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 our consolidated financial statements.

OVERVIEW

Our Business

We develop, manufacture and market a broad range of consumer household, personal care and specialty products focused on animal and food production, chemicals and cleaners.  We focus our consumer products marketing efforts principally on our 14 “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 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; BATISTE® dry shampoos; WATERPIK® water flossers and replacement showerheads; FLAWLESS® products;  ZICAM® cold shortening and relief products and THERABREATH® oral care products.We sell our consumer products under a variety of brands through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, dollar, pet and other specialty stores and websites and other e-commerce channels, all of which sell the products to consumers. We sell our specialty products to industrial customers, livestock producers and through distributors.We operate our business in three segments: Consumer Domestic, Consumer International and the Specialty Products Division (“SPD”).  The segments are based on differences in the nature of products and organizational and ownership structures.  In 2021, the Consumer Domestic, Consumer International and SPD segments represented approximately 76%, 18% and 6%, respectively, of our consolidated net sales.

COVID-19 Pandemic and Other Recent Developments

The COVID-19 pandemic continues to impact most of our businesses.  As certain government restrictions were reduced or removed, we have experienced increased demand for certain product categories, mainly in the United States, including ARM & HAMMER cat litter, VITAFUSION and L’IL CRITTERS gummy vitamins, and BATISTE dry shampoo, that had been negatively impacted by the temporary and permanent closures of certain retailers, reduced consumer foot traffic at retailers, and COVID-19 related precautionary measures. Overall, we have continued to experience increased online sales.We continue to experience challenges to meet customer demand, largely because of broad-based shortages in suppliers’ labor which impact the availability of many critical components in our supply chain and distribution. Additionally, we and our suppliers are experiencing significant broad-based inflation of manufacturing and distribution costs as well as transportation challenges.  We expect shortages to continue at least through the first half of 2022 and input cost inflation to continue at least throughout 2022.  To attempt to offset some of these cost pressures, we have recently enacted and continue to evaluate price increases. In addition, to address challenges meeting customer demand, we have taken steps to increase our short-term manufacturing capacity for many of our products (including laundry detergent, baking soda, cleaners and vitamins) as well as our raw material and packaging capacity, and continue to work closely with our suppliers, contract manufacturers and retail partners to increase capacity and ensure sustained supply to keep pace with increased demand.  We have also made investments in the expansion of long-term, in-house and third-party manufacturing capacity and are working to enlist additional suppliers that meet our quality specifications.  While we expect supply availability issues to start improving in the second half of 2022 for most of our brands, there is no assurance that these challenges will abate in the foreseeable future or that our customers will accept all or a portion of any price increases, or that the other measures we have or may implement will mitigate the impact of supply disruptions or rising costs.Looking forward, the extent that COVID-19 and other recent developments’ have on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, the spread and severity of new variants such as Omicron, the impact of vaccines, and our continued ability to manufacture and distribute our products, as well as any future government actions affecting employers, consumers and the economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees; maximizing the availability of products that help consumers with their health, hygiene and cleaning needs; and using our employees’ talents and our resources to help society meet and overcome the current challenges.

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

We are monitoring the impact of both inflation and the COVID-19 pandemic, including the effect of corresponding government actions on consumer demand, and how these factors will potentially influence future cash flows for the short and long term.  While we expect that many of these effects will not be permanent, it is impossible to predict their duration.

2021 Financial Highlights

Key 2021 financial results include:

 

•

2021 net sales grew 6.0% over 2020, with gains in all three of our segments.  The gains are primarily due to favorable pricing/product mix in the Consumer Domestic and SPD segments, partially offset by unfavorable pricing/product mix in Consumer International, as well as favorable volumes in the Consumer International and SPD segments, partially offset by slightly decreased sales volumes in the Consumer Domestic segment. Changes in foreign exchange rates and acquisitions also contributed to 2021 sales growth.

 

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Gross margin decreased 160 basis points to 43.6% in 2021 from 45.2% in 2020, primarily due to higher manufacturing costs including labor, raw materials and components, as well as higher transportation costs, and higher tariffs, partially offset by favorable volumes/price/product mix, the impact of productivity programs, and business acquisition benefits.

 

•

Operating margin decreased 20 basis points to 20.8% in 2021 from 21.0% in 2020, reflecting a lower gross margin percentage, partially offset by lower marketing costs and selling general and administrative costs as a percentage of sales (including the higher favorable impact of the Flawless business acquisition liability adjustments.)

 

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We reported diluted net earnings per share in 2021 of $3.32, an increase of approximately 6.4% from 2020 diluted net earnings per share of $3.12.  

 

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Cash provided by operations was $993.8 in 2021, a $3.5 increase from the prior year, as higher cash earnings (net income adjusted for non-cash items) were partially offset by higher working capital.

 

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We returned $747.5 in 2021 to our stockholders through dividends and share repurchases.

Strategic Goals, Challenges and Initiatives

Our ability to generate sales depends on consumer demand for our products and retail customers’ decisions to carry our products, which are, in part, affected by general economic conditions in our markets. While a vast majority of our products are consumer staples and less vulnerable to decreases in discretionary spending than other products, an increasing number of our products, particularly those from our recent acquisitions, are more likely to be affected by consumer decisions to control spending.  Some customers have responded to economic conditions by increasing their private label offerings (primarily in the dietary supplements, diagnostic kits and oral analgesics categories), launching their own brands, and consolidating the product selections they offer to the top few leading brands in each category.  In addition, an increasing portion of our product categories are being sold by club stores, dollar stores, mass merchandisers and internet-based retailers.  These factors have placed downward pressure on our sales and gross margins.We intend to continue to aggressively pursue several key strategic initiatives: maintain competitive marketing and trade spending, tightly control our cost structure, continue to develop and launch new and differentiated products, and pursue strategic acquisitions.  We also intend to continue to grow our product sales globally and maintain an offering of premium and value brand products to appeal to a wide range of consumers.We derive a substantial percentage of our revenues from sales of liquid laundry detergent. As a result, any delays or reduction of sales of these products, in the event that our product category diversification efforts discussed below are not successful, could have a material adverse effect on our business, financial condition and operating results and cash flows. Condom usage has declined over the last decade.  However, after a large decline in condom sales during 2020 due to social distancing, the condom category began to recover in 2021 with fewer social restrictions leading to an increase in sexual activity. However, there is no assurance the category will not decline in the future and that we will be able to offset any such decline. We are continuously focused on strengthening our key 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 the domestic business, six out of 13 “power brands” met or exceeded category growth for the full year 2021. With the acquisition of THERABREATH, we now have 14 “power brands”.  Our global product portfolio consists of both premium (60% of total worldwide consumer revenue in 2021) and value (40% of total worldwide consumer revenue in 2021) brands, which we believe enables us to succeed in a range of economic environments.  We intend to continue to develop a portfolio of appealing new products to build loyalty among cost-conscious consumers.

