Church & Dwight Co., Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing was signed February 22, 2013. This is an annual report, not a standalone quarterly filing. The company develops and sells household, personal-care and specialty products across Consumer Domestic, Consumer International and Specialty Products Division (SPD), which represented about 74%, 17% and 9% of sales, respectively.
Financial performance
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Net sales | $2,921.9 million | $2,749.3 million | Up 6.3% |
| Gross profit / margin | $1,291.4 million / 44.2% | $1,214.5 million / 44.2% | Gross profit increased; margin was flat |
| Operating income / margin | $545.1 million / 18.7% | $492.6 million / 17.9% | Up 10.7%; margin improved |
| Net income | $349.8 million | $309.6 million | Up 13.0% |
| Diluted EPS | $2.45 | $2.12 | Up 15.6% |
| Cash from operations | $523.6 million | $437.8 million | Up $85.8 million, mainly from working-capital improvement |
| Capital expenditures | $74.5 million | $76.6 million | 2013 spending expected to be about $85 million |
| Cash / total debt | $343.0 million / $903.2 million | $251.4 million / $252.3 million | Net debt was $560.2 million versus $0.9 million |
FY2012 cash used in investing was $741.3 million, including $652.3 million for Avid Health, $74.5 million of capital spending and $13.7 million invested in Natronx. Financing activities provided $305.2 million, primarily from the new notes and commercial paper, partly offset by $250.4 million of share repurchases and $134.5 million of dividends. At year-end, the company reported about $250 million available through its revolving-credit/commercial-paper arrangements, with an additional $500 million commitment-increase feature subject to lender commitments and conditions. Its credit covenants were met: leverage ratio 1.4 versus a stated maximum of 3.5, and interest coverage 72.0 versus a minimum of 3.0.
Fourth-quarter snapshot: Sales were $809.7 million versus $731.1 million in Q4 2011; operating income was $134.6 million versus $117.4 million; net income was $80.8 million versus $63.8 million; and diluted EPS was $0.57 versus $0.44. Q4 2012 included approximately $70 million of Avid-related sales.
Material changes versus prior period
- Sales growth reflected higher product volumes and acquired product lines, partly offset by unfavorable pricing/product mix, foreign exchange, a fiscal-calendar change and customer-order timing related to the North American information-systems upgrade.
- Consumer Domestic sales rose 9.0% to $2,156.9 million, with acquired Avid sales and strength in several laundry, litter and cleaning products. Consumer International sales were nearly flat at $510.1 million; foreign exchange and calendar effects offset volume and acquisition contributions. SPD sales declined 2.4% to $254.9 million, while its income before taxes increased to $33.8 million, mainly reflecting higher prices.
- Gross margin remained 44.2%: manufacturing productivity gains were offset by commodity costs, unfavorable mix/pricing and an Avid inventory step-up charge. The effective tax rate declined to 35.5% from 37.4%, aided by resolution of a U.S. tax audit.
- The October 2012 Avid Health acquisition added gummy vitamin brands L’IL CRITTERS and VITAFUSION for approximately $652.3 million. The company issued $400 million of 2.875% senior notes due 2022 and used commercial paper and cash to fund the purchase. Avid contributed about $70 million of post-acquisition 2012 sales but no income before taxes, as inventory step-up and interest expense offset operating income.
- Total debt increased substantially to fund the acquisition. The company repurchased about 5 million shares for approximately $250 million during 2012 and raised its quarterly dividend from $0.17 to $0.24 per share. In January 2013, it raised the quarterly dividend again to $0.28 per share.
Outlook, risks and unusual items
- Management expected challenging conditions to persist in 2013, citing weak or uneven consumer demand, especially in personal care, and continued pricing pressure. Its stated priorities included brand investment, new products, cost management and strategic acquisitions. The filing does not provide a specific 2013 sales, earnings or EPS forecast.
- Management expected operating cash flow and borrowing capacity to cover planned capital expenditures, dividends at the latest approved rate and share repurchases if implemented. This outlook is subject to market conditions and the company’s financing capacity.
- Key exposures include competition and private-label pressure, retailer bargaining power, and customer concentration: Wal-Mart and affiliates generated 24% of 2012 sales; the top three customers generated about 34%. Higher raw-material, packaging, energy and fuel costs may pressure margins if not offset by productivity or pricing.
- QGN’s Brazilian environmental matter remains unresolved. The company had accrued remediation, fines and related costs in prior years and spent about $2.5 million on remediation through year-end 2012. Regulators could require landfill removal, which the company estimates could cost $30–$50 million; the fine of about $2.4 million is being contested.
- Other litigation includes a dispute over FIRST RESPONSE advertising claims and an amended class-action complaint concerning “natural” claims for ARM & HAMMER ESSENTIALS deodorant. The company says damages or equitable relief cannot presently be estimated; an adverse outcome is reasonably possible in each matter.
- The new headquarters lease carries an approximately $116 million commitment over its term; the company recorded about $50 million of related building assets and other long-term liabilities at year-end. Avid’s internal controls were excluded from management’s year-end control assessment pending integration; the remaining assessed controls were reported effective, and the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether Avid’s post-acquisition performance, integration and compliance reviews support the expected growth and profitability of the acquired brands.
- Whether operating cash flow and liquidity remain adequate after acquisition-related borrowing, near-term commercial-paper obligations, dividends, capital spending and any further repurchases.
- Whether persistent pricing pressure and input-cost inflation affect gross margin, particularly as customer concentration remains high.
- Developments in the Brazilian remediation plan and fine, including whether landfill removal is required, and the progress and potential exposure in the two consumer-product lawsuits.
- The comparability effect of the 2011 extra reporting month for certain international subsidiaries and 2012 changes to the fiscal calendar when evaluating growth.
Amounts are in U.S. dollars. The company’s financial statements were audited and reported fairly in all material respects under U.S. GAAP.