NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions, except per share data)
These condensed consolidated financial statements have been prepared by Church & Dwight Co., Inc. (the “Company”). In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows for all periods presented have been made. Results of operations for interim periods may not be representative of results to be expected for the full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”).
The Company incurred research and development expenses in the second quarter of 2020 and 2019 of $24.6 and $22.4, respectively. The Company incurred research and development expenses in the first six months of 2020 and 2019 of $46.3 and $43.1, respectively. These expenses are included in selling, general and administrative (“SG&A”) expenses.
2.
|
New Accounting Pronouncements
|
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued 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 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may apply the amendments prospectively to contract modifications made or relationships entered into or evaluated through December 31, 2022. The adoption of this guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows in the current period. The Company will continue to evaluate the impacts of this guidance on future contract modifications.
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.
Inventories consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2020
|
|
|
2019
|
|
Raw materials and supplies
|
$
|
104.4
|
|
|
$
|
85.9
|
|
Work in process
|
|
28.2
|
|
|
|
29.0
|
|
Finished goods
|
|
322.9
|
|
|
|
302.5
|
|
Total
|
$
|
455.5
|
|
|
$
|
417.4
|
|
8
4.
|
Property, Plant and Equipment, Net (“PP&E”)
|
PP&E consists of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2020
|
|
|
2019
|
|
Land
|
$
|
28.2
|
|
|
$
|
27.8
|
|
Buildings and improvements
|
|
256.6
|
|
|
|
255.4
|
|
Machinery and equipment
|
|
743.6
|
|
|
|
737.4
|
|
Software
|
|
98.9
|
|
|
|
96.7
|
|
Office equipment and other assets
|
|
79.3
|
|
|
|
76.0
|
|
Construction in progress
|
|
83.4
|
|
|
|
72.9
|
|
Gross PP&E
|
|
1,290.0
|
|
|
|
1,266.2
|
|
Less accumulated depreciation and amortization
|
|
721.3
|
|
|
|
693.2
|
|
Net PP&E
|
$
|
568.7
|
|
|
$
|
573.0
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Depreciation and amortization on PP&E
|
$
|
16.0
|
|
|
$
|
16.1
|
|
|
$
|
32.0
|
|
|
$
|
31.9
|
|
5.
|
Earnings Per Share (“EPS”)
|
Basic EPS is calculated based on income available to holders of the Company’s common stock (“Common Stock”) and the weighted average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential Common Stock issuable pursuant to the exercise of outstanding stock options.
The following table sets forth a reconciliation of the weighted average number of shares of Common Stock outstanding to the weighted average number of shares outstanding on a diluted basis:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Weighted average common shares outstanding - basic
|
|
246.2
|
|
|
|
246.4
|
|
|
|
245.9
|
|
|
|
246.2
|
|
Dilutive effect of stock options
|
|
5.1
|
|
|
|
6.3
|
|
|
|
5.3
|
|
|
|
6.1
|
|
Weighted average common shares outstanding - diluted
|
|
251.3
|
|
|
|
252.7
|
|
|
|
251.2
|
|
|
|
252.3
|
|
Antidilutive stock options outstanding
|
|
3.3
|
|
|
|
1.4
|
|
|
|
3.3
|
|
|
|
1.4
|
|
6.
|
Stock Based Compensation Plans
|
The following table provides a summary of option activity:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
Value
|
|
Outstanding at December 31, 2019
|
|
14.0
|
|
|
$
|
43.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1.8
|
|
|
|
73.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(1.5
|
)
|
|
|
29.35
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(0.1
|
)
|
|
|
61.87
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
14.2
|
|
|
$
|
48.61
|
|
|
|
5.9
|
|
|
$
|
407.0
|
|
Exercisable at June 30, 2020
|
|
8.9
|
|
|
$
|
38.78
|
|
|
|
4.2
|
|
|
$
|
341.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The following table provides information regarding the intrinsic value of stock options exercised and stock compensation expense related to stock option awards:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Intrinsic Value of Stock Options Exercised
|
$
|
54.6
|
|
|
$
|
47.8
|
|
|
$
|
68.9
|
|
|
$
|
71.9
|
|
Stock Compensation Expense Related to Stock Option Awards
|
$
|
12.7
|
|
|
$
|
12.2
|
|
|
$
|
15.4
|
|
|
$
|
14.5
|
|
Issued Stock Options
|
|
1.8
|
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
1.4
|
|
Weighted Average Fair Value of Stock Options issued (per share)
|
$
|
12.74
|
|
|
$
|
14.94
|
|
|
$
|
12.73
|
|
|
$
|
14.94
|
|
Fair Value of Stock Options Issued
|
$
|
23.1
|
|
|
$
|
21.3
|
|
|
$
|
23.6
|
|
|
$
|
21.3
|
|
The following table provides a summary of the assumptions used in the valuation of issued stock options:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
0.5
|
%
|
|
|
2.1
|
%
|
|
|
0.5
|
%
|
|
|
2.1
|
%
|
Expected life in years
|
|
7.3
|
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
7.3
|
|
Expected volatility
|
|
19.9
|
%
|
|
|
17.2
|
%
|
|
|
19.8
|
%
|
|
|
17.2
|
%
|
Dividend yield
|
|
1.3
|
%
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
7. Share Repurchases
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.
