Church & Dwight Co., Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The company sells household, personal care and specialty chemical products through Consumer Domestic, Consumer International and Specialty Products (SPD) segments. This filing covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Figures are unaudited and in millions, except per-share data.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $877.2 | $849.0; up 3.3% |
| Gross profit / margin | $399.3 / 45.5% | $379.0 / 44.6%; margin up 90 bps |
| Operating income / margin | $196.1 / 22.4% | $179.5 / 21.1%; income up 9.2%, margin up 130 bps |
| Net income | $131.5 | $113.0; up 16.4% |
| Diluted EPS | $0.51 | $0.43; up 18.6% |
| Operating cash flow | $131.5 | $177.8 |
| Cash and cash equivalents at quarter-end | $139.5 | $187.8 at Dec. 31, 2016 |
Q1 sales growth comprised 2.7% volume growth, 1.6% acquired-product volume and offsets from pricing/product mix (-0.4%) and foreign exchange (-0.6%). Cost improvement projects and acquired-product margins supported gross-margin expansion; higher commodity costs, FX, unfavorable mix and the Brazil business sale partly offset those gains.
At March 31, total short- and long-term debt was approximately $1,278.6, versus $1,120.2 at year-end, primarily reflecting commercial paper borrowings that funded the Viviscal acquisition. Short-term borrowings were $585.7 and long-term debt was $692.9. Current assets were $754.5 versus current liabilities of $1,166.8. The company reported $200 available under a term loan facility and approximately $414 available through its revolving facility and commercial paper program, plus a conditional commitment-increase feature of up to $600. Management said it expects to remain in compliance with its maximum leverage covenant.
Investing cash outflow was $159.3, including $160.3 for Viviscal, partly offset by $4.5 of proceeds from the Brazil chemical business sale. Financing cash outflow was $24.4, including $157.1 of share repurchases and $48.4 of dividends, partly offset by commercial paper borrowings and stock-option proceeds. Operating cash flow fell $46.3 year over year, mainly because of working-capital outflows, including lower accounts payable and higher inventory and receivables. The cash conversion cycle improved to 17 days from 26 days.
Material changes and business developments
- Consumer Domestic sales rose 1.8% to $659.7; pretax segment income increased $21.0 to $160.9, helped by manufacturing and commodity costs, volume and lower expenses. Management cited sustained price and distribution competition in laundry detergents.
- Consumer International sales rose 12.3% to $143.1, including acquired products; unfavorable FX and mix partly offset growth. Pretax segment income increased $1.3 to $19.4.
- SPD sales increased 0.8% to $74.4, but pretax segment income declined $5.5 to $7.8, mainly due to higher manufacturing costs and Brazil sale-related charges.
- On January 17, 2017, the company acquired VIVISCAL for approximately $160.3, funded with short-term borrowings. The brand had 2016 global sales of $44. Goodwill and intangible assets were recorded; pro forma results were omitted as the impact was considered immaterial.
- The company sold its Brazilian chemical business in Q1 for approximately $4.5 and recorded $3.5 of severance and other charges ($1.3 in cost of sales and $2.2 in SG&A).
- After quarter-end, the company repurchased approximately 2.9 million shares for $142.9. On May 1, it acquired Agro BioSciences for approximately $75, including up to $25 contingent on operating performance, funded with short-term borrowings.
Outlook, risks and unusual items
- No specific full-year sales or EPS guidance is stated in the provided filing text. Management expects 2017 capital expenditures of approximately $50 and says operating cash flow and borrowing capacity should cover capital needs, planned dividends and repurchases as implemented.
- The quarterly dividend was increased 7% to $0.19 per share, or $0.76 annualized. The company repurchased 3.1 million shares for $157.1 in Q1; $267.9 remained under the 2016 repurchase program at March 31.
- Q1 diluted EPS included an $8.7, or $0.03 per-share, tax benefit from adopting new share-based compensation accounting. The Brazil sale charges reduced EPS by approximately $0.01. The effective tax rate was 30.9%, versus 34.7%, primarily reflecting the accounting-related tax benefit.
- Management expected termination of international defined-benefit pension plans by the end of Q2 2017, subject to regulatory approval. Settlement was estimated to cause a one-time 2017 expense of $44–$50 ($36–$41 after tax) and an additional cash payment of $14–$20 ($9–$14 after tax); estimates could change.
- A Scantibodies contract lawsuit seeks more than $20 in damages and other relief. The company is defending the case and has recorded an immaterial reserve, but says it is reasonably possible it could pay all or substantially all of the amount sought; the excess exposure cannot presently be estimated clearly.
- Other stated risks include competition, consumer and retailer demand, commodity and energy prices, manufacturing or distribution disruption, foreign exchange, acquisition and divestiture outcomes, litigation and regulatory matters. The filing says market-risk exposure had not changed materially from year-end.
Important facts for investors to verify
- Whether sales, margins and segment profitability trends continued, particularly SPD’s earnings decline and competitive pressures in laundry products.
- How much of EPS growth reflects recurring operations versus the $8.7 accounting-related tax benefit and Brazil sale charges.
- Post-quarter debt, liquidity and leverage after the Agro BioSciences acquisition and additional share repurchases.
- Actual timing and settlement cost of the international pension-plan termination.
- Developments and potential financial exposure in the Scantibodies litigation.