Church & Dwight Co., Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; amounts below are in U.S. dollars, millions except per-share data.
Business context
Church & Dwight develops and sells household, personal-care and specialty products, including ARM & HAMMER, OXICLEAN, TROJAN, VITAFUSION, WATERPIK and FLAWLESS. Consumer Domestic, Consumer International and Specialty Products Division (SPD) generated approximately 76%, 17% and 7% of 2019 sales, respectively. Walmart represented 24% of consolidated sales.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $4,357.7 | $4,145.9 | +5.1% |
| Gross profit / gross margin | $1,984.0 / 45.5% | $1,840.8 / 44.4% | +7.8%; +110 bps |
| Operating income / margin | $840.2 / 19.3% | $791.7 / 19.1% | +6.1%; +20 bps |
| Net income | $615.9 | $568.6 | +8.3% |
| Diluted EPS | $2.44 | $2.27 | +7.5% |
| Cash from operations | $864.5 | $763.6 | +$100.9 |
| Capital expenditures | $73.7 | $60.4 | +$13.3 |
Gross-margin improvement reflected productivity programs, favorable pricing/product mix and acquired-business margins, partly offset by higher manufacturing, commodity and transportation costs. SG&A rose 11.1% to $628.8, increasing to 14.4% of sales from 13.6%, including acquisition-related costs and a $7.6 charge for the sale of the Brazilian consumer business. The effective tax rate was 20.4%, compared with 21.0%.
Fourth quarter: Sales were $1,144.2 versus $1,074.4 in Q4 2018; operating income was $195.2 versus $193.4; net income was $144.4 versus $142.8; diluted EPS was $0.58 versus $0.57.
Segments and material changes
- Consumer Domestic sales increased 5.5% to $3,302.6, supported by 4.2% favorable pricing/product mix and FLAWLESS; volume was down 0.2%.
- Consumer International sales increased 6.6% to $756.3, driven by 8.3% volume growth, partly offset by 3.2% unfavorable foreign exchange. Segment income before taxes declined to $74.0 from $81.5.
- SPD sales declined 2.5% to $298.8, mainly from lower animal and food production volumes amid weak dairy-farm profitability. Segment income before taxes fell to $47.3 from $51.6.
- FLAWLESS was acquired May 1, 2019 for $475.0, with up to $425.0 of additional contingent consideration tied to sales targets through 2021. The recorded contingent liability was $192.0 at year-end.
Cash, debt and liquidity
Year-end cash and cash equivalents were $155.7, down from $316.7. Total debt was $2,063.1, compared with $2,107.1 a year earlier. The company had approximately $749.0 available through its revolving facility and commercial-paper program. Its $1.0 billion revolving credit facility was extended to March 2024; a $300.0 term loan matures in May 2022. Operating cash flow increased mainly because of higher cash earnings and working-capital changes, including extended supplier payment terms. Investing cash outflow was $553.5, primarily the FLAWLESS acquisition; financing cash outflow was $472.9.
The company returned $474.1 through dividends and repurchases: $224.1 in dividends and $250.0 in stock repurchases. It expected 2020 capital expenditures of approximately $90.0 and stated operating cash flow plus borrowing capacity should fund capital needs, debt service, dividends and repurchases at management’s discretion. The Board raised the quarterly dividend to $0.24 per share in January 2020.
Outlook, risks and unusual items
- Management anticipated a competitive 2020 marketplace and emphasized marketing and trade spending, cost control, new-product launches, global growth and strategic acquisitions. The filing does not provide a clear numerical 2020 sales or earnings guidance value.
- Key exposures include intense price and private-label competition, dependence on laundry detergent and major retailers, raw-material and transportation costs, foreign exchange, tariffs, customer concentration, and execution and integration risks from acquisitions.
- Management reported declining demand in gummy supplements and condoms, and identified dairy-market weakness as a drag on SPD. It also noted risks from regulatory uncertainty surrounding CBD products, cybersecurity, sustainability requirements and potential supply-chain disruptions.
- Personal-care trade names had reduced valuation headroom following sales and profit declines; future underperformance could trigger impairment. The auditor identified intangible-asset valuations and the FLAWLESS acquisition valuation as critical audit matters. No goodwill impairment was recorded in 2019.
- Scantibodies’ contract claims seeking more than $20 million were dismissed on summary judgment, but the plaintiff appealed; oral argument was scheduled for March 2020. The company reserved an immaterial amount and stated a reversal could expose it to substantially all claimed damages.
- The company recorded an $18.9 liability for unrecognized tax benefits, including a $12.0 Brazil-related tax position; it expected an IRS determination in 2020. It also disclosed a short-seller negative publicity campaign that negatively affected its share price.
Investor verification points
- Track organic volume, pricing/mix and acquisition contributions separately, particularly the sustainability of Consumer Domestic growth and the recovery of SPD.
- Monitor FLAWLESS sales against earn-out targets and the potential cash payment of up to $425 million.
- Assess whether improved cash generation is repeatable given working-capital benefits from supplier payment timing and terms.
- Review debt maturities, variable-rate exposure, covenant headroom and refinancing needs, including the 2022 maturities.
- Follow impairment headroom for personal-care trade names, the Scantibodies appeal, and the outcome of the Brazil tax ruling.