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

Over the past two decades, we have diversified from an almost exclusively U.S. business to a global company with approximately 18% of sales derived from countries outside of the United States in 2021.  We have subsidiary operations in seven countries (Canada, Mexico, U.K., France, Germany, China and Australia) and sell into over 130 other countries.  In 2021, we benefited from our expanded global footprint and expect to continue to focus on selectively expanding our global business.  If we are unable to expand our business internationally at the rate that we expect, we may not realize our anticipated growth targets.  Although we believe ongoing international expansion represents a significant opportunity to grow our business, our increasing activity in global markets exposes us to additional complexity and uncertainty.  Sales generated outside of the U.S. are exposed to foreign currency exchange rate fluctuations as well as political uncertainty which could impact future operating results.  Moreover, the current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty regarding the global economy. The impact of U.S. tariffs on certain products was a component of increased cost of sale during the year ended December 31, 2021. The implementation of more restrictive trade policies, such as higher tariffs or new barriers to entry, in countries in which we manufacture or sell large quantities of products could negatively impact our business, cash flows, results of operations and financial condition.We also continue to focus on controlling our costs.  Historically, we have been able to mitigate the effects of cost increases primarily by implementing cost reduction programs and, to a lesser extent, by passing along cost increases to customers.  We have also entered into set pricing and pre-buying arrangements with certain suppliers and hedge agreements for diesel fuel and other commodities. Additionally, our focus on tight cost controls has enabled us to effectively navigate recent challenging economic conditions.  In 2021, due to the significant increase in input costs, we have not been able to fully mitigate the impact of these increases with cost control measures and productivity programs.  We have, and will continue to, implement price increases to address cost inflation.  However, we cannot be certain that these price increases will be accepted by customers.The identification and integration of strategic acquisitions are an important component of our overall strategy and product category diversification.  Acquisitions have added significantly to our sales and profits and product category diversification over the last decade.  This is evidenced by our 2015 acquisition of certain assets of Varied Industries Corporation (the “Vi-cor Acquisition”), the 2016 acquisitions of Spencer Forrest, Inc., the maker of TOPPIK (the “Toppik Acquisition”), and the ANUSOL and RECTINOL businesses from Johnson & Johnson (the “Anusol Acquisition”), the 2017 acquisitions of VIVISCAL from Lifes2Good Holdings Limited (the “Viviscal Acquisition”), Agro BioSciences, Inc. (the “Agro Acquisition”), and WATERPIK from Pik Holdings, Inc. (the “Waterpik Acquisition”),  the 2018 acquisition of Passport Food Safety Solutions, Inc. (the “Passport Acquisition”), the 2019 acquisition of FLAWLESS; the 2020 acquisition of ZICAM from Consumer Health Holdco LLC and the 2021 acquisition of THERABREATH from Dr. Harold Katz, LLC and HK-IP International, Inc. The failure to effectively identify or integrate any acquisition or achieve expected synergies may cause us to incur material asset write-downs.  We actively seek acquisitions that fit our guidelines, and our strong financial position provides us with flexibility to take advantage of acquisition opportunities.  In addition, our ability to quickly integrate acquisitions and leverage existing infrastructure has enabled us to establish a strong track record in making accretive acquisitions.  Since 2001, we have acquired 13 of our 14 “power brands”.    We believe we are positioned to meet the ongoing challenges described above due to our strong financial condition, experience operating in challenging environments and continued focus on key strategic initiatives.  Our focus is to maintain competitive marketing and trade spending, manage our cost structure, continue to develop and launch new and differentiated products, while pursuing strategic acquisitions.  This focus, together with the strength of our portfolio of premium and value brands, has enabled us to succeed in a range of economic environments.  Moreover, the generation of a significant amount of cash from operations combined with an investment grade credit rating, provides us 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.  These factors position us to continue to increase stockholder value over the long-term.For information regarding risks and uncertainties that could materially adversely affect our business, results of operations and financial condition and cash flows, see “Risk Factors” in Item 1A of this Annual Report.

Recent Developments

TheraBreath Acquisition

On December 24, 2021, we acquired all of the outstanding equity of Dr. Harold Katz, LLC and HK-IP International, Inc., the owners of the THERABREATH brand of oral care products business (the “TheraBreath Acquisition”).  We paid $556.0, net of cash acquired, at closing and deferred an additional cash payment of $14.0 related to certain indemnity obligations provided by the seller.  The additional amount, to the extent not used in satisfaction of such indemnity obligations, is payable in installments between two and four years from the closing.  THERABREATH’s annual net sales for the year ended December 31, 2021 were approximately $100.  The acquisition was financed by the proceeds from a $400.0 three-year term loan and an underwritten public offering of $400.0 aggregate principal Senior Notes due on December 15, 2031 (as defined below) completed on December 10, 2021.  The THERABREATH business is managed in the Consumer Domestic and Consumer International segments.

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

Dividend Increase

On January 28, 2022, the Board declared a 4% increase in the regular quarterly dividend from $0.2525 to $0.2625 per share, equivalent to an annual dividend of $1.05 per share payable to stockholders of record as of February 15, 2022.  The increase raises the annual dividend payout from $248.0 to approximately $255.0.

Accelerated Share Repurchase Program

In December 2021, we entered into an ASR contract with a commercial bank to purchase Common Stock.  We paid $200.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to $180.0, or 1.8 million shares.  We used cash on hand and short-term borrowings to fund the initial purchase price.  Upon the completion of the ASR, which ended in February 2022, the bank delivered an additional 0.2 million shares to us.  The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period.  All 2.0 million shares were purchased under the 2021 Share Repurchase Program.  As a result of our recent stock repurchases, there remains $729.7 of share repurchase availability under the 2021 Share Repurchase Program as of December 31, 2021.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our 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 our historical experience, our observation of trends in industry, information provided by our customers and information available from other outside sources, as appropriate.  Our significant accounting policies and estimates are described below.

Revenue Recognition and Promotional and Sales Return Reserves

Virtually all of our revenue represents sales of finished goods inventory and is recognized when received or picked up by our customers.  The reserves for consumer and trade promotion liabilities and sales returns are established based on our 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 our products.  Discounts relating to price reduction arrangements and coupons 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.  We rely on historical experience and forecasted data to determine the required reserves.  For example, we use 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, a difference of approximately $0.1 in the reserve required for coupons would result.  With regard to other promotional reserves and sales returns, we use experience-based estimates, customer and sales organization inputs and historical trend analysis in arriving at the reserves required.  If our estimates for promotional activities and sales returns reserves were to change by 10% the impact to promotional spending and sales return accruals would be approximately $11.3.  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.

Impairment of goodwill, trade names and other intangible assets

Carrying values of goodwill and indefinite-lived trade names are reviewed periodically for possible impairment.  Finite intangible assets are assessed when there are business triggering events.  Our 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 and royalty 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 our 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, 2021.Fair value for indefinite lived intangible assets 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.  We determined that the fair value of all intangible assets for each of the years in the three-year period ended December 31, 2021 exceeded their respective carrying values based upon the forecasted cash flows and profitability. However, in recent years our TROJAN business, specifically the condom category, has not grown and competition has increased resulting in a reduction in expected future cash flows.  In addition, the COVID-19 pandemic has further negatively impacted condom sales due to social distancing.  As a result, the TROJAN business has experienced sales and profit declines that has eroded a significant portion of the excess between the fair and carrying value of the tradename, which, if these trends continue, could potentially result in an impairment.  However, the condom category began to recover in 2021 as fewer social restrictions led to an increase in sexual activity with less shutdowns and governmental restrictions.  While management can and has implemented strategies to address the risk, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges of these assets. It is possible that our 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 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

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

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 our consolidated financial position or results of operations.

