# Church & Dwight Co Inc: Form 10-Q for the period ended Jun 30, 2020

- Company: [Church & Dwight Co Inc](/companies/chd.md) (CIK 313927)
- Form: 10-Q
- Filed: 2020-07-31
- Accepted by EDGAR: Jul 31, 2020, 15:35 ET
- Period: 2020-06-30
- Accession: 0001564590-20-035085
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/313927/000156459020035085/chd-10q_20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/313927/000156459020035085/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $1.19bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $2.36bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $634.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $1.27bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $559.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $1.09bn | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $24.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $46.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $186.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $307.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $250.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $565.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $16.8m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $33.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $46.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $115.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $189.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $419.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $1.67 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.77 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $1.71 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 251,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 251,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $598.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $30.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $118.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $451.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $1.28bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $6.92bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $996.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $3.92bn | us-gaap:Liabilities |
| Long-term debt | at 2020-06-30 | $1.81bn | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2020-06-30 | $65.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-06-30 | $3.00bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,935 characters.

#### Recent Developments

#### COVID-19 Disclosure

The COVID-19 pandemic is positively impacting certain of our businesses, while negatively impacting the short-term results of certain others. We have continued to experience a significant increase in consumer demand for many of our products that began in March, including VITAFUSION gummy vitamins, Simply Saline and Sterimar nasal hygiene products, A&H baking soda, and A&H cat litter and Kaboom bathroom cleaners. On the other hand, our WaterPik business has been negatively impacted by the temporary closure of dental offices across the United States and some other personal care brands have been negatively impacted by the temporary closures of certain non-essential retailers and the reduction of consumer foot traffic at retailers from which these brands derive a significant proportion of sales. Looking forward, we may experience significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by, among other things, the temporary or prolonged inability of consumers to purchase our products due to illness, quarantine or other travel or gathering restrictions, store closures, unemployment or other financial hardship, shifts in demand away from one or more of our more discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-loading or unloading activity.

Some products have also been impacted by a shift in consumer spending away from more discretionary products. While there is no certainty that current high levels of demand for certain of our products will continue, we have taken steps to increase short term manufacturing capacity for our cleaning products (including laundry detergent, baking soda, and cleaners) and health care products (including vitamins and nasal hygiene) and are working closely with our suppliers, contract manufacturers and retail partners to ensure sustained supply to keep pace with increased demand. We will also make investments in the expansion of long-term in-house and third-party manufacturing capacity. Although we have seen increased demand in certain of our product categories, in the future, the pandemic may cause reduced demand for our products if it results in a recessionary global economic environment. The timing and impact of potential consumer pantry destocking in markets in which we serve may also have a negative impact on demand. Moreover, we continue to experience and anticipate increased online sales during the pandemic.

The COVID-19 pandemic and the corresponding government response have led to increased unemployment and economic uncertainty, which could lead to a further reduction in consumer spending. Economic conditions are, and we expect that they will continue to be, highly volatile and uncertain. Recessionary conditions could reduce demand for our discretionary products and put downward pressure on prices. Some of our retail customers have closed their stores or reduced store hours, which has impacted their ability to meet outstanding obligations and may cause further reductions in their purchases in the coming months.

Substantially all of our manufacturing facilities and distribution centers, and those of our key suppliers, contract manufacturers, and transportation suppliers, currently remain open and continue to operate. Various state and local governments in the U.S. and other jurisdictions have required cessation of non-essential activities. Substantially all of our products are considered essential under applicable governmental requirements and guidance, including the Department of Homeland Security’s March 19, 2020 Guidance on the Essential Critical Infrastructure Workforce. We intend to continue to work with government authorities, implement our employee safety measures and supplement our in-house manufacturing with increased use of contract manufacturers to ensure that we are able to continue to manufacture and distribute our products during the pandemic. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our supply chain (for example a closure of a key manufacturing or distribution facility or the inability of a key supplier, contract manufacturer or transportation supplier to source and transport materials) that could impact our operations and ability to supply products to our customers.

We are monitoring the impact that the COVID-19 pandemic and corresponding government action is having on our customers and consumer demand and how potentially it will impact future cash flows for the short and long term and its impact to intangible asset carrying values. While we expect that many of these effects will not be permanent, it is impossible to predict their duration.

