10-K 1 chd-10k_20161231.htm CHD-10K-20141231-FY chd-10k_20161231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

THE SECURITIES EXCHANGE ACT OF 1934

                         For the fiscal year ended December 31, 2016                                                  Commission file number 1-10585

 

CHURCH & DWIGHT CO., INC.

(Exact name of registrant as specified in its charter)

             

 

Delaware

 

13-4996950

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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:

 

Title of each class

 

Name of each exchange

on which registered

Common Stock, $1 par value

 

New York Stock Exchange

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes      No  

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $13.0 billion.  For purposes of making this calculation only, the registrant included all directors, executive officers and beneficial owners of more than ten percent of the common stock (the “Common Stock”) of Church & Dwight Co., Inc. (the “Company”).  The aggregate market value is based on the closing price of such stock on the New York Stock Exchange on June 30, 2016.

As of February 21, 2017, there were 254,632,798 shares of Common Stock outstanding.

Documents Incorporated by Reference

Certain provisions of the registrant’s definitive proxy statement to be filed not later than April 30, 2017 are incorporated by reference in Items 10 through 14 of Part III of this Annual Report on Form 10‑K (this “Annual Report”).  

 

 

 

 

 


CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

This Annual 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 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. 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; adverse developments affecting the financial condition of major customers and suppliers; competition, including The Procter & Gamble Company’s (“P&G”) participation in the value laundry detergent category and Henkel AG & Co. KGaA’s (“Henkel”) entry into the U.S. premium laundry detergent category; Henkel’s acquisition of the Sun Products Co., Inc. (“Sun Products”); 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 under the new presidential administration 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.

For a description of additional factors that could cause actual results to differ materially from the forward looking statements, please see Item 1A, “Risk Factors” in this Annual Report.

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”).

All applicable amounts in the consolidated financial statements and related disclosure included in this annual report have been retroactively adjusted to reflect the Company’s two for one stock split effected September 1, 2016.

 

 

 

 

 

2


TABLE OF CONTENTS

PART I

Item

 

 

Page

 

1.

Business

 

4

 

1A.

Risk Factors

 

16

 

1B.

Unresolved Staff Comments

 

27

 

2.

Properties

 

27

 

3.

Legal Proceedings

 

29

 

4.

Mine Safety Disclosures

 

30

 

PART II

 

PART III

 

 

 

3


 

PART I

 

ITEM 1.

BUSINESS

GENERAL

The Company, founded in 1846, develops, manufactures and markets a broad range of household, personal care and specialty products. The Company sells its 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, all of which sell the products to consumers. The Company also sells specialty products to industrial customers and distributors.

The Company focuses its consumer products marketing efforts principally on its ten “power brands.” These well-recognized brand names include ARM & HAMMER, used in multiple product categories such as baking soda, cat litter, carpet deodorization and laundry detergent; TROJAN condoms, lubricants and vibrators; OXICLEAN stain removers, cleaning solutions, laundry detergents, dishwashing detergent and bleach alternatives; SPINBRUSH battery-operated and manual toothbrushes; FIRST RESPONSE home pregnancy and ovulation test kits; NAIR depilatories; ORAJEL oral analgesic; XTRA laundry detergent; the combination of the L’IL CRITTERS and VITAFUSION brand names for the Company’s gummy dietary supplement business and BATISTE dry shampoo.

The Company’s business is divided into three primary segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”). The Consumer Domestic segment includes the power brands noted previously as well as other household and personal care products such as KABOOM cleaning products, ARRID antiperspirant, CLOSE-UP and AIM toothpastes and SIMPLY SALINE nasal saline moisturizer. The Consumer International segment primarily sells a variety of personal care products, some of which use the same brands as the Company’s domestic product lines, in international markets, including Canada, Europe, Australia, Mexico and Brazil. The SPD segment has a growing global animal productivity business with more than a dozen products designed to help improve the productivity and wellness of animals in animal agriculture.  The segment is also the largest United States (“U.S.”) producer of sodium bicarbonate, which it sells together with other specialty inorganic chemicals for a variety of industrial, institutional, medical, and specialty cleaning applications. In 2016, the Consumer Domestic, Consumer International and SPD segments represented approximately 77%, 15% and 8%, respectively, of the Company’s net sales.  

All domestic brand “rankings” contained in this Annual Report are based on dollar share rankings from ACNielsen AOC (All Outlets Combined) for the 52 weeks ended December 17, 2016.  Foreign brand “rankings” are derived from several sources.  

FINANCIAL INFORMATION ABOUT SEGMENTS

As noted above, the Company’s business is organized into three reportable segments: Consumer Domestic, Consumer International and SPD.  These segments are based on differences in the nature of products and organizational and ownership structures.  The businesses of these segments generally are not seasonal, although the Consumer Domestic and Consumer International segments are affected by sales of SPINBRUSH battery-operated toothbrushes (which typically are higher during the fall, in advance of the holiday season), sales of NAIR depilatories and waxes (which typically are higher in the spring and summer months), and sales of VITAFUSION and L’IL CRITTERS dietary supplements (which typically are slightly higher in the fourth quarter of each year, in advance of the cold and flu season and renewed commitments to health).  Information concerning each of the segments is set forth in Note 16 to the consolidated financial statements included in this Annual Report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is Item 7 of this Annual Report.  

CONSUMER PRODUCTS

Consumer Domestic

Principal Products

The Company’s founders first marketed baking soda in 1846 for use in home baking.  Today, this product has a wide variety of uses in the home, including as a refrigerator and freezer deodorizer, scratch-free cleaner and deodorizer for kitchen surfaces and cooking appliances, bath additive, dentifrice, cat litter deodorizer and swimming pool pH stabilizer.  The Company specializes in baking soda-based products, as well as other products which use the same raw materials or technology or are sold in the same markets.  In addition, this segment includes other deodorizing and household cleaning products, as well as laundry and personal care products.  The following table sets forth the principal products of the Company’s Consumer Domestic segment.

4


 

 

Type of Product

 

Key Brand Names

 

 

 

Household

 

ARM & HAMMER Baking Soda

 

 

ARM & HAMMER Carpet Deodorizers

 

 

ARM & HAMMER Cat Litter Deodorizer

 

 

ARM & HAMMER Clumping Cat Litters (including CLUMP & SEAL)

 

 

ARM & HAMMER Powder, Liquid and Unit Dose Laundry Detergents

 

 

ARM & HAMMER Super Washing Soda

 

 

ARM & HAMMER FRESH’N SOFT Fabric Softeners

 

 

CLEAN SHOWER Daily Shower Cleaner

 

 

FELINE PINE Cat Litter

 

 

KABOOM Cleaning Products

 

 

NICE’N FLUFFY Fabric Softeners

 

 

ORANGE GLO Cleaning Products

 

 

OXICLEAN Dishwashing Detergent and Dishwashing Booster

 

 

OXICLEAN Laundry and Cleaning Solutions

  

 

SCRUB FREE Bathroom Cleaners

 

 

XTRA Fabric Softeners

 

 

XTRA Powder and Liquid Laundry Detergents

 

 

 

Personal Care

 

AIM Toothpaste

 

 

ARM & HAMMER Deodorants and Antiperspirants

 

 

ARM & HAMMER Toothpaste and Oral Rinses (including TRULY RADIANT)

 

 

ARRID Antiperspirants

 

 

BATISTE Dry Shampoo

 

 

CLOSE-UP Toothpaste

 

 

FIRST RESPONSE Home Pregnancy and Ovulation Test Kits

 

 

L’IL CRITTERS Dietary Supplements

 

 

NAIR Depilatories, Lotions, Creams and Waxes

 

 

ORAJEL Oral Analgesics

 

 

PEPSODENT Toothpaste

 

 

REPHRESH Feminine Hygiene Product

 

 

REPLENS Feminine Hygiene Product

 

 

SIMPLY SALINE Nasal Saline Moisturizer

 

 

SPINBRUSH Battery-operated Toothbrushes

 

 

SPINBRUSH Manual Toothbrushes

 

 

TOPPIK Hair Building Fibers

 

 

TROJAN Condoms, Lubricants and Vibrating Products

VIVISCAL Non-drug Hair Growth Supplement

 

 

VITAFUSION Dietary Supplements

Household Products

In 2016, household products constituted approximately 60% of the Company’s Domestic Consumer sales and approximately 46% of the Company’s consolidated net sales.  

The ARM & HAMMER trademark was adopted in 1867.  ARM & HAMMER Baking Soda remains the number one leading brand of baking soda in terms of consumer recognition of the brand name and reputation for quality and value.  The deodorizing properties of baking soda have led to the development of several baking soda-based household products.  For example, the Company markets ARM & HAMMER FRIDGE FRESH, a refrigerator deodorizer equipped with a baking soda filter to help keep food tasting fresher, and ARM & HAMMER Carpet Deodorizer.    

The Company’s laundry detergents constitute its largest consumer business, measured by net sales. The Company markets its ARM & HAMMER brand laundry detergents in powder, liquid and unit dose forms as value products, priced at a discount from products identified by the Company as market leaders. The Company markets ARM & HAMMER PLUS OXICLEAN Odor Blasters liquid laundry detergent, ARM & HAMMER CLEAN SCENTSATIONS a line of laundry scent boosters inspired by U.S. National Parks, and ARM & HAMMER BioEnzyme Power unit dose laundry detergent. The Company markets its XTRA laundry detergent in liquid, powder and single dose forms at a slightly lower price than ARM & HAMMER brand laundry detergents. The Company also markets XTRA LASTING SCENTSATIONS and XTRA FRESCO SCENTSATIONS, a line of highly fragranced and concentrated

5


 

liquid laundry detergents, and OXICLEAN laundry detergent and stain fighting additives.   OXICLEAN is the number one brand in the U.S. laundry stain fighting additive market. The Company markets ARM & HAMMER PLUS OXICLEAN liquid and powder laundry detergents, combining the benefits of these two powerful laundry detergent products, including, ARM & HAMMER PLUS OXICLEAN Ultra Power liquid detergent, an ultra-concentrated version of ARM & HAMMER PLUS OXICLEAN, and OXICLEAN Power Paks. The Company also markets OXICLEAN laundry detergent, a premium-priced line of liquid, powder and unit dose laundry detergents, OXICLEAN WHITE REVIVE laundry detergent, OXICLEAN versatile stain remover plus Odor Blasters and OXICLEAN washing machine cleaner.   In 2016, the Company introduced ARM & HAMMER BioEnzyme Power liquid, ARM & HAMMER Tropical Paradise Scent Booster and OXICLEAN Max Force Foam laundry stain remover.  In 2017, the Company has launched ARM & HAMMER plus OXICLEAN Stainfighters Triple Chamber unit dose laundry detergent.

The Company’s laundry products also include fabric softener sheets that prevent static cling and soften and freshen clothes. The Company markets ARM & HAMMER FRESH’N SOFT fabric softeners and offers a liquid fabric softener, NICE’N FLUFFY, at a slightly lower price enabling the Company to compete at several price points.  

The Company also markets a line of cat litter products, including ARM & HAMMER CLUMP & SEAL clumping cat litter, ARM & HAMMER CLUMP & SEAL lightweight cat litter, ARM & HAMMER SUPER SCOOP clumping cat litter and ARM & HAMMER ULTRA LAST, a longer lasting clumping cat litter. Other products include ARM & HAMMER Multi-Cat cat litter, designed for households with more than one cat, ARM & HAMMER ESSENTIALS clumping cat litter, a corn-based scoopable litter made for consumers who prefer to use products made with natural ingredients and ARM & HAMMER Double Duty cat litter, which eliminates both urine and feces odors on contact. The Company markets FELINE PINE in the natural litter segment, complementing the Company’s ARM & HAMMER branded cat litter business and positioning the Company as a leading supplier of natural cat litter.    In 2016, the Company launched ARM & HAMMER CLUMP & SEAL MICROGUARD, which seals and destroys immediate odors and prevents future bacterial odors.   In 2017, the Company has launched ARM & HAMMER CLUMP & SEAL SLIDE cat litter, which slides out of the litter box for easy cleaning.

In addition, the Company markets a line of household cleaning products including CLEAN SHOWER daily shower cleaner and SCRUB FREE bathroom cleaners.  The Company also markets KABOOM bathroom cleaners, ORANGE GLO household cleaning products, and OXICLEAN Dishwashing Booster, which removes cloudy film and food particles on glasses and dishes.  In 2016, the Company launched KABOOM Plus Disinfex bathroom surface cleaner.  

Personal Care Products

The Company’s personal care business was founded on the unique strengths of its ARM & HAMMER trademark and baking soda technology. The Company has expanded its personal care business through its acquisition of antiperspirants, oral care products, depilatories, reproductive health products, oral analgesics, nasal saline moisturizers and dietary supplements under a variety of other leading brand names. In 2016, Personal Care Products constituted approximately 40% of the Company’s Consumer Domestic sales and approximately 31% of the Company’s total sales.

ARM & HAMMER Baking Soda, when used as a dentifrice, helps whiten and polish teeth, removes plaque and leaves the mouth feeling fresh and clean. These properties led to the development of a complete line of sodium bicarbonate-based dentifrice products that are marketed and sold nationally primarily under the ARM & HAMMER DENTAL CARE, ARM & HAMMER SENSITIVE, ARM & HAMMER ADVANCE WHITE and ARM & HAMMER TRULY RADIANT brand names.    The Company also manufactures in the U.S. and markets in the U.S. (including Puerto Rico) and Canada CLOSE-UP, PEPSODENT and AIM toothpastes, which are priced at a discount from the market leaders.

The Company markets and sells ARRID and ARM & HAMMER antiperspirants and deodorants in the U.S and Mexico.  The ARM & HAMMER brand was the third fastest growing antiperspirant brand, in the U. S., in 2016 behind the success of ARM & HAMMER Essentials line-extension, introduced in 2014.  In 2017, the Company has launched a new ARM & HAMMER Essentials fragrance (Clean).  

Condoms are recognized as highly reliable contraceptives as well as an effective means of reducing the risk of sexually transmitted diseases. The Company’s TROJAN condom brand is the number one condom brand in the U.S., and has been in use for 100 years. The brand includes such products as ECSTASY, TROJAN EXTENDED PLEASURE, HER PLEASURE, BARESKIN, MAGNUM, TROJAN DOUBLE ECSTACY, TROJAN MAGNUM RIBBED, TROJAN STUDDED BARESKIN, MAGNUM BARESKIN and TROJAN Vibrations, a line of vibrating products. The Company also markets a line of lubrication products under the TROJAN brand such as TROJAN H2O and TROJAN TONIGHT.  In 2016, the Company launched the TROJAN GROOVE condom, TROJAN DIVINE Massager, TROJAN 2-1 Vibrating Ring and TROJAN RIVIERA lubricant.  In 2017, the Company plans to launch XOXO by TROJAN, an upscale, discrete condom targeting both men and women with a soft touch, aloe lubricated latex in a unique portable carrying case.

6


 

The Company markets SPINBRUSH battery-operated toothbrushes in the U.S. (including Puerto Rico), the United Kingdom, Canada, France, China and Australia.  The SPINBRUSH battery-operated toothbrush was the number one leading brand of battery-operated toothbrushes in the U.S. in 2016.  The Company markets SPINBRUSH PROCLEAN and SPINBRUSH TRULY RADIANT toothbrushes, featuring a two-speed patented brush head design leading to superior plaque removal versus manual brushes, SPINBRUSH PROCLEAN Recharge, a rechargeable toothbrush offering up to one week of power brushes between charges, SPINBRUSH PROCLEAN Sonic, a value high speed battery-operated toothbrush which competes with much more expensive “sonic” toothbrushes, ARM & HAMMER SPINBRUSH manual toothbrushes with rotating heads and SPINBRUSH KIDS featuring top licensed characters from partners like NICKELODEON, DISNEY, MARVEL and HASBRO.  In 2016, the Company introduced ARM & HAMMER SPINBRUSH TRULY RADIANT Clean & Fresh, building off of the success of TRULY RADIANT from 2014 and 2015.  In 2017, the Company entered the slim vibrating toothbrush segment with ARM & HAMMER SPINBRUSH Sonic Pulse.  Building on our successful partnership with NICKELODEON and the PAW PATROL franchise, ARM & HAMMER SPINBRUSH KIDS has launched a SHIMMER & SHINE battery toothbrush to continue growth on the children’s vibrating toothbrush business.

The Company markets home pregnancy and ovulation test kits. Its FIRST RESPONSE brand of diagnostic kits is the number one selling brand in the U.S. and includes an enhanced FIRST RESPONSE pregnancy test kit that can tell a woman that she is pregnant up to six days before her expected period, with 99% accuracy from the day of her missed period.  

