On Monday, leading consumer products company, Church & Dwight Co. Inc. (CHD) posted better-than-expected third-quarter 2012 results. The company’s quarterly earnings of 66 cents a share came ahead of the Zacks Consensus Estimate of 59 cents and jumped 22.2% from 54 cents earned in the prior-year quarter.
The company’s top line increased 3.5% to $725.2 million and surpassed the Zacks Consensus Estimate of $719 million, reflecting a 4.6% rise in organic sales. The strengthening of organic sales represents a 4.5% growth in volume and a positive effect of 0.1% through pricing and product mix.
Revenue Segments
Consumer Domestic's net sales elevated 4.8% to $530.4 million, driven by increases in household products, which marked a rise of 7.6% in revenue to $360.4 million, partially offset by 0.7% decline in personal care products to $170 million.
On an organic basis, sales rose 4.8% during the quarter, reflecting higher sales of ARM & HAMMER liquid laundry detergents. Moreover, higher sales of XTRA liquid laundry detergent, ARM & HAMMER cat litter, TROJAN products, NAIR depilatories, OXICLEAN Laundry Additives and ARM & HAMMER CRYSTAL BURST boosted sales. This was, however, partially offset by sluggish sales of ARM & HAMMER SPINBRUSH battery-operated toothbrushes, ARRID deodorant and ANSWER diagnostic kits.
Increases in organic growth represent a 5.2% improvement in volume, while product mix and pricing unfavorably impacted sales by 0.4%.
Consumer International's sales strengthened 2% year over year to $131.1 million. On an organic basis, sales rose 6.7% attributable to healthy sales in Europe and Australia. The rise in organic revenue reflected 6.6% growth in volume coupled with an increase of 0.1% through favorable product mix and pricing.
Specialty Products' sales decreased 4.0% year over year to $63.7 million. Moreover, on an organic basis, sales inched down 0.9%, reflecting 4.7% contraction in volume, partially offset by a favorable contribution of 3.8% from product pricing. The positive impact on pricing was a result of recovery of input costs through customers.
Margins
Gross profit increased 5.7% to $327.5 million compared with $309.9 million in the prior- year quarter. Moreover, gross margin expanded 100 basis points to 45.2%, reflecting productivity programs and strong performance by new products launched and in-house production of unit dose detergent. Further, price increases in cat litter contributed favorably to margins.
Operating income escalated 15.1% year over year to 145.4 million during the quarter. Moreover, operating margin expanded approximately 200 basis points to 20%, reflecting a 70 basis-point decline in SG&A as a percentage of net sales.
Avid Health Acquisition
During the quarter, the company completed the acquisition of Avid Health Inc., maker of gummy vitamins and supplements, for $650 million in cash.
The company funded the acquisition with a mix of debt including $400 million Senior Notes at 2.875% scheduled to mature in 2022 and commercial papers, and cash. Also, the company added that the Avid acquisition will be accretive to the earnings in 2013 and will boost the bottom line by 4% to 6%.
Moreover, the acquisition will expand the product categories of the company and facilitate it to gain market share in one of the fastest growing segments of the vitamin/mineral/supplement (VMS) business. Avid is the market leader in gummy form VMS business along with strong sales trend, which tripled over the last three years.
Other Financial Details
Church & Dwight, which faces stiff competition from Clorox Corporation (CLX), ended the quarter with cash and cash equivalents of $241.2 million, long-term debt of $649.4 million and shareholders’ equity of $2,058.2 million.
The company announced a new $300 million share repurchase program supplementing the existing program. The company has $20 million left under the previous share buyback program announced in August 2011.
Moreover, the company generated operating cash flow of $315.9 million, reflecting a decline of 1% year over year for the nine-month period ended on September 30, 2012, and incurred $49.7 million in capital expenditures.
Outlook
Excluding the impact of the Avid acquisition, the company expects innovative new product launches to continue boosting organic sales in 2012, and anticipates organic growth to be 4.5%.
Church & Dwight forecasts cost savings programs to offset the increases in commodity prices and expects gross margin to rise at the lower end of its targeted 25 – 50 basis points rise in fiscal 2012.
Management anticipates earnings per share to be 55 cents for the fourth quarter, significantly down from the Zacks Consensus Estimate of 61 cents. Further, including the impact of the Avid acquisition, Church & Dwight now expects earnings to be $2.43 per share (excluding charges of 9 cents related to deferred tax valuation in 2011) in fiscal 2012, indicating an increase of 15% year over year. Moreover, for fiscal 2013, the company expects earnings to be between $2.74 and $2.79 per share, up 13–15% year over year.
Church & Dwight maintains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.
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