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, 2019. 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, 2019, the Company’s internal control over financial reporting was effective.
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 48 and 51 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. (“GAAP”) 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. Armand and ArmaKleen are specialty chemical businesses. The Company’s equity in earnings of Armand and ArmaKleen are included in the Corporate segment, as described in Note 16. 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.
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 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.
57
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Revenue Recognition
Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration that the Company expects to be entitled to in exchange for that good. This usually occurs 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.
Adoption of the new revenue recognition pronouncement as discussed below did not have a significant impact on the Company’s consolidated financial statements. The adoption required the Company to recognize certain costs earlier, primarily due to the timing of coupon expense recognition, which was not material. Refer to the table below on page 63 for a presentation of the impacts of adoption of the guidance on the Company’s January 1, 2018 balance sheet.
|
a.
|
Nature of Goods and Services
|
The Company primarily ships finished goods to its customers and operates in three segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”). The segments are based on differences in the nature of products and organizational and ownership structures. The Consumer Domestic and Consumer International segments market a variety of personal care and household products and over-the-counter products, including but not limited to baking soda, cat litter, laundry detergent, condoms, stain removers, hair removal, gummy dietary supplements, dry shampoo, water flossers and showerheads. The SPD segment focuses on sales to businesses and participates in three product areas: Animal and Food Production, Specialty Chemicals and Specialty Cleaners. The Company’s products are distinct and separately identifiable on customer contracts or invoices, with each product sale representing a separate performance obligation.
The Company sells 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 our products to consumers. The Company sells its specialty products to industrial customers, livestock producers and through distributors.
Refer to Note 17 for disaggregated revenue information with respect to each of our segments.
|
b.
|
When Performance Obligations are Satisfied
|
For performance obligations related to the shipping and invoicing of products, control transfers at the point in time upon which finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier. Once a product has been delivered or picked up by the customer, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon delivery or customer receipt because the Company has an enforceable right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.
|
c.
|
Variable Consideration
|
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 and are recorded when the related sale takes place. 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 inputs 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.
The Company expenses incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place. These costs are recorded in SG&A expenses in the accompanying consolidated statements of income.
The Company accounts for shipping and handling costs as fulfillment activities which are therefore recognized upon shipment of the goods.
The Company has applied the portfolio approach to all open contracts as they have similar characteristics and can reasonably expect that the effects on the financial statements of applying this new guidance to the portfolio of contracts would not differ materially from applying this guidance to the individual contracts within the portfolio.
The Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes.
58
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
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 $26.0 in 2019, resulting in a total of $138.9 and $112.9 as of December 31, 2019 and 2018, 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.
Inventories
Inventories are valued at the lower of cost or market (net realizable value, which reflects any costs to sell or dispose). 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 $16.0 at December 31, 2019, and $17.0 at December 31, 2018.
On April 1, 2018, the Company changed its method of accounting for inventories from last-in-first-out (“LIFO”) to first-in-first-out (“FIFO”) for the approximately 17% of consolidated inventory not previously valued using FIFO. Substantially all of the Company’s SPD segment inventory, as well as domestic inventory sold primarily under the ARM & HAMMER trademark in the Consumer Domestic segment, was previously determined using LIFO. After this change, the value of all of the Company’s inventory was determined by the FIFO method. The Company believes this change is preferable as the predominant method to value inventory has been FIFO, which will provide a uniform costing method across all inventory. Prior financial statements have not been retroactively adjusted due to immateriality. The cumulative effect of the change in accounting principle of approximately $4.0 pre-tax was recorded as a decrease to cost of goods sold for the quarter ending June 30, 2018.
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.
59
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
PP&E is 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 and indefinite-lived trade names 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.
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 future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies 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 decline, resulting in lower multiples of revenues and EBITDA.
Research and Development
The Company incurred research and development expenses in the amount of $93.6, $89.7 and $70.8 in 2019, 2018 and 2017, 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:
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted average common shares outstanding - basic
|
|
246.2
|
|
|
|
245.5
|
|
|
|
250.6
|
|
Dilutive effect of stock options
|
|
5.9
|
|
|
|
5.2
|
|
|
|
5.5
|
|
Weighted average common shares outstanding - diluted
|
|
252.1
|
|
|
|
250.7
|
|
|
|
256.1
|
|
Antidilutive stock options outstanding
|
|
1.5
|
|
|
|
1.9
|
|
|
|
3.2
|
|
60
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Employee and Director Stock 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,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
$
|
2.8
|
|
|
$
|
2.6
|
|
|
$
|
1.8
|
|
Selling, general and administrative expenses
|
|
19.6
|
|
|
|
22.3
|
|
|
|
16.3
|
|
Total
|
$
|
22.4
|
|
|
$
|
24.9
|
|
|
$
|
18.1
|
|
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 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.
61
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
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 of the Company’s previous corporate offices that remained unchanged as a result of the transition. Refer to Note 8 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.
In August 2018, the FASB issued new accounting guidance requiring a customer in a hosting arrangement that is a service contract to apply the guidance on internal-use software to determine which implementation costs to recognize as an asset and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has adopted this new standard during the third quarter of 2018 and elected to use the prospective approach.
In February 2018, the FASB issued new accounting guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this change using the modified retrospective approach by adjusting certain December 31, 2017 stockholders’ equity accounts (see below).
62
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
In 2016, the FASB issued 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 new standard was adopted by the Company using the modified retrospective approach in the first quarter of 2018. See page 58 for the Company’s revenue recognition accounting policy.
The effects of the recently adopted accounting pronouncements to the Company’s consolidated balance sheet as of January 1, 2018 is as follows:
|
Balance at
|
|
|
New Revenue
|
|
|
New Tax
|
|
|
Balance at
|
|
|
December 31,
|
|
|
Standard
|
|
|
Reform
|
|
|
January 1,
|
|
|
2017
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
2018
|
|
Accounts payable and accrued expenses
|
$
|
659.1
|
|
|
$
|
3.0
|
|
|
$
|
0.0
|
|
|
$
|
662.1
|
|
Income taxes payable
|
|
5.0
|
|
|
|
(0.7
|
)
|
|
|
0.0
|
|
|
|
4.3
|
|
Retained earnings
|
|
3,479.0
|
|
|
|
(2.3
|
)
|
|
|
0.6
|
|
|
|
3,477.3
|
|
Accumulated other comprehensive loss
|
|
(36.4
|
)
|
|
|
0.0
|
|
|
|
(0.6
|
)
|
|
|
(37.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adoption had no impact on the Company’s results of operations or cash flow.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issue new accounting guidance (with subsequent targeted amendments) which modifies the measurements of expected credit losses for certain financial instruments and financial assets, including trade receivables. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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.
63
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, 2019 and December 31, 2018:
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Input
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Level
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Level 1
|
|
$
|
65.3
|
|
|
$
|
65.3
|
|
|
$
|
234.6
|
|
|
$
|
234.6
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
Level 2
|
|
|
252.9
|
|
|
|
252.9
|
|
|
|
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
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
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
|
|
|
|
302.6
|
|
|
|
299.7
|
|
|
|
289.7
|
|
2.875% Senior notes due October 1, 2022
|
Level 2
|
|
|
399.9
|
|
|
|
408.2
|
|
|
|
399.9
|
|
|
|
393.0
|
|
3.15% Senior notes due August 1, 2027
|
Level 2
|
|
|
424.7
|
|
|
|
438.9
|
|
|
|
424.6
|
|
|
|
400.0
|
|
3.95% Senior notes due August 1, 2047
|
Level 2
|
|
|
397.3
|
|
|
|
427.1
|
|
|
|
397.2
|
|
|
|
363.7
|
|
Business Acquisition Liabilities
|
Level 3
|
|
|
206.2
|
|
|
|
206.2
|
|
|
|
23.0
|
|
|
|
23.0
|
|
Fair value adjustment asset (liability) related to hedged fixed rate debt instrument
|
Level 2
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
Interest Rate Swap Lock Agreement asset (liability)
|
Level 2
|
|
|
(29.5
|
)
|
|
|
(29.5
|
)
|
|
|
(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 twelve months ended December 31, 2019.
