Earnings from Cerner and Church & Dwight

Cerner (CERN) today announced results for the 2021 second quarter that ended June 30, 2021.

“I am very pleased with Cerner’s top and bottom-line execution in the second quarter, with our results reflecting good progress on our transformation initiatives and a strengthening market presence,” said Brent Shafer, Chairman and CEO. “We delivered good revenue growth, expanded Adjusted Operating Margin and increased Adjusted Diluted EPS (non-GAAP) during the quarter while continuing to accelerate innovation and drive client value.”

“During the second quarter we took a series of actions which we believe will strengthen our business in the years ahead. Namely, as part of recently implemented productivity measures and a comprehensive review of our business, we performed a sizable reduction in force, took specific measures to shrink our physical (office space) footprint and made some important product rationalization decisions to improve the return on our nearly $800 million annual R&D investment,” said Mark Erceg, Executive Vice President and Chief Financial Officer. “We also spent $400 million on share repurchases, which brings our year-to-date purchases to $750 million, because we continue to believe that Cerner stock, at current trading levels, represents a good return on investment for our shareholders.”

2021 Second Quarter Highlights
• Revenue of $1.457 billion, up 10% compared to $1.330 billion in the second quarter of 2020, which included the largest impact of the pandemic last year.
• GAAP operating margin of 3.4%, down from 11.0% in the year-ago quarter, reflecting impacts from employee separation costs, an impairment related to sold and held-for-sale properties, and product rationalization.
• Adjusted Operating Margin (non-GAAP) of 20.6%, up 220 basis points from 18.4% in year-ago quarter.
• GAAP diluted EPS of $0.11, down 75% compared to $0.44 in year-ago quarter.
• Adjusted Diluted EPS (non-GAAP) of $0.80 up 27% compared to $0.63 in year-ago quarter.
• GAAP cash flow from operating activities of $369 million, up 43% compared to $259 million in year-ago quarter.
• Free Cash Flow (non-GAAP) of $162 million, up 153% compared to $64 million in the year-ago quarter.

Future Period Guidance
Cerner currently expects:
• Third quarter 2021 revenue to grow approximately 6% compared to third quarter of 2020
• Full year 2021 revenue growth in the mid-single digits
• Third quarter 2021 Adjusted Diluted EPS growth of 12% to 15% over the third quarter of 2020
• Full year 2021 Adjusted Diluted EPS of approximately $3.25, compared to a prior outlook of more than $3.20
• Full year 2021 Free Cash Flow (non-GAAP) of approximately $900 million
• Total 2021 share repurchases of up to $1.5 billion

Church & Dwight (CHD) today announced that second quarter net sales grew 6.4% to $1,271.1 million. The Company continues to experience strong consumer demand for many of its products. Organic sales grew 4.5% driven by volume, exceeding the Company’s outlook of 4% growth.

Second quarter 2021 EPS increased 16.0% to $0.87 per share. Adjusted EPS, which excludes a positive acquisition-related earn-out adjustment, decreased 1.3% to $0.76, exceeding the Company’s adjusted outlook of $0.69.

Matthew Farrell, Chief Executive Officer, commented, “Our brands once again drove strong consumption in Q2. Organic sales growth of 4.5% is on top of 8.4% organic growth in Q2 2020. In the U.S., we grew consumption in 13 of the 16 categories in which we compete. Our brands experienced double-digit consumption growth in 9 of those 16 categories, including gummy vitamins, cat litter, dry shampoo, and water flossers. Our personal care categories are benefitting from increased consumer mobility. Consumption is far outpacing shipments as supply chain disruptions continue and fill levels are below normal. Our International business, despite many countries still experiencing lockdowns, delivered broad-based organic sales growth of 10.4%. Global online sales grew 7.2% (on top of 77% growth in Q2 2020) and as a percentage of total sales has expanded to 14.2% in Q2.”

“I’d like to recognize all Church & Dwight employees around the world for their continued dedication to helping us successfully navigate the difficult environment, especially our Supply Chain and R&D teams as the Company continues to face complexities of raw material and labor shortages at our suppliers and third party manufacturers.”

“In the second quarter, we experienced shortages of many key raw materials. Labor shortages at suppliers and third party manufacturers and transportation challenges have resulted in supply issues. Shortages of available trucks and drivers for raw and packaging materials such as chemicals have also impacted supply. Due to a lower case fill rate, we pulled back on Q2 marketing for affected products, especially household products. We expect the supply issues to begin to abate in Q4 as we continue our efforts to improve. Significant inflation of material and component costs is impacting our gross margin outlook. We expect higher input costs and transportation costs to remain elevated for the rest of the year.”

“Our previously announced pricing actions took effect on June 28, which included a high single digit increase in laundry. In July, we announced additional price increases in cat litter, laundry performance additives, baking soda, water flossers, and showerheads. These actions are in response to rising costs in the commodity, labor and transportation markets. Our cumulative price increases cover approximately 50% of our global portfolio of brands.”

Second Quarter Review

Consumer Domestic net sales were $959.7 million, a $28.6 million or 3.1% increase driven by household and personal care sales growth and acquisitions. Organic sales increased 2.8% due to higher volume (+2.5%) and positive price and product mix (+0.3%). Growth was led by WATERPIK® oral care products, ARM & HAMMER® clumping cat litter, BATISTE® dry shampoo, NAIR® hair removal products and TROJAN® condoms.

