Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Developments

Supply Chain, Inflation, Labor, Consumer Demand and Competition

Significant broad-based cost inflation and higher interest rates continue to affect input costs and consumer demand for our discretionary products. To attempt to offset some of these cost pressures, we have enacted, and continue to evaluate, price increases in certain categories. While conditions are improving and we expect pricing and productivity to offset inflation in the near term, we expect some raw material and labor shortages and input cost inflation to continue.

Inflation and recessionary concerns are driving a decline in consumer spending for our most discretionary brands, Waterpik and Flawless, as consumers reduce spending in these categories and shift to lower cost alternatives. Most notably, a growing number of water flosser consumers have switched to more value-branded products. To address these demand shifts, we are taking steps to better manage production schedules and inventory levels for those products along with increasing promotional activities and marketing spend, as well as continuing efforts to develop lower cost water flosser alternatives. Our portfolio being comprised of 40% value products and our low exposure to private label should help us mitigate against a potential recessionary environment.

In our vitamin business, we have experienced residual impacts from previous vitamin-specific supply chain challenges that, in some cases, have resulted in reduced shelf space at certain retailers.

In addition, our Specialty Products business has been negatively impacted by the entrance of new foreign competition in the United States dairy market. We expect that low-priced imports will continue to enter the market.

For additional discussion of how we are addressing decreased consumer demand for discretionary brands, as well as lower growth and increased competition in the vitamin category, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K.

Looking forward, the impact that these challenges will continue to have on our operational and financial performance will depend on future developments, including inflationary impacts, retail customers' acceptance of all or a portion of any price increases, the spread and severity of new COVID-19 variants, and the long-term impact of vaccines. Additionally, we may be impacted by our ability to recruit and retain a workforce and engage third-parties to manufacture and distribute our products, as well as any future government actions affecting employers and employees, consumers and the economy in general. The impact of any of these potential future developments are uncertain and difficult to predict considering the rapidly evolving landscape.

We are monitoring the impact of both inflation and recessionary indicators including the effect of corresponding government actions, such as raising interest rates to counteract inflation, that may negatively impact consumer spending, 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 be transitory and that our value focused portfolio positions us well in inflationary and slowing economic environments, it is impossible to predict their impact.

Results of Operations

Consolidated results

	Three Months Ended				Change vs.		Three Months Ended
	June 30, 2023				Prior Year		June 30, 2022
Net Sales	$	1,454.2			9.7%		$	1,325.1
Gross Profit	$	638.9			17.2%		$	545.3
Gross Margin		43.9	%		270 basis points			41.2	%
Marketing Expenses	$	132.2			28.5%		$	102.9
Percent of Net Sales		9.1	%		130 basis points			7.8	%
Selling, General & Administrative Expenses	$	213.1			17.9%		$	180.8
Percent of Net Sales		14.6	%		100 basis points			13.6	%
Income from Operations	$	293.6			12.2%		$	261.6
Operating Margin		20.2	%		40 basis points			19.8	%
Net income per share - Diluted	$	0.89			17.1%		$	0.76
	Six Months Ended				Change vs.		Six Months Ended
	June 30, 2023				Prior Year		June 30, 2022
Net Sales	$	2,884.0			10.0%		$	2,622.3
Gross Profit	$	1,260.9			14.9%		$	1,097.8
Gross Margin		43.7	%		180 basis points			41.9	%
Marketing Expenses	$	254.5			24.3%		$	204.8
Percent of Net Sales		8.8	%		100 basis points			7.8	%
Selling, General & Administrative Expenses	$	420.9			20.0%		$	350.7
Percent of Net Sales		14.6	%		120 basis points			13.4	%
Income from Operations	$	585.5			8.0%		$	542.3
Operating Margin		20.3	%		-40 basis points			20.7	%
Net income per share - Diluted	$	1.72			8.2%		$	1.59

Diluted Net Income per share was $0.89 in the second quarter of 2023 as compared to $0.76 in the second quarter of 2022. Diluted Net Income per share was $1.72 in the first six months of 2023 as compared to $1.59 in the same period in 2022.

