Church & Dwight Co., Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2012, compared with the three months ended April 1, 2011. Church & Dwight sells household and personal care products and specialty chemicals through Consumer Domestic, Consumer International and Specialty Products (SPD), with equity-method affiliates reported in Corporate. The company changed to a month-end quarterly calendar starting in 2012; management said the calendar change would not materially affect 2012 versus 2011 quarterly comparisons.
Financial results and liquidity
- Revenue: Net sales were $690.6 million, up $48.3 million, or 7.5%. Volume added 10.5 percentage points; pricing/product mix reduced growth by 2.1 points, foreign exchange by 0.3 points, acquired product lines added 0.8 points, and customer orders shifted out of Q1 ahead of a U.S. information-systems upgrade reduced growth by 1.4 points.
- Profit and margins: Gross profit was $302.5 million versus $288.1 million; gross margin was 43.8%, down 110 basis points. Operating income was $142.7 million versus $131.1 million. Net income was $95.8 million versus $83.6 million; diluted EPS was $0.66 versus $0.58. The effective tax rate fell to 33.1% from 36.5%, partly reflecting a tax-audit settlement and a lower effective state tax rate.
- Cash flow: Operating cash flow was $113.9 million versus $79.5 million. Investing used $18.5 million, including $15.1 million of capital expenditures and a $3.0 million Natronx investment. Financing used $117.4 million, including $90.3 million of share repurchases and $34.2 million of dividends. Cash ended the quarter at $232.4 million, down $19.0 million from year-end.
- Balance sheet and liquidity: Total assets were $3.14 billion and current assets were $759.3 million at March 31. Debt totaled $249.9 million, almost all fixed-rate 3.35% senior notes due in 2015; net debt was $17.5 million versus $0.9 million at year-end. The company reported about $500 million available under its revolving credit facility and commercial paper program, plus a borrowing-increase feature of up to an additional $500 million subject to conditions. Approximately $130 million of cash was held by foreign subsidiaries and intended to remain invested abroad.
- Shareholder returns: The quarterly dividend increased from $0.17 to $0.24 per share, effective February 1. The company repurchased 1.9 million shares for $90.0 million during Q1; it reported a further 2.2 million shares repurchased for about $110 million during April.
Material changes versus the prior comparable period
- Consumer Domestic sales increased 8.4% to $510.6 million and pretax income rose to $112.2 million from $104.8 million. Household products grew, led by liquid laundry detergent; personal care sales were weaker.
- Consumer International sales increased 10.7% to $121.4 million and pretax income rose to $21.8 million from $19.0 million. Growth included higher volumes and the acquired BATISTE dry shampoo line.
- SPD sales declined 4.9% to $58.6 million, reflecting lower volumes; pretax income nevertheless increased to $6.7 million from $5.6 million, aided by higher selling prices.
- Gross margin pressure reflected higher commodity costs, unfavorable product mix, increased trade promotion spending, and start-up costs at the California facility. Savings programs and higher volumes partly offset these pressures. SG&A increased $4.0 million, including higher legal and information-systems costs; marketing expense decreased $1.2 million.
- Operating cash flow improved, but investing outflows increased from $6.1 million to $18.5 million, and financing outflows included substantially higher repurchases and dividends.
Outlook, management commentary, risks and unusual items
- Management projected a 2012 annual effective tax rate of approximately 35%, capital expenditures of approximately $70–75 million, and stated that operating cash and borrowing capacity were expected to cover planned capital spending, dividends, share repurchases as implemented, and Natronx contributions of up to $17 million in 2012.
- The company said it expected to remain within credit covenants. At quarter-end, its leverage ratio was 0.5 against a 3.25 maximum, and its interest-coverage ratio was 69.1 against a 3.00 minimum.
- The Victorville, California facility and related Green River transition were expected to require about $35 million of capital expenditures and $7 million of transition expenses in total through 2012. Q1 included $0.6 million of accelerated depreciation and $0.9 million of transition costs.
- Environmental remediation at the Brazilian QGN site remains uncertain. The company had accrued $7.8 million in prior periods and spent about $2.2 million through Q1 2012. If landfill removal is required and an appeal fails, the estimated additional cost could be $30–50 million.
- The FTC investigation into U.S. condom distribution and sales practices was continuing. The Mayer Labs litigation was settled in April 2012 for an amount described as not material. A new purported class action alleged misleading “natural” claims for ARM & HAMMER Essentials deodorant; the company said it would defend the case, and damages could not then be estimated. The SPD pregnancy-test advertising litigation also remained ongoing, with potential loss not estimable.
- On May 3, 2012, after quarter-end, the company announced a voluntary recall of select SPINBRUSH rechargeable toothbrush lots because charging bases could overheat. It reported seven consumer overheating reports and no injuries or fires; the anticipated Q2 charge was not expected to be material.
- Other risks cited include commodity and energy costs, foreign exchange, consumer demand, competition, customer order timing, litigation, and environmental matters. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether volume-led sales growth continues and whether pricing, product mix, commodity costs, and promotional spending improve gross margin.
- The timing and economic impact of the California facility transition, 2012 capital spending, and continued share repurchases and higher dividends.
- Developments in the QGN remediation discussions, including whether landfill removal is required and whether the recorded accrual remains sufficient.
- Outcomes of the FTC inquiry and remaining or new litigation, including the deodorant class action and SPD advertising dispute.
- The cost and scope of the SPINBRUSH recall, and whether the company’s stated liquidity and covenant position changes.