The Company did not repurchase any shares of its common stock in the first six months of 2020. As a result of the Company’s stock repurchases in recent years, there remains $210.0 of share repurchase availability under the 2017 Share Repurchase Program as of June 30, 2020.
8.Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments at June 30, 2020 and December 31, 2019:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Input
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Level
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Level 1
|
|
$
|
226.8
|
|
|
$
|
226.8
|
|
|
$
|
65.3
|
|
|
$
|
65.3
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
Level 2
|
|
|
65.8
|
|
|
|
65.8
|
|
|
|
252.9
|
|
|
|
252.9
|
|
Term loan due May 1, 2022
|
Level 2
|
|
|
300.0
|
|
|
|
300.0
|
|
|
|
300.0
|
|
|
|
300.0
|
|
2.45% Senior notes due August 1, 2022
|
Level 2
|
|
|
299.8
|
|
|
|
310.4
|
|
|
|
299.8
|
|
|
|
302.6
|
|
2.875% Senior notes due October 1, 2022
|
Level 2
|
|
|
399.9
|
|
|
|
418.5
|
|
|
|
399.9
|
|
|
|
408.2
|
|
3.15% Senior notes due August 1, 2027
|
Level 2
|
|
|
424.7
|
|
|
|
465.8
|
|
|
|
424.7
|
|
|
|
438.9
|
|
3.95% Senior notes due August 1, 2047
|
Level 2
|
|
|
397.4
|
|
|
|
470.1
|
|
|
|
397.3
|
|
|
|
427.1
|
|
Interest Rate Swap Lock Agreement asset (liability)
|
Level 2
|
|
|
(67.6
|
)
|
|
|
(67.6
|
)
|
|
|
(29.5
|
)
|
|
|
(29.5
|
)
|
Business Acquisition Liabilities
|
Level 3
|
|
|
171.0
|
|
|
|
171.0
|
|
|
|
206.2
|
|
|
|
206.2
|
|
The Company recognizes transfers between input levels as of the actual date of the event. There were no transfers between input levels during the six months ended June 30, 2020.
10
Refer to Note 2 in the Form 10-K for a description of the methods and assumptions used to estimate the fair value of each class of financial instruments reflected in the condensed consolidated balance sheets.
The business acquisition liabilities represent the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration is being evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs. In the six months ended June 30, 2020, the Company decreased the fair value estimate of the contingent consideration liability for the Flawless Acquisition by $21.0 from $192.0 to $171.0 based on the revised valuation due to updated sales forecasts as well as the passage of time. The $21.0 reduction of SG&A expense was recorded within the Consumer Domestic and Consumer International Segments. The business acquisition liabilities for December 31, 2019 also included a $14.2 liability for the Agro Acquisition. The Agro Acquisition earnout was paid in the second quarter of 2020. As of December 31, 2019, the Agro Acquisition liability was recorded within Accounts Payable and Accrued Expenses.
The interest rate swap lock agreements are used to hedge the risk of changes in the interest payments attributable to changes in the benchmark U.S. Dollar LIBOR interest rate associated with anticipated issuances of debt. The liability increased by $38.1 during the first six months of 2020 primarily due to lower current and projected interest rates resulting from the COVID-19 pandemic.
The carrying amounts of accounts receivable, and accounts payable and accrued expenses, approximated estimated fair values as of June 30, 2020 and December 31, 2019.
