CHURCH & DWIGHT CO., INC. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements.
OVERVIEW Our Business We develop, manufacture and market a broad range of consumer household and personal care and specialty products focused on animal and food production, chemicals and cleaners. We focus our consumer products marketing efforts principally on our 12 "power brands." These well-recognized brand names include ARM & HAMMER, used in multiple product categories such as baking soda, cat litter, carpet deodorization and laundry detergent; TROJAN condoms, lubricants and vibrators; OXICLEAN stain removers, cleaning solutions, laundry detergent and bleach alternatives; SPINBRUSH battery-operated and manual toothbrushes; FIRST RESPONSE home pregnancy and ovulation test kits; NAIR depilatories; ORAJEL oral analgesic; XTRA laundry detergent; L'IL CRITTERS and VITAFUSION gummy dietary supplements, BATISTE dry shampoos,WATERPIK water flossers and replacement showerheads and FLAWLESS hair removal products. We sell our 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. We sell our specialty products to industrial customers, livestock producers and through distributors.
We operate our business in three segments: Consumer Domestic,
2019 Financial Highlights
Key 2019 financial results include:
• 2019 net sales grew 5.1% over 2018, with gains in the Consumer Domestic and
SPD. The gains in
due to favorable pricing pricing/product mix in Consumer Domestic and
favorable volumes in
volumes in SPD.
were favorably impacted by the Flawless Acquisition, which occurred on
2019.
• Gross margin increased 110 basis points to 45.5% in 2019 from 44.4% in 2018,
primarily due to the impact of productivity programs, favorable volume
price/product mix, and the Flawless Acquisition, partially offset by higher
commodity and manufacturing costs.
• Operating margin increased 20 basis points to 19.3% in 2019 from 19.1% in
2018, reflecting higher gross margin, partially offset by higher selling,
general and administrative expenses and slightly higher marketing costs.
• We reported diluted net earnings per share in 2019 of
approximately 7.5% from 2018 diluted net earnings per share of
• Cash provided by operations was
year, due to higher cash earnings and a larger reduction in working capital.
• We returned$474.1 to our stockholders through dividends and share repurchases.
Strategic Goals, Challenges and Initiatives
Our ability to generate sales depends on consumer demand for our products and
retail customers' decisions to carry our products, which are, in part, affected
by general economic conditions in our markets. While a vast majority of our
products are consumer staples and less vulnerable to decreases in discretionary
spending than other products, an increasing number of our products, particularly
those from our recent acquisitions, are more durable in nature and are more
likely to be affected by consumer decisions to control spending. Some customers
have responded to economic conditions by increasing their private label
offerings (primarily in the dietary supplements, diagnostic kits and oral
analgesics categories), launching their own brands, and consolidating the
product selections they offer to the top few leading
31
--------------------------------------------------------------------------------CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data) brands in each category. In addition, an increasing portion of our product categories is being sold by club stores, dollar stores, mass merchandisers and internet-based retailers. These factors have placed downward pressure on our sales and gross margins. We expect a competitive marketplace in 2020 due to new product introductions by competitors. In this environment, we intend to continue to aggressively pursue several key strategic initiatives: maintain competitive marketing and trade spending, tightly control our cost structure, continue to develop and launch new and differentiated products, and pursue strategic acquisitions. We also intend to continue to grow our product sales globally and maintain an offering of premium and value brand products to appeal to a wide range of consumers. We derive a substantial percentage of our revenues from sales of laundry detergent. The continued customer demand for these products are critical to our future success. As a result, any commercialization, delays or reduction of sales of these products, in the event that our diversification efforts discussed below are not successful, could have a material adverse effect on our business, financial condition and operating results. In addition, there continues to be significant product competition in the gummy vitamin category. The category has grown from six brands to over 50 in the last eight years. Moreover, condom usage has declined, as a result of a lower 18 to 24-year old population, alternate birth control options, less fear of HIV, less sex acts and, increased competition, all of which have contributed to lower demand for our product. We continue to evaluate and vigorously address these pressures through, among other things, new product introductions and increased marketing and trade spending. However, there is no assurance that the category will not decline in the future and that we will be able to offset any such decline. We are continuously focused on strengthening our key brands, such as ARM & HAMMER, OXICLEAN, TROJAN, L'IL CRITTERS and VITAFUSION, BATISTE,WATERPIK , and FLAWLESS, through the launch of innovative new products, which span various product categories, including premium and value household products supported by increased marketing and trade spending. There can be no assurance that these measures will be successful. In the domestic business, ten out of 12 "power brands" met or exceeded category growth for the full year 2019. Our global product portfolio consists of both premium (63% of total worldwide consumer revenue in 2019) and value (37% of total worldwide consumer revenue in 2019) brands, which we believe enables us to succeed in a range of economic environments. We intend to continue to develop a portfolio of appealing new products to build loyalty among cost-conscious consumers. Over the past two decades, we have diversified from an almost exclusivelyU.S. business to a global company with approximately 18% of sales derived from international countries in 2019. We have subsidiary operations in six countries (Canada ,Mexico ,U.K. ,France ,Germany , andAustralia ) and