#### PERL WEISS Transaction

During the first quarter of 2020, we sold our PERL WEISS® toothpaste brand in Germany with a net book value of $4.0 for cash proceeds of $7.0. The $3.0 gain associated with this transaction was recorded as a reduction of SG&A expense in the Consumer International Segment.

### Results of Operations

### Consolidated results

|  | Three Months Ended June 30, 2020 | Change vs. Prior Year | Three Months Ended June 30, 2019 |
| --- | ---: | ---: | ---: |
| **Net Sales** | **$1,194.3** | 10.6% | $1,079.4 |
| **Gross Profit** | **$559.6** | 16.2% | $481.5 |
| Gross Margin | **46.8%** | +220 basis points | 44.6% |
| **Marketing Expenses** | **$122.3** | -5.3% | $129.1 |
| Percent of Net Sales | **10.2%** | -180 basis points | 12.0% |
| **Selling, General & Administrative Expenses** | **$186.6** | 13.1% | $165.0 |
| Percent of Net Sales | **15.6%** | +30 basis points | 15.3% |
| **Income from Operations** | **$250.7** | 33.8% | $187.4 |
| Operating Margin | **21.0%** | +370 basis points | 17.3% |
| **Net income per share - Diluted** | **$0.75** | 36.4% | $0.55 |
|  | **Six Months Ended** | **Change vs.** | **Six Months Ended** |
|  | **June 30, 2020** | **Prior Year** | **June 30, 2019** |
| **Net Sales** | **$2,359.5** | 11.1% | $2,124.1 |
| **Gross Profit** | **$1,091.6** | 14.6% | $952.3 |
| Gross Margin | **46.3%** | +150 basis points | 44.8% |
| **Marketing Expenses** | **$218.7** | -3.7% | $227.2 |
| Percent of Net Sales | **9.3%** | -140 basis points | 10.7% |
| **Selling, General & Administrative Expenses** | **$307.6** | 3.6% | $296.9 |
| Percent of Net Sales | **13.0%** | -100 basis points | 14.0% |
| **Income from Operations** | **$565.3** | 32.0% | $428.2 |
| Operating Margin | **24.0%** | +390 basis points | 20.1% |
| **Net income per share - Diluted** | **$1.67** | 33.6% | $1.25 |

Diluted Net Income per share was $0.75 in the second quarter of 2020 as compared to $0.55 in the second quarter of 2019. Diluted Net Income per share was $1.67 in the first six months of 2020 as compared to $1.25 in the same period in 2019.

During the second quarter of 2020 we increased the fair value of our contingent liability associated with the Flawless Acquisition by $6.0 ($4.5 after tax or $0.02 diluted per share), for a total net reduction of $21.0 ($15.8 after tax or $0.06 diluted per share) for the six months ended June 30, 2020 based on updated sales forecasts and the passage of time. During the second quarter of 2019, we increased the estimate of the contingent liability by $5.0 ($3.7 after tax or $0.01 diluted per share). The contingent liability adjustments were recorded in SG&A expense.

During the first quarter of 2020, we completed the sale of the PERL WEISS® toothpaste brand in Germany which resulted in a gain of $3.0 ($2.2 after tax or $0.01 diluted per share) recorded in SG&A expense.

#### Net Sales

Net sales for the quarter ended June 30, 2020 were $1,194.3, an increase of $114.9 or 10.6% as compared to the same period in 2019. Net sales for the six months ended June 30, 2020 were $2,359.5, an increase of $235.4 or 11.1% over the comparable six month period of 2019. The components of the net sales increase are as follows:

| Net Sales – Consolidated | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Product volumes sold | 4.9% | 5.8% |
| Pricing/Product mix | 3.5% | 3.0% |
| Foreign exchange rate fluctuations | (0.7%) | (0.5%) |
| Acquired product lines (net of divestiture) (1) | 2.9% | 2.8% |
| **Net Sales increase** | **10.6%** | **11.1%** |

(1) On May 1, 2019, we completed the Flawless Acquisition. The results of this acquisition are included in our results since the date of acquisition. During the first quarter of 2020 we completed the sale of the PERL WEISS brand.

