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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2018

Commission file number 1-10585

 

CHURCH & DWIGHT CO., INC.

(Exact name of registrant as specified in its charter)

 

 

500 Charles Ewing Boulevard, Ewing, N.J. 08628

(Address of principal executive offices)

Registrant’s telephone number, including area code: (609) 806-1200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

As of May 1, 2018, there were 244,702,059 shares of Common Stock outstanding.

 

 

 

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TABLE OF CONTENTS

PART I

 

PART II

 

 

 

 

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PART I – FINANCIAL INFORMATION

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In millions, except per share data)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except share and per share data)

 

 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(In millions)

 

 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW-CONTINUED

(Unaudited)

(In millions)

 

 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2018 and 2017

(Unaudited)

(In millions)

 

 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In millions, except per share data)

 

The condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, the condensed consolidated statements of income and comprehensive income, cash flow and stockholders’ equity for the three months ended March 31, 2018 and March 31, 2017 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 at March 31, 2018 and results of operations and cash flows for all periods presented have been made.  

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, 2017 (the “Form 10-K”).  The results of operations for the period ended March 31, 2018 are not necessarily indicative of the operating results for the full year.

The Company incurred research and development expenses in the first quarter of 2018 and 2017 of $19.5 and $14.1, respectively.  These expenses are included in selling, general and administrative expenses.

 

Recently Adopted Accounting Pronouncements

In February 2018, the FASB issued new accounting guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) and requires certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this change by adjusting certain December 31, 2017 stockholders’ equity accounts (see below).      

In 2016, the FASB issued guidance that clarifies the principles for recognizing revenue.  The amendments clarify the guidance for identifying performance obligations, licensing arrangements and principal versus agent considerations.  The amendments additionally provide clarification on how to assess collectability, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition.  The new standard was adopted by the Company using the modified retrospective approach in the first quarter of 2018.  See Note 3 for the Company’s revenue recognition accounting policy.      

 

The effects of the recently adopted accounting pronouncements to the Company’s condensed consolidated balance sheet as of January 1, 2018 is as follows:

 

The adoption had no impact on the Company’s results of operations or cash flow.

Recent Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued new accounting guidance, which is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These amendments also make targeted improvements to simplify the application of the hedge accounting. The guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating

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the impact that adoption of the guidance will have on the Company’s consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued new lease accounting guidance, requiring lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases, with a term greater than a year. The new guidance also expands the required quantitative and qualitative disclosures surrounding leases. The guidance is effective for annual and interim periods beginning after December 15, 2018, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact that adoption of the guidance, which will consist primarily of a balance sheet gross up of the Company’s operating leases to show equal and offsetting lease assets and lease liabilities.  

There have been no other accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.  

 

Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration that the Company expects to be entitled to in exchange for that good.  This usually occurs when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier.

Adoption of the new pronouncement did not have a significant impact on the Company’s condensed consolidated financial statements.  However, the adoption required the Company to recognize certain costs earlier, primarily due to the timing of coupon expense recognition.  Refer to the table above in Note 2 for a presentation of the impacts of adoption of the guidance on the Company’s January 1, 2018 balance sheet.  

Nature of Goods and Services

The Company primarily ships finished goods to its customers and operates in three segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”).  The segments are based on differences in the nature of products and organizational and ownership structures.  The Consumer Domestic and Consumer International segments market a variety of personal care and household products and over-the-counter products, including but not limited to baking soda, cat litter, laundry detergent, condoms, stain removers, hair removal, gummy dietary supplements, dry shampoo, water flossers and showerheads.  The SPD segment focuses on sales to businesses and participates in three product areas: Animal Productivity, Specialty Chemicals and Specialty Cleaners.  The Company’s products are distinct and separately identifiable on customer contracts or invoices, with each product sale representing a separate performance obligation.

The Company sells consumer products under a variety of brands through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, dollar, pet and other specialty stores and websites and other e-commerce channels, all of which sell our products to consumers. The Company sells its specialty products to industrial customers, livestock producers and through distributors.

Refer to Note 19 for disaggregated revenue information.

When Performance Obligations are Satisfied

For performance obligations related to the shipping and invoicing of products, control transfers at the point in time upon which finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier. Once a product has been delivered or picked up by the customer, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon delivery or customer receipt because the Company has an enforceable right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.