sell to over 130 other countries. In 2019, we benefited from our expanded global footprint and expect to continue to focus on selectively expanding our global business. If we are unable to expand our business internationally at the rate that we expect, we may not realize the operational benefits that we anticipate. Although we believe ongoing international expansion represents a significant opportunity to grow our business, our increasing activity in global markets exposes us to additional complexity and uncertainty. Net sales generated outside of theU.S. are exposed to foreign currency exchange rate fluctuations as well as political uncertainty which could impact future operating results. Moreover, the current domestic and international political environment, including existing and potential changes toU.S. policies related to global trade and tariffs, have resulted in uncertainty regarding the global economy. The impact ofU.S. tariffs on certain products was a component of increased cost of sale during the year endedDecember 31, 2019 . The implementation of more restrictive trade policies, such as higher tariffs or new barriers to entry, in countries in which we manufacture or sell large quantities of products and services could negatively impact our business, results of operations and financial condition. We also continue to focus on controlling our costs. Historically, we have been able to mitigate the effects of cost increases primarily by implementing cost reduction programs and, to a lesser extent, by passing along some of these cost increases to customers. We have also entered into set pricing and pre-buying arrangements with certain suppliers and hedge agreements for diesel fuel and other commodities. Should we be required to address cost increases by increasing the prices that our customers pay for our products, we cannot be certain they will be accepted. Additionally, maintaining tight controls on overhead costs has been a hallmark of ours and has enabled us to effectively navigate recent challenging economic conditions. The identification and integration of strategic acquisitions are an important component of our overall strategy and product category diversification. Acquisitions have added significantly to our sales and profits and product category diversification over the last decade. This is evidenced by our 2015 acquisition of certain assets ofVaried Industries Corporation (the "Vi-cor Acquisition"), 2016 acquisitions ofSpencer Forrest, Inc. , the maker of TOPPIK (the "Toppik Acquisition"), and the ANUSOL and RECTINOL businesses from Johnson & Johnson (the "Anusol Acquisition"), 2017 acquisitions of VIVISCAL fromLifes2Good Holdings Limited (the "Viviscal Acquisition"),Agro BioSciences, Inc. (the "Agro Acquisition"), andWATERPIK fromPik Holdings, Inc. (the "Waterpik Acquisition"), 2018 acquisition ofPassport Food Safety Solutions, Inc. (the "Passport Acquisition") and the Flawless Acquisition in 2019. However, the failure to effectively identify or integrate any acquisition or achieve expected synergies may cause us to incur material asset write-downs. We actively seek acquisitions that fit our guidelines, and our strong financial position provides us with flexibility to take advantage of acquisition opportunities. In addition, our ability to quickly integrate acquisitions and leverage existing infrastructure has enabled us to establish a strong track record in making accretive acquisitions. Since 2001, we have acquired 11 of our 12 "power brands". 32 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data) We believe we are positioned to meet the ongoing challenges described above due to our strong financial condition, experience operating in challenging environments and continued focus on key strategic initiatives: maintaining competitive marketing and trade spending, managing our cost structure, continuing to develop and launch new and differentiated products, and pursuing strategic acquisitions. This focus, together with the strength of our portfolio of premium and value brands, has enabled us to succeed in a range of economic environments, and is expected to position us to continue to increase stockholder value over the long-term. Moreover, the generation of a significant amount of cash from operations, as a result of net income and effective working capital management, combined with an investment grade credit rating provides us with the financial flexibility to pursue acquisitions, drive new product development, make capital expenditures to support organic growth and gross margin improvements, return cash to stockholders through dividends and share buy backs, and reduce outstanding debt, positioning us to continue to create stockholder value.
For information regarding risks and uncertainties that could materially adversely affect our business, results of operations and financial condition, see "Risk Factors" in Item 1A of this Annual Report.
Recent Developments Flawless Acquisition OnMay 1, 2019 , we closed on our previously announced Flawless Acquisition from Ideavillage. We 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 thanDecember 31, 2021 . The transaction was funded with proceeds from a three-year term loan and commercial paper borrowings. The Flawless hair removal business is managed in theConsumer 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.
Dividend Increase
OnJanuary 31, 2020 , the Board declared a 5.5% increase in the regular quarterly dividend from$0.2275 to$0.24 per share, equivalent to an annual dividend of$0.96 per share payable to stockholders of record as ofFebruary 14, 2020 . The increase raises the annual dividend payout from$224.0 to approximately$237.0 . OnFebruary 5, 2019 , the Board declared a 5% increase in the regular quarterly dividend from $0.2175 to$0.2275 per share, equivalent to an annual dividend of$0.91 per share payable to stockholders of record as ofFebruary 15, 2019 . The increase raised the annual dividend payout from$213.0 to$224.0 . 33
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CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in theU.S. (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. By their nature, these judgments are subject to uncertainty. They are based on our historical experience, our observation of trends in industry, information provided by our customers and information available from other outside sources, as appropriate. Our significant accounting policies and estimates are described below.