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.
Interest Rate Swap Lock Agreement: The Company entered into interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark U.S. Dollar London Interbank Offered Rate (“LIBOR”) interest rate associated with anticipated issuances of debt. The notional amount of the interest rate swap locks is $300.0. These interest rate swap lock 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 lock agreements is reflected in the Consolidated Balance Sheet within Deferred and Other Long-term Liabilities.
Business Acquisition Liabilities: As of December 31, 2019, the Company had liabilities for contingent consideration related to the Flawless Acquisition of $192.0 and related to the Agro Acquisition of $14.2. As of December 31, 2018, the Company had liabilities for contingent consideration related to the Agro Acquisition of $15.7 and related to the Passport Acquisition of $7.3.
During the second quarter of 2019, the Company recorded a reduction in fair value of the entire $7.3 Passport contingent liability based on the revised valuation due to updated sales forecasts. The initial fair value of the Flawless contingent liability was $182.0. That amount was first established in the purchase allocation after Flawless was acquired on May 1, 2019 and has since been increased by $10.0 to $192.0 based on the revised valuation due to updated sales forecasts as well as the passage of time. See Note 15 for further details.
The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is determined using the present value of the weighted probabilities of the possible payments due to randomly changing revenue growth. These fair value measurements represent Level 3 measurements as they are based on significant inputs not
64
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the fair value of the contingent consideration liabilities. Changes in the fair value of the contingent consideration obligations are recorded in general and administrative expenses in the accompanying consolidated statements of operations.
Other: The carrying amounts of accounts receivable, and accounts payable and accrued expenses, approximated estimated fair values as of December 31, 2019 and 2018.
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 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 effective in offsetting changes in fair values or cash 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 accounting 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 failure 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 2019 and 2018, 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 2019 and 2018, 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 79% of the Company’s 2019 diesel fuel requirements and are expected to cover approximately 70% of the Company’s estimated diesel fuel requirements for 2020. 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, and U.S. Dollar/Australian Dollar.
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, Euro, Mexican Peso, and Australian Dollar. 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, 2019 totaled $216.0 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 Accumulated Other Comprehensive Income (Loss) and reclassified to earnings when the hedged transaction affected earnings.
65
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Interest Rate Swap Lock Agreement
The Company entered into interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark LIBOR interest rate associated with anticipated issuances of debt. The notional amount of the interest rate swap locks is $300.0. These interest rate swap lock 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 lock agreements is reflected in the Consolidated Balance Sheet within Deferred and Other Long-term Liabilities.
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 agreements covered approximately 60% of the Company’s 2019 exposure and are expected to cover approximately 45% of the Company’s 2020 exposure. These hedges are designated as cash flow hedges for accounting purposes and, therefore, changes in the fair value of the contracts are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to earnings when the hedged transaction affected earnings. The fair value of these commodity 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, 2019
|
|
December 31, 2018
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
216.0
|
|
$
|
146.6
|
|
Interest rate swap
|
|
$
|
0.0
|
|
$
|
300.0
|
|
Interest rate swap lock
|
|
$
|
300.0
|
|
$
|
250.0
|
|
Diesel fuel contracts
|
|
4.8 gallons
|
|
8.2 gallons
|
|
Commodities contracts
|
|
81.2 pounds
|
|
94.7 pounds
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Equity derivatives
|
|
$
|
22.1
|
|
$
|
21.0
|
|
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,
|
|
|
2019
|
|
|
2018
|
|
Raw materials and supplies
|
$
|
85.9
|
|
|
$
|
84.4
|
|
Work in process
|
|
29.0
|
|
|
|
34.1
|
|
Finished goods
|
|
302.5
|
|
|
|
264.3
|
|
Total
|
$
|
417.4
|
|
|
$
|
382.8
|
|
On April 1, 2018, the Company changed its method of accounting for inventories from last-in-first-out (“LIFO”) to first-in-first-out (“FIFO”) for the approximately 17% of consolidated inventory not previously valued using FIFO. Substantially all of the Company’s Specialty Products Division segment inventory as well as domestic inventory sold primarily under the ARM & HAMMER trademark in the Consumer Domestic segment was previously determined using LIFO. After this change, the value of all of the Company’s inventory was
66
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
determined by the FIFO method. The Company believes this change is preferable as the predominant method to value inventory has been FIFO, which will provide a uniform costing method across all inventory. Prior financial statements have not been retroactively adjusted due to immateriality. The cumulative effect of the change in accounting principle of approximately $4.0 pre-tax was recorded as a decrease to cost of goods sold for the quarter ending June 30, 2018.
5.
|
Property, Plant and Equipment, Net (“PP&E”)
|
PP&E consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Land
|
$
|
27.8
|
|
|
$
|
27.8
|
|
Buildings and improvements(1)
|
|
255.4
|
|
|
|
301.3
|
|
Machinery and equipment
|
|
737.4
|
|
|
|
716.7
|
|
Software
|
|
96.7
|
|
|
|
97.9
|
|
Office equipment and other assets
|
|
76.0
|
|
|
|
73.8
|
|
Construction in progress
|
|
72.9
|
|
|
|
49.7
|
|
Gross PP&E
|
|
1,266.2
|
|
|
|
1,267.2
|
|
Less accumulated depreciation and amortization
|
|
693.2
|
|
|
|
669.0
|
|
Net PP&E
|
$
|
573.0
|
|
|
$
|
598.2
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Depreciation and amortization on PP&E
|
$
|
63.8
|
|
|
$
|
64.4
|
|
|
$
|
60.9
|
|
(1)
|
In conjunction with the new lease accounting guidance adopted in the first quarter of 2019, the Company de-recognized its corporate headquarters building lease which had a value of approximately $35.0 in Buildings and improvements at December 31, 2018. See the Recently Adopted Accounting Pronouncements in Note 1 for further details.
|
On May 1, 2019, the Company closed on its previously announced acquisition of the FLAWLESS hair removal business (the “Flawless Acquisition”) from Ideavillage Products Corporation (“Ideavillage”). The Company paid $475.0 at closing and may make an additional contingent consideration 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 proceeds from a three-year term loan and commercial paper borrowings. There was a six-month integration transition period in which the net cash received from Ideavillage was accounted for as other revenue as a component of net sales. The Company purchased the inventory following the transition period, at such time, the Company became the principal party to the sales transactions. The Flawless hair removal business 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 fair values of the net assets acquired are set forth as follows:
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 trade names and other intangible assets were valued using a discounted cash flow model. 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 contingent liability will be reassessed at each balance sheet date until the completion of the earn-out period. Subsequent to the date of the Flawless Acquisition, the Company increased the estimate of the contingent consideration liability by $10.0 from $182.0 to $192.0 based on the revised valuation due to updated sales forecasts as well as the passage of time. Ideavillage will help support the business through a separate long-term transition services agreement.
67
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
On March 8, 2018, the Company purchased Passport Food Safety Solutions, Inc. (“Passport”). Passport sells products for pre- and post-harvest treatment in the poultry, swine, and beef production markets (the “Passport Acquisition”). 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 SPD segment.
