Church & Dwight Co., Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with the three months ended March 31, 2013 unless noted. Church & Dwight sells household and personal care products, and specialty chemicals, through Consumer Domestic, Consumer International, and Specialty Products Division (SPD). Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $782.0 | $779.3 | +0.3% |
| Gross profit / gross margin | $339.4 / 43.4% | $350.1 / 44.9% | Profit down $10.7; margin down 150 bps |
| Operating income / operating margin | $162.0 / 20.7% | $169.3 / 21.7% | Operating income down $7.3 |
| Net income | $102.6 | $107.7 | Down $5.1 |
| Diluted EPS | $0.73 | $0.76 | Down $0.03 |
| Operating cash flow | $102.4 | $72.3 | Up $30.1 |
| Capital expenditures | $6.3 | $10.4 | Cash outflow |
| Cash and cash equivalents (March 31) | $300.0 | $496.9 at Dec. 31, 2013 | Down $196.9 |
| Total debt / net debt (March 31) | $803.1 / $503.1 | $803.3 / $306.4 at Dec. 31, 2013 | Net debt increased $196.7 |
Gross margin pressure reflected higher commodity, slotting, trade-promotion and coupon costs, including new-product launch spending, and foreign exchange effects; productivity improvements and higher volume partly offset these factors. Marketing expense rose $8.9 to $87.8, while SG&A fell $12.3 to $89.6, primarily due to lower legal and compensation costs and the absence of certain 2013 integration and lease-related costs. The effective tax rate was 34.5%, versus 34.0%.
Segments and material year-over-year changes
- Consumer Domestic: Sales rose 0.4% to $593.3; pretax income declined $7.1 to $126.9. Higher volume was offset by adverse price/mix, including launch costs, and lower laundry-detergent sales.
- Consumer International: Sales fell 4.2% to $123.8 and pretax income declined $3.4 to $18.2. Foreign exchange, lower volume and higher marketing expense weighed on results.
- SPD: Sales increased 10.0% to $64.9 and pretax income increased $3.0 to $10.0, driven mainly by animal nutrition and bulk chemical volumes.
- Consolidated sales growth reflected 4.4% higher volume, offset by 3.2% unfavorable pricing/product mix, 0.8% foreign exchange impact and 0.1% divestitures. Management attributed 2.0 percentage points of negative price/mix to new-product launch costs.
Cash, debt and capital allocation
- Operating cash flow increased year over year, partly because Q1 2013 included payment of a deferred $36.0 federal tax obligation; working-capital movements and lower net income partly offset the improvement.
- Financing activities used $289.9, principally $260.0 of share repurchases and $42.5 of dividends, partly offset by stock-option proceeds and tax benefits. Investing activities used $6.6.
- At March 31, cash was $300.0, including $225.8 held by foreign subsidiaries that management intends to permanently reinvest outside the U.S. The company reported approximately $350 of availability through its revolving facility and commercial-paper program, plus a facility feature that could permit up to $500 of additional commitments subject to conditions and lender participation.
- Total debt comprised $153.5 of short-term borrowings and $649.6 of long-term debt. Approximately 81% of debt had a fixed weighted-average rate of 3.06%; most of the remaining debt was commercial paper at less than 0.4%.
- The company authorized a new $500 share-repurchase program and an evergreen program for offsetting incentive-plan dilution. It spent $260 under accelerated repurchase contracts and $74 under the evergreen program during the quarter; $314 remained under the $500 program. The accelerated purchase included an initial delivery of about 3.5 million shares, with approximately 0.3 million additional shares expected in Q2 subject to the contract’s settlement terms.
Outlook, risks and contingencies
- No specific revenue, earnings or EPS forecast is provided in the supplied filing text. Management expected 2014 capital expenditures of approximately $85, anticipated cash and operating cash flow to support capital spending, dividends and repurchases, and expected to purchase additional shares by year-end.
- Management said it expected to remain within credit covenants. The trailing-twelve-month leverage ratio was 1.2 versus a maximum of 3.25; interest coverage was 28.3 versus a minimum of 3.0.
- Management warned of intense laundry-detergent competition, weak consumer spending and category pressures, including a competitor’s lower-priced detergent. New products and increased marketing are intended to respond, but success is not assured. Other stated risks include commodity and energy prices, foreign exchange, consumer demand, retailer actions, competition, and legal, regulatory and environmental outcomes.
- Brazil environmental matter: The company had a $4.1 accrual for remediation, fines and related costs. Although management did not believe landfill removal would be required, it said removal remained reasonably possible; estimated cost was $30–$50. A Brazilian environmental fine of approximately $2.2 was under administrative defense, and discussions over remediation continued.
- Other items include $251.1 of purchase and other commitments through 2019, pension contributions of about $0.8 in Q1 and an estimated additional $2.6 for the remainder of 2014, and $5.9 of liabilities for uncertain tax positions. The company also described ordinary-course legal proceedings whose outcomes may be material but are not predictable from the filing.
Most important facts for investors to verify
- Whether new-product launches, promotions and competitive pricing improve volume and price/mix enough to restore gross margin.
- Whether Consumer Domestic detergent pressures persist and SPD’s volume growth is sustainable.
- Cash generation and liquidity after substantial repurchases and dividends, including the treatment and final settlement of the accelerated share repurchase.
- Progress and ultimate cost of the Brazil remediation, and any resolution of the associated fine or landfill-removal question.
- Actual 2014 capital spending, repurchases and dividends versus management’s stated plans and cash-flow expectations.