Revenue Recognition and Promotional and Sales Return Reserves
Virtually all of our revenue represents sales of finished goods inventory and is recognized when received or picked up by our customers. The reserves for consumer and trade promotion liabilities and sales returns are established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Promotional reserves are provided for sales incentives, such as coupons to consumers, and sales incentives provided to customers (such as slotting, cooperative advertising, incentive discounts based on volume of sales and other arrangements made directly with customers). All such costs are netted against sales. Slotting costs are recorded when the product is delivered to the customer. Cooperative advertising costs are recorded when the customer places the advertisement for our products. Discounts relating to price reduction arrangements and coupons are recorded when the related sale takes place. Costs associated with end-aisle or other in-store displays are recorded when product that is subject to the promotion is sold. We rely on historical experience and forecasted data to determine the required reserves. For example, we use historical experience to project coupon redemption rates to determine reserve requirements. Based on the total face value of Consumer Domestic coupons redeemed over the past several years, if the actual rate of redemptions were to deviate by 0.1% from the rate for which reserves are accrued in the financial statements, a difference of approximately$1.2 in the reserve required for coupons would result. With regard to other promotional reserves and sales returns, we use experience-based estimates, customer and sales organization inputs and historical trend analysis in arriving at the reserves required. If our estimates for promotional activities and sales returns reserves were to change by 10% the impact to promotional spending and sales return accruals would be approximately$6.6 . While management believes that its promotional and sales returns reserves are reasonable and that appropriate judgments have been made, estimated amounts could differ materially from actual future obligations.
Impairment of goodwill, trade names and other intangible assets
Carrying values of goodwill and indefinite-lived trade names are reviewed periodically for possible impairment. Finite intangible assets are assessed when there are business triggering events. Our 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. The result of our annual goodwill impairment test determined that the estimated fair value substantially exceeded the carrying values of all reporting units. In addition, there were no goodwill impairment charges for each of the years in the three-year period endedDecember 31, 2019 . 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. We determined that the fair value of all other intangible assets for each of the years in the three-year period endedDecember 31, 2019 exceeded their respective carrying values based upon the forecasted cash flows and profitability. 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. These excesses had been reduced due in large part to an increased competitive market environment therefore resulting in reduced cash flow projections. These indefinite-lived intangible assets could still be susceptible to impairment risk. While management can and has implemented strategies to address the risk, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges of these assets. It is possible that our 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. A future impairment charge for goodwill or intangible assets could have a material effect on our consolidated financial position or results of operations. 34 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
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. We record liabilities for potential assessments in various tax jurisdictions underU.S. GAAP guidelines. The liabilities relate to tax return positions that, although supportable by us, 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. We adjust 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, or an adverse determination in litigation, with a taxing authority could require the use of cash and result in an increase in our annual tax rate. Conversely, favorable resolution of an issue with a taxing authority would be recognized as a reduction to our annual tax rate.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as ofDecember 31, 2019 . 35
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CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
RESULTS OF OPERATIONS FOR THE YEARS ENDED
The discussion of results of operations at the consolidated level presented below is followed by a more detailed discussion of results of operations by segment. The discussion of our consolidated results of operations and segment operating results is presented on a historical basis for the years endedDecember 31, 2019 , 2018, and 2017. The segment discussion also addresses certain product line information. Our operating segments are consistent with our reportable segments. Consolidated results 2019 compared to 2018 Twelve Months Ended Change vs. Twelve Months Ended December 31, 2019 Prior Year December 31, 2018 Net Sales $ 4,357.7 5.1% $ 4,145.9 Gross Profit $ 1,984.0 7.8% $ 1,840.8 45.5 % +110 basis 44.4 % Gross Margin points Marketing Expenses $ 515.0 6.6% $ 483.2 11.8 % +10 basis 11.7 % Percent of Net Sales points Selling, General & Administrative $ 628.8 11.1% $ 565.9 Expenses 14.4 % +80 basis 13.6 % Percent of Net Sales points Income from Operations $ 840.2 6.1% $ 791.7 19.3 % +20 basis 19.1 % Operating Margin points Net income per share - Diluted $ 2.44 7.5% $ 2.27 Net Sales Net sales for the year endedDecember 31, 2019 were$4,357.7 , an increase of$211.8 , or 5.1% compared to 2018 net sales. The components of the net sales increase are as follows: Net Sales - Consolidated December 31, 2019 Product volumes sold 1.0 % Pricing/Product mix 3.4 % Foreign exchange rate fluctuations / Other (0.5 %) Volume from acquired product lines (net of divestiture) (1) 1.2 % Net Sales increase 5.1 %