The fair values of the net assets acquired are set forth as follows:
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 trade names and other intangible assets were valued using a discounted cash flow model. 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. During the second quarter of 2019, the Company reduced the entire fair value of the $7.3 contingent liability based on the revised valuation and updated sales forecasts. The goodwill and other intangible assets associated with the Passport Acquisition are not deductible for U.S. tax purposes.
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 showerheads (the “Waterpik Acquisition”). The total purchase price was $1,024.6 (net of cash acquired). 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 10) completed on July 25, 2017. Subsequent to the Waterpik Acquisition, Waterpik is managed by the Consumer Domestic and Consumer International segments.
68
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:
Current assets
|
$
|
95.4
|
|
Property, plant and equipment
|
|
28.4
|
|
Trade name (indefinite lived)
|
|
644.7
|
|
Other intangible assets
|
|
146.1
|
|
Goodwill
|
|
425.8
|
|
Current liabilities
|
|
(31.8
|
)
|
Long-term liabilities
|
|
(284.0
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
1,024.6
|
|
The trade names and other intangible assets were valued using a discounted cash flow model. 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 goodwill and other intangible assets associated with the Waterpik Acquisition are not deductible for U.S. tax purposes.
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
|
|
|
December 31,
|
|
|
2017
|
|
|
Reported
|
|
|
Pro forma
|
|
Net Sales
|
$
|
3,776.2
|
|
|
$
|
3,936.2
|
|
Net Income
|
$
|
743.4
|
|
|
$
|
753.4
|
|
Net income per share - Basic
|
$
|
2.97
|
|
|
$
|
3.01
|
|
Net income per share - Diluted
|
$
|
2.90
|
|
|
$
|
2.94
|
|
On May 1, 2017, the Company acquired Agro BioSciences, Inc. (“Agro”), an innovator and leader in developing custom probiotic products for poultry, cattle and swine (the “Agro Acquisition”). The total purchase price was approximately $75.0, and an additional payment of up to $25.0 after 3 years based on sales performance. Agro’s annual sales were approximately $11.0 in 2016. The Agro Acquisition was funded with short-term borrowings and is managed in the SPD segment.
The fair values of the net assets acquired are set forth as follows:
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 trade names and other intangible assets were valued using a discounted cash flow model. 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. In December 2019, the final contingent consideration liability, which is expected to be paid in early 2020, was lowered to $14.2 based on 2019 sales. The reduction was recorded in SG&A in the SPD segment. The goodwill and other intangible assets associated with the Agro Acquisition are deductible for U.S. tax purposes.
69
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
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:
|
|
|
|
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 trade names and other intangible assets were valued using the discounted cash flow model. 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. The goodwill and other intangible assets associated with the Viviscal Acquisition 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, 2019
|
|
|
|
|
December 31, 2018
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
$
|
1,025.8
|
|
|
$
|
(219.7
|
)
|
|
$
|
806.1
|
|
|
3-20
|
|
$
|
578.6
|
|
|
$
|
(175.2
|
)
|
|
$
|
403.4
|
|
Customer Relationships
|
|
584.8
|
|
|
|
(255.0
|
)
|
|
|
329.8
|
|
|
15-20
|
|
|
506.3
|
|
|
|
(220.8
|
)
|
|
|
285.5
|
|
Patents/Formulas
|
|
211.4
|
|
|
|
(73.0
|
)
|
|
|
138.4
|
|
|
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
|
$
|
1,822.4
|
|
|
$
|
(548.1
|
)
|
|
$
|
1,274.3
|
|
|
|
|
$
|
1,250.7
|
|
|
$
|
(457.8
|
)
|
|
$
|
792.9
|
|
Indefinite lived intangible assets - Carrying value
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
Trade names
|
$
|
1,475.7
|
|
|
|
|
|
|
|
|
$
|
1,481.1
|
|
|
|
|
|
The Company determined that the carrying value of its trade names as of December 31, 2019 and 2018, was recoverable based upon the forecasted cash flows and profitability of the brands. There are personal care trade names that, based on recent 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 assets. 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 $90.4 for 2019, $71.2 for 2018 and $61.0 for 2017, respectively. The Company estimates that intangible amortization expense will be approximately $98.2 in 2020 and approximately $96.5 to $88.0 annually over the next five years.
During the fourth quarter of 2017, the Company determined that a Consumer Domestic trade name should be re-characterized from an indefinite lived to a finite lived asset. 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 trade name as of December 31, 2017 was approximately $22.0 million and is being amortized over 20 years based upon the estimated cash flows.
70
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows:
|
Consumer
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
1,632.1
|
|
|
$
|
223.3
|
|
|
$
|
103.5
|
|
|
$
|
1,958.9
|
|
Passport acquired goodwill
|
|
0.0
|
|
|
|
0.0
|
|
|
|
32.5
|
|
|
$
|
32.5
|
|
Waterpik adjustment
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.0
|
|
|
$
|
1.5
|
|
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 December 31, 2019
|
$
|
1,707.9
|
|
|
$
|
235.6
|
|
|
$
|
136.0
|
|
|
$
|
2,079.5
|
|
The result of the Company’s annual goodwill impairment test, performed in the beginning of the second quarter of 2019, 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.
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.
71
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
A summary of the Company’s lease information is as follows:
|
|
December 31,
|
|
|
Classification
|
2019
|
|
Assets
|
|
|
|
|
Right of use assets
|
Other Assets
|
$
|
150.7
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current lease liabilities
|
Accounts Payable and Accrued Expenses
|
$
|
16.4
|
|
Long-term lease liabilities
|
Deferred and Other Long-term Liabilities
|
|
144.0
|
|
Total lease liabilities
|
|
$
|
160.4
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
11.1
|
|
Weighted-average discount rate
|
|
|
4.9
|
%
|
|
Twelve Months
|
|
|
Ended
|
|
|
December 31, 2019
|
|
Statement of Income
|
|
|
|
Lease cost(1)
|
$
|
24.6
|
|
|
|
|
|
Other information
|
|
|
|
Leased assets obtained in exchange for new lease liabilities(2)
|
$
|
61.1
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
24.3
|
|
|
(1)
|
Lease expense is included in cost of sales or SG&A expenses based on the nature of the leased item. 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 twelve months ended December 31, 2019 was $17.9 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.
|
The Company’s minimum annual rentals including reasonably assured renewal options under lease agreements are as follows:
|
|
Operating
|
|
|
|
Leases
|
|
2020
|
|
$
|
23.4
|
|
2021
|
|
|
23.5
|
|
2022
|
|
|
21.1
|
|
2023
|
|
|
16.4
|
|
2024
|
|
|
13.9
|
|
2025 and thereafter
|
|
|
112.3
|
|
Total future minimum lease commitments
|
|
|
210.6
|
|
Less: Imputed Interest
|
|
|
(50.2
|
)
|
Present value of lease liabilities
|
|
$
|
160.4
|
|
9.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Trade accounts payable
|
$
|
473.3
|
|
|
$
|
430.2
|
|
Accrued marketing and promotion costs
|
|
138.1
|
|
|
|
116.2
|
|
Accrued wages and related benefit costs
|
|
96.5
|
|
|
|
84.2
|
|
Other accrued current liabilities
|
|
124.0
|
|
|
|
94.5
|
|
Total
|
$
|
831.9
|
|
|
$
|
725.1
|
|
72
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
10.
|
Short-Term Borrowings and Long-Term Debt
|
Short-term borrowings and long-term debt consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
Commercial paper issuances
|
$
|
248.6
|
|
|
$
|
0.0
|
|
Various debt due to international banks
|
|
4.3
|
|
|
|
1.8
|
|
Total short-term borrowings
|
$
|
252.9
|
|
|
$
|
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
|
|
0.0
|
|
|
|
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
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
3.95% Senior notes due August 1, 2047
|
|
400.0
|
|
|
|
400.0
|
|
Less: Discount
|
|
(2.7
|
)
|
|
|
(2.8
|
)
|
Debt issuance costs, net
|
|
(11.5
|
)
|
|
|
(13.1
|
)
|
Fair value adjustment asset (liability) related to hedged fixed rate debt instrument
|
|
0.0
|
|
|
|
(3.0
|
)
|
Total long-term debt
|
|
1,810.2
|
|
|
|
2,105.3
|
|
Less: current maturities
|
|
0.0
|
|
|
|
(596.5
|
)
|
Net long-term debt
|
$
|
1,810.2
|
|
|
$
|
1,508.8
|
|
Revolving Credit Facility
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 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.