Variable Consideration

The Company conducts extensive promotional activities, primarily through the use of off-list discounts, slotting, coupons, cooperative advertising, periodic price reduction arrangements, and end-aisle and other in-store displays.  The costs of such activities are netted against sales and are recorded when the related sale takes place.  The reserves for sales returns and consumer and trade promotion liabilities are established based on the Company’s best estimate of the amounts necessary to settle future and existing obligations for products sold as of the balance sheet date.  The Company uses historical trend experience and coupon redemption

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inputs in arriving at coupon reserve requirements, and uses forecasted appropriations, customer and sales organization inputs, and historical trend analysis in determining the reserves for other promotional activities and sales returns.  

Practical Expedients

The Company expenses incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place. These costs are recorded in Selling, General and Administrative expenses in the accompanying condensed consolidated statements of income.

The Company accounts for shipping and handling costs as fulfillment activities and are therefore recognized upon shipment of the goods.

The Company has applied the portfolio approach to all open contracts as they have similar characteristics and can reasonably expect that the effects on the financial statements of applying this new guidance to the portfolio of contracts would not differ materially from applying this guidance to the individual contracts within the portfolio.

The Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes.

 

U.S. Tax Reform

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act significantly changed the U.S. corporate income tax regime by, among other things, lowering U.S. corporate income tax rates to 21%. However, the Tax Act eliminated the domestic manufacturing deduction and moves toward a territorial system, which also eliminated the ability to credit certain foreign taxes that existed prior to enactment of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on a deemed repatriation of historical earnings of foreign subsidiaries. In 2018, the Company intends to repatriate approximately $150.0 of its non-U.S. earnings and pay the associated repatriation tax. During the first quarter of 2018 the Company repatriated $128.0.  In addition, the reduction of the U.S. corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These provisional impacts resulted in a net credit of approximately $273.0 for the quarter and year ended December 31, 2017. The credit was primarily due to the adjustment to the U.S. deferred tax assets and liabilities.

 

The changes included in the Tax Act are broad and complex. While the provisional net credit was not adjusted in the first quarter of 2018, the final provisional impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the provisional impacts. The U.S. Securities and Exchange Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments by the end of the measurement period.

 

Inventories consist of the following:

 

 

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PP&E consists of the following:

 

 

 

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:

 

 

The following table provides a summary of option activity:

 

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The following table provides information regarding the intrinsic value of stock options exercised and stock compensation expense related to stock option awards:  

 

 

On November 1, 2017, the Company’s Board of Directors (the “Board”) authorized a new 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 and replaced the 2016 Share Repurchase Program.  The Company also continued its evergreen share repurchase program, authorized by the Board on January 29, 2014, under which the Company may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under the Company’s incentive plans.   

In December of 2017, the Company entered into an accelerated share repurchase (“ASR”) contract with a commercial bank to purchase $200.0 of the Common Stock.  In the first quarter of 2018, the Company settled the 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.  As a result of the Company’s purchases, there remained $310.0 of share repurchase availability under the 2017 Share Repurchase Program as of March 31, 2018.  See Part II - Item 2 for further details.

 

Fair Value Hierarchy

Accounting guidance on fair value measurements and disclosures establishes a hierarchy that prioritizes the inputs used to measure fair value (generally, assumptions that market participants would use in pricing an asset or liability) based on the quality and reliability of the information provided by the inputs, as follows:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Fair Values of Other Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments at March 31, 2018 and December 31, 2017:

 

The Company recognizes transfers between input levels as of the actual date of the event.  There were no transfers between input levels during the three months ended March 31, 2018.

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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 carrying amounts of accounts receivable, and accounts payable and accrued expenses, approximated estimated fair values as of March 31, 2018 and December 31, 2017.  

Changes in interest rates, foreign exchange rates, the price of common stock and commodity prices expose the Company to market risk.  The Company manages these risks through 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, 2017.  

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:

 

 

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.

 

 

 

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12.Acquisition

 

On March 8, 2018, the Company purchased Passport Food Safety Solutions, Inc. (“Passport”).  Passport sells products for pre and post-harvest treatment in the poultry, swine, and beef production markets (the “Passport Acquisition”).  The total purchase price was approximately $50.0, which is subject to an additional payment of up to $25.0 based on sales performance through 2020 and a working capital adjustment.  Passport’s annual sales were approximately $21.0 in 2017.  The acquisition was funded with short-term borrowings and will be managed in the SPD segment.  

