Church & Dwight Co., Inc. — 2017 Form 10-K Summary
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017 (not solely Q4). Church & Dwight sells household, personal care and specialty products through Consumer Domestic, Consumer International and Specialty Products Division (SPD). Consumer Domestic contributed 76% of sales, International 16% and SPD 8%. Key brands include ARM & HAMMER, OXICLEAN, TROJAN, VITAFUSION and WATERPIK.
Financial results and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $3,776.2 million | $3,493.1 million |
| Gross profit / margin | $1,729.6 million / 45.8% | $1,590.6 million / 45.5% |
| Operating income / margin | $732.7 million / 19.4% | $724.2 million / 20.7% |
| Net income | $743.4 million | $459.0 million |
| Diluted EPS | $2.90 | $1.75 |
| Cash from operations | $681.5 million | $655.3 million |
| Cash and cash equivalents at year-end | $278.9 million | $187.8 million |
| Total debt, net of issuance costs | $2,374.3 million | $1,120.2 million |
Sales rose 8.1%, reflecting 5.0% organic volume growth and 5.4% contribution from acquired product lines, partly offset by unfavorable pricing/product mix of 2.3%. Gross margin improved 30 basis points, while operating margin declined 130 basis points as SG&A rose 23.6%, including a pension settlement charge and acquisition-related costs. Operating income grew just 1.2%.
Reported net income and EPS benefited substantially from a provisional $272.9 million tax-reform benefit. The 2017 effective tax rate was negative 7.3%, versus 35.0% in 2016; management estimated a future effective rate of approximately 24–25%, subject to final tax-law interpretations. Excluding the tax benefit, reported earnings growth is not representative of underlying operating performance.
Cash used in investing was $1,303.4 million, primarily $1,260.0 million for acquisitions; capital expenditures were $45.0 million. Cash provided by financing was $698.9 million, including debt issuance used principally to fund Waterpik. The cash conversion cycle improved to 18 days from 21 days. At year-end, the company reported approximately $728 million available through its revolving facility and commercial-paper program, in addition to cash. Debt was 52% of total capitalization, versus 36% in 2016.
Fourth-quarter 2017 sales were $1,033.1 million, operating income $214.7 million and net income $405.6 million. Fourth-quarter diluted EPS was $1.60; the quarter’s net income also reflects the tax-reform benefit.
Material changes versus prior year
- Waterpik was acquired in August for approximately $1,024.6 million net of cash acquired; Viviscal was acquired for $160.3 million and Agro BioSciences for approximately $75 million, plus potential contingent consideration.
- Acquisitions helped lift sales, especially International sales, which grew 18.3%; Consumer Domestic sales rose 6.6% and SPD sales rose 3.5%.
- Debt increased by approximately $1.25 billion year over year, largely to finance Waterpik. Interest expense rose to $52.6 million from $27.7 million.
- The company completed termination of an international defined-benefit pension plan and recorded a $39.2 million pretax charge ($31.5 million after tax).
- Consumer International pretax income fell to $32.0 million from $66.3 million, chiefly due to the pension charge and higher SG&A. SPD pretax income improved to $43.5 million from $39.8 million; its 2016 comparison included lower dairy-market demand.
Outlook, risks and unusual items
- Management expected a competitive 2018 market, citing weak or inconsistent consumer demand, aggressive competitor pricing, private-label expansion and pressure in laundry detergent and gummy vitamins. Its stated priorities were marketing and trade investment, cost control, product innovation, global growth and strategic acquisitions.
- Management expected operating cash flow and borrowing capacity to cover approximately $70 million of 2018 capital expenditures, dividends at the latest approved rate and share repurchases as implemented. The quarterly dividend was increased 14% in February 2018 to $0.2175 per share ($0.87 annualized).
- The company repurchased $400 million of shares in 2017 and had $400 million remaining under its 2017 authorization at year-end. A separate $200 million accelerated repurchase was paid in January 2018, with 4.1 million shares delivered in Q1.
- Raw-material, packaging, energy and transportation costs, pricing pressure, major-customer concentration, foreign exchange, acquisition integration, regulation, cyber risks and debt/covenant compliance are identified risks. Walmart represented 24% of sales; the top three customers represented approximately 36%.
- A personal-care trade name had only about $34 million, or 12%, of estimated fair-value cushion over carrying value, making it more susceptible to impairment. Waterpik’s purchase-price allocation was preliminary; its controls were excluded from management’s year-end internal-control assessment, although the company’s overall controls received an effective assessment.
- In the Scantibodies contract case, the plaintiff seeks damages exceeding $20 million. The company is defending the matter and recorded an immaterial reserve, but disclosed that it could potentially owe all or substantially all of the amounts sought; the excess exposure was not estimable.
Important facts for investors to verify
- Underlying earnings and operating trends apart from the one-time $272.9 million tax benefit; confirm the eventual tax-reform accounting and the expected 24–25% tax rate.
- Waterpik’s post-acquisition sales, profitability, integration progress and final purchase-price allocation, alongside the effect of higher debt and interest expense.
- Whether pricing, promotion and competitive pressures—particularly in laundry detergents and gummy vitamins—affect volumes, mix and margins.
- Developments in the Scantibodies litigation and any change in the estimated exposure or reserve.
- Performance and impairment assumptions for the at-risk personal-care trade name, and progress integrating Waterpik’s financial controls.