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 equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America’s “prime rate” and (c) the adjusted LIBOR rate for an interest period of one-month plus 1.00%), in any case not less than zero, 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 1.500% per annum, in the case of any borrowing bearing interest by reference to the adjusted LIBOR rate, and 0% to 0.50%, in the case of any borrowing bearing interest by reference to the Base Rate. In addition, the Company will bear certain customary fees, including a commitment fee, determined based upon the corporate credit rating of the Company and ranging from 0.070% to 0.175% per annum on the aggregate unused commitments under the Credit Agreement, and additional issuance fees and participation fees in respect of any letters of credit issued under the Credit Agreement.
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 its Consolidated Funded Indebtedness (as defined in the Credit Agreement) to EBITDA, at a level no greater than 3.75 to 1.00 (or, to the extent the Company or any Subsidiary has consummated a material acquisition , (i) at a level no greater than 4.25:1.00 for the 12 month period commencing on the date the Company or any Subsidiary consummates the first material acquisition after the closing date and (ii) at a level no greater than 4.25:1.00
73
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
for the 12 month period commencing on the date the Company or any Subsidiary consummates any additional material acquisition, provided that the Company has maintained a leverage ratio of 3:75:1.00 or less during each of the immediately preceding four consecutive fiscal quarters before the date of such additional material acquisition).
The Credit Agreement also contains customary events of default, including failure to make certain payments under the Credit Agreement when due, breach of covenants, materially incorrect representations and warranties, default on other material indebtedness, events of bankruptcy, material adverse judgments, certain events relating to pension plans, the failure of any of the loan documents to remain in full force and effect and the occurrence of any change in control with respect to the Company.
$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 which matured and were repaid in full on January 25, 2019, bore interest at a rate, reset quarterly, equal to three-month U.S. Dollar 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”). These Notes were repaid in full in the fourth quarter of 2019 with cash on hand and proceeds from the issuance of commercial paper borrowings.
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”). These 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.
May 1, 2022 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.
Commercial Paper
The Company has an agreement with four 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 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 $248.6 of commercial paper outstanding as of December 31, 2019 with a weighted-average interest rate of approximately 1.92% and did not have any commercial paper outstanding as of December 31, 2018.
74
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Interest Rate Swaps
Concurrent with the 2.45% Senior Notes that matured in December of 2019, the Company entered into interest rate swaps to hedge changes in the fair value of these Notes. Under the terms of the swaps, the counterparties paid the Company a fixed rate of 2.45% and the Company paid 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 was reflected in the Consolidated Balance Sheet within Other Current Assets or Accounts Payable and Accrued Expenses, with an offsetting amount recorded in the Current portion of long-term debt to adjust the carrying amount of the hedged debt obligation until this derivative was settled in December of 2019.
Interest Rate Swap Lock Agreement
The Company entered into interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark LIBOR interest rate associated with anticipated issuances of debt. The notional amount of the interest rate swap locks is $300.0. These interest rate swap lock 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 lock agreements is reflected in the Consolidated Balance Sheet within Deferred and Other Long-term Liabilities.
75
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The components of income before taxes are as follows:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
726.7
|
|
|
$
|
671.8
|
|
|
$
|
683.2
|
|
Foreign
|
|
|
47.0
|
|
|
|
47.7
|
|
|
|
9.5
|
|
Total
|
|
$
|
773.7
|
|
|
$
|
719.5
|
|
|
$
|
692.7
|
|
The following table summarizes the provision for U.S. federal, state and foreign income taxes:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
117.2
|
|
|
$
|
103.4
|
|
|
$
|
146.7
|
|
State
|
|
|
24.9
|
|
|
|
23.4
|
|
|
|
29.0
|
|
Foreign
|
|
|
10.1
|
|
|
|
13.0
|
|
|
|
11.2
|
|
|
|
|
152.2
|
|
|
|
139.8
|
|
|
|
186.9
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
3.6
|
|
|
|
5.4
|
|
|
|
(235.0
|
)
|
State
|
|
|
(0.5
|
)
|
|
|
4.6
|
|
|
|
3.8
|
|
Foreign
|
|
|
2.5
|
|
|
|
1.1
|
|
|
|
(6.4
|
)
|
|
|
|
5.6
|
|
|
|
11.1
|
|
|
|
(237.6
|
)
|
Total provision
|
|
$
|
157.8
|
|
|
$
|
150.9
|
|
|
$
|
(50.7
|
)
|
Deferred tax assets (liabilities) consist of the following at December 31:
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3.8
|
|
|
$
|
3.4
|
|
Deferred compensation
|
|
|
47.7
|
|
|
|
44.8
|
|
Pension, postretirement and postemployment benefits
|
|
|
5.6
|
|
|
|
5.8
|
|
Other
|
|
|
28.4
|
|
|
|
22.1
|
|
Tax credit carryforwards/other tax attributes
|
|
|
9.0
|
|
|
|
10.7
|
|
International operating loss carryforwards
|
|
|
11.4
|
|
|
|
10.8
|
|
Total gross deferred tax assets
|
|
|
105.9
|
|
|
|
97.6
|
|
Valuation allowances
|
|
|
(23.2
|
)
|
|
|
(24.5
|
)
|
Total deferred tax assets
|
|
|
82.7
|
|
|
|
73.1
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(187.0
|
)
|
|
|
(165.6
|
)
|
Trade names and other intangibles
|
|
|
(414.1
|
)
|
|
|
(420.1
|
)
|
Property, plant and equipment
|
|
|
(59.7
|
)
|
|
|
(62.1
|
)
|
Total deferred tax liabilities
|
|
|
(660.8
|
)
|
|
|
(647.8
|
)
|
Net deferred tax liability
|
|
$
|
(578.1
|
)
|
|
$
|
(574.7
|
)
|
Long term net deferred tax asset
|
|
|
1.5
|
|
|
|
1.7
|
|
Long term net deferred tax liability
|
|
|
(579.6
|
)
|
|
|
(576.4
|
)
|
Net deferred tax liability
|
|
$
|
(578.1
|
)
|
|
$
|
(574.7
|
)
|
76
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The difference between tax expense and the tax that would result from the application of the federal statutory rate is as follows:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
35
|
%
|
Tax that would result from use of the federal statutory rate
|
|
$
|
162.4
|
|
|
$
|
151.1
|
|
|
$
|
242.4
|
|
State and local income tax, net of federal effect
|
|
|
19.3
|
|
|
|
22.1
|
|
|
|
21.4
|
|
Varying tax rates of foreign affiliates
|
|
|
1.8
|
|
|
|
3.3
|
|
|
|
(0.1
|
)
|
Benefit from domestic manufacturing deduction
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(15.2
|
)
|
Valuation Allowances
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
(6.2
|
)
|
Stock Options Exercised
|
|
|
(16.1
|
)
|
|
|
(22.1
|
)
|
|
|
(15.1
|
)
|
Worthless Stock Deduction - Investment in Brazil
|
|
|
(12.0
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Reserve for Uncertain Tax Position - Investment in Brazil
|
|
|
12.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
US Tax Reform
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(272.9
|
)
|
Other
|
|
|
(10.5
|
)
|
|
|
(4.5
|
)
|
|
|
(5.0
|
)
|
Recorded tax expense
|
|
$
|
157.8
|
|
|
$
|
150.9
|
|
|
$
|
(50.7
|
)
|
Effective tax rate
|
|
|
20.4
|
%
|
|
|
21.0
|
%
|
|
|
-7.3
|
%
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly changed the U.S. corporate income tax regime by, among other things, lowering U.S. corporate income tax rates to 21%. However, the Tax Act eliminated the domestic manufacturing deduction and moved toward a territorial system, which also eliminated the ability to credit certain foreign taxes that existed prior to enactment of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on a deemed repatriation of historical earnings of foreign subsidiaries. In the year ended December 31, 2018, the Company repatriated approximately $150.0 of its non-U.S. earnings and paid the associated withholding 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 provisional impacts resulted in a reduction of tax expense of approximately $273.0 for the quarter and year ended December 31, 2017. This was primarily due to the adjustment to the U.S. deferred tax assets and liabilities.
