Recent Developments
COVID-19 and Other Related Recent Developments
The COVID-19 pandemic continues to impact our business. During the onset of the pandemic, demand for many of our brands was impacted by "stay at home" orders and the temporary and permanent closure of certain retailers. As government restrictions were reduced or removed and stimulus actions, primarily in the US, benefitted consumers, we started to experience an increase in demand for many of our brands. More recently, the impacts to our business have been primarily supply chain related, including labor shortages and challenges with distribution and transportation, resulting in difficulty meeting customer demand and significant broad-based cost inflation. In addition, recent government restrictions inChina have further exacerbated global supply chain challenges and may also have a negative impact on demand for certain of our products inChina , because many Chinese consumers are restricted to their homes, thereby reducing consumer in-store foot traffic and delivery services. While it is difficult to predict with certainty when these challenges might subside, we expect shortages to continue at least through the first half of 2022 and input cost inflation to continue at least throughout 2022. To attempt to offset some of the cost pressures we are experiencing, we have recently enacted and continue to evaluate price increases. In addition, to address challenges meeting customer demand, we have taken steps to increase our short-term manufacturing capacity for many of our products (including laundry detergent, baking soda, cleaners and vitamins) as well as our raw material and packaging capacity, and continue to work closely with our suppliers, contract manufacturers and retail partners to increase capacity and ensure sustained supply to keep pace with increased demand. We have also made investments in the expansion of long-term, in-house and third-party manufacturing capacity and are working to enlist additional suppliers that meet our quality specifications. While we expect supply availability issues to start improving in the second half of 2022 for most of our brands, there is no assurance that these challenges will abate in the foreseeable future or that our customers will accept all or a portion of any price increases, or that the other measures we have or may implement will mitigate the impact of supply disruptions or rising costs. Looking forward, the extent that COVID-19 and other recent developments' have on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, the spread and severity of new variants, the long-term impact of vaccines, and our continued ability to obtain an adequate supply of materials and recruit and retain a workforce and engage third-parties to manufacture and distribute our products, as well as any future government actions affecting employers and employees, consumers and the economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees; maximizing the availability of products that help consumers with their health, hygiene and cleaning needs; and using our employees' talents and our resources to help society meet and overcome the current challenges. 20 --------------------------------------------------------------------------------
We are monitoring the impact of both inflation and the COVID-19 pandemic, including the effect of corresponding government actions, such as raising interest rates to counteract inflation, that may negatively impact consumer spending, and how these factors will potentially influence future cash flows for the short and long term. While we expect that many of these effects will be transitory and that our value focused portfolio positions us well in an inflationary and slowing economic environments, it is impossible to predict their impact.
The global economy has been negatively impacted by the military conflict betweenRussia andUkraine . Furthermore, governments in theU.S. ,United Kingdom , andEuropean Union have each imposed export controls on certain products as well as financial and economic sanctions on certain industry sectors and parties inRussia andBelarus . We have experienced shortages in materials and increased costs for transportation, energy, and raw material due in part to the negative impact of theRussia -Ukraine military conflict on the global economy. Further escalation of geopolitical tensions related to the conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. We have no operations inRussia orUkraine . Sales intoRussia andBelarus , which have been suspended indefinitely, are not material to the Company's consolidated net sales and earnings. Results of Operations Consolidated results Three Months Ended Change vs. Three Months Ended March 31, 2022 Prior Year March 31, 2021 Net Sales $ 1,297.2 4.7% $ 1,238.9 Gross Profit $ 552.5 0.3% $ 550.9 Gross Margin 42.6 % -190 basis points 44.5 % Marketing Expenses $ 101.9 3.2% $ 98.7 Percent of Net Sales 7.9 % -10 basis points 8.0 % Selling, General & Administrative $ 169.9 13.6% $ 149.6
Expenses
Percent of Net Sales 13.1 % +100 basis points 12.1 % Income from Operations $ 280.7 -7.2% $ 302.6 Operating Margin 21.6 % -280 basis points 24.4 % Net income per share - Diluted $ 0.83 -5.7% $ 0.88
Diluted Net Income per share was
During the first quarter of 2021 we decreased the fair value of our business acquisition liability associated with the 2019 acquisition of the FLAWLESS hair removal business (the "Flawless Acquisition") by$19.0 ($14.3 after tax or$0.05 per diluted share), based on updated sales forecasts. The business acquisition liability adjustment was recorded as a reduction in SG&A expense. 21 --------------------------------------------------------------------------------
Net sales for the quarter endedMarch 31, 2022 were$1,297.2 , an increase of$58.3 or 4.7% as compared to the same period in 2021. The components of the net sales increase are as follows: Three Months EndedMarch 31 ,Net Sales - Consolidated 2022 Product volumes sold (5.1 %) Pricing/Product mix 7.8 % Foreign exchange rate fluctuations (0.3 %) Acquired product lines (1) 2.3 %Net Sales increase 4.7 % (1) OnDecember 24, 2021 , we acquired all of the outstanding equity ofDr. Harold Katz, LLC andHK-IP International, Inc. , the owners of the THERABREATH brand of oral care products (the "TheraBreath Acquisition"). The results of this acquisition are included in our results since the date of acquisition. For the three months endedMarch 31, 2022 , the volume change reflects decreased product unit sales in theConsumer Domestic and Consumer International segments, partially offset by increased product unit sales in the Specialty Products ("SPD") segments. For the three months endedMarch 31, 2022 , price/mix was favorable in all three segments.