Net Sales

Net sales for the quarter ended June 30, 2023 were $1,454.2, an increase of $129.1 or 9.7% as compared to the same period in 2022. Net sales for the six months ended June 30, 2023 were $2,884.0, an increase of $261.7 or 10.0% over the comparable six month period of 2022. The components of the net sales increase are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Net Sales - Consolidated	2023				2023
Product volumes sold		(0.4	%)			(0.2	%)
Pricing/Product mix		5.8	%			5.8	%
Foreign exchange rate fluctuations		(0.2	%)			(0.4	%)
Acquired product lines (1)		4.5	%			4.8	%
Net Sales increase		9.7	%			10.0	%

(1)

On October 13, 2022, we completed the Hero Acquisition. Hero is included in our results since the date of acquisition.

For both the three and six months ended June 30, 2023, the volume change reflects increased product unit sales in the Consumer International segment, offset by decreased product unit sales in the Consumer Domestic and the SPD segments. For both the three and six months ended June 30, 2023, price/mix was favorable in the Consumer Domestic and Consumer International segments partially offset by the SPD segment.

Gross Profit / Gross Margin

Our gross profit was $638.9 for the three months ended June 30, 2023, a $93.6 increase as compared to the same period in 2022. Gross margin increased 270 basis points (“bps”) in the second quarter of 2023 compared to the same period in 2022, due to favorable price/mix/volume of 280 bps, the impact of productivity programs of 160 bps, business acquisition mix benefits of 120 bps, lower transportation costs of 110 bps, and favorable foreign exchange of 10 bps, offset by the impact of higher manufacturing costs, including labor, of 310 bps, and higher commodities of 100 bps. Gross profit was $1,260.9 for the six months ended June 30, 2023, a $163.1 increase compared to the same period in 2022. Gross margin increased 180 bps in the first six months of 2023 compared to the same period in 2022, due to favorable price/mix/volume of 210 bps, the impact of productivity programs of 160 bps, business acquisition mix benefits of 120 bps, lower transportation costs of 90 bps, and favorable foreign exchange of 10 bps, offset by the impact of higher manufacturing costs, including labor of 330 bps, and higher commodities of 80 bps.

Operating Expenses

Marketing expenses for the three months ended June 30, 2023 were $132.2, an increase of $29.3 or 28.5% as compared to the same period in 2022. Marketing expenses as a percentage of net sales in the second quarter of 2023 increased by 130 bps to 9.1% as compared to 7.8% in the same period in 2022 due to 200 bps on higher expense, as we increased marketing spend as fill rates improved, offset by 70 bps of leverage on higher net sales. Marketing expenses for the six months ended June 30, 2023 were $254.5, an increase of $49.7 or 24.3% as compared to the same period in 2022. Marketing expenses as a percentage of net sales for the first six months of 2023 increased by 100 bps to 8.8% as compared to 7.8% in the same period in 2022 due to 170 bps on higher expense, as we increased marketing spend as fill rates improved, offset by 70 bps of leverage on higher net sales.

SG&A expenses were $213.1 in the second quarter of 2023, an increase of $32.3 or 17.9% as compared to the same period in 2022. SG&A as a percentage of net sales increased 100 bps to 14.6% in the second quarter of 2023 as compared to 13.6% in the same period in 2022. The increase is due to 220 bps on higher expenses, primarily due to the HERO acquisition, higher incentive compensation costs as well as new product and technology investments, offset by 120 bps of leverage associated with higher sales. SG&A expenses for the first six months of 2023 were $420.9, an increase of $70.2 or 20.0% as compared to the same period in 2022. SG&A as a percentage of net sales increased 120 bps to 14.6% in the first six months of 2023 compared to 13.4% in 2022 due to 240 bps on higher expenses, primarily due to the HERO acquisition, higher incentive compensation costs as well as new product and technology investments, offset by 120 bps of leverage associated with higher sales.

Other (income) expense, net was nominal for the three and six months ended June 30, 2023 and 2022.

Interest expense for the three and six months ended June 30, 2023 increased $8.6 and $20.8 to $27.9 and $56.7, respectively, as compared to the same periods in 2022, primarily due to higher average interest rates on outstanding debt.

Income Taxes

The effective tax rate for the three months ended June 30, 2023 was 17.9%, compared to 24.1% in the same period in 2022.

The effective tax rate for the six months ended June 30, 2023 was 21.1%, compared to 23.6% in the same period in 2022.