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.  We record liabilities for potential assessments in various tax jurisdictions under U.S. GAAP guidelines.  The liabilities relate to tax return positions that, although supportable by us, 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.  We adjust 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 our annual tax rate.  Conversely, favorable resolution of an issue with a taxing authority would be recognized as a reduction to our annual tax rate.

New Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements included in this Annual Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2021.

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

Revenue Recognition and Promotional and Sales Return Reserves

Virtually all of our revenue represents sales of finished goods inventory and is recognized when received or picked up by our customers.  The reserves for consumer and trade promotion liabilities and sales returns are established based on our 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 our products.  Discounts relating to price reduction arrangements and coupons 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.  We rely on historical experience and forecasted data to determine the required reserves.  For example, we use 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, a difference of approximately $0.1 in the reserve required for coupons would result.  With regard to other promotional reserves and sales returns, we use experience-based estimates, customer and sales organization inputs and historical trend analysis in arriving at the reserves required.  If our estimates for promotional activities and sales returns reserves were to change by 10% the impact to promotional spending and sales return accruals would be approximately $11.3.  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.

Impairment of goodwill, trade names and other intangible assets

Carrying values of goodwill and indefinite-lived trade names are reviewed periodically for possible impairment.  Finite intangible assets are assessed when there are business triggering events.  Our 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 and royalty 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 our 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, 2021.Fair value for indefinite lived intangible assets 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.  We determined that the fair value of all intangible assets for each of the years in the three-year period ended December 31, 2021 exceeded their respective carrying values based upon the forecasted cash flows and profitability. However, in recent years our TROJAN business, specifically the condom category, has not grown and competition has increased resulting in a reduction in expected future cash flows.  In addition, the COVID-19 pandemic has further negatively impacted condom sales due to social distancing.  As a result, the TROJAN business has experienced sales and profit declines that has eroded a significant portion of the excess between the fair and carrying value of the tradename, which, if these trends continue, could potentially result in an impairment.  However, the condom category began to recover in 2021 as fewer social restrictions led to an increase in sexual activity with less shutdowns and governmental restrictions.  While management can and has implemented strategies to address the risk, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges of these assets. It is possible that our 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 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

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

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 our consolidated financial position or results of operations.

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.  We record liabilities for potential assessments in various tax jurisdictions under U.S. GAAP guidelines.  The liabilities relate to tax return positions that, although supportable by us, 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.  We adjust 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 our annual tax rate.  Conversely, favorable resolution of an issue with a taxing authority would be recognized as a reduction to our annual tax rate.

New Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements included in this Annual Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2021.

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

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.  This section of this Form 10-K generally discusses 2021 and 2020 results and year-to-year comparisons between 2021 and 2020.  Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. The segment discussion also addresses certain product line information.  Our operating segments are consistent with our reportable segments.

Consolidated results

2021 compared to 2020

[Table with ~10 rows, ~32 numbers, and 838 characters.]

Net Sales

Net sales for the year ended December 31, 2021 were $5,190.1, an increase of $294.3, or 6.0% compared to 2020 net sales.  The components of the net sales increase are as follows: [Table with ~6 rows, ~7 numbers, and 279 characters.] (1)

On December 24, 2021, we acquired all of the outstanding equity of Dr. Harold Katz, LLC and HK-IP International, Inc., the owners of the THERABREATH brand of oral care products (the “TheraBreath Acquisition”).  On December 1, 2020, we acquired all of the outstanding equity of Consumer Health Holdco LLC, the owner of the ZICAM brand and cold remedy products business (the “Zicam Acquisition”).  The results of these acquisitions are included in our results since the date of acquisition.   The volume change reflects increased product sales in the Consumer International and SPD segments, partially offset by slightly decreased sales in the Consumer Domestic segment. Price/mix was favorable in the Consumer Domestic and SPD segments, but was partially offset by slightly unfavorable price/mix in the Consumer International segment.  Our gross profit for 2021 was $2,263.5, a $49.3 increase compared to 2020.  Gross margin was 43.6% in 2021 compared to 45.2% in 2020, a 160 basis points (“bps”) decrease.  The decrease is due to the impact of higher manufacturing costs including labor and commodities of 400 bps, higher transportation costs of 80 bps, and higher costs of 30 bps as a result of incremental tariffs, partially offset by favorable price/volume/mix of 200 bps, the impact of productivity programs of 130 bps and business acquisition benefits of 20 bps.

Operating Costs

Marketing expenses for 2021 were $577.7, a decrease of $13.5 compared to 2020.  We reduced marketing spending, mainly in household products, as supply shortages impacted our ability to meet customer demand.  Marketing expenses as a percentage of net sales decreased 100 bps to 11.1% in 2021 as compared to 2020 due to 70 bps of leverage on higher net sales and 30 bps on lower expenses.

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

SG&A expenses for 2021 were $606.7, an increase of $13.4 or 2.3% compared to 2020.  The increase is primarily due to higher expenses related to the Zicam Acquisition (including amortization), asset impairment charges of $11.3 associated with the Passport business acquired in 2018, and the prior year gain on the sale of PERL WEISS®, partially offset by lower incentive compensation and litigation costs. SG&A as a percentage of net sales decreased 40 bps to 11.7% in 2021 compared to 12.1% in 2020.  The decrease is due to 70 bps of leverage associated with higher sales offset by 30 bps on higher expenses.  The favorable adjustment to the fair value of the Flawless business acquisition liability, which is recognized as a reduction in expense, was $98.0 in 2021 compared to $94.0 in 2020.

Other Income and Expenses

Other expense increased nominally in 2021 as compared to 2020.Interest expense in 2021 was $54.5, a decrease of $6.5. The decrease is primarily due to lower interest rates.

Taxation

The 2021 U.S. federal effective income tax rate was 19.8% compared to 19.3% in 2020. The increase of 50 basis points was impacted by a favorable tax settlement in 2020.

Segment results for 2021, 2020 and 2019

We operate three reportable segments: Consumer Domestic, Consumer International and SPD.  These segments are determined based on differences in the nature of products and organizational and ownership structures.  We also have a Corporate segment. [Table with ~4 rows, ~0 numbers, and 172 characters.] The Corporate segment income consists of equity in earnings of affiliates.  As of December 31, 2021, we held 50% ownership interests in each of Armand and ArmaKleen, respectively.  Our equity in earnings of Armand and ArmaKleen, totaling $9.4, $6.7 and $6.6 for the three years ended December 31, 2021, 2020 and 2019, respectively, are included in the Corporate segment.

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

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, 2021, 2020 and 2019 were as follows: [Table with ~8 rows, ~39 numbers, and 823 characters.] (1)

Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $10.8, $11.7 and $10.5 for the years ended December 31, 2021, 2020 and 2019, respectively.

(2)

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

(3)

Corporate segment consists of equity in earnings of affiliates from Armand and ArmaKleen in 2021, 2020 and 2019.

(4)

2021 results include a $98.0 reduction in SG&A expenses to reduce the Flawless business acquisition liability, of which $83.2 was recorded to Consumer Domestic and $14.8 was recorded to Consumer International.

(5)

2020 results include a $94.0 reduction of SG&A expenses to reduce the Flawless business acquisition liability, of which $79.9 was recorded to Consumer Domestic and $14.1 was recorded to Consumer International.  During 2020, we sold our PERL WEISS toothpaste brand in Germany resulting in a reduction in SG&A expenses of $3.0 recorded in Consumer International.

