Church & Dwight Co., Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016. Church & Dwight sells household and personal care products, specialty chemicals, and related products through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $877.4 | $847.1 | $1,726.4 | $1,659.4 |
| Gross profit / margin | $408.0 / 46.5% | $373.1 / 44.0% | $787.0 / 45.6% | $728.6 / 43.9% |
| Operating income / margin | $175.3 / 20.0% | $142.3 / 16.8% | $354.8 / 20.6% | $314.4 / 18.9% |
| Net income | $111.6 | $73.7 | $224.6 | $180.9 |
| Diluted EPS | $0.85 | $0.55 | $1.71 | $1.35 |
- Sales increased 3.6% for the quarter and 4.0% for the first half. Company-reported sales growth reflected volume, pricing/product mix, Toppik acquisition contribution, and a partial offset from foreign exchange.
- Gross margin expanded 250 basis points in Q2 and 170 basis points in the first half. Management attributed the improvement mainly to lower manufacturing and commodity costs, productivity, favorable mix, and the higher-margin acquired business; unfavorable foreign exchange partly offset the gains.
- Q2 sales by segment: Consumer Domestic $669.8 million, up 4.9%; Consumer International $136.4 million, up 4.2%; and SPD $71.2 million, down 8.6%. First-half sales were up 5.2% in Domestic and 5.0% in International, while SPD declined 6.6%.
- Cash from operations was $296.5 million for the first half, versus $248.4 million a year earlier. Investing used $193.6 million, including the Toppik acquisition; financing used $225.6 million, including $200.0 million of share repurchases and $91.7 million of dividends. Cash ended the period at $210.8 million, down from $330.0 million at year-end 2015.
- At June 30, cash was $210.8 million; short-term borrowings were $381.6 million and long-term debt was $700.7 million. Current assets were $817.9 million and current liabilities were $926.9 million. The company reported approximately $620 million available through its revolving facility and commercial paper program, plus a potential $600 million commitment increase subject to lender commitments and conditions.
- The quarterly dividend increased 6% to $0.355 per share, or $1.42 annualized. The company repurchased about 2.2 million shares for $200.0 million in Q1 and made no repurchases in Q2.
Material changes and unusual items
- Income from operations rose 23.2% in Q2 and 12.8% for the first half. Net income comparisons also benefited from a lower effective tax rate: 34.7% in 2016 versus 38.3% in Q2 2015 and 36.5% for the first half of 2015.
- Comparative 2015 results included an $8.9 million international pension settlement charge in SG&A and a $17.0 million impairment charge on the Natronx investment. These items affected the year-over-year comparisons, including affiliate earnings and taxes.
- On January 4, 2016, the company acquired Spencer Forrest, maker of TOPPIK, for approximately $175.5 million, funded with commercial paper. TOPPIK annual sales were stated as approximately $30 million; purchase accounting was preliminary.
- SPD faced lower animal nutrition sales amid low milk prices, excess global supply, weak exports, and a strong U.S. dollar. Consumer Domestic growth included VITAFUSION, OXICLEAN, and BATISTE, partly offset by lower KABOOM sales.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management expected 2016 capital expenditures of approximately $55 million and said operating cash flow plus borrowing capacity should fund capital needs, dividends, and repurchases as implemented. Management stated it expected to remain in compliance with the credit agreement’s maximum leverage covenant.
- Management highlighted competitive pressure in laundry detergents, including Tide Pods, Henkel’s entry into the U.S. premium market with Persil, and Henkel’s announced acquisition of Sun Products. The filing notes potential impacts on pricing, distribution, market share, and OXICLEAN; future category growth and the company’s ability to offset a decline are uncertain.
- Foreign exchange and commodity-price movements, economic and consumer-demand conditions, supply and manufacturing disruptions, customer and supplier issues, acquisitions, regulatory matters, and litigation are identified as risks. Market-risk exposure was reported as not materially changed from year-end 2015.
- A Scantibodies breach-of-contract suit seeks damages in excess of $20 million plus other relief. The company is defending the case and recorded an immaterial reserve; it says any excess loss cannot currently be estimated and could be material. Other ordinary-course proceedings and acquisition/divestiture indemnities are also disclosed.
- The company disclosed approximately $245 million in vendor and other commitments, guarantees and letters of credit of approximately $23 million, and a possible additional $7 million license payment upon specified FDA approvals.
- Subsequent to quarter-end, the board approved a two-for-one stock split, payable September 1, 2016 to shareholders of record August 15. The quarter-end financial statements do not reflect the split.
Important facts for investors to verify
- Whether gross-margin improvements from productivity, commodity costs, and mix are sustainable, and how competitive laundry-market developments affect sales and margins.
- How much of operating cash-flow improvement reflects durable operations versus working-capital actions, including approximately $64 million of receivables factoring; inventory days increased year over year.
- Final Toppik purchase-price allocation, acquired-business contribution, and the effect of additional debt and amortization.
- Available borrowing capacity, covenant headroom, and the company’s planned balance among acquisitions, dividends, capital spending, and repurchases.
- Developments and potential exposure in the Scantibodies litigation and other disclosed contingencies.
- Application of the announced stock split to per-share and share-count comparisons.