For the three months ended June 30, 2020, the volume change reflects increased product sales in the Consumer Domestic and Specialty Products (“SPD”) segments, with volume declines in the Consumer International segment. For the six months ended June 30, 2020, the volume change primarily reflects increased product sales in all three of our segments. For both the three and six months ended June 30, 2020, price/mix was favorable in the Consumer Domestic and Consumer International segments, but was partially offset by unfavorable price/mix in the SPD segment.

#### Gross Profit / Gross Margin

Our gross profit was $559.6 for the three months ended June 30, 2020, a $78.1 increase as compared to the same period in 2019. Gross margin increased 220 basis points (“bps”) in the second quarter of 2020 compared to the same period in 2019, due to favorable price/volume mix of 220 bps (primarily due to a reduction in trade promotion and coupons to reduce retail depletion of inventories), productivity programs of 140 bps, partially offset by higher manufacturing costs of 110 bps, primarily due to costs associated with the COVID-19 pandemic, the impact of margins on acquired businesses of 20 bps, and unfavorable foreign exchange rates of 10 bps. Gross profit was $1,091.6 for the six months ended June 30, 2020, a $139.3 increase compared to the same period in 2019. Gross margin increased 150 bps in the first six months of 2020 compared to the same period in 2019, due to favorable price/volume mix of 180 bps (primarily due to a reduction in trade promotion and coupons to reduce retail depletion of inventories), productivity programs of 130 bps, partially offset by higher manufacturing cost increases of 150 bps (including costs of approximately 70 bps associated with the COVID-19 pandemic), and unfavorable foreign exchange rates of 10 bps.

#### Operating Expenses

Marketing expenses for the three months ended June 30, 2020 were $122.3, a decrease of $6.8 or 5.3% as compared to the same period in 2019. Marketing expenses as a percentage of net sales in the second quarter of 2020 decreased by 180 bps to 10.2% as compared to 12.0% in the same period in 2019 due to 120 bps of leverage on higher net sales and 60 bps on lower expenses. Due to retailer out of stocks, marketing expense was significantly reduced. Marketing expenses for the six months ended June 30, 2020 were $218.7, a decrease of $8.5 or 3.7% as compared to the same period in 2019. Marketing expenses as a percentage of net sales for the first six months of 2020 decreased by 140 bps to 9.3% as compared to 10.7% in the same period in 2019 due to 100 bps of leverage on higher net sales and 40 bps on lower expenses. The trend of lower marketing expenses is not expected to continue as we intend to make investments behind new product launches, consumer research and digital advertising in the second half of 2020.

Selling, general and administrative (“SG&A”) expenses were $186.6 in the second quarter of 2020, an increase of $21.6 or 13.1% as compared to the same period in 2019. SG&A as a percentage of net sales increased 30 bps to 15.6% in the second quarter of 2020 as compared to 15.3% in the same period in 2019. The increase is due to 180 bps of higher expenses, partially offset by 150 bps of leverage associated with higher sales. The higher expenses for the three-month period ended June 30, 2020 is primarily due to an increase of the FLAWLESS earnout liability by $6.0, acquisition-related costs (including amortization expense) and higher compensation, information system, research and development (“R&D”) and selling costs. SG&A expenses for the first six months of 2020 were $307.6, an increase of $10.7 or 3.6% as compared to the same period in 2019. SG&A as a percentage of net sales decreased 100 bps to 13.0% in the first six months of 2020 compared to 14.0% in 2019 due to 140 bps of leverage associated with higher sales, partially offset by 40 bps on higher expenses. The higher expenses for the six-month period ended June 30, 2020 is primarily due to acquisition-related costs (including amortization expense) and higher compensation, information system, R&D and selling costs, partially offset by reduction of the Flawless earnout liability by $21.0 and the $3.0 gain associated with the sale of PERL WEISS.

Other expense, net for the three and six months ended June 30, 2020 increased $0.1 and $0.6 respectively, compared to the same period in 2019 primarily due to the effect of changes in foreign exchange rates.

Interest expense for the three and six months ended June 30, 2020 decreased $2.1 and $3.6 respectively, as compared to the same period in 2019 primarily due to the repayment of the $300.0 2.45% Senior Notes that matured in the fourth quarter of 2019 and lower interest rates.