(1) On
completed the Flawless Acquisition. The results of these acquisitions are
included in our results since the date of acquisition. During the second
quarter of 2019, we sold our consumer business in
The volume change primarily reflects increased product sales in theConsumer International segment, with a volume decline in SPD and a slight decline in the Consumer Domestic segment. Price/mix was favorable in theConsumer Domestic and Consumer International segments, but was partially offset by slightly unfavorable price/mix in the SPD segment. Our gross profit for 2019 was$1,984.0 , a$143.2 increase compared to 2018. Gross margin was 45.5% in 2019 compared to 44.4% in 2018, a 110 basis points ("bps") increase. The increase is due to the impact of productivity programs of 120 bps, favorable volume price/product mix of 120 bps, and the impact of higher margins on acquired businesses of 50 bps, partially offset by higher manufacturing costs of 100 bps and commodity costs and transportation costs of 80 bps. Operating Costs Marketing expenses for 2019 were$515.0 , an increase of$31.8 compared to 2018. The acquired businesses contributed modestly to the increase. Marketing expenses as a percentage of net sales increased 10 bps to 11.8% in 2019 as compared to 2018 due to 70 bps on higher expenses partially offset by 60 bps of leverage on higher net sales. Selling, general and administrative ("SG&A") expenses for 2019 were$628.8 , an increase of$62.9 or 11.1% compared to 2018. The increase is primarily due to transition and ongoing acquisition-related costs (including amortization expense and Flawless earnout adjustment), higher spending in information technology, research and development ("R&D"), and incentive compensation costs, and the charge associated with selling our consumer business inBrazil of$7.6 , partially offset by the reduction in fair value of a$7.3 contingent consideration liability associated with the Passport Acquisition. SG&A as a percentage of net sales increased 80 bps to 14.4% in 2019 36 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
compared to 13.6% in 2018. The increase is due to 150 bps on higher costs, partially offset by 70 bps of leverage associated with higher sales.
Other Income and Expenses
Equity in earnings of affiliates decreased by
Other expense decreased by
Interest expense in 2019 was
Taxation
The 2019 tax rate was 20.4% compared to 21.0% in 2018.
2018 compared to 2017
Net sales for the year endedDecember 31, 2018 were$4,145.9 , an increase of$369.7 , or 9.8% compared to 2017 net sales. The components of the net sales increase are as follows:Net Sales - ConsolidatedDecember 31, 2018 Product volumes sold 3.7 % Pricing/Product mix 0.6 % Foreign exchange rate fluctuations / Other 0.1 % Volume from acquired product lines (net of divestiture) (1) 5.4 %Net Sales increase 9.8 % 37
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CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data) OnMarch 8, 2018 , we completed the Passport Acquisition. OnJanuary 17, 2017 , we completed the Viviscal Acquisition. OnMay 1, 2017 , we completed the Agro Acquisition. OnAugust 7, 2017 , we completed the Waterpik Acquisition. Net sales of these acquisitions are included in our results since the dates of acquisition. InMarch 2017 , we sold our chemical business inBrazil .
The volume change primarily reflects increased product sales in both the
Our gross profit for 2018 was
Operating Costs
Marketing expenses for 2018 were
SG&A expenses for 2018 were$565.9 , an increase of$23.2 or 4.3% compared to 2017. The prior year includes the$39.2 international pension settlement charge. The increase is primarily due to transition and ongoing acquisition-related costs, higher compensation, information system (in part in support of new technologies and security upgrades) and R&D costs. SG&A as a percentage of net sales decreased 80 bps to 13.6% in 2018 compared to 14.4% in 2017. The decrease is due to 130 bps of leverage associated with higher sales, partially offset by higher costs of 50 bps. The comparison is helped by approximately 100 bps associated with the 2017 pension settlement charge.
Other Income and Expenses
Equity in earnings of affiliates decreased by
Other expense increased by
Interest expense in 2018 was
Taxation
The 2018 tax rate was 21.0% compared to -7.3% in 2017. The 2017 tax rate was positively impacted by 39.4% as a result of the Tax Cuts and Jobs Act (the "Tax Act"), which lowered theU.S. corporate income tax rate to 21% starting in 2018 and resulted in a negative tax rate for 2017.
Segment results for 2019, 2018 and 2017
We operate three reportable segments: Consumer Domestic,Consumer International and SPD. These segments are determined based on differences in the nature of products and organizational and ownership structures. We also have a Corporate segment. 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 , we held 50% ownership interests in each of Armand and
ArmaKleen, respectively. Our 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.
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--------------------------------------------------------------------------------CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
Some of the subsidiaries that are included in the
Segment net sales and income before income taxes for each of the three years
ended
Consumer Consumer
Domestic International SPD Corporate(3) Total
Net Sales (1)
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
Income before Income Taxes(2)
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
(1) Intersegment sales from
are not reflected in the table, were
(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.
