Church & Dwight Co., Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Figures are in millions of dollars except per-share data and percentages. The financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $861.8 | $841.8 | $2,521.2 | $2,432.1 |
| Gross profit | $385.8 | $367.5 | $1,114.4 | $1,063.3 |
| Gross margin | 44.8% | 43.7% | 44.2% | 43.7% |
| Operating income | $190.6 | $177.2 | $505.0 | $477.4 |
| Operating margin | 22.1% | 21.1% | 20.0% | 19.6% |
| Net income | $120.4 | $115.9 | $301.3 | $307.3 |
| Diluted EPS | $0.90 | $0.85 | $2.25 | $2.23 |
- Q3 sales rose 2.4%; the nine-month increase was 3.7%. Reported growth reflected volume, pricing/product mix and acquired product lines, partly offset by foreign exchange. FX reduced sales growth by 3.1 percentage points in Q3 and 2.6 points year to date.
- Q3 gross margin expanded 110 basis points, helped by volume/price/mix, acquisitions and lower commodity costs; higher manufacturing costs, vitamin-facility start-up costs and FX were offsets. Nine-month gross margin increased 50 basis points.
- Nine-month operating income increased 5.8%, but net income fell about 2.0%, principally amid a $17.0 Natronx investment impairment and a higher effective tax rate. Q3 net income increased about 3.9%.
- Cash from operations was $408.8 for the first nine months, essentially unchanged from $408.7 in 2014. Investing used $122.6, including the $74.9 VI-COR acquisition and $44.7 of capital spending; financing used $480.3, including $263.1 of share repurchases and $131.4 of dividends.
Balance sheet and liquidity
- At September 30, cash and equivalents were $210.6, versus $423.0 at year-end 2014. Current assets were $851.7 and current liabilities $783.0.
- Total debt was $981.0 and net debt $770.4, compared with year-end net debt of $672.2. Debt included $25.0 of short-term borrowings, $250.0 of notes due December 2015, and longer-dated senior notes. The company expected to repay the $250.0 maturity using operating cash, existing cash and commercial paper.
- The company reported approximately $570.0 available through its revolving facility and commercial paper program, plus a commitment increase feature of up to $500.0 subject to lender commitments and agreement conditions. Its leverage ratio was 1.32 against a maximum of 3.75.
- Cash conversion cycle improved to 31 days from 35 days a year earlier. The quarterly dividend was increased 8% to $0.335 per share; the company said its 2015 distribution exceeded its 40%-of-net-income objective.
Segments and material changes
- Consumer Domestic: Q3 sales rose 4.7% to $656.4; nine-month sales rose 4.9% to $1,909.3. Growth came from household and personal-care products and the LDS acquisition.
- Consumer International: Q3 sales fell 8.4% to $124.7 and nine-month sales fell 5.2% to $376.0, despite volume and price/mix gains; adverse FX was the main reported sales drag.
- Specialty Products: Q3 sales rose 2.9% to $80.7; nine-month sales rose 9.2% to $235.9, including VI-COR acquisition revenue. Q3 segment pretax income declined to $12.8 from $13.4; nine-month pretax income increased to $42.9 from $33.5.
- Consumer International nine-month pretax income declined to $40.2 from $47.5, affected by FX and the pension settlement charge. Corporate recorded a nine-month pretax loss of $8.4, primarily reflecting the $17.0 Natronx impairment.
Outlook, commentary and risks
- The filing provides no specific full-year sales or EPS guidance. Management expected 2015 capital expenditures of approximately $70.0 and stated that cash and operating cash flow should fund capital spending, dividends, benefit contributions and planned repurchases, while supporting repayment of the December 2015 notes.
- Management cited competitive pressure in laundry detergent, including P&G’s value offerings and Henkel’s U.S. Persil launch. It noted that category conditions could weaken and that the company may not offset a decline.
- Start-up delays at the York vitamin facility led to retailer allocation and scrutiny. Production rates and service levels were improving, but loss of a significant customer or product-quality concerns could materially affect results.
- Other notable items include the $8.9 pension settlement expense in Q2; $93.0 of cash repatriated and used to reduce commercial paper; and $142.2 of cash held outside the U.S. that management intended to keep permanently reinvested abroad.
- Brazilian environmental remediation remains uncertain. The company had accrued $1.9; landfill removal remained reasonably possible, with estimated costs of $30.0–$50.0. The filing also describes ordinary-course legal proceedings whose outcomes may be material but are not predictable or estimable.
- Market risks include FX, interest rates and diesel fuel. Diesel hedges covered approximately 72% of remaining 2015 requirements and 32% of estimated 2016 requirements. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether vitamin-facility output, customer service and product quality recover without lasting retailer or sales losses.
- Whether laundry detergent competition, category demand and promotional spending affect future volume, pricing and margins.
- Execution of the December 2015 debt repayment and planned capital allocation, including repurchases and dividends, while cash balances and net debt change.
- Developments in Natronx’s strategic alternatives and the potential for further impairment or delayed demand.
- Progress and ultimate cost of the Brazilian remediation, and any material developments in legal or regulatory contingencies.
- Effects of foreign exchange, tax treatment of foreign cash, and the higher year-to-date tax rate on reported earnings.