(6)

2019 results include an SG&A charge associated with selling our consumer business in Brazil of $7.6 recorded in Consumer International and a $10.0 SG&A charge to adjust the Flawless business acquisition liability, of which $8.5 was recorded to Consumer Domestic and $1.5 was recorded to Consumer International.  These charges were partially offset by a $7.3 adjustment to the Passport business acquisition liability and a $1.5 adjustment to the Agro business acquisition liability, both of which reduced SG&A expenses in SPD.Product line revenues for external customers for the years ended December 31, 2021, 2020 and 2019 were as follows: [Table with ~6 rows, ~21 numbers, and 492 characters.] Household Products include deodorizing, cleaning and laundry products.  Personal Care Products include condoms, pregnancy kits, oral care products, skin care products, hair care products and gummy dietary supplements.

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

Consumer Domestic

2021 compared to 2020

Consumer Domestic net sales in 2021 were $3,941.9, an increase of $174.3 or 4.6% compared to net sales of $3,767.6 in 2020.  The components of the net sales change are the following: [Table with ~5 rows, ~6 numbers, and 196 characters.] (1)

Includes the TheraBreath and Zicam Acquisitions since the date of acquisition.The increase in net sales for 2021 reflects the impact of the TheraBreath and Zicam Acquisitions, higher net sales in ARM & HAMMER clumping cat litter, WATERPIK oral care products, VITAFUSION and L’IL CRITTERS gummy vitamins, BATISTE dry shampoo, ARM & HAMMER scent booster, and OXICLEAN powder.In recent years our TROJAN business, specifically the condom category, had not grown and competition has increased.  Social distancing requirements due to the COVID-19 pandemic had further negatively impacted the business.  As a result, the TROJAN business had experienced stagnant sales and profits resulting in a reduction in expected future cash flows which eroded a portion of the excess between the fair and carrying value of the tradename.  This indefinite-lived intangible asset may be susceptible to impairment risk and a continued decline in fair value could trigger a future impairment charge of the TROJAN tradename.  While management can and has implemented strategies to address the risk, including lowering our production costs, investing in new product ideas, and developing new creative advertising, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair value.  In 2021, TROJAN experienced a recovery in sales and profits as it is benefiting from an easing of COVID-19 social restrictions leading to an increase in sexual activity. We expect this trend will continue into next year with the continued adoption of vaccines, the reduction of social distancing restrictions and the benefit of management strategies to improve sales and profitability.Consumer Domestic income before income taxes for 2021 was $861.4, a $29.0 increase as compared to 2020.  The increase is due primarily to favorable price/mix of $135.6, a $31.0 benefit from higher sales volumes, lower marketing expenses of $18.6, lower SG&A expenses of $10.3 (including a $3.3 favorable year-over-year fair value adjustment to the Flawless business acquisition liability), and lower interest and other expenses of $5.8, mostly offset by unfavorable manufacturing and distribution expenses of $171.9.

Consumer International

2021 compared to 2020

Consumer International net sales in 2021 were $912.2, an increase of $84.0 or 10.1% as compared to 2020.  The components of the net sales change are the following: [Table with ~5 rows, ~5 numbers, and 210 characters.] Excluding the impact of foreign exchange rates, higher sales were driven primarily by FEMFRESH® feminine hygiene products, VITAFUSION and L’IL CRITTERS gummy vitamins, STERIMAR nasal spray, and NAIR depilatories in the GMG business. Consumer International income before income taxes was $127.3 in 2021, an increase of $22.3 compared to 2020 due to a $26.4 benefit from higher sales volumes, favorable foreign exchange rates of $8.8, lower marketing expenses of $1.9 and lower interest expense of $0.2, offset by unfavorable manufacturing and commodity costs of $11.4, higher SG&A costs of $2.4 (partially due to the prior year gain on the sale of PERL WEISS of $3.0), and unfavorable price/product mix of $1.2.

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

Specialty Products

2021 compared to 2020

SPD net sales were $336.0 for 2021, an increase of $36.0, or 12.0% compared to 2020.  The components of the net sales change are the following: [Table with ~4 rows, ~4 numbers, and 140 characters.] Net sales increased due to higher volumes across all categories, higher pricing for our dairy segment products and reduced competitive imports due to a constrained transportation market.SPD income before income taxes was $33.6 in 2021, an increase of $3.9 compared to 2020.  The increase in income before income taxes for 2021 is due primarily to favorable price/product mix of $22.4 and a $3.8 benefit from higher sales volumes, which were partially offset by unfavorable manufacturing costs of $17.6, higher SG&A costs of $4.0 primarily due to asset impairments in the Passport business of $11.3, and higher marketing expenses of $0.8.

Corporate

Corporate includes administrative costs of the production, planning and logistics functions which are allocated to the operating segments in SG&A expenses but are elements of cost of sales in our Consolidated Statements of Income.  Such amounts were $47.1, $59.8 and $48.2 for 2021, 2020 and 2019, respectively.  Also included in corporate are the equity in earnings of affiliates from Armand and ArmaKleen, totaling $9.4, $6.7 and $6.6 for the three years ended December 31, 2021, 2020 and 2019, respectively.

Liquidity and Capital Resources

On May 1, 2019, we amended the credit agreement (the “Credit Agreement”) that provides for our $1,000.0 unsecured revolving credit facility (the “Revolving Credit Facility”) to extend the term of the Revolving Credit Facility from March 29, 2023 to March 29, 2024.  We continue to have the ability to increase our borrowing up to an additional $600.0, subject to lender commitments and certain conditions as described in the Credit Agreement.  Borrowings under the Credit Agreement are available for general corporate purposes.  As of December 31, 2021, we had $240.6 in cash and cash equivalents, and approximately $746.0 available through the revolving facility under our Credit Agreement and our commercial paper program.  To preserve our liquidity, we invest cash primarily in government money market funds, prime money market funds, short-term commercial paper and short-term bank deposits.  On December 22, 2021, we entered into a $400.0 unsecured term loan facility with various banks.  The loan was fully drawn at closing. Unless prepaid, the loan is due on December 22, 2024.  The interest rate is LIBOR plus an applicable margin based on our credit rating, which can range from 60 basis points (“bps”) to 125 bps.  The proceeds of the loan were used to partially fund the TheraBreath Acquisition, with the remaining proceeds used for the repayment of commercial paper.Additionally, we financed the TheraBreath Acquisition with a portion of the proceeds from an underwritten public offering of $400.0 aggregate principal amount Senior Notes due 2031 (the “2031 Notes”).  These Notes bear interest at 2.3% and were issued in an underwritten transaction under an indenture with Deutsche Bank Trust Company Americas, as trustee.  Interest on the 2031 Notes is payable semi-annually, on each June 15 and December 15.  The 2031 Notes will mature on December 15, 2031, unless earlier retired or redeemed.We financed the Waterpik Acquisition with a portion of the proceeds from an underwritten public offering of $1,425.0 aggregate principal amount of Senior Notes completed on July 25, 2017, consisting of $300.0 aggregate principal amount of Floating Rate Senior Notes that were due in 2019 and have been fully repaid, $300.0 aggregate principal amount of 2.45% Senior Notes due 2022, $425.0 aggregate principal amount of 3.15% Senior Notes due 2027 and $400.0 aggregate principal amount of 3.95% Senior Notes due 2047 (collectively with the 2031 Notes, the “Senior Notes”).  The $300.0 Floating Rate Senior Notes, which matured and were repaid in full with cash on hand and commercial paper on January 25, 2019, bore interest at a rate, reset quarterly, equal to three-month LIBOR plus 0.15%.