(3) Corporate segment consists of equity in earnings of affiliates from Armand
and ArmaKleen in 2019, 2018 and 2017.
Product line revenues for external customers for the years ended
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 deodorizing, cleaning and laundry products. Personal
Care Products include condoms, pregnancy kits, oral care products, skin care
products, hair care products and gummy dietary supplements.
Consumer Domestic
2019 compared to 2018
Consumer Domestic net sales in 2019 were$3,302.6 , an increase of$172.1 or 5.5% compared to net sales of$3,129.9 in 2018. The components of the net sales change are the following:Net Sales - Consumer DomesticDecember 31, 2019 Product volumes sold (0.2 %) Pricing/Product mix 4.2 % Acquired product lines (1) 1.5 %Net Sales increase 5.5 %
(1) Includes the Flawless Acquisition since the date of acquisition.
The increase in net sales for 2019 reflects the impact of the Flawless Acquisition, higher sales of ARM & HAMMER liquid detergent,WATERPIK oral care products, ARM & HAMMER clumping cat litter, ARM & HAMMER scent booster, XTRA liquid laundry detergent, BATISTE dry shampoo, OXICLEAN® stain fighters, and VITAFUSION gummy vitamins partially offset by lower sales of TROJAN condoms and OXICLEAN® liquid laundry detergent. There continues to be significant product competition in the gummy vitamin category. The category has grown from six brands to over 50 in the last eight years. Moreover, condom usage has declined, as a result of a lower 18 to 24-year old population, alternate birth control 39 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data) options, less fear of HIV, less sex acts and, increased competition, all of which have contributed to lower demand for our product. We continue to evaluate and vigorously address these pressures through, among other things, new product introductions and increased marketing and trade spending. However, there is no assurance this category will not decline in the future and that we will be able to offset any such decline. Consumer Domestic income before income taxes for 2019 was$645.8 , a$68.6 increase as compared to 2018. The increase is due primarily to favorable price/mix of$137.0 , and lower interest and other expenses of$4.7 , partially offset by higher SG&A expenses of$47.7 (in large part due to the Flawless Acquisition contingent consideration charge and other costs associated with the Flawless Acquisition, higher spending in information technology, R&D, and incentive compensation costs), higher marketing expenses of$14.7 , unfavorable manufacturing and distribution expenses of$8.2 , and lower volumes of$2.5 .
2018 compared to 2017
Consumer Domestic net sales in 2018 were$3,129.9 , an increase of$275.0 or 9.6% compared to net sales of$2,854.9 in 2017. The components of the net sales change are the following:Net Sales - Consumer DomesticDecember 31, 2018 Product volumes sold 4.0 % Pricing/Product mix 0.3 % Volume from acquired product lines (1) 5.3 %Net Sales increase 9.6 %
(1) Includes net sales of the brands acquired in the Viviscal Acquisition and
the Waterpik Acquisition since the date of acquisition.
The increase in net sales for 2018 reflects the impact of acquisitions and higher sales of ARM & HAMMER liquid and unit dose detergents, ARM & HAMMER cat litter, BATISTE dry shampoo, OXICLEAN stain fighters and gummy vitamins, partially offset by lower sales of KABOOM cleaning products.
There continues to be significant product competition in the gummy vitamin category. The category has grown from eight competitors to 30 in the last five years. We continue to evaluate and vigorously combat these pressures through, among other things, new product introductions and increased marketing and trade spending. However, there is no assurance this category will not decline in the future and that we will be able to offset any such decline. Consumer Domestic income before income taxes for 2018 was$577.2 , a$29.2 decrease as compared to 2017. The decrease is due primarily to the impact of higher SG&A costs of$56.1 , unfavorable commodity and manufacturing costs of$49.6 , higher interest and other expenses of$22.5 , higher marketing expenses of$19.3 and unfavorable price/product mix of$11.8 , partially offset by higher sales volumes of$130.3 .Consumer International 2019 compared to 2018
Net Sales -Consumer International December 31, 2019 Product volumes sold 8.3 % Pricing/Product mix 0.9 % Foreign exchange rate fluctuations (3.2 %) Volume from acquired product lines (net of divestiture) (1) 0.6 %Net Sales increase 6.6 %
(1) Includes the Flawless Acquisition since the date of acquisition. During the
second quarter of 2019, we sold our consumer business in
Excluding the impact of foreign exchange rates and the Flawless Acquisition, higher sales were driven primarily by VITAFUSION & L'IL CRITTERS gummy vitamins, BATISTE dry shampoo, FEMFRESH feminine hygiene portfolio, and STERIMAR nasal spray in theGlobal Markets Group business, ARM & HAMMER cat litter and liquid laundry detergent, BATISTE dry shampoo, GRAVOL anti-nauseant, OXICLEAN stain fighters, and TROJAN condoms inCanada , ARM & HAMMER liquid laundry detergent and STERIMAR nasal 40
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CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data) spray inMexico , and BATISTE dry shampoo inGermany .WATERPIK water flossers sales grew across theGlobal Markets Group business (formerly exports),U.K. ,Canada ,Australia , andFrance .Consumer International income before income taxes was$74.0 in 2019, a decrease of$7.5 compared to 2018 due primarily to higher SG&A costs of$23.3 (including the charge to sell the consumer business inBrazil , higher spending in information technology, R&D, and incentive compensation costs), higher marketing expenses of$20.6 , unfavorable manufacturing and commodity costs of$9.7 , and unfavorable foreign exchange rates of$3.9 , partially offset by higher sales volumes of$31.8 , favorable price/product mix of$15.8 , and lower interest and other expenses of$2.4 . 2018 compared to 2017
6.9 %
Pricing/Product mix 0.9 %
Foreign exchange rate fluctuations 0.5 %
Volume from acquired product lines (1) 5.9 %
Net Sales increase 14.2 %
(1) Includes net sales of the brands acquired in the Viviscal Acquisition and
the Waterpik Acquisition since the dates of acquisition.