9.
|
Derivative Instruments and Risk Management
|
Changes in interest rates, foreign exchange rates, the price of the Common Stock and commodity prices expose the Company to market risk. The Company manages these risks by the use of derivative instruments, such as cash flow and fair value hedges, diesel and commodity hedge contracts, equity derivatives and foreign exchange forward contracts. The Company does not use derivatives for trading or speculative purposes. Refer to Note 3 in the Form 10-K for a discussion of each of the Company’s derivative instruments in effect as of December 31, 2019.
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
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
239.9
|
|
|
$
|
216.0
|
|
Interest rate swap lock
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
Diesel fuel contracts
|
|
5.9 gallons
|
|
|
4.8 gallons
|
|
Commodities contracts
|
|
63.8 pounds
|
|
|
81.2 pounds
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Equity derivatives
|
|
$
|
26.6
|
|
|
$
|
22.1
|
|
Excluding the Interest Rate Swap Lock Agreement disclosed in Note 8, the fair values and amount of gain (loss) recognized in income and Other Comprehensive Income (“OCI”) associated with the derivative instruments disclosed above did not have a material impact on the Company’s condensed consolidated financial statements.
On May 1, 2019, the Company closed on its previously announced acquisition of the FLAWLESS 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 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, and 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 the Company’s specialty haircare portfolio which includes BATISTE dry shampoo, VIVISCAL hair thinning supplements, and TOPPIK hair fibers.
11
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
|
|
As a result of the Company purchasing assets, 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 acquired business 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 is remeasured at each balance sheet date until the completion of the earn-out period. Subsequent to the date of the Flawless Acquisition, the Company decreased the fair value estimate of the contingent consideration liability by $11.0 from $182.0 to $171.0 as of the six months ended June 30, 2020 based on the revised valuation due to updated sales forecasts as well as the passage of time. Ideavillage will continue to help support the business through a separate long-term transition services agreement.
11.
|
Goodwill and Other Intangibles, Net
|
The following table provides information related to the carrying value of all intangible assets, other than goodwill:
|
June 30, 2020
|
|
|
|
|
December 31, 2019
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names
|
$
|
1,020.4
|
|
|
$
|
(242.0
|
)
|
|
$
|
778.4
|
|
|
3-20
|
|
$
|
1,025.8
|
|
|
$
|
(219.7
|
)
|
|
$
|
806.1
|
|
Customer Relationships
|
|
584.8
|
|
|
|
(272.9
|
)
|
|
|
311.9
|
|
|
15-20
|
|
|
584.8
|
|
|
|
(255.0
|
)
|
|
|
329.8
|
|
Patents/Formulas
|
|
211.4
|
|
|
|
(79.1
|
)
|
|
|
132.3
|
|
|
4-20
|
|
|
211.4
|
|
|
|
(73.0
|
)
|
|
|
138.4
|
|
Non-Compete Agreement
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
5-10
|
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
Total
|
$
|
1,816.6
|
|
|
$
|
(594.0
|
)
|
|
$
|
1,222.6
|
|
|
|
|
$
|
1,822.4
|
|
|
$
|
(548.1
|
)
|
|
$
|
1,274.3
|
|
Indefinite Lived Intangible Assets - Gross Carrying Amount
|
June 30,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
Trade Names
|
$
|
1,475.3
|
|
|
|
|
|
|
|
|
$
|
1,475.7
|
|
|
|
|
|
Intangible amortization expense was $24.5 and $22.7 for the second quarter of 2020 and 2019, respectively. Intangible amortization expense amounted to $49.0 and $40.3 for the first six months of 2020 and 2019, respectively. The Company estimates that intangible amortization expense will be approximately $98.0 in 2020 and approximately $96.0 to $88.0 annually over the next five years.
During the first quarter of 2020, the Company sold its PERL WEISS® toothpaste brand in Germany with a tradename net book value of $2.7 and corresponding goodwill of $1.3 for cash proceeds of $7.0. The $3.0 gain associated with this transaction was recorded as a reduction of SG&A expense in the Consumer International segment.
