NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions, except per share data)
The condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015, the condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2016 and June 30, 2015, and the condensed consolidated statements of cash flow and stockholders’ equity for the six months ended June 30, 2016 and June 30, 2015 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 June 30, 2016 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, 2015 (the “Form 10-K”). The results of operations for the period ended June 30, 2016 are not necessarily indicative of the operating results for the full year.
The Company incurred research and development expenses in the second quarter of 2016 and 2015 of $16.1 and $18.3, respectively. The Company incurred research and development expenses in the first six months of 2016 and 2015 of $30.5 and $32.1, respectively. These expenses are included in selling, general and administrative expenses.
2.
|
New Accounting Pronouncements
|
In February 2016, the Financial Accounting Standards Board (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 will have on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued new accounting guidance that makes modifications to how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact that adoption of the guidance will have on its consolidated financial position, results of operations and cash flows.
In March, April, and May of 2016, the FASB issued amended 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 guidance is effective for annual and interim periods beginning after December 15, 2017, and allows companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption. Early adoption is allowed for annual and interim periods beginning after December 15, 2016. While the Company is still in the process of evaluating the financial statement impact of the standard adoption, it is not currently expected to have a material impact on its consolidated financial position, results of operations or cash flows.
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.
8
Inventories consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Raw materials and supplies
|
$
|
76.2
|
|
|
$
|
84.6
|
|
Work in process
|
|
32.8
|
|
|
|
33.1
|
|
Finished goods
|
|
181.3
|
|
|
|
156.3
|
|
Total
|
$
|
290.3
|
|
|
$
|
274.0
|
|
4.
|
Property, Plant and Equipment, Net (“PP&E”)
|
PP&E consists of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Land
|
$
|
25.2
|
|
|
$
|
25.2
|
|
Buildings and improvements
|
|
288.7
|
|
|
|
277.3
|
|
Machinery and equipment
|
|
674.0
|
|
|
|
665.2
|
|
Software
|
|
85.8
|
|
|
|
84.9
|
|
Office equipment and other assets
|
|
60.6
|
|
|
|
59.2
|
|
Construction in progress
|
|
26.7
|
|
|
|
33.2
|
|
Gross PP&E
|
|
1,161.0
|
|
|
|
1,145.0
|
|
Less accumulated depreciation and amortization
|
|
566.4
|
|
|
|
535.4
|
|
Net PP&E
|
$
|
594.6
|
|
|
$
|
609.6
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Depreciation and amortization on PP&E
|
$
|
14.7
|
|
|
$
|
15.0
|
|
|
$
|
30.7
|
|
|
$
|
29.6
|
|
5.
|
Earnings Per Share (“EPS”)
|
Basic EPS is calculated based on income available to holders of the Company’s common stock (“Common Stock”) and the weighted average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential Common Stock issuable pursuant to the exercise of outstanding stock options.
The following table sets forth a reconciliation of the weighted average number of shares of Common Stock outstanding to the weighted average number of shares outstanding on a diluted basis:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding - basic
|
|
128.5
|
|
|
|
130.9
|
|
|
|
129.0
|
|
|
|
131.4
|
|
Dilutive effect of stock options
|
|
2.4
|
|
|
|
2.5
|
|
|
|
2.4
|
|
|
|
2.6
|
|
Weighted average common shares outstanding - diluted
|
|
130.9
|
|
|
|
133.4
|
|
|
|
131.4
|
|
|
|
134.0
|
|
Antidilutive stock options outstanding
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
9
6.
|
Stock Based Compensation Plans
|
The following table provides a summary of option activity during the six months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding at December 31, 2015
|
|
8.6
|
|
|
$
|
51.77
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1.0
|
|
|
|
93.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(0.9
|
)
|
|
|
32.18
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(0.1
|
)
|
|
|
72.47
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
8.6
|
|
|
$
|
58.47
|
|
|
|
6.1
|
|
|
$
|
381.9
|
|
Exercisable at June 30, 2016
|
|
5.4
|
|
|
$
|
44.64
|
|
|
|
4.6
|
|
|
$
|
313.3
|
|
The following table provides information regarding the intrinsic value of stock options exercised and stock compensation expense related to stock option awards.
