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

Recent Developments

We continue to monitor 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, especially for our discretionary brands, and how these factors will potentially influence future cash flows for the short and long term.

Inflation and recessionary concerns are continuing to drive 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.

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.

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, rising interest rates, recessionary concerns, 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. 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.

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.

Results of Operations

Consolidated results

	Three Months Ended				Change vs.		Three Months Ended
	September 30, 2023				Prior Year		September 30, 2022
Net Sales	$	1,455.9			10.5%		$	1,317.3
Gross Profit	$	646.3			17.6%		$	549.7
Gross Margin		44.4	%		270 basis points			41.7	%
Marketing Expenses	$	167.8			19.3%		$	140.7
Percent of Net Sales		11.5	%		80 basis points			10.7	%
Selling, General & Administrative Expenses	$	222.7			43.6%		$	155.1
Percent of Net Sales		15.3	%		360 basis points			11.7	%
Income from Operations	$	255.8			0.7%		$	253.9
Operating Margin		17.6	%		-170 basis points			19.3	%
Net income per share - Diluted	$	0.71			-6.6%		$	0.76
	Nine Months Ended				Change vs.		Nine Months Ended
	September 30, 2023				Prior Year		September 30, 2022
Net Sales	$	4,339.9			10.2%		$	3,939.6
Gross Profit	$	1,907.2			15.8%		$	1,647.5
Gross Margin		43.9	%		210 basis points			41.8	%
Marketing Expenses	$	422.3			22.2%		$	345.5
Percent of Net Sales		9.7	%		90 basis points			8.8	%
Selling, General & Administrative Expenses	$	643.6			27.2%		$	505.8
Percent of Net Sales		14.8	%		200 basis points			12.8	%
Income from Operations	$	841.3			5.7%		$	796.2
Operating Margin		19.4	%		-80 basis points			20.2	%
Net income per share - Diluted	$	2.43			3.4%		$	2.35

Diluted Net Income per share was $0.71 in the third quarter of 2023 as compared to $0.76 in the third quarter of 2022. Diluted Net Income per share was $2.43 in the first nine months of 2023 as compared to $2.35 in the same period in 2022.

Net Sales

Net sales for the quarter ended September 30, 2023 were $1,455.9, an increase of $138.6 or 10.5% as compared to the same period in 2022. Net sales for the nine months ended September 30, 2023 were $4,339.9, an increase of $400.3 or 10.2% over the comparable nine month period of 2022. The components of the net sales increase are as follows:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Net Sales - Consolidated		2023				2023
Product volumes sold			2.7	%			0.7	%
Pricing/Product mix			2.1	%			4.6	%
Foreign exchange rate fluctuations			0.5	%			(0.1	)%
Acquired product lines (1)			5.2	%			5.0	%
Net Sales increase			10.5	%			10.2	%

(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 nine months ended September 30, 2023, the volume change reflects increased product unit sales in the Consumer Domestic and Consumer International segments, with volume declines in SPD. For both the three and nine months ended September 30, 2023, price/mix was favorable in the Consumer Domestic and Consumer International segments and unfavorable in SPD.

Gross Profit / Gross Margin

Our gross profit was $646.3 for the three months ended September 30, 2023, a $96.6 increase as compared to the same period in 2022. Gross margin increased 270 basis points (“bps”) in the third quarter of 2023 compared to the same period in 2022, due to the positive impact of productivity programs of 160 bps, favorable price/volume/mix of 140 bps, benefits from the Hero Acquisition of 120 bps, and lower transportation costs of 110 bps, partially offset by higher manufacturing costs including labor and commodities of 260 bps. Gross profit was $1,907.2 for the nine months ended September 30, 2023, a $259.7 increase compared to the same period in 2022. Gross margin increased 210 bps in the first nine months of 2023 compared to the same period in 2022, due to favorable price/volume/mix of 190 bps, the impact of productivity programs of 160 bps, benefits from the Hero Acquisition of 120 bps, lower transportation costs of 100 bps, and favorable foreign exchange rates of 10 bps, partially offset by higher manufacturing costs including labor and higher commodities of 370 bps.