Fair value for indefinite lived intangible assets was estimated based on a “relief from royalty” or “excess earnings” discounted cash flow method, which contains numerous variables that are subject to change as business conditions change, and therefore could impact fair values in the future. The key assumptions used in determining fair value are sales growth, profitability margins, tax rates and discount rates. The Company determined that the fair value of all other intangible assets for each of the years in the three-year period ended December 31, 2019 exceeded their respective carrying values based upon the forecasted cash flows and profitability. The Company considers all of its personal care brands fair value to substantially exceed their carrying value. However, in recent years the Company’s TROJAN business, specifically the condom category, has not grown and competition has increased resulting in a potential reduction in cash flows. As a result, the TROJAN business has experienced sales and profit declines that has eroded a portion of the excess between fair and carrying value, which could potentially result in an impairment of the tradename. The carrying value of the TROJAN tradename is $176.4 million. As of December 31, 2019, fair value exceeded carrying value by 26%. Key assumptions used
12
in the projections include discount rates of 9.5% in the U.S. and 11.5% internationally, growth assumptions of 0% to 2% and an average royalty rate of approximately 10%. This indefinite-lived intangible asset is susceptible to impairment risk. While management can and has implemented strategies to address the risk, including lowering the Company’s production costs, investing in new product ideas, and developing new creative advertising, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair value. This could result in a decline in fair value that could trigger a future impairment charge of the tradename.
The Company has continued to experience a significant increase in consumer demand for many of its products that began in March, including VITAFUSION gummy vitamins, SIMPLY SALINE and STERIMAR nasal hygiene products, A&H baking soda, and A&H cat litter and KABOOM bathroom cleaners. On the other hand, the Company’s WATERPIK business has been negatively impacted by the temporary closure of dental offices across the United States and some other personal care brands have been negatively impacted by the temporary closures of certain non-essential retailers and the reduction of consumer foot traffic at retailers from which these brands derive a significant proportion of sales. The Company is monitoring the impact the pandemic and the associated governmental response is having on its customers and consumer demand, as well as the potential impact on the Company’s short and long term cash flows as it relates to its intangible asset carrying values.
In addition, the Company’s Passport Food Safety business, under pressure as a result of the COVID-19 pandemic and new competitive activities, is experiencing sales and profit declines due to closures of meat processing plants and decreased demand for its products that could result in an impairment of the associated tradename and other intangible assets. The assets have a current net book value of approximately $24.0 million and are being amortized over their remaining weighted average life of 12 years. The Company is implementing strategies to address the decline, however if unsuccessful, this decline could trigger a future impairment charge.
The carrying amount of goodwill is as follows:
|
Consumer
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
1,707.9
|
|
|
$
|
235.6
|
|
|
$
|
136.0
|
|
|
$
|
2,079.5
|
|
PERL WEISS divestiture
|
|
0.0
|
|
|
|
(1.3
|
)
|
|
|
0.0
|
|
|
|
(1.3
|
)
|
Balance at June 30, 2020
|
$
|
1,707.9
|
|
|
$
|
234.3
|
|
|
$
|
136.0
|
|
|
$
|
2,078.2
|
|
The result of the Company’s annual goodwill impairment test, performed in the beginning of the second quarter of 2020, 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.
13
A summary of the Company’s lease information is as follows:
|
|
June 30,
|
|
December 31,
|
|
|
Classification
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
Right of use assets
|
Other Assets
|
$
|
156.9
|
|
$
|
150.7
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current lease liabilities
|
Accounts Payable and Accrued Expenses
|
$
|
17.9
|
|
$
|
16.4
|
|
Long-term lease liabilities
|
Deferred and Other Long-term Liabilities
|
|
149.3
|
|
|
144.0
|
|
Total lease liabilities
|
|
$
|
167.2
|
|
$
|
160.4
|
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
10.9
|
|
|
11.1
|
|
Weighted-average discount rate
|
|
|
4.8
|
%
|
|
4.9
|
%
|
|
Three Months
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cost(1)
|
$
|
6.8
|
|
|
$
|
6.0
|
|
|
$
|
13.4
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased assets obtained in exchange for new lease liabilities(2)
|
$
|
6.3
|
|
|
$
|
55.8
|
|
|
$
|
16.5
|
|
|
$
|
57.1
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
6.4
|
|
|
$
|
6.1
|
|
|
$
|
12.6
|
|
|
$
|
12.1
|
|
|
(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 first six months of 2020 and 2019 was $9.7 and $8.6, respectively, and is included in the Amortization caption in the condensed consolidated statement of cash flows.