 

The preliminary fair values of the net assets acquired are set forth as follows:

 

The life of the amortizable intangible assets recognized from the Passport Acquisition ranges from 10 - 15 years.  The goodwill is a result of expected synergies from combined operations of the acquisition and the Company. Pro forma results are not presented because the impact is not material to the Company’s consolidated financial results.

 

On August 7, 2017, the Company acquired Pik Holdings, Inc. (“Waterpik”), a water-jet technology company that designs and sells both oral water flossers and replacement shower heads (the “Waterpik Acquisition”).  The total purchase price was $1,024.6 (net of cash acquired).  Waterpik’s annual sales were approximately $265.0 for the trailing twelve months through June 30, 2017.  The Company financed the Waterpik Acquisition with proceeds from its underwritten public offering of $1,425.0 aggregate principal amount of Senior Notes completed on July 25, 2017.  Subsequent to the Waterpik Acquisition, Waterpik is managed by the Consumer Domestic and Consumer International segments.

The preliminary fair values of the net assets acquired are set forth as follows:

 

 

The life of the amortizable intangible assets recognized from the Waterpik Acquisition will be amortized over 15 years.  The goodwill is a result of expected synergies from combined operations of the acquisition and the Company.  The fair values of the assets and liabilities of the Waterpik Acquisition above is considered preliminary as the purchase price allocation is not finalized.

 

The following unaudited pro forma information is based on the Company’s historical data and assumptions for condensed consolidated results of operations, and gives effect to the Waterpik Acquisition as if the acquisition occurred on January 1, 2017. These unaudited pro forma results include adjustments having a continuing impact on the Company’s condensed consolidated statements of income. These adjustments primarily consist of adjustments to depreciation for the fair value and depreciable lives of property and equipment, amortization of intangible assets, stock compensation expense, interest expense and adjustments to tax expense based on condensed consolidated pro forma results. These results have been prepared using assumptions the Company’s

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management believes are reasonable, are not necessarily indicative of the actual results that would have occurred if the acquisition had occurred on January 1, 2017, and are not necessarily indicative of the results that may be achieved in the future, including, but not limited to, the realization of operating synergies that the Company may realize as a result of the acquisition.

 

 

The following table provides information related to the carrying value of all intangible assets, other than goodwill:

 

 

Indefinite lived intangible assets - Carrying value  

Intangible amortization expense amounted to $18.0 and $13.9 for the first three months of 2018 and 2017, respectively.  The Company estimates that intangible amortization expense related to amortizable intangible assets held as of March 31, 2018 will be approximately $71.0 in 2018 and declining over the next five years from approximately $70.0 to $60.0 annually.

The carrying amount of goodwill is as follows:

 

 

The goodwill and other intangible assets associated with the Passport Acquisition are not deductible for U.S. tax purposes.

 

Accounts payable and accrued expenses consist of the following:

 

 

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Short-term borrowings and long-term debt consist of the following:

 

 

On March 29, 2018, the Company replaced its former $1,000.0 unsecured revolving credit facility that was scheduled to terminate on December 4, 2020 with a new $1,000.0 unsecured revolving credit facility (the “Credit Agreement”).  Under the Credit Agreement, the Company has the ability to increase its borrowing up to an additional $600.0, subject to lender commitments and certain conditions as described in the Credit Agreement.  Borrowings under the Credit Agreement are available for general corporate purposes and are used to support the Company’s $1,000.0 commercial paper program.  Unless extended, the Credit Agreement will terminate and all amounts outstanding thereunder will be due and payable on March 29, 2023.             

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The components of changes in accumulated other comprehensive income (loss) are as follows:  

 

     

17.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.  With the exception of the Natronx Technologies LLC (“Natronx”) joint venture, in which the Company and the partner supplier are each one-third owners, the Company is not engaged in any other material transactions with the partnership or the partner supplier.  

b. As of March 31, 2018, the Company had commitments of approximately $245.3.  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 March 31, 2018, the Company had various guarantees and letters of credit totaling $5.9.     

d. In connection with the Agro Acquisition, the Company is obligated to pay an additional amount of up to $25.0 based on sales performance in 2019. The initial fair value of this contingent liability was $17.8, which was established in the purchase price allocation.  Subsequent to the acquisition, the Company increased the estimate of the contingent consideration liability $5.4 in the fourth quarter of 2017 from $17.8 to $23.2 based on updated financial performance forecasts. The charge was recorded in SG&A in the SPD segment.  The liability will be assessed for re-measurement at each balance sheet date leading up to the end of the 3-year period.   