 

The Company’s NAIR hair-removal brand is the number one selling depilatory brand in the U.S., with innovative products that address consumer needs for quick, complete and longer-lasting hair removal.  The Company offers a full line of depilatory products for women and men under the NAIR brand name, including SHOWER POWER, SPRAYS AWAY, and the Moroccan Argan Oil line of depilatories and waxes.  In 2016, the Company launched NAIR NOURISH SHOWER POWER, Sprays Away depilatories with Japanese Cherry Blossom and 100% Natural Rice Bran Oil and NAIR Wax Ready-strips for Face and Body, with no warming or rubbing required and results that last up to eight weeks. In 2017, the Company has launched NAIR Skin Renewal depilatories with grape seed oil and antioxidant-rich resveratrol.  To help grow the NAIR wax business, the Company also launched NAIR Wax Bikini Pro Kit, a microwaveable stripless wax that is effective on coarse bikini hair and helps reduce pain while waxing. 

The Company markets ORAJEL oral analgesics and oral care products which includes products for both adults and children.  The ORAJEL brand remains the market leader in the toothache, canker sore, and children’s teething categories in the U.S. and continues to grow its presence in the children’s toothpaste and cold sore categories.  In 2016, the Company strengthened its positioning within the cold sore segment by introducing new ORAJEL Moisturelock Cold Sore Treatment that treats six symptoms of cold sores and by re-launching its ORAJEL Touch-Free Cold Sore Treatment which provides pain relief via convenient, touch-free application.  In 2017 the Company has launched a new ORAJEL Toothache Rinse to provide toothache sufferers non-numbing pain relief.  The Company is also furthering its partnership with NICKELODEON and following its successful PAW PATROL toothpaste launch with a new SHIMMER & SHINE toothpaste.

The Company markets the L’IL CRITTERS children’s gummy dietary supplement line and the VITAFUSION adult gummy dietary supplement line, both number one leading brands in their respective categories.  The Company markets VITAFUSION Extra Strength line extensions, FIRST RESPONSE reproductive health dietary supplements and L’IL CRITTERS dietary supplement line of licensed characters (Barbie and Super Mario) under those brands.  The Company also markets a line of probiotics under the ACCUFLORA brand name, a line of probiotics and gummy supplements under the NUTRITION NOW brand name and private label gummy dietary supplements.  In 2016, the Company launched L’IL CRITTERS Despicable Me dietary supplement, and a line of nutritional beauty-inspired supplements including VITAFUSION Gorgeous Hair, Skin & Nails, VITAFUSION Beauty Sleep and VITAFUSION Relaxed Mood.  In 2017, the Company will launch a new VITAFUSION energy variant that supports everyday energy needs and alertness.

The Company markets a growing number of hair care products, including BATISTE dry shampoo, a significantly growing brand as distribution, category awareness and trial continues to increase.  In 2017, the Company has launched BATISTE Bare, a low-fragrance variant and purse-size offerings of top-selling color dry shampoos, BATISTE Divine Dark and BATISTE Brilliant Blonde.   The Company also markets TOPPIK Hair Building Fibers and other hair cosmetics under the TOPPIK brand name, the number one leading brand of cosmetics for thinning hair.   The Company also markets a line of hair cosmetics for salon professionals under the XFUSION brand name.  On January 17, 2017, the Company acquired the VIVISCAL brand (the “Viviscal Acquisition”) from Life2good Holdings Limited for $160 million.  VIVISCAL is the number one non-drug hair growth supplement in the U.S. and the United Kingdom.

The Company markets the SIMPLY SALINE brand of nasal saline moisturizers in the U.S., complementing the Company’s STERIMAR brand nasal saline solution business in Europe and other parts of the world.

7


 

Consumer International

The Consumer International segment markets a variety of personal care products, household and over-the-counter products in international markets, including Canada, France, Australia, China, the United Kingdom, Mexico and Brazil.  Export sales from the U.S. are included in this segment.  

Total Consumer International net sales represented approximately 15% of the Company’s consolidated net sales in 2016.  Net sales of the businesses located in Europe, Canada, Mexico and Australia accounted for 35%, 32%, 10% and 10%, respectively, of the Company’s 2016 international net sales in this segment.  No other country in which the Company operates accounts for more than 10% of its total international net sales and no product line accounts for more than 20% of total international net sales.  

Certain of the Company’s international product lines are similar to its domestic product lines and many are unique. For example, the Company markets its ARM & HAMMER and OXICLEAN laundry products and TROJAN condoms in Canada and Mexico, ARM & HAMMER cat litter in Canada, home pregnancy and ovulation test kits and oral care products in most of its international markets, waxes and depilatory products in virtually all international locations and L’IL CRITTERS and VITAFUSION gummy dietary supplements principally in Canada and Asia.  

The Company also markets SPINBRUSH battery-operated toothbrushes internationally, primarily in the United Kingdom, Canada, France, China and Australia.  The Company sells STERIMAR nasal hygiene products in a number of markets in Europe, as well as in Mexico, parts of Asia and Australia and other international markets. The Company also sells BATISTE dry shampoo principally in the United Kingdom, where it is the number one selling dry shampoo, Australia, Canada, France, Brazil, China and Mexico, as well as other markets including the U. S. The Company also markets the CURASH line of babycare products in Australia, and GRAVOL anti-nauseant and RUB-A535 topical analgesic in Canada and other international markets.  

 

On December 22, 2016, the Company acquired the ANUSOL and RECTINOL businesses from Johnson & Johnson, Inc. (“Johnson & Johnson”) for $130 (the “Anusol Acquisition”).  These are the number one or number two hemorrhoid care brands in each market in which they operate primarily in the United Kingdom, Canada, Australia and South Africa.

COMPETITION FOR CONSUMER DOMESTIC AND CONSUMER INTERNATIONAL

The Company competes in the household and personal care consumer product categories, which are highly innovative categories, characterized by a continuous flow of new products and line extensions, and require significant advertising and promotion. The Company competes in these categories primarily on the basis of product innovation and performance, brand recognition, price, value and other consumer benefits. Consumer products, particularly laundry and household cleaning products, as well as certain toothpaste products, are subject to significant price competition. As a result, the Company from time to time may need to reduce the prices for some of its products to respond to competitive and customer pressures and to maintain market share.  

Internationally, the Company competes in similar competitive categories for most of its products.  

The Company’s competitors include P&G, The Clorox Company, Colgate-Palmolive Company, S.C. Johnson & Son, Inc., Nestle Purina PetCare Company, Henkel, Reckitt Benckiser Group plc, Johnson & Johnson, Ansell Limited, Pfizer Inc., Bayer AG, Alere Inc., NBTY, Inc. and Pharmavite LLC. Many of these companies have greater financial resources than the Company and have the capacity to outspend the Company if they attempt to gain market share.  In 2016, Henkel acquired Sun Products, making Henkel the second leading laundry detergent company in the U. S.

Product introductions typically involve heavy marketing and trade spending in the year of launch, and the Company usually is not able to determine whether the new products and line extensions will be successful until a period of time has elapsed following the introduction of the new products or the extension of the product line.

Because of the competitive environment facing retailers, the Company faces pricing pressure from customers, particularly high-volume retailer store customers, who have increasingly sought to obtain pricing concessions or better trade terms. These concessions or terms could reduce the Company’s margins. Furthermore, if the Company is unable to maintain price or trade terms acceptable to its customers, they could increase product purchases from competitors and reduce purchases from the Company, which would harm the Company’s sales and profitability.  


8


 

DISTRIBUTION FOR CONSUMER DOMESTIC

Products in the Consumer Domestic segment are marketed throughout the U.S. primarily 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, all of which sell the products to consumers. The Company employs a sales force based regionally throughout the U.S. and utilizes the services of independent food brokers, who represent the Company’s products in the food, mass, pet, dollar and club, as well as numerous other classes of trade. The Company’s products are stored in Company plants and third-party owned warehouses and are either delivered by independent trucking companies or picked up by customers at the Company’s facilities.  

DISTRIBUTION FOR CONSUMER INTERNATIONAL

Products in the Consumer International segment are sold broadly across retail platforms that include supermarkets, wholesale clubs, pharmacies and drugstores, convenience stores, discount stores and websites, all of which sell the products to consumers. The Company’s Consumer International distribution network is well-established and varies according to the needs of each market.  Subsidiary countries primarily utilize internal warehousing and distribution capabilities that enable direct shipment to key retailers.  Export markets primarily rely upon third party suppliers to market, warehouse and distribute products to end customers.  

Specialty Products Division

Principal Products

The Company’s SPD segment focuses on sales to businesses and participates in three product areas: Animal Productivity, Specialty Chemicals and Specialty Cleaners, and accounted for approximately 8% of the Company’s consolidated net sales in 2016.  The following table sets forth the principal products of the Company’s SPD segment.

 

Type of Product

 

Key Brand Names

Animal Productivity

 

ARM & HAMMER Feed Grade Sodium Bicarbonate

 

 

BIO-CHLOR and FERMENTEN Rumen Fermentation Enhancers

 

 

DCAD PLUS Feed Grade Potassium Carbonate (1)

 

 

MEGALAC Rumen Bypass Fat (2)

 

 

ESSENTIOM Omega 3 & Omega 6 Essential Fatty Acids

 

 

MEGAMINE-L, Rumen Bypass Lysine

 

 

SQ-810 Natural Sodium Sesquicarbonate

 

 

CELMANAX  Refined Functional Carbohydrate

 

 

 

Specialty Chemicals

 

ARM & HAMMER Performance Grade Sodium Bicarbonate

 

 

ARMAND PRODUCTS COMPANY Potassium Carbonate and Potassium Bicarbonate(3)

 

 

 

Specialty Cleaners

 

ARMAKLEEN Commercial & Professional Aqueous Cleaners (4)

 

 

ARMEX Blast Media (4)

 

 

Commercial & Professional Cleaners and Deodorizers

 

 

 

(1)

Manufactured for the Company by Armand Products Company (“Armand”).  

(2)

MEGALAC is a registered trademark of Volac International Limited.

(3)

Manufactured and marketed by Armand, a joint venture in which the Company holds a 50% interest.  

(4)

Distributed in North America by The ArmaKleen Company (“ArmaKleen”), a joint venture in which the Company holds a 50% ownership interest.  

Animal Productivity Products

The Company markets a special grade of sodium bicarbonate and sodium sesquicarbonate to the animal feed market as a feed additive for use by the dairy industry as a buffer, or antacid, for dairy cattle.  The Company also markets DCAD PLUS feed grade potassium carbonate, which is manufactured by Armand as a feed additive into the animal feed market.  

The Company markets MEGALAC rumen bypass fat, a nutritional supplement made from natural oils, which enables cows to maintain energy levels during the period of high milk production, resulting in improved milk yields and minimized weight loss.  The MEGALAC product and the trademark are licensed under a long-term license agreement from Volac International Limited, a British Company.

9


 

The Company also markets BIO-CHLOR and FERMENTEN, a range of specialty feed ingredients for dairy cows, which improve rumen feed efficiency and help increase milk production.

The Company manufactures CELMANAX Refined Functional Carbohydrate and other feed additives for cows, beef cattle, poultry and other livestock for sale in domestic and international markets and used to promote livestock digestive health and performance.

Specialty Chemicals

The Company’s specialty chemicals business primarily encompasses the manufacture, marketing and sale of sodium bicarbonate in a range of grades and granulations for use in industrial markets. In industrial markets, sodium bicarbonate is used by other manufacturing companies as a leavening agent for commercial baked goods, as an antacid in pharmaceuticals, as a carbon dioxide release agent in fire extinguishers, as an alkaline agent in swimming pool chemicals, and as a buffer in kidney dialysis.  

The Company’s Brazilian subsidiary, Quimica Geral do Nordeste (“QGN”), markets sodium bicarbonate in Brazil and is South America’s leading provider of sodium bicarbonate.   During fourth quarter of 2016, the Company decided to sell its Brazilian chemical business to focus on its Brazilian consumer business, resulting in a plant impairment charge of $4.9 recognized in the fourth quarter of 2016 based upon an anticipated selling price.  During the first quarter of 2017, the Company signed an agreement to sell the business, resulting in an approximate $5.0 expense for severance and other charges.  Sales for the Brazilian chemical business in 2016 were approximately $22.0.  The Company anticipates the transaction to close during the first quarter.

The Company and Occidental Chemical Corporation are equal partners in a joint venture, Armand, which manufactures and markets potassium carbonate and potassium bicarbonate for sale in domestic and international markets. The potassium-based products are used in a wide variety of applications, including agricultural products, specialty glass and ceramics, and potassium silicates. Armand also manufactures for the Company a potassium carbonate-based animal feed additive for sale in the dairy industry, described above under “Animal Productivity Products.”

Specialty Cleaners

The Company also provides a line of cleaning and deodorizing products for use in commercial and industrial applications such as office buildings, hotels, restaurants and other facilities.

The Company and Safety-Kleen Systems, Inc. (“Safety-Kleen”) are equal partners in a joint venture, ArmaKleen, which has built a specialty cleaning products business based on the Company’s technology and Safety-Kleen’s sales and distribution organization. In North America, this joint venture distributes the Company’s proprietary product line of aqueous cleaners along with the Company’s ARMEX blast media line, which is designed for the removal of a wide variety of surface coatings.

COMPETITION FOR SPD

Competition within the specialty chemicals and animal productivity product lines is intense. The specialty chemicals business operates in a competitive environment influenced by capacity utilization, customers’ leverage and the impact of raw material and energy costs. Product introductions typically involve introductory costs in the year of launch, and the Company usually is not able to determine whether new products and line extensions will be successful until a period of time has elapsed following the introduction of new products or the extension of the product lines. The Company’s key competitors are Archer Daniel Midland Co, Diamond V, Lallemand Inc., Solvay Chemicals, Inc., Tronox USA Holdings, Inc. and Natural Soda, Inc.

DISTRIBUTION FOR SPD

SPD markets sodium bicarbonate and other chemicals to industrial and agricultural customers primarily throughout the U.S. and Canada. Distribution is accomplished through a dedicated sales force supplemented by manufacturers’ representatives and the sales personnel of independent distributors throughout the country. The Company’s products in this segment are located in Company plants and public warehouses and are either delivered by independent trucking companies or picked up by customers at the Company’s facilities.

10


 

RAW MATERIALS AND SOURCES OF SUPPLY

The Company manufactures sodium bicarbonate for both its consumer and specialty products businesses at its plants located at Green River, Wyoming and Old Fort, Ohio. The primary source of soda ash, a basic raw material used by the Company in the production of sodium bicarbonate, is the mineral trona, which is found in abundance in southwestern Wyoming near the Company’s Green River plant. The Company has adequate trona reserves under mineral leases to support the Company’s sodium bicarbonate requirements for the foreseeable future.

The Company is party to a partnership agreement with Tata Chemicals (Soda Ash) Partners, which mines and processes trona reserves in Wyoming. Through the partnership and related supply and services agreements, the Company fulfills a substantial amount of its soda ash requirements, enabling the Company to achieve some of the economies of an integrated business capable of producing sodium bicarbonate and related products from the basic raw material. The Company also has an agreement for the supply of soda ash from another company. The partnership agreement and other supply agreements between the Company and Tata Chemicals (Soda Ash) Partners are terminable upon two years notice by either company. The Company believes that sufficient alternative sources of soda ash supply are available.

The Company believes that ample sources of raw materials are available for all of its other major products. Detergent chemicals are used in a variety of the Company’s products and are available from a number of sources. Bottles, paper products and clay are available from multiple suppliers, although the Company chooses to source most of these materials from single sources under long-term supply agreements in order to gain favorable pricing. The Company also uses a palm oil fraction (by-product) in a number of products including, its rumen bypass fats products. Alternative sources of supply are available in case of disruption or termination of the supply agreements.

The cost of raw materials, including surfactants, diesel fuel and oil based raw and packaging materials used primarily in the Company’s consumer businesses, were lower in 2016 relative to 2015, reducing the Company’s core commodity costs.  Increases in the prices of certain raw materials could materially impact the Company’s costs and financial results if the Company is unable to pass such costs along in the form of price increases to its customers.

The Company utilizes the services of third party contract manufacturers around the world for certain products.  

PATENTS AND TRADEMARKS

The Company’s trademarks appear in upper case letters throughout this Annual Report. The majority of the Company’s trademarks are registered with either the U.S. Patent and Trademark Office or with the trademark offices of many foreign countries. The ARM & HAMMER trademark has been used by the Company since 1867, and is a valuable asset and important to the successful operation of the Company’s business. The Company’s products are sold under many other valuable trademarks held by the Company, including TROJAN, NAIR, ORAJEL, FIRST RESPONSE, XTRA, OXICLEAN, SPINBRUSH, BATISTE, SIMPLY SALINE, L’IL CRITTERS and VITAFUSION. The Company’s portfolio of trademarks represents substantial goodwill in the businesses using the trademarks.

U.S. patents are currently granted for a term of 20 years from the date the patent application is filed. Although the Company actively seeks and maintains a number of patents, no single patent is considered significant to the business as a whole.  