The changes included in the Tax Act are broad and complex. The Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the provisional tax impact originally recorded in the quarter and year ended December 31, 2017. This measurement period expired in the fourth quarter of 2018, and there were no adjustments to the provisional tax impact of approximately $273.0 recorded in the quarter and year ended December 31, 2017.
At December 31, 2019, certain foreign subsidiaries of the Company had net operating loss carryforwards of approximately $35.5. Approximately $0.8 of such net operating loss carryforwards expire on various dates through December 31, 2024. 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 $11.4 and $10.3 at December 31, 2019 and 2018, 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 $1.3 and $1.9 at December 31, 2019 and 2018, respectively, on these deferred tax assets.
Due to changes in the ability to credit certain foreign taxes resulting from the Tax Act, the Company 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 established a valuation allowance of $9.9 at December 31, 2017 and maintained a valuation allowance of $10.5 and $12.3 at December 31, 2019 and December 31, 2018, respectively, on the deferred tax asset relating to these foreign tax credit carryforwards.
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. The Company has since 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.
The Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries in 2017, and moved toward a territorial tax system. As a result, the Company will no longer have undistributed earnings of foreign subsidiaries that are considered to be permanently reinvested outside of the U.S.
77
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
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 had 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:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Unrecognized tax benefits at January 1
|
|
$
|
4.7
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Gross increases - tax positions in current period
|
|
|
13.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Gross increases - tax positions in prior period
|
|
|
1.4
|
|
|
|
5.1
|
|
|
|
0.0
|
|
Lapse of statute of limitations
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
Unrecognized tax benefits at December 31
|
|
$
|
18.9
|
|
|
$
|
4.7
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2019 the Company ceased conducting business in Brazil and recorded a $12.0 reserve for an uncertain tax position relating to a worthless stock deduction for its investment in Brazil. The Company has requested a ruling from the IRS in connection with the worthless stock deduction and expects a determination in 2020. It is reasonably possible that a decrease of $12.0 in unrecognized tax benefits may occur within the next twelve months related to a favorable ruling.
Included in the balance of unrecognized tax benefits at December 31, 2019 and December 31, 2018 are $18.0 and $3.9, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2019 and December 31, 2018 are $0.9 and $0.8, respectively, of tax benefits that, if recognized, would result in adjustments to deferred taxes.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and international jurisdictions. The Company’s U.S. federal income tax returns are closed for tax years through 2015. The Company is currently under audit by several state and international taxing authorities for the years 2015 through 2017.
The Company’s policy for recording interest associated with income tax examinations is to record interest as a component of Income before Income Taxes. During the twelve months ended December 31, 2019, and December 31, 2018, the Company recognized interest expense associated with uncertain tax positions of approximately $0.4 and $0.2, respectively. As of December 31, 2019, and December 31, 2018 the Company had accrued interest expense related to unrecognized tax benefits of $0.6 and $0.3, respectively.
12.Stock Based Compensation Plans and Other Benefit Plans
The Company has non-qualified options outstanding under four equity compensation plans. Under the Amended and Restated Omnibus Equity Plan, the Company may grant stock options and other stock-based awards to employees and directors. Under the 1983 Stock Option Plan and the Stock Award Plan, the Company granted stock options to key management employees. Under the Stock Option Plan for Directors, the Company granted stock options to non‑employee directors. Following approval of the original Omnibus Equity Plan by stockholders in 2008, no further grants were permitted under the other equity compensation plans. Stock options outstanding under the plans are issued at market value on the date of grant (with the exception of options granted to former Waterpik employees as part of the Waterpik Acquisition), vest on the third anniversary of the date of grant and must be exercised within 10 years of the date of grant.
If, upon termination of a participant’s employment (other than a termination for cause), a participant is at least 55 years old, has at least five years of service, and the sum of the participant’s age and years of service is at least 65, the participant may exercise any stock options granted between 2007 through 2017 within a period of three years from the date of termination or, if earlier, the date such stock options otherwise would have expired, subject to specified conditions. Starting with stock options granted in 2018, a terminated employee who meets the above conditions may exercise any stock options within a period of ten years from the date of termination or, if earlier, the date such stock options otherwise would have expired, subject to specified conditions. Issuances of Common Stock to satisfy employee stock option exercises currently are made from treasury stock.
78
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Stock option transactions for the year ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding as of December 31, 2018
|
|
14.7
|
|
|
$
|
37.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1.5
|
|
|
|
77.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(2.0
|
)
|
|
|
26.35
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(0.2
|
)
|
|
|
55.28
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
14.0
|
|
|
$
|
43.23
|
|
|
|
5.4
|
|
|
$
|
388.6
|
|
Exercisable as of December 31, 2019
|
|
8.7
|
|
|
$
|
34.23
|
|
|
|
3.8
|
|
|
$
|
314.5
|
|
The following table summarizes information relating to options outstanding and exercisable as of December 31, 2019:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
Range of
|
|
as of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
as of
|
|
|
Exercise
|
|
Exercise Prices
|
|
12/31/2019
|
|
|
Contractual Life
|
|
|
Price
|
|
|
12/31/2019
|
|
|
Price
|
|
$0.01 - $20.00
|
|
|
0.5
|
|
|
|
1.0
|
|
|
$
|
14.54
|
|
|
|
0.5
|
|
|
$
|
16.70
|
|
$20.01 - $30.00
|
|
|
2.0
|
|
|
|
2.0
|
|
|
$
|
24.03
|
|
|
|
2.0
|
|
|
$
|
24.03
|
|
$30.01 - $40.00
|
|
|
3.0
|
|
|
|
3.8
|
|
|
$
|
32.77
|
|
|
|
3.0
|
|
|
$
|
32.77
|
|
$40.01 - $50.00
|
|
|
3.4
|
|
|
|
5.5
|
|
|
$
|
44.39
|
|
|
|
3.2
|
|
|
$
|
44.26
|
|
$50.01 - $60.00
|
|
|
3.6
|
|
|
|
7.7
|
|
|
$
|
52.13
|
|
|
|
0.0
|
|
|
$
|
51.58
|
|
$60.01 - $70.00
|
|
|
0.1
|
|
|
|
8.9
|
|
|
$
|
65.52
|
|
|
|
0.0
|
|
|
$
|
0.0
|
|
$70.01 - $80.00
|
|
|
1.4
|
|
|
|
9.5
|
|
|
$
|
77.24
|
|
|
|
0.0
|
|
|
$
|
0.0
|
|
|
|
|
14.0
|
|
|
|
5.4
|
|
|
$
|
43.23
|
|
|
|
8.7
|
|
|
$
|
34.23
|
|
The table above represents the Company’s estimate of stock options fully vested and expected to vest. Expected forfeitures are not material and, therefore, are not reflected in the table above.