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 preliminary purchase price allocation.  The liability will be assessed for re-measurement at each balance sheet date leading up to December 31, 2020.

 

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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 of 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 June 16, 2014, the Company filed an amended answer to the complaint denying all of the Plaintiff’s material allegations.  On September 11, 2017, each of the Company and the Plaintiff filed motions for summary judgment.  The court has not yet ruled on these motions, and a trial date has not been set.   

In connection with this matter, the Company has reserved an amount that is immaterial.  However, it is reasonably possible that the Company may ultimately be required to pay all or substantially all of the damages and other amounts sought by Plaintiff.  It is not currently possible to more precisely estimate the amount or range of any amounts that the Company may be required to pay in excess of the reserved amount because the proceedings are not sufficiently advanced and the outcome thereof is uncertain.

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.  

 

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 :  

 

 

 

 

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Segment Information

The Company operates 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.  The Company also has a Corporate segment.

Segment revenues are derived from the sale of the following products:

 

 

The Corporate segment income consists of equity in earnings of affiliates.  As of March 31, 2018, the Company held 50% ownership interests in each of Armand and ArmaKleen, respectively .  The Company’s equity in earnings of Armand and ArmaKleen for the three months ended March 31, 2018 and 2017 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:    

 

 

 

Product line revenues from external customers are as follows:  

 

 

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.  

 

 

 

 

 

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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

(In millions, except per share data)

 

Recent Developments

 

Passport Acquisition

 

On March 8, 2018, we purchased Passport Food Safety Solutions, Inc. (“Passport”).  Passport sells products for pre and post-harvest treatment in the poultry, swine, and beef production markets (the “Passport Acquisition”).  The total purchase price was approximately $50.0, which is subject to an additional payment of up to $25.0 based on sales performance through 2020 and a working capital adjustment.  Passport’s annual sales were approximately $21.0 in 2017.  The acquisition was funded with short-term borrowings and will be managed in the SPD segment.  

 

Results of Operations

Consolidated results

Diluted Net Income per share was $0.63 as compared to $0.51 in the first quarter of 2017. During the first quarter of 2017, we sold our chemical business in Brazil. As a result, a pre and post- tax charge of $3.5 was recorded ($1.3 in cost of goods sold and $2.2 in selling, general and administrative expenses). This equated to $0.01 per share.

Net Sales

Net sales for the quarter ended March 31, 2018 were $1,006.0, an increase of $128.8 or 14.7% as compared to the same period in 2017.  The components of the net sales increase are as follows:  

 

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For the three months ended March 31, 2018, the volume change primarily reflects increased product sales in both the Consumer Domestic and Consumer International segments, with volume declines in Specialty Products (“SPD”). Favorable price/mix in the Consumer International and SPD segments was offset by lower price/mix in the Consumer Domestic segment.

Gross Profit / Gross Margin

Our gross profit was $451.5 for the three months ended March 31, 2018, a $52.2 increase as compared to the same period in 2017.  Gross margin decreased 60 basis points (“bps”) in the first quarter of 2018 compared to the same period in 2017, primarily due to higher commodity costs of 80 bps, higher transportation costs of 30 bps, other manufacturing cost increases of 70 bps partially offset by productivity programs of 70 bps and the impact of higher margins on acquired businesses of 50 bps.

Operating Expenses

Marketing expenses for the three months ended March 31, 2018 were $99.9, an increase of $9.1 or 10.0% as compared to the same period in 2017. Marketing expenses as a percentage of net sales in the first quarter of 2018 decreased 40 bps to 9.9% as compared to 10.3% in 2017 due to 130 bps of leverage on higher net sales partially offset by 90 bps on higher expenses, in part due to the impact of the businesses acquired since the first quarter of 2017.  