CUSTOMERS AND ORDER BACKLOG

In each of the years ended December 31, 2016, 2015, and 2014, net sales to the Company’s largest customer, Wal-Mart Stores, Inc. and its affiliates (“Wal-Mart”), were 24%, 24% and 25% respectively, of the Company’s consolidated net sales.  No other customer accounted for 10% or more of consolidated net sales in the three-year period.  The time between receipt of orders and shipment is generally short, and as a result, backlog is not significant.  

RESEARCH & DEVELOPMENT

The Company conducts research and development activities primarily at its Princeton facility in New Jersey.  The Company devotes significant resources and attention to product development, process technology and basic research to develop differentiated products with new and distinctive features and to provide increased convenience and value to its customers.  To increase its innovative capabilities, the Company engages outside contractors for general research and development in activities beyond its core areas of expertise.  The Company spent $63.2 million, $64.7 million and $59.8 million on research and development activities in 2016, 2015 and 2014, respectively.

11


 

GOVERNMENT REGULATION

General

Some of the Company’s products are subject to regulation by one or more U.S. agencies, including the U.S. Food and Drug Administration (“FDA”), the Environmental Protection Agency (“EPA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”) and foreign agencies.  

FDA regulations govern a variety of matters relating to the Company’s products, such as product development, manufacturing, premarket clearance or approval, advertising and distribution. The regulations adopted and standards imposed by the FDA and similar foreign agencies evolve over time and can require the Company to make changes in its manufacturing processes and quality systems to remain in compliance. These agencies periodically inspect manufacturing and other facilities. If the Company fails to comply with applicable regulations and standards, it may be subject to sanctions, including fines and penalties, the recall of products and cessation of manufacturing and/or distribution.  

In addition, the Company sells products that are subject to regulation under the Federal Insecticide, Fungicide and Rodenticide Act and the Toxic Substances Control Act, both of which are administered by the EPA. The Company also is subject to regulation by the FTC in connection with the content of its labeling, advertising, promotion, trade practices and other matters.

The CPSC administers the Poison Prevention Packaging Act, and has issued regulations requiring special child resistant packaging for certain products, including pharmaceuticals, dietary supplements, and dietary substances, containing certain ingredients (e.g., iron).

The Company’s relationship with certain union employees may be overseen by the National Labor Relations Board. The Company’s activities also are regulated by various agencies of the countries, states, provinces and other localities in which the Company sells its products.  

Medical Device Clearance and Approval  

To be commercially distributed in the U.S., a medical device must, unless exempt, receive clearance or approval from the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”). Lower risk devices are categorized as either class I or II devices. For class II devices, the manufacturer must generally submit a premarket notification requesting clearance for commercial distribution known as a “510(k)” clearance. The Company’s condoms, lubricants, contact lens solution, wound wash and home pregnancy test kits are regulated as class II devices. Some low risk devices, including SPINBRUSH and other battery powered toothbrushes, are in class I and are generally exempted from the 510(k) requirement. To obtain 510(k) clearance, a device must be determined to be substantially equivalent in intended use and in safety and effectiveness to a benchmark device, or “predicate” that is already legally in commercial distribution. Any modification to a 510(k) cleared device that could significantly affect its safety or effectiveness, or that would constitute a change in its intended use, generally requires a new 510(k) clearance. A manufacturer may determine that a new 510(k) clearance is not required, but if the FDA disagrees, it may retroactively require a 510(k) clearance and may require the manufacturer to cease marketing or recall the modified device until 510(k) clearance is obtained.  

Medical Device Postmarket Regulation

After a medical device is commercialized, numerous regulatory requirements apply, including:  

 

the quality system regulation, which imposes FDA current Good Manufacturing Practice (“cGMP”) requirements governing the methods used in, and the facilities and controls used for, the design, manufacture, packaging, servicing, labeling, storage, installation, and distribution of all finished medical devices intended for human use;

 

labeling regulations, including a prohibition on product promotion for unapproved or “off label” uses;

 

the medical device reporting regulation requiring a manufacturer to report to the FDA if its device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

 

the reports of corrections and removals regulation, which requires a manufacturer to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health.

12


 

OTC Pharmaceutical

The Company markets over-the-counter (“OTC”) pharmaceutical products, such as toothpaste, antiperspirant, and oral analgesics products, that are also subject to FDA and foreign regulation. Under the U.S. OTC monograph system, selected OTC pharmaceutical products are generally recognized as safe and effective and do not require the submission and approval of a new drug application. The FDA OTC monographs include well-known ingredients and specify requirements for permitted indications, required warnings and precautions, allowable combinations of ingredients and dosage levels. Pharmaceutical products marketed under the OTC monograph system must conform to specific quality, formula and labeling requirements.

All facilities where OTC pharmaceutical products are manufactured, tested, packaged, stored or distributed must comply with cGMP regulations and/or regulations promulgated by competent authorities in the countries where the facilities are located. All of the Company’s pharmaceutical products are manufactured, tested, packaged, stored and distributed according to cGMP regulations. The FDA performs periodic audits to ensure that the Company’s facilities remain in compliance with all appropriate regulations. The failure of a facility to be in compliance may lead to a breach of representations made to customers or to regulatory action against the Company related to the products made in that facility, such as seizure, injunction or recall. Serious product quality concerns could also result in governmental actions against the Company that, among other things, could result in the suspension of production or distribution of the Company’s products, product seizures, loss of certain licenses or other governmental penalties, and could have a material adverse effect on the Company’s financial condition or operating results. The manufacturer, packer, or distributor of an OTC pharmaceutical product marketed in the U.S. whose name appears on the label of such product is required to report serious adverse events associated with the use of the product.  

The Company cannot predict whether new legislation regulating the Company’s activities will be enacted or what effect any legislation would have on the Company’s business.

Food Products

The Company markets baking soda and animal feed products, such as rumen fermentation enhancers and Dietary Cation-Anion Difference (“DCAD”) balancers that are also subject to FDA and foreign regulation. In 2011, the Food Safety Modernization Act (“FSMA”) was enacted, changing the ways in which food and animal feed products are regulated. Under the provisions of the FSMA, the emphasis shifted from compliant products to mandatory preventive controls including hazard analysis, risk controls, supplier qualifications and controls and increased record keeping. FSMA grants the FDA the authority to require mandatory recalls for products under certain conditions. The FDA is currently in the process of establishing rules and guidance to implement the provisions of FSMA.  The potential impact of these rules and applicable guidance cannot be determined at this time.

Dietary Supplements

The processing, formulation, safety, manufacturing, packaging, labeling, advertising, distribution, importing, selling, and storing of dietary supplements are subject to regulation by one or more federal agencies, including the FDA, the FTC, the CPSC, the EPA, and by various agencies of the states and localities in which the Company’s products are sold. The FDCA governs the composition, safety, labeling, manufacturing and marketing of dietary supplements.  

Generally, dietary ingredients that were marketed in the U.S. prior to October 15, 1994 may be used in dietary supplements without notifying the FDA. “New” dietary ingredients (i.e. dietary ingredients that were not marketed in the U.S. before October 15, 1994) must be the subject of a new dietary ingredient notification submitted to the FDA at least 75 days before the initial marketing unless the ingredient has been present in the food supply as an article used for food without being chemically altered. A new dietary ingredient notification must provide evidence of a history of use or other evidence establishing that use of the dietary ingredient is reasonably expected to be safe. The FDA may determine that a new dietary ingredient notification does not provide an adequate basis to conclude that a dietary ingredient is reasonably expected to be safe. Such a determination could effectively prevent the marketing of the dietary ingredient. On July 5, 2011, the FDA issued draft guidance governing notification of new dietary ingredients. The draft guidance was issued for public comment and not for implementation. To date the FDA has not taken any further steps towards implementing the guidance. The guidance, if implemented, could effectively change the status of dietary ingredients that the industry has marketed as “old” dietary ingredients to “new” dietary ingredients that may require submission of a new dietary ingredient notification.  

The FDCA permits “statements of nutritional support” to be included in labeling for dietary supplements without FDA pre-market approval. The FDA must be notified of those statements within 30 days of marketing. Among other things, the statements may describe the role of a dietary ingredient intended to affect the structure or function of the body or characterize the documented mechanism of action by which a dietary ingredient maintains such structure or function, but may not expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease. A company that uses a statement of nutritional

13


 

support in labeling must possess information substantiating that the statement is truthful and not misleading. If the FDA determines that a particular statement of nutritional support is an unacceptable drug claim or an unauthorized version of a health claim, or if the FDA determines that a particular claim is not adequately supported by existing scientific evidence or is otherwise false or misleading, the claim could not be used and any product bearing the claim could be subject to regulatory action.

The FDA’s cGMP regulations govern the manufacturing, packaging, labeling and holding operations of dietary supplement manufacturers. As with OTC products, the FDA performs periodic audits to ensure that the Company’s dietary supplement facilities remain in compliance with all appropriate regulations. The failure of a facility to be in compliance may lead to a breach of representation made to customers or to regulatory action against the Company related to the products made in that facility, seizure, injunction or recall. There remains considerable uncertainty with respect to the FDA’s interpretation of the cGMP regulations and their actual implementation in manufacturing facilities. The failure of a manufacturing facility to comply with the cGMP regulations may render products manufactured in that facility adulterated, and subjects those products and the manufacturer to a variety of potential FDA enforcement actions. In addition, under recent amendments to the FDCA, the manufacturing of dietary ingredients contained in dietary supplements will be subject to similar or even more burdensome requirements, which may increase the costs of dietary ingredients and subject suppliers of such ingredients to more rigorous inspections and enforcement. The manufacturer, packer, or distributor of a dietary supplement marketed in the U.S. whose name appears on the label of the supplement is required to report serious adverse events associated with the use of that supplement to the FDA.

The FTC exercises jurisdiction over the advertising of dietary supplements. The FTC considers whether a product’s advertising claims are accurate, truthful and not misleading pursuant to its authority under the Federal Trade Commission Act, or FTC Act. The FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising or for the use of otherwise false or misleading advertising claims. These enforcement actions have resulted in consent decrees and the payment of civil penalties and/or restitution by the companies involved. Such actions can result in substantial financial penalties and significantly restrict the marketing of a dietary supplement.

Additional legislation may be introduced which, if passed, would impose substantial new regulatory requirements on dietary supplements. The effect of additional domestic or international governmental legislation, regulations, or administrative orders, if and when promulgated, cannot be determined. New legislation or regulations may require the reformulation of certain products to meet new standards, and require the recall or discontinuance of certain products not capable of reformulation.  

ENVIRONMENTAL MATTERS

The Company’s operations are subject to federal, state, local and foreign laws, rules and regulations relating to environmental concerns including air emissions, wastewater discharges, solid and hazardous waste management activities, and the safety of its employees. The Company endeavors to take actions necessary to comply with such regulations. These steps include periodic environmental and health and safety audits of Company facilities. The audits, conducted by independent firms with expertise in environmental, health and safety compliance, include site visits at each location, as well as, a review of documentary information, to determine compliance with such federal, state, local and foreign laws, rules and regulations.    

GEOGRAPHIC AREAS

Approximately 84%, 83% and 81% of the Company’s consolidated net sales in 2016, 2015 and 2014, respectively, were to customers in the U.S.  Approximately 98%, 96% and 96% of the Company’s long-lived assets were located in the U.S. at December 31, 2016, 2015 and 2014, respectively.  Other than the U.S., no one country accounts for more than 5% of consolidated net sales or 5% of total assets.  

EMPLOYEES

At December 31, 2016, the Company had approximately 4,500 employees.  The Company is party to a labor contract with the International Machinists Union at its Colonial Heights, Virginia plant, which expires May 31, 2018.  Internationally, the Company employs union employees in France, Mexico, Brazil and New Zealand.  The Company believes that its relations with both its union and non-union employees are satisfactory.


14


 

CLASSES OF SIMILAR PRODUCTS

The Company’s operations, exclusive of unconsolidated entities, constitute three reportable segments: Consumer Domestic, Consumer International and SPD.  The table set forth below shows the percentage of the Company’s net sales contributed by each group of similar products marketed by the Company during 2016, 2015 and 2014.

 

 

% of Net Sales

 

 

 

2016

 

 

2015

 

 

2014

 

Consumer Domestic

 

 

 

 

 

 

 

 

 

 

 

 

Household Products

 

 

46%

 

 

 

45%

 

 

 

45%

 

Personal Care Products

 

 

31%

 

 

 

31%

 

 

 

30%

 

Consumer International

 

 

15%

 

 

 

15%

 

 

 

16%

 

Specialty Products

 

 

8%

 

 

 

9%

 

 

 

9%

 

 

PUBLIC INFORMATION

The Company maintains a website at www.churchdwight.com and on the “Investors—Financial Information—SEC Filings” page of reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files these materials with, or furnishes them to, the Commission. Also available on the “Investors—Corporate Governance” page on the Company’s website are the Company’s Corporate Governance Guidelines, charters for the Audit, Compensation & Organization and Governance & Nominating Committees of the Company’s Board of Directors (the “Board”) and the Company’s Code of Conduct. Each of the foregoing is also available in print free of charge and may be obtained upon written request to: Church & Dwight Co., Inc., 500 Charles Ewing Boulevard, Ewing, New Jersey 08628, attention: Secretary. The information presented on the Company’s website is not a part of this Annual Report and the reference to the Company’s website is intended to be an inactive textual reference only.  

15


 

ITEM 1A.

RISK FACTORS

The following risks and uncertainties, as well as other factors described elsewhere in this Annual Report or in other filings by the Company with the Commission, could materially adversely affect the Company’s business, results of operations and financial condition:

Unfavorable economic conditions could adversely affect demand for the Company’s products.  

Unfavorable and uncertain economic conditions have adversely affected, and in the future may adversely affect, demand for some of the categories of products the Company sells, resulting in reduced sales volume or market share or a shift in its product mix from higher margin to lower margin products. Factors that can affect demand include competitors’ products, advertising and pricing actions, rates of unemployment, consumer confidence, health care costs, including increased costs as a result of recent or future changes in federal regulations, commodity costs, fuel and other energy costs and other economic factors affecting consumer spending behavior, including delays in the timing of tax refunds from the federal government, gasoline and home heating oil pricing, reduced unemployment benefits in periods of high unemployment and tax increases. While the vast majority of the Company’s products are consumer staples that generally are less vulnerable to decreases in discretionary spending than other products, they may become subject to increasing price competition. Additionally, some of the Company’s products, such as laundry additives, gummy dietary supplements and battery-operated toothbrushes, are more likely to be affected by consumer decisions to control spending.  For example, recent deflation in dairy products, primarily milk, has adversely affected sales of our animal productivity products.   Although we experienced a slight increase in demand for dairy products in the later part of 2016, the demand for dairy products may decline in the future and sales growth in that category may decline as a result.

Some of the Company’s 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 declining financial performance, which could affect their ability to pay amounts due to the Company on a timely basis or at all. The Company regularly reviews the financial strength of its key customers and, where appropriate, modifies customer credit limits, which may have an adverse impact on future sales. Because the same economic conditions that affect the Company also affect many of the Company’s suppliers, the Company regularly conducts a similar review of its suppliers to assess both their financial viability and the importance of their products to the Company’s operations. When appropriate, the Company identifies alternate sources of materials and services. To date, the Company has not experienced a material adverse impact from economic conditions affecting its customers or suppliers. However, a protracted economic downturn that adversely affects the Company’s suppliers and customers could adversely affect its sales and results of operations.  

The Company faces intense competition in its markets, and the failure to compete effectively could have a material adverse effect on its business, financial condition and results of operations.

The Company faces increasingly intense competition from consumer products companies, both in the U.S. and in international markets. Most of the Company’s products compete with other widely-advertised brands within each product category and with private label brands and generic non-branded products of its customers in certain categories, which typically are sold at lower prices.

The Company’s products generally compete on the basis of performance, brand recognition, price, value or other benefits to consumers. Consumer products are subject to significant price competition. As a result, the Company may need to reduce the prices for some of its products, or increase prices by an amount that does not cover manufacturing cost increases, to respond to competitive and customer pressures and to maintain market share. Any reduction in prices, or inability to raise prices sufficiently to cover manufacturing cost increases, would harm profit margins. In addition, if the Company’s sales volumes fail to grow sufficiently to offset any reduction in margins, its sales growth and other results of operations would suffer.

Advertising, promotion, merchandising and packaging also have a significant impact on retail customer decisions regarding the brands and product lines they sell and on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it normally requires continued advertising, promotional support and product improvements to maintain its relative market position. If the Company’s advertising, marketing and promotional programs are not effective, its sales growth may decline.  

Many of the Company’s competitors are large companies, including P&G, The Clorox Company, Colgate-Palmolive Company, Henkel, Reckitt Benckiser Group plc, Johnson & Johnson, Nestle Purina PetCare Company, Ansell Limited, Alere Inc., Pfizer Inc., Bayer AG, S.C. Johnson & Son, Inc., Pharmavite LLC and NBTY, Inc. Many of these companies have greater financial resources than does the Company, and, therefore, have the capacity to outspend the Company on advertising and promotional activities and introduce competing products more quickly and respond more effectively to changing business and economic conditions than can the Company. In addition, the Company’s competitors may attempt to gain market share by offering products at prices at or below those

16


 

typically offered by it. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced profits and adversely affect growth. If the Company loses market share or the markets in which it competes do not grow substantially, its sales growth will decline.  

