Church & Dwight Co., Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended October 1, 2010, compared with periods ended September 25, 2009. The 2010 first nine months included six additional days. The company sells household and personal care products domestically and internationally, plus specialty chemicals.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $656.9 million | $646.2 million | $1,932.3 million | $1,850.1 million |
| Gross profit | $288.9 million | $284.9 million | $865.3 million | $815.8 million |
| Income from operations | $113.0 million | $117.9 million | $364.9 million | $321.6 million |
| Net income attributable to Church & Dwight | $69.5 million | $70.0 million | $223.7 million | $190.8 million |
| Diluted EPS | $0.96 | $0.98 | $3.10 | $2.67 |
- Q3 sales rose 1.7%; nine-month sales rose 4.4%. Management attributed growth chiefly to volume, partly offset by lower pricing and mix, customer delivery changes, and divestitures. Q3 volume increased 5.0%; nine-month volume increased 7.2%.
- Gross margin was 44.0% in Q3 versus 44.1%; for nine months it was 44.8% versus 44.1%. Management cited York facility efficiencies and lower North Brunswick closure costs, offset in part by higher trade spending and commodity costs.
- Q3 operating income declined despite sales growth; the 2009 comparison included a $20 million net patent-litigation settlement benefit. Nine-month operating income and attributable net income increased.
- Q3 marketing expense fell $10.0 million to $90.2 million; management said some savings supported higher trade promotions. Nine-month SG&A increased $4.6 million to $258.5 million.
- Net cash from operations was $288.7 million for nine months, down from $308.8 million. Investing used $108.2 million, including acquisitions; financing used $172.3 million, mainly debt repayment and dividends. Cash increased $6.4 million to $453.5 million.
- At October 1, total debt was $658.0 million, down from $816.3 million at year-end 2009; net debt was $204.5 million versus $369.2 million. There were no short-term borrowings. Current assets were $964.6 million and current liabilities $507.6 million.
- Nine-month cash dividends were $31.9 million. The quarterly dividend was raised from $0.14 to $0.17 per share, or $0.68 annualized.
Changes, outlook, and significant items
- Segment sales for the first nine months increased 1.8% in Consumer Domestic, 15.0% in Consumer International, and 7.9% in Specialty Products. Q3 Consumer Domestic sales were essentially flat; International and Specialty Products sales rose 4.9% and 10.1%, respectively.
- The company acquired the Simply Saline brand for $70.0 million and toothbrush technology for $10.0 million in 2010. It also sold BRILLO and certain LAMBERT KAY product lines.
- Management anticipated repaying the $408.0 million term loan in Q4 using cash and accounts receivable securitization borrowings, and planned a new unsecured five-year revolving facility of approximately $500 million, with a potential additional $500 million accordion. These were plans, not completed transactions in this filing. The existing securitization facility provided up to $115 million and was expected to be renewed in February 2011.
- Planned refinancing prompted a $4.3 million pretax loss reclassification into interest expense in Q3; $3.3 million of unamortized financing costs was expected to be charged to other expense in Q4. Management projected a 2010 effective tax rate of approximately 36%, including tax-related benefits recognized in Q3.
- Management said operating cash and borrowing capacity were expected to cover capital spending, required debt payments, pension funding, and dividends over the next 12 months. The company reported covenant ratios comfortably within limits: leverage 1.2 versus a 3.0 maximum and interest coverage 18.3 versus a 3.0 minimum.
- Risks and contingencies include an FTC investigation into condom distribution practices (no decision on further action reported), possible FDA restrictions or labeling requirements for N-9 condoms, environmental remediation at an international facility (additional costs cannot be ruled out), and other ordinary-course litigation. A Brazilian facility shutdown was expected to require about $2 million of cash costs across Q4 2010 and 2011.
- The company was evaluating termination of an hourly pension plan; estimates after anticipated contributions included approximately $15 million in one-time cash contributions for annuities and a one-time expense of approximately $25 million. These were estimates and the company continued evaluating options.
- Management cited consumer demand, competition and private-label growth, raw material and energy prices, customer and supplier financial health, market conditions, and litigation or remediation outcomes as risks to forward results. No specific sales or EPS guidance is provided in the filing text.
Important facts for investors to verify
- Whether the planned term-loan repayment and new credit facility were completed on expected terms, and whether the securitization facility was renewed.
- Whether reported volume growth and manufacturing savings persist as trade promotion, commodity, and input-cost pressures evolve.
- The eventual costs and timing of environmental remediation and pension-plan termination, and any developments in the FTC or FDA matters.
- How much of the improvement in nine-month earnings reflects operating performance versus the extra six fiscal days and tax-related benefits.