The decrease in the tax rate for both periods is primarily due to the tax benefit on higher stock option exercises.

Segment results

We operate three reportable segments: Consumer Domestic, Consumer International and SPD. These segments are determined based on differences in the nature of products and organizational structure. We also have a Corporate segment.

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

The Corporate segment income consists of equity in earnings of affiliates. As of June 30, 2023, we held 50% ownership interests in each of Armand and ArmaKleen, respectively. Our equity in earnings of Armand and ArmaKleen, totaling $2.0 and $3.9 for the three months ended June 30, 2023 and 2022, respectively, and $6.4 and $6.3 for the six months ended June 30, 2023 and 2022, respectively, are included in the Corporate segment. Certain subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results set forth below.

Segment net sales and income before income taxes for the three and six months ended June 30, 2023 and June 30, 2022 are as follows:

	Consumer				Consumer
	Domestic				International				SPD				Corporate**(3)**				Total
Net Sales**(1)**
Second Quarter 2023	$	1,128.2			$	241.9			$	84.1			$	0.0			$	1,454.2
Second Quarter 2022		1,004.7				230.5				89.9				0.0				1,325.1
First Six Months of 2023	$	2,245.1			$	472.5			$	166.4			$	0.0			$	2,884.0
First Six Months of 2022		1,999.8				445.1				177.4				0.0				2,622.3
Income before Income Taxes**(2)**
Second Quarter 2023	$	230.7			$	27.5			$	9.2			$	2.0			$	269.4
Second Quarter 2022		201.7				28.5				12.4				3.9				246.5
First Six Months of 2023	$	459.4			$	56.4			$	16.0			$	6.4			$	538.2
First Six Months of 2022		424.4				58.1				23.9				6.3				512.7

(1)

Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $3.4 and $3.8 for the three months ended June 30, 2023 and June 30, 2022, respectively, and were $7.0 and $8.6 for the six months ended June 30, 2023 and June 30, 2022, respectively.

(2)

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

(3)

Corporate segment consists of equity in earnings of affiliates from Armand and ArmaKleen for the three and six months ended June 30, 2023 and June 30, 2022.

Product line revenues from external customers are as follows:

	Three Months Ended								Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2023				2022				2023				2022
Household Products	$	619.2			$	572.8			$	1,220.8			$	1,093.3
Personal Care Products		509.0				431.9				1,024.3				906.5
Total Consumer Domestic		1,128.2				1,004.7				2,245.1				1,999.8
Total Consumer International		241.9				230.5				472.5				445.1
Total SPD		84.1				89.9				166.4				177.4
Total Consolidated Net Sales	$	1,454.2			$	1,325.1			$	2,884.0			$	2,622.3

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

Consumer Domestic

Consumer Domestic net sales in the second quarter of 2023 were $1,128.2, an increase of $123.5 or 12.3% as compared to the same period in 2022. Consumer Domestic net sales for the six months ended June 30, 2023 were $2,245.1, an increase of $245.3 or 12.3% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Net Sales - Consumer Domestic	2023				2023
Product volumes sold		(0.2	%)			(0.6	%)
Pricing/Product mix		6.5	%			6.5	%
Acquired product lines (1)		6.0	%			6.4	%
Net Sales increase		12.3	%			12.3	%

(1)

Hero is included in our results since the date of acquisition.

The increase in net sales for the three months ended June 30, 2023, reflects the impact of the HERO acquisition, and the impact of higher sales of THERABREATH® mouth wash, ARM & HAMMER® Cat Litter, ARM & HAMMER® Liquid Detergent, and ARM & HAMMER® unit dose laundry detergent partially offset by declines in FINISHING TOUCH FLAWLESS® Hair Removal Products, WATERPIK® Shower Heads and FIRST RESPONSE®. The increase in net sales for the six-month period ending June 30, 2023, reflects the impact of the HERO acquisition, and the impact of higher sales of THERABREATH® mouth wash, ARM & HAMMER® Liquid Detergent, ARM & HAMMER® Cat Litter, and BATISTE® Dry Shampoo partially offset by declines in WATERPIK® Shower Heads, VITAFUSION® and L’IL CRITTERS® gummy vitamins, and FINISHING TOUCH FLAWLESS® Hair Removal Products.

