Church & Dwight Co., Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2014; comparisons are with the corresponding 2013 periods unless 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 Specialty Products Division (SPD).
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $841.8 | $804.8 | $2,432.1 | $2,371.7 |
| Gross profit | $367.5 | $365.2 | $1,063.3 | $1,066.3 |
| Operating income | $177.2 | $167.8 | $477.4 | $477.6 |
| Net income | $115.9 | $107.9 | $307.3 | $302.2 |
| Diluted EPS | $0.85 | $0.76 | $2.23 | $2.14 |
- Q3 sales rose 4.6%; nine-month sales increased 2.5%. Volume growth was 5.2% in Q3 and 4.4% year to date, partly offset by unfavorable pricing/product mix.
- Gross margin declined 170 basis points to 43.7% in Q3 and 130 basis points to 43.7% for the first nine months. Higher trade promotion, coupon, slotting and commodity costs outweighed productivity savings.
- Q3 operating income increased despite lower gross margin, helped by lower marketing and SG&A expenses. Nine-month operating income was essentially flat.
- Nine-month operating cash flow was $408.7, up from $376.6. Investing cash outflow was $253.6, including the $216.1 acquisition; financing cash outflow was $271.6. Cash ended at $370.2, down from $496.9 at year-end 2013.
Balance sheet, debt and liquidity
- At September 30, 2014, short-term borrowings were $404.1 and long-term debt was $649.6; total debt was $1,053.7. Net debt was $683.5, compared with $306.4 at December 31, 2013.
- The debt increase primarily reflects borrowing to fund the acquisition and share repurchases. The company reported approximately $100 of availability through its revolving facility and commercial paper program, plus a facility feature allowing up to $500 in additional borrowing subject to conditions and lender commitments.
- Foreign subsidiaries held $242.8 of cash that management intended to reinvest abroad; repatriation for U.S. use would incur taxes. The company said cash and operating cash flow should cover expected capital spending, dividends and planned repurchases.
- Credit Agreement covenants were met: leverage ratio 1.5 versus a 3.5 maximum; interest coverage ratio 30.0 versus a 3.0 minimum.
Material changes and segment results
- SPD was the strongest growth contributor: Q3 sales increased 20.6% and nine-month sales increased 17.2%, driven mainly by animal nutrition and performance products. Nine-month segment income before tax rose to $33.5 from $21.0.
- Consumer Domestic sales rose 3.6% in Q3 and 1.6% year to date, but nine-month segment income before tax fell to $376.0 from $383.2, reflecting launch-related promotion and marketing, commodity costs and a $5.0 intangible impairment.
- Consumer International sales increased 1.3% in Q3 and were flat year to date. Nine-month segment income before tax decreased to $47.5 from $53.0, with foreign exchange and higher marketing costs cited.
- On September 19, the company acquired feminine-care brands REPHRESH and REPLENS for $216.1, funded with additional debt. The acquired brands had approximately $46 in annual sales; preliminary purchase accounting included $109.0 of intangibles and $102.8 of goodwill.
- The company repurchased approximately 6.4 million shares for $435 in the first nine months under its repurchase programs. About $139 remained under the $500 share-repurchase authorization. Nine-month dividends paid were $126.0.
Outlook, risks and unusual items
- Management projected a 2014 annual effective tax rate of approximately 34% and capital expenditures of approximately $70.0. It did not provide a clear full-year sales or earnings forecast in the supplied filing text.
- Management described persistent detergent-category weakness and aggressive pricing competition, including a competitor’s lower-priced product. The company was responding with new products and marketing, but cautioned it might not offset further category decline.
- Brazilian environmental remediation remains uncertain. The company had accrued $3.4; landfill removal remains reasonably possible, with estimated cost of $30–$50. The regulator had approved an initial remediation step, and construction of a groundwater trench drain was expected to finish in Q4 2014.
- The company authorized termination of an international defined-benefit pension plan. It estimated a one-time noncash 2015 expense of $9–$12 ($7–$9 after tax), subject to change when settlement valuations are finalized.
- Ordinary-course legal and regulatory matters, uncertain tax positions ($4.4 recorded liability), commodity and foreign-exchange exposure, and acquisition-related execution risks remain relevant. A $5.0 intangible impairment was recorded in Q2 2014 due to reduced sales and profitability in a product line.
- New revenue-recognition guidance was expected to take effect for the company after December 15, 2016; management was evaluating its impact. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Check whether volume growth and new-product launches can offset weak detergent-category demand and unfavorable price/mix.
- Track gross-margin recovery, particularly trade promotion, commodity costs and productivity savings.
- Monitor acquisition contribution, integration, and the rise in short-term borrowing and net debt.
- Verify progress and ultimate cost of the Brazilian remediation, including whether landfill removal is required.
- Confirm pension-plan settlement timing and final 2015 expense, and follow the company’s execution of its remaining repurchase authorization.