Consumer International net sales were $226.8 million, a $39.3 million or a 21.0% increase, primarily driven by Global Markets Group organic growth and the impact of currency. Despite continued lockdowns, organic sales increased 10.4% due to higher volume (+12.5%), partially offset by price and product mix (-2.1%). Organic sales were driven primarily by WATERPIK and ARM & HAMMER liquid laundry detergent in the Global Markets Group, WATERPIK, BATISTE and STERIMAR® nasal spray in Europe and GRAVOL® nausea relief products and ARM & HAMMER litter in Canada.

Specialty Products net sales were $84.6 million, an $8.9 million or an 11.8% increase driven by demand for dairy products. Organic sales increased 11.8% due to higher pricing (+5.5%) and higher volume (+6.3%). Milk prices have remained stable in the U.S. dairy market.

Gross margin decreased 340 basis points to 43.4% due to the impact of higher distribution costs as well as higher manufacturing costs primarily related to commodities and higher tariffs, partially offset by productivity and favorable volume and price.

Marketing expense was $117.0 million, a decrease of $5.3 million or 4.3%. Marketing expense as a percentage of net sales decreased 100 basis points to 9.2%. Marketing spending was temporarily lowered in order to reduce demand until customer fill rates could recover.

Selling, general, and administrative expense (SG&A) was $136.5 million or 10.7% of net sales on a reported basis. Adjusted SG&A as a percentage of net sales was 13.7% a decrease of 140 basis points due to lower litigation costs and lower incentive compensation.²

Income from Operations was $298.7 million or 23.5% of net sales. Adjusted Income from Operations was $260.7 million or 20.5% of net sales.²

Other Expense of $11.4 million declined primarily due to lower interest expense resulting from lower interest rates.

The effective tax rate was 24.0% compared to 19.6% in 2020, an increase of 440 basis points (EPS -$0.04) primarily related to lower stock option exercises. The full year tax rate is now expected to be 23% compared to our previous expectation of 22%.

Operating Cash Flow

For the first six months of 2021, cash from operating activities decreased 42.5% to $344.3 million, a $254.3 million decrease from the prior year, as higher cash earnings were offset by an increase in working capital. The increase in working capital is primarily related to lower accounts payable and accrued expense balances as well as the deferral of U.S. Federal income tax payments from the second to the third quarter in the prior year. We expect to generate $950 million of cash from operations for the full year.

Capital expenditures for the first six months were $43.3 million, a $12.4 million increase from the prior year to support production capacity related to increased demand. Full year capex is expected to be $140 million (previously $180 million) primarily due to timing of projects.

At June 30, 2021, cash on hand was $149.8 million, while total debt was $1,946.9 million.

2021 New Products

Mr. Farrell commented, “Innovation has been a hallmark of Church & Dwight’s success. We will continue to invest in new products and R&D to drive long-term revenue and earnings growth and to meet consumer needs. We are very excited about our new product launches.”

“In the household products portfolio, we have introduced OXICLEAN Laundry and Home Sanitizer. It is the first and only sanitizing product that consumers add directly to the washing machine with their regular detergent, that boosts stain fighting and eliminates 99.9% of bacteria and viruses. The product is also designed for cleaning throughout the house on a variety of surfaces for a germ-free clean.”

“In the personal care portfolio, WATERPIK launched WATERPIK IONTM, a water flosser which is 30% smaller and contains a lithium ion battery that lasts up to four weeks with a single charge and is specifically designed for smaller bathroom spaces with limited counter space and electric outlets. To capitalize on its earlier success, WATERPIK SONIC-FUSION®, the world’s first flossing toothbrush, was upgraded to SONIC-FUSION 2.0, with two brush head sizes and two brush speeds. FLAWLESS is capitalizing on the at-home beauty and self-care trends with a facial cleanser system, a shower wand for a full body spa-like experience, and salon at-home manicure and pedicure solutions. VITAFUSION launched POWER ZINC, Elderberry gummies in both adult and kids’ variants, and Super Immune Support to capitalize on increased consumer interest in immunity.”

Outlook for 2021

Mr. Farrell stated, “We continue to expect 2021 to be another strong year. Our categories are growing and our brands are performing well. As we continue to experience supply chain disruptions, we now expect full year 2021 reported sales growth to be approximately 5% and organic sales growth to be approximately 4%. This is remarkable on top of 9.6% organic growth in 2020.”

“We now expect to be at the lower end of our range of adjusted EPS growth of 6-8%, reflecting continued strong business performance on top of our 2020 results. We now expect an incremental $125 million in full year input costs (previously $90 million) which have been partially offset by announced price increases, a reduction in coupons and promotions, and lower SG&A. In the near-term, incremental inflation combined with a higher tax rate exceed the partial year benefit of our pricing actions. The full benefit of these pricing actions will be realized in 2022.”

Mr. Farrell continued, “We now expect full year gross margin down 75 basis points (previously we expected flat gross margins) and adjusted operating profit margin expansion of 70 basis points (previous outlook of 80 basis points), which exceeds our Evergreen model of +50 basis points.¹ Consistent with our long term view, our marketing support levels are unchanged from our previous outlook of approximately 11.5%. We now expect full year adjusted SG&A to be down 85 basis points largely due to lower incentive compensation and lower travel. The 2021 effective tax rate is expected to be approximately 23% (previously 22%). Finally, our expectation for cash flow from operations is now approximately $950 million (previously $1 billion).”

“In line with our long term strategy, we continue to pursue accretive acquisitions that meet our strict criteria.”

“While consumption is strong, for Q3, we expect reported sales growth of approximately 3.0% and organic sales growth of approximately 1.5% as we are temporarily constrained by supply. We expect Q3 net sales to be comparable to Q2 net sales. Gross margin expansion reflects the impact of price increases. Adjusted EPS is expected to be $0.70 per share, flat from last year’s adjusted Q3 EPS.”