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

On September 26, 2012, we issued $400.0 aggregate principal amount of 2.875% Senior Notes due 2022 (the “2022 Notes”).  The 2022 Notes were issued under the second supplemental indenture, dated September 26, 2012 (the “BNY Mellon Second Supplemental Indenture”) to the indenture dated December 15, 2010 (the “BNY Mellon Base Indenture”) between us and The Bank of New York Mellon Trust Company, N.A., as trustee.  These Notes will mature on October 1, 2022, unless earlier retired or redeemed pursuant to the terms of the BNY Mellon Second Supplemental Indenture.  In 2021, we repaid the $300.0 term loan due May 1, 2022 that was used to partially fund the Flawless acquisition in 2019, with proceeds from commercial paper borrowings and cash on hand.In 2015, we initiated a Supply Chain Finance program (“SCF Program”).  Under the SCF Program, qualifying suppliers may elect to sell their receivables from us for early payment. Participating suppliers negotiate their receivables sales arrangements directly with a third party. We are not party to those agreements and do not have an economic interest in the supplier’s decision to sell their receivables.  The SCF Program may allow suppliers more favorable terms than they could secure on their own.  The terms of our payment obligations are not impacted by a supplier’s participation in the SCF Program.   Our payment terms with suppliers are consistent between suppliers that elect to participate in the SCF Program and those that do not participate.  As a result, the program does not have an impact to our average days outstanding. All amounts outstanding to suppliers participating in the SCF Program are recorded within Accounts Payable in our Consolidated Balance Sheets, and the associated payments are included in operating activities within our Consolidated Statements of Cash Flows.The current economic environment presents risks that could have adverse consequences for our liquidity.  See the discussion of this and other risks under “Risk Factors” in Item 1A of this Annual Report.  Although there is uncertainty related to the impact of the COVID-19 pandemic on our future results, we believe our efficient business model and strong balance sheet position us to manage our business through this crisis. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.  We do not anticipate that current economic conditions will adversely affect our ability to comply with the financial covenant in the Credit Agreement because we currently are, and anticipate that we will continue to be, in compliance with the maximum leverage ratio requirement under the Credit Agreement.  In December 2020, we entered into an accelerated share repurchase (“ASR”) contract with a commercial bank to purchase Common Stock.  We paid $300.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to $270.0, or 3.1 million shares.  We used cash on hand and short-term borrowings to fund the initial purchase price.  Upon the completion of the ASR, which ended in February 2021, the bank delivered to us an additional 0.4 million shares.  The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period.  All 3.5 million shares were purchased under our evergreen program.  In August 2021, we executed an agreement to purchase up to $200.0 of our Common Stock through October 31, 2021.  We purchased 1.6 million shares for approximately $130.0 through October, inclusive of fees, all of which was purchased under the 2017 Share Repurchase Program. On October 28, 2021, the Board authorized a new share repurchase program under which we may purchase up to $1,000.0 in shares of Common Stock (the “2021 Share Repurchase Program”).  The 2021 Share Repurchase Program does not have an expiration and replaces our 2017 Share Repurchase Program.  All remaining dollars authorized for repurchase under the 2017 Share Repurchase Plan have been cancelled.  The 2021 Share Repurchase Program does not modify our evergreen share repurchase program, authorized by the Board on January 29, 2014, under which we may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under our incentive plans.   In December 2021, we executed open market purchases of 1.8 million shares for $170.3, inclusive of fees, of which $100.0 was purchased under the evergreen share repurchase program and $70.3 was purchased under the 2021 Share Repurchase Program.  In December 2021, we also entered into an ASR contract with a commercial bank to purchase Common Stock.  We paid $200.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to $180.0, or 1.8 million shares.  We used cash on hand and short-term borrowings to fund the initial purchase price.  Upon the completion of the ASR, which ended in February 2022, the bank delivered an additional 0.2 million shares to us.  The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period.  All 2.0 million shares were purchased under our 2021 Share Repurchase Program.  As a result of our recent stock repurchases, there remains $729.7 of share repurchase availability under the 2021 Share Repurchase Program as of December 31, 2021.On January 28, 2022, the Board declared a 4% increase in the regular quarterly dividend from $0.2525 to $0.2625 per share, equivalent to an annual dividend of $1.05 per share payable to stockholders of record as of February 15, 2022.  The increase raises the annual dividend payout from $248.0 to approximately $255.0.

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

We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to fund our share repurchase programs to the extent implemented by management, pay debt and interest as it comes due and pay dividends at the latest approved rate, and meet our capital expenditure program costs, which are expected to be approximately $216.0 in 2022 primarily for manufacturing capacity investments in laundry, litter and vitamins to support expected future sales growth.  Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets.

Cash Flow Analysis

[Table with ~3 rows, ~15 numbers, and 381 characters.]

2021 compared to 2020

Net Cash Provided by Operating Activities – Our primary source of liquidity is our cash flow provided by operating activities, which is dependent on the level of net income and changes in working capital.  Our net cash provided by operating activities in 2021 increased by $3.5 to $993.8 as compared to $990.3 in 2020 as higher cash earnings (net income adjusted for non-cash items) were mostly offset by higher working capital.  The increase in working capital is primarily related to lower obligations for incentive compensation and marketing.  We measure working capital effectiveness based on our cash conversion cycle.  The following table presents our cash conversion cycle information for the quarters ended December 31, 2021 and 2020: [Table with ~4 rows, ~13 numbers, and 402 characters.] Our cash conversion cycle (defined as the sum of DSO plus DIO less DPO) at December 31, 2021, which is calculated using a two period average method, decreased 4 days from the prior year due to an increase in DPO of 6 days due to payable term extensions partially offset by an increase in DIO of 2 days.  We continue to focus on reducing our working capital requirements.Net Cash Used in Investing Activities – Net cash used in investing activities during 2021 was $682.0, primarily reflecting $556.0 for the TheraBreath Acquisition and $118.8 for property, plant and equipment additions.  Net cash used in investing activities during 2020 was $608.1, primarily reflecting $512.7 for the Zicam Acquisition, $98.9 for property, plant and equipment additions, partially offset by cash proceeds of $7.0 from the sale of the PERL WEISS toothpaste brand in Germany.Net Cash Used in Financing Activities – Net cash used in financing activities during the twelve months of 2021 was $252.1, reflecting $500.0 of repurchases of our Common Stock, $247.5 of cash dividend payments and $3.9 of financing costs, partially offset by $400.7 of net debt borrowings, and $98.7 of proceeds from stock option exercises. Net cash used in financing activities during the twelve months of 2020 was $360.1, reflecting $300.0 of repurchases of our Common Stock, $237.3 of cash dividend payments, and $14.5 for the Agro business acquisition liability settlement, partially offset by $99.0 of short-term debt borrowings, net of repayments, and $93.0 of proceeds from stock option exercises.

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

Consolidated results

2021 compared to 2020

[Table with ~10 rows, ~32 numbers, and 838 characters.]

