Church & Dwight Co., Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; dollar amounts are in millions except per-share data. The company sells household, personal-care and specialty chemical products. Results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Net sales | $725.2 | $701.0 | $2,112.2 | $2,018.2 |
| Gross profit | $327.5 | $309.9 | $933.0 | $898.0 |
| Operating income | $145.4 | $126.3 | $410.5 | $375.2 |
| Net income | $93.9 | $79.6 | $269.0 | $245.8 |
| Diluted EPS | $0.66 | $0.54 | $1.88 | $1.68 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $315.9 | $319.2 |
- Q3 sales rose 3.5%; nine-month sales rose 4.7%. Sales growth reflected higher volumes, partly offset by foreign exchange and, year to date, unfavorable pricing and mix.
- Gross margin was 45.2% in Q3, up from 44.2%; for nine months it was 44.2%, down from 44.5%. Higher volume, productivity and new production supported Q3 margin; commodity costs and mix weighed on year-to-date margin.
- Q3 operating income increased 15.1% and net income 18.0%; nine-month operating income rose 9.4% and net income 9.4%. Q3 diluted EPS increased 22.2%; nine-month diluted EPS increased 11.9%.
- Q3 marketing expense was $92.2 and SG&A was $89.9. For nine months, marketing was $248.6 and SG&A was $273.9. Management cited lower legal and information-system-upgrade costs as contributors to lower Q3 SG&A.
- Cash dividends were $0.24 per share in Q3 versus $0.17 a year earlier; nine-month dividends were $0.72 versus $0.51.
Segments and material changes
- Consumer Domestic: Q3 sales of $530.4, up 4.8%; nine-month sales of $1,547.5, up 6.0%. Growth came chiefly from household products, including liquid laundry detergent, cat litter and unit-dose detergent. Domestic pretax income was $116.6 in Q3 and $324.9 year to date.
- Consumer International: Q3 sales of $131.1, up 2.0%; nine-month sales of $373.8, up 2.7%. Volume and Batiste dry shampoo contributed, while unfavorable exchange rates offset growth. Pretax income was $16.0 in Q3 and $52.6 year to date.
- Specialty Products: Q3 sales of $63.7, down 4.0%; nine-month sales of $190.9, down 1.9%, mainly on lower volume and foreign exchange. Pretax income nevertheless increased to $11.0 in Q3 and $27.5 year to date, supported by pricing and lower SG&A.
- The company changed from a 4-4-5 quarterly calendar to month-end quarters beginning in 2012; management said the change would not materially affect 2012 comparisons.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $241.2, plus $650.0 held in escrow for the Avid Health acquisition. Total debt was $903.8: $254.4 short-term borrowings and $649.4 long-term debt. Net debt was $12.6 including escrow cash, or $662.6 excluding it.
- Debt increased substantially from $252.3 at December 31, 2011, mainly reflecting financing for the subsequent acquisition. The company issued $400 million of 2.875% notes due 2022 and had $250 million of commercial paper outstanding at quarter-end.
- Nine-month operating cash flow was $315.9, down $3.3 year over year. Investing cash use was $711.0, including the $650.0 escrow deposit, $49.7 of capital expenditures and $9.7 invested in Natronx. Financing provided $381.3, including debt proceeds; the company also spent $200.4 repurchasing shares and paid $101.0 in dividends.
- Management reported covenant ratios at September 30 of 1.5 times debt to Adjusted EBITDA versus a 3.25 maximum, and 69.6 times interest coverage versus a 3.00 minimum. The maximum leverage ratio rises to 3.50 in Q4 following the acquisition.
Outlook, events and risks
- Avid Health: Acquired October 1, 2012 for approximately $650 million, subject to working-capital adjustment. The company said Avid’s annual sales are approximately $230 million and expected to manage its vitamin and supplement brands principally in Consumer Domestic. Purchase accounting and pro forma results were not yet available in this filing.
- Management projected an approximately 35% 2012 annual effective tax rate, approximately $75 million of 2012 capital expenditures, and sufficient operating cash and borrowing capacity for planned spending, dividends and Natronx commitments. No specific sales or earnings guidance is provided in the filing.
- On October 31, the board authorized up to an additional $300 million of share repurchases; approximately $20 million remained under the prior authorization. No purchases were made in Q3 under the prior program.
- Hurricane Sandy disrupted some company, customer and supplier operations, including third-party IT services. The financial impact could not yet be quantified and could be material.
- Environmental remediation at a Brazilian site remains unresolved. The company had accrued $7.8 million cumulatively and spent approximately $2.4 million; possible landfill removal could cost $30–$50 million if required and not successfully appealed.
- Other disclosed exposures include litigation over pregnancy-test advertising and ARM & HAMMER deodorant claims, as well as possible FDA requirements affecting N-9 condoms. The company said potential losses in the litigation were not estimable. The FDA closed its 2011 warning letter in June 2012, but the company continued work on quality-system compliance.
- Other commitments include a 20-year headquarters lease with approximately $116 million of payments and vendor commitments of approximately $201.2 million through 2016. Management cited commodity and energy prices, demand, competition, foreign exchange, acquisition integration and operational disruptions among factors that could affect results.
Key facts for investors to verify
- How Avid Health’s purchase price, assumed obligations, purchase accounting and financing affect post-acquisition debt, earnings and cash flow.
- Underlying sales and margin trends by segment, especially the effect of product mix, pricing, commodities and foreign exchange.
- Liquidity excluding the $650 million escrow balance, and debt and covenant capacity after the acquisition.
- Developments and any revised estimates for Brazilian environmental remediation, pending litigation and regulatory matters.
- The financial impact of Hurricane Sandy and whether it alters operating or cash-flow expectations.