Church & Dwight Co., Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,079.4 | $1,027.9 | $2,124.1 | $2,033.9 |
| Gross profit / margin | $481.5 / 44.6% | $454.9 / 44.3% | $952.3 / 44.8% | $906.4 / 44.6% |
| Operating income / margin | $187.4 / 17.3% | $173.8 / 16.9% | $428.2 / 20.1% | $394.1 / 19.4% |
| Net income | $138.5 | $121.7 | $314.2 | $279.5 |
| Diluted EPS | $0.55 | $0.49 | $1.25 | $1.12 |
| Operating cash flow | Not separately stated | Not separately stated | $351.2 | $322.7 |
- Q2 sales rose 5.0%; first-half sales rose 4.4%. Pricing/product mix contributed 4.8 percentage points to Q2 growth and 3.5 points to first-half growth. Volume contributed 0.1 and 1.2 points, respectively; foreign exchange reduced growth by 0.6 and 0.8 points.
- Gross margin improved 30 basis points in Q2 and 20 basis points in the first half. Favorable pricing/mix and productivity were partly offset by manufacturing cost increases, including tariffs, and higher commodity and transportation costs.
- Q2 SG&A increased 14.0% to $165.0, while marketing expense declined 5.4% to $129.1. SG&A included acquisition-related costs, a $7.6 charge related to the Brazil business sale, a $5.0 Flawless earn-out estimate increase, and a $7.3 reversal of the Passport acquisition earn-out liability.
Segments and material changes
- Consumer Domestic: Q2 sales increased 5.8% to $819.3; pretax income rose to $136.2 from $119.4. Pricing/mix drove growth, while Q2 volume declined 0.9%.
- Consumer International: Q2 sales increased 6.0% to $186.6, including volume growth partly offset by foreign exchange. Pretax income declined to $16.9 from $18.0, reflecting higher SG&A and manufacturing costs.
- Specialty Products (SPD): Q2 sales declined 5.4% to $73.5, primarily from lower volumes in animal and food production markets. Pretax income was $15.5, versus $15.6, with the Passport earn-out reversal helping offset cost and volume pressures.
- On May 1, the company acquired the Flawless and Finishing Touch hair-removal business for $475.0 cash, funded partly with a new $300.0 three-year term loan and commercial paper. Additional earn-out payments may reach $425.0, based on sales through no later than 2021. Flawless results are included from the acquisition date.
- The company sold its Brazilian consumer business during Q2 and recorded a $7.6 charge. That business had approximately $15.0 of 2018 sales.
Cash, debt, liquidity and capital allocation
- At June 30, cash and equivalents were $97.9, down from $316.7 at year-end 2018. Net cash used in investing was $502.4, chiefly the $475.0 Flawless purchase. Financing used $67.7, including $100.0 of share repurchases and $112.0 of dividends, partly offset by net debt borrowings.
- Reported short-term borrowings were $111.6 and long-term debt was $1,809.0, including $299.0 current maturities. The $300.0 term loan is due May 2022. The $300.0 2.45% senior notes mature in December 2019; management said it intends to repay them using cash and, if needed, commercial paper.
- The $1,000.0 revolving credit facility was extended to March 2024 and supports the $1,000.0 commercial paper program. The company reported approximately $886.9 of availability through the facility and commercial paper program at quarter-end and stated it expected to remain within its maximum leverage covenant.
- Management expected operating cash flow and borrowing capacity to cover planned 2019 capital expenditures of approximately $85.0, dividends, upcoming note repayment, and share repurchases to the extent pursued. The quarterly dividend was raised 5% to $0.2275 per share, or $0.91 annually.
Outlook, risks and unusual items
- The filing does not provide a clear numerical full-year sales or earnings forecast. Management’s stated outlook focuses on expected cash-flow sufficiency and approximately $85.0 of 2019 capital expenditures.
- Risks highlighted include tariffs and raw-material, commodity and transportation costs; foreign exchange; consumer demand and competition; manufacturing or distribution disruption; and acquisition integration and earn-out estimates. Management noted intensified competition in gummy vitamins and reduced dairy-industry demand affecting SPD.
- The Flawless earn-out liability was estimated at $187.0 at June 30 and is subject to remeasurement; the maximum contractual earn-out is $425.0. The Passport contingent liability was fully reversed based on updated sales forecasts.
- A supplier, Scantibodies Laboratory, appealed after the company obtained summary judgment dismissing its claims. The plaintiff seeks more than $20.0; the company’s reserve is immaterial, but the filing says substantially all claimed amounts could become payable if the judgment is reversed.
- The company adopted lease accounting in 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not materially affect results or cash flows. Disclosure controls were reported effective, and market-risk exposure had not materially changed since year-end.
Important facts for investors to verify
- Whether Flawless sales performance supports the acquisition valuation and potential earn-out, and how transition-period revenue is reported.
- Whether pricing and productivity continue to offset tariff, manufacturing, commodity and transportation cost inflation.
- Repayment or refinancing of the December 2019 notes, commercial-paper usage, and covenant headroom.
- Volume and profitability trends in Consumer International and SPD, including foreign-exchange exposure and weak dairy demand.
- Outcome of the Scantibodies appeal and changes in acquisition-related contingent liabilities.