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Intrinsic Value of Stock Options Exercised
|
$
|
31.1
|
|
|
$
|
8.5
|
|
|
$
|
55.3
|
|
|
$
|
32.3
|
|
Stock Compensation Expense Related to Stock Option Awards
|
$
|
5.7
|
|
|
$
|
9.7
|
|
|
$
|
11.2
|
|
|
$
|
11.4
|
|
Issued Stock Options
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
Weighted Average Fair Value of Stock Options issued (per share)
|
$
|
16.11
|
|
|
$
|
13.73
|
|
|
$
|
15.15
|
|
|
$
|
13.73
|
|
Fair Value of Stock Options Issued
|
$
|
10.2
|
|
|
$
|
14.8
|
|
|
$
|
15.2
|
|
|
$
|
14.8
|
|
The following table provides a summary of the assumptions used in the valuation of issued stock options:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
1.5
|
%
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
Expected life in years
|
|
7.0
|
|
|
|
6.3
|
|
|
|
6.8
|
|
|
|
6.3
|
|
Expected volatility
|
|
17.1
|
%
|
|
|
17.2
|
%
|
|
|
17.0
|
%
|
|
|
17.2
|
%
|
Dividend yield
|
|
1.4
|
%
|
|
|
1.6
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
The fair value of stock options is based upon the Black Scholes option pricing model. The Company determined the stock options’ lives based on historical exercise behavior and their expected volatility and dividend yield based on historical changes in stock price and dividend payments. The risk free interest rate is based on the yield of an applicable term U.S. Treasury instrument.
On January 28, 2015, the Board authorized a new share repurchase program, under which the Company may repurchase up to $500 million in shares of Common Stock (the “2015 Share Repurchase Program”). The 2015 Share Repurchase Program replaced the 2014 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 connection with the Company’s 2015 Share Repurchase Program and its evergreen repurchase program, the Company repurchased approximately 2.2 million shares
in the first quarter of 2016
at a cost of $200.0, of which
approximately
$103.0
was purchased under the evergreen share repurchase program and approximately $97.0 was purchased under the 2015 Share Repurchase Program
. The Company did not repurchase any shares of Common Stock during the quarter ended June 30, 2016.
10
8.
|
Fair Value Measurements
|
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 June 30, 2016 and December 31, 2015:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Input
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Level
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Level 1
|
|
$
|
98.2
|
|
|
$
|
98.2
|
|
|
$
|
89.3
|
|
|
$
|
89.3
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
Level 2
|
|
|
381.6
|
|
|
|
381.6
|
|
|
|
357.2
|
|
|
|
357.2
|
|
2.875% Senior notes due October 1, 2022
|
Level 2
|
|
|
399.7
|
|
|
|
412.1
|
|
|
|
399.7
|
|
|
|
390.5
|
|
2.45% Senior notes due December 15, 2019
|
Level 2
|
|
|
299.9
|
|
|
|
303.2
|
|
|
|
299.9
|
|
|
|
296.0
|
|
Fair value adjustment asset (liability) related to hedged fixed rate
debt instrument
|
Level 2
|
|
|
8.4
|
|
|
|
8.4
|
|
|
|
1.3
|
|
|
|
1.3
|
|
The Company recognizes transfers between input levels as of the actual date of the event. There were no transfers between input levels during the six months ended June 30, 2016.
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 June 30, 2016 and December 31, 2015.
9.
|
Derivative Instruments and Risk Management
|
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 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.
The notional amount of a derivative instrument is the nominal or face amount used to calculate payments made on that instrument. Notional amounts are presented in the following table:
|
|
Notional
|
|
|
Notional
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
118.8
|
|
|
$
|
118.0
|
|
Interest rate swap
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
Diesel fuel contracts
|
|
1.0 gallons
|
|
|
2.0 gallons
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
17.7
|
|
|
$
|
33.2
|
|
Equity derivatives
|
|
$
|
36.1
|
|
|
$
|
32.4
|
|
11
The fair values and amount of gain (loss) recognized in income and other comprehensive income associated with the derivative instruments disclosed above did not have a material impact on the Company’s condensed consolidated financial statements.
On January 4, 2016, the Company acquired
Spencer Forrest, Inc., the maker of TOPPIK, (the “
Toppik Acquisition”), the leading brand of hair building fibers for people with thinning hair. The total purchase price was approximately $175.5, which is subject to adjustment based on the closing working capital. The Company financed the acquisition with commercial paper. Toppik’s annual sales are approximately $30.0. This brand will be managed within the Consumer Domestic and Consumer International segments.