Selling, general and administrative (“SG&A”) expenses were $131.3 in the first quarter of 2018, an increase of $18.9 or 16.8% as compared to the same period in 2017 which was significantly impacted by transition and ongoing costs associated with the Agro, Waterpik and Passport acquisitions, along with higher research and development costs.  SG&A as a percentage of net sales increased 30 bps to 13.1% in the first quarter of 2018 as compared to 12.8% in the same period in 2017.  The increase is due to higher costs of 190 bps primarily associated with our acquisitions, partially offset by 160 bps of leverage associated with higher sales.  

Other Income and Expenses

Other expense, net for the three months ended March 31, 2018 increased $1.9 compared to the same period in 2017 primarily due to the effect of changes in foreign exchange rates.

Interest expense for the three months ended March 31, 2018 increased $11.9 as compared to the same period in 2017 due to a higher amount of average debt outstanding associated with the $1,425.0 aggregate principal amount of Senior Notes completed on July 25, 2017.  

Income Taxes

The effective tax rate for the three months ended March 31, 2018 was 21.4% compared to 30.9% in the same period in 2017.  The decrease in the tax rate is primarily due to the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017, which lowered the U.S. statutory tax rate from 35% to 21%.  

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 and ownership structures.  We also have a Corporate segment.

 

 

The Corporate segment income consists of equity in earnings of affiliates.  As of March 31, 2018, we held 50% ownership interests in each of Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”), respectively.  Our equity in earnings of Armand and ArmaKleen for the three months ended March 31, 2018 and 2017 are included in the Corporate segment.  

 

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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 below.

Segment net sales and income before income taxes for the three months ended March 31, 2018 and March 31, 2017 are as follows:

 

Product line revenues from external customers are as follows:

 

 

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.

Consumer Domestic

Consumer Domestic net sales in the first quarter of 2018 were $751.4, an increase of $91.7 or 13.9% as compared to the same period in 2017.  The components of the net sales change are the following:

 

The increase in net sales for the three months ended March 31, 2018, reflects the impact of acquisitions, higher sales of ARM & HAMMER liquid and unit dose laundry detergent, ARM & HAMMER cat litter, OXICLEAN stain fighters, BATISTE dry shampoo, VITAFUSION and L’IL CRITTERS gummy vitamins and TOPPIK and VIVISCAL hair care businesses, partially offset by lower sales of XTRA laundry detergent.

 

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There continues to be significant product and price competition in the premium and deep value laundry detergent categories and more recently, product competition in the gummy vitamin category.  For example, in the laundry detergent category, P&G and Henkel, the two largest laundry detergent companies in the U.S., are engaged in aggressive pricing promotions, and retailers are continuing to de-emphasize the deep value tier of laundry detergents, which is where XTRA competes.  In addition, the gummy vitamin 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 the categories will not decline in the future and that we will be able to offset any such decline.

Consumer Domestic income before income taxes for the first quarter of 2018 was $159.3, a $1.6 decrease as compared to the first quarter of 2017.  The decrease is due primarily to higher SG&A of $15.6 (primarily associated with the acquisitions), unfavorable price/mix (consisting of higher promotion and coupon spending) of $14.0, higher marketing expenses of $6.8, unfavorable manufacturing and distribution costs of $6.6, higher interest and other expenses of $10.8, partially offset by the impact of higher sales volumes of $52.2.  

Consumer International

Consumer International net sales were $180.7 in the first quarter of 2018, an increase of $37.6 or 26.3% as compared to the same period in 2017.  The components of the net sales change are the following:

  

 

Excluding the impact of foreign exchange rates and acquisitions, higher sales in the first quarter ended March 31, 2018 were primarily due to OXICLEAN in the export business, STERIMAR, ARM & HAMMER toothpaste and OXICLEAN in Mexico and FEMFRESH and BATISTE in Australia.

Consumer International income before income taxes was $27.7 in the first quarter 2018, an increase of $8.3 compared to the same period in 2017 due primarily to higher sales volumes of $9.4, favorable foreign exchange rates of $3.0, favorable price/mix of $4.1, partially offset by SG&A costs of $2.9, higher interest expense of $2.0, higher marketing expenses of $0.7 and unfavorable manufacturing costs of $2.6.  

Specialty Products (“SPD”)

SPD net sales were $73.9 in the first quarter of 2018, a decrease of $0.5 or 0.7% as compared to the same period in 2017.  The components of the net sales change are the following:

Excluding the impact of the acquisition and divestiture, the net sales decrease in the first quarter of 2018 was driven by lower volumes in the animal productivity business.  Demand in the dairy industry is significantly reduced due to low milk prices.