There is significant product and price competition in the laundry detergent category.  For example, P&G markets a lower-priced line of laundry detergents, Simply Tide, which competes directly with the Company’s core value laundry detergents.  P&G has significantly increased its discounting of Simply Tide which could have a broad negative impact on the laundry category pricing and profitability.  In addition, in 2016, Henkel entered the premium laundry detergent segment with Persil, its leading worldwide premium laundry detergent and acquired Sun Products, making Henkel the second largest laundry detergent company in the U.S.  While it is too early to assess what impact this will have on the Company’s laundry detergent business, the introduction of Persil and Henkel’s increased scale and market share could precipitate greater price competition in the category and distribution pressure with a potential adverse impact on the Company’s laundry detergent business.  Additionally, while the category grew 3.3% in 2016 (0.5% in the fourth quarter of 2016) after experiencing growth in 2015 and a decline in 2014, there is no assurance the category will not decline in the future and that the Company will be able to offset any such decline.

Loss of any of its principal customers could significantly decrease the Company’s sales and profitability.  

A limited number of customers account for a large percentage of the Company’s net sales.  Wal-Mart is the Company’s largest customer, accounting for approximately 24% of net sales in 2016, 24% of net sales in 2015 and 25% of net sales in 2014.  The Company’s top three customers accounted for approximately 35% of net sales in 2016, 35% of net sales in 2015 and 36% of net sales in 2014.  The Company expects that a significant portion of its net sales will continue to be derived from a small number of customers and that these percentages may increase if the growth of mass merchandisers continues.  As a result, changes in the strategies of Wal-Mart or any of the Company’s other largest customers, including a reduction in the number of brands they carry or of shelf space they dedicate to private label products, could materially harm the Company’s net sales and profitability.  In addition, if the Company were to lose a significant customer due to customer service levels or real or perceived product quality or appearance issues, this could also have a material adverse effect on the Company’s business, financial condition and results of operations.  

In addition, the Company’s business is based primarily upon individual sales orders as it rarely enters into long-term contracts with its customers and most customer agreements include customer termination rights after short notice. Accordingly, these customers could reduce their purchasing levels or cease buying products from the Company at any time and for any reason. If the Company loses a significant customer or if sales of its products to a significant customer materially decrease, it could have a material adverse effect on the Company’s business, financial condition and results of operations.  

Changes in the policies of the Company’s retailer customers and increasing dependence on key retailer customers in developed markets may adversely affect its business.  

In recent years, retailer consolidation both in the U.S. and internationally has increased. This trend has resulted in the increased size and influence of large consolidated retailer customers, who may demand lower pricing, special packaging or impose other requirements on the Company. These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship. Some of the Company’s customers, particularly its high-volume retail store customers, have sought to obtain pricing and other concessions and better trade terms. To the extent the Company provides concessions or better trade terms to those customers, its margins are reduced. Further, if the Company is unable to effectively respond to the demands of its customers, these customers could reduce their purchases of Company products and increase their purchases of products from competitors, which would harm the Company’s sales and profitability. In addition, reductions in inventory by the Company’s customers, including as a result of consolidations in the retail industry, or these customers managing their working capital requirements, could result in reduced orders for Company products and adversely affect its results of operations for the financial periods affected by the reductions.  

Protracted unfavorable market conditions have caused many of the Company’s customers to more critically analyze the number of brands they sell, and reduce or discontinue certain of the Company’s product lines, particularly those products that were not number one or two in their category. If this continues to occur and the Company is unable to improve distribution for those products at other customers, its results could be adversely affected.  

In addition, private label products sold by retail trade chains are typically sold at lower prices than branded products. As consumers look for opportunities to decrease discretionary spending, the Company’s customers have discontinued or reduced distribution of some of its products to encourage those consumers to purchase the customers’ less expensive and, in some cases, more profitable private label products (primarily in the dietary supplements, diagnostic kits and oral analgesics categories). To the extent customers discontinue or reduce distribution of the Company’s products or these products are adversely affected by customers’ actions to increase shelf space for their private label products, the Company would seek to improve distribution with other customers. However, if the Company’s efforts are not effective, its sales growth and other results, as well as its market share, could be adversely affected.

17


 

A continued shift in the retail market from food and drug stores to club stores, dollar stores and mass merchandisers, internet-based retailers and subscription services could cause the Company’s sales to decline.  

The Company’s performance depends upon the general health of the economy and of the retail environment in particular, and could be significantly harmed by changes affecting retailing and the financial difficulties of the Company’s retailer customers. Consumer products, such as those marketed by the Company, are increasingly being sold by club stores, dollar stores, mass merchandisers and internet-based retailers. Sales of the Company’s products remain strongest in the traditional mass merchandiser, food and drug retail stores, and the Company’s products are also being sold in club stores and dollar stores channels. Additionally, certain consumer products are now offered through internet-based subscription services or buying clubs.  In 2016, Unilever acquired Dollar Shave Club, a subscription-based razor blade company, and in July 2016, P&G launched Tide Wash Club, an online subscription service for its unit-dose laundry detergent. Although the Company has taken steps to improve, and has seen improvement in, sales to club stores, [dollar stores] and internet-based retailers, and is engaged in e-commerce with respect to its TOPPIK and newly acquired VIVISCAL brands, if the current trend continues and the Company is not successful in further improving sales to these channels, its financial condition and operating results could suffer.  

Market category declines and changes to the Company’s product and geographic mix may impact the achievement of the Company’s sales growth targets, planned pricing and financial results.

A significant percentage of the Company’s revenues come from mature markets that are subject to high levels of competition.  During 2016, approximately 84% of the Company’s sales were generated in U.S. markets.  U.S. markets for consumer products are considered mature and commonly characterized by high household penetration, particularly with respect to the Company’s most significant product categories, such as laundry detergents, deodorizers, household cleaning products, toothpastes, dietary supplements, antiperspirants and deodorants. The Company’s ability to achieve unit sales growth in domestic markets will depend on increased use of its products by consumers relative to competitors’ products, its ability to drive growth through product innovation in existing and new product categories, investment in its established brands and enhanced merchandising and its ability to capture market share from its competitors. If the Company is unable to increase market share in existing product lines, develop product improvements, undertake sales, marketing and advertising initiatives that expand its product categories and develop, acquire or successfully launch new products, it may not achieve its sales growth objectives. Even if the Company is successful in increasing sales within its product categories, a continuing or accelerating decline in the overall markets for the Company’s products could have a negative impact on its financial results.

Cost overruns and delays, regulatory requirements, and miscalculations in capacity needs with respect to the Company’s expansion projects and manufacturing facilities could adversely affect its business.

From time to time, the Company initiates expansion projects with respect to its facilities.   As is customary with large construction projects, these projects are subject to risks of, and the Company has from time to time experienced, delay or cost overruns resulting from numerous factors, including the following: shortages of equipment, materials or skilled labor; work stoppages; unscheduled delays in the delivery of ordered materials and equipment; unanticipated cost increases; difficulties in obtaining necessary permits or in meeting permit conditions; difficulties in meeting regulatory or quality requirements or obtaining regulatory approvals; availability of suppliers to certify equipment for existing and enhanced regulations; design and engineering problems; and failure or delay of third party service providers, civil unrest and labor disputes. Significant cost overruns or delays in completing a project, or the miscalculations of our anticipated capacity needs could have a material adverse effect on the Company’s return on investment, results of operations and cash flows.  If the Company were to experience delays or cost overruns in the future it could result in product allocation and retailer frustration, the loss of a significant customer or customers, or if sales of any of its products were to materially decrease due to customer service levels or real or perceived product quality or appearance issues, this could have a material adverse effect on the Company’s business, financial condition and results of operations.

Additionally, the supply of the Company’s products depends on the uninterrupted efficient operation of its manufacturing facilities and ability to meet customer service levels. Many of the Company’s manufacturing processes are complex and present difficult technical challenges to obtain the manufacturing yields necessary to operate profitably. In addition, the Company’s manufacturing processes may require complex and specialized equipment which can be expensive to repair or replace with required lead times of up to a year.

The manufacturing of certain of the Company’s products is concentrated in one or more of its plants or contract manufacturers, with limited alternate facilities. Any event that negatively impacts manufacturing facilities, manufacturing systems or equipment, or contract manufacturers or suppliers could delay or suspend shipments of products or the release of new products or could result in the delivery of inferior products. The Company’s revenues from the affected products would decline and it could incur losses until such time as the Company or its contract manufacturers are able to restore production processes or are able to put in place alternative contract manufacturers or suppliers.

18


 

The Company’s reliance on a limited number of suppliers, including sole source suppliers for certain products, could materially and adversely affect its operations and financial results.  

The Company relies on a limited number of suppliers for certain of its commodities and raw materials, including sole source suppliers for certain of its raw materials, packaging, product components, finished products and other necessary supplies. New suppliers may have to be qualified under governmental, industry and Company standards, which can require additional investment and time. The Company may be unable to qualify any needed new suppliers or maintain supplier arrangements and relationships based on a variety of factors; it may be unable to contract with suppliers at the quantity, quality and price levels needed for its business; certain of its suppliers may not meet the standards of the Company’s customers or licensors; or certain of the Company’s key suppliers may become insolvent or experience other financial distress. If any of these events occurs and the Company has failed to identify and qualify an alternative vendor, then it may be unable to meet its contractual obligations and customer expectations, which could damage its reputation and result in lost customers and sales, or the Company may incur higher than expected expenses, either of which could materially and adversely affect its business, operations and results of operations.

Volatility and increases in the price of raw and packaging materials or energy costs could erode the Company’s profit margins, which could harm operating results, and efforts to hedge against raw material price increases may adversely affect the Company’s operating results if raw material prices decline.

The principal raw materials and packaging used by the Company include surfactants (cleaning agents), paper products and resin-based molded components.  Volatility and increases in the price of raw materials, or increases in the costs of energy, shipping and other necessary services, could significantly affect the Company’s profit margins if it is unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies, such as in manufacturing and distribution.  Historically, the Company has attempted to address such price increases through cost reduction programs and price increases of its products, entering into pre-buying or locked-in pricing arrangements with certain suppliers and entering into hedge agreements. There is no assurance, however, that the Company will be able to fully offset any price increases, especially given the competitive environment. In addition, volatility in certain commodity markets could significantly affect the Company’s production cost and, therefore, harm its financial condition and operating results.  

From time to time, the Company uses hedge agreements to mitigate the volatility of diesel fuel prices. The hedge agreements are designed to add stability to product costs, enabling the Company to make pricing decisions and lessen the economic impact of abrupt changes in prices over the term of the contract. However, in periods of declining fuel prices, the hedge agreements can have the effect of locking the Company in at above-market prices.

If new products and product line extensions do not gain widespread customer acceptance or are otherwise discontinued, or if they cause sales of existing products to decline, the Company’s financial performance could decline.  

The Company’s future performance and growth depends on its ability to successfully identify, develop and introduce new products and product line extensions. The Company cannot be certain that it will achieve its innovation goals. The successful development and introduction of new products involves substantial research, development, marketing and promotional expenditures, which the Company may be unable to recover if the new products do not gain widespread market acceptance. New product development and marketing efforts, including efforts to enter markets or product categories in which the Company has limited or no prior experience, have inherent risks. These risks include product development or launch delays, competitor actions, regulatory approval hurdles and the failure of new products and line extensions to achieve anticipated levels of market acceptance. In addition, if sales generated by new products result in a concomitant decline in sales of existing products, the Company’s financial performance could be harmed.  

Each year, the Company introduces new products, including launches into new “white space” categories, across the majority of its marketed brands.  Historically, new product acceptance has generally been widespread across the retailer base.  There is no assurance, however, that the Company’s customers and consumers will continue to purchase these new products.  If new products are not successful in generating sales growth, the Company’s financial results could suffer.  From time to time, the Company has discontinued certain products and product lines, which resulted in returns from customers, asset write-offs and shutdown costs. The Company may suffer similar adverse consequences in the future to the extent it discontinues products that do not meet retailer or consumer expectations or no longer satisfy consumer demand.  

Reduced availability of transportation or disruptions in our transportation network could adversely affect us.

We distribute our products and receive raw materials and packaging components primarily by truck, rail and ship and through various ports of entry.  Reduced availability of trucking, rail or shipping capacity due to adverse weather conditions, allocation of assets to other industries or geographies or otherwise, work stoppages, strikes or shutdowns of ports of entry or such transportation

19


 

sources, could cause us to incur unanticipated expenses and impair our ability to distribute our products or receive our raw materials or packaging components in a timely manner, which could disrupt our operations, strain our customer relationships and competitive position, and adversely affect our operating profits.

If the reputation of one or more of the Company’s leading brands erodes, its financial results could suffer.  

The Company’s financial success is directly dependent on the reputation and success of its brands, particularly the ARM & HAMMER, OXICLEAN, TROJAN, L’IL CRITTERS and VITAFUSION brands. The effectiveness of these brands could suffer if the Company’s marketing plans or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers. Further, the Company’s results could be adversely affected if one or more of its other leading brands suffers damage to its reputation due to real or perceived, sustainability, quality or safety issues.

Additionally, claims made in the Company’s marketing campaigns may become subject to litigation alleging false advertising, which, if successful, could cause the Company to alter its marketing plans and may materially and adversely affect sales or result in the imposition of significant damages against the Company, or other customer or consumer dissatisfaction, especially if such dissatisfaction were to be broadly disseminated, including through the use of social media.  

 

Widespread use of social media and networking sites by consumers has greatly increased the speed and accessibility of information dissemination.  Negative or inaccurate posting or comments about the Company in the media or on any social networking website, or the disclosure of non-public sensitive information through social media, could generate adverse publicity that could damage the reputation of our brands.  In addition, given the association of our individual products with the Company, an issue with one of our products could negatively affect the reputation of our other products, or the Company as a whole, thereby potentially adversely impacting the Company’s financial results.  

Product liability claims and withdrawals or recalls could adversely affect the Company’s sales and operating results and the reputation of the Company’s brands.  

From time to time, the Company is subject to product liability claims. The Company may be required to pay for losses or injuries actually or purportedly caused by its products, including losses or injuries caused by raw materials or other components provided by third party suppliers that are included in the Company’s products. Claims could be based on allegations that, among other things, the Company’s products contain contaminants, are improperly labeled or designed, or provide inadequate instructions regarding their use or inadequate warnings concerning interactions with other substances. Whether or not successful, product liability claims could result in negative publicity that could harm the Company’s sales and operating results and the reputation of its brands. In addition, if one of the Company’s products is found to be defective or non-compliant with applicable rules or regulations, it could be required to withdraw or recall it, which could result in adverse publicity and significant expenses. Although the Company maintains product liability and product recall insurance coverage, potential product liability claims and withdrawal and recall costs may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could have a material adverse effect on the Company’s business, operating results and financial condition.

Environmental matters create potential liability risks.  

The Company must comply with various environmental laws and regulations in the jurisdictions in which it operates, including those relating to the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. A release of such substances due to accident or an intentional act could result in substantial liability to governmental authorities or to third parties. The Company has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with environmental laws and regulations. It is possible that the Company could become subject to other environmental remediation costs and liabilities in the future that could have a material adverse effect on its results of operations or financial condition.

From time to time, the Company is involved in litigation, arbitration or regulatory matters where the outcome is uncertain and which could entail significant expense.

 

The Company, in the ordinary course of its business is, and from time to time, may become, the subject of, or party to, various pending or threatened legal actions, government investigations and proceedings, including, without limitation, those relating to, 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 pending or future legal actions, for example, the matter described under “Item 3 Legal Proceedings - Scantibodies Laboratory, Inc.” below, could

20


 

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.

Current and future laws and regulations in the countries in which the Company and its suppliers operate could expose the Company to increased costs and other adverse consequences.   

The manufacturing, processing, formulation (including stability), packaging, labeling, marketing, distribution and sale of the Company’s products are subject to regulation by federal agencies, including the FDA, the FTC, the EPA and the CPSC. In addition, the Company’s and its suppliers’ operations are subject to the oversight of the Occupational Safety and Health Administration and the National Labor Relations Board. The Company’s activities are also regulated by various agencies of the states, localities and foreign countries in which its products are sold.  

