Church & Dwight Co., Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions except per-share data. The company sells household and personal care products, and specialty chemicals, through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $847.1 | $808.3 | $1,659.4 | $1,590.3 |
| Gross profit / margin | $373.1 / 44.0% | $356.4 / 44.1% | $728.6 / 43.9% | $695.8 / 43.8% |
| Operating income / margin | $142.3 / 16.8% | $138.2 / 17.1% | $314.4 / 18.9% | $300.2 / 18.9% |
| Income before taxes | $119.5 | $135.0 | $284.8 | $291.7 |
| Net income | $73.7 | $88.8 | $180.9 | $191.4 |
| Diluted EPS | $0.55 | $0.65 | $1.35 | $1.38 |
- Q2 sales rose 4.8%; reported growth reflected volume (+4.5%), pricing/product mix (+0.6%), acquired product lines (+2.4%), and foreign exchange (-2.7%). Six-month sales rose 4.3%.
- Q2 gross margin declined 10 basis points, while the first-half margin increased 10 basis points. Q2 operating margin declined 30 basis points; the first-half margin was unchanged.
- Q2 SG&A increased 9.7% to $115.0, including an $8.9 pension settlement charge and acquisition-related costs. The effective tax rate was 38.3% in Q2 and 36.5% for the first half, versus 34.2% and 34.4%, respectively, in 2014.
- Quarterly dividend increased 8% to $0.335 per share; dividends paid in the first half were $87.5.
Cash flow, debt and liquidity
- First-half operating cash flow was $248.4, versus $206.8 a year earlier. Investing cash outflow was $110.9, including $74.9 for the VI-COR acquisition and $34.0 of capital expenditures. Financing cash outflow was $347.9, including $263.1 of share repurchases and $87.5 of dividends.
- Cash fell to $203.2 from $423.0 at year-end 2014. Total debt was $1,073.7 and net debt was $870.5, compared with $1,095.2 and $672.2, respectively, at year-end.
- At June 30, short-term borrowings were $123.6; long-term debt was $950.1, including $250.0 of notes due December 2015. Management anticipated repaying those notes from operating cash flow and existing cash.
- The company reported approximately $470 of availability through its revolving credit facility and commercial paper program, plus a potential $500 commitment increase subject to lender commitments and conditions. Its leverage ratio was 1.47 against a maximum of 3.75 under the credit agreement.
- Management expected 2015 capital expenditures of approximately $70 and stated available cash and operating cash flow were expected to support capital spending, dividends, repurchases, benefit-plan contributions, and the 2015 note repayment. First-half cash conversion cycle improved nine days year over year to 30 days.
Material changes and management commentary
- Consumer Domestic Q2 sales rose 6.6% to $638.3, with growth from product volume and acquired brands. Consumer International sales fell 4.2% to $130.9, as currency headwinds outweighed volume and pricing gains. SPD sales increased 7.0% to $77.9, helped by VI-COR and chemicals.
- Consumer International income before taxes fell to $4.5 from $14.3 in Q2, reflecting the pension charge, unfavorable exchange rates, and higher marketing costs. SPD income before taxes rose to $16.1 from $10.1. Corporate recorded a $13.7 pretax loss, primarily reflecting a $17.0 impairment of the Natronx investment.
- The Natronx impairment reflected weaker expected demand amid the power-sector shift from coal to natural gas and delays in federal regulation. Partners were exploring strategic alternatives.
- Gross margin was pressured by manufacturing costs, including start-up costs at the new vitamin facility, and unfavorable foreign exchange; acquisitions, volume, pricing/mix, productivity programs, and lower commodity costs partly offset the pressure.
- Management said start-up delays at the vitamin facility required allocating product to some retailers; production rates were increasing, with customer service expected to improve. The company also completed the VI-COR acquisition for $74.9 cash, with a possible additional $5.0 payment dependent on performance.
- The company repatriated $93.0 of cash, used to reduce commercial paper. It intended to keep a further $149.2 of foreign cash permanently invested abroad; using that cash for U.S. operations could trigger U.S. tax.
Risks, contingencies and unusual items
- Competitive pressure in laundry detergents—including lower-priced rival products and Henkel’s U.S. launch of Persil—could intensify pricing pressure. Management noted the category’s recent performance did not assure continued growth.
- Vitamin product allocations could affect retailer relationships; the filing warns that loss of a significant customer or material sales declines related to service or perceived quality issues could adversely affect results.
- A Brazilian environmental matter remains unresolved. The company had accrued $2.4; landfill removal remains reasonably possible, with an estimated cost of $30–$50. The company said it did not believe removal would be required, but the outcome was uncertain.
- The filing describes ordinary-course litigation, investigations, and other proceedings whose outcomes may be uncertain and could materially affect the company. It also cites foreign exchange, commodity costs, demand, customer and supplier conditions, and regulatory changes as risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No specific full-year earnings or sales guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether vitamin-facility production and retailer service levels improved, and whether any customer or product-quality issues emerged.
- Performance in laundry detergents and other key product categories as competition and pricing pressure evolve.
- Whether the company repaid the $250.0 notes due December 2015 as planned and how cash, commercial paper, and net debt subsequently changed.
- Developments in the Natronx strategic review and the Brazilian environmental remediation matter, including any change in estimated exposure.
- Whether acquisition integration, manufacturing start-up costs, foreign exchange, and the higher tax rate affected subsequent margins and earnings.