The following table provides information regarding the intrinsic value of stock options exercised and stock compensation expense related to stock option awards:
|
2019
|
|
|
2018
|
|
|
2017
|
|
Intrinsic Value of Stock Options Exercised
|
$
|
93.1
|
|
|
$
|
109.6
|
|
|
$
|
48.0
|
|
Stock Compensation Expense Related to Stock Option Awards
|
$
|
20.3
|
|
|
$
|
21.3
|
|
|
$
|
15.7
|
|
Issued Stock Options
|
|
1.5
|
|
|
|
2.0
|
|
|
|
2.1
|
|
Weighted Average Fair Value of Stock Options issued (per share)
|
$
|
14.90
|
|
|
$
|
9.79
|
|
|
$
|
12.90
|
|
Fair Value of Stock Options Issued
|
$
|
22.1
|
|
|
$
|
19.4
|
|
|
$
|
27.8
|
|
79
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The following table provides a summary of the assumptions used in the valuation of issued stock options:
|
2019
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
2.0
|
%
|
|
|
2.9
|
%
|
|
|
2.0
|
%
|
Expected life in years
|
|
7.3
|
|
|
|
7.3
|
|
|
|
6.9
|
|
Expected volatility
|
|
17.2
|
%
|
|
|
17.1
|
%
|
|
|
16.7
|
%
|
Dividend yield
|
|
1.2
|
%
|
|
|
1.7
|
%
|
|
|
1.4
|
%
|
The fair value of stock options is based upon the Black Scholes option pricing model. The Company determined the stock options’ lives based on historical exercise behavior and their expected volatility and dividend yield based on the historical changes in stock price and dividend payments. The risk-free interest rate is based on the yield of an applicable term Treasury instrument.
As of December 31, 2019, there was a fair value of $15.2 related to unamortized stock option compensation expense, which is expected to be recognized over the next three years. The Company’s Consolidated Statements of Cash Flow reflect an add back to Net Cash Provided by Operating Activities of $20.8, $23.3 and $18.1 in 2019, 2018 and 2017, respectively, for non-cash compensation expense, primarily stock option expense.
During 2018, the Company issued cash settled restricted shares to all employees. These restricted shares vest on the third anniversary of the date of grant. As a result, the Company recorded stock compensation expense of $1.5 and $1.6 in 2019 and 2018, and the liability was approximately $3.1 and $1.6 as of December 31, 2019 and 2018, respectively. The unamortized amount is approximately $2.1 based on the year-end stock price.
Other Benefit Plans
International Pension Plan Termination
In 2016, the Company authorized the termination of international defined benefit pension plans under which approximately 336 participants, including 53 active employees, had accrued benefits. The Company completed the termination of this plan in the second quarter of 2017. In addition to plan assets, the Company made a one-time payment of $7.5 to purchase annuities for participants. The Company recorded a one-time SG&A expense of $39.2 ($31.5 after tax) in the Consumer International segment in the second quarter of 2017. This expense primarily included the effect of the additional cash payment required at settlement and pension settlement accounting rules which require accelerated recognition of actuarial losses that were to be amortized over the expected benefit lives of participants. As of June 30, 2017, the Company had no further obligations with respect to material defined benefit pension plans.
Deferred Compensation Plans
The Company maintains a non-qualified deferred compensation plan under which certain members of management are eligible to defer a maximum of 85% of their regular compensation (i.e. salary) and, in general, up to 85% of their incentive bonus. The amounts deferred under this plan are credited with earnings or losses based upon changes in values of notional investments selected by the plan participant. The investment options available include notional investments in various stock, bond and money market funds as well as the Company’s Common Stock. Each plan participant is fully vested in the amounts the participant defers. The plan permits the Company to make profit sharing contributions that cannot otherwise be contributed to the qualified savings and profit sharing plan due to limitations established by the Internal Revenue Service. These contributions vest under the same vesting schedule applicable to the qualified plan.
The liability to plan participants for contributions designated for notional investment in Common Stock is based on the quoted fair value of the Common Stock plus any dividends credited. The Company uses cash-settled hedging instruments to minimize the cost related to the volatility of Common Stock. At December 31, 2019 and 2018, the amount of the Company’s liability under the deferred compensation plan is included in Current and Deferred and Other Long-term Liabilities and was $102.8 and $92.7, respectively and the funded balances recorded in Other Assets amounted to $98.2 and $79.4, respectively. The amounts charged to earnings, including the effect of the hedges, totaled income of $1.0 in 2019 and expense of $2.4, and $1.9 in 2018 and 2017, respectively.
Non-employee members of the Company’s Board are eligible to defer up to 100% of their directors’ compensation into a similar plan; however, the only option for investment is Common Stock. Members of the Board are fully vested in their account balance. As of December 31, 2019, there were approximately 188,000 shares of Common Stock from shares held as Treasury Stock in a rabbi trust to protect the interest of the directors’ deferred compensation plan participants in the event of a change of control.
80
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
On November 1, 2017, 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 November of 2017, the Company executed open market purchases of $100.0 of its Common Stock under the 2017 Share Repurchase Program. In the first quarter of 2018, the Company settled an accelerated share repurchase (“ASR”) contract and purchased approximately 4.1 million shares of Common Stock for $200.0, of which approximately $110.0 was purchased under the evergreen share repurchase program and $90.0 was purchased under the 2017 Share Repurchase Program.
In January 2019, the Company executed open market purchases of $100.0 of its Common Stock, all of which were purchased under the evergreen share repurchase program. 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 Common Stock repurchases, there remains $210.0 of share repurchase availability under the 2017 Share Repurchase Program as of December 31, 2019.
81
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
14.
|
Accumulated Other Comprehensive Income (Loss)
|
Comprehensive income is defined as net income and other changes in stockholders’ equity from transactions and other events from sources other than stockholders.
The components of changes in accumulated other comprehensive income (“AOCI”) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
Defined
|
|
|
|
|
|
|
Other
|
|
|
Currency
|
|
|
Benefit
|
|
|
Derivative
|
|
|
Comprehensive
|
|
|
Adjustments
|
|
|
Plans
|
|
|
Agreements
|
|
|
Income (Loss)
|
|
Balance December 31, 2016
|
$
|
(50.0
|
)
|
|
$
|
(13.2
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(63.8
|
)
|
Other comprehensive income before reclassifications
|
|
20.0
|
|
|
|
3.3
|
|
|
|
(7.9
|
)
|
|
|
15.4
|
|
Amounts reclassified to consolidated statement of
income(a)(b)
|
|
0.0
|
|
|
|
11.9
|
|
|
|
2.6
|
|
|
|
14.5
|
|
Tax benefit (expense)
|
|
(1.6
|
)
|
|
|
(2.6
|
)
|
|
|
1.7
|
|
|
|
(2.5
|
)
|
Other comprehensive income (loss)
|
|
18.4
|
|
|
|
12.6
|
|
|
|
(3.6
|
)
|
|
|
27.4
|
|
Balance December 31, 2017
|
$
|
(31.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(36.4
|
)
|
Adoption of new accounting pronouncements (Note 1)
|
|
(0.3
|
)
|
|
$
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
Other comprehensive income before reclassifications
|
|
(10.6
|
)
|
|
|
1.9
|
|
|
|
(9.7
|
)
|
|
|
(18.4
|
)
|
Amounts reclassified to consolidated statement of
income(c)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
(0.5
|
)
|
|
|
2.3
|
|
|
|
1.8
|
|
Other comprehensive income (loss)
|
|
(10.6
|
)
|
|
|
1.4
|
|
|
|
(7.4
|
)
|
|
|
(16.6
|
)
|
Balance December 31, 2018
|
$
|
(42.5
|
)
|
|
$
|
0.9
|
|
|
$
|
(12.0
|
)
|
|
$
|
(53.6
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
3.8
|
|
|
|
(1.3
|
)
|
|
|
(30.2
|
)
|
|
|
(27.7
|
)
|
Amounts reclassified to consolidated statement of
income(b)
|
|
1.9
|
|
|
|
0.0
|
|
|
|
6.1
|
|
|
|
8.0
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.4
|
|
|
|
6.2
|
|
|
|
6.6
|
|
Other comprehensive income (loss)
|
|
5.7
|
|
|
|
(0.9
|
)
|
|
|
(17.9
|
)
|
|
|
(13.1
|
)
|
Balance December 31, 2019
|
$
|
(36.8
|
)
|
|
$
|
0.0
|
|
|
$
|
(29.9
|
)
|
|
$
|
(66.7
|
)
|
(a)
|
In connection with the termination of international defined benefit pension plans, $11.9 was reclassified to SG&A. All other amounts were reclassified to cost of sales.