In particular, the FDA regulates the formulation, safety, manufacturing, packaging, labeling and distribution of condoms, home pregnancy and ovulation test kits, battery operated toothbrushes, over-the-counter pharmaceuticals and dietary supplements, including vitamins and minerals. The FDA also exercises oversight over cosmetic products such as depilatories. In addition, under a memorandum of understanding between the FDA and the FTC, the FTC has jurisdiction with regard to the promotion and advertising of these products, and the FTC regulates the promotion and advertising of the Company’s other products as well. As part of its regulatory authority, the FDA may periodically conduct inspections of the physical facilities, machinery, processes and procedures that the Company and its suppliers use to manufacture regulated products and may identify compliance issues that would require the Company and its suppliers to make certain changes in its manufacturing facilities and processes. The failure of a facility to be in compliance may lead to regulatory action against the products made in that facility, including seizure, injunction or recall, as well as to possible action against the owner of the facility/manufacturer. The Company may be required to make additional expenditures to address these issues or possibly stop selling certain products until the compliance issue has been remediated. As a result, the Company’s business could be adversely affected.

Likewise, any future determination by the FDA or a similar foreign agency, or by the Company in reviewing its compliance with applicable rules and regulations, that the Company’s products or quality systems do not comply with applicable regulations could result in future compliance activities, including product withdrawals or recalls, import detentions, injunctions preventing the shipment of products, or other enforcement actions. For example, the FDA may determine that a particular claim that the Company uses to support the marketing of a product is not substantiated, may not accept the evidence of safety for a new product that the Company may wish to market, may challenge the safety or effectiveness of existing products based on, among other things, changes in formulations, inadequate stability or “shelf-life,” consumer complaints, or improper labeling, and may determine that the Company’s dietary supplement business manufacturing, packaging, labeling and holding operations do not comply with cGMPs. Similarly, the Company may identify these or other issues in internal compliance reviews of its operations and the operations and products of vendors and acquired companies. These other issues may include the identification of contaminants or non-compliant levels of particular ingredients. Any of the foregoing could subject the Company to adverse publicity, force it to incur unanticipated costs and have a material adverse effect on its business, financial condition and results of operations.

In addition, the Commission has promulgated federally mandated rules regarding disclosure of the use of tin, tantalum, tungsten and gold, known as “conflict minerals”, in products manufactured by public companies. Certain of the Company’s products, including its diagnostic test kits and SPINBRUSH battery-operated toothbrushes, use these minerals sourced through third parties. The new rules require the Company to conduct due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the DRC) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC.  The Company has incurred, and will continue to incur, costs associated with complying with these disclosure requirements, including costs to determine the origin of minerals used in its products. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of such minerals used in the Company’s products. Also, the Company may face disqualification as a supplier for customers and reputational challenges, or may need to discontinue supply from its suppliers, if its due diligence procedures do not enable it to verify the origins for the minerals used in its products or determine that the minerals are conflict free.

From time to time, Congress, the FDA, the FTC, the Commission or other federal, state, local or foreign legislative and regulatory authorities may impose additional laws or regulations that apply to the Company, repeal laws or regulations that the Company considers favorable, or impose more stringent interpretations of current laws or regulations. The new presidential administration is expected to introduce changes to the administration of federal regulatory agencies, including changes in policy and personnel at the FDA, the FTC and the Commission.  The Company is not able to predict the nature of these changes or of such future laws, regulations, repeals or interpretations or to predict the effect additional or shifting governmental regulation, when and if it occurs, would have on its business in the future. Such developments could require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, expanded adverse event reporting or other new requirements. Any such developments could increase the Company’s costs significantly and could have a material adverse effect on its business, financial condition and results of operations.  

21


 

The Company is subject to risks related to its international operations that could adversely affect its results of operations.  

The Company’s international operations subject it to risks customarily associated with foreign operations, including:

 

currency fluctuations;

 

import and export license and taxation requirements and restrictions;

 

trade restrictions, including local investment or exchange control regulations;

 

changes in tariffs and taxes, including changes in trade policies following the recent federal election in the U. S. and geopolitical events generally;

 

the effect of foreign income taxes, value-added taxes and withholding taxes, including the inability to recover amounts owed to the Company by foreign governments, and the determination of the U.S. Internal Revenue Service (the “I.R.S.”) regarding the applicability of certain regulations, including the Foreign Account Tax Compliance Act, to the Company’s international transactions;

 

the possibility of a new border adjustment tax by the new presidential administration;

 

the possibility of expropriation, confiscatory taxation or price controls;

 

obstacles to repatriating foreign profits back to the U.S.;

 

political or economic instability, and civil unrest;

 

disruptions in the global transportation network, such as work stoppages, strikes or shutdowns of ports of entry or such other transportation sources, or other labor unrest;

 

compliance with laws and regulations concerning ethical business practices, including without limitation, the U.S. Foreign Corrupt Practices Act and United Kingdom Bribery Act;

 

difficulty in enforcing contractual and intellectual property rights;

 

regulatory requirements for certain products;

 

difficulties in staffing and managing international operations; and  

 

changes to the Company’s cash contributions or other charges with respect to its pension plans covering certain of its international employees.

In addition, changes as result of the United Kingdom’s referendum approved by a majority of votes to exit the European Union could subject the Company to heightened risks in that region, including disruptions to trade and free movement of goods, services and people to and from the United Kingdom, increased foreign exchange volatility with respect to the British pound and additional legal and economic uncertainty.  Moreover, following the 2016 U.S. presidential and congressional elections and the related transition to a new presidential administration, there may be shifts in U.S. foreign, trade, economic and other policies that may materially affect our foreign operations and our ability to market our products in certain international markets.  All of the foregoing risks could have a significant impact on the Company’s ability to commercialize its products on a competitive basis in international markets and may have a material adverse effect on its results of operations or financial position.  In all foreign jurisdictions in which the Company operates, it is subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions.  

The Company’s business is exposed to domestic and foreign currency fluctuations that could have a material adverse effect on the Company’s business, financial condition and results of operations.  

Approximately 16% of the Company’s net sales were to customers outside the U.S. in 2016.  The Company is exposed to foreign currency exchange rate risk (both transaction and translation) with respect to its sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. Outside of the U.S., sales and costs are denominated in a variety of currencies, including the Canadian Dollar, Euro, Pound, Brazilian Real, Mexican Peso, Chinese Yuan and Australian Dollar. A weakening of the currencies in which sales are generated relative to the currencies in which costs are denominated would decrease operating profits and cash flow.  Changes in currency exchange rates may also affect the relative prices at which the Company purchases materials and services in foreign markets.  Although the Company, from time to time, enters into forward exchange contracts to reduce the impact of foreign exchange rate fluctuations related to anticipated but not yet committed intercompany sales or purchases denominated in the U.S. Dollar, Canadian Dollar, Pound and Euro, foreign currency fluctuations could have a material adverse effect on its business, financial condition and results of operations.  

22


 

The failure of the Company to expand in existing geographic locations or enter new geographic locations could have a material adverse effect on the growth of the Company’s business, sales and results of operations.

The Company’s ability to continue to grow its sales and profits is dependent on expanding in the locations in which it already does business and entering into new geographic locations, both of which would require significant resources and investments which would affect the Company’s risk profile. The failure to successfully enter into or expand its business in such locations could materially affect the growth of the Company’s business, sales and results of operations.

The Company may not be able to continue to identify and complete strategic acquisitions and effectively integrate acquired companies to achieve desired financial benefits.  

The Company seeks to acquire or invest in businesses that offer products, services or technologies that are complementary.  The Company has made 12 acquisitions in the past 13 years, including the following brands: SPINBRUSH battery-powered toothbrushes; OXICLEAN, KABOOM and ORANGE GLO cleaning products; ORAJEL oral analgesics; SIMPLY SALINE nasal moisturizers; FELINE PINE natural cat litter; BATISTE dry shampoo; L’IL CRITTERS and VITAFUSION dietary supplements; REPHRESH and REPLENS feminine care products; VI-COR, feed ingredients for dairy cows, beef cattle, poultry and other livestock , TOPPIK, a leading brand of hair building fibers for people with thinning hair, in December 2016, ANUSOL and RECTINOL, hemorrhoid products and in January 2017, VIVISCAL, a non-drug hair growth supplement.

The Company may make additional acquisitions or substantial investments in complementary businesses or products in the future. Those acquisitions may be significantly larger than the ones completed in the past and may require the Company to increase its levels of debt, potentially resulting in the Company being assigned a lower credit rating.  However, the Company may not be able to identify and successfully negotiate suitable strategic acquisitions at attractive valuations, obtain financing for future acquisitions on satisfactory terms or otherwise complete future acquisitions. In recent periods, competition from other consumer products companies that are seeking similar opportunities has been particularly strong, and valuations for potential acquisition assets have been high, which has placed pressure on the Company’s ability to identify, structure and execute transactions.  In addition, all acquisitions and investments entail various risks, including the difficulty of entering new markets or product categories, the challenges of integrating the operations and personnel of the acquired businesses or products, the potential disruption of the Company’s ongoing business and the ongoing business of the acquired company, the need to review and, if necessary, upgrade processes of the acquired company to conform to the Company’s own processes and applicable legal and regulatory requirements, and, generally, the Company’s potential inability to obtain the desired financial and strategic benefits from the acquisition or investment. Any of these risks may divert management and other resources, require the Company to incur unanticipated costs or delay the anticipated positive impact on the Company’s business and results of the acquisition. The risks associated with assimilation are increased to the extent the Company acquires businesses that have stand-alone operations that cannot easily be integrated or operations or sources of supply outside of the U.S. and Canada, for which products are manufactured locally by third parties. These factors could harm the Company’s financial condition and operating results.  

Acquired companies or operations or newly-created ventures may not be profitable or may not achieve sales levels and profitability that justify the investments made. In addition, future acquisitions or investments could result in substantial cash expenditures, the potentially dilutive issuances of new equity by the Company or the incurrence of additional debt or contingent liabilities, all of which could adversely affect the Company’s results of operations and financial condition. In addition, any potential acquisitions or investments, whether or not ultimately completed, could divert the attention of management and resources from other matters that are critical to the Company’s operations.  

The Company relies significantly on information technology.  Any inadequacy, interruption, theft or loss of data, malicious attack, integration failure, failure to maintain the security, confidentiality or privacy of sensitive data residing on our systems or other security failure of that technology could harm the Company’s ability to effectively operate its business and damage the reputation of its brands.  

The Company relies extensively on information technology systems, some of which are managed by third-party service providers, to conduct its business. These systems include, but are not limited to, programs and processes relating to internal communications and communications with other parties, ordering and managing materials from suppliers, converting materials to finished products, shipping product to customers, billing customers and receiving and applying payment, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, collecting and storing customer, consumer, employee, investor, and other stakeholder information and personal data, and other processes necessary to manage the Company’s business.  In addition, the Company is engaged in e-commerce with respect to its TOPPIK brand and the recently acquired VIVISCAL brand.

Increased information technology security threats and more sophisticated computer crime, including advanced persistent threats, pose a potential risk to the security of the information technology systems, networks, and services of the Company, its customers and

23


 

other business partners, as well as the confidentiality, availability, and integrity of the data of the Company, its customers and other business partners. As a result, the Company’s information technology systems, networks or service providers could be damaged or cease to function properly or the Company could suffer a loss or disclosure of business, personal or stakeholder information, due to any number of causes, including catastrophic events, power outages and security breaches. Although the Company has business continuity plans in place and has implemented a breach response plan to address service interruptions, if these plans do not provide effective alternative processes on a timely basis, the Company may suffer interruptions in its ability to manage or conduct its operations which may adversely affect its business. The Company cannot guarantee that its security efforts will prevent attacks and resulting breaches or breakdowns of the Company’s, or its third-party service providers’ databases or systems since the techniques used in these attacks change frequently and may be difficult to detect for periods of time.  In addition, although we have policies and procedures in place governing the secure storage of personal information collected by the Company or its third-party service providers, data breaches due to human error or intentional or unintentional conduct may occur in the future. The Company may need to expend additional resources in the future to continue to protect against, or to address problems caused by any business interruptions or data security breaches.  

Any business interruptions or data security breaches, including cyber security breaches resulting in private data disclosure of personal data, could result in lawsuits or regulatory proceedings, damage the Company’s reputation or adversely impact the Company’s results of operations and cash flows.

 

In addition, the Company from time to time needs to upgrade its information technology systems. If a new system does not function properly, it could affect our ability to order supplies, process and deliver customer orders and process and receive payments for our products. This could adversely impact our results of operations and cash flows.

The Company’s substantial indebtedness and its financial covenants could adversely affect its operations and financial results and prevent it from fulfilling its obligations, and the Company may incur substantially more debt in the future, which could exacerbate these risks.  

As of December 31, 2016, the Company had approximately $1,120 million of total consolidated indebtedness net of debt issuance costs.  This amount of indebtedness could have important consequences, including:

 

making it more difficult for the Company to satisfy its cash obligations;

 

limiting the Company’s ability to fund potential acquisitions;

 

requiring the Company to dedicate a portion of its cash flow from operations to payments on its indebtedness, which would reduce the availability of cash flow to fund working capital requirements, capital expenditures and other general corporate purposes;

 

limiting the Company’s flexibility in planning for, or reacting to, general adverse economic conditions or changes in its business and the industry in which it operates; and

 

placing the Company at a competitive disadvantage compared to its competitors that have less debt.

Additionally, the Company’s credit facility is subject to certain financial and other customary covenants.  In the event of a breach of those covenants, our lenders under the credit facility may be entitled to accelerate the related debt (and any lenders in respect of any other debt to which a cross-default provision applies may be entitled to accelerate such other debt), and we could be required to seek amendments or waivers under the debt instruments or to refinance the debt.

Moreover, the Company may incur substantial additional indebtedness in the future to fund acquisitions, to repurchase shares or to fund other activities for general business purposes. If new debt is added to the current debt levels, the related risks that the Company now faces could intensify. A substantial increase in the Company’s indebtedness could also have a negative impact on the Company’s credit rating. In this regard, failure to maintain the Company's credit ratings could adversely affect the interest rate available to the Company in future financings, as well as the Company’s liquidity, competitive position and access to capital markets.  Any decision regarding future borrowings will be based on the facts and circumstances existing at the time, including market conditions and the Company’s credit rating.  

The Company may not have sufficient cash flow to service its indebtedness or fund capital expenditures.  

The Company’s ability to repay and refinance its indebtedness and to fund capital expenditures depends primarily on its cash flow. Cash flow is often subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Company’s control, and such factors may limit its ability to repay indebtedness and fund capital expenditures. A failure to service its indebtedness or obtain additional financing as needed could have a material adverse effect on the Company’s business, operating results and financial condition.

24


 

There can be no guarantee that the Company will continue to make dividend payments or repurchase the Common Stock at sustained levels or at all.

Although the Board has authorized new share repurchase programs in each of 2014, 2015 and 2016 and recently increased the amount of the quarterly cash dividends payable on the Common Stock, any Board determinations to continue to repurchase the Common Stock or to continue to pay cash dividends on the Common Stock, in each case at levels consistent with recent practice or at all, will be based primarily upon the Company’s financial condition, results of operations, business requirements, price of the Common Stock in the case of the repurchase programs, and the Board’s continuing determination that the repurchase programs and the declaration of dividends under the dividend policy are in the best interests of Company stockholders and are in compliance with all laws and agreements applicable to the repurchase and dividend programs. In the event the Company does not declare a quarterly dividend, or discontinues its share repurchases, its stock price could be adversely affected.

Volatility in the financial markets may negatively impact the Company’s ability to access the credit markets.

Over the years, the banking system and financial markets have experienced severe disruption, including, among other things, bank failures and consolidations, severely diminished liquidity and credit availability, rating downgrades, declines in asset valuations and fluctuations in foreign currency exchange rates.  These conditions present the following risks to the Company, among others:

The Company is dependent on the continued viability of the financial institutions that participate in the syndicate that is generally obligated to fund the Company’s $1 billion unsecured revolving credit facility dated December 4, 2015 (as amended, the “Credit Agreement”).  In addition, the Credit Agreement includes a “commitment increase” feature that enables the Company to increase the amount of its borrowing under the Credit Agreement, subject to lending commitments and certain conditions.  Any disruption in the credit markets could limit the availability of credit or the ability or willingness of financial institutions to extend credit, which could adversely affect the Company’s liquidity and capital resources.  

The Company’s short- and long-term credit ratings affect its borrowing costs and access to financing.  A downgrade in the Company’s credit ratings, as a result of a substantial increase in the Company’s indebtedness or otherwise, would increase its borrowing costs and could affect its ability to issue commercial paper.  Disruptions in the commercial paper market or other effects of volatile economic conditions on the credit market also could raise the Company’s borrowing costs for both short- and long-term debt offerings.  Either scenario could adversely affect the Company’s liquidity and capital resources.  Failure to maintain the Company’s credit ratings could adversely affect the interest rate in future financings, liquidity, competitive position and access to capital markets.

Although the Company believes that its operating cash flows, together with its access to the credit markets, provides it with significant discretionary funding capacity, the inability of one or more institutions to fulfill funding obligations under the Credit Agreement could have a material adverse effect on the Company’s liquidity and operations.  

Changes in tax laws and regulations or in our operations may impact the Company’s effective tax rate and may adversely affect our business, financial condition and operating results.  

