Church & Dwight Co., Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing. Amounts are in millions of dollars except per-share data.
Business context
The company develops and sells household, personal care and specialty products, including ARM & HAMMER, OXICLEAN, TROJAN, VITAFUSION and WATERPIK. Its three reporting segments are Consumer Domestic, Consumer International and Specialty Products Division (SPD), representing approximately 76%, 17% and 7% of 2018 sales, respectively. The March 2018 acquisition of Passport Food Safety Solutions added food-safety products for livestock processing.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $4,145.9 | $3,776.2 | +9.8% |
| Gross profit / margin | $1,840.8 / 44.4% | $1,729.6 / 45.8% | Margin down 140 bps |
| Operating income / margin | $791.7 / 19.1% | $732.7 / 19.4% | Income +8.1%; margin down 30 bps |
| Net income | $568.6 | $743.4 | Down 23.5% |
| Diluted EPS | $2.27 | $2.90 | Down 21.7% |
| Cash from operations | $763.6 | $681.5 | +$82.1 |
| Cash and cash equivalents | $316.7 | $278.9 | +$37.8 |
| Total debt, net of issuance costs | $2,107.1 | $2,374.3 | Down $267.2 |
Sales growth reflected 3.7% higher product volume, 0.6% pricing/product mix, 0.1% foreign exchange and other, and 5.4% from acquired product lines net of divestiture. Gross margin pressure chiefly came from higher commodity, transportation and manufacturing costs. Interest expense rose to $79.4 from $52.6, primarily reflecting debt issued to finance the 2017 Waterpik acquisition.
Cash used in investing was $112.1, including $60.4 of capital expenditures and $49.8 for Passport. Cash used in financing was $609.0, including $200.0 of share repurchases, $213.3 of dividends and $268.8 of debt repayments. The current ratio was approximately 0.81 at year-end, based on current assets of $1,078.2 and current liabilities of $1,326.3; current liabilities included $596.5 of current debt maturities.
Fourth-quarter and segment developments
- Fourth-quarter sales were $1,074.4 versus $1,033.1 in 2017; operating income was $193.4 versus $214.7, and net income was $142.8 versus $405.6. The unusually high prior-year quarterly net income reflected the Tax Cuts and Jobs Act benefit; the filing does not provide a comparable adjusted fourth-quarter earnings figure.
- Consumer Domestic sales increased 9.6% to $3,129.9, including acquired products and stronger sales in several major brands. Income before taxes declined to $577.2 from $606.4 amid higher costs and expenses.
- Consumer International sales increased 14.2% to $709.5; income before taxes rose to $81.5 from $32.0, helped substantially by the absence of the 2017 pension settlement charge.
- SPD sales increased 2.1% to $306.5, but underlying volume fell 6.4%; dairy demand remained weak amid low milk prices. Income before taxes increased to $51.6 from $43.5.
Outlook, risks and unusual items
- Management expected a competitive 2019 market, citing new competitor products and continued pricing pressure. Planned responses included marketing and trade spending, cost control, product launches, international expansion and strategic acquisitions. The filing provides no specific 2019 sales or EPS guidance.
- To address higher input costs and tariffs, the company announced price increases across approximately 30% of its portfolio in 2018; management cautioned that customer acceptance of further increases is uncertain. U.S. tariffs, particularly on WATERPIK products, increased 2018 cost of sales.
- Major exposures include dependence on a few retailers (Walmart represented 23% of sales; the top three customers represented 36%), competition and private-label products, input and freight costs, foreign exchange, regulation, product liability, cyber and supply-chain disruptions, and acquisition integration. Laundry detergent is a significant business.
- Church & Dwight reported $2,107.1 of debt at year-end and approximately $997.0 of availability through its revolving facility and commercial-paper program. Its $1 billion revolving facility matures in 2023 and permits up to $600 million of additional commitments subject to conditions. A $300 million floating-rate note matured and was repaid on January 25, 2019; $300 million of 2.45% notes were due in December 2019.
- The board raised the quarterly dividend 5% in February 2019, to $0.2275 per share ($0.91 annualized). A $100 million open-market repurchase was executed in January 2019; $310 million remained available under the 2017 repurchase authorization at year-end 2018.
- 2018 reported net income was affected by the prior-year tax comparison: 2017 included a $272.9 tax benefit from the Tax Act, while the 2018 effective tax rate was 21.0%. The company also changed remaining LIFO inventory to FIFO in 2018, recording an approximately $4.0 pretax reduction in cost of goods sold.
- The Scantibodies contract case was dismissed on summary judgment in September 2018, but the plaintiff appealed. The company said its reserve was immaterial, while noting it could potentially face substantially all of the more-than-$20 million claimed if the judgment is reversed.
Investor facts to verify
- How much of reported sales growth and future earnings depends on acquisitions, particularly Waterpik, and whether acquired businesses meet expected performance and synergy assumptions.
- Whether pricing, productivity and cost controls can recover gross margin lost to commodities, freight, manufacturing costs and tariffs.
- Whether working-capital needs, including inventory growth and the longer cash-conversion cycle, continue to affect cash generation.
- The refinancing and repayment plan for the December 2019 notes, covenant headroom and the effect of debt service on repurchases, dividends and acquisitions.
- The outcome of the Scantibodies appeal and any changes in litigation, tax contingencies or impairment assumptions.