|
|
(2)
|
In March 2020, the Company approved a capital project to purchase additional machinery and equipment at one of its leased manufacturing facilities. This led to a lease modification to include a renewal option that would extend the lease for an additional five years through 2029. The modification resulted in an increase to the Company’s right of use assets and corresponding lease liabilities of approximately $7.3 recorded in the first quarter of 2020. 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
|
|
$
|
11.9
|
|
2021
|
|
|
25.6
|
|
2022
|
|
|
23.3
|
|
2023
|
|
|
17.9
|
|
2024
|
|
|
16.5
|
|
2025 and thereafter
|
|
|
121.7
|
|
Total future minimum lease commitments
|
|
|
216.9
|
|
Less: Imputed Interest
|
|
|
(49.7
|
)
|
Present value of lease liabilities
|
|
$
|
167.2
|
|
14
13.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2020
|
|
|
2019
|
|
Trade accounts payable
|
$
|
516.7
|
|
|
$
|
473.3
|
|
Accrued marketing and promotion costs
|
|
148.6
|
|
|
|
138.1
|
|
Accrued wages and related benefit costs
|
|
61.7
|
|
|
|
96.5
|
|
Other accrued current liabilities
|
|
115.3
|
|
|
|
124.0
|
|
Total
|
$
|
842.3
|
|
|
$
|
831.9
|
|
14.
|
Short-Term Borrowings and Long-Term Debt
|
Short-term borrowings and long-term debt consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2020
|
|
|
2019
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
Commercial paper issuances
|
$
|
64.5
|
|
|
$
|
248.6
|
|
Various debt due to international banks
|
|
1.3
|
|
|
|
4.3
|
|
Total short-term borrowings
|
$
|
65.8
|
|
|
$
|
252.9
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
Term loan due May 1, 2022
|
|
300.0
|
|
|
|
300.0
|
|
2.45% Senior notes due August 1, 2022
|
|
300.0
|
|
|
|
300.0
|
|
Less: Discount
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
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
|
)
|
|
|
(0.3
|
)
|
3.95% Senior notes due August 1, 2047
|
|
400.0
|
|
|
|
400.0
|
|
Less: Discount
|
|
(2.6
|
)
|
|
|
(2.7
|
)
|
Debt issuance costs, net
|
|
(10.4
|
)
|
|
|
(11.5
|
)
|
Net long-term debt
|
$
|
1,811.4
|
|
|
$
|
1,810.2
|
|
The Company is party to a credit agreement dated March 29, 2018, as amended (the “Credit Agreement”), that provides for a $1,000.0 unsecured revolving credit facility (the “Revolving Credit Facility”). In March 2020, the Company drew down a total amount of $825.0 under the Revolving Credit Facility. The Company initiated borrowings under the Revolving Credit Facility as a precautionary measure to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic. The full $825.0 was repaid in May 2020.
15
15.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of changes in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
Defined
|
|
|
|
|
|
|
Other
|
|
|
Currency
|
|
|
Benefit
|
|
|
Derivative
|
|
|
Comprehensive
|
|
|
Adjustments
|
|
|
Plans
|
|
|
Agreements
|
|
|
Income (Loss)
|
|
Balance at December 31, 2018
|
$
|
(42.5
|
)
|
|
$
|
0.9
|
|
|
$
|
(12.0
|
)
|
|
$
|
(53.6
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
1.0
|
|
|
|
0.0
|
|
|
|
(24.7
|
)
|
|
|
(23.7
|
)
|
Amounts reclassified to consolidated statement of
income (a) (b)
|
|
1.9
|
|
|
|
0.0
|
|
|
|
1.0
|
|
|
|
2.9
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Other comprehensive income (loss)
|
|
2.9
|
|
|
|
0.0
|
|
|
|
(17.7
|
)
|
|
|
(14.8
|
)
|
Balance at June 30, 2019
|
$
|
(39.6
|
)
|
|
$
|
0.9
|
|
|
$
|
(29.7
|
)
|
|
$
|
(68.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
(36.8
|
)
|
|
$
|
0.0
|
|
|
$
|
(29.9
|
)
|
|
$
|
(66.7
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(6.6
|
)
|
|
|
0.0
|
|
|
|
(35.5
|
)
|
|
|
(42.1
|
)
|
Amounts reclassified to consolidated statement of
income (a) (b)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
1.9
|
|
|
|
1.9
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
8.6
|
|
|
|
8.6
|
|
Other comprehensive income (loss)
|
|
(6.6
|
)
|
|
|
0.0
|
|
|
|
(25.0
|
)
|
|
|
(31.6
|
)
|
Balance at June 30, 2020
|
$
|
(43.4
|
)
|
|
$
|
0.0
|
|
|
$
|
(54.9
|
)
|
|
$
|
(98.3
|
)
|
(a)
|
Amounts reclassified to cost of sales, selling, general and administrative expenses or interest expense.