Net Sales

Net sales for the year ended December 31, 2021 were $5,190.1, an increase of $294.3, or 6.0% compared to 2020 net sales.  The components of the net sales increase are as follows: [Table with ~6 rows, ~7 numbers, and 279 characters.] (1)

On December 24, 2021, we acquired all of the outstanding equity of Dr. Harold Katz, LLC and HK-IP International, Inc., the owners of the THERABREATH brand of oral care products (the “TheraBreath Acquisition”).  On December 1, 2020, we acquired all of the outstanding equity of Consumer Health Holdco LLC, the owner of the ZICAM brand and cold remedy products business (the “Zicam Acquisition”).  The results of these acquisitions are included in our results since the date of acquisition.   The volume change reflects increased product sales in the Consumer International and SPD segments, partially offset by slightly decreased sales in the Consumer Domestic segment. Price/mix was favorable in the Consumer Domestic and SPD segments, but was partially offset by slightly unfavorable price/mix in the Consumer International segment.  Our gross profit for 2021 was $2,263.5, a $49.3 increase compared to 2020.  Gross margin was 43.6% in 2021 compared to 45.2% in 2020, a 160 basis points (“bps”) decrease.  The decrease is due to the impact of higher manufacturing costs including labor and commodities of 400 bps, higher transportation costs of 80 bps, and higher costs of 30 bps as a result of incremental tariffs, partially offset by favorable price/volume/mix of 200 bps, the impact of productivity programs of 130 bps and business acquisition benefits of 20 bps.

Operating Costs

Marketing expenses for 2021 were $577.7, a decrease of $13.5 compared to 2020.  We reduced marketing spending, mainly in household products, as supply shortages impacted our ability to meet customer demand.  Marketing expenses as a percentage of net sales decreased 100 bps to 11.1% in 2021 as compared to 2020 due to 70 bps of leverage on higher net sales and 30 bps on lower expenses.

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

SG&A expenses for 2021 were $606.7, an increase of $13.4 or 2.3% compared to 2020.  The increase is primarily due to higher expenses related to the Zicam Acquisition (including amortization), asset impairment charges of $11.3 associated with the Passport business acquired in 2018, and the prior year gain on the sale of PERL WEISS®, partially offset by lower incentive compensation and litigation costs. SG&A as a percentage of net sales decreased 40 bps to 11.7% in 2021 compared to 12.1% in 2020.  The decrease is due to 70 bps of leverage associated with higher sales offset by 30 bps on higher expenses.  The favorable adjustment to the fair value of the Flawless business acquisition liability, which is recognized as a reduction in expense, was $98.0 in 2021 compared to $94.0 in 2020.

Other Income and Expenses

Other expense increased nominally in 2021 as compared to 2020.Interest expense in 2021 was $54.5, a decrease of $6.5. The decrease is primarily due to lower interest rates.

Taxation

The 2021 U.S. federal effective income tax rate was 19.8% compared to 19.3% in 2020. The increase of 50 basis points was impacted by a favorable tax settlement in 2020.

Segment results for 2021, 2020 and 2019

We operate three reportable segments: Consumer Domestic, Consumer International and SPD.  These segments are determined based on differences in the nature of products and organizational and ownership structures.  We also have a Corporate segment. [Table with ~4 rows, ~0 numbers, and 172 characters.] The Corporate segment income consists of equity in earnings of affiliates.  As of December 31, 2021, we held 50% ownership interests in each of Armand and ArmaKleen, respectively.  Our equity in earnings of Armand and ArmaKleen, totaling $9.4, $6.7 and $6.6 for the three years ended December 31, 2021, 2020 and 2019, respectively, are included in the Corporate segment.

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

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, 2021, 2020 and 2019 were as follows: [Table with ~8 rows, ~39 numbers, and 823 characters.] (1)

Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $10.8, $11.7 and $10.5 for the years ended December 31, 2021, 2020 and 2019, respectively.

(2)

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

(3)

Corporate segment consists of equity in earnings of affiliates from Armand and ArmaKleen in 2021, 2020 and 2019.

(4)

2021 results include a $98.0 reduction in SG&A expenses to reduce the Flawless business acquisition liability, of which $83.2 was recorded to Consumer Domestic and $14.8 was recorded to Consumer International.

(5)

2020 results include a $94.0 reduction of SG&A expenses to reduce the Flawless business acquisition liability, of which $79.9 was recorded to Consumer Domestic and $14.1 was recorded to Consumer International.  During 2020, we sold our PERL WEISS toothpaste brand in Germany resulting in a reduction in SG&A expenses of $3.0 recorded in Consumer International.

(6)

2019 results include an SG&A charge associated with selling our consumer business in Brazil of $7.6 recorded in Consumer International and a $10.0 SG&A charge to adjust the Flawless business acquisition liability, of which $8.5 was recorded to Consumer Domestic and $1.5 was recorded to Consumer International.  These charges were partially offset by a $7.3 adjustment to the Passport business acquisition liability and a $1.5 adjustment to the Agro business acquisition liability, both of which reduced SG&A expenses in SPD.Product line revenues for external customers for the years ended December 31, 2021, 2020 and 2019 were as follows: [Table with ~6 rows, ~21 numbers, and 492 characters.] Household Products include deodorizing, cleaning and laundry products.  Personal Care Products include condoms, pregnancy kits, oral care products, skin care products, hair care products and gummy dietary supplements.

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

Consumer Domestic

2021 compared to 2020

Consumer Domestic net sales in 2021 were $3,941.9, an increase of $174.3 or 4.6% compared to net sales of $3,767.6 in 2020.  The components of the net sales change are the following: [Table with ~5 rows, ~6 numbers, and 196 characters.] (1)

Includes the TheraBreath and Zicam Acquisitions since the date of acquisition.The increase in net sales for 2021 reflects the impact of the TheraBreath and Zicam Acquisitions, higher net sales in ARM & HAMMER clumping cat litter, WATERPIK oral care products, VITAFUSION and L’IL CRITTERS gummy vitamins, BATISTE dry shampoo, ARM & HAMMER scent booster, and OXICLEAN powder.In recent years our TROJAN business, specifically the condom category, had not grown and competition has increased.  Social distancing requirements due to the COVID-19 pandemic had further negatively impacted the business.  As a result, the TROJAN business had experienced stagnant sales and profits resulting in a reduction in expected future cash flows which eroded a portion of the excess between the fair and carrying value of the tradename.  This indefinite-lived intangible asset may be susceptible to impairment risk and a continued decline in fair value could trigger a future impairment charge of the TROJAN tradename.  While management can and has implemented strategies to address the risk, including lowering our production costs, investing in new product ideas, and developing new creative advertising, significant changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair value.  In 2021, TROJAN experienced a recovery in sales and profits as it is benefiting from an easing of COVID-19 social restrictions leading to an increase in sexual activity. We expect this trend will continue into next year with the continued adoption of vaccines, the reduction of social distancing restrictions and the benefit of management strategies to improve sales and profitability.Consumer Domestic income before income taxes for 2021 was $861.4, a $29.0 increase as compared to 2020.  The increase is due primarily to favorable price/mix of $135.6, a $31.0 benefit from higher sales volumes, lower marketing expenses of $18.6, lower SG&A expenses of $10.3 (including a $3.3 favorable year-over-year fair value adjustment to the Flawless business acquisition liability), and lower interest and other expenses of $5.8, mostly offset by unfavorable manufacturing and distribution expenses of $171.9.

