Church & Dwight Co., Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Amounts are in millions except per-share data. The company sells household, personal care and specialty chemical products through Consumer Domestic, Consumer International and SPD segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $849.0 | $812.3 | +4.5% |
| Gross profit / margin | $379.0 / 44.6% | $355.5 / 43.8% | Profit +6.6%; margin +80 bps |
| Operating income / margin | $179.5 / 21.1% | $172.1 / 21.2% | Income +4.3%; margin -10 bps |
| Net income | $113.0 | $107.2 | +5.4% |
| Diluted EPS | $0.86 | $0.80 | +7.5% |
| Operating cash flow | $177.8 | $144.2 | +$33.6 |
Gross margin benefited from lower commodity costs (+120 bps), the acquired business (+20 bps) and price/volume mix (+10 bps), partly offset by manufacturing costs (-30 bps) and foreign exchange (-40 bps). SG&A rose 13.1% to $107.0, chiefly from compensation—including the timing of senior-management stock-option grants—and ongoing and one-time Toppik acquisition costs. Marketing expense rose 4.2% to $92.5 and remained 10.9% of sales. The effective tax rate was 34.7%, versus 35.1%.
Sales and segment developments
- Sales growth reflected product volume (+5.6%) and acquired product lines (+0.9%), partly offset by foreign exchange (-1.6%) and pricing/product mix (-0.4%).
- Consumer Domestic sales rose 5.4% to $647.8; income before tax increased to $139.9 from $129.6. Growth included ARM & HAMMER laundry detergent, VITAFUSION, cat litter and BATISTE dry shampoo.
- Consumer International sales increased 5.8% to $127.4, but income before tax fell to $18.1 from $19.4. Foreign exchange reduced sales growth by 9.0 percentage points and weighed on earnings.
- SPD sales fell 4.6% to $73.8 and income before tax declined to $13.3 from $14.0, reflecting lower animal-nutrition sales amid lower milk prices and a strong prior-year comparison.
Cash, debt and capital allocation
- Cash and cash equivalents were $194.3 at March 31, down from $330.0 at year-end. Current assets were $785.5 and current liabilities $1,012.8.
- Short-term borrowings increased to $451.3 from $357.2, including $445.0 of commercial paper. Long-term debt was $699.8, including $400 million of 2.875% notes due 2022 and $300 million of 2.45% notes due 2019.
- Investing cash outflow was $184.1, including $175.0 for the January acquisition of Spencer Forrest, maker of TOPPIK, and $8.5 of capital expenditures. Financing cash outflow was $136.1, including $200.0 of share repurchases and $46.1 of dividends.
- Operating cash flow improved partly because of lower working capital and higher cash earnings. The company factored $67.0 of receivables; reported DSO improved by eight days, while inventory days increased by five. The cash conversion cycle improved three days to 26.
- The company reported $551.0 of availability through its revolving facility and commercial-paper program, with a further $600.0 commitment-increase feature subject to lender commitments and conditions. Its trailing-twelve-month leverage ratio was 1.5, below the covenant maximum.
Outlook, risks and contingencies
- Management expected operating cash and borrowing capacity to cover approximately $55.0 of 2016 capital expenditures, dividends at the approved rate and share repurchases as implemented. The filing provides no specific earnings or sales guidance.
- The board raised the quarterly dividend 6% to $0.355 per share ($1.42 annualized). The company repurchased 2.2 million shares for $200.0; approximately $128.0 remained under the 2015 repurchase program at quarter-end.
- Toppik was acquired for approximately $175.0, funded with commercial paper; its annual sales were approximately $30.0. Purchase accounting was preliminary, including $115.8 of trade names and other intangibles and $52.2 of goodwill.
- Management highlighted laundry-detergent competition, potential price and distribution pressure, foreign-exchange exposure, commodity and manufacturing costs, consumer demand, and animal-nutrition market conditions. The company stated its market-risk exposure had not changed materially since year-end.
- A supplier, Scantibodies Laboratory, seeks damages exceeding $20.0 in a contract dispute. The company is defending the case and recorded an immaterial reserve; any excess loss could be material, and the amount is not currently estimable. The filing also describes other ordinary-course legal matters and acquisition/divestiture indemnities.
- The company had approximately $248.7 of vendor and other commitments, approximately $24.0 of guarantees and letters of credit, and a potential additional $7.0 payment tied to FDA approvals under an oral-care technology license.
Important facts for investors to verify
- Whether sales and margin gains persist after factoring in Toppik and foreign-exchange effects, and whether higher SG&A moderates.
- How laundry-category competition, pricing and unit-dose product trends affect market share and profitability.
- Receivables factoring’s contribution to operating cash flow and the rise in inventory days.
- Commercial-paper funding, acquisition integration and continued share repurchases against lower cash balances and higher short-term borrowings.
- Developments in the Scantibodies litigation and any changes to the acquisition purchase-price allocation or stated outlook.