Gross Profit / Gross Margin
Our gross profit was$552.5 for the three months endedMarch 31, 2022 , a$1.6 increase as compared to the same period in 2021. Gross margin decreased 190 basis points ("bps") in the first quarter of 2022 compared to the same period in 2021, due to the impact of higher manufacturing costs including labor and commodities of 450 bps, higher transportation costs of 100 bps, and unfavorable foreign exchange of 10 bps, offset by favorable price/volume/mix of 270 bps, the impact of productivity programs of 70 bps, and business acquisition benefits of 30 bps. Operating Expenses Marketing expenses for the three months endedMarch 31, 2022 were$101.9 , an increase of$3.2 or 3.2% as compared to the same period in 2021. Marketing expenses as a percentage of net sales in the first quarter of 2022 decreased by 10 bps to 7.9% as compared to 8.0% in the same period in 2021 due to 40 bps of leverage on higher net sales, offset by 30 bps on higher expenses. SG&A expenses were$169.9 in the first quarter of 2022, an increase of$20.3 or 13.6% as compared to the same period in 2021. SG&A as a percentage of net sales increased 100 bps to 13.1% in the first quarter of 2022 as compared to 12.1% in the same period in 2021. The increase is due to 160 bps on higher expenses, offset by 60 bps of leverage associated with higher sales. The higher expenses for the three-month period endedMarch 31, 2022 are primarily due to the prior year reduction in the fair value of the Flawless business acquisition liability of$19.0 .
Other (income) expense, net was nominal for the three months ended
Interest expense for the three months endedMarch 31, 2022 increased$2.6 to$16.6 , as compared to the same period in 2021, primarily due to higher average debt outstanding. Income Taxes
The effective tax rate for the three months ended
Segment results
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 structure. We also have a Corporate segment. Segment Products Consumer Domestic Household and personal care productsConsumer International Primarily personal care products SPD Specialty chemical products 22
-------------------------------------------------------------------------------- The Corporate segment income consists of equity in earnings of affiliates. As ofMarch 31, 2022 , we held 50% ownership interests in each ofArmand Products Company ("Armand") andThe ArmaKleen Company ("ArmaKleen"), respectively. Our equity in earnings of Armand and ArmaKleen, totaling$2.4 and$2.6 for the three months endedMarch 31, 2022 and 2021, respectively, and are included in the Corporate segment. Certain subsidiaries that are included in theConsumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from theConsumer International segment results set forth below.
Segment net sales and income before income taxes for the three months ended
Consumer Consumer Domestic International SPD Corporate(3) TotalNet Sales (1) First Quarter of 2022$ 995.1 $ 214.6$ 87.5 $ 0.0$ 1,297.2 First Quarter of 2021 942.4 216.4 80.1 0.0 1,238.9 Income before Income Taxes(2) First Quarter of 2022$ 222.7 $ 29.6$ 11.5 $ 2.4$ 266.2 First Quarter of 2021(4) 240.9 38.2 9.3 2.6 291.0 (1) Intersegment sales fromConsumer International to Consumer Domestic, which are not reflected in the table, were$4.8 and$2.6 for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively.
(2)
In determining income before income taxes, interest expense, investment earnings and certain aspects of other income and expense were allocated among the segments based upon each segment's relative income from operations.
(3)
Corporate segment consists of equity in earnings of affiliates from Armand and
ArmaKleen for the three months ended
(4)
2021 results include a$19.0 reduction of SG&A expenses to reduce the Flawless business acquisition liability, of which$16.1 was recorded to Consumer Domestic and$2.9 was recorded toConsumer International .