#### Income Taxes

The effective tax rate for the three and six months ended June 30, 2020 was 19.6% and 21.6% respectively, compared to 18.7% and 20.5% in the same periods in 2019. The increase in the tax rate for both periods is primarily due to a lower tax benefit related to stock option exercises.

### 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.

| Segment | Products |
| --- | --- |
| Consumer Domestic | Household and personal care products |
| Consumer International | Primarily personal care products |
| SPD | Specialty chemical products |

The Corporate segment income consists of equity in earnings of affiliates. As of June 30, 2020, 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, totaling $2.0 and $1.7 for the three months ended June 30, 2020 and 2019, respectively, and $3.6 and $3.4 for the six months ended June 30, 2020 and 2019, respectively, are included in the Corporate segment. Certain subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results set forth below.

Segment net sales and income before income taxes for the three and six months ended June 30, 2020 and June 30, 2019 are as follows:

| Net Sales(1) | Consumer Domestic | Consumer International | SPD | Corporate | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| **Second Quarter 2020** | **$931.1** | **$187.5** | **$75.7** | **$0.0** | **$1,194.3** |
| Second Quarter 2019 | 819.3 | 186.6 | 73.5 | 0.0 | 1,079.4 |
| **First Six Months of 2020** | **$1,822.1** | **$386.1** | **$151.3** | **$0.0** | **$2,359.5** |
| First Six Months of 2019 | 1,604.2 | 373.3 | 146.6 | 0.0 | 2,124.1 |
| **Income before Income Taxes(2)** |  |  |  |  |  |
| **Second Quarter 2020** | **$200.4** | **$23.4** | **$10.2** | **$2.0** | **$236.0** |
| Second Quarter 2019 | 136.2 | 16.9 | 15.5 | 1.7 | 170.3 |
| **First Six Months of 2020** | **$451.2** | **$61.6** | **$19.0** | **$3.6** | **$535.4** |
| First Six Months of 2019 | 318.9 | 45.3 | 27.8 | 3.4 | 395.4 |

(1) Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $2.8 and $2.4 for the three months ended June 30, 2020 and June 30, 2019, respectively, and were $5.8 and $4.7 for the six months ended June 30, 2020 and June 30, 2019, respectively.

(2) In determining income before income taxes, interest expense, investment earnings and certain aspects of other income and expense were allocated among the segments based upon each segment’s relative income from operations.

Product line revenues from external customers are as follows:

|  | Three Months Ended June 30, 2020 | June 30, 2019 | Six Months Ended June 30, 2020 | June 30, 2019 |
| --- | ---: | ---: | ---: | ---: |
| Household Products | **$544.7** | $464.3 | **$1,039.0** | $907.6 |
| Personal Care Products | **386.4** | 355.0 | **783.1** | 696.6 |
| Total Consumer Domestic | **931.1** | 819.3 | **1,822.1** | 1,604.2 |
| Total Consumer International | **187.5** | 186.6 | **386.1** | 373.3 |
| Total SPD | **75.7** | 73.5 | **151.3** | 146.6 |
| **Total Consolidated Net Sales** | **$1,194.3** | $1,079.4 | **$2,359.5** | $2,124.1 |

Household Products include laundry, deodorizing, and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care and hair care products and gummy dietary supplements.

### Consumer Domestic

Consumer Domestic net sales in the second quarter of 2020 were $931.1, an increase of $111.8 or 13.6% as compared to the same period in 2019. Consumer Domestic net sales for the six months ended June 30, 2020 were $1,822.1 an increase of $217.9 or 13.6% as compared to the same period in 2019. The components of the net sales change are the following:

| Net Sales - Consumer Domestic | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Product volumes sold | 6.3% | 6.8% |
| Pricing/Product mix | 4.4% | 3.7% |
| Acquired product lines (1) | 2.9% | 3.1% |
| **Net Sales increase** | **13.6%** | **13.6%** |

(1) Includes the Flawless Acquisition since the date of acquisition.

