Business context and reporting period
Church & Dwight Co., Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Its reportable segments are Consumer Domestic (household and personal care), Consumer International (primarily personal care), and Specialty Products Division (specialty chemicals), plus Corporate.
Financial performance and liquidity
Amounts are in millions except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $808.3, up 2.6% from $787.6 | $1,590.3, up 1.5% from $1,566.9 |
| Gross profit / margin | $356.4 vs. $351.0; 44.1% vs. 44.6% | $695.8 vs. $701.1; 43.8% vs. 44.7% |
| Operating income | $138.2 vs. $140.5 | $300.2 vs. $309.8 |
| Net income | $88.8 vs. $86.6 | $191.4 vs. $194.3 |
| Diluted EPS | $0.65 vs. $0.61 | $1.38 vs. $1.38 |
- Sales growth reflected higher volumes: consolidated volume rose 3.6% in Q2 and 4.0% in the first half. Price/mix and foreign exchange were headwinds.
- Q2 gross profit increased on volume and manufacturing improvements, but margins declined due to trade promotions, coupons, slotting, commodity costs and foreign exchange. First-half gross profit also declined.
- Marketing expense rose to $113.4 in Q2 and $201.2 in the first half, primarily supporting new product launches and key brands. SG&A declined to $104.8 and $194.4, respectively; the 2014 figures include a $5.0 intangible-asset impairment charge.
- Segment sales / income before income taxes: Consumer Domestic $598.9 / $107.7 for Q2 and $1,192.2 / $234.6 for the first half; Consumer International $136.6 / $14.3 and $260.4 / $32.5; SPD $72.8 / $10.1 and $137.7 / $20.1. SPD growth was especially strong, with sales up 20.5% in Q2 and 15.3% year to date.
- Operating cash flow was $206.8 for the first half, versus $161.0; investing cash outflow was $18.0 versus $25.7; financing cash outflow was $490.3 versus $195.1. Financing outflow mainly reflected $435.0 of share repurchases and $84.6 of dividends.
- Cash was $196.9 at June 30, 2014, down from $496.9 at year-end 2013. Total debt was $802.7 and net debt $605.8, compared with net debt of $306.4 at year-end. Debt included $153.1 short-term borrowings and $649.6 long-term debt.
- The company reported approximately $350 available through its revolving facility and commercial paper program, plus a conditional facility increase of up to $500. Its disclosed leverage ratio was 1.2 versus a maximum 3.25, and interest coverage was 28.9 versus a minimum 3.0.
- Cash dividends were $0.31 per share in Q2 and $0.62 for the first half, up from $0.28 and $0.56, respectively, in 2013. Capital expenditures were $17.1 in the first half.
Material changes, outlook and management commentary
- First-half sales growth was driven by SPD and Consumer Domestic; Consumer International sales declined 0.6%, affected by foreign exchange and divested product lines. Consumer Domestic income before tax fell $12.6 for the first half, while Consumer International income fell $5.0; SPD income rose $8.9.
- Management projected a 2014 annual effective tax rate of approximately 34% and capital expenditures of approximately $70.0. It expected cash and operating cash flows to cover capital spending, dividends at the latest approved rate and the repurchase program, but did not anticipate additional share purchases in the remainder of 2014.
- The company completed accelerated repurchases totaling $435.0 under its programs; $139 remained under the $500 share repurchase authorization at June 30. The second $175.0 ASR was settled in July.
- No specific full-year sales or earnings forecast is provided in the supplied filing text. Management cautioned that results for the six-month period are not necessarily indicative of full-year results.
- Management cited competitive pressure in laundry detergents, including a competitor’s lower-priced product, weak consumer spending and category weakness. It is responding with new products and increased marketing, with no assurance these efforts will succeed.
- A $5.0 impairment was recorded for a Consumer Domestic intangible asset after reduced sales and profitability in the related product line. The annual goodwill impairment test found fair value substantially above carrying values for all reporting units.
Risks, contingencies and other notable items
- At a Brazilian subsidiary’s former manufacturing site, remediation is ongoing. The company accrued $3.9 at June 30; regulators could still require landfill removal, estimated by the company to cost $30–$50. Discussions with the environmental authority continued in July 2014.
- The company authorized termination of an international defined-benefit pension plan. It estimated a one-time, non-cash 2015 settlement expense of $7–$10 ($5–$8 after tax), subject to change and regulatory approvals.
- Uncertain income tax liabilities were $5.9; approximately $1.5 of unrecognized tax benefits could decrease within 12 months as audits settle or statutes expire.
- Other commitments include approximately $230.5 of vendor, licensing and promotion commitments through 2019, and an annual commitment to purchase 240,000 tons of sodium-based raw materials at market prices. The filing also describes pending or threatened legal and regulatory matters whose outcomes may be adverse and are not always estimable.
- Foreign exchange, commodity prices, consumer demand, competition, customer and supplier conditions, and economic and financial-market conditions are identified risks. The company stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether volume growth and SPD strength can offset weaker pricing, higher promotional costs and pressure in laundry detergents.
- Whether gross-margin declines persist and how new-product and marketing spending affect earnings.
- Cash generation and liquidity after the substantial repurchases, including the use of foreign-held cash and available borrowing capacity.
- Progress and ultimate cost of the Brazilian site remediation, including whether landfill removal is required.
- The final timing and cost of the pension-plan termination, and resolution of tax audits and other legal or regulatory matters.