The Company’s future effective tax rate could be affected by changes in tax laws and regulations or their interpretation, changes in the mix of earnings in countries with differing statutory tax rates, or changes in the valuation of deferred tax assets and liabilities. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. If the actual amount of the Company’s future taxable income is less than the amount it is currently projecting with respect to specific tax jurisdictions, or if there is a change in the time period within which the deferred tax asset becomes deductible, the Company could be required to record a valuation allowance against its deferred tax assets. The recording of a valuation allowance would result in an increase in the Company’s effective tax rate, and would have an adverse effect on its operating results. In addition, changes in statutory tax rates may change the Company’s deferred tax assets or liability balances, which would have either a favorable or unfavorable impact on its effective tax rate. Additionally, reform proposals put forth by members of the U.S. Congress and the new presidential administration have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the U.S. and other countries.   Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.

Resolutions of tax disputes may adversely affect the Company’s earnings and cash flow.  

Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company provides for uncertain tax positions with respect to tax positions that do not meet the recognition thresholds or measurement standards mandated by applicable accounting guidance. Fluctuations in federal, state, local and foreign taxes or changes to uncertain tax positions, including related interest and penalties, may impact the Company’s effective tax rate and its financial results. The

25


 

Company is regularly under audit by tax authorities, and although the Company believes its tax estimates are reasonable, the final outcome of tax audits and related litigation could be materially different than that reflected in its historical income tax provisions and accruals. In addition, when particular tax matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective tax rate in the year of resolution. Unfavorable resolution of any tax matter could increase the effective tax rate. Any resolution of a tax issue may require the use of cash in the year of resolution.  Additionally, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition and operating results.

Failure to effectively utilize or successfully assert intellectual property rights, and the loss or expiration of such rights, could materially adversely affect the Company’s competitiveness.  Infringement by the Company of third-party intellectual property rights could result in costly litigation and/or the modification or discontinuance of Company products.  

The market for the Company’s products depends to a significant extent upon the value associated with its trademarks and brand names, including ARM & HAMMER, TROJAN, OXICLEAN, L’IL CRITTERS and VITAFUSION. The Company owns the material trademarks and brand names used in connection with the marketing and distribution of its major products both in the U.S. and in other countries. In addition, the Company holds several valuable patents on its products, which the Company believes serve as an effective barrier to entry for new competitors. Accordingly, the Company relies on trademark, trade secret, patent and copyright laws to protect its intellectual property rights. Although most of the Company’s material intellectual property is registered in the U.S. and in certain foreign countries in which it operates, it cannot be sure that its intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that the Company will not be able to obtain and perfect its own intellectual property rights, or, where appropriate, license from others intellectual property rights necessary to support new product introductions. The Company cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future, and the Company could incur significant costs in connection with legal actions relating to such rights. In addition, even if such rights are obtained in the U.S., the laws of some of the other countries in which the Company’s products are or may be sold do not protect intellectual property rights to the same extent as the laws of the U.S. If other parties infringe the Company’s intellectual property rights, they may dilute the value of the Company’s brands in the marketplace, which could diminish the value that consumers associate with the Company’s brands and harm its sales. The Company’s failure to perfect or successfully assert intellectual property rights could make it less competitive and could have a material adverse effect on its business, operating results and financial condition.  Also, the Company’s patents are granted for a term of 20 years from the date the patent application is filed.  The Company does not consider any single patent to be material to the business as a whole.

In addition, if the Company’s products are found to infringe intellectual property rights of others, the owners of those rights could bring legal actions against the Company claiming substantial damages for past infringement and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages from past infringement, the Company could be required to obtain a license in order to continue to manufacture or market the affected products, potentially adding significant costs. The Company might not prevail in any action brought against it or it may be unsuccessful in securing any license for continued use and therefore have to discontinue the marketing and sale of a product. This could make the Company less competitive and could have a material adverse impact on its business, operating results and financial condition.

Impairment of the Company’s goodwill and other intangible assets may result in a reduction in net income.

The Company has a material amount of goodwill, trademarks and other intangible assets, as well as other long-lived assets, which are periodically evaluated for impairment in accordance with current accounting standards. Declines in the Company’s profitability and/or estimated cash flows related to specific intangible assets, as well as potential changes in market valuations for similar assets and market discount rates, has resulted in impairment charges from time to time, and may result in future impairment charges, which could reduce the Company’s net income and otherwise have an adverse impact on operating results.  

The Company’s operations and the operations of its third party manufacturers, suppliers and customers may be subject to disruption from events beyond its or their control.  

The Company’s operations, as well as the operations of its third party manufacturers, suppliers and customers, may be subject to disruption from a variety of causes, including work stoppages, material shortages, financial difficulties, acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural disasters. If a major disruption were to occur, it could result in harm to people or the natural environment, delays in shipments of products to customers or suspension of operations, any of which could have a material adverse effect on the Company’s business.  

26


 

The Company may not be able to attract, retain and develop key personnel.  

The Company’s future performance depends in significant part upon the continued service of its executive officers and other key personnel. The loss of the services of one or more executive officers or other key employees could have a material adverse effect on the Company’s business, prospects, financial condition and results of operations. This effect could be exacerbated if any officers or other key personnel left as a group or at the same time. The Company’s success also depends, in part, on its continuing ability to attract, retain and develop highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key employees or attract, assimilate and retain other highly qualified personnel in the future.  

We have a limited number of authorized shares of our Common Stock available for future issuance.

Currently, approximately 2% of the authorized number of shares of our Common Stock remain available for issuance under our restated certificate of incorporation.  Under Delaware law, stockholder approval is required in order to amend our restated certificate of incorporation to increase the number of authorized shares of common stock. We anticipate including such a proposal for consideration at our next annual meeting of stockholders; however, we cannot provide any assurances that our stockholders will approve that proposal.  If our stockholders do not approve such an amendment to our restated certificate of incorporation, we may be unable to take timely advantage of market conditions and issue common stock for a variety of purposes, including stock splits or other recapitalizations, acquisitions and other business development transactions and strategic growth initiatives, equity financings, grants of stock options and other equity-based instruments, and other corporate purposes.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2.

PROPERTIES

The Company leases a 250,000 square foot building in Ewing, New Jersey for its global corporate headquarters.  The lease expires in 2033, subject to two ten-year extension terms at the option of the Company.  The Company’s aggregate lease commitment is approximately $95 million over the remainder of the lease term.  

In addition, the Company owns a 127,000 square feet facility in Princeton, New Jersey which is occupied by the Company’s research and development and SPD personnel.  

The Company also leases offices in various locations throughout the U.S. and globally.  The Company and its consolidated subsidiaries also own or lease other facilities as set forth in the following table:

 

Location

 

Products Manufactured

 

Segment

 

Approximate

Area (Sq.  Feet)

Owned:

 

 

 

 

 

 

Manufacturing facilities

 

 

 

 

 

 

     York, Pennsylvania

 

Liquid laundry detergent, dietary supplements and cat litter

 

Consumer Domestic and Consumer International

 

450,000

     Harrisonville, Missouri

  

Liquid laundry detergent and fabric softener

 

Consumer Domestic and Consumer International

 

272,000

Green River, Wyoming

  

Sodium bicarbonate and various consumer products

 

Consumer Domestic, Consumer International and SPD

 

250,000

Lakewood, New Jersey

  

Various consumer products

 

Consumer Domestic and Consumer International

 

250,000

Colonial Heights, Virginia

  

Condoms

 

Consumer Domestic and Consumer International

 

220,000

Old Fort, Ohio

  

Sodium bicarbonate, rumen bypass fats and various consumer products

 

Consumer Domestic, Consumer International and SPD

 

208,000

Montreal, Canada

  

Personal care products

 

Consumer International

 

157,000

Camaçari, Bahia, Brazil

  

Sodium bicarbonate and other products

 

SPD

 

120,000

Feira de Santana, Bahia, Brazil(1)

  

 

 

SPD

 

106,000

27


 

Folkestone, England

  

Personal care products

 

Consumer International

 

78,000

Madera, California

  

Rumen bypass fats and related products

 

SPD

 

50,000

Itapura, Bahia, Brazil(1)

 

Barite

 

SPD

 

35,000

New Plymouth, New Zealand (2)

  

Condom processing

 

Consumer Domestic and Consumer International

 

31,000

Oskaloosa, Iowa

  

Animal productivity products

 

SPD

 

27,000

 

 

 

 

 

 

 

Warehouses

  

 

 

 

 

 

York, Pennsylvania

 

 

Consumer Domestic and Consumer International

 

650,000

Harrisonville, Missouri

  

 

Consumer Domestic and Consumer International

 

282,000

Green River, Wyoming

  

 

Consumer Domestic, Consumer International and SPD

 

215,000

Old Fort, Ohio

 

 

Consumer Domestic, Consumer International and SPD

 

90,000

Camaçari, Bahia, Brazil

  

 

SPD

 

39,200

Itapura, Bahia, Brazil

 

 

SPD

 

19,600

Feira de Santana, Bahia, Brazil

  

 

SPD

 

13,100

 

 

 

 

 

 

 

Leased:

  

 

 

 

 

 

Manufacturing facilities

  

 

 

 

 

 

 

 

 

 

 

 

 

Vancouver, Washington(3)

 

Dietary supplements

 

Consumer Domestic and Consumer International

 

206,000

Victorville, California(4)

 

Liquid laundry detergent and cat litter

 

Consumer Domestic and Consumer International

 

150,000

Mason City, Iowa(5)

 

Animal productivity products

 

SPD

 

36,000

Folkestone, England(6)

  

Personal care products

 

Consumer International

 

22,000

 

 

 

 

 

 

 

Warehouses

 

 

 

 

 

 

Fostoria, Ohio(7)    

 

 

Consumer Domestic, Consumer International and SPD

 

486,000

Victorville, California(4)

 

 

Consumer Domestic and Consumer International

 

300,000

Grandview, Missouri(8)  

 

 

Consumer Domestic and Consumer International

 

125,000

Ridgefield, Washington(3)

 

 

Consumer Domestic and Consumer International

 

190,000

Mississauga, Canada(9)

  

 

Consumer International

 

123,000

Mason City, Iowa(5)

 

 

 

SPD

 

64,000

Folkestone, England(10)

  

 

Consumer International

 

55,000

Revel, France

  

 

Consumer International

 

48,900

 

 

 

 

 

 

 

Offices(13)

  

 

 

 

 

 

Mexico City, Mexico

  

 

Consumer International

 

27,500

Levallois, France

  

 

Consumer International

 

21,600

Mississauga, Canada

 

 

Consumer International

 

17,000

Folkestone, England(11)

 

 

Consumer International

 

11,000

Sydney, Australia(12)

  

 

Consumer International

 

24,900

 

 

 

 

 

 

 

(1)

Manufacturing site is idle, and all manufacturing equipment has now been removed.

(2)

Land lease expires in March 2025.

(3)

There are a total of seven buildings in Vancouver, Washington and one building in Ridgefield, Washington dedicated to the Company’s dietary supplements business.  All leases have an expiration date of December 2020, except for the building in

28


 

Ridgefield (March 2018, subject to a 33-month extension at the option of the Company) and one building in Vancouver (December 2017, subject to three one-year extensions, at the option of the Company).

(4)

Lease expires in April 2024, subject to two five-year extensions at the option of the Company.  

(5)

There are three buildings in Mason City, Iowa dedicated to the Company’s Animal Productivity business.  One lease, for two buildings, has an expiration date of November 2019, subject to three five-year extensions at the option of the Company.  The lease for the other building has an expiration date of November 2024, subject to two five-year extensions at the option of the Company.

(6)

Lease expires in April 2022, subject to a break option in 2017.

(7)

Lease expires in November 2019.  

(8)

Lease consists of one suite (approximately 125,000 sq. feet).  The lease expires in May 2019.  The lease is subject to one two -year extension at the option of the Company.  

(9)

Lease expires in September 2022, subject to two five-year extensions at the option of the Company.

(10)

There are two leased warehouses in Folkestone, England.  One lease expires in March 2028, with break options every five years.  The second lease expires in April 2022, subject to a break option in April 2017.

(11)

Lease expires in November 2024, subject to a break option in December 2020.

(12)

Lease expires in June 2020, subject to a six-year extension at the option of the Company.

(13)

We also lease offices in Brazil, China, London, Los Angeles, Panama, Singapore and Taiwan.

In Syracuse, New York, the Company owns a 21 acre site which includes a group of connected buildings.  This facility was closed in 2001 and a portion of the facility is now leased to a third party.  

Armand, a joint venture in which the Company owns a 50% interest, operates a potassium carbonate manufacturing plant located in Muscle Shoals, Alabama.  This facility contains approximately 53,000 square feet of space and has a production capacity of 103,000 tons of potassium carbonate per year.  

The Old Fort, Ohio plant has a production capacity for sodium bicarbonate of 280,000 tons per year.  The Green River, Wyoming plant has a production capacity for sodium bicarbonate of 200,000 tons per year.  

The Company believes that its operating and administrative facilities are adequate and suitable for the conduct of its business.  The Company also believes that its production facilities are suitable for current manufacturing requirements for its consumer and specialty products businesses.  In addition, the facilities possess a capacity sufficient to accommodate the Company’s estimated increases in production requirements over the next several years, based on its current product lines.

 

 

ITEM 3.

LEGAL PROCEEDINGS

General

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, 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 below, 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.

29


 

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 in an amount in excess of $20 million, 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 and expert discovery, which is ongoing.

In connection with this matter, the Company has reserved an immaterial amount.  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.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.


30


 

PART II

 

 

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

2016

 

 

2015

 

Common Stock Price Range and Dividends

 

Low

 

 

High

 

 

Dividend

 

 

Low

 

 

High

 

 

Dividend

 

1st Quarter

 

$

38.42

 

 

$

46.36

 

 

$

0.178

 

 

$

38.70

 

 

$

43.33

 

 

$

0.17

 

2nd Quarter

 

$

45.10

 

 

$

53.68

 

 

$

0.178

 

 

$

40.41

 

 

$

43.63

 

 

$

0.17

 

3rd Quarter

 

$

46.63

 

 

$

52.28

 

 

$

0.178

 

 

$

40.61

 

 

$

45.37

 

 

$

0.17

 

4th Quarter

 

$

42.56

 

 

$

48.70

 

 

$

0.178

 

 

$

40.29

 

 

$

44.69

 

 

$

0.17

 

Full Year

 

$

38.42

 

 

$

53.68

 

 

$

0.71

 

 

$

38.70

 

 

$

45.37

 

 

$

0.67

 

Based on composite trades reported by the New York Stock Exchange and dividends paid for each fiscal quarter for the years ended December 31, 2016 and 2015.

Approximate number of record holders of the Company’s Common Stock as of December 31, 2016: 1,900.

The following graph compares the yearly change in the cumulative total stockholder return on the Company’s Common Stock for the past five fiscal years with the cumulative total return of the S&P 500 Index and the S&P 500 Household Products Index described more fully below.  The returns are indexed to a value of $100 at December 31, 2011.  Dividend reinvestment has been assumed.  

Comparison of Cumulative Five-Year Total Return among Company, S&P 500 Index and the S&P 500 Household Products Index(1)

(1)

S&P 500 Household Products Index consists of THE CLOROX COMPANY, COLGATE-PALMOLIVE COMPANY, KIMBERLY-CLARK CORPORATION and P&G.

 

 

 

 

 

 

INDEXED RETURNS (Years ending)

 

 

 

 

Company / Index

 

2011

 

2012

 

2013

 

2014

 

2015

 

2016

 

Church & Dwight Co., Inc.

 

 

100.00

 

 

119.29

 

 

150.26

 

 

181.96

 

 

199.12

 

 

210.53

 

  S&P 500 Index

 

 

100.00

 

 

116.00

 

 

153.56

 

 

174.57

 

 

176.97

 

 

198.12

 

  S&P 500 Household Products Index

 

 

100.00

 

 

108.77

 

 

136.04

 

 

155.97

 

 

148.85

 

 

156.03

 

 

31


 

Share Repurchase Authorization

On November 2, 2016, the Board authorized a new share repurchase program, under which the Company may repurchase up to $500 million in shares of Common Stock (the “2016 Share Repurchase Program”).  The 2016 Share Repurchase Program does not have an expiration and replaced the 2015 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 2016, the Company purchased approximately 9.0 million shares of Common Stock for $400.0, of which $103.0 was purchased under the evergreen share repurchase program, $200.0 was purchased under the 2016 Share Repurchase Program, and $97.0 was purchased under the 2015 Share Repurchase Program.  As a result of the Company’s purchases, there remained $300.0 under the 2016 Share Repurchase Program as of December 31, 2016.    

