01—Abstract
Summary
Summary of the 10-Q filed August 2, 2018. Cited figures are marked; the original filing is the authoritative source.
Church & Dwight Co., Inc. (CHD) reported strong financial results for the second quarter and first half of 2018, driven by robust net sales growth and improved operational efficiencies.
Net sales increased by 14.5%a for the quarter and 14.6% for the six-month period, largely fueled by strategic acquisitions, including the recent Passport acquisition and the significant Waterpik acquisition in the prior year. The company demonstrated strong operational leverage, with income from operations growing by 41.1% for the quarter and 23.4% for the six-month period, leading to a notable increase in diluted EPS. Despite increased commodity and transportation costs impacting gross margin, the company effectively managed operating expenses, particularly SG&A, which decreased as a percentage of net sales due to leverage from higher sales and favorable comparisons to the prior year's pension settlement charge.
The company also benefited from a lower effective tax rate following the Tax Cuts and Jobs Act. Management anticipates that cash flow from operations, coupled with available borrowing capacity, will be sufficient to cover capital expenditures, dividends, and potential share repurchases and acquisitions, underscoring a healthy financial position.
02—Key points
Key Highlights
- Net sales increased by 14.5% year-over-year for the three months ended June 30, 2018, reaching $1,027.9 million, and by 14.6% for the six months ended June 30, 2018, reaching $2,033.9 million.
- Income from operations saw significant growth, increasing by 41.1% for the quarter to $173.8 million and by 23.4% for the six months to $394.1 million, indicating strong operational leverage.
- Diluted Earnings Per Share (EPS) rose substantially, to $0.49 for the quarter and $1.12 for the six months, compared to $0.29 and $0.79 in the prior year periods, respectively.
- The company completed the acquisition of Passport Food Safety Solutions, Inc. in March 2018, adding to its portfolio and contributing to net sales growth.
- Gross margin experienced a decline of 140 basis points in the second quarter and 100 basis points year-to-date, primarily due to higher commodity and transportation costs, partially offset by productivity programs.
- Selling, General & Administrative (SG&A) expenses as a percentage of net sales decreased significantly, falling by 330 basis points for the quarter and 150 basis points for the six months, demonstrating effective cost management and operating leverage.
- The effective tax rate decreased from 37.6% to 21.7% for the quarter and from 33.4% to 21.5% for the six months, mainly due to the Tax Cuts and Jobs Act enacted in December 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2018, Church & Dwight Co Inc kept $0.12.
- Revenue$1.03B100.0%
- Cost of revenue−$573.0M55.7%
- Gross profit$454.9M44.3%
- Operating costs−$281.1M27.3%
- Operating income$173.8M16.9%
- Interest, other & tax−$52.1M5.1%
- Net income$121.7M11.8%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2018filed August 2, 2018Financial Statements
Q2 FY2018 against Q2 FY2017
| Line item | Q2 FY2018Q2 FY2017 | Change |
|---|---|---|
| Revenue | $1.03B$898.00M | +14.5% |
| Cost of Revenue | $573.00M$487.60M | +17.5% |
| Gross Profit | $454.90M$410.40M | +10.8% |
| R&D Expenses | $21.80M$16.00M | +36.3% |
| SG&A Expenses | $144.70M$156.30M | −7.4% |
| Operating Income | $173.80M$123.20M | +41.1% |
| Interest Expense | $20.20M$9.30M | +117.2% |
| Net Income | $121.70M$72.90M | +66.9% |
| EPS (Basic) | $0.50$0.29 | +72.4% |
| EPS (Diluted) | $0.49$0.29 | +69.0% |
| Shares Outstanding (Basic) | 244.80M249.80M | −2.0% |
| Shares Outstanding (Diluted) | 249.30M255.60M | −2.5% |
05—Questions
Frequently Asked Questions
What were the main drivers of the reported net sales increase?
The increase in net sales was primarily driven by product volumes sold across Consumer Domestic and Consumer International segments, and importantly, by the inclusion of sales from recent acquisitions such as Passport Food Safety Solutions, Inc. and prior year acquisitions like Waterpik.
What is impacting the company's gross margin?
Gross margin decreased due to higher commodity costs (approximately 120 basis points for the quarter) and increased transportation costs (approximately 40 basis points for the quarter). The impact of lower-margin acquired businesses and unfavorable price/mix also contributed. These pressures were partially offset by productivity programs.
How did the company manage its operating expenses, particularly SG&A?
The company demonstrated effective management of SG&A expenses. SG&A as a percentage of net sales decreased significantly, benefiting from operating leverage due to higher sales and a favorable comparison to the prior year's pension settlement charge. The increase in reported SG&A dollar amount was attributed to transition and ongoing costs from acquisitions and higher R&D expenses.
What is the impact of the Tax Cuts and Jobs Act on the company's financials?
The Tax Cuts and Jobs Act significantly lowered the U.S. corporate income tax rate from 35% to 21%. This resulted in a substantially lower effective tax rate for the company in the reported periods, positively impacting net income and EPS. The company also repatriated approximately $150.0 million of foreign earnings due to the Act.
06—Continue