Church & Dwight Co., Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Financial statements are unaudited. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $779.3 million | $690.6 million | +$88.7 million; +12.8% |
| Gross profit / margin | $350.1 million / 44.9% | $302.5 million / 43.8% | Margin +110 basis points |
| Operating income | $169.3 million | $142.7 million | +$26.6 million |
| Net income | $107.7 million | $95.8 million | +$11.9 million |
| Diluted EPS | $0.76 | $0.66 | +$0.10 |
| Operating cash flow | $72.3 million | $113.9 million | -$41.6 million |
Sales growth reflected acquired product lines (+9.9 percentage points, principally Avid Health), volume (+2.4 points), and sales timing related to a U.S. information-systems upgrade (+1.3 points), partially offset by pricing/product mix and foreign exchange (each -0.4 points). Gross-margin improvement reflected productivity initiatives and volume, partly offset by unfavorable mix and the lower margins of Avid Health products. SG&A rose to $101.9 million, including Avid-related operating and transition costs, higher R&D, and a charge for ceasing use of Princeton leased buildings. Interest expense increased $4.3 million, principally due to acquisition financing.
Segments and material changes
- Consumer Domestic: Sales of $591.0 million, up 15.7%; pretax income of $134.0 million, versus $112.2 million. Avid Health contributed to growth, alongside higher sales of several laundry, cleaning, and personal-care brands.
- Consumer International: Sales of $129.3 million, up 6.5%; pretax income of $21.6 million, down $0.2 million. Volume gains were offset in part by lower pricing/mix and unfavorable foreign exchange.
- Specialty Products Division: Sales of $59.0 million, up 0.7%; pretax income of $7.0 million, versus $6.7 million.
- Personal-care revenue in Consumer Domestic increased to $232.3 million from $163.0 million, including Avid Health; household-products revenue rose to $358.7 million from $347.6 million.
- Avid Health was acquired October 1, 2012 for $652.3 million. Its purchase-price allocation remained preliminary; completion was expected by September 30, 2013.
Cash, debt, and liquidity
- At March 31, 2013, cash was $259.6 million and marketable securities were $19.7 million, down from year-end cash of $343.0 million. The securities mature September 5, 2013.
- Total debt was $853.3 million: $203.9 million short-term borrowings and $649.4 million long-term debt. Net debt was $574.0 million, versus $560.2 million at December 31, 2012.
- Current assets were $911.8 million and current liabilities were $655.6 million. The company reported approximately $250 million available through its revolving-credit facility and commercial-paper program, plus a feature that could permit up to $500 million of additional commitments, subject to conditions and lender participation.
- Cash from operations fell to $72.3 million, principally reflecting working-capital changes and a roughly $36 million federal tax payment deferred from Q4 2012 into Q1 2013 after Hurricane Sandy. Investing outflow was $33.3 million, including $10.4 million of capital spending and $19.7 million invested in marketable securities. Financing outflow was $118.9 million, including $50.0 million of commercial-paper repayments, $50.3 million of share repurchases, and $38.6 million of dividends.
- Foreign subsidiaries held approximately $168.1 million of cash, cash equivalents, and marketable securities. Management said it intended to permanently reinvest these funds abroad; repatriation for U.S. use could incur U.S. taxes.
Outlook, risks, and unusual items
- Management projected a 2013 annual effective tax rate of approximately 35% and capital expenditures of approximately $85 million. It expected operating cash flow and borrowing capacity to cover capital spending, dividends at the approved rate, and repurchases if implemented. No full-year sales or EPS guidance is stated in the provided filing text.
- The quarterly dividend increased from $0.24 to $0.28 per share, equivalent to $1.12 annualized. The company repurchased approximately 0.9 million shares for about $50 million in January, with approximately $219.8 million remaining under the authorization at March 31.
- Credit covenants were in compliance: leverage ratio 1.3 versus a maximum 3.5; interest coverage ratio 63.5 versus a minimum 3.0. Approximately 76% of debt carried fixed rates; the remainder was principally commercial paper at less than 0.5% at quarter-end.
- Management identified risks including consumer demand and category trends, competition, raw-material and energy costs, foreign exchange, acquisition integration, regulation, litigation, and environmental matters. Unit-dose detergent has contributed to category contraction; management said the impact appeared to be stabilizing but warned the category could decline further.
- Brazil environmental matter: The company had accrued approximately $7.8 million for remediation, fines, and related costs and had spent $2.6 million on remediation. A landfill-removal requirement remained reasonably possible; estimated cost was $30–$50 million, with the outcome and ultimate cost uncertain.
- Legal matters: Litigation with SPD Swiss Precision Diagnostics was settled April 11, 2013, with an immaterial payment and no admission of wrongdoing. A purported class action concerning ARM & HAMMER ESSENTIALS Natural Deodorant remained pending; the company said damages and potential impact could not yet be estimated.
- Other items include $221.2 million of vendor commitments through 2017, a $17.8 million U.K. pension insolvency guarantee, and uncertain tax-position liabilities of $9.1 million. A roughly $3.1 million decrease in unrecognized tax benefits was considered reasonably possible within twelve months.
Investor verification priorities
- Separate Avid Health’s contribution and the prior-year order-timing effect from underlying organic sales and earnings trends.
- Track operating cash flow and working capital, particularly receivables, inventory, and the timing of tax payments.
- Monitor Avid’s final purchase-price allocation, integration costs, and contribution to margins and debt levels.
- Seek updates on Brazil remediation, including any landfill-removal decision and whether accrued amounts remain adequate.
- Review the pending deodorant class action, tax audits, and regulatory risks affecting N-9-lubricated condoms.
- Confirm capital spending, dividends, and repurchases against cash generation and available borrowing capacity.