|
(b)
|
Amounts reclassified to cost of sales, selling, general and administrative expenses, or interest expense.
|
(c)
|
Amounts reclassified to cost of sales or interest expense.
|
15.
|
Commitments, Contingencies and Guarantees
|
Commitments
a. Operating lease rent expense, included in income from operations, amounted to $24.5 and $24.5 in 2018 and 2017, respectively. Beginning January 1, 2013, financing lease expense was recorded primarily for the Company’s Corporate Headquarters building. In 2018, interest expense associated with this lease amounted to $3.8 and depreciation expense amounted to $2.5.
82
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
As of December 31, 2018, the Company was obligated to pay minimum annual rentals under different operating and financing lease agreements as follows:
|
|
Operating
|
|
|
Financing
|
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
2019
|
|
$
|
18.7
|
|
|
$
|
6.0
|
|
|
$
|
24.7
|
|
2020
|
|
|
14.6
|
|
|
|
5.8
|
|
|
|
20.4
|
|
2021
|
|
|
12.2
|
|
|
|
5.7
|
|
|
|
17.9
|
|
2022
|
|
|
10.9
|
|
|
|
5.7
|
|
|
|
16.6
|
|
2023
|
|
|
6.4
|
|
|
|
6.0
|
|
|
|
12.4
|
|
2024 and thereafter
|
|
|
10.5
|
|
|
|
55.3
|
|
|
|
65.8
|
|
Total future minimum lease commitments
|
|
$
|
73.3
|
|
|
$
|
84.5
|
|
|
$
|
157.8
|
|
b. 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.
c. As of December 31, 2019, the Company had commitments of approximately $257.6. 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.
d. As of December 31, 2019, the Company had various guarantees and letters of credit totaling $4.4.
e. In connection with the Company’s acquisition of Agro BioSciences, Inc. 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. In December 2019, the final liability, which is expected to be paid in early 2020, was lowered to $14.2 based on 2019 sales. The reduction was recorded in SG&A in the SPD segment.
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 recorded a reduction in fair value of the entire $7.3 Passport 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. That amount was established in the purchase price allocation. Subsequent to the date of the Flawless Acquisition, the Company increased the estimate of the contingent consideration liability by $10.0 from $182.0 to $192.0 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 contingent 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
f. 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, which is scheduled for oral argument in March 2020.
83
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
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.
g. 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.
h. 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. 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.
16.
|
Related Party Transactions
|
The following summarizes the balances and transactions between the Company and each of Armand and ArmaKleen, in which the Company holds a 50% ownership interest:
|
Armand
|
|
|
ArmaKleen
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Purchases by Company
|
$
|
14.3
|
|
|
$
|
15.6
|
|
|
$
|
20.5
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Sales by Company
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
1.1
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Outstanding Accounts Receivable
|
$
|
0.6
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
Outstanding Accounts Payable
|
$
|
1.6
|
|
|
$
|
1.0
|
|
|
$
|
1.7
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Administration & Management Oversight Services(1)
|
$
|
2.7
|
|
|
$
|
2.5
|
|
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
$
|
2.0
|
|
(1)
|
Billed by Company and recorded as a reduction of SG&A expenses.
|
84
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Segment Information
The Company operates three reportable segments: Consumer Domestic, Consumer International and Specialty Products Division. 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 December 31, 2019, the Company held 50% ownership interests in each of Armand and ArmaKleen, respectively. The Company’s equity in earnings of Armand and ArmaKleen, totaling $6.6, $9.2, and $10.8 for the three years ending December 31, 2019, 2018 and 2017, respectively, are included in the Corporate segment.
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.
85
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The following table presents selected financial information relating to the Company’s segments for each of the three years in the period ended December 31, 2019:
|
|
Consumer
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
SPD
|
|
|
Corporate(1)
|
|
|
As Reported
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
3,302.6
|
|
|
$
|
756.3
|
|
|
$
|
298.8
|
|
|
$
|
0.0
|
|
|
$
|
4,357.7
|
|
2018
|
|
|
3,129.9
|
|
|
|
709.5
|
|
|
|
306.5
|
|
|
|
0.0
|
|
|
|
4,145.9
|
|
2017
|
|
|
2,854.9
|
|
|
|
621.1
|
|
|
|
300.2
|
|
|
|
0.0
|
|
|
|
3,776.2
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
1,575.2
|
|
|
|
346.1
|
|
|
|
110.9
|
|
|
|
(48.2
|
)
|
|
|
1,984.0
|
|
2018
|
|
|
1,448.9
|
|
|
|
318.4
|
|
|
|
117.5
|
|
|
|
(44.0
|
)
|
|
|
1,840.8
|
|
2017
|
|
|
1,380.1
|
|
|
|
281.0
|
|
|
|
101.3
|
|
|
|
(32.8
|
)
|
|
|
1,729.6
|
|
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
398.0
|
|
|
|
112.9
|
|
|
|
4.1
|
|
|
|
0.0
|
|
|
|
515.0
|
|
2018
|
|
|
383.3
|
|
|
|
95.4
|
|
|
|
4.5
|
|
|
|
0.0
|
|
|
|
483.2
|
|
2017
|
|
|
364.1
|
|
|
|
85.7
|
|
|
|
4.4
|
|
|
|
0.0
|
|
|
|
454.2
|
|
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
470.1
|
|
|
|
151.7
|
|
|
|
55.2
|
|
|
|
(48.2
|
)
|
|
|
628.8
|
|
2018
|
|
|
422.7
|
|
|
|
131.6
|
|
|
|
55.6
|
|
|
|
(44.0
|
)
|
|
|
565.9
|
|
2017
|
|
|
366.6
|
|
|
|
158.5
|
|
|
|
50.4
|
|
|
|
(32.8
|
)
|
|
|
542.7
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
707.1
|
|
|
|
81.5
|
|
|
|
51.6
|
|
|
|
0.0
|
|
|
|
840.2
|
|
2018
|
|
|
642.9
|
|
|
|
91.4
|
|
|
|
57.4
|
|
|
|
0.0
|
|
|
|
791.7
|
|
2017
|
|
|
649.4
|
|
|
|
36.8
|
|
|
|
46.5
|
|
|
|
0.0
|
|
|
|
732.7
|
|
Equity in Earnings of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
6.6
|
|
|
|
6.6
|
|
2018
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
9.2
|
|
|
|
9.2
|
|
2017
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
10.8
|
|
|
|
10.8
|
|
Income Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
645.8
|
|
|
|
74.0
|
|
|
|
47.3
|
|
|
|
6.6
|
|
|
|
773.7
|
|
2018
|
|
|
577.2
|
|
|
|
81.5
|
|
|
|
51.6
|
|
|
|
9.2
|
|
|
|
719.5
|
|
2017
|
|
|
606.4
|
|
|
|
32.0
|
|
|
|
43.5
|
|
|
|
10.8
|
|
|
|
692.7
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
5,099.1
|
|
|
|
1,110.0
|
|
|
|
340.4
|
|
|
|
107.9
|
|
|
|
6,657.4
|
|
2018
|
|
|
4,642.4
|
|
|
|
991.6
|
|
|
|
347.4
|
|
|
|
87.8
|
|
|
|
6,069.2
|
|
2017
|
|
|
4,543.2
|
|
|
|
1,112.4
|
|
|
|
268.5
|
|
|
|
90.7
|
|
|
|
6,014.8
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
53.9
|
|
|
|
9.4
|
|
|
|
10.4
|
|
|
|
0.0
|
|
|
|
73.7
|
|
2018
|
|
|
36.0
|
|
|
|
12.5
|
|
|
|
11.9
|
|
|
|
0.0
|
|
|
|
60.4
|
|
2017
|
|
|
30.6
|
|
|
|
8.9
|
|
|
|
5.5
|
|
|
|
0.0
|
|
|
|
45.0
|
|
Depreciation & Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
131.9
|
|
|
|
27.1
|
|
|
|
14.1
|
|
|
|
3.3
|
|
|
|
176.4
|
|
2018
|
|
|
103.5
|
|
|
|
19.9
|
|
|
|
13.5
|
|
|
|
4.2
|
|
|
|
141.1
|
|
2017
|
|
|
95.5
|
|
|
|
16.8
|
|
|
|
10.3
|
|
|
|
2.8
|
|
|
|
125.4
|
|
(1)
|
The Corporate segment reflects the following:
(A) The administrative costs of the production planning and logistics functions are included in segment Selling, General and Administrative expenses but are elements of Cost of Sales in the Company’s Consolidated Statements of Income. Such amounts were $48.2, $44.0, and $32.8 for 2019, 2018 and 2017, respectively.