Operating Expenses

Marketing expenses for the three months ended September 30, 2023 were $167.8, an increase of $27.1 or 19.3% as compared to the same period in 2022. Marketing expenses as a percentage of net sales in the third quarter of 2023 increased by 80 bps to 11.5% as compared to 10.7% in the same period in 2022 due to 180 bps on higher expense from increased marketing spend as fill rates improved, offset by 100 bps of leverage on higher net sales. Marketing expenses for the nine months ended September 30, 2023 were $422.3, an increase of $76.8 or 22.2% as compared to the same period in 2022. Marketing expenses as a percentage of net sales for the first nine months of 2023 increased by 90 bps to 9.7% as compared to 8.8% in the same period in 2022 due to 170 bps on higher expense from increased marketing spend as fill rates improved, offset by 80 bps of leverage on higher net sales.

SG&A expenses were $222.7 in the third quarter of 2023, an increase of $67.6 or 43.6% as compared to the same period in 2022. SG&A as a percentage of net sales increased 360 bps to 15.3% in the third quarter of 2023 as compared to 11.7% in the same period in 2022. The increase is due to 460 bps on higher expenses, primarily from the Hero Acquisition (including $7.3 of expense related to restricted stock issued for the acquisition) and higher incentive compensation costs which reflects improved business performance, offset by 100 bps of leverage associated with higher sales. SG&A expenses for the first nine months of 2023 were $643.6, an increase of $137.8 or 27.2% as compared to the same period in 2022. SG&A as a percentage of net sales increased 200 bps to 14.8% in the first nine months of 2023 compared to 12.8% in 2022 due to 320 bps on higher expenses, primarily from the Hero Acquisition (including $21.9 of expense related to restricted stock issued for the acquisition) and higher incentive compensation costs which reflects improved business performance, offset by 120 bps of leverage associated with higher sales.

Other income (expense), net for the three and nine months ended September 30, 2023 increased $3.1 and $6.1 to $3.7 and $6.7, respectively, as compared to the same periods in 2022, primarily due to higher investment income.

Interest expense for the three and nine months ended September 30, 2023 increased $3.5 and $24.3 to $27.2 and $83.9, 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 September 30, 2023 was 24.1%, compared to 20.2% in the same period in 2022. The increase in the rate is mainly due to a discrete benefit related to a state tax rate reduction in the period ending September 30, 2022.

The effective tax rate for the nine months ended September 30, 2023 was 22.1%, compared to 22.6% in the same period in 2022. The decrease in the rate relates to the benefit from higher stock option exercises in the current quarter partially offset by a one-time state tax rate reduction in the period ending September 30, 2022.

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 September 30, 2023, we held 50% ownership interests in each of Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”), respectively. Our equity in earnings of Armand and ArmaKleen, totaling $1.7 and $3.7 for the three months ended September 30, 2023 and 2022, respectively, and $8.1 and $10.0 for the nine months ended September 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 nine months ended September 30, 2023 and September 30, 2022 are as follows:

	Consumer				Consumer
	Domestic				International				SPD				Corporate**(3)**				Total
Net Sales**(1)**
Third Quarter 2023	$	1,133.1			$	244.4			$	78.4			$	0.0			$	1,455.9
Third Quarter 2022		1,010.4				219.7				87.2				0.0				1,317.3
First Nine Months of 2023	$	3,378.2			$	716.9			$	244.8			$	0.0			$	4,339.9
First Nine Months of 2022		3,010.2				664.8				264.6				0.0				3,939.6
Income before Income Taxes**(2)**
Third Quarter 2023	$	203.4			$	22.7			$	6.2			$	1.7			$	234.0
Third Quarter 2022		193.9				22.7				14.2				3.7				234.5
First Nine Months of 2023	$	662.8			$	79.1			$	22.2			$	8.1			$	772.2
First Nine Months of 2022		618.3				80.8				38.1				10.0				747.2

(1)

Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $4.7 and $3.9 for the three months ended September 30, 2023 and September 30, 2022, respectively, and were $11.7 and $12.5 for the nine months ended September 30, 2023 and September 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 nine months ended September 30, 2023 and September 30, 2022.