 

Period

 

Total

Number of

Shares

Purchased(1)

 

 

Average

Price Paid

per Share(2)

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

 

Approximate Dollar

Value of Shares that

May Yet Be Purchased Under All

Programs(3)

 

10/1/2016 to 10/31/2016

 

 

0

 

 

 

0

 

 

 

0

 

 

$

128,353,339

 

11/1/2016 to 11/30/2016

 

 

4,500,668

 

 

$

44.50

 

 

 

4,494,668

 

 

$

300,000,000

 

12/1/2016 to 12/31/2016

 

 

0

 

 

 

0

 

 

 

0

 

 

$

300,000,000

 

Total

 

 

4,500,668

 

 

$

44.50

 

 

 

4,494,668

 

 

 

 

 

 

(1) Includes purchases by the Company and certain affiliated purchasers within the meaning of Rule 10b-18(a)(3) during the fourth quarter of 2016.

(2) Average price paid per share in the period includes commission.

(3) The 2015 Share Repurchase Program was replaced by the 2016 Share Repurchase Program on November 2, 2016. The evergreen share repurchase program has no specified cap and therefore is not reflected in this column.     

  

 


32


 

ITEM 6.

SELECTED FINANCIAL DATA

The following selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s audited consolidated financial statements and related notes to those statements included in this Annual Report.  The selected historical consolidated financial data for the periods presented have been derived from the Company’s audited consolidated financial statements.

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

FIVE‑YEAR FINANCIAL REVIEW

(Dollars in millions, except per share data and employees)

  

 

 

2016 (1)

 

 

2015 (1)

 

 

2014 (1)

 

 

2013 (1)

 

 

2012 (1)

 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

3,493.1

 

 

 

3,394.8

 

 

 

3,297.6

 

 

 

3,194.3

 

 

 

2,921.9

 

Marketing expenses

 

$

427.2

 

 

 

417.5

 

 

 

416.9

 

 

 

399.8

 

 

 

357.3

 

Research and development expenses

 

$

63.2

 

 

 

64.7

 

 

 

59.8

 

 

 

61.8

 

 

 

54.8

 

Income from Operations (2, 3)

 

$

724.2

 

 

 

674.2

 

 

 

641.2

 

 

 

622.2

 

 

 

545.1

 

% of Sales

 

 

20.7

%

 

 

19.9

%

 

 

19.4

%

 

 

19.5

%

 

 

18.7

%

Net Income (2, 4)

 

$

459.0

 

 

 

410.4

 

 

 

413.9

 

 

 

394.4

 

 

 

349.8

 

Net Income per Share-Basic (3, 4, 5)

 

$

1.78

 

 

 

1.57

 

 

 

1.53

 

 

 

1.43

 

 

 

1.25

 

Net Income per Share-Diluted (3, 4, 5)

 

$

1.75

 

 

 

1.54

 

 

 

1.51

 

 

 

1.40

 

 

 

1.23

 

Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,354.1

 

 

 

4,256.9

 

 

 

4,359.2

 

 

 

4,237.3

 

 

 

4,072.5

 

Total Debt (2)

 

$

1,120.2

 

 

 

1,050.0

 

 

 

1,086.6

 

 

 

797.3

 

 

 

895.6

 

Total Stockholders' Equity

 

$

1,977.9

 

 

 

2,023.2

 

 

 

2,101.9

 

 

 

2,300.0

 

 

 

2,061.1

 

Total Debt as a % of Total Capitalization

 

 

36

%

 

 

34

%

 

 

34

%

 

 

26

%

 

 

30

%

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares Outstanding-Basic (5)

 

 

257.6

 

 

 

262.2

 

 

 

270.2

 

 

 

277.2

 

 

 

280.2

 

Cash Dividends Paid

 

$

183.0

 

 

 

175.3

 

 

 

167.5

 

 

 

155.2

 

 

 

134.5

 

Cash Dividends Paid per Common Share (5)

 

$

0.71

 

 

 

0.67

 

 

 

0.62

 

 

 

0.56

 

 

 

0.48

 

Stockholders' Equity per Common Share (5)

 

$

7.68

 

 

 

7.72

 

 

 

7.78

 

 

 

8.30

 

 

 

7.36

 

Additions to Property, Plant & Equipment (6)

 

$

49.8

 

 

 

61.8

 

 

 

70.5

 

 

 

67.1

 

 

 

74.5

 

Depreciation & Amortization

 

$

107.6

 

 

 

101.0

 

 

 

91.2

 

 

 

90.5

 

 

 

85.0

 

Employees at Year-End

 

 

4,500

 

 

 

4,406

 

 

 

4,145

 

 

 

4,177

 

 

 

4,354

 

(1)

Period to period comparisons of the data presented above are impacted by the effect of acquisitions and divestitures made by the Company.  For further explanation of the impact of the acquisitions occurring in 2016, 2015, and 2014 refer to Note 6 to the consolidated financial statements.

(2)

2014 results reflect an increase of $300.0 in debt and its impact on interest expense due to the acquisition of assets of Lil’ Drug Store Products, Inc.  2012 results reflect an increase of $650.0 in debt and its impact on interest expense due to the acquisition of Avid Health..  

(3)

2015 results include an $8.9 pre-tax charge or $0.03 per share to terminate an international defined benefit pension plan.

(4)

2015 results include a $17.0 or $0.06 per share impairment charge to write-off the remaining investment in Natronx Technologies LLC (“Natronx”).

(5)

On August 4, 2016, the Company announced a two-for-one stock split of the Company’s common stock. Share and per share information has been retroactively adjusted to reflect the stock split which was effected on September 1, 2016.

(6)

2015 and 2014 results include approximately $18.1 and $34.0, respectively, for expenditures for the gummy dietary supplement product line expansion at the York facilities.  2012 results include $37.8 for expenditures for the Victorville facility.

 

 


 

33


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements.

OVERVIEW

The Company’s Business

The Company develops, manufactures, markets and sells a broad range of household, personal care and specialty products.  The Company sells its 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, all of which sell the products to consumers.  The Company also sells specialty products to industrial customers and distributors.  The Company focuses its consumer products marketing efforts principally on its ten “power brands.”  These well-recognized brand names include ARM & HAMMER, used in multiple product categories such as baking soda, cat litter, carpet deodorization and laundry detergent; TROJAN condoms, lubricants and vibrators; OXICLEAN stain removers, cleaning solutions, laundry detergent, dishwashing detergent and bleach alternatives; SPINBRUSH battery-operated and manual toothbrushes;  FIRST RESPONSE home pregnancy and ovulation test kits; NAIR depilatories; ORAJEL oral analgesic; XTRA laundry detergent; L’IL CRITTERS and VITAFUSION gummy dietary supplements; and BATISTE dry shampoos.  

The Company operates its business in three segments: Consumer Domestic, Consumer International and SPD.  The Consumer Domestic segment includes the power brands noted above and other household and personal care products such as SCRUB FREE, KABOOM and ORANGE GLO cleaning products, ARRID antiperspirant, CLOSE-UP and AIM toothpastes and SIMPLY SALINE nasal saline moisturizer.  The Consumer International segment primarily sells a variety of personal care products, some of which use the same brand names as the Company’s domestic product lines, in international markets including Canada, France, Australia, the United Kingdom, Mexico and Brazil.  The SPD segment is the largest U.S. producer of sodium bicarbonate, which it sells together with other specialty inorganic chemicals for a variety of industrial, institutional, medical and food applications.  This segment also sells a range of animal nutrition and specialty cleaning products.  In 2016, the Consumer Domestic, Consumer International and SPD segments represented approximately 77%, 15% and 8%, respectively, of the Company’s consolidated net sales.

2016 Financial Highlights

Key fiscal year 2016 financial results include:

 

2016 net sales grew 2.9% over fiscal year 2015, with gains in the Consumer Domestic and Consumer International segments, primarily due to volume growth in both the Consumer Domestic and Consumer International segments, helped in part by the January 2016 acquisition of Spencer Forrest, Inc. (“Spencer Forrest”), the maker of TOPPIK, (the “Toppik Acquisition”), partially offset by lower sales of animal productivity products.  

 

On December 22, 2016, the Company completed the Anusol Acquisition, acquiring the ANUSOL and RECTINOL businesses from Johnson & Johnson, Inc. for $130.  Total annual sales for ANUSOL and RECTINOL were $24 in 2016.

 

Gross margin increased 100 basis points to 45.5% in fiscal year 2016 from 44.5% in fiscal year 2015, primarily due to lower manufacturing and commodity costs.

 

Operating margin increased 80 basis points to 20.7% in fiscal year 2016 from 19.9% in fiscal year 2015, reflecting a higher gross margin and slightly lower marketing costs, partially offset by higher selling, general and administrative expenses (“SG&A”).

 

The Company reported diluted net earnings per share in fiscal year 2016 of $1.75, an increase of approximately 14.0% from fiscal year 2015 diluted net earnings per share of $1.54.

 

Cash provided by operations was $655.3, a $49.2 increase from the prior year, due to higher cash earnings and improved working capital.

 

The Company returned $583.0 to its stockholders through dividends and share repurchases.

 

 

34


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

Strategic Goals, Challenges and Initiatives

The Company’s ability to generate sales depends on consumer demand for its products and retail customers’ decisions to carry its products, which are, in part, affected by general economic conditions in its markets.  In 2016, many of the markets in which the Company operates continued to experience pricing pressures, general economic softness and weak or inconsistent consumer demand.  Although the Company’s consumer products generally are consumer staples and less vulnerable to decreases in discretionary spending than other products, the continued economic downturn has reduced demand in many categories, particularly those in personal care, and affected Company sales in recent periods.  Some customers have responded to economic conditions by increasing their private label offerings (primarily in the dietary supplements, diagnostic kits and oral analgesics categories), and consolidating the product selections they offer to the top few leading brands in each category.  In addition, an increasing portion of the Company’s product categories are being sold by club stores, dollar stores and mass merchandisers.  These customer actions have placed downward pressure on the Company’s sales and gross margins.

The Company expects a competitive marketplace in 2017 due to new product introductions by competitors and continuing aggressive competitive pricing pressures.  In the U.S., an improving unemployment rate and higher disposable income due to low gasoline prices are expected to have a positive effect on consumption patterns.  To continue to deliver attractive results for stockholders in this environment, the Company intends to continue to aggressively pursue several key strategic initiatives: maintain competitive marketing and trade spending, tightly control its cost structure, continue to develop and launch new and differentiated products, and pursue strategic acquisitions.  The Company also intends to continue to grow its product sales geographically (in an attempt to mitigate the impact of weakness in any one area), and maintain an offering of premium and value brand products (to appeal to a wide range of consumers).

There continues to be significant product and price competition in the laundry detergent category.  For example, P&G markets a lower-priced line of laundry detergents, Simply Tide, which competes directly with the Company’s core value laundry detergents. P&G has significantly increased its discounting of Simply Tide which could have a broad negative impact on the laundry category pricing and profitability.  In addition, in 2016, Henkel entered the U.S. market with Persil, its leading worldwide premium laundry detergent, and on September 1, 2016 completed its acquisition of Sun Products, the maker of All, Wisk, Sun, and private label laundry detergents.  While it is too early to assess what impact this will have on the Company’s laundry detergent business, the introduction of Persil and Henkel’s increased scale and market share could precipitate greater price competition in the category and distribution pressure with a potential adverse impact on the Company’s laundry detergent business.   Moreover, the unit dose laundry detergent segment is the fastest growing segment in the laundry detergent category, having grown to approximately 16% of the category since its introduction in 2012, and the Company faces pressure to achieve its proportionate share of the segment with a potential adverse impact on its share of the laundry detergent category.  The Company continues to evaluate and vigorously combat these pressures through, among other things, new product introductions and increased marketing and trade spending.  Additionally, while the category grew 3.3% for the 52 weeks ended December 17, 2016 and 1.6% for the 52 weeks ended December 19, 2015, after experiencing declines in 2013 and 2014, there is no assurance the category will not decline in the future and that the Company will be able to offset any such decline.

The Company has responded to these competitive pressures by, among other things, focusing on strengthening its key brands, including increased focus on the ARM & HAMMER, OXICLEAN, TROJAN, L’IL CRITTERS and VITAFUSION and BATISTE brands through the launch of innovative new products, which span various product categories, including premium and value household products supported by increased marketing and trade spending.    There can be no assurance that these measures will be successful.  

In 2016, the Company was able to grow market share in four of 10 of its “power brands” in measured channels.  The Company’s global product portfolio consists of both premium (60% of total worldwide consumer revenue in 2016) and value (40% of total worldwide consumer revenue in 2016) brands, which it believes enables it to succeed in a range of economic environments.  The Company intends to continue to develop a portfolio of appealing new products to build loyalty among cost-conscious consumers.

Over the past 16 years, the Company has diversified from an almost exclusively U.S. business to a global company with approximately 16% of sales derived from foreign countries in 2016.  The Company has operations in six countries (Canada, Mexico, U.K., France, Australia and Brazil) and exports to over 90 other countries.  In 2016, the Company benefited from its concentration in North America in light of the economic downturn in Europe; however, the Company has focused and will continue to focus on selectively expanding its global business.  Net sales generated outside of the United States are exposed to foreign currency exchange rate fluctuations as well as political uncertainty which could impact future operating results.  

The Company also continues to focus on controlling its costs.  Historically, the Company has been able to mitigate the effects of cost increases primarily by implementing cost reduction programs and, to a lesser extent, by passing along some of these cost

35


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

increases to customers.  The Company has also entered into set pricing and pre-buying arrangements with certain suppliers and hedge agreements for diesel fuel.  Additionally, maintaining tight controls on overhead costs has been a hallmark of the Company and has enabled it to effectively navigate recent challenging economic conditions.  

The identification and integration of strategic acquisitions are an important component of the Company’s overall strategy.  Acquisitions have added significantly to Company sales and profits over the last decade.  This is evidenced by the Company’s 2015 acquisition of certain assets of Varied Industries Corporation (the “VI-COR Acquisition”) and 2016 acquisitions of Spencer Forrest, Inc., the maker of TOPPIK, and the ANUSOL and RECTINOL businesses from Johnson & Johnson in the Anusol Acquisition.  However, the failure to effectively integrate any acquisition or achieve expected synergies may cause the Company to incur material asset write-downs.  The Company actively seeks acquisitions that fit its guidelines, and its strong financial position provides it with flexibility to take advantage of acquisition opportunities.  In addition, the Company’s ability to quickly integrate acquisitions and leverage existing infrastructure has enabled it to establish a strong track record in making accretive acquisitions. Since 2001, the Company has acquired nine of its ten “power brands”.    

The Company believes it is positioned to meet the ongoing challenges described above due to its strong financial condition, experience operating in challenging environments and continued focus on key strategic initiatives: maintaining competitive marketing and trade spending, managing its cost structure, continuing to develop and launch new and differentiated products, and pursuing strategic acquisitions.  This focus, together with the strength of the Company’s portfolio of premium and value brands, has enabled the Company to succeed in a range of economic environments, and is expected to position the Company to continue to increase stockholder value over the long-term.  Moreover, the generation of a significant amount of cash from operations, as a result of net income and effective working capital management, combined with an investment grade credit rating provides the Company with the financial flexibility to pursue acquisitions, drive new product development, make capital expenditures to support organic growth and gross margin improvements, return cash to stockholders through dividends and  share buy backs, and reduce outstanding debt, positioning it to continue to create stockholder value.  

For information regarding risks and uncertainties that could materially adversely affect the Company’s business, results of operations and financial condition, see “Risk Factors” in Item 1A of this Annual Report.

Recent Developments

 

Stock Split

 

On August 4, 2016, the Company announced a two-for-one stock split of the Company’s common stock (“Common Stock”). The stock split was structured in the form of a 100% stock dividend, payable on September 1, 2016 to stockholders of record as of August 15, 2016. All applicable amounts in the consolidated financial statements and related disclosures have been retroactively adjusted to reflect the stock split.

 

Share Repurchase Program

 

On November 2, 2016, the Board authorized a new share repurchase program, under which the Company may repurchase up to $500.0 in shares of Common Stock (the “2016 Share Repurchase Program”).  The 2016 Share Repurchase Program replaced the 2015 Share Repurchase Program and does not have an expiration.  The Company will continue its evergreen share repurchase program, 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.

 

Toppik Acquisition

 

On January 4, 2016, the Company acquired Spencer Forrest, Inc., the maker of TOPPIK, the leading brand of hair building fibers for people with thinning hair in the Toppik Acquisition.  The total purchase price was $175.3.  The Company financed the acquisition with short-term borrowings.  This brand is managed within the Consumer Domestic and Consumer International segments.

 

Anusol and Rectinol Acquisitions

 

On December 22, 2016, the Company acquired the ANUSOL and RECTINOL businesses from Johnson & Johnson, Inc. for $130.  These are the number one or number two hemorrhoid care brands in each market in which they operate, primarily in the U.K., Canada, Australia and South Africa with total annual sales of $24 in 2016.  The acquisition was funded with short-term borrowings and will be managed in the Consumer International segment.

36


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

 

Viviscal Acquisition

 

On January 17, 2017, the Company acquired the VIVISCAL business from Lifes2Good Holdings Limited for approximately $160.  Viviscal is the number one hair care supplement brand both in the U.S. and the U.K. with global annual sales of $44 in 2016.  This brand is complementary to the Company’s global BATISTE dry shampoo and TOPPIK hair care business. The acquisition was funded with short-term borrowings and will be managed in the Consumer Domestic and Consumer International segments.

