Church & Dwight Co., Inc. — 2013 Third-Quarter 10-Q
Business context and period: The unaudited filing covers the quarter and nine months ended September 30, 2013. Church & Dwight sells household, personal-care and specialty chemical products through Consumer Domestic, Consumer International and Specialty Products Division (SPD). The October 1, 2012 Avid Health acquisition materially affects year-over-year comparisons.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Net sales | $804.8 million | $725.2 million | $2,371.7 million | $2,112.2 million |
| Gross profit | $365.2 million | $327.5 million | $1,066.3 million | $933.0 million |
| Gross margin | 45.4% | 45.2% | 45.0% | 44.2% |
| Operating income | $167.8 million | $145.4 million | $477.6 million | $410.5 million |
| Net income | $107.9 million | $93.9 million | $302.2 million | $269.0 million |
| Diluted EPS | $0.76 | $0.66 | $2.14 | $1.88 |
- Reported sales rose 11.0% in Q3 and 12.3% for the nine months. Management attributed the increases principally to acquired product lines, higher volumes and, to a lesser extent, other factors; pricing/product mix and foreign exchange were unfavorable for consolidated results.
- Q3 net sales growth included 10.2 percentage points from acquired product lines; nine-month growth included 10.5 points. For context, 2012 pro forma sales including Avid were $788.7 million for Q3 and $2,296.3 million for the first nine months. Reported 2012 net income was $93.9 million and $269.0 million, respectively; pro forma amounts were $99.4 million and $286.8 million.
- Gross margin improved 20 basis points in Q3 and 80 basis points year to date, supported by productivity and volume, partly offset by trade promotions, coupons and unfavorable mix. Commodity costs were flat versus the comparable periods.
- Interest expense increased to $7.0 million in Q3 and $21.0 million year to date, mainly reflecting debt used to fund Avid Health. The effective tax rate was 33.9% for Q3 and 34.1% year to date, versus 35.7% and 34.8% in 2012.
- Segment sales in Q3: Consumer Domestic $605.3 million, Consumer International $134.5 million and SPD $65.0 million. Year-to-date SPD sales declined 3.4%, and its pretax income declined $6.5 million to $21.0 million; lower animal-nutrition prices and weaker demand contributed.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $376.6 million, versus $315.9 million in 2012. Investing used $39.1 million, including $30.3 million of capital expenditures and $5.7 million invested in Natronx. Financing used $230.0 million, principally for debt repayment, dividends and share repurchases.
- At September 30, cash was $445.5 million, including approximately $190.1 million held by foreign subsidiaries that the company intended to permanently reinvest outside the U.S. Total debt was $803.5 million and net debt was $358.0 million, compared with $903.2 million and $560.2 million, respectively, at December 31, 2012.
- The company reported approximately $350 million available through its revolving credit facility and commercial paper program, plus a feature allowing up to an additional $500 million of borrowing subject to lender commitments and conditions. Management said available cash and borrowing capacity should fund operations, planned capital expenditures, dividends and repurchases as implemented.
- Capital expenditures were expected to be approximately $70 million for 2013. The quarterly dividend increased to $0.28 per share in 2013 ($1.12 annualized). The company repurchased approximately $50 million of stock in January and made no repurchases in Q2 or Q3; approximately $220 million remained under the authorization.
- Credit-agreement leverage ratio was 1.2 against a maximum of 3.5; interest coverage was 36.4 against a minimum of 3.0. The company stated it expected to remain compliant.
Outlook, commentary and risks
- Management projected a 2013 annual effective tax rate of approximately 34%. The filing does not provide a clear quantified full-year sales or earnings guidance figure.
- Management cited ongoing competition and category pressure in laundry detergent, including a 3.5% category decline in Q3 and a planned lower-priced competitor product in 2014. The company planned new products and increased marketing, but cautioned that these actions might not offset the pressure.
- QGN’s proposed Brazilian site remediation plan was approved by the environmental authority. The company had a $4.4 million accrual; removal of landfills remained reasonably possible, with estimated costs of $30 million to $50 million. Resolution of a separate fine remained under discussion.
- A class action involving claims about ARM & HAMMER ESSENTIALS Natural Deodorant remained pending in part: the court dismissed non-label-based claims but allowed label-based claims to proceed. The company said a material adverse outcome was reasonably possible, but damages could not yet be estimated.
- Other exposures include regulatory uncertainty for N-9-lubricated condoms, tax audits and uncertain tax positions ($9.9 million liability; approximately $3.9 million reduction was reasonably possible within 12 months), vendor purchase commitments, and ordinary-course litigation. These matters could affect results, cash flows or costs.
- Foreign exchange, consumer demand, raw-material and energy costs, competition, promotional spending and execution of the Avid acquisition were among the risks identified. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported growth and earnings improvement reflects Avid Health versus organic volume, pricing and product mix.
- Whether laundry-detergent competition and category contraction affect sales, margins or required marketing spend.
- Progress and eventual cost of the QGN remediation and fine, including whether landfill removal is required.
- Developments in the deodorant class action, tax audits and other contingencies, and any changes to recorded liabilities.
- Cash availability after considering foreign-held funds, capital spending, dividends, debt maturities and any renewed share repurchases.