Church & Dwight Co., Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in millions except per-share data. The filing is unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $967.9 (+11.2%) | $870.7 | $2,743.1 (+5.6%) | $2,597.1 |
| Gross profit / margin | $438.5 / 45.3% | $395.6 / 45.4% | $1,248.2 / 45.5% | $1,182.6 / 45.5% |
| Operating income / margin | $198.7 / 20.5% | $196.0 / 22.5% | $518.0 / 18.9% | $550.8 / 21.2% |
| Net income | $133.4 | $124.0 | $337.8 | $348.6 |
| Diluted EPS | $0.52 | $0.47 | $1.32 | $1.33 |
- Q3 sales growth reflected 6.9% higher product volumes, 7.5% contribution from acquired product lines net of divestiture, and 0.5% foreign exchange benefit, partly offset by 3.7% unfavorable pricing/product mix.
- Nine-month operating income fell 6.0% and net income fell 3.1%, despite higher sales. Q3 net income rose 7.6%; diluted EPS rose 10.6%.
- Q3 gross margin declined 10 basis points, mainly from unfavorable price/mix, higher commodity costs and foreign exchange, partly offset by acquired businesses, volume and cost improvements. Nine-month gross margin was unchanged.
- Marketing expense increased 14.0% in Q3 and 7.3% for nine months. SG&A increased 26.1% and 23.6%, respectively, reflecting acquisition-related costs and, year to date, a pension settlement charge.
- Reported earnings included a $7.6 Q3 tax benefit from reversing a Natronx-related valuation allowance. A new share-based compensation accounting standard reduced income tax expense by $3.5 in Q3 and $14.6 year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $424.1, down from $495.0, primarily due to increased working capital, including higher receivables and inventory. Investing cash use was $1,278.3, chiefly for acquisitions; financing provided $888.6, primarily from debt issuance.
- Cash was $236.5 at September 30, 2017, versus $187.8 at year-end 2016. Management reported approximately $681.0 available under the revolving facility and commercial paper program, plus a potential additional $600.0 borrowing feature subject to lender commitments and conditions.
- Short-term borrowings were $317.2 and long-term debt $2,104.1, compared with $426.8 and $693.4, respectively, at year-end. The increase in long-term debt primarily reflects the July issuance of $1,425.0 of senior notes used mainly to fund the Waterpik acquisition and repay other borrowings.
- Capital returns included $300.0 of share repurchases and $143.2 of dividends during the first nine months. The quarterly dividend was increased 7% to $0.19 per share. A new $500.0 repurchase program was authorized November 1, 2017.
Material changes and business developments
- Waterpik was acquired August 7 for $1,024.7 net of cash acquired; its trailing twelve-month sales through June 30 were approximately $265.0. The acquisition added to both Consumer Domestic and Consumer International.
- Other 2017 acquisitions included Viviscal for $160.3 and Agro BioSciences for approximately $75.0, with up to $25.0 additional Agro consideration contingent on sales performance. Purchase accounting for Waterpik and Agro remained preliminary.
- Acquired product lines contributed 7.5% to Q3 sales growth and 3.4% to nine-month growth, net of divestiture. Pricing/product mix was unfavorable in both periods, principally due to promotional and coupon costs.
- Consumer Domestic sales rose 9.7% in Q3 and 4.3% year to date, but pretax income declined in both periods. Consumer International sales increased 21.7% and 13.4%; nine-month pretax income was reduced substantially by the pension settlement. SPD sales increased 5.3% and 3.6%.
Outlook, risks and contingencies
- No specific full-year sales or EPS guidance is provided in the supplied filing text. Management expected cash from operations and borrowing capacity to cover approximately $45.0 of 2017 capital expenditures, dividends and repurchases as implemented, and stated it expected to remain compliant with its maximum-leverage covenant.
- Management cited intense laundry-detergent price and distribution competition, including pressure from value and premium competitors. Other identified risks include demand and retailer actions, commodity and energy costs, foreign exchange, manufacturing or distribution disruptions, acquisitions, and litigation and regulatory matters.
- A personal-care indefinite-lived trade name had experienced sales and profit declines that reduced the excess of estimated fair value over carrying value; the company planned to complete its impairment assessment in Q4. The filing states the 2016 excess was approximately $60.0, or 20%.
- In a contract dispute, Scantibodies seeks more than $20.0 in damages and other relief. The company is defending the case and has an immaterial reserve, but says it is reasonably possible it could pay all or substantially all of the amounts sought; the potential exposure cannot yet be estimated more precisely.
- The international defined-benefit plan termination resulted in a one-time $39.2 pretax charge in Q2 ($31.5 after tax). The Brazilian chemical business sale resulted in a $3.5 charge in Q1.
Important facts for investors to verify
- Whether Waterpik and other acquisitions deliver expected sales, synergies and margins, and how acquisition-related costs develop.
- Whether unfavorable price/mix, promotions and competitive pressure continue to weigh on profitability.
- Progress on the personal-care trade-name impairment assessment and any resulting charge.
- Debt, interest expense and liquidity following the senior-note issuance and major acquisition spending.
- Developments in the Scantibodies litigation and any change in the company’s assessment of potential loss.