CHURCH & DWIGHT CO INC quarterly report, Q2 FY2013

Church & Dwight Co., Inc. — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company sells household and personal-care products and specialty chemicals through Consumer Domestic, Consumer International and Specialty Products Division (SPD). Results include Avid Health, acquired October 1, 2012, which materially affects year-over-year comparisons.

Financial performance

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Net sales	$787.6 million	$696.4 million	$1,566.9 million	$1,387.0 million
Gross profit	$351.0 million	$303.0 million	$701.1 million	$605.5 million
Income from operations	$140.5 million	$122.4 million	$309.8 million	$265.1 million
Net income	$86.6 million	$79.3 million	$194.3 million	$175.1 million
Diluted EPS	$0.61	$0.56	$1.38	$1.22

Sales increased 13.1% in Q2 and 13.0% year to date. Acquired product lines contributed 11.5 and 10.7 percentage points, respectively; reported volume contributed 2.7 and 2.6 points.
Gross margin rose to 44.6% from 43.5% in Q2 and to 44.7% from 43.7% for the six-month period. Management attributed the improvement mainly to productivity programs and volume, partly offset by unfavorable mix; commodity costs were flat.
Q2 marketing expense was $103.7 million, or 13.2% of sales, versus $88.4 million, or 12.7%. SG&A was $106.8 million, or 13.6% of sales, versus $92.2 million, or 13.2%.
Interest expense was $7.0 million in Q2 and $14.0 million for the first half, compared with $2.4 million and $5.1 million, respectively, largely reflecting acquisition financing. The effective tax rate was 34.5% for Q2 and 34.2% year to date; management projected an approximately 35% full-year rate.

Cash flow, debt and liquidity

First-half operating cash flow was $161.0 million, down from $189.2 million. Investing used $25.7 million, including $20.1 million of capital spending and $4.5 million invested in Natronx; financing used $195.1 million.
Cash at June 30 was $274.1 million. Total debt was $804.3 million and net debt was $530.2 million, down from $560.2 million at December 31, 2012. Debt comprised $154.8 million short-term borrowings and $649.5 million long-term debt.
The company reported approximately $350 million available through its revolving facility and commercial-paper program, with a conditional feature allowing up to an additional $500 million of commitments. It reported covenant ratios comfortably within requirements: leverage of 1.2 versus a 3.5 maximum, and interest coverage of 39.6 versus a 3.0 minimum.
Cash dividends paid were $77.5 million in the first half. The quarterly dividend increased from $0.24 to $0.28 per share, an annualized rate of $1.12. The company repurchased approximately 0.9 million shares for $50 million in January and made no repurchases in Q2. 2013 capital expenditures were expected to be approximately $80 million.

Changes by business and management commentary

Consumer Domestic: Q2 sales grew 17.4% to $594.5 million, including Avid products; income before tax increased to $113.3 million. Growth included Avid and higher sales of several laundry, oral-care and testing products, partly offset by weaker products and unfavorable mix/pricing.
Consumer International: Q2 sales rose 9.4% to $132.7 million; income before tax increased to $15.8 million. Volume and Avid contributed, while currency movements were a drag.
SPD: Q2 sales fell 12.0% to $60.4 million and income before tax declined to $4.2 million. Management cited lower animal-nutrition volumes and pricing, linked in part to colder weather and reduced dairy-industry demand, and lower Brazil sales.
Management said consumer spending and category growth were expected to remain weak in the second half of 2013, with increased price competition in some categories. The laundry-detergent category had declined 2.6% over the prior three months; management noted its own detergent sales had increased but cautioned that further category declines might not be offset.
No specific full-year sales or EPS guidance is provided in the supplied filing text. The company said operating cash and borrowing capacity were expected to cover planned capital spending, dividends and repurchases, if implemented.

Risks, contingencies and unusual items

A $3.2 million impairment charge on an affiliate reduced equity earnings; management cited delays in expected discounted cash flows. Affiliate results also reflected higher raw-material costs at Armand.
For the former Brazil chemical-site operations, the company had accrued $4.7 million for remediation, fines and related costs. Further landfill removal remained reasonably possible; estimated cost was $30 million to $50 million. The environmental authority had not finalized the remediation plan or resolved the fine.
A purported class action concerning “natural” claims for ARM & HAMMER ESSENTIALS deodorant remained pending after the company moved to dismiss the amended complaint. The company said it could not estimate potential damages or equitable relief.
Possible FDA labeling restrictions on N-9-lubricated condoms could cause obsolete inventory and lower sales. Other disclosed exposures include ordinary-course litigation, uncertain tax positions ($9.1 million recorded; a possible $3.1 million decrease within 12 months), and vendor commitments of approximately $177.9 million through 2017.
Approximately $178.8 million of cash was held by foreign subsidiaries and management intended to reinvest it abroad; U.S. repatriation could result in additional taxes. The company also noted currency, commodity, consumer-demand and competitive risks.
The annual goodwill impairment test found estimated fair value substantially above carrying value for all reporting units. Avid’s purchase-price allocation remained preliminary, with completion anticipated by September 30, 2013.

Most important facts for investors to verify

How much of sales and earnings growth reflects Avid Health versus organic volume, pricing and mix, and how acquisition integration costs evolve.
Whether SPD’s animal-nutrition demand and Consumer Domestic category trends improve or weaken in the second half.
Operating cash conversion and working-capital trends, including the timing of tax payments and cash held overseas.
Progress on Brazil-site remediation and the potential exposure relative to the existing accrual; status and potential impact of the deodorant litigation and N-9 labeling matter.
Debt, liquidity and capital returns, including the use of repurchases, dividends and available credit capacity.