Product line revenues from external customers are as follows:
Three Months Ended March 31, March 31, 2022 2021 Household Products$ 520.5 $ 495.2 Personal Care Products 474.6 447.2 Total Consumer Domestic 995.1 942.4
87.5 80.1
Total Consolidated
Household Products include laundry, deodorizing, and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care and hair care products, cold and remedy products, and gummy dietary supplements. 23 --------------------------------------------------------------------------------
Consumer Domestic
Consumer Domestic net sales in the first quarter of 2022 were
Three Months EndedMarch 31 ,Net Sales - Consumer Domestic 2022 Product volumes sold (6.0 %) Pricing/Product mix 8.7 % Acquired product lines (1) 2.9 %Net Sales increase 5.6 % (1)
Includes the TheraBreath Acquisition since the date of acquisition.
The increase in net sales for the three months endedMarch 31, 2022 , reflects the impact of the TheraBreath® Acquisition, and higher net sales in ZICAM™ zinc supplements, OXICLEAN® Versatile Stain Remover, BATISTE® dry shampoo, ARM & HAMMER® Cat Litter and ARM & HAMMER® Liquid Detergent, offset by declines in FLAWLESS® Hair Removal Products, WATERPIK® Shower Heads, and XTRA® Liquid Detergent. In recent years our TROJAN business, specifically the condom category, had not grown and competition has increased. Social distancing requirements due to the COVID-19 pandemic had further negatively impacted the business. As a result, the TROJAN business had experienced stagnant sales and profits resulting in a reduction in expected future cash flows which eroded a portion of the excess between the fair and carrying value of the tradename. This indefinite-lived intangible asset may be susceptible to impairment risk and a continued decline in fair value could trigger a future impairment charge of the TROJAN tradename. While management has implemented strategies to address the risk, including lowering our 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. More recently, TROJAN has experienced a recovery in sales and profits as it is benefiting from an easing of COVID-19 social restrictions leading to an increase in sexual activity. We expect this trend will continue with the adoption of vaccines, the reduction of social distancing restrictions and the benefit of management strategies to improve sales and profitability. Consumer Domestic income before income taxes for the first quarter of 2022 was$222.7 , an$18.2 decrease as compared to the first quarter of 2021. The decrease is due primarily to higher manufacturing and distribution expenses of$52.5 , the impact of lower sales volumes of$16.6 , higher SG&A expenses of$15.8 (including the prior year reduction in the fair value of the Flawless business acquisition liability of$16.1 ), higher marketing expenses of$4.9 and higher interest and other expenses of$2.4 , partially offset by a favorable price/mix of$73.9 .
Consumer International net sales were$214.6 in the first quarter of 2022, a decrease of$1.8 or 0.8% as compared to the same period in 2021. The components of the net sales change are the following: Three Months EndedMarch 31 ,Net Sales -Consumer International 2022 Product volumes sold (3.6 %) Pricing/Product mix 3.9 % Foreign exchange rate fluctuations (1.9 %) Acquired product lines (1) 0.8 %Net Sales decrease (0.8 %) (1)
Includes the TheraBreath Acquisition since the date of acquisition.
Excluding the impact of foreign exchange rates, sales were higher in the first quarter endedMarch 31, 2022 for STERIMAR®, BATISTE, OXICLEAN, and VITAFUSION and L'IL CRITTERS gummy vitamins in theGlobal Markets Group ("GMG") business. 24 --------------------------------------------------------------------------------
The positive GMG performance was offset by volume declines in
Consumer International income before income taxes was$29.6 in the first quarter of 2022, an$8.6 decrease as compared to the first quarter of 2021. Higher manufacturing and commodity costs of$6.0 , higher SG&A expenses of$3.4 (partially due to the prior year reduction in fair value of the Flawless business acquisition liability of$2.9 ), the impact of lower sales volumes of$3.2 , unfavorable foreign exchange rates of$1.8 and higher interest and other expenses of$0.2 , were partially offset by a favorable price/mix of$5.0 and lower marketing expenses of$0.8 .
Specialty Products ("SPD")
SPD net sales were$87.5 in the first quarter of 2022, an increase of$7.4 or 9.2% as compared to the same period in 2021. The components of the net sales change are the following: Three Months EndedMarch 31 ,Net Sales - SPD 2022 Product volumes sold 1.1 % Pricing/Product mix 8.1 %Net Sales increase 9.2 % Net sales increased in the first quarter of 2022 primarily due to higher pricing in our dairy and specialty chemicals segments in response to rising costs and higher volumes for our non-dairy segment.