|
(b)
|
The Company reclassified a loss of $0.8 and a loss of $2.9 to the condensed consolidated statement of income during the three months ended June 30, 2020 and 2019, respectively.
|
16.
|
Commitments, Contingencies and Guarantees
|
Commitments
a. The Company has a partnership with a supplier of raw materials that mines and processes sodium-based mineral deposits. The Company purchases the majority of its sodium-based raw material requirements from the partnership. The partnership agreement terminates upon two years’ written notice by either partner. Under the partnership agreement, the Company has an annual commitment to purchase 240,000 tons of sodium-based raw materials at the prevailing market price. The Company is not engaged in any other material transactions with the partnership or the partner supplier.
b. As of June 30, 2020, the Company had commitments of approximately $263.8. 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.
c. As of June 30, 2020, the Company had various guarantees and letters of credit totaling $4.2.
d. In connection with the Company’s acquisition of Agro BioSciences, Inc. on January 17, 2017, the Company was 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 April 2020, a payment of $14.5 was paid to settle the liability.
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. There was no change in the contingent liability in the first six months of 2020 and it will be reassessed at each balance sheet date leading up to December 31, 2020.
16
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 of $182.0 was established in the purchase price allocation. During the first quarter of 2020 the Company reduced the fair value of the contingent liability associated with the Flawless Acquisition by $27.0 and during the second quarter of 2020 the Company increased the fair value of the contingent liability by $6.0 for a total reduction of $21.0 for the six months ended June 30, 2020 based on updated sales forecasts and the passage of time. As a result of these adjustments and further adjustments in 2019, the fair value of this contingent liability was $171.0 as of June 30, 2020. The change in fair value was recorded within the Consumer Domestic and Consumer International segments. The contingent liability is remeasured at each balance sheet date until the completion of the earn-out period.
Legal proceedings
e. The Company has been named as a defendant in a breach of contract action filed by Scantibodies Laboratory, Inc. (the “Plaintiff”) on April 1, 2014, in the U.S. District Court for the Southern District of New York.
The complaint alleges, among other things, that the Company (i) breached two agreements for the manufacture and supply of pregnancy and ovulation test kits by switching suppliers, (ii) failed to give Plaintiff the proper notice, (iii) failed to reimburse Plaintiff for costs and expenses under the agreements and (iv) misrepresented its future requirements. The complaint seeks compensatory and punitive damages in an amount in excess of $20.0, as well as declaratory relief, statutory prejudgment interest and attorneys’ fees and costs.
The Company is vigorously defending itself in this matter. On September 19, 2018, the trial court granted the Company’s motion for summary judgment, dismissing all claims brought by the Plaintiff as a matter of law. The Plaintiff appealed that decision, and the 2nd Circuit Court of Appeals reversed it in April 2020, remanding the case back to the lower court for a jury trial.
In connection with this matter, an amount has been reserved that is immaterial to the Company. 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.
f. In addition, in conjunction with the Company’s acquisition and divestiture activities, the Company entered into select guarantees and indemnifications of performance with respect to the fulfillment of the Company’s commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable contract. Representations and warranties that survive the closing date generally survive for periods up to five years or the expiration of the applicable statutes of limitations. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for select provisions. With respect to sale transactions, the Company also routinely enters into non-competition agreements for varying periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materially adverse impact on the Company’s financial condition, results of operations and cash flows.