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SPD income before income taxes was $11.6 in the first quarter of 2018, an increase of $3.8 as compared to the same period in 2017 due to higher sales volumes of $3.1 (primarily as a result of acquired businesses), lower costs as a result of the sale of our Brazilian business of $3.3, favorable price/product mix of $2.1, partially offset by higher SG&A costs of $3.3, higher manufacturing costs of $0.4 and higher interest expense of $0.8.  

 

Corporate

The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the first quarter of 2018 and 2017.  The Corporate segment income before income taxes was $2.1 in the first quarter of 2018, as compared to $2.1 in the same period in 2017.  

Liquidity and Capital Resources

On March 29, 2018, we replaced our former $1,000.0 unsecured revolving credit facility that was scheduled to terminate on December 4, 2020 with a new $1,000.0 unsecured revolving credit facility (the “Credit Agreement”).  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.  Unless extended, the Credit Agreement will terminate and all amounts outstanding thereunder will be due and payable on March 29, 2023.  

As of March 31, 2018, we had $119.8 in cash and cash equivalents, and approximately $745.0 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.  

As a result of the Tax Act, we have decided to repatriate excess cash held at our foreign subsidiaries in 2018. We estimate we will repatriate approximately $150.0 of the $194.0 that was held outside the U.S as of December 31, 2017.  Approximately $128.0 was repatriated in the first quarter of 2018 and $22.0 is expected to be repatriated throughout the remainder of 2018.

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 ended December 31, 2017 (the “Form 10-K”).  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.  

On February 5, 2018, the Board declared a 14% increase in the regular quarterly dividend from $0.19 to $0.2175 per share, equivalent to an annual dividend of $0.87 per share payable to stockholders of record as of February 15, 2018.  The increase raises the annual dividend payout from $190.0 to approximately $215.0.  

In connection with our share repurchase program authorized by the Board in November 2017 (the “2017 Share Repurchase Program”) and our evergreen repurchase program, we entered into an accelerated share repurchase (“ASR”) contract with a commercial bank in December of 2017 to purchase $200.0 of the Common Stock in the first quarter of 2018, of which approximately $110.0 was purchased under the evergreen share repurchase program and approximately $90.0 was purchased under the 2017 Share Repurchase Program.  See Part II - Item 2 for further details.

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 $70.0 in 2018, fund our share repurchase programs to the extent implemented by management and pay dividends at the latest approved rate.  Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets.  We do not have any mandatory fixed rate debt principal payments in 2018.  

Cash Flow Analysis  

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Net Cash Provided by Operating Activities – Our primary source of liquidity is the strong 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 the three months ended March 31, 2018 increased by $24.0 to $155.5 as compared to $131.5 in the same period in 2017 due to higher cash earnings (net income plus non-cash expenses such as depreciation, amortization, non-cash compensation and asset impairment charges). The change in working capital from December 31, 2017 is primarily due to a decrease in accrued expenses due to changes in deferred compensation, incentive compensation and profit sharing payments, increases in inventory and accounts receivable, partially offset by an increase in trade accounts payable and taxes payable.  However, we measure working capital effectiveness based on our cash conversion cycle.  The following table presents our cash conversion cycle information for the quarters ended March 31, 2018 and 2017:

Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two period average method, increased five days from the prior year amount of 17 days to 22 days at March 31, 2018 due primarily to an increase in DIO of five days. DPO improved one day from 64 to 65 days as we continue to extend payment terms with our suppliers, offset by DSO which increased one day from 30 to 31 days. The increase is primarily due to certain acquisitions, which currently require a higher level of working capital. 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 2018 was 60.0, primarily reflecting $49.9 for the Passport Acquisition, and $9.9 for property, plant and equipment additions.  Net cash used in investing activities during the first three months of 2017 was $159.3, primarily reflecting $160.3 for the Viviscal Acquisition and $2.8 for property, plant and equipment expenditures, partially offset by $4.5 of cash proceeds from the sale of the Brazil chemical business.  