Consumer Domestic income before income taxes for the second quarter of 2023 was $230.7, a $29.0 increase as compared to the second quarter of 2022. The increase is due primarily to favorable price/mix of $66.6 and the gross margin benefit of higher sales volumes related to the HERO acquisition of $34.6, offset by higher marketing expenses of $30.5, higher SG&A expenses of $30.2, higher interest and other expenses of $6.9 and higher manufacturing and distribution expenses of $4.6. For the six-month period ended June 30, 2023, income before income taxes was $459.4, a $35.0 increase as compared to the first six months of 2022. The increase is due primarily to favorable price/mix of $122.3 and the gross margin benefit of higher sales volumes related to the HERO acquisition of $61.4, offset by higher SG&A expenses of $66.2, higher marketing expenses of $49.7, higher interest and other expenses of $16.7 and higher manufacturing and distribution expenses of $16.2.

Consumer International

Consumer International net sales were $241.9 in the second quarter of 2023, an increase of $11.4 or 4.9% as compared to the same period in 2022. Consumer International net sales in the first six months of 2023 were $472.5, an increase of $27.4 or 6.2% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Net Sales - Consumer International	2023				2023
Product volumes sold		0.6	%			3.6	%
Pricing/Product mix		5.5	%			5.3	%
Foreign exchange rate fluctuations		(1.2	%)			(2.7	%)
Net Sales increase		4.9	%			6.2	%

Excluding the impact of foreign exchange rates, sales growth in the second quarter ended June 30, 2023 is driven by WATERPIK, THERABREATH, and BATISTE in GMG, BATISTE and STERIMAR in Europe, BATISTE and OXICLEAN in Canada, and STERIMAR, A&H DENTAL CARE, and BAKING SODA in Mexico. The increase in net sales for the six-month period ending June 30,2023, is driven by BATISTE, THERABREATH, FEMFRESH, and OXICLEAN in GMG, BATISTE, GRAVOL, THERABREATH, and OXICLEAN in Canada, BATISTE and STERIMAR in Europe, and STERIMAR and A&H Dental CARE in Mexico.

Consumer International income before income taxes was $27.5 in the second quarter of 2023, a $1.0 decrease as compared to the second quarter of 2022. Higher manufacturing and commodity costs of $9.8, higher SG&A expenses of $4.2, higher interest and other expenses of $0.5 and unfavorable foreign exchange rates of $0.1, were offset by a favorable price/mix of $12.2, the impact of higher sales volumes of $0.7 and lower marketing expenses of $0.6. For the first six months of 2023, income before income taxes was $56.4, an $1.7 decrease as compared to the same period in 2022. Higher manufacturing and commodity costs of $20.9, higher SG&A expenses of $6.5, unfavorable foreign exchange rates of $1.7, higher interest and other expenses of $1.2 and higher marketing expenses of $0.1, were offset by a favorable price/mix of $21.2 and the impact of higher sales volumes of $7.5.

Specialty Products (“SPD”)

SPD net sales were $84.1 in the second quarter of 2023, a decrease of $5.8 or 6.5% as compared to the same period in 2022. SPD net sales were $166.4 for the first six months of 2023, a decrease of $11.0, or 6.2% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Net Sales - SPD	2023				2023
Product volumes sold		(4.2	%)			(5.8	%)
Pricing/Product mix		(2.3	%)			(0.4	%)
Net Sales decrease		(6.5	%)			(6.2	%)

Net sales decreased in the three and six months ended June 30, 2023 primarily due to competitive imports within our domestic dairy business.

SPD income before income taxes was $9.2 in the second quarter of 2023, a decrease of $3.2 as compared to the same period in 2022 due to unfavorable price/product mix of $2.1, higher SG&A expenses and other expenses of $2.1, and lower volumes of $1.1, partially offset by favorable manufacturing costs of $1.4, and lower marketing costs of $0.6. SPD income before income taxes was $16.0 in the first six months of 2023, a decrease of $7.9 as compared to the same period in 2022 due primarily to higher SG&A and other costs of $4.7, lower volumes of $3.0, unfavorable price/mix of $0.7, partially offset by favorable manufacturing costs of $0.5.

Corporate

The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the three and six months of 2023 and 2022. The Corporate segment income before income taxes was $2.0 in the second quarter of 2023, as compared to $3.9 in the same period in 2022. The Corporate segment income before income taxes was $6.4 for the first six months of 2023, as compared to $6.3 in the same period in 2022.

