Church & Dwight Co., Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are with the third quarter and first nine months of 2018. Amounts are in millions of dollars, except per-share data. The company sells household, personal care, and specialty chemical products through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $1,089.4 | $1,037.6 | $3,213.5 | $3,071.5 |
| Gross profit | $507.7 | $460.1 | $1,460.0 | $1,366.5 |
| Gross margin | 46.6% | 44.3% | 45.4% | 44.5% |
| Operating income | $216.8 | $204.2 | $645.0 | $598.3 |
| Operating margin | 19.9% | 19.7% | 20.1% | 19.5% |
| Net income | $157.3 | $146.3 | $471.5 | $425.8 |
| Diluted EPS | $0.62 | $0.58 | $1.87 | $1.70 |
- Q3 sales rose 5.0%; pricing/product mix contributed 4.3 percentage points, acquired product lines 2.0 points, while volume and foreign exchange reduced growth by 0.7 and 0.6 points, respectively. Nine-month sales increased 4.6%.
- Q3 gross margin expanded 230 basis points, reflecting favorable price/mix, productivity, acquired-business margins, and a favorable tariff ruling. The tariff ruling benefited Q3 margin by 100 basis points. Higher commodity, transportation, and manufacturing costs partly offset gains.
- SG&A rose 22.4% in Q3 and 12.4% for the first nine months, driven in part by acquisition-related costs and earn-out adjustments, amortization, and the Brazil business sale. Q3 SG&A was 15.2% of sales, up 220 basis points.
- Segment sales in Q3: Consumer Domestic $827.6 million, up 5.4%; Consumer International $186.4 million, up 7.1%; SPD $75.4 million, down 4.1%. SPD weakness reflected lower animal and food-production volumes, including subdued dairy-industry demand.
- Effective tax rates were 21.6% for Q3 and 20.9% for the first nine months, versus 21.9% and 21.6% in the comparable 2018 periods.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $617.5 million, up from $568.0 million. Investing cash outflow was $519.0 million, mainly the $475.0 million Flawless acquisition and $39.7 million of capital expenditures. Financing cash outflow was $298.6 million.
- Cash and equivalents were $114.7 million at September 30, 2019, versus $316.7 million at December 31, 2018. The company reported approximately $927 million of available capacity through its revolving facility and commercial paper program.
- Debt consisted of $74.0 million of short-term borrowings and $2,109.2 million of long-term debt, including current maturities; the current portion was $299.6 million. Cash less reported debt implies approximately $2.07 billion of net debt, excluding lease liabilities.
- Operating lease liabilities were $162.0 million. Total assets were $6,610.1 million and stockholders’ equity was $2,559.3 million at quarter-end.
- The company repurchased $250.0 million of shares and paid $168.2 million in dividends during the first nine months. The quarterly dividend was increased 5% to $0.2275 per share, or $0.91 annualized. The company expected 2019 capital expenditures of approximately $80 million.
Material developments, outlook, and risks
- Flawless acquisition: Closed May 1, 2019 for $475 million, funded with a three-year $300 million term loan and commercial paper borrowings. Additional earn-out payments may reach $425 million, based on sales through no later than December 31, 2021. The recorded earn-out liability was increased by $17 million to $199 million during 2019, with the charge recorded in SG&A.
- Other unusual items: The company recorded a $7.6 million charge related to the sale of its Brazilian consumer business. It reversed a $7.3 million Passport acquisition earn-out liability in Q2. These items and the Flawless adjustment affected year-to-date SG&A.
- Financing and liquidity: The $1 billion revolving credit facility was extended to March 2024. Management said operating cash flow and borrowing capacity were expected to cover capital expenditures, dividends, share repurchases as implemented, and upcoming debt maturities. The $300 million 2.45% notes due December 15, 2019 were expected to be repaid or redeemed using cash and, if needed, commercial paper. Management stated it expected to remain within the credit agreement’s maximum leverage covenant.
- Outlook: The filing provides no clear numerical full-year sales or EPS guidance. It identifies risks including competition, consumer demand, commodity and transportation costs, foreign exchange, tariffs and trade restrictions, acquisition integration and earn-out estimates, and economic conditions. Management noted strong competition in gummy vitamins and continuing weakness in dairy-related SPD demand.
- Contingencies: Scantibodies seeks more than $20 million in a contract dispute. The company won summary judgment, but the plaintiff appealed; the company says it is vigorously defending the case and has recorded an immaterial reserve. The filing says an adverse outcome could require payment of all or substantially all claimed amounts if the judgment is reversed.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Flawless sales performance supports the recorded $199 million earn-out liability and whether further payments may approach the $425 million contractual maximum.
- How the company funds the December 2019 note maturity and manages debt, commercial paper, and liquidity after the acquisition and share repurchases.
- Whether pricing, productivity, and tariff benefits can offset manufacturing, commodity, transportation, and foreign-exchange pressures as the one-year tariff exemption progresses.
- Whether volume trends improve in Consumer Domestic and SPD, and whether gummy-vitamin competition or weak dairy demand affects results.
- The outcome of the Scantibodies appeal and any resulting financial exposure.