The increase in net sales for the three months ended June 30, 2020, reflects the impact of the Flawless Acquisition, higher sales of ARM & HAMMER liquid laundry detergent, VITAFUSION and L’IL CRITTERS gummy vitamins, OXICLEAN® stain fighters, ARM & HAMMER clumping cat litter and baking soda, and ARM & HAMMER laundry detergent scent boosters. The increase in net sales for the six-month period ending June 30, 2020, reflects the impact of the Flawless Acquisition, higher sales of ARM & HAMMER liquid laundry detergent, VITAFUSION and L’IL CRITTERS gummy vitamins, OXICLEAN® stain fighters, ARM & HAMMER clumping cat litter and baking soda, and ARM & HAMMER laundry detergent scent boosters. A number of these brands realized higher than anticipated sales due to higher consumer demand due to the COVID-19 pandemic.

Condom usage has declined, as a result of a lower 18 to 24-year old population, alternate birth control options, less fear of HIV, decreased sexual activity, and increased competition, all of which have contributed to lower demand for our products in the condom category. Due primarily to the recent social distancing requirements related to the COVID-19 pandemic, condom usage continues to decline. As a result, the TROJAN business has experienced sales and profit declines that has eroded a portion of the excess between fair and carrying value, which could potentially result in an impairment of the tradename. The carrying value of the TROJAN tradename is $176.4 million. As of December 31, 2019, fair value exceeded carrying value by 26%. This indefinite-lived intangible asset is susceptible to impairment risk. While management can and 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. This could result in a decline in fair value that could trigger a future impairment charge of the tradename.

Consumer Domestic income before income taxes for the second quarter of 2020 was $200.4, a $64.2 increase as compared to the second quarter of 2019. The increase is due primarily to favorable price/mix of $40.0, volumes of $34.4 (including the impact of the pandemic), lower marketing costs of $6.2, lower manufacturing and distribution costs of $4.3, and lower interest and other expenses of $1.0., partially offset by higher SG&A costs of $21.5 (in part due to the Flawless earn-out adjustment and other costs associated with the Flawless Acquisition). For the six-month period ended June 30, 2020, income before income taxes was $451.2, a $132.3 increase as compared to the first six months of 2019. The increase is due primarily to volumes of $77.8 (including the impact of the pandemic), favorable price/mix of $59.9, lower marketing costs of $6.2, and lower interest and other expenses of $1.8. partially offset by higher SG&A costs of $14.3. Higher manufacturing and distribution costs were offset by productivity programs.

### Consumer International

Consumer International net sales were $187.5 in the second quarter of 2020, an increase of $0.9 or 0.5% as compared to the same period in 2019. Consumer International net sales in the first six months of 2020 were $386.1, an increase of $12.8 or approximately 3.4% as compared to the same period in 2019. The components of the net sales change are the following:

| Net Sales - Consumer International | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Product volumes sold | (0.7%) | 2.1% |
| Pricing/Product mix | 1.3% | 1.7% |
| Foreign exchange rate fluctuations / Other | (3.9%) | (3.1%) |
| Acquired product lines (net of divestiture) (1) | 3.8% | 2.7% |
| **Net Sales increase** | **0.5%** | **3.4%** |

(1) Includes the Flawless Acquisition since the date of acquisition. During the second quarter of 2019, we sold our consumer business in Brazil. During the first quarter of 2020 we completed the sale of the PERL WEISS brand.

Excluding the impact of foreign exchange rates and the Flawless Acquisition, higher sales in the second quarter ended June 30, 2020 were driven primarily by the Global Markets Group offset by declines in Europe and Mexico. For the six months ended June 30, 2020 higher sales were driven primarily by the Global Markets Group, Canada, and Australia, offset by a decline in Mexico. During the first quarter of 2020, a number of brands in these regions realized higher than anticipated sales due to higher consumer demand resulting from the COVID-19 pandemic.

Consumer International income before income taxes was $23.4 in the second quarter of 2020, an increase of $6.5 compared to the same period in 2019 due primarily to lower SG&A costs of $6.3 and higher sales volumes of $3.6, partially offset by unfavorable foreign exchange rates of $1.6, unfavorable manufacturing costs of $1.0, unfavorable price/mix of $0.7, and higher marketing expenses of $0.2. For the first six months of 2020, income before income taxes was $61.6, a $16.3 increase as compared to the same period in 2019, due primarily to lower SG&A costs of $10.6, higher sales volumes of $8.4, favorable price/mix of $2.6 and lower marketing expenses of $1.0, partially offset by unfavorable foreign exchange rates of $3.5 and unfavorable manufacturing costs of $2.6.

