Church & Dwight Co., Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone Q4 filing; quarterly figures are included below. Amounts are in millions of dollars except per-share data.
Business context and reporting period
Church & Dwight develops, manufactures and markets household, personal care and specialty products, including ARM & HAMMER, OXICLEAN, TROJAN, VITAFUSION and BATISTE. FY 2016 sales mix was approximately 77% Consumer Domestic, 15% Consumer International and 8% Specialty Products Division (SPD). The company completed the TOPPIK acquisition in January and the ANUSOL/RECTINOL acquisition in December. Financial and per-share figures were retrospectively adjusted for a two-for-one stock split effective September 1, 2016.
Key financial metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $3,493.1 | $3,394.8 | +2.9% |
| Gross profit / margin | $1,590.6 / 45.5% | $1,511.8 / 44.5% | +5.2% / +100 bps |
| Operating income / margin | $724.2 / 20.7% | $674.2 / 19.9% | +7.4% / +80 bps |
| Net income | $459.0 | $410.4 | +11.9% |
| Diluted EPS | $1.75 | $1.54 | +14.0% |
| Cash from operating activities | $655.3 | $606.1 | +$49.2 |
| Capital expenditures | $49.8 | $61.8 | −$12.0 |
Sales growth reflected 3.1% higher product volume, 0.1% favorable pricing/product mix, a 0.9% adverse foreign-exchange/other effect, and 0.6% from acquired product lines. Lower manufacturing and commodity costs supported the gross-margin improvement. SG&A rose 4.5% to $439.2; marketing expense increased 2.3% to $427.2.
By segment, sales and income before income taxes were: Consumer Domestic $2,677.8 and $590.6; Consumer International $525.2 and $66.3; SPD $290.1 and $39.8. Domestic sales grew 3.7%, International sales grew 4.8% (including a 6.0% adverse FX effect), while SPD sales fell 7.1%, principally due to weaker animal-productivity sales amid low milk prices.
Q4 2016: Net sales were $896.0 versus $873.6 in Q4 2015; operating income was $173.4 versus $169.2; net income was $110.4 versus $109.1; diluted EPS was $0.42 versus $0.41.
Cash, debt and capital allocation
At year-end, cash and cash equivalents were $187.8, total debt net of issuance costs was $1,120.2, and stockholders’ equity was $1,977.9. Debt comprised $426.8 of short-term borrowings and $693.4 of long-term debt. The company reported $576.0 of availability through its revolving credit facility and commercial-paper program, plus a potential $600.0 commitment increase subject to conditions. It was in compliance with its maximum leverage covenant.
Operating cash flow increased to $655.3. Investing activities used $354.6, including $305.3 for acquisitions; financing activities used $439.6, including $400.0 of share repurchases and $183.0 of dividends. The company repurchased approximately 9.0 million shares in 2016. A new $500.0 repurchase authorization was approved in November, with $300.0 remaining at year-end. The Board raised the quarterly dividend 7% in February 2017 to $0.19 per share. Management expected 2017 capital expenditures of approximately $55.0.
Material changes, outlook and risks
- Management cited continuing retailer pricing pressure, private-label competition and soft or inconsistent consumer demand. P&G’s discounting of Simply Tide and Henkel’s entry into premium laundry detergent and acquisition of Sun Products could intensify competition. The company said it would focus on brand investment, new products, cost control, geographic growth and strategic acquisitions; no specific 2017 sales or EPS guidance is provided in the supplied filing text.
- In Q4 2016, the company decided to sell its Brazilian chemical business, recording a $4.9 plant impairment. It signed a sale agreement in Q1 2017 and expected approximately $5.0 of severance and other charges; 2016 sales of the business were approximately $22.0.
- The company expected to terminate an international defined-benefit pension plan by the end of Q2 2017, subject to approvals. It estimated a 2017 expense of $49.0–$55.0 ($40.0–$45.0 after tax) and an additional cash payment of $20.0–$26.0 ($14.0–$19.0 after tax).
- In January 2017, the company acquired VIVISCAL for approximately $160.0, funded with short-term borrowings. The filing states the brand had $44.0 of global sales in 2016.
- Key exposures include significant customer concentration (Wal-Mart represented 24% of sales; the top three customers 35%), competitive pricing and distribution pressures, raw-material and fuel costs, foreign exchange, acquisition integration, regulation, environmental matters, cyber and operational disruptions, and leverage/liquidity risks.
- In the Scantibodies contract dispute, the plaintiff seeks more than $20.0 plus other relief. The company is defending the case and had recorded an immaterial reserve; it said any excess loss could not then be estimated and could be material.
Important facts for investors to verify
- Whether volume-led sales growth and the 100-basis-point gross-margin expansion persist as competitive pricing and input costs change.
- Progress and financial impact of the Brazilian chemical-business sale, including the anticipated charges and closing.
- Actual cash cost and settlement expense for the pension-plan termination versus management’s estimates.
- Debt, cash and available borrowing capacity after the VIVISCAL acquisition, repurchases and dividends; note $150.1 of foreign cash was considered permanently reinvested.
- Developments in the Scantibodies litigation and any changes to the company’s reserve or exposure.