Church & Dwight Co., Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited quarterly results, including the fourth quarter. Unless noted, amounts are in millions of dollars.
Business context and reporting period
Church & Dwight develops and sells household, personal care and specialty products. Its three segments are Consumer Domestic, Consumer International and Specialty Products Division (SPD), representing approximately 76%, 15% and 9% of 2015 sales, respectively. Key brands include ARM & HAMMER, OXICLEAN, TROJAN, L’IL CRITTERS and VITAFUSION. Approximately 83% of sales were in the U.S.; Wal-Mart accounted for 24% of consolidated sales.
Key financial metrics
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $3,394.8 | $3,297.6 | +2.9% |
| Gross profit / margin | $1,511.8 / 44.5% | $1,452.9 / 44.1% | +4.1% / +40 bps |
| Operating income / margin | $674.2 / 19.9% | $641.2 / 19.4% | +5.1% / +50 bps |
| Net income | $410.4 | $413.9 | -0.8% |
| Diluted EPS | $3.07 | $3.01 | +2.0% |
| Cash from operations | $606.1 | $540.3 | +$65.8 |
| Capital expenditures | $61.8 | $70.5 | -$8.7 |
Net income was 12.1% of sales. Sales growth reflected volume (+3.1%), pricing/product mix (+0.5%) and acquired product lines (+2.0%), partly offset by foreign exchange and other effects (-2.7%). Lower commodity costs and higher volume supported gross margin; foreign exchange and higher manufacturing costs were offsets.
At December 31, 2015, cash and cash equivalents were $330.0, total debt net of issuance costs was approximately $1,050.0, and stockholders’ equity was $2,023.2. Cash from operations exceeded investing outflows of $141.2; financing outflows were $535.0, principally share repurchases, dividends and debt repayment. The company reported $641.0 of available borrowing capacity under its revolving facility and commercial paper program, plus a conditional commitment-increase feature of up to $600.0. Its leverage ratio under the credit agreement was 1.4 versus a maximum of 3.5.
Fourth quarter: Net sales were $873.6, gross profit $397.4, operating income $169.2, net income $109.1 and diluted EPS $0.82. Fourth-quarter 2014 comparatives were $865.5, $389.6, $163.8, $106.6 and $0.78, respectively.
Material changes versus prior periods
- All three segments reported higher 2015 sales: Consumer Domestic +4.5% to $2,581.6; Consumer International -6.4% to $501.0, mainly due to currency; and SPD +7.3% to $312.2, including the VI-COR acquisition.
- Operating income improved, but net income declined slightly as the effective tax rate rose to 35.4% from 33.8%, and equity in affiliate earnings shifted to a $5.8 loss from $11.6 of earnings.
- 2015 results included an $8.9 pretax charge to settle an international pension plan and a $17.0 impairment of the remaining Natronx investment. The Natronx impairment reflected weaker expected demand amid the shift from coal to natural gas and delays in federal regulations.
- Operating cash flow increased, supported by higher cash earnings and improved working capital; the cash conversion cycle improved from 32 to 27 days. The company factored $37.8 of receivables during 2015.
- The company repurchased approximately 4.4 million shares for $363.1 and paid $175.3 in dividends. The annual dividend per share rose to $1.34 from $1.24.
Outlook, commentary, risks and contingencies
Management did not provide a quantified FY 2016 sales or earnings forecast in the supplied filing text. It expected competitive conditions and aggressive pricing to continue, while citing low gasoline prices and improved employment as potential supports for U.S. consumption. Priorities include brand investment, cost control, differentiated product launches, geographic expansion and selective acquisitions. Management expected 2016 capital expenditures of approximately $55.0 and stated that operating cash flow and borrowing capacity were expected to support planned investment, dividends and repurchases.
- Major risks include retailer concentration and bargaining power, private-label competition, price pressure in laundry detergent, consumer demand, product-launch execution, manufacturing and supplier disruption, commodity and foreign-exchange volatility, regulation, cybersecurity and international exposure.
- Wal-Mart represented 24% of sales; the top three customers represented approximately 35%. This concentration increases exposure to customer purchasing, shelf-space and pricing decisions.
- A Scantibodies contract lawsuit seeks more than $20.0 million in damages and other relief. The company is defending the case; it has recorded an immaterial reserve and says any excess exposure cannot currently be estimated.
- A Brazilian environmental matter was resolved through an agreement setting a fine of approximately $1.0 million and requiring continued remediation, monitoring and reporting. The recorded remaining accrual was $1.7 million.
- Subsequent events included the January 2016 acquisition of TOPPIK for approximately $175.0, financed with commercial paper, and a February 2016 6% quarterly dividend increase to $0.355 per share.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether 2015 volume growth, pricing and new-product launches can offset currency headwinds, retailer pressure and competition, particularly in laundry detergent.
- The sustainability of the improved gross and operating margins after lower commodity costs and acquisition contributions, and the effect of manufacturing start-up costs.
- Cash generation, working-capital trends and liquidity after the TOPPIK acquisition, planned repurchases, dividends and commercial-paper borrowing.
- Any change in the Scantibodies litigation estimate, Brazilian remediation costs, or Natronx strategic alternatives and related impairment risk.
- Whether Consumer International can recover from currency-driven sales and earnings declines, and whether the acquired TOPPIK business meets expectations.