Excluding the impact of foreign exchange rates, higher sales for the year occurred in exports,Europe ,Canada ,Mexico andAustralia . The addition of the acquired businesses contributed significantly to the sales growth. Of the existing brands, the net sales increase is due primarily to OXICLEAN, BATISTE, L'IL CRITTERS & VITAFUSION and NAIR in the export business, ARM & HAMMER clumping cat litter and BATISTE inCanada , OXICLEAN, ARM & HAMMER liquid laundry detergent and ARM & HAMMER dental care inMexico andWaterpik in several countries.Consumer International income before income taxes was$81.5 in 2018, an increase of$49.5 compared to 2017 due primarily to lower costs as a result of the 2017 pension settlement of$39.2 , higher sales volumes of$42.2 , favorable foreign exchange rates of$3.8 , and favorable price/product mix of$0.7 , partially offset by higher other SG&A costs of$12.2 , higher marketing costs of$9.4 , unfavorable manufacturing and commodity costs of$9.6 , and higher interest and other expenses of$5.2 . Specialty Products 2019 compared to 2018
SPD net sales were
Net Sales - SPDDecember 31, 2019 Product volumes sold (3.2 %) Pricing/Product mix (0.1 %) Volume from acquired product lines (1) 0.8 %Net Sales increase (2.5 %)
(1) Includes net sales of Passport since the date of acquisition.
Excluding the impact of the acquisitions, the net sales decrease in 2019 was primarily driven by lower volumes in the animal and food production business. Demand in the dairy industry was significantly reduced due to low dairy farm profitability, which improved in the fourth quarter of 2019.
SPD income before income taxes was$47.2 in 2019, a decrease of$4.4 compared to 2018. The decrease in income before income taxes for 2019 is due primarily to higher SG&A costs of$6.8 , lower sales volumes of$3.4 , unfavorable manufacturing costs of$3.1 , and unfavorable price/product mix of$0.2 , partially offset by$7.3 due to the reduction in fair value of a contingent consideration liability associated with the Passport Acquisition, lower interest and other expenses of$1.5 . and lower marketing expenses of$0.4 . 41 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
2018 compared to 2017
SPD net sales were
Net Sales - SPDDecember 31, 2018 Product volumes sold (6.4 %) Pricing/Product mix 3.0 % Volume from acquired product lines (net of divestiture) (1) 5.5 %Net Sales increase 2.1 % (1) Includes net sales ofPassport and Agro BioSciences, Inc. since the dates
of acquisition, partially offset by the sale of our Brazilian chemical
business.
Excluding the impact of the acquisitions and divestiture, the net sales decrease in 2018 was driven primarily by lower volumes in the animal productivity business, partially offset by higher broad-based pricing. Although demand for our products continues to grow in the poultry industry, demand in the dairy industry continues to be significantly reduced due to low milk prices. SPD income before income taxes was$51.6 in 2018, an increase of$8.1 compared to 2017. The increase in income before income taxes for 2018 is due primarily to favorable price/product mix of$9.1 , lower costs associated with selling the Brazilian chemical business of$3.5 , higher sales volume of$3.3 , and lower manufacturing costs of$2.6 , partially offset by higher SG&A costs of$7.4 and higher interest and other expenses of$2.7 .
Corporate
The Corporate segment reflects the reclassification of administrative costs of the production, planning and logistics functions which are included in SG&A expenses in the operating segments but are elements of cost of sales in our Consolidated Statements of Income. Such amounts were$48.2 ,$44.0 and$32.8 for 2019, 2018 and 2017, respectively. Also included in corporate segment are the equity in earnings of affiliates from Armand and ArmaKleen, totaling$6.6 ,$9.2 and$10.8 for the three years endedDecember 31, 2019 , 2018 and 2017, respectively.