(B) Equity in earnings (loss) of affiliates from Armand and ArmaKleen for the year ended December 31, 2019, 2018 and 2017.
(C) Corporate assets include deferred compensation investments and the Company's investment in unconsolidated affiliates.
|
Other than the differences noted in the footnote above, the accounting policies followed by each of the segments, including intersegment transactions, are substantially consistent with the accounting policies described in Note 1.
Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table above, were $10.5, $5.7 and $4.5 for the twelve months ended December 31, 2019, December 31, 2018 and December 31, 2017, respectively.
86
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Product line revenues from external customers for each of the three years ended December 31, 2019, December 31, 2018 and December 31, 2017 were as follows:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Household Products
|
|
$
|
1,821.7
|
|
|
$
|
1,725.5
|
|
|
$
|
1,640.0
|
|
Personal Care Products
|
|
|
1,480.9
|
|
|
|
1,404.4
|
|
|
|
1,214.9
|
|
Total Consumer Domestic
|
|
|
3,302.6
|
|
|
|
3,129.9
|
|
|
|
2,854.9
|
|
Total Consumer International
|
|
|
756.3
|
|
|
|
709.5
|
|
|
|
621.1
|
|
Total SPD
|
|
|
298.8
|
|
|
|
306.5
|
|
|
|
300.2
|
|
Total Consolidated Net Sales
|
|
$
|
4,357.7
|
|
|
$
|
4,145.9
|
|
|
$
|
3,776.2
|
|
Household Products include laundry, deodorizing, and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care products, hair care products and gummy dietary supplements.
Geographic Information
Approximately 82%, 82% and 83% of the net sales reported in the accompanying consolidated financial statements in 2019, 2018 and 2017, respectively, were to customers in the U.S. Approximately 95%, 95% and 95% of long-lived assets were located in the U.S. at December 31, 2019, 2018 and 2017, respectively. Other than the U.S., no one country accounts for more than 5% of consolidated net sales and 5% of total assets.
Customers
A group of three customers accounted for approximately 36%, 36% and 36% of consolidated net sales in 2019, 2018 and 2017, respectively, of which a single customer (Walmart Inc. and its affiliates) accounted for approximately 24%, 23% and 24% in 2019, 2018 and 2017, respectively.
18.Brazilian Chemical and Consumer Business
During the fourth quarter of 2016, the Company decided to sell its Brazilian chemical business, resulting in a plant impairment charge of $4.9 recognized in the fourth quarter of 2016 based upon an expected sales price. During the first quarter of 2017, the Company sold the business for approximately $4.5, and recorded an approximate $3.5 expense for severance and other charges for the three months ended March 31, 2017. These charges were included in the SPD segment. Sales for the Brazilian chemical business in 2016 were approximately $22.0.
During the second quarter of 2019, the Company decided to sell and subsequently sold our Brazilian consumer business, resulting in a $7.6 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.
87
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
19.Unaudited Quarterly Financial Information
The unaudited quarterly results of operations are prepared in conformity with generally accepted accounting principles and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations for the periods presented. Adjustments are of a normal, recurring nature, except as discussed in the accompanying notes. Due to rounding differences, the sum of the quarterly amounts may not add precisely to the annual amounts.
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,044.7
|
|
|
$
|
1,079.4
|
|
|
$
|
1,089.4
|
|
|
$
|
1,144.2
|
|
|
$
|
4,357.7
|
|
Gross Profit
|
|
|
470.8
|
|
|
|
481.5
|
|
|
|
507.7
|
|
|
|
524.0
|
|
|
|
1,984.0
|
|
Income from Operations
|
|
|
240.8
|
|
|
|
187.4
|
|
|
|
216.8
|
|
|
|
195.2
|
|
|
|
840.2
|
|
Net Income
|
|
|
175.7
|
|
|
|
138.5
|
|
|
|
157.3
|
|
|
|
144.4
|
|
|
|
615.9
|
|
Net Income per Share-Basic
|
|
$
|
0.71
|
|
|
$
|
0.56
|
|
|
$
|
0.64
|
|
|
$
|
0.59
|
|
|
$
|
2.50
|
|
Net Income per Share-Diluted
|
|
$
|
0.70
|
|
|
$
|
0.55
|
|
|
$
|
0.62
|
|
|
$
|
0.58
|
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,006.0
|
|
|
$
|
1,027.9
|
|
|
$
|
1,037.6
|
|
|
$
|
1,074.4
|
|
|
$
|
4,145.9
|
|
Gross Profit
|
|
|
451.5
|
|
|
|
454.9
|
|
|
|
460.1
|
|
|
|
474.3
|
|
|
|
1,840.8
|
|
Income from Operations
|
|
|
220.3
|
|
|
|
173.8
|
|
|
|
204.2
|
|
|
|
193.4
|
|
|
|
791.7
|
|
Net Income
|
|
|
157.8
|
|
|
|
121.7
|
|
|
|
146.3
|
|
|
|
142.8
|
|
|
|
568.6
|
|
Net Income per Share-Basic
|
|
$
|
0.64
|
|
|
$
|
0.50
|
|
|
$
|
0.60
|
|
|
$
|
0.58
|
|
|
$
|
2.32
|
|
Net Income per Share-Diluted
|
|
$
|
0.63
|
|
|
$
|
0.49
|
|
|
$
|
0.58
|
|
|
$
|
0.57
|
|
|
$
|
2.27
|
|
88