 

Dividend Increase

On February 7, 2017, the Board of Directors declared a 7% increase in the regular quarterly dividend from $0.1775 to $0.19 per share, equivalent to an annual dividend of $0.76 per share payable to stockholders of record as of February 21, 2017.  The increase raises the annual dividend payout from $183 to approximately $195, and maintains the Company’s payout of dividends relative to net income at approximately 40%.

 

Brazil’s Chemical Business

During fourth quarter of 2016, the Company decided to sell its Brazilian chemical business to focus on its Brazilian consumer business, resulting in a plant impairment charge of $4.9 recognized in the fourth quarter of 2016 based upon an anticipated selling price. During the first quarter of 2017, the Company signed an agreement to sell the business, resulting in an approximate $5.0 expense for severance and other charges. Sales for the Brazilian chemical business in 2016 were approximately $22.0. The Company anticipates the transaction to close during the first quarter.

 

International Pension Plan Termination

 

In 2016 the Company authorized the termination of an international defined benefit pension plan under which approximately 336 participants, including 53 active employees, have accrued benefits.  The Company anticipates completing the termination of this plan by the end of the second quarter of 2017, once regulatory approvals are obtained.  In addition to plan assets, the Company will need to make a one-time payment of $20.0 to $26.0 ($14.0 to $19.0 after tax) to purchase annuities for participants.  The Company estimates that it will incur a one-time expense of $49.0 to $55.0 ($40.0 to $45.0 after tax) in 2017 when the plan settlement is completed.  This expense primarily includes the effect of the additional cash payment required at settlement and pension settlement accounting rules which require accelerated recognition of actuarial losses that were to be amortized over the expected benefit lives of participants.  The estimated expense is subject to change based on valuations at the actual date of settlement.  Upon the termination of these plans in 2017, the Company will have no further obligations with respect to material defined benefit pension plans.

 


37


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP).  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  By their nature, these judgments are subject to uncertainty.  They are based on the Company’s historical experience, its observation of trends in industry, information provided by its customers and information available from other outside sources, as appropriate.  The Company’s significant accounting policies and estimates are described below.  

Revenue Recognition and Promotional and Sales Return Reserves

Virtually all of the Company’s revenue represents sales of finished goods inventory and is recognized when received or picked up by the Company’s customers.  The reserves for consumer and trade promotion liabilities and sales returns are established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.  Promotional reserves are provided for sales incentives, such as coupons to consumers, and sales incentives provided to customers (such as slotting, cooperative advertising, incentive discounts based on volume of sales and other arrangements made directly with customers).  All such costs are netted against sales.  Slotting costs are recorded when the product is delivered to the customer.  Cooperative advertising costs are recorded when the customer places the advertisement for the Company’s products.  Discounts relating to price reduction arrangements are recorded when the related sale takes place.  Costs associated with end-aisle or other in-store displays are recorded when product that is subject to the promotion is sold.  The Company relies on historical experience and forecasted data to determine the required reserves.  For example, the Company uses historical experience to project coupon redemption rates to determine reserve requirements.  Based on the total face value of Consumer Domestic coupons redeemed over the past several years, if the actual rate of redemptions were to deviate by 0.1% from the rate for which reserves are accrued in the financial statements, an approximately $4.1 difference in the reserve required for coupons would result.  With regard to other promotional reserves and sales returns, the Company uses experience-based estimates, customer and sales organization inputs and historical trend analysis in arriving at the reserves required.  If the Company’s estimates for promotional activities and sales returns were to change by 10% the impact to promotional spending and sales return accruals would be approximately $6.4.  While management believes that its promotional and sales returns reserves are reasonable and that appropriate judgments have been made, estimated amounts could differ materially from actual future obligations.  During the twelve months ended December 31, 2016, 2015 and 2014, the Company reduced promotion liabilities by approximately $5.4, $4.3 and $6.7, respectively, based on a change in estimate as a result of actual experience and updated information.  These adjustments are immaterial relative to the amount of trade promotion expense incurred annually by the Company.  

Impairment of goodwill, trade names and other intangible assets

Carrying values of goodwill, trade names and other indefinite lived intangible assets are reviewed periodically for possible impairment.  For finite intangible assets, the Company assesses business triggering events.  The Company’s impairment analysis is based on a discounted cash flow approach that requires significant judgment with respect to unit volume, revenue and expense growth rates, and the selection of an appropriate discount rate.  Management uses estimates based on expected trends in making these assumptions.  With respect to goodwill, impairment occurs when the carrying value of the reporting unit exceeds the discounted present value of cash flows for that reporting unit.  For trade names and other intangible assets, an impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the asset.  Judgment is required in assessing whether assets may have become impaired between annual valuations.  Indicators such as unexpected adverse economic factors, unanticipated technological change, distribution losses, or competitive activities and acts by governments and courts may indicate that an asset has become impaired.  The result of the Company’s annual goodwill impairment test determined that the estimated fair value substantially exceeded the carrying values of all reporting units.  In addition, there were no goodwill impairment charges for each of the years in the three-year period ended December 31, 2016.

38


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

In 2014, the Company recorded an impairment charge of $5.0 for an intangible asset related to the Consumer Domestic segment.  The impairment charge recorded in 2014 was a result of actual and projected reductions in sales and profitability as a result of increased competition.  The amount of the impairment charges was determined by comparing the estimated fair value of the asset to its carrying amount.  Fair value was estimated based on a “relief from royalty” or “excess earnings” discounted cash flow method, which contains numerous variables that are subject to change as business conditions change, and therefore could impact fair values in the future.  The Company determined that the fair value of all other intangible assets as of December 31, 2016 exceeded their respective carrying values based upon the forecasted cash flows and profitability.  

It is possible that the Company’s conclusions regarding impairment or recoverability of goodwill or other intangible assets could change in future periods if, for example, (i) the businesses or brands do not perform as projected, (ii) overall economic conditions in 2017 or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies change from current assumptions, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA.  A future impairment charge for goodwill or intangible assets could have a material effect on the Company’s consolidated financial position or results of operations.

Inventory valuation

When appropriate, the Company writes down the carrying value of its inventory to the lower of cost or market (net realizable value, which reflects any costs to sell or dispose).  The Company identifies any slow moving, obsolete or excess inventory to determine whether an adjustment is required to establish a new carrying value.  The determination of whether inventory items are slow moving, obsolete or in excess of needs requires estimates and assumptions about the future demand for the Company’s products, technological changes, and new product introductions.  In addition, the Company’s allowance for obsolescence may be impacted by the reduction of the number of stock keeping units (SKUs).  The Company evaluates its inventory levels and expected usage on a periodic basis and records adjustments as required.  Adjustments to inventory to reflect a reduction in net realizable value were $10.5 at December 31, 2016, $12.6 at December 31, 2015, and $8.3 at December 31, 2014.

Income Taxes

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized to reflect the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled.  Management provides a valuation allowance against deferred tax assets for amounts which are not considered “more likely than not” to be realized.  The Company records liabilities for potential assessments in various tax jurisdictions under U.S. GAAP guidelines.  The liabilities relate to tax return positions that, although supportable by the Company, may be challenged by the tax authorities and do not meet the minimum recognition threshold required under applicable accounting guidance for the related tax benefit to be recognized in the income statement.  The Company adjusts this liability as a result of changes in tax legislation, interpretations of laws by courts, rulings by tax authorities, changes in estimates and the expiration of the statute of limitations.  Many of the judgments involved in adjusting the liability involve assumptions and estimates that are highly uncertain and subject to change.  In this regard, settlement of any issue, or an adverse determination in litigation, with a taxing authority could require the use of cash and result in an increase in the Company’s annual tax rate.  Conversely, favorable resolution of an issue with a taxing authority would be recognized as a reduction to the Company’s annual tax rate.

New Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2016.

 

 


39


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

The discussion of results of operations at the consolidated level presented below is followed by a more detailed discussion of results of operations by segment.  The discussion of the Company’s consolidated results of operations and segment operating results is presented on a historical basis for the years ended December 31, 2016, 2015, and 2014.  The segment discussion also addresses certain product line information.  The Company’s operating units are consistent with its reportable segments.  

Consolidated results

2016 compared to 2015

 

Twelve Months Ended

 

 

Change vs.

 

 

Twelve Months Ended

 

 

December 31, 2016

 

 

Prior Year

 

 

December 31, 2015

 

Net Sales

$

3,493.1

 

 

 

2.9%

 

 

$

3,394.8

 

Gross Profit

$

1,590.6

 

 

 

5.2%

 

 

$

1,511.8

 

Gross Margin

 

45.5

%

 

+100 basis points

 

 

 

44.5

%

Marketing Expenses

$

427.2

 

 

 

2.3%

 

 

$

417.5

 

Percent of Net Sales

 

12.2

%

 

-10 basis points

 

 

 

12.3

%

Selling, General & Administrative Expenses

$

439.2

 

 

 

4.5%

 

 

$

420.1

 

Percent of Net Sales

 

12.6

%

 

+30 basis points

 

 

 

12.3

%

Income from Operations

$

724.2

 

 

 

7.4%

 

 

$

674.2

 

Operating Margin

 

20.7

%

 

+80 basis points

 

 

 

19.9

%

Net Sales

Net sales for the year ended December 31, 2016 were $3,493.1, an increase of $98.3, or approximately 2.9% compared to 2015 net sales.  The components of the net sales increase are as follows:

Net Sales - Consolidated

December 31, 2016

 

Product volumes sold

 

3.1

%

Pricing/Product mix

 

0.1

%

Foreign exchange rate fluctuations / Other

 

(0.9

%)

Volume from acquired product lines (1)

 

0.6

%

Net Sales increase

 

2.9

%

 

(1)

On January 4, 2016, the Company completed the Toppik Acquisition, acquiring Spencer Forrest, Inc., the maker of TOPPIK, the leading brand of hair building fibers for people with thinning hair.  Net sales of this acquisition are included in the Company’s results since the date of acquisition.

Volume growth in Consumer Domestic and Consumer International was partially offset by lower SPD volume.

The Company’s gross profit for 2016 was $1,590.6, a $78.8 increase compared to 2015. Gross margin was 45.5% in 2016 compared to 44.5% in 2015, a 100 basis points (“bps”) increase.  The increase is due to lower manufacturing costs of 70 bps (including productivity programs and the absence of start-up costs incurred in 2015 associated with the Company’s new vitamin manufacturing facility), lower commodity costs of 60 bps, and the impact of the higher margin acquired business of 30 bps, partially offset by unfavorable foreign exchange rates of 30 bps, a plant impairment charge of 20 bps at an international subsidiary and unfavorable price/volume mix of 10 bps.  

Operating Costs

Marketing expenses for 2016 were $427.2, an increase of $9.7 compared to 2015.  Marketing expenses as a percentage of net sales decreased 10 bps to 12.2% in 2016 as compared to 2015 due to 40 bps of leverage on higher net sales partially offset by 30 bps on higher expenses.  

Selling, general and administrative expenses (“SG&A”) expenses for 2016 were $439.2, an increase of $19.1 or 4.5% compared to 2015. The increase is primarily due to costs associated with the Toppik Acquisition and higher compensation costs, partially offset by a pension plan charge recorded in 2015.  SG&A as a percentage of net sales increased 30 bps to 12.6% in 2016 compared to 12.3% in 2015.  The increase is due to higher costs of 60 bps, partially offset by 30 bps of leverage associated with higher sales.

40


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

Other Income and Expenses

Equity in earnings of affiliates increased by $15.0 in 2016 as compared to 2015.  The increase in earnings during 2016 was due primarily to a $17.0 impairment charge in 2015 associated with the Company’s remaining investment in Natronx.

Interest expense in 2016 was $27.7, a decrease of $2.8 compared to 2015 due to a lower amount of average debt outstanding.

Taxation

The 2016 tax rate was 35.0% compared to 35.4% in 2015.  The 2015 tax rate was negatively impacted by a valuation allowance recorded in connection with the Natronx impairment charge.  

2015 compared to 2014

Net Sales

Net sales for the year ended December 31, 2015 were $3,394.8, an increase of $97.2, or approximately 2.9% compared to 2014 net sales.  The components of the net sales increase are as follows:

Net Sales - Consolidated

December 31, 2015

 

Product volumes sold

 

3.1

%

Pricing/Product mix

 

0.5

%

Foreign exchange rate fluctuations / Other

 

(2.7

%)

Acquired product lines (1)

 

2.0

%

Net Sales increase

 

2.9

%

 

(1)

On September 19, 2014, the Company acquired certain brands in the Lil’ Drug Store Brands Acquisition (the “Lil’ Drug Store Brands Acquisition”) and on January 2, 2015, the Company acquired certain assets of Varied Industries Corporation (the “VI-COR Acquisition”).  Net sales of these acquisitions are included in the Company’s results since the date of acquisition.

All three segments reported volume increases and favorable price/mix for the year ended December 31, 2015.  

Gross Profit

The Company’s gross profit for 2015 was $1,511.8, a $58.9 increase compared to 2014. Gross margin was 44.5% in 2015 compared to 44.1% in 2014, a 40 basis points (“bps”) increase.  The increase is due to 30 bps associated with higher volume, price and mix, favorable impact associated with the Lil’ Drug Store Brands and VI-COR acquisitions of 40 bps, lower commodity costs of 70 bps, partially offset by higher manufacturing costs (net of productivity programs and including higher than anticipated start-up costs associated with the Company’s new vitamin manufacturing facility) of 70 bps and unfavorable foreign exchange rates of 30 bps.  The higher volume, price and mix favorability included higher trade promotion and couponing to continue to support proven consumer trial generating activities for the OXICLEAN megabrand.  

Operating Costs

Marketing expenses for 2015 were $417.5, an increase of $0.6 compared to 2014.  The reason the increase was small was due to shifting some marketing funds to trade promotion and couponing to continue to support proven consumer trial generating activities for the OXICLEAN megabrand.  Marketing expenses as a percentage of net sales decreased 30 bps to 12.3% in 2015 compared to 12.6% in 2014.  This is due to 30 bps from leverage of expenses on higher sales.  

Selling, general and administrative expenses (“SG&A”) expenses for 2015 were $420.1, an increase of $25.3 or 6.4% compared to 2014 due primarily to both on-going and one-time costs associated with the Lil’ Drug Store Brands and VI-COR acquisitions, higher compensation related costs, higher legal and research and development expenses and an $8.9 pension settlement charge in the second quarter of 2015.  The increase was partially offset by lower foreign exchange rates.  SG&A as a percentage of net sales increased 20 bps to 12.3% in 2015 compared to 12.1% in 2014.  The increase is due to higher costs of 50 bps, including 25 bps associated with the pension charge, partially offset by 30 bps of leverage associated with higher sales.

41


CHURCH & DWIGHT CO., INC AND SUBSIDIARIES

(Dollars in millions, except share and per share data)

 

Other Income and Expenses

Equity in earnings of affiliates for 2015 was a loss of $5.8 compared to earnings of $11.6 in 2014.  The decrease in earnings was primarily due to a $17.0 impairment charge associated with the Company’s remaining investment in Natronx recorded in the second quarter of 2015.  This charge is primarily a result of lower than expected demand for the joint venture’s products as a result of a shift in the electric utility industry from coal-fired to natural gas-supplied power plants, continued delays in the implementation of updated federal regulations, and indirectly, the recent U.S. Supreme Court ruling against the Environmental Protection Agency (“EPA”) where the court stated that the EPA failed to properly consider the costs to implement the regulations. We believe that the foregoing factors will likely further delay the demand for these products.  

Interest expense in 2015 was $30.5, an increase of $3.1 compared to 2014 due to a higher amount of average debt outstanding.

Taxation

The 2015 tax rate was 35.4% compared to 33.8% in 2014.  The 2015 tax rate was negatively impacted by a valuation allowance recorded in connection with the Natronx impairment charge. The tax rate for 2014 was favorably impacted by discrete adjustments related to uncertain income tax positions.   

Segment results for 2016, 2015 and 2014

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

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 December 31, 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 year ended December 31, 2016 and Armand, ArmaKleen and Natronx for the years ended December 31, 2015 and 2014 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 below.

Segment net sales and income before income taxes for each of the three years ended December 31, 2016, 2015 and 2014 were as follows: 

 

Consumer

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

International

 

 

SPD

 

 

Corporate(3)

 

 

Total

 

Net Sales(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

2,677.8

 

 

$

525.2

 

 

$

290.1

 

 

$

0.0

 

 

$

3,493.1

 

2015

 

2,581.6

 

 

 

501.0

 

 

 

312.2

 

 

 

0.0

 

 

 

3,394.8

 

2014

 

2,471.6

 

 

 

535.2

 

 

 

290.8

 

 

 

0.0

 

 

 

3,297.6

 

Income before Income Taxes(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

590.6

 

 

$

66.3

 

 

$