Church & Dwight Co., Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results; dollar amounts in millions except per-share data. The company sells household and personal-care products, specialty chemicals, and related products through Consumer Domestic, Consumer International, and SPD segments. Share and per-share figures reflect the two-for-one stock split effective September 1, 2016.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $870.7 | $861.8 | $2,597.1 | $2,521.2 |
| Gross profit | $395.6 | $385.8 | $1,182.6 | $1,114.4 |
| Gross margin | 45.4% | 44.8% | 45.5% | 44.2% |
| Operating income | $196.0 | $190.6 | $550.8 | $505.0 |
| Operating margin | 22.5% | 22.1% | 21.2% | 20.0% |
| Net income | $124.0 | $120.4 | $348.6 | $301.3 |
| Diluted EPS | $0.47 | $0.45 | $1.33 | $1.13 |
- Q3 sales rose 1.0%; nine-month sales rose 3.0%. Consolidated volume growth was 1.7% in Q3 and 3.5% year to date, partly offset by unfavorable foreign exchange and price/product mix.
- Q3 gross margin improved 60 basis points, attributed to lower manufacturing and commodity costs and the acquired business, partly offset by adverse mix and currency. Nine-month gross margin rose 130 basis points.
- Marketing expense increased 5.8% in Q3 and 4.5% year to date. SG&A declined 1.0% in Q3 and increased 2.9% year to date.
- Operating cash flow was $495.0 for the first nine months, versus $408.8 in 2015. Investing cash outflow was $202.8, including the Toppik acquisition; financing cash outflow was $392.7.
- Cash was $232.1 at September 30, 2016, down from $330.0 at year-end 2015. Short-term borrowings were $230.6 and long-term debt was $699.1, compared with $357.2 and $692.8, respectively, at year-end.
- Liquidity included approximately $773.0 available under the revolving facility and commercial paper program, plus a potential $600.0 commitment increase subject to lender commitments and conditions. Management said cash from operations and borrowing capacity should cover expected 2016 capital expenditures of approximately $50.0, dividends, and planned repurchases.
- Cash dividends were $0.177 per share in Q3 and $0.53 per share for the nine months. The company repurchased $200.0 of shares in Q1 and none in Q3.
Material changes and segment trends
- Consumer Domestic: Sales increased 1.3% in Q3 and 3.8% year to date. Higher sales of ARM & HAMMER detergents, VITAFUSION, OXICLEAN, and BATISTE were partly offset by weaker products and price/mix. Segment pretax income was $160.2 in Q3 and $441.7 year to date.
- Consumer International: Sales increased 7.3% in Q3 and 5.7% year to date; currency was a significant offset. Segment pretax income was $19.8 and $54.1, respectively.
- SPD: Sales fell 10.7% in Q3 and 8.0% year to date, mainly from lower animal nutrition sales amid low milk prices and a strong prior-year comparison. Segment pretax income declined to $9.9 in Q3 and $33.9 year to date.
- Corporate results improved year to date to $6.7 pretax income from an $8.4 loss, principally because 2015 included a $17.0 impairment charge related to Natronx.
- On January 4, 2016, the company acquired Toppik maker Spencer Forrest for approximately $175.5, financed with commercial paper. Toppik annual sales were stated as approximately $30.0.
Outlook, risks, and unusual items
- The filing provides no specific full-year sales, earnings, or EPS guidance. Management expected 2016 capital expenditures of approximately $50.0 and stated it expected to remain compliant with its credit agreement’s maximum leverage covenant.
- Management cited intense laundry-detergent competition, including Tide Pods, Henkel’s Persil launch, and Henkel’s acquisition of Sun Products. It noted potential pressure on market share, pricing, distribution, and OXICLEAN detergent; responses include product launches and increased marketing and trade spending.
- Other cited risks include foreign exchange and commodity movements, weak milk prices affecting SPD, economic and consumer-demand conditions, supply or manufacturing disruptions, regulatory matters, and litigation.
- Scantibodies Laboratory seeks more than $20.0 in compensatory and punitive damages in a contract dispute. The company is defending the matter and has recorded an immaterial reserve; it says any excess loss is not currently estimable and could be material.
- Commitments included approximately $242.0 for materials, packaging, services, licensing, and promotion, plus approximately $22.0 of guarantees and letters of credit. A potential additional $7.0 oral-care license payment depends on FDA approvals.
- On November 2, 2016, the board authorized a new share-repurchase program of up to $500.0, replacing the 2015 program; the evergreen program continues. Repurchases may be suspended or discontinued.
- Operating cash flow benefited from working-capital changes, including factoring approximately $60.0 of receivables. The cash conversion cycle improved to 22 days from 31 days a year earlier, primarily due to lower DSO associated with factoring.
Important facts for investors to verify
- Whether Consumer Domestic growth and gross-margin improvement persist amid laundry-category pricing, competition, and promotional pressures.
- Whether SPD animal-nutrition weakness and low milk prices continue, and whether the Toppik acquisition delivers expected sales and synergies.
- The sustainability of operating cash flow and working-capital improvement, including the role and ongoing extent of receivables factoring.
- Future borrowing, cash deployment, and share repurchases under the new $500.0 authorization; the additional $600.0 borrowing feature is conditional.
- Developments in the Scantibodies litigation and other contingencies, including whether any material loss becomes estimable.