g. In addition to the matters described above, from time to time in the ordinary course of its business the Company is the subject of, or party to, various pending or threatened legal, regulatory or governmental actions or other proceedings, including, without limitation, those relating to, intellectual property, commercial transactions, product liability, purported consumer class actions, employment matters, antitrust, environmental, health, safety and other compliance related matters. Such proceedings are generally subject to considerable uncertainty and their outcomes, and any related damages, may not be reasonably predictable or estimable. While any such proceedings could result in an adverse outcome for the Company, any such adverse outcome is not expected to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
17
17.Related Party Transactions
The following summarizes the balances and transactions between the Company and Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”), in each of which the Company holds a 50% ownership interest:
|
Armand
|
|
|
ArmaKleen
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Purchases by Company
|
$
|
6.8
|
|
|
$
|
6.4
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Sales by Company
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Outstanding Accounts Receivable
|
$
|
0.4
|
|
|
$
|
0.6
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
Outstanding Accounts Payable
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Administration & Management Oversight Services (1)
|
$
|
1.1
|
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
(1)
|
Billed by the Company and recorded as a reduction of SG&A expenses.
|
Segment Information
The Company operates three reportable segments: Consumer Domestic, Consumer International and 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 June 30, 2020, the Company held 50% ownership interests in each of Armand and ArmaKleen, respectively. The Company’s equity in earnings of Armand and ArmaKleen, totaling $2.0 and $1.7 for the three months ended June 30, 2020 and 2019, respectively, and $3.6 and $3.4 for the six months ended June 30, 2020 and 2019, 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.
Segment net sales and income before income taxes are as follows:
|
Consumer
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
SPD
|
|
|
Corporate
|
|
|
Total
|
|
Net Sales(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2020
|
$
|
931.1
|
|
|
$
|
187.5
|
|
|
$
|
75.7
|
|
|
$
|
0.0
|
|
|
$
|
1,194.3
|
|
Second Quarter 2019
|
|
819.3
|
|
|
|
186.6
|
|
|
|
73.5
|
|
|
|
0.0
|
|
|
|
1,079.4
|
|
First Six Months of 2020
|
$
|
1,822.1
|
|
|
$
|
386.1
|
|
|
$
|
151.3
|
|
|
$
|
0.0
|
|
|
$
|
2,359.5
|
|
First Six Months of 2019
|
|
1,604.2
|
|
|
|
373.3
|
|
|
|
146.6
|
|
|
|
0.0
|
|
|
|
2,124.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2020
|
$
|
200.4
|
|
|
$
|
23.4
|
|
|
$
|
10.2
|
|
|
$
|
2.0
|
|
|
$
|
236.0
|
|
Second Quarter 2019
|
|
136.2
|
|
|
|
16.9
|
|
|
|
15.5
|
|
|
|
1.7
|
|
|
|
170.3
|
|
First Six Months of 2020
|
$
|
451.2
|
|
|
$
|
61.6
|
|
|
$
|
19.0
|
|
|
$
|
3.6
|
|
|
$
|
535.4
|
|
First Six Months of 2019
|
|
318.9
|
|
|
|
45.3
|
|
|
|
27.8
|
|
|
|
3.4
|
|
|
|
395.4
|
|
(1)
|
Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $2.8 and $2.4 for the three months ended June 30, 2020 and June 30, 2019, respectively, and were $5.8 and $4.7 for the six months ended June 30, 2020 and June 30, 2019, respectively.
|
(2)
|
In determining income before income taxes, interest expense, investment earnings and certain aspects of other income and expense were allocated among segments based upon each segment’s relative income from operations.
|
18
Product line revenues from external customers are as follows:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Household Products
|
$
|
544.7
|
|
|
$
|
464.3
|
|
|
$
|
1,039.0
|
|
|
$
|
907.6
|
|
Personal Care Products
|
|
386.4
|
|
|
|
355.0
|
|
|
|
783.1
|
|
|
|
696.6
|
|
Total Consumer Domestic
|
|
931.1
|
|
|
|
819.3
|
|
|
|
1,822.1
|
|
|
|
1,604.2
|
|
Total Consumer International
|
|
187.5
|
|
|
|
186.6
|
|
|
|
386.1
|
|
|
|
373.3
|
|
Total SPD
|
|
75.7
|
|
|
|
73.5
|
|
|
|
151.3
|
|
|
|
146.6
|
|
Total Consolidated Net Sales
|
$
|
1,194.3
|
|
|
$
|
1,079.4
|
|
|
$
|
2,359.5
|
|
|
$
|
2,124.1
|
|
Household Products include laundry, deodorizing and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care and hair care products and gummy dietary supplements.
19
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
(In millions, except per share data)