The preliminary fair values of net assets acquired are set forth below:
|
Acquisition Date
|
|
|
Preliminary
|
|
Toppik Acquisition
|
Fair Value
|
|
Inventory and other working capital assets
|
$
|
9.5
|
|
Property, plant and equipment and other long-term assets
|
|
0.2
|
|
Trade names and other intangibles
|
|
115.8
|
|
Goodwill
|
|
52.2
|
|
Current liabilities
|
|
(2.2
|
)
|
Cash purchase price as of June 30, 2016 (net of cash acquired)
|
$
|
175.5
|
|
The life of the amortizable intangible assets recognized from the Toppik Acquisition ranges from 10 - 20 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.
11.
|
Goodwill and Other Intangibles, Net
|
The following table provides information related to the carrying value of all intangible assets, other than goodwill:
|
|
June 30, 2016
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names
|
|
$
|
356.6
|
|
|
$
|
(106.3
|
)
|
|
$
|
250.3
|
|
|
3-20
|
|
$
|
259.5
|
|
|
$
|
(96.4
|
)
|
|
$
|
163.1
|
|
Customer Relationships
|
|
|
380.5
|
|
|
|
(153.0
|
)
|
|
|
227.5
|
|
|
15-20
|
|
|
372.4
|
|
|
|
(141.8
|
)
|
|
|
230.6
|
|
Patents/Formulas
|
|
|
68.7
|
|
|
|
(43.7
|
)
|
|
|
25.0
|
|
|
4-20
|
|
|
57.4
|
|
|
|
(41.9
|
)
|
|
|
15.5
|
|
Non Compete Agreement
|
|
|
1.8
|
|
|
|
(1.5
|
)
|
|
|
0.3
|
|
|
5-10
|
|
|
1.8
|
|
|
|
(1.5
|
)
|
|
|
0.3
|
|
Total
|
|
$
|
807.6
|
|
|
$
|
(304.5
|
)
|
|
$
|
503.1
|
|
|
|
|
$
|
691.1
|
|
|
$
|
(281.6
|
)
|
|
$
|
409.5
|
|
Indefinite lived intangible assets - Carrying value
|
|
June 30,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Trade Names
|
|
$
|
861.3
|
|
|
|
|
|
|
|
|
$
|
860.0
|
|
|
|
|
|
Intangible amortization expense was $11.1 and $9.7 for the second quarter of 2016 and 2015, respectively. Intangible amortization expense amounted to $22.4 and $20.4 for the first six months of 2016 and 2015, respectively. The Company estimates that intangible amortization expense will be approximately $45.0 in 2016 and approximately $40.0 to $45.0 annually over the next five years.
The carrying amount of goodwill as of June 30, 2016 and December 31, 2015, respectively, is as follows:
|
Consumer
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2015
|
$
|
1,242.2
|
|
|
$
|
62.6
|
|
|
$
|
50.1
|
|
|
$
|
1,354.9
|
|
Toppik acquired goodwill
|
|
39.2
|
|
|
|
13.0
|
|
|
|
0.0
|
|
|
|
52.2
|
|
Other
|
|
(0.8
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.8
|
)
|
Balance at June 30, 2016
|
$
|
1,280.6
|
|
|
$
|
75.6
|
|
|
$
|
50.1
|
|
|
$
|
1,406.3
|
|
12
In connection with
its annual goodwill impairment test, performed in the beginning of the second quarter of 2016, the Company determined that the estimated fair value substantially exceeded the carrying values of all reporting units.
12.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Trade accounts payable
|
$
|
316.1
|
|
|
$
|
293.9
|
|
Accrued marketing and promotion costs
|
|
108.1
|
|
|
|
91.5
|
|
Accrued wages and related benefit costs
|
|
39.6
|
|
|
|
59.4
|
|
Other accrued current liabilities
|
|
79.9
|
|
|
|
63.5
|
|
Total
|
$
|
543.7
|
|
|
$
|
508.3
|
|
13.
