Church & Dwight Co., Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018, compared with the same period in 2017. Church & Dwight sells household and personal care products, international consumer products, and specialty products through its Consumer Domestic, Consumer International, and Specialty Products (SPD) segments. Results are unaudited; management cautions that the quarter is not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,006.0 million | $877.2 million | +14.7% |
| Gross profit / margin | $451.5 million / 44.9% | $399.3 million / 45.5% | Profit +13.1%; margin down 60 bps |
| Operating income / margin | $220.3 million / 21.9% | $196.1 million / 22.4% | Income +12.3%; margin down 50 bps |
| Net income | $157.8 million | $131.5 million | +20.0% |
| Diluted EPS | $0.63 | $0.51 | +23.5% |
| Operating cash flow | $155.5 million | $131.5 million | +$24.0 million |
- Sales growth comprised 4.0% higher product volumes, a 0.2% reduction from pricing/product mix, 1.3% foreign-exchange benefit, and 9.6% from acquired product lines net of divestiture. Thus, acquisitions contributed substantially to reported growth.
- Gross margin was pressured by commodity costs (80 bps), transportation (30 bps), and other manufacturing costs (70 bps); productivity programs contributed 70 bps and acquired businesses’ higher margins 50 bps.
- Marketing expense rose 10.0% to $99.9 million, but declined to 9.9% of sales from 10.3%. SG&A increased 16.8% to $131.3 million and rose to 13.1% of sales from 12.8%, reflecting acquisition-related costs and higher R&D expense.
- Interest expense increased to $20.1 million from $8.2 million, primarily due to higher average debt following the 2017 senior-note issuance. The effective tax rate fell to 21.4% from 30.9%, mainly reflecting the Tax Act’s reduction in the U.S. statutory rate to 21%.
Balance sheet, cash flow, and liquidity
- At March 31, cash and cash equivalents were $119.8 million, down from $278.9 million at year-end. Current assets were $891.4 million and current liabilities $1,230.7 million.
- Total debt was approximately $2.355 billion, comprising $253.5 million of short-term borrowings, $299.2 million of current debt maturities, and $1,802.1 million of long-term debt. Total debt was approximately $2.374 billion at December 31, 2017; the current portion primarily reflects debt due in 2019.
- Operating cash flow was $155.5 million. Investing used $60.0 million, including $49.9 million for Passport and $9.9 million for capital expenditures. Financing used $255.6 million, including $200.0 million of share repurchases and $53.0 million of dividends. Cash declined by $159.1 million during the quarter.
- The company reported approximately $745 million available through its revolving facility and commercial-paper program. A new $1.0 billion unsecured revolving credit facility, entered into March 29, 2018, runs to March 29, 2023 and can be increased by up to $600 million subject to conditions. Management stated it expects to remain compliant with the facility’s maximum-leverage covenant.
- The cash conversion cycle increased five days year over year to 22 days, mainly because inventory days rose five days to 56; days sales outstanding rose to 31 from 30.
Material changes and segment results
- Consumer Domestic sales rose 13.9% to $751.4 million, but segment income before taxes declined to $159.3 million from $160.9 million. Higher volume and sales were offset by acquisition-related SG&A, increased promotions, marketing, manufacturing/distribution costs, and interest expense.
- Consumer International sales rose 26.3% to $180.7 million; segment income before taxes increased to $27.7 million from $19.4 million, supported by volume, pricing/mix, and foreign exchange.
- SPD sales declined 0.7% to $73.9 million, while segment income before taxes increased to $11.6 million from $7.8 million. Lower animal-productivity volumes reflected weak dairy-industry demand and low milk prices.
- Passport Food Safety Solutions was acquired on March 8 for approximately $50 million, funded with short-term borrowings. It had 2017 sales of approximately $21 million and may earn up to an additional $25 million based on sales through 2020. The acquisition added $32.6 million of goodwill.
- The company repurchased approximately 4.1 million shares for $200 million. Remaining authorization under the 2017 repurchase program was $310 million at quarter-end. The board raised the quarterly dividend 14% to $0.2175 per share.
Outlook, risks, and unusual items
- No specific full-year sales or EPS guidance is stated in the provided filing text. Management expects 2018 capital expenditures of approximately $70 million and believes operating cash flow and borrowing capacity will be sufficient for capital expenditures, planned dividends, and repurchases to the extent implemented.
- The company expected to repatriate approximately $150 million of foreign earnings in 2018; $128 million had been repatriated by March 31, with $22 million expected later in the year. The related tax effects remained subject to finalization within the Tax Act measurement period.
- Competition and promotions in laundry detergent and gummy vitamins, commodity and transportation costs, manufacturing and distribution, foreign exchange, consumer demand, and acquisition integration are cited risks. Management noted no material change in market-risk exposure since year-end.
- In the Scantibodies contract case, the plaintiff seeks more than $20 million plus other relief. The company is defending the case and has recorded an immaterial reserve; management says it is reasonably possible the company could be required to pay all or substantially all of the amounts sought, but the excess exposure cannot currently be estimated. Other ordinary-course proceedings are not expected to have a material adverse effect.
- Q1 2017 included a $3.5 million pre- and post-tax charge associated with the sale of the Brazilian chemical business, equivalent to $0.01 per share. The 2018 results also reflect acquisition-related transition and ongoing costs.
- Disclosure controls were reported effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of sales growth and future earnings depends on acquisitions versus organic volume, pricing, and foreign exchange.
- Whether productivity and acquired-product margins can offset continued commodity, transportation, manufacturing, and promotional pressures.
- Debt repayment or refinancing plans for the $300 million notes due in 2019 and the effect of elevated interest expense on earnings and liquidity.
- Passport’s performance and the likelihood and potential amount of its contingent payment, alongside other acquisition-related costs.
- Developments in the Scantibodies litigation and any change to the currently immaterial reserve.