Church & Dwight Co., Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts are in millions of dollars, except per-share data.
Business context
Church & Dwight develops and sells household, personal-care and specialty products, led by brands including ARM & HAMMER, OXICLEAN, TROJAN, and L’IL CRITTERS/VITAFUSION. FY 2014 sales mix was approximately 75% Consumer Domestic, 16% Consumer International and 9% Specialty Products Division (SPD). Wal-Mart represented about 25% of consolidated sales.
Key financial results
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $3,297.6 | $3,194.3 |
| Gross profit / margin | $1,452.9 / 44.1% | $1,438.0 / 45.0% |
| Operating income / margin | $641.2 / 19.4% | $622.2 / 19.5% |
| Net income | $413.9 | $394.4 |
| Diluted EPS | $3.01 | $2.79 |
| Operating cash flow | $540.3 | $499.6 |
| Capital expenditures | $70.5 | $67.1 |
| Cash and cash equivalents at year-end | $423.0 | $496.9 |
| Total debt at year-end | $1,095.2 | $803.3 |
FY 2014 net sales increased 3.2%, driven chiefly by 4.4% volume growth; pricing/product mix, foreign exchange and divestitures/other partly offset growth. Net income rose about 5% and diluted EPS about 8%. Gross margin fell 90 basis points, while operating margin declined 10 basis points. Management attributed the gross-margin pressure to promotion and launch spending, higher commodity costs and currency effects; productivity savings and lower SG&A partly offset these pressures. The effective tax rate was 33.8%, compared with 34.0%.
Operating cash flow increased $40.7. Investing cash outflow was $288.4, including $215.7 for the Lil’ Drug Store brands acquisition and $70.5 of capital spending. Financing cash outflow was $306.6, principally reflecting $478.8 of share repurchases and $167.5 of dividends, partly offset by $299.8 of new long-term borrowing. The company reported net debt of $672.2, versus $306.4 a year earlier. Current assets were $1,032.5 and current liabilities $905.3 at year-end; the resulting current ratio was approximately 1.14, compared with approximately 1.71 in 2013.
Fourth-quarter results
| Unaudited metric | Q4 2014 | Q4 2013 | Approx. change |
|---|---|---|---|
| Net sales | $865.5 | $822.6 | +5.2% |
| Gross profit | $389.6 | $371.7 | +4.8% |
| Operating income | $163.8 | $144.6 | +13.3% |
| Net income | $106.6 | $92.2 | +15.6% |
| Diluted EPS | $0.78 | $0.65 | +20.0% |
Calculated Q4 gross margin was approximately 45.0% versus 45.2%; operating margin was approximately 18.9% versus 17.6%. The filing identifies $6.5 of trade-name impairment charges in Q4 2013; Q4 2014 included a $5.0 intangible impairment charge in the second quarter, not Q4.
Segments and material changes
- Consumer Domestic: Sales rose 2.4% to $2,471.6, on 3.5% volume growth, partly offset by unfavorable pricing/mix. Sales of several brands increased, while XTRA, L’IL CRITTERS and ARM & HAMMER powder/unit-dose detergents declined. Segment income before tax was $502.8, up slightly.
- Consumer International: Sales increased 0.5% to $535.2. Volume and mix gains were largely offset by a 2.7% foreign-exchange headwind. Income before tax was $64.7, approximately flat.
- SPD: Sales rose 17.3% to $290.8, chiefly from higher animal-nutrition and performance-product volumes. Income before tax increased to $45.8 from $29.5, benefiting from higher volumes/prices and lower SG&A.
In September 2014, the company acquired feminine-care brands including REPHRESH and REPLENS for $215.7; acquired brands had annual sales of approximately $46.0. The company issued $300 of 2.45% senior notes due 2019. Year-end debt included $250 of 3.35% notes due December 2015, $300 of 2019 notes and $400 of 2.875% notes due 2022, as well as commercial paper and foreign borrowings.
Outlook, risks and unusual items
- Management gave no specific quantified FY 2015 sales or earnings guidance in the supplied filing text. It expected a competitive marketplace, continued promotional and pricing pressure, and intended to invest in marketing, innovation, cost control and acquisitions. Management anticipated potential support in the second half of 2015 from an improving U.S. economy, lower commodity prices and productivity programs.
- Management expected FY 2015 capital expenditures of approximately $70 and stated that operating cash flow and borrowing capacity were expected to support capital spending, dividends and planned repurchases. A $250 principal payment on the 2015 Notes was due December 15, 2015. The $600 revolving credit facility supported the commercial-paper program; approximately $450 was available at year-end. The leverage ratio was 1.5, below the 3.5 maximum covenant.
- In January 2015, the company acquired VI-COR assets for approximately $75, subject to working-capital adjustment and a potential additional $5 payment based on performance. It also raised the quarterly dividend 8%, from $0.31 to $0.335 per share, and authorized a new $500 repurchase program. A $215 accelerated share repurchase was initiated in February 2015.
- Brazil environmental proceedings remain a significant contingency. The company had accrued $3.1 for remediation and related costs and contested a fine equivalent to approximately $1.9. It believed landfill removal was unlikely, but removal remained reasonably possible; estimated removal costs were $30–$50.
- The company planned to complete termination of an international pension plan in 2015, expecting a one-time non-cash expense of $8–$11 ($6–$8 after tax), subject to final valuation and regulatory approval.
- Other principal risks include intense competition and private-label pressure, dependence on large retailers (Wal-Mart was 25% of sales), weak or declining laundry-category demand, raw-material and energy costs, foreign-exchange exposure, product acceptance and regulatory/product-liability risks, supply and transportation interruptions, acquisition integration, cybersecurity, and possible impairment of goodwill or trade names. A personal-care trade name valued at approximately $37 had only an 11% fair-value cushion over carrying value.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Confirm the sustainability of volume growth and whether pricing, promotion and input-cost pressure continue to erode gross margin.
- Track detergent-category performance and the sales, margins and integration of the Lil’ Drug Store and VI-COR acquisitions.
- Review the debt and liquidity outlook, particularly repayment or refinancing of the $250 notes due in December 2015 and funding for buybacks, dividends and acquisitions.
- Monitor developments in the Brazilian remediation case, including any landfill-removal requirement and potential costs versus the $3.1 accrual.
- Assess whether the personal-care trade name’s performance and valuation assumptions support its limited impairment cushion, and verify the pension settlement expense when finalized.
- Check subsequent filings for actual 2015 results, quantified guidance, repurchase settlement details and any material change in customer concentration or foreign-exchange effects.