Consumer International

2021 compared to 2020

Consumer International net sales in 2021 were $912.2, an increase of $84.0 or 10.1% as compared to 2020.  The components of the net sales change are the following: [Table with ~5 rows, ~5 numbers, and 210 characters.] Excluding the impact of foreign exchange rates, higher sales were driven primarily by FEMFRESH® feminine hygiene products, VITAFUSION and L’IL CRITTERS gummy vitamins, STERIMAR nasal spray, and NAIR depilatories in the GMG business. Consumer International income before income taxes was $127.3 in 2021, an increase of $22.3 compared to 2020 due to a $26.4 benefit from higher sales volumes, favorable foreign exchange rates of $8.8, lower marketing expenses of $1.9 and lower interest expense of $0.2, offset by unfavorable manufacturing and commodity costs of $11.4, higher SG&A costs of $2.4 (partially due to the prior year gain on the sale of PERL WEISS of $3.0), and unfavorable price/product mix of $1.2.

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

Specialty Products

2021 compared to 2020

SPD net sales were $336.0 for 2021, an increase of $36.0, or 12.0% compared to 2020.  The components of the net sales change are the following: [Table with ~4 rows, ~4 numbers, and 140 characters.] Net sales increased due to higher volumes across all categories, higher pricing for our dairy segment products and reduced competitive imports due to a constrained transportation market.SPD income before income taxes was $33.6 in 2021, an increase of $3.9 compared to 2020.  The increase in income before income taxes for 2021 is due primarily to favorable price/product mix of $22.4 and a $3.8 benefit from higher sales volumes, which were partially offset by unfavorable manufacturing costs of $17.6, higher SG&A costs of $4.0 primarily due to asset impairments in the Passport business of $11.3, and higher marketing expenses of $0.8.

Corporate

Corporate includes administrative costs of the production, planning and logistics functions which are allocated to the operating segments in SG&A expenses but are elements of cost of sales in our Consolidated Statements of Income.  Such amounts were $47.1, $59.8 and $48.2 for 2021, 2020 and 2019, respectively.  Also included in corporate are the equity in earnings of affiliates from Armand and ArmaKleen, totaling $9.4, $6.7 and $6.6 for the three years ended December 31, 2021, 2020 and 2019, respectively.

Liquidity and Capital Resources

On May 1, 2019, we amended the credit agreement (the “Credit Agreement”) that provides for our $1,000.0 unsecured revolving credit facility (the “Revolving Credit Facility”) to extend the term of the Revolving Credit Facility from March 29, 2023 to March 29, 2024.  We continue to have the ability to increase our borrowing up to an additional $600.0, subject to lender commitments and certain conditions as described in the Credit Agreement.  Borrowings under the Credit Agreement are available for general corporate purposes.  As of December 31, 2021, we had $240.6 in cash and cash equivalents, and approximately $746.0 available through the revolving facility under our Credit Agreement and our commercial paper program.  To preserve our liquidity, we invest cash primarily in government money market funds, prime money market funds, short-term commercial paper and short-term bank deposits.  On December 22, 2021, we entered into a $400.0 unsecured term loan facility with various banks.  The loan was fully drawn at closing. Unless prepaid, the loan is due on December 22, 2024.  The interest rate is LIBOR plus an applicable margin based on our credit rating, which can range from 60 basis points (“bps”) to 125 bps.  The proceeds of the loan were used to partially fund the TheraBreath Acquisition, with the remaining proceeds used for the repayment of commercial paper.Additionally, we financed the TheraBreath Acquisition with a portion of the proceeds from an underwritten public offering of $400.0 aggregate principal amount Senior Notes due 2031 (the “2031 Notes”).  These Notes bear interest at 2.3% and were issued in an underwritten transaction under an indenture with Deutsche Bank Trust Company Americas, as trustee.  Interest on the 2031 Notes is payable semi-annually, on each June 15 and December 15.  The 2031 Notes will mature on December 15, 2031, unless earlier retired or redeemed.We financed the Waterpik Acquisition with a portion of the proceeds from an underwritten public offering of $1,425.0 aggregate principal amount of Senior Notes completed on July 25, 2017, consisting of $300.0 aggregate principal amount of Floating Rate Senior Notes that were due in 2019 and have been fully repaid, $300.0 aggregate principal amount of 2.45% Senior Notes due 2022, $425.0 aggregate principal amount of 3.15% Senior Notes due 2027 and $400.0 aggregate principal amount of 3.95% Senior Notes due 2047 (collectively with the 2031 Notes, the “Senior Notes”).  The $300.0 Floating Rate Senior Notes, which matured and were repaid in full with cash on hand and commercial paper on January 25, 2019, bore interest at a rate, reset quarterly, equal to three-month LIBOR plus 0.15%.

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

On September 26, 2012, we issued $400.0 aggregate principal amount of 2.875% Senior Notes due 2022 (the “2022 Notes”).  The 2022 Notes were issued under the second supplemental indenture, dated September 26, 2012 (the “BNY Mellon Second Supplemental Indenture”) to the indenture dated December 15, 2010 (the “BNY Mellon Base Indenture”) between us and The Bank of New York Mellon Trust Company, N.A., as trustee.  These Notes will mature on October 1, 2022, unless earlier retired or redeemed pursuant to the terms of the BNY Mellon Second Supplemental Indenture.  In 2021, we repaid the $300.0 term loan due May 1, 2022 that was used to partially fund the Flawless acquisition in 2019, with proceeds from commercial paper borrowings and cash on hand.In 2015, we initiated a Supply Chain Finance program (“SCF Program”).  Under the SCF Program, qualifying suppliers may elect to sell their receivables from us for early payment. Participating suppliers negotiate their receivables sales arrangements directly with a third party. We are not party to those agreements and do not have an economic interest in the supplier’s decision to sell their receivables.  The SCF Program may allow suppliers more favorable terms than they could secure on their own.  The terms of our payment obligations are not impacted by a supplier’s participation in the SCF Program.   Our payment terms with suppliers are consistent between suppliers that elect to participate in the SCF Program and those that do not participate.  As a result, the program does not have an impact to our average days outstanding. All amounts outstanding to suppliers participating in the SCF Program are recorded within Accounts Payable in our Consolidated Balance Sheets, and the associated payments are included in operating activities within our Consolidated Statements of Cash Flows.The current economic environment presents risks that could have adverse consequences for our liquidity.  See the discussion of this and other risks under “Risk Factors” in Item 1A of this Annual Report.  Although there is uncertainty related to the impact of the COVID-19 pandemic on our future results, we believe our efficient business model and strong balance sheet position us to manage our business through this crisis. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.  We do not anticipate that current economic conditions will adversely affect our ability to comply with the financial covenant in the Credit Agreement because we currently are, and anticipate that we will continue to be, in compliance with the maximum leverage ratio requirement under the Credit Agreement.  In December 2020, we entered into an accelerated share repurchase (“ASR”) contract with a commercial bank to purchase Common Stock.  We paid $300.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to $270.0, or 3.1 million shares.  We used cash on hand and short-term borrowings to fund the initial purchase price.  Upon the completion of the ASR, which ended in February 2021, the bank delivered to us an additional 0.4 million shares.  The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period.  All 3.5 million shares were purchased under our evergreen program.  In August 2021, we executed an agreement to purchase up to $200.0 of our Common Stock through October 31, 2021.  We purchased 1.6 million shares for approximately $130.0 through October, inclusive of fees, all of which was purchased under the 2017 Share Repurchase Program. On October 28, 2021, the Board authorized a new share repurchase program under which we may purchase up to $1,000.0 in shares of Common Stock (the “2021 Share Repurchase Program”).  The 2021 Share Repurchase Program does not have an expiration and replaces our 2017 Share Repurchase Program.  All remaining dollars authorized for repurchase under the 2017 Share Repurchase Plan have been cancelled.  The 2021 Share Repurchase Program does not modify our evergreen share repurchase program, authorized by the Board on January 29, 2014, under which we may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under our incentive plans.   In December 2021, we executed open market purchases of 1.8 million shares for $170.3, inclusive of fees, of which $100.0 was purchased under the evergreen share repurchase program and $70.3 was purchased under the 2021 Share Repurchase Program.  In December 2021, we also entered into an ASR contract with a commercial bank to purchase Common Stock.  We paid $200.0 to the bank, inclusive of fees, and received an initial delivery of shares equal to $180.0, or 1.8 million shares.  We used cash on hand and short-term borrowings to fund the initial purchase price.  Upon the completion of the ASR, which ended in February 2022, the bank delivered an additional 0.2 million shares to us.  The final shares delivered to us were determined by the average price per share paid by the bank during the purchase period.  All 2.0 million shares were purchased under our 2021 Share Repurchase Program.  As a result of our recent stock repurchases, there remains $729.7 of share repurchase availability under the 2021 Share Repurchase Program as of December 31, 2021.On January 28, 2022, the Board declared a 4% increase in the regular quarterly dividend from $0.2525 to $0.2625 per share, equivalent to an annual dividend of $1.05 per share payable to stockholders of record as of February 15, 2022.  The increase raises the annual dividend payout from $248.0 to approximately $255.0.