Liquidity and Capital Resources

On June 16, 2022, we entered into a credit agreement (the “Credit Agreement”) that provides for our $1,500.0 unsecured revolving credit facility (the “Revolving Credit Facility”) that matures on June 16, 2027, unless extended. The Credit Agreement replaced our prior credit agreement that was entered into on March 29, 2018 which included a $1,000.0 unsecured revolving credit facility maturing on March 29, 2024. We have the ability to increase our borrowing up to an additional $750.0, subject to lender commitments and certain conditions as described in the Credit Agreement. Borrowings under the Credit Agreement are available for general corporate purposes and are used to support our $1,500.0 commercial paper program.

As of June 30, 2023, we had $396.9 in cash and cash equivalents, and approximately $1,495.0 available through the Revolving Credit Facility and our commercial paper program. To preserve our liquidity, we invest cash primarily in government money market funds, prime money market funds, short-term commercial paper and short-term bank deposits.

In the first quarter of 2023, we repaid $200.0 of our $400.0 Term Loan due December 22, 2024 with cash on hand and commercial paper borrowings.

The current economic environment presents risks that could have adverse consequences for our liquidity. See “Unfavorable economic conditions could adversely affect demand for our products” under “Risk Factors” in Item 1A of our Form 10-K. 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 requirements under the Credit Agreement.

On October 28, 2021, the Board authorized a share repurchase program, under which we may repurchase 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 replaced the 2017 Share Repurchase Program. The 2021 Share Repurchase Program did 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 its incentive plans.

As of June 30, 2023, there remains $729.7 of share repurchase availability under the 2021 Share Repurchase Program.

On February 1, 2023, the Board declared a 4% increase in the regular quarterly dividend from $0.2625 to $0.2725 per share, equivalent to an annual dividend of $1.09 per share payable to stockholders of record as of February 15, 2023. The increase raises the annual dividend payout from $255.0 to approximately $265.0.

We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to fund our share repurchase programs, pay debt and interest as it comes due, fund dividends, and meet our capital expenditure program costs. Capital expenditures in 2023 are expected to be approximately $250.0 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

	Six Months Ended
	June 30,				June 30,
	2023				2022
Net cash provided by operating activities	$	509.2			$	310.4
Net cash used in investing activities	$	(69.2	)		$	(39.8	)
Net cash used in financing activities	$	(315.4	)		$	132.2

Net Cash Provided by Operating Activities – Our primary source of liquidity is the cash flow provided by operating activities, which is dependent on net income and changes in working capital. Our net cash provided by operating activities in the six months ended June 30, 2023 increased by $198.8 to $509.2 as compared to $310.4 in the same period in 2022 due to an improvement in working capital and an increase in cash earnings (net income adjusted for non-cash items) including the impact of recent acquisitions. The improvement in working capital is primarily related to lower investment in inventory for our discretionary brands. We measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters ended June 30, 2023 and 2022:

	As of
	June 30, 2023				June 30, 2022				Change
Days of sales outstanding in accounts receivable ("DSO")		28				27				1
Days of inventory outstanding ("DIO")		73				73			0
Days of accounts payable outstanding ("DPO")		73				76				3
Cash conversion cycle		28				24				4

Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two-period average method, increased four days from the prior year. The decrease in DPO is a result of the timing of inventory purchase for most of our brands and a reduction in inventory purchases related to our discretionary brands. We continue to focus on reducing our working capital requirements.

Net Cash Used in Investing Activities – Net cash used in investing activities during the first six months of 2023 was $69.2, primarily reflecting $63.2 for property, plant and equipment additions. Net cash used in investing activities during the first six months of 2022 was $39.8, primarily reflecting $38.8 for property, plant and equipment additions.

Net Cash Used in Financing Activities – Net cash used in financing activities during the first six months of 2023 was $315.4 reflecting $270.6 of net debt payments and $133.0 of cash dividend payments, partially offset by $88.3 of proceeds from stock option exercises. Net cash provided by financing activities during the first six months of 2022 was $132.2 reflecting $250.3 of net debt borrowings, and $16.9 of proceeds from stock option exercises, less $127.4 of cash dividend payments and $7.6 of deferred financing costs.