Church & Dwight Co., Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Church & Dwight sells household, personal care, and specialty chemical products through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $696.4 | $674.9 | $1,387.0 | $1,317.2 |
| Gross profit | $303.0 | $300.0 | $605.5 | $588.1 |
| Income from operations | $122.4 | $117.8 | $265.1 | $248.9 |
| Income before taxes | $123.1 | $119.0 | $266.3 | $250.6 |
| Net income | $79.3 | $82.6 | $175.1 | $166.2 |
| Diluted EPS | $0.56 | $0.57 | $1.22 | $1.14 |
| Gross margin | 43.5% | 44.5% | 43.6% | 44.6% |
- Q2 sales rose 3.2%; first-half sales rose 5.3%. Management attributed growth principally to higher volumes, offset by unfavorable pricing/product mix and foreign exchange. First-half comparisons were also affected by customer orders shifted into late 2011 ahead of a U.S. information-systems upgrade.
- Q2 operating income increased despite lower net income, as the effective tax rate rose to 35.6% from 30.6%. First-half net income increased; the first-half effective tax rate was 34.2% versus 33.7%.
- Gross margin fell 100 basis points in both comparison periods. Management cited unfavorable mix and higher trade promotion spending; manufacturing savings largely offset higher commodity costs. Victorville start-up costs also weighed on results.
- Q2 segment sales / income before taxes: Consumer Domestic $506.5 / $96.1; Consumer International $121.3 / $14.8; SPD $68.6 / $9.8; Corporate income $2.4. Domestic growth was led by household products, while international Q2 sales fell 3.7%, notably from weaker European volumes and currency effects. SPD Q2 sales and pretax income increased.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $189.2, versus $171.7 in 2011. Investing outflow was $48.2, including $40.0 of capital expenditures and $6.8 invested in Natronx. Financing outflow was $207.9, including $200.4 of share repurchases and $67.5 of dividends.
- Cash was $184.2 at June 30, 2012, down from $251.4 at year-end 2011. Total debt was $282.2, comprising $32.4 of short-term borrowings and $249.8 of long-term debt; reported net debt was $98.0, versus $0.9 at year-end.
- Current assets were $731.6 and current liabilities $419.0. The company reported approximately $470 million of availability through its revolving credit facility and commercial paper program. About $96.4 million of cash was held by foreign subsidiaries and was intended to remain permanently invested overseas.
- Credit Agreement leverage ratio was 0.6 against a maximum of 3.25; interest coverage was 67.5 against a minimum of 3.00. Approximately 89% of debt carried a fixed 3.35% rate; commercial paper rates were below 0.5%.
- The quarterly dividend was raised from $0.17 to $0.24 per share in February 2012. The company repurchased approximately 5.9 million shares for about $280 million through June 30 under a $300 million authorization and said it did not anticipate further purchases during the balance of 2012.
Outlook, developments, and risks
- Management projected a 2012 annual effective tax rate of approximately 35%, capital expenditures of approximately $80 million, and expected operating cash and borrowing capacity to cover planned investment, dividends, and up to $10 million of additional Natronx funding. No specific full-year sales or earnings guidance is provided in the filing text.
- The Victorville facility began producing liquid laundry detergent and cat litter in Q2. The company expected approximately $35 million of aggregate capital investment and about $6 million of transition expenses through 2012; $1.9 million of accelerated depreciation and transition costs were recorded in the first half of 2012.
- The company has a 20-year lease commitment of approximately $116 million for a new headquarters facility, expected to be completed and occupied in late 2012. It also had commitments through 2016 for approximately $196.3 million of raw materials, packaging, and services at market prices.
- Brazil environmental remediation remains uncertain. The company had accrued approximately $7.8 million in 2009–2010 and spent approximately $2.4 million through June 2012. If authorities require landfill removal and the company cannot successfully appeal, estimated costs could be $30–$50 million.
- Other disclosed legal matters include ongoing advertising and competition litigation involving SPD Swiss Precision Diagnostics and a purported class action concerning ARM & HAMMER Essentials Natural Deodorant. The company said potential losses could not be estimated. The FTC closed its condom-distribution investigation in June 2012 with no further action warranted.
- Other risks highlighted include consumer demand and economic conditions, raw-material and energy costs, competition and private-label products, foreign exchange, customer and supplier financial condition, regulatory outcomes, litigation, and environmental remediation. Management stated that disclosure controls were effective and no material change in internal control occurred during the quarter.
Most important facts for investors to verify
- Whether volume growth can persist and pricing, product mix, promotions, and foreign exchange improve enough to stabilize gross margins.
- Whether the higher tax rate, including the timing and effects of tax settlements, affects full-year earnings relative to the approximately 35% projection.
- Progress, spending, and production performance at Victorville, and completion costs and obligations for the new headquarters.
- Cash and debt trends after substantial buybacks and dividends, and whether capital spending and Natronx commitments remain within expected funding capacity.
- Updates on Brazil remediation exposure, the SPD and deodorant litigation, and any material change in other contingencies.