Church & Dwight Co., Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts are in millions except per-share data.
Business context
Church & Dwight develops and sells household, personal care and specialty products, including ARM & HAMMER, OXICLEAN, TROJAN, and L’IL CRITTERS/VITAFUSION. In 2013, Consumer Domestic, Consumer International and Specialty Products Division (SPD) represented approximately 75%, 17% and 8% of consolidated sales, respectively. The 2012 acquisition of Avid Health added the gummy-vitamin brands to the portfolio.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $3,194.3 | $2,921.9 |
| Gross profit / gross margin | $1,438.0 / 45.0% | $1,291.4 / 44.2% |
| Operating income / operating margin | $622.2 / 19.5% | $545.1 / 18.7% |
| Net income | $394.4 | $349.8 |
| Diluted EPS | $2.79 | $2.45 |
| Cash from operations | $499.6 | $523.6 |
| Capital expenditures | $67.1 | $74.5 |
| Cash and cash equivalents at year-end | $496.9 | $343.0 |
| Total debt at year-end | $803.3 | $903.2 |
| Net debt | $306.4 | $560.2 |
- Sales increased 9.3%; reported growth included 7.6 percentage points from acquired product lines, 3.8 points from volume, and negative contributions from price/mix and foreign exchange. The filing also cites a 0.3-point benefit from sales timing related to the information-systems upgrade.
- Gross-margin expansion reflected productivity gains and higher volume, partly offset by unfavorable mix and increased trade-promotion and coupon costs. Marketing expense rose to $399.8, or 12.5% of sales, from $357.3, or 12.2%.
- Operating cash flow declined $24.0, primarily because a $36.0 federal tax payment deferred from late 2012 was paid in early 2013; working-capital movements partly offset the decline. The company returned approximately $205 through dividends and share repurchases.
- At year-end, the company reported approximately $350 of availability through its revolving facility and commercial-paper program, in addition to cash. Its leverage ratio was 1.2 against a 3.25 maximum, and its interest-coverage ratio was 28.3 against a 3.0 minimum.
Material changes versus comparable periods
- Consumer Domestic sales rose 11.9% to $2,413.5, substantially reflecting the Avid Health acquisition; segment income before taxes increased to $501.0 from $428.8.
- Consumer International sales rose 4.5% to $532.8, but income before taxes fell to $64.5 from $71.0, reflecting foreign exchange, marketing costs and a trade-name impairment.
- SPD sales declined 2.7% to $248.0 and income before taxes declined to $29.5 from $33.8, with lower animal-nutrition prices and weaker demand among dairy customers cited as factors.
- Interest expense increased to $27.7 from $14.0, mainly due to debt used to finance Avid Health and the headquarters financing lease. The effective tax rate decreased to 34.0% from 35.5%, aided by state-tax effects and federal research tax credits.
- Fourth-quarter sales were $822.6 versus $809.7; net income was $92.2 versus $80.8; diluted EPS was $0.65 versus $0.57. Fourth-quarter 2013 operating income included $6.5 of trade-name impairment charges.
Outlook, commentary, risks and unusual items
- Management expected challenging conditions to continue in 2014, citing weak consumer demand, competitor launches and aggressive pricing. The filing provides no specific numerical 2014 sales or earnings guidance.
- Planned actions included continued marketing and trade spending, cost control, new-product launches, geographic growth and potential strategic acquisitions. Planned 2014 capital expenditures were approximately $85. Management expected operating cash flow and borrowing capacity to cover planned capital spending, dividends and share repurchases.
- Competition and category pressure are notable in laundry detergent: the U.S. category declined 3.2% in 2013 after a 0.6% decline in 2012. Management highlighted P&G’s planned value-detergent and premium unit-dose initiatives.
- Customer concentration is significant: Wal-Mart represented 24% of 2013 sales; the top three customers represented approximately 35%.
- Brazil environmental proceedings remain a contingency. The company had accrued $4.0 for remediation, fines and related costs; possible landfill removal could cost an estimated $30–$50, although management said it did not believe removal would be required. A Brazilian fine of approximately $2.1 was being contested.
- A class action concerning ARM & HAMMER ESSENTIALS Natural Deodorant was settled in January 2014 for an immaterial amount, subject to court approval. The filing also notes other ordinary-course legal and regulatory matters.
- Other notable items: the company recorded $6.5 of trade-name impairment and a $3.2 impairment of an affiliate investment in 2013. In January 2014, the board authorized a $500 share-repurchase program and increased the quarterly dividend 11% to $0.31 per share; a $140 accelerated repurchase began in February.
Important facts for investors to verify
- How much reported growth and earnings contribution came from Avid Health versus organic volume, pricing and mix.
- Whether the margin improvement is sustainable given promotion costs, competitive pricing and raw-material exposure.
- Progress in 2014 product launches and whether laundry-category declines or competitor actions affect sales and market share.
- Final costs and regulatory outcomes for the Brazil environmental matter, including whether landfill removal is required.
- Cash deployment and liquidity after the accelerated repurchase, dividends, planned capital spending and the $250 senior notes due in 2015.
- Customer concentration, foreign-exchange exposure, and the company’s ability to sustain operating cash flow and meet its outlook.