Liquidity and capital resources
OnMay 1, 2019 , we amended our$1,000.0 unsecured revolving credit facility (the "Credit Agreement") to extend the term of the Credit Agreement fromMarch 29, 2023 toMarch 29, 2024 . Under the Credit Agreement, we have the ability to increase our 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 our$1,000.0 commercial paper program. OnMay 1, 2019 , we 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 onMay 1, 2022 . The interest rate isU.S. Dollar London Interbank Offered Rate ("LIBOR") plus an applicable margin based on our credit rating, which can range from 60 bps to 113 bps. As ofDecember 31, 2019 , we had$155.7 in cash and cash equivalents, and approximately$749.0 available through the revolving facility under our Credit Agreement and our commercial paper program. To preserve our liquidity, we invest cash primarily in government money market funds, prime money market funds, short-term commercial paper and short-term bank deposits. We 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 onJuly 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 with cash on hand and commercial paper onJanuary 25, 2019 , bore interest at a rate, reset quarterly, equal to three-month LIBOR plus 0.15%. OnDecember 9, 2014 , we issued$300.0 aggregate principal amount of 2.45% Senior Notes dueDecember 15, 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. OnSeptember 26, 2012 , we issued$400.0 aggregate principal amount of 2.875% Senior Notes due 2022 (the "2022 Notes"). The 2022 Notes were issued under the second supplemental indenture, datedSeptember 26, 2012 (the "BNY Mellon Second Supplemental Indenture") to the indenture datedDecember 15, 2010 (the "BNY Mellon Base Indenture") between us andThe Bank of New York Mellon Trust 42 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
The current economic environment presents risks that could have adverse consequences for our liquidity. See "Unfavorable economic conditions could adversely affect demand for our products" under "Risk Factors" in Item 1A of this Annual Report. We do not anticipate that current economic conditions will adversely affect our ability to comply with the financial covenant in the Credit Agreement because we currently are, and anticipate that we will continue to be, in compliance with the maximum leverage ratio requirement under the Credit Agreement. OnJanuary 31, 2020 , the Board declared a 5.5% increase in the regular quarterly dividend from$0.2275 to$0.24 per share, equivalent to an annual dividend of$0.96 per share payable to stockholders of record as ofFebruary 14, 2020 . The increase raises the annual dividend payout from$224.0 to approximately$237.0 . OnNovember 1, 2017 , the Board authorized a share repurchase program, under which we 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 date. We also continued our evergreen share repurchase program, authorized by the Board onJanuary 29, 2014 , under which we may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under our incentive plans. In November of 2017, we executed open market purchases of$100.0 of our Common Stock under the 2017 Share Repurchase Program. In the first quarter of 2018, we 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. InJanuary 2019 , we executed open market purchases of$100.0 of our Common Stock, all of which were purchased under the evergreen share repurchase program. InSeptember 2019 , we executed open market purchases of$150.0 of our 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 ofDecember 31, 2019 . We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to meet our capital expenditure program costs, which are expected to be approximately$90.0 in 2020, fund our share repurchase programs to the extent implemented by management, pay debt and interest as it comes due and pay dividends at the latest approved rate. We do not have any mandatory fixed rate debt principal payments due in 2020. Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets. Cash Flow Analysis Year Ended December 31, December 31, December 31, 2019 2018 2017 Net cash provided by operating activities$ 864.5 $ 763.6 $ 681.5 Net cash used in investing activities$ (553.5 ) $ (112.1 ) $ (1,303.4 ) Net cash (used in) provided by financing activities$ (472.9 ) $ (609.0 ) $ 698.9 43
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CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
2019 compared to 2018
Net Cash Provided by Operating Activities - Our primary source of liquidity is our cash flow provided by operating activities, which is dependent on the level of net income and changes in working capital. Our net cash provided by operating activities in 2019 increased by$100.9 to$864.5 as compared to$763.6 in 2018 due to higher cash earnings (net income plus non-cash expenses such as depreciation, amortization, deferred taxes, non-cash compensation and asset impairment and write-off charges) and a larger decrease in working capital. The change in working capital is primarily due to a larger increase in accounts payable and accrued expenses due to our continued program to extend payment terms with our suppliers, timing of payments and higher incentive compensation and profit sharing accruals and a smaller increase in inventory. The change in inventory is largely due to the Flawless acquisition. However, we measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters endedDecember 31, 2019 and 2018: As of December 31, 2019 December 31, 2018 Change Days of sales outstanding in accounts receivable ("DSO") 29 30 (1 ) Days of inventory outstanding ("DIO") 61 58 3 Days of accounts payable outstanding ("DPO") 69 66 (3 ) Cash conversion cycle 21 22 (1 ) Our cash conversion cycle (defined as the sum of DSO plus DIO less DPO) atDecember 31, 2019 , which is calculated using a two period average method, decreased 1 day from the prior year amount of 22 days to 21 days atDecember 31, 2019 due primarily to an increase in DPO of 3 days due to the timing of payments and term extensions with our suppliers, offset by an increase in DIO of 3 days from 58 to 61 days primarily due to the Flawless acquisition. We continue to focus on reducing our working capital requirements.