Product line revenues from external customers are as follows:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2023				2022				2023				2022
Household Products		$	636.2			$	592.3			$	1,857.0			$	1,685.6
Personal Care Products			496.9				418.1				1,521.2				1,324.6
Total Consumer Domestic			1,133.1				1,010.4				3,378.2				3,010.2
Total Consumer International			244.4				219.7				716.9				664.8
Total SPD			78.4				87.2				244.8				264.6
Total Consolidated Net Sales		$	1,455.9			$	1,317.3			$	4,339.9			$	3,939.6

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 third quarter of 2023 were $1,133.1, an increase of $122.7 or 12.1% as compared to the same period in 2022. Consumer Domestic net sales for the nine months ended September 30, 2023 were $3,378.2, an increase of $368.0 or 12.2% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net Sales - Consumer Domestic	2023				2023
Product volumes sold		3.6	%			0.8	%
Pricing/Product mix		1.9	%			5.0	%
Acquired product lines (1)		6.6	%			6.4	%
Net Sales increase		12.1	%			12.2	%

(1)

Hero has been included in our results since October 13, 2022 (the date of the acquisition).

The increase in net sales for three months ended September 30, 2023, reflects the impact of the Hero Acquisition, and the impact of higher sales of THERABREATH® mouth wash, ARM & HAMMER® cat litter, XTRA® liquid detergent, WATERPIK® water flossers, and BATISTE® dry shampoo, partially offset by declines in VITAFUSION® and L’IL CRITTERS® gummy vitamins, FINISHING TOUCH FLAWLESS® hair removal products, and FIRST RESPONSE® pregnancy kits. The increase in net sales for the nine-month period ending September 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, XTRA® liquid detergent, and BATISTE® dry shampoo, partially offset by declines in FINISHING TOUCH FLAWLESS® hair removal products, and FIRST RESPONSE® pregnancy kits.

Consumer Domestic income before income taxes for the third quarter of 2023 was $203.4, a $9.5 increase as compared to the third quarter of 2022. The increase is due to the gross margin benefit of higher sales volumes related to the Hero Acquisition of $57.1, lower manufacturing and distribution expenses of $20.9, favorable price/mix of $18.6, partially offset by higher SG&A expenses of $63.5 (including $24.3 related to Hero), higher marketing expenses of $22.0, and higher interest and other expenses of $1.6. For the nine-month period ended September 30, 2023, income before income taxes was $662.8, a $44.5 increase as compared to the first nine months of 2022. The increase is due to favorable price/mix of $141.0, the gross margin benefit of higher sales volumes related to the Hero Acquisition of $118.6, lower manufacturing and distribution expenses of $4.6, partially offset by higher SG&A expenses of $129.6 (including $67.4 related to Hero), higher marketing expenses of $71.7, and higher interest and other expenses of $18.4.

Consumer International

Consumer International net sales were $244.4 in the third quarter of 2023, an increase of $24.7 or 11.2% as compared to the same period in 2022. Consumer International net sales in the first nine months of 2023 were $716.9, an increase of $52.1 or 7.8% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net Sales - Consumer International	2023				2023
Product volumes sold		2.3	%			3.2	%
Pricing/Product mix		5.0	%			5.1	%
Foreign exchange rate fluctuations		2.8	%			(0.8	)%
Acquired product lines (1)		1.1	%			0.3	%
Net Sales increase		11.2	%			7.8	%

(1)

Hero has been included in our results since October 13, 2022 (the date of the acquisition).

Excluding the impact of foreign exchange rates, sales growth in the third quarter ended September 30, 2023 is driven by STERIMAR® nasal congestion relief, OXICLEAN® stain removers, and VITAFUSION® and L’IL CRITTERS® gummy vitamins in the Global Markets Group ("GMG"), STERIMAR® nasal congestion relief and ARM & HAMMER® liquid detergent in Mexico, STERIMAR® nasal congestion relief in Europe, and GRAVOL® anti-nauseant and ANUSOL® hemorrhoid ointments in Canada. The increase in net sales for the nine-month period ending September 30, 2023, is driven by BATISTE® dry shampoo, THERABREATH® mouth wash, OXICLEAN® stain removers and STERIMAR® nasal congestion relief in GMG, BATISTE® dry shampoo, GRAVOL®

anti-nauseant, THERABREATH® mouth wash, and OXICLEAN® stain removers in Canada, STERIMAR® nasal congestion relief and BATISTE® dry shampoo in Europe, and STERIMAR® nasal congestion relief, ARM & HAMMER® liquid detergent, and ARM & HAMMER® dental care in Mexico.