Net Cash Used in Financing Activities – Net cash used in financing activities during the first three months of 2018 was $255.6, reflecting $200.0 of repurchases of our common stock (“Common Stock”), $53.0 of cash dividend payments, $17.4 of debt payments, partially offset by $16.4 of proceeds from stock option exercises.  Net cash used in financing activities during the first three months of 2017 was $24.4, primarily reflecting $157.1 of repurchases of our Common Stock, $48.4 of cash dividend payments, and $3.4 of short term debt repayments at an international subsidiary, partially offset by of $162.2 of commercial paper borrowings, and $22.7 of proceeds from stock option exercises. 

 

Market risk

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  Our exposure to market risk has not changed materially since December 31, 2017.  

 

a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission (the “Commission”), and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.

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b) Change in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurring during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

This report contains forward-looking statements, including, among others, statements relating to net sales and earnings growth; gross margin changes; trade and marketing spending; marketing expense as a percentage of net sales; sufficiency of cash flows from operations; earnings per share; the impact of new accounting pronouncements; cost savings programs; consumer demand and spending; the effects of competition; the effect of product mix; volume growth, including the effects of new product launches into new and existing categories; the impact of competitive laundry detergent products,  including unit dose laundry detergent; the Company’s hedge programs; the impact of foreign exchange and commodity price fluctuations; actual voluntary and expected cash contributions to pension plans; impairments and other charges including the pension settlement charge and asset impairment charges; the Company’s investments in joint ventures; the impact of acquisitions and divestitures; capital expenditures; the Company’s effective tax rate; the impact of the Tax Cuts and Jobs Act; the impact of tax audits; tax changes and the lapse of applicable statutes of limitations; the effect of the credit environment on the Company’s liquidity and capital resources; the Company’s fixed rate debt; compliance with covenants under the Company’s debt instruments; the Company’s commercial paper program; the Company’s current and anticipated future borrowing capacity to meet capital expenditure program costs; and the Company’s share repurchase programs; payment of dividends; environmental and regulatory matters; and the availability and adequacy of raw materials, including trona reserves and the conversion of such reserves. These statements represent the intentions, plans, expectations and beliefs of the Company, and are based on assumptions that the Company believes are reasonable but may prove to be incorrect.  In addition, these statements are subject to risks, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. Factors that could cause such differences include a decline in market growth, retailer distribution and consumer demand (as a result of, among other things, political, economic and marketplace conditions and events); unanticipated increases in raw material and energy prices; delays or other problems in manufacturing or distribution; increases in transportation costs; adverse developments affecting the financial condition of major customers and suppliers; competition; changes in marketing and promotional spending; growth or declines in various product categories and the impact of customer actions in response to changes in consumer demand and the economy, including increasing shelf space of private label products; consumer and competitor reaction to, and customer acceptance of, new product introductions and features; the Company’s ability to maintain product quality and characteristics at a level acceptable to our customers and consumers; disruptions in the banking system and financial markets; foreign currency exchange rate fluctuations; implications of the United Kingdom’s withdrawal from the European Union; transition to, and shifting trade or economic policies in the United States; issues relating to the Company’s information technology and controls; the impact of natural disasters on the Company and its customers and suppliers, including third party information technology service providers; the acquisition or divestiture of assets; the outcome of contingencies, including litigation, pending regulatory proceedings and environmental matters; and changes in the regulatory environment.

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the U. S. federal securities laws.  You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the Commission.

 

PART II – OTHER INFORMATION

General

In addition to the matters described below, 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.  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.

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Scantibodies Laboratory, Inc.

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 of 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 June 16, 2014, the Company filed an amended answer to the complaint denying all of the Plaintiff’s material allegations.  On September 11, 2017, each of the Company and the Plaintiff filed motions for summary judgment.  The court has not yet ruled on these motions, and a trial date has not been set.  

In connection with this matter, the Company has reserved an amount that is immaterial.  However, it is reasonably possible that the Company may ultimately be required to pay all or substantially all of the damages and other amounts sought by Plaintiff.  It is not currently possible to more precisely estimate the amount or range of any amounts that the Company may be required to pay in excess of the reserved amount because the proceedings are not sufficiently advanced and the outcome thereof is uncertain.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Form 10-K, which could materially affect the Company’s business, financial condition or future results.

 

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The Company repurchases shares of its Common Stock from time to time pursuant to its publicly announced share repurchase programs.  The following table contains information for shares repurchased during the first quarter of 2018.

 

 

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Exhibit Index

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

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