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

We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to fund our share repurchase programs to the extent implemented by management, pay debt and interest as it comes due and pay dividends at the latest approved rate, and meet our capital expenditure program costs, which are expected to be approximately $216.0 in 2022 primarily for manufacturing capacity investments in laundry, litter and vitamins to support expected future sales growth.  Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets.

Cash Flow Analysis

[Table with ~3 rows, ~15 numbers, and 381 characters.]

2021 compared to 2020

Net Cash Provided by Operating Activities – Our primary source of liquidity is our cash flow provided by operating activities, which is dependent on the level of net income and changes in working capital.  Our net cash provided by operating activities in 2021 increased by $3.5 to $993.8 as compared to $990.3 in 2020 as higher cash earnings (net income adjusted for non-cash items) were mostly offset by higher working capital.  The increase in working capital is primarily related to lower obligations for incentive compensation and marketing.  We measure working capital effectiveness based on our cash conversion cycle.  The following table presents our cash conversion cycle information for the quarters ended December 31, 2021 and 2020: [Table with ~4 rows, ~13 numbers, and 402 characters.] Our cash conversion cycle (defined as the sum of DSO plus DIO less DPO) at December 31, 2021, which is calculated using a two period average method, decreased 4 days from the prior year due to an increase in DPO of 6 days due to payable term extensions partially offset by an increase in DIO of 2 days.  We continue to focus on reducing our working capital requirements.Net Cash Used in Investing Activities – Net cash used in investing activities during 2021 was $682.0, primarily reflecting $556.0 for the TheraBreath Acquisition and $118.8 for property, plant and equipment additions.  Net cash used in investing activities during 2020 was $608.1, primarily reflecting $512.7 for the Zicam Acquisition, $98.9 for property, plant and equipment additions, partially offset by cash proceeds of $7.0 from the sale of the PERL WEISS toothpaste brand in Germany.Net Cash Used in Financing Activities – Net cash used in financing activities during the twelve months of 2021 was $252.1, reflecting $500.0 of repurchases of our Common Stock, $247.5 of cash dividend payments and $3.9 of financing costs, partially offset by $400.7 of net debt borrowings, and $98.7 of proceeds from stock option exercises. Net cash used in financing activities during the twelve months of 2020 was $360.1, reflecting $300.0 of repurchases of our Common Stock, $237.3 of cash dividend payments, and $14.5 for the Agro business acquisition liability settlement, partially offset by $99.0 of short-term debt borrowings, net of repayments, and $93.0 of proceeds from stock option exercises.

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

OTHER ITEMS

Market risk

Concentration of Risk

A group of three customers accounted for approximately 37% of consolidated net sales in 2021 and 36% in 2020 and 2019, respectively, of which a single customer, Walmart, accounted for approximately 24%, 23% and 24% in 2021, 2020 and 2019, respectively.

Interest Rate Risk

We had outstanding total debt at December 31, 2021, of $2,562.9, net of debt issuance costs, of which approximately 75% has a fixed weighted average interest rate of 3.0% and the remaining 25% was constituted of commercial paper issued by us that currently has a weighted average interest rate of approximately 0.30% and the term loan due 2024 with a current rate of approximately 0.80%  In 2019, we entered into interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark LIBOR interest rate associated with anticipated issuances of debt.  The notional amount of the interest rate swap locks is $300.0. These interest rate swap lock agreements have been designated as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and are accounted for as fair value hedges.  The fair value of the interest rate swap lock agreements is $41.6 and is reflected in the Consolidated Balance Sheet included in this Annual Report within Accounts payable and accrued expenses as it will be settled in 2022.

Other Market Risks

We are also subject to market risks relating to our diesel and other commodity costs, fluctuations in foreign currency exchange rates, and changes in the market price of the Common Stock.  Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report for a discussion of these market risks and the derivatives used to manage the risks associated with changing diesel fuel and other commodity prices, foreign exchange rates and the price of our Common Stock.

Market risk

Concentration of Risk

A group of three customers accounted for approximately 37% of consolidated net sales in 2021 and 36% in 2020 and 2019, respectively, of which a single customer, Walmart, accounted for approximately 24%, 23% and 24% in 2021, 2020 and 2019, respectively.

Interest Rate Risk

We had outstanding total debt at December 31, 2021, of $2,562.9, net of debt issuance costs, of which approximately 75% has a fixed weighted average interest rate of 3.0% and the remaining 25% was constituted of commercial paper issued by us that currently has a weighted average interest rate of approximately 0.30% and the term loan due 2024 with a current rate of approximately 0.80%  In 2019, we entered into interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark LIBOR interest rate associated with anticipated issuances of debt.  The notional amount of the interest rate swap locks is $300.0. These interest rate swap lock agreements have been designated as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and are accounted for as fair value hedges.  The fair value of the interest rate swap lock agreements is $41.6 and is reflected in the Consolidated Balance Sheet included in this Annual Report within Accounts payable and accrued expenses as it will be settled in 2022.

Other Market Risks

We are also subject to market risks relating to our diesel and other commodity costs, fluctuations in foreign currency exchange rates, and changes in the market price of the Common Stock.  Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report for a discussion of these market risks and the derivatives used to manage the risks associated with changing diesel fuel and other commodity prices, foreign exchange rates and the price of our Common Stock.