Consumer International income before income taxes was $22.7 in the third quarter of 2023, which is consistent compared to the third quarter of 2022. Favorable price/mix of $17.2, favorable foreign exchange rates of $2.9, the impact of higher sales volumes of $1.2, and lower interest and other expenses of $0.5 were offset by higher SG&A expenses of $10.2, higher manufacturing and commodity costs of $6.3, and higher marketing expenses of $5.3. For the first nine months of 2023, income before income taxes was $79.1, a $1.7 decrease as compared to the same period in 2022. Higher manufacturing and commodity costs of $27.0, higher SG&A expenses of $16.9, higher marketing expenses of $5.3, and higher interest and other expenses of $0.7, were partially offset by favorable price/mix of $38.4, the impact of higher sales volumes of $8.4, and favorable foreign exchange rates of $1.2.

Specialty Products (“SPD”)

SPD net sales were $78.4 in the third quarter of 2023, a decrease of $8.8 or 10.1% as compared to the same period in 2022. SPD net sales were $244.8 for the first nine months of 2023, a decrease of $19.8, or 7.5% as compared to the same period in 2022. The components of the net sales change are the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net Sales - SPD	2023				2023
Product volumes sold		(8.3	)%			(6.6	)%
Pricing/Product mix		(1.8	)%			(0.9	)%
Net Sales decrease		(10.1	)%			(7.5	)%

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

SPD income before income taxes was $6.2 in the third quarter of 2023, a decrease of $8.0 as compared to the same period in 2022 due to higher SG&A expenses of $4.0, lower sales volumes of $2.2, unfavorable price/product mix of $1.6, and unfavorable manufacturing costs of $0.8 partially offset by lower interest and other expenses of $0.6. SPD income before income taxes was $22.2 in the first nine months of 2023, a decrease of $15.9 as compared to the same period in 2022 due to higher SG&A expenses of $8.7, lower volumes of $5.2, unfavorable price/product mix of $2.3, and unfavorable manufacturing costs of $0.3, partially offset by lower interest and other expenses of $0.8.

Corporate

The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the three and nine months of 2023 and 2022. The Corporate segment income before income taxes was $1.7 in the third quarter of 2023, as compared to $3.7 in the same period in 2022. The Corporate segment income before income taxes was $8.1 for the first nine months of 2023, as compared to $10.0 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. 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 September 30, 2023, we had $573.3 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 had initial availability to 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. There have been no stock repurchases in 2023.

As of September 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. 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 $230.0 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

	Nine Months Ended
	September 30,				September 30,
	2023				2022
Net cash provided by operating activities	$	795.1			$	534.1
Net cash used in investing activities	$	(128.4	)		$	(100.7	)
Net cash used in financing activities	$	(363.0	)		$	(226.0	)

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 nine months ended September 30, 2023 increased by $261.0 to $795.1 as compared to $534.1 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 and higher incentive compensation accruals. We measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters ended September 30, 2023 and 2022:

	As of
	September 30, 2023				September 30, 2022				Change
Days of sales outstanding in accounts receivable ("DSO")		28				27				1
Days of inventory outstanding ("DIO")		75				79				(4	)
Days of accounts payable outstanding ("DPO")		76				78				2
Cash conversion cycle		27				28				(1	)

Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two-period average method, decreased 1 day from the prior year primarily due to lower investments in inventory for 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 nine months of 2023 was $128.4, primarily reflecting $121.5 property, plant and equipment additions. Net cash used in investing activities during the first nine months of 2022 was $100.7, primarily reflecting $98.1 for property, plant and equipment additions.

Net Cash Used in Financing Activities – Net cash used in financing activities during the first nine months of 2023 was $363.0, reflecting $199.9 of cash dividend payments and $270.6 of net debt repayments, partially offset by $107.6 of proceeds from stock option exercises. Net cash used in financing activities during the first nine months of 2022 was $226.0, reflecting $191.2 of cash dividend payments, $49.7 of net debt repayments, and $7.5 of deferred financing costs, partially offset by $22.4 of proceeds from stock option exercises.