SPD income before income taxes was
Corporate The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the three months of 2022 and 2021. The Corporate segment income before income taxes was$2.4 in the first quarter of 2022, as compared to$2.6 in the same period in 2021. 25
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Liquidity and Capital Resources
OnMay 1, 2019 , we amended the credit agreement (the "Credit Agreement") that provides for our$1,000.0 unsecured revolving credit facility (the "Revolving Credit Facility") to extend the term of the Revolving Credit Facility fromMarch 29, 2023 toMarch 29, 2024 . We continue to 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. As ofMarch 31, 2022 , we had$174.4 in cash and cash equivalents, and approximately$896.0 available through the Revolving Credit Facility 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. 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 our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (the "Form 10-K"). Although there is uncertainty related to the impact of the COVID-19 pandemic, and other recent developments on our future results, we believe our efficient business model, value focused portfolio and strong balance sheet position us to manage our business through these challenges. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth. 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. OnOctober 28, 2021 , the Board authorized a new share repurchase program, under which we may repurchase up to$1,000.0 in shares of Common Stock (the "2021 Share Repurchase Program"). The 2021 Share Repurchase Program does not have an expiration and replaced the 2017 Share Repurchase Program. All remaining dollars authorized for repurchase under the 2017 Share Repurchase Plan have been cancelled. The 2021 Share Repurchase Program did not modify 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 its incentive plans. InDecember 2021 , we executed open market purchases of 1.8 million shares for$170.3 million , inclusive of fees, of which$100.0 million was purchased under the evergreen share repurchase program and$70.3 million was purchased under the 2021 Share Repurchase Program. InDecember 2021 , we also entered into an accelerated share repurchase ("ASR") contract with a commercial bank to purchase Common Stock. We paid$200.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to$180.0 , or 1.8 million shares. We used cash on hand and short-term borrowings to fund the initial purchase price. Upon the completion of the ASR, which ended inFebruary 2022 , the bank delivered an additional 0.2 million shares. The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period. All 2.0 million shares were purchased under the 2021 Share Repurchase Program.
As a result of our recent stock repurchases, there remains
OnJanuary 28, 2022 , the Board declared a 4% increase in the regular quarterly dividend from$0.2525 to$0.2625 per share, equivalent to an annual dividend of$1.05 per share. The increase raises the annual dividend payout from$248.0 to approximately$255.0 . We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to 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, and meet our capital expenditure program costs, which are expected to be approximately$200.0 in 2022 primarily for manufacturing capacity investments in laundry, litter and vitamins to support expected future sales growth. Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets. 26 --------------------------------------------------------------------------------
Cash Flow Analysis Three Months EndedMarch 31 ,March 31, 2022 2021
Net cash provided by operating activities
Net Cash Provided by Operating Activities - Our primary source of liquidity is the cash flow provided by operating activities, which is dependent on net income and changes in working capital. Our net cash provided by operating activities in the first three months endedMarch 31, 2022 increased by$52.6 to$152.8 as compared to$100.2 in the same period in 2021 due to a decrease in working capital partially offset by lower cash earnings (net income adjusted for non-cash items). The decrease in working capital is primarily related to the change in accruals related to incentive compensation partially offset by higher inventory levels to support service levels. We measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters endedMarch 31, 2022 and 2021: As of March 31, 2022 March 31, 2021 Change Days of sales outstanding in accounts receivable ("DSO") 28 29 (1 ) Days of inventory outstanding ("DIO") 69 68 1 Days of accounts payable outstanding ("DPO") 80 74 (6 ) Cash conversion cycle 17 23 (6 ) Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two-period average method, decreased 6 days from the prior year due to payable term extensions. We continue to focus on reducing our working capital requirements.Net Cash Used in Investing Activities - Net cash used in investing activities during the first three months of 2022 was$15.7 , primarily reflecting$15.6 for property, plant and equipment additions. Net cash used in investing activities during the first three months of 2021 was$30.0 , primarily reflecting$26.3 for property, plant and equipment additions.Net Cash Used in Financing Activities - Net cash used in financing activities during the first three months of 2022 was$202.6 reflecting$149.9 of net debt payments,$63.7 of cash dividend payments, partially offset by$11.0 of proceeds from stock option exercises. Net cash used in financing activities during the first three months of 2021 was$125.0 , reflecting$69.0 of net debt payments and$61.9 of cash dividend payments, partially offset by$5.9 of proceeds from stock option exercises.
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