### Specialty Products (“SPD”)

SPD net sales were $75.7 in the second quarter of 2020, an increase of $2.2 or 3.0% as compared to the same period in 2019. SPD net sales were $151.3 for the first six months of 2020, an increase of $4.7, or 3.2% as compared to the same period in 2019. The components of the net sales change are the following:

| Net Sales - SPD | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Product volumes sold | 3.3% | 5.0% |
| Pricing/Product mix | (0.3)% | (1.8)% |
| **Net Sales increase** | **3.0%** | **3.2%** |

The net sales increase in the second quarter and the first six months of 2020 was driven by higher volumes in the animal and food production business. The demand for our non-dairy products grew in both domestic and international markets as our prebiotic and probiotic products continued to grow in the poultry industry. Our dairy product demand contracted in the second quarter due to a short-term decline in dairy farm profitability and the first six months of 2020 remains improved compared to the same period in 2019. Milk prices have returned to pre-COVID-19 pandemic levels and demand from dairy customers is expected to strengthen in the second half of the year.

SPD income before income taxes was $10.2 in the second quarter of 2020, a decrease of $5.3 as compared to the same period in 2019 due primarily to higher SG&A costs of $7.4, unfavorable manufacturing costs of $0.7, and unfavorable price/product mix of $0.2, partially offset by higher volumes of $2.0 and lower interest and other expenses of $0.9. SG&A expense in 2019 was favorably impacted by the $7.3 reduction in the fair value of the contingent liability associated with the Passport Acquisition. SPD income before income taxes was $19.0 in the first six months of 2020, a decrease of $8.8 as compared to the same period in 2019 due to higher SG&A costs of $8.5, primarily due to the Passport liability adjustment, unfavorable manufacturing costs of $3.4, unfavorable price/product mix of $2.6 and higher marketing costs of $0.1, partially offset by higher volumes of $4.3 and lower interest and other expenses of $1.4.

### Corporate

The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the second quarter of 2020 and 2019. The Corporate segment income before income taxes was $2.0 in the second quarter of 2020, as compared to $1.7 in the same period in 2019. The Corporate segment income before income taxes was $3.6 for the first six months of 2020, as compared to $3.4 in the same period in 2019.

### Liquidity and Capital Resources

On May 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 from March 29, 2023 to March 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.

In March 2020, we borrowed $825.0 under the Revolving Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic. The full $825.0 was repaid in May 2020. We have the ability to borrow again under the Revolving Credit Facility at any time up to the borrowing limit.

As of June 30, 2020, we had $451.7 in cash and cash equivalents, and approximately $933.0 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 ended December 31, 2019 (the “Form 10-K”) and in Item 1A of Part II of this Quarterly Report. Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our efficient business model and the recent steps we have taken to strengthen our balance sheet positioned us to manage our business through this crisis as it continues to unfold. 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 covenants in the Credit Agreement because we currently are, and anticipate that we will continue to be, in compliance with the maximum leverage ratio requirement in the Credit Agreement.

On January 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 of February 14, 2020. The increase raises the annual dividend payout from $224.0 to approximately $237.0.

We did not repurchase any shares of our common stock in the first six months of 2020. As a result of our stock repurchases in recent years, there remains $210.0 of share repurchase availability under the share repurchase program approved by our Board of Directors in 2017 as of June 30, 2020.

We anticipate that our cash holdings, cash from operations, and our remaining borrowing capacity, will be sufficient to meet our spending requirements, including capital expenditures, which are expected to be approximately $100.0 in 2020, debt payments, dividends, and any share repurchase activity to the extent implemented by management. We may also fund acquisitions that will complement our existing product lines or expand our presence in international markets. We do not have any mandatory fixed rate debt principal payments in 2020.