|
Short-Term Borrowings and Long-Term Debt
|
Short-term borrowings and long-term debt consist of the following:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
Commercial paper issuances
|
$
|
375.0
|
|
|
$
|
354.5
|
|
Various debt due to international banks
|
|
6.6
|
|
|
|
2.7
|
|
Total short-term borrowings
|
$
|
381.6
|
|
|
$
|
357.2
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
2.875% Senior notes due October 1, 2022
|
$
|
400.0
|
|
|
$
|
400.0
|
|
Less: Discount
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
2.45% Senior notes due December 15, 2019
|
|
300.0
|
|
|
|
300.0
|
|
Less: Discount
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Debt issuance costs, net
|
|
(7.3
|
)
|
|
|
(8.1
|
)
|
Fair value adjustment related to hedged fixed rate debt instrument
|
|
8.4
|
|
|
|
1.3
|
|
Net long-term debt
|
$
|
700.7
|
|
|
$
|
692.8
|
|
13
14.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2016 and June 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
Defined
|
|
|
|
|
|
|
Other
|
|
|
Currency
|
|
|
Benefit
|
|
|
Derivative
|
|
|
Comprehensive
|
|
|
Adjustments
|
|
|
Plans
|
|
|
Agreements
|
|
|
Income (Loss)
|
|
Balance at December 31, 2014
|
$
|
(16.4
|
)
|
|
$
|
(17.7
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(34.7
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(16.3
|
)
|
|
|
0.0
|
|
|
|
5.9
|
|
|
|
(10.4
|
)
|
Amounts reclassified to consolidated statement of
income
(a) (b)
|
|
0.0
|
|
|
|
5.2
|
|
|
|
(3.6
|
)
|
|
|
1.6
|
|
Tax benefit (expense)
|
|
11.6
|
|
(c)
|
|
(1.3
|
)
|
|
|
(0.9
|
)
|
|
|
9.4
|
|
Other comprehensive income (loss)
|
|
(4.7
|
)
|
|
|
3.9
|
|
|
|
1.4
|
|
|
|
0.6
|
|
Balance at June 30, 2015
|
$
|
(21.1
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
0.8
|
|
|
$
|
(34.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
(38.5
|
)
|
|
$
|
(11.5
|
)
|
|
$
|
4.1
|
|
|
$
|
(45.9
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
3.4
|
|
|
|
0.0
|
|
|
|
(9.5
|
)
|
|
|
(6.1
|
)
|
Amounts reclassified to consolidated statement of
income
(a) (b)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
2.3
|
|
|
|
2.3
|
|
Other comprehensive income (loss)
|
|
3.4
|
|
|
|
0.0
|
|
|
|
(7.5
|
)
|
|
|
(4.1
|
)
|
Balance at June 30, 2016
|
$
|
(35.1
|
)
|
|
$
|
(11.5
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(50.0
|
)
|
|
(a)
|
Amounts classified to cost of sales and selling, general and administrative expenses.
|
|
(b)
|
The Company reclassified a loss of $0.2 and a loss of $3.3 to the consolidated statement of income during the three months ended June 30, 2016 and 2015, respectively.
|
|
(c)
|
Refer to Note 10 in the Form 10-K for a discussion of the deferred tax benefit recorded from the liquidation of the Company’s Netherlands subsidiary.
|
15.
|
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 for the partnership 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 June 30, 2016, the Company had commitments of approximately $
245.0
.
These commitments include the purchase of raw materials, packaging supplies and services from its vendors at market prices to enable the Company to respond quickly to changes in customer orders or requirements, as well as costs associated with licensing and promotion agreements.
c. As of June 30, 2016, the Company had various guarantees and letters of credit of approximately $23.0.
d. On November 8, 2011, the Company acquired a license for certain oral care technology for cash consideration of $4.3. In addition to this initial payment, the Company was required to make advance royalty payments of up to $5.5 upon the launch of a product utilizing the licensed technology, of which the entire $5.5 has been paid as of December 31, 2015. As of June 30, 2016, no additional payments are required under the license agreement. However, upon the approval of certain New Drug Applications by the U.S. Food and Drug Administration for products incorporating the acquired technology, the Company would be required to make an additional $7.0 license payment.
14
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. The parties have been engaged in fact discovery, which is ongoing.
In connection with this matter, the Company has reserved an amount that it does not believe is material. Although any damages ultimately paid by the Company may exceed this amount, it is not currently possible to estimate the amount of any such excess; however, any such excess could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
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. The Company,
in the ordinary course of its business, is the subject of, or party to, various pending or threatened legal actions, government investigations and proceedings from time to time, 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 subject to many uncertainties and the outcome of certain pending or threatened legal actions may not be reasonably predictable and any related damages may not be estimable. Certain legal actions, including those described above, could result in an adverse outcome for the Company, and any such adverse outcome could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows
.
