Church & Dwight Co., Inc. — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. Church & Dwight sells household and personal care products, primarily through Consumer Domestic and Consumer International, and specialty chemical products through SPD. Amounts are in millions except per-share data.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,044.7 | $1,006.0 | +3.8% |
| Gross profit / gross margin | $470.8 / 45.1% | $451.5 / 44.9% | Profit +4.3%; margin +20 bps |
| Income from operations / operating margin | $240.8 / 23.1% | $220.3 / 21.9% | Income +9.3%; margin +120 bps |
| Net income | $175.7 | $157.8 | +11.3% |
| Diluted EPS | $0.70 | $0.63 | +11.1% |
| Operating cash flow | $137.9 | $155.5 | Down $17.6 |
| Cash and cash equivalents, quarter-end | $97.9 | $119.8 | Prior-year quarter-end comparator |
Sales growth reflected volume +2.2%, pricing/product mix +2.3%, acquired product-line volume +0.3%, and foreign exchange −1.0%. Gross-margin improvement was attributed to productivity programs (+130 bps) and favorable price/volume mix (+70 bps), offset by commodity and transportation costs (−100 bps) and other manufacturing costs (−80 bps). Marketing expense was $98.1, down 1.8%; SG&A was $131.9, up 0.5%. Both declined as a share of sales by 50 bps. The effective tax rate rose to 21.9% from 21.4%.
Segments and material changes
- Consumer Domestic: Sales rose 4.5% to $784.9; pretax income increased $23.4 to $182.7. Growth included household products and favorable pricing/mix. Management cited significant and growing competition in gummy vitamins.
- Consumer International: Sales increased 3.3% to $186.7, driven by volume growth of 10.2%, partly offset by unfavorable pricing/mix and foreign exchange/other impacts. Pretax income edged up to $28.4 from $27.7.
- SPD: Sales declined 1.1% to $73.1; pretax income increased to $12.3 from $11.6. Excluding Passport acquisition sales, lower animal and food production volumes weighed on sales; management cited reduced dairy-industry demand amid low milk prices.
- Net interest expense decreased $2.3, primarily reflecting lower average debt after repayment of $300.0 floating-rate notes due January 2019. Other expense improved by $2.0, primarily due to foreign-exchange changes.
Cash, debt and liquidity
At March 31, 2019, cash was $97.9. Short-term borrowings were $99.8 and long-term debt was $1,807.1, including $297.7 of current maturities; reported total debt was therefore approximately $1,906.9. The company had approximately $899.0 available through its revolving facility and commercial-paper program. Current assets were $913.7 and current liabilities $1,133.3.
Operating cash flow fell to $137.9, mainly because working-capital outflows—particularly accounts receivable and accounts payable/accrued expenses—more than offset higher cash earnings. The cash conversion cycle lengthened to 25 days from 22, primarily as inventory days increased. Investing used $12.4, including $11.7 of capital expenditures. Financing used $344.3, including $300.0 of long-term debt repayments, $98.0 net short-term borrowing, $100.0 of share repurchases and $55.9 of dividends. The quarter-end cash balance fell by $218.8 from year-end 2018.
Outlook, events and risks
- Management expected operating cash and borrowing capacity to cover 2019 capital expenditures of approximately $85.0, planned dividends, upcoming note maturities and share repurchases to the extent implemented. No specific full-year sales or EPS guidance is stated in the supplied filing text.
- The $300.0 senior notes bearing 2.45% mature in December 2019; management intended to repay them with cash and, if needed, commercial-paper borrowings. The board increased the quarterly dividend 5% to $0.2275 per share, or $0.91 annualized.
- Subsequent event: On May 1, 2019, the company completed the FLAWLESS and FINISHING TOUCH acquisition for $475.0, with an additional earn-out of up to $425.0 tied to sales through no later than December 31, 2021. It was funded with a three-year term loan and commercial-paper borrowings. The company also entered a $300.0 term loan due May 1, 2022 and extended its $1,000.0 revolving-credit facility to March 29, 2024.
- Risks include commodity, transportation and manufacturing cost pressure; foreign-exchange movements; competition and consumer demand; working-capital needs; and the ability to realize acquisition benefits. The Scantibodies contract case was dismissed on summary judgment, but the plaintiff appealed; the company said it could potentially face substantially all claimed damages (more than $20.0) if the ruling is reversed. Other ordinary-course proceedings were not expected to have a material adverse effect.
- Lease-accounting adoption added right-of-use assets and lease liabilities; at March 31, lease liabilities totaled $113.7. Management said adoption did not materially affect results or cash flows. A personal-care trade name remains subject to impairment monitoring if forecasts or assumptions change.
Important facts for investors to verify
- Whether sales and margin gains persist, particularly given cost inflation and competitive pressure in gummy vitamins.
- Whether working capital and the cash conversion cycle improve, and how operating cash flow develops.
- Funding and repayment plans for the December 2019 notes and the incremental debt associated with the May 2019 Flawless acquisition and earn-out.
- Flawless sales performance, integration, transition-period revenue treatment and contingent consideration.
- Outcome of the Scantibodies appeal and any changes in the company’s legal, impairment or other contingencies.