Net Cash (Used in) Provided by Financing Activities - Net cash used in financing activities during the first twelve months of 2019 was$472.9 , reflecting$250.0 of repurchases of our common stock ("Common Stock"),$224.1 of cash dividend payments, and$49.0 of net debt repayments, partially offset by$52.8 of proceeds from stock option exercises.
2018 compared to 2017
Net Cash Provided by Operating Activities - Our primary source of liquidity is our cash flow provided by operating activities, which is dependent on the level of net income and changes in working capital. Our net cash provided by operating activities in 2018 increased by$82.1 to$763.6 as compared to$681.5 in 2017 due to higher cash earnings (net income plus non-cash expenses such as depreciation, amortization, non-cash compensation and asset impairment charges) and lower working capital. The change in working capital is primarily due to an increase in accounts payable and accrued expenses and lower other current assets partially offset by higher inventories.Net Cash Used in Investing Activities - Net cash used in investing activities during 2018 was$112.1 , principally reflecting$60.4 for property, plant and equipment expenditures and$49.8 for the Passport Acquisition.Net Cash (Used in) Provided by Financing Activities - Net cash used in financing activities during 2018 was$609.0 , primarily reflecting$200.0 of repurchases of our Common Stock,$213.3 of cash dividend payments, and$268.8 of debt payments, partially offset by$76.6 of proceeds from stock option exercises. 44 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
Commitments as of
The table below summarizes our material contractual obligations and commitments as ofDecember 31, 2019 . Payments Due by Period 2021 to 2023 to After Total 2020 2022 2024 2024 Short & Long-Term Debt Term loan due 2022$ 300.0 $ 0.0 $ 300.0 $ 0.0 $ 0.0 2.45% Senior Notes due 2022 300.0 0.0 300.0 0.0 0.0 2.875% Senior Notes due 2022 400.0 0.0 400.0 0.0 0.0 3.15% Senior Notes due 2027 425.0 0.0 0.0 0.0 425.0 3.95% Senior Notes due 2047 400.0 0.0 0.0 0.0 400.0 Debt obligations of foreign subsidiaries 4.3 4.3 0.0 0.0 0.0 1,829.3 4.3 1,000.0 0.0 825.0 Interest on Fixed Rate Debt(1) 587.9 48.0 90.1 58.4 391.4 Lease Obligations 210.6 23.4 44.6 30.3 112.3 Other Long-Term Liabilities Letters of Credit(2) 2.8 2.8 0.0 0.0 0.0 Purchase Obligations(3) 250.1 177.8 67.3 5.0 0.0 Other(4) 7.5 0.5 1.0 1.2 4.8 Total$ 2,888.2 $ 256.8 $ 1,203.0 $ 94.9 $ 1,333.5
(1) Represents interest on our 2.45% Senior Notes due in 2022, 2.875% Senior
Notes due in 2022, 3.15% Senior Notes due 2027 and 3.95% Senior Notes due
2047.
(2) Letters of credit with several banks guarantee payment for items such as
insurance claims in the event of our insolvency.
(3) We have outstanding purchase obligations with suppliers at the end of 2019
for raw, packaging and other materials and services in the normal course of
business. These purchase obligation amounts represent only those items which
are based on agreements that are enforceable and legally binding, and do not
represent total anticipated purchases.
(4) Other includes payments for stadium naming rights for a period of 20 years
until
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing or unconsolidated special purpose entities.
OTHER ITEMS Market risk Concentration of Risk 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, accounted for approximately 24%, 23% and 24% in 2019, 2018 and 2017, respectively. Interest Rate Risk We had outstanding total debt atDecember 31, 2019 , of$2,063.1 , net of debt issuance costs, of which 73% has a fixed weighted average interest rate of 3.1% and the remaining 27% was constituted of commercial paper issued by us that currently has a weighted average interest rate of approximately 1.92% and the Term loan due 2022 with a current rate of approximately 2.60%. In 2019, we 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 for as fair value hedges. Other Market Risks We are also subject to market risks relating to our diesel and other commodity costs, fluctuations in foreign currency exchange rates, and changes in the market price of the Common Stock. Refer to Note 3 to the Consolidated Financial Statements for a discussion of these market 45 --------------------------------------------------------------------------------
CHURCH & DWIGHT CO. , INC AND SUBSIDIARIES (Dollars in millions, except share and per share data)
risks and the derivatives used to manage the risks associated with changing diesel fuel and other commodity prices, foreign exchange rates and the price of our Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information appears under the heading "Market Risk" in the "Management's Discussion and Analysis" section. Refer to page 45 of this Annual Report.
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