#### Cash Flow Analysis

|  | Six Months Ended June 30, 2020 | June 30, 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | **$598.6** | $351.2 |
| Net cash used in investing activities | **$(26.4)** | $(502.4) |
| Net cash used in financing activities | **$(274.0)** | $(67.7) |

27

**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 six months ended June 30, 2020 increased by $247.4 to $598.6 as compared to $351.2 in the same period in 2019 due to higher cash earnings (net income plus non-cash expenses such as depreciation, amortization, deferred taxes, and non-cash compensation) and a reduction in working capital. The change in working capital is primarily due to the deferral of U.S. federal income tax payments from the second to the third quarter of $81.0 and higher accounts payable and accrued expenses, which in part is due to higher inventories. We measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters ended June 30, 2020 and 2019:

|  | As of June 30, 2020 | June 30, 2019 | Change |
| --- | ---: | ---: | ---: |
| Days of sales outstanding in accounts receivable ("DSO") | 26 | 32 | (6) |
| Days of inventory outstanding ("DIO") | 60 | 60 | - |
| Days of accounts payable outstanding ("DPO") | 69 | 68 | (1) |
| Cash conversion cycle | 17 | 24 | (7) |

Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two-period average method, decreased 7 days from the prior year amount of 24 days to 17 days at June 30, 2020 due primarily to a decrease in DSO of 6 days and an increase in DPO of 1 day. The decrease in the cash conversion cycle is primarily due to lower accounts receivable from sales timing and increased receivable factoring. 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 six months of 2020 was $26.4, primarily reflecting $30.9 for property, plant and equipment additions, partially offset by cash proceeds of $7.0 from the sale of the PERL WEISS® toothpaste brand in Germany. Net cash used in investing activities during the first six months of 2019 was $502.4, primarily reflecting $475.0 for the Flawless Acquisition, and $23.6 for property, plant and equipment additions.

**Net Cash Used in Financing Activities –** Net cash used in financing activities during the first six months of 2020 was $274.0, reflecting $186.2 of net debt payments, $118.1 of cash dividend payments, and $14.5 for the Agro business acquisition liability settlement, partially offset by $44.9 of proceeds from stock option exercises. Net cash used in financing activities during the first six months of 2019 was $67.7, reflecting $100.0 of repurchases of our common stock (“Common Stock”), $112.0 of cash dividend payments, partially offset by $109.8 of net debt borrowings and $37.0 of proceeds from stock option exercises.

## Market risk

As filed, 843 characters.

### Market risk

We are subject to market risks particularly due to changes in interest rates, diesel and other commodity costs, fluctuations in foreign currency exchange rates, and changes in the market price of the Common Stock. We use derivative agreements to manage these risks. The current economic environment associated with COVID-19 has led to significant volatility and uncertainty with each of these market risks. For economic and other impacts of the COVID-19 pandemic on the Company, see “Recent Developments” within Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

For historical quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II in the Form 10-K.

## Controls and procedures

As filed, 7,256 characters.

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.

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; the impact of the COVID-19 pandemic and the Company’s response; 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 decline of condom usage; the Company’s hedge programs; the impact of foreign exchange, tariffs, and commodity price fluctuations; impairments and other 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; the availability and adequacy of raw materials, including trona reserves and the conversion of such reserves; and the customers and consumer acceptance of certain ingredients in our products. Other forward-looking statements in this report are generally identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable terms. 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), including those relating to the outbreak of contagious diseases; other impacts of the COVID-19 pandemic and its impact on the Company’s operations, customers, suppliers, employees, and other constituents, and market volatility and impact on the economy (including causing recessionary conditions), resulting from global, nationwide or local or regional outbreaks or increases in infections, and the risk that the Company will not be able to successfully execute its response plans with respect to the pandemic or localized outbreaks and the corresponding uncertainty; the impact of regulatory changes or policies associated with the COVID-19 pandemic, including continuing or renewed shutdowns of retail and other businesses in various jurisdictions; the impact of the CARES Act and other governmental actions; unanticipated increases in raw material and energy prices; delays or other problems in manufacturing or distribution; 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 or on line share of private label and retailer-branded products or other changes in the retail environment; 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; shifting economic policies in the United States; potential changes in export/import and trade laws, regulations and policies of the United States and other countries, including any increased trade restrictions or tariffs, including the actual and potential effect of tariffs on Chinese goods imposed by the United States; increased or changing regulation regarding the Company’s products in the United States and other countries where it or its suppliers operate; issues relating to the Company’s information technology and controls; the impact of natural disasters, including those related to climate change, 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 United States federal securities laws. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the United States Securities and Exchange Commission (the “Commission”).

## Risk factors

As filed, 6,433 characters.

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 is modified by the disclosure below. These risks and uncertainties, along with those previously disclosed, could materially affect the Company’s business, financial condition or future results.

