Church & Dwight Co., Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 30, 2011; nine-month comparison is against the period ended October 1, 2010. Amounts are in U.S. dollars and millions, except per-share data. Interim results are unaudited and may not indicate full-year results.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $701.0 | $656.9 | $2,018.2 | $1,932.3 |
| Gross profit | $309.9 | $289.0 | $898.0 | $865.3 |
| Income from operations | $126.3 | $113.0 | $375.2 | $364.9 |
| Income before taxes | $126.0 | $105.9 | $376.6 | $347.6 |
| Net income | $79.6 | $69.5 | $245.8 | $223.7 |
| Diluted EPS | $0.54 | $0.48 | $1.68 | $1.55 |
| Operating cash flow | — | — | $319.2 | $288.7 |
- Sales increased 6.7% in Q3 and 4.4% in the first nine months. Q3 growth reflected volume (+3.7%), foreign exchange (+1.6%), acquired product lines (+1.3%) and pricing (+0.8%); nine-month growth was primarily volume and foreign exchange, with pricing slightly negative.
- Gross margin was 44.2% in Q3 versus 44.0%; for the nine months it was 44.5% versus 44.8%. Management attributed Q3 improvement to cost-reduction programs, partly offset by higher commodity costs and unfavorable mix. Nine-month margin pressure also reflected trade promotion spending.
- Q3 net income rose about 15% year over year; nine-month net income rose about 10%. Lower interest expense supported results: $2.2 million in Q3 versus $8.0 million, and $7.5 million for nine months versus $21.5 million.
- For the first nine months, investing cash use was $104.9 million, including the $64.8 million BATISTE acquisition and $40.8 million of capital spending. Financing cash use was $129.1 million, including $73.1 million of dividends and net repayment of $86.1 million of short-term borrowings. Cash increased $85.8 million to $275.0 million.
Financial position and liquidity
- At September 30, cash was $275.0 million, total debt was $253.6 million, and the company reported net cash of $21.4 million. At December 31, 2010, it had $189.2 million of cash and $339.7 million of debt, or net debt of $150.5 million.
- Current assets were $798.8 million and current liabilities $393.6 million. The filing reported $115 million available under the receivables securitization facility and approximately $500 million under the revolving credit facility. Commercial paper and revolver borrowings together are capped at $500 million; the credit agreement was extended to August 2016.
- Management said operating cash and borrowing capacity were expected to fund planned capital spending, dividends and repurchases. The company reported covenant ratios well within limits: leverage of 0.5 versus a 3.25 maximum and interest coverage of 31.0 versus a 3.00 minimum.
Material changes and operating developments
- Consumer Domestic sales rose 5.2% in Q3; Consumer International rose 17.8%, including a favorable 9.2% foreign-exchange effect; Specialty Products sales were nearly flat. Consumer International and Specialty Products pretax income improved, as did Consumer Domestic pretax income.
- The company acquired the BATISTE dry shampoo brand for $64.8 million in June; reported annual sales were approximately $20 million. It also formed Natronx, a one-third-owned joint venture, which planned a roughly $60 million facility, with costs shared equally by the three members.
- The company authorized up to $300 million in share repurchases and expected to repurchase approximately $80 million before year-end; no purchases under the authorization had occurred through September 30. The two-for-one stock split was retroactively reflected in share and per-share figures.
- A new 20-year headquarters lease carries an approximately $116 million commitment. The planned Victorville, California facility and related Green River transition were expected to require about $35 million of capital expenditures and $7 million of transition costs through 2012.
Outlook, risks and contingencies
- Management projected an approximately 35% annual effective tax rate and approximately $75 million of 2011 capital expenditures. The filing did not provide clear full-year sales or EPS guidance.
- Management expected fourth-quarter sales to benefit from customer orders ahead of U.S. information-system upgrades and anticipated higher year-end working capital as a result. The filing cautioned that these timing effects may shift sales between periods.
- Key operating risks include higher raw-material and energy costs, changes in consumer demand, customer and supplier financial condition, competition and private-label pressure, foreign-exchange movements, and disruptions in financial markets. The company uses derivatives for fuel, currency and equity-related exposures and stated they are not used for speculation.
- Contingencies include a Brazilian environmental remediation matter: the company had accrued approximately $7.8 million through 2010, including a fine, and said additional costs could arise. The FTC was investigating U.S. condom distribution practices; it had not decided whether to take further action. FDA guidance on labeling for condoms containing nonoxynol-9 remained uncertain.
- Other notable items: potential uncertain-tax-position liabilities could decrease by approximately $14 million within 12 months, but the effective-tax-rate impact was not estimable; planned Green River/Victorville transition expenses and restructuring costs remain relevant. The filing states ordinary-course legal actions are not expected to materially affect results.
Important facts for investors to verify
- Whether sales growth and margins persist after accounting for foreign exchange, acquisitions, commodity inflation, promotions and customer order timing ahead of system upgrades.
- Execution, total costs and timing of the Victorville relocation, headquarters lease and information-system upgrades, including working-capital effects.
- Actual share repurchases, capital expenditures and dividend cash needs, and continued access to commercial-paper and revolving-credit funding.
- Developments and potential financial exposure in the Brazilian environmental matter, FTC inquiry, N-9 labeling process and tax audits.