16.
|
Related Party Transactions
|
The following summarizes the balances and transactions between the Company and each of (i) Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”), in each of which the Company holds a 50% ownership interest, and (ii) Natronx, in which the Company holds a one-third ownership interest:
|
Armand
|
|
|
ArmaKleen
|
|
|
Natronx
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Purchases by Company
|
$
|
10.0
|
|
|
$
|
11.2
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Sales by Company
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.6
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
1.0
|
|
Outstanding Accounts Receivable
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Outstanding Accounts Payable
|
$
|
2.3
|
|
|
$
|
2.3
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Administration & Management Oversight Services
(1)
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
(1)
Billed by Company and recorded as a reduction of selling, general and administrative expenses.
15
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:
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 (losses) of affiliates. As of June 30, 2016, the Company held 50% ownership interests in each of Armand and ArmaKleen, respectively, and a one-third ownership interest in Natronx. The Company’s equity in earnings (losses) of Armand and ArmaKleen for the three and six months ended June 30, 2016 and Armand, ArmaKleen and Natronx for the three and six months ended June 30, 2015, respectively, are included in the Corporate segment.
Some of the 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 for the three and six months ended June 30, 2016 and June 30, 2015 respectively, are as follows:
|
Consumer
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
SPD
|
|
|
Corporate
(3)
|
|
|
Total
|
|
Net Sales
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2016
|
$
|
669.8
|
|
|
$
|
136.4
|
|
|
$
|
71.2
|
|
|
$
|
0.0
|
|
|
$
|
877.4
|
|
Second Quarter 2015
|
|
638.3
|
|
|
|
130.9
|
|
|
|
77.9
|
|
|
|
0.0
|
|
|
|
847.1
|
|
First Six Months of 2016
|
$
|
1,317.6
|
|
|
$
|
263.8
|
|
|
$
|
145.0
|
|
|
$
|
0.0
|
|
|
$
|
1,726.4
|
|
First Six Months of 2015
|
|
1,252.9
|
|
|
|
251.3
|
|
|
|
155.2
|
|
|
|
0.0
|
|
|
|
1,659.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2016
|
$
|
141.6
|
|
|
$
|
16.2
|
|
|
$
|
10.7
|
|
|
$
|
2.5
|
|
|
$
|
171.0
|
|
Second Quarter 2015
|
|
112.6
|
|
|
|
4.5
|
|
|
|
16.1
|
|
|
|
(13.7
|
)
|
|
|
119.5
|
|
First Six Months of 2016
|
$
|
281.5
|
|
|
$
|
34.3
|
|
|
$
|
24.0
|
|
|
$
|
4.2
|
|
|
$
|
344.0
|
|
First Six Months of 2015
|
|
242.2
|
|
|
|
23.9
|
|
|
|
30.1
|
|
|
|
(11.4
|
)
|
|
|
284.8
|
|
(1)
|
Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $1.0 and $1.7 for the three months ended June 30, 2016 and June 30, 2015, respectively, and were $2.0 and $3.0 for the six months ended June 30, 2016 and June 30, 2015, respectively.
|
(2)
|
In determining Income before Income Taxes, interest expense and investment earnings were allocated among segments based upon each segment’s relative Income from Operations.
|
(3)
|
Corporate consists of equity in earnings of affiliates from Armand and ArmaKleen in the first six months of 2016, and Armand, ArmaKleen and Natronx in the first six months of 2015.
|
16
Product line revenues from external customers are as follows:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Household Products
|
$
|
397.8
|
|
|
$
|
390.9
|
|
|
$
|
786.1
|
|
|
$
|
757.4
|
|
Personal Care Products
|
|
272.0
|
|
|
|
247.4
|
|
|
|
531.5
|
|
|
|
495.5
|
|
Total Consumer Domestic
|
|
669.8
|
|
|
|
638.3
|
|
|
|
1,317.6
|
|
|
|
1,252.9
|
|
Total Consumer International
|
|
136.4
|
|
|
|
130.9
|
|
|
|
263.8
|
|
|
|
251.3
|
|
Total SPD
|
|
71.2
|
|
|
|
77.9
|
|
|
|
145.0
|
|
|
|
155.2
|
|
Total Consolidated Net Sales
|
$
|
877.4
|
|
|
$
|
847.1
|
|
|
$
|
1,726.4
|
|
|
$
|
1,659.4
|
|
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.
Two-for-One Stock Split
On August 4, 2016, the Company announced that its Board of Directors has approved a two-for-one stock split of the Company’s common stock in the form of a stock dividend, payable on September 1, 2016 to shareholders of record as of August 15, 2016. The split will increase the Company’s total shares outstanding from approximately 129 million shares to approximately 258 million shares.
The financial statements presented in this quarterly report on Form 10-Q do not reflect the effect of the stock split.
17
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
(In millions, except per share data)