- **We must successfully manage the demand, supply, and operational challenges associated with the actual or perceived effects of the novel coronavirus (COVID-19) pandemic.**

Our business and financial results have been, and may continue to be, negatively impacted by the fear of exposure to or actual effects of the coronavirus (COVID-19) pandemic, such as negative impact on the global and U.S. domestic economy, significant unemployment, market volatility, reduced travel or recommendations or mandates from governmental authorities to avoid various sized gatherings, close facilities, suspend operations, or to self-quarantine. These impacts include, but are not limited to:

- Significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by, among other things: the temporary or prolonged inability of consumers to purchase our products due to illness, quarantine or other travel or gathering restrictions, store closures, unemployment or other financial hardship, shifts in demand away from one or more of our more discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-loading or unloading activity. For example, our WaterPik business has been negatively impacted by the temporary closure of dental offices across the United States and some other personal care brands have been negatively impacted by the temporary closures of certain non-essential retailers and the reduction of consumer foot traffic at retailers from which they derive a significant proportion of their sales. WaterPik and some other personal care brands have also been impacted by reduced demand for discretionary consumable products by consumers due the impact of the pandemic, including increased unemployment and concerns about the economy. Continuing recessionary economic conditions, including after the direct impact of the pandemic has subsided, may continue to impact consumer demand for certain of our products and put downward pressure on product prices. Some of our retail customers have been forced to shut down or reduce their hours, which has impacted and may continue to impact their orders. If these impacts are prolonged, they can further increase the difficulty of planning for operations and may adversely impact our results.
- Inability to meet our retailer orders and customers’ needs due to disruptions in our manufacturing and distribution network or capacity constraints or those of our finished goods, raw materials, or transportation suppliers caused by the closure or suspension of operations due to governmental prohibitions or employees becoming infected or refusing to work. In addition, our retailers may prioritize certain categories and we may be unable to shift our production capacity to address those shifts, which could also impact our ability to meet customer demand. While many of our facilities produce essential products and have been allowed to continue to operate despite general shut-down orders by certain governmental authorities, we could face challenges in continuing to operate such facilities as a result of employee absenteeism or sickness, additional governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities or those of our suppliers.
- If key employees become ill as a result of the COVID-19 pandemic or otherwise our business activities may be adversely affected and our management team's attention may be diverted. In addition, we may not be able to locate suitable replacements for any key employees who become ill.
- Although we are actively monitoring the impact of the COVID-19 pandemic on our supply chain, we are unable to accurately predict the impact that the COVID-19 pandemic will have due to various uncertainties, including the ultimate geographic spread of the virus, the severity of the pandemic, and the duration of the pandemic and corresponding government action. Restrictions resulting from the COVID-19 pandemic could impact our supply chain both in the United States and globally. These restrictions may cause the price of certain raw materials used in our products to increase and/or we may experience disruptions to our operations.
- Some of our customers, including mass merchandisers, supermarkets, drugstores, convenience stores, wholesale clubs, home stores, and dollar, pet and other specialty stores, have experienced, and may experience in the future, closures or reduced hours of or consumer capacity in their stores, declining financial performance, which could affect their ability to pay amounts due to us on a timely basis or at all, and any protracted economic downturn or recession that may adversely affect our suppliers and customers and could adversely affect our sales and results of operations. In addition, we may be unable to maintain the same level of sales and profitability if consumers shift to a higher percentage of their purchases online and we are unable to shift our sales strategies or execute on them.
- Due to government orders and the need to protect our workforce, the majority of our office and management personnel are working remotely, which could increase our exposure to technological failures or cybersecurity risks, which could negatively impact our operations.

Despite our efforts to manage and remedy these impacts to the Company, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak as well as third-party or governmental actions taken to contain its spread and mitigate its public health effects. While the vast majority of our products are consumer staples that generally are less vulnerable to decreases in discretionary spending than other products, some of our products, particularly WaterPik and some other personal care brands, are more discretionary in nature and, are more likely to be affected by consumer decisions to control spending and the impact and duration of recessionary economic conditions.

Filed Jul 31, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-035085. Last ingested by Listed: Nov 13, 2026, 16:10 ET. No prices; not investment advice.