Church & Dwight Co., Inc. — Q2 2011 Form 10-Q
Business context and period: The filing reports the quarter and six months ended July 1, 2011, compared with the periods ended July 2, 2010. Church & Dwight sells household and personal care products, international personal care products, and specialty chemicals. Amounts below are in millions of dollars except per-share data. The two-for-one stock split effective June 1, 2011 is reflected retroactively in share and per-share figures.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $674.9 | $640.9 | $1,317.2 | $1,275.4 |
| Gross profit | $300.0 | $290.9 | $588.1 | $576.4 |
| Income from operations | $117.8 | $120.0 | $248.9 | $252.0 |
| Income before taxes | $119.0 | $116.4 | $250.6 | $241.8 |
| Net income | $82.6 | $74.3 | $166.2 | $154.3 |
| Diluted EPS | $0.57 | $0.51 | $1.14 | $1.07 |
- Q2 sales rose 5.3%; first-half sales increased 3.3%. Management attributed growth mainly to volume, foreign exchange, and acquired product lines. Q2 pricing and mix were flat overall; first-half pricing and mix reduced sales by 1.0%, primarily reflecting higher trade promotions.
- Gross margin declined to 44.5% from 45.4% in Q2 and to 44.6% from 45.2% for the first half. Higher commodity costs, trade promotion spending, and unfavorable mix outweighed manufacturing cost reductions.
- Operating income fell 1.8% in Q2 and 1.2% in the first half despite higher sales. Q2 net income rose 11.2%, benefiting in part from a lower effective tax rate and reduced interest expense.
- Q2 marketing expense was $87.5, up 5.7%; SG&A was $94.7, up $6.6, including higher legal expenses, acquisition-related costs, amortization, and foreign-exchange effects. Q2 equity earnings from affiliates increased to $3.2 from $1.6.
- Effective tax rates were 30.6% for Q2 and 33.7% for the first half, versus 36.2% in the comparable 2010 periods. The Q2 rate benefited from an approximately $6 million deferred tax benefit related to New Jersey tax reform.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $171.7, up from $123.8. Investing used $87.2, including $64.8 for the BATISTE acquisition and $23.6 of capital expenditures. Financing used $116.7, including repayment of $90.0 of securitization borrowings and $48.6 of dividends.
- Cash was $163.4 at July 1, 2011, versus $189.2 at year-end 2010. Total debt was $249.7, all fixed-rate 3.35% senior notes due in 2015; net debt was $86.3, down from $150.5 at year-end. The $90.0 securitization balance was repaid and the facility renewed to February 2012.
- Management reported $115 million available under the receivables securitization facility and approximately $500 million under the revolving credit facility, with a feature allowing up to another $500 million subject to lender agreement and conditions. Leverage and interest-coverage ratios were 0.5 and 23.3, respectively, within covenant limits of 3.25 maximum and 3.00 minimum.
- Capital expenditures were expected to be approximately $80 million in 2011. Management said operating cash flow and borrowing capacity should be sufficient for expected capital expenditures and dividends at the current rate.
Segments and material changes
- Consumer Domestic: Q2 sales increased 3.6% to $482.3, while pretax income declined $3.5 to $94.1. First-half sales rose 2.3% to $953.4 and pretax income increased $2.1 to $198.9. Cost pressures and higher legal, marketing, and promotional spending weighed on Q2 results.
- Consumer International: Q2 sales rose 12.4% to $126.0 and pretax income rose to $13.5 from $11.7. First-half sales increased 9.7% to $235.6 and pretax income increased to $32.6 from $27.3. Growth reflected volume and favorable currency, partly offset by unfavorable price and mix.
- Specialty Products: Q2 sales increased 5.3% to $66.6 and pretax income increased to $8.2 from $5.5. First-half sales decreased 0.2% to $128.2 and pretax income fell to $13.8 from $14.9, reflecting higher manufacturing costs and a discontinued product line.
- On June 28, the company acquired the BATISTE dry shampoo brand for $64.8 cash; reported annual sales are approximately $20 million. It will be managed principally in Consumer International.
Outlook, risks and unusual items
- Management projected a 2011 annual effective tax rate of approximately 35%. The filing does not provide a clear numerical full-year sales or EPS forecast.
- The company planned a Victorville, California facility and relocation of cat-litter production and distribution from Green River, Wyoming. Expected total capital investment was approximately $30 million and transition costs approximately $8 million; 2011 project capital spending was expected to be $11 million. After-tax transition expense was estimated at about $0.02 per share in both 2011 and 2012.
- Subsequent to quarter-end, the company signed a 20-year lease for a new headquarters building, with an estimated commitment of approximately $116 million. The Board also authorized up to $300 million of share repurchases; purchases are discretionary and subject to conditions.
- Key exposures include higher raw-material and energy costs, consumer demand and competition, foreign exchange, and legal, regulatory, and environmental proceedings. The FTC was investigating alleged potentially exclusionary condom-distribution practices and had not decided whether to take further action. A Brazilian subsidiary faced remediation requirements and a disputed fine; the company had accrued approximately $7.8 million through 2010 and said further costs were possible. Future FDA labeling requirements for N-9 condoms could also affect costs and sales.
- The company reported approximately $139 million of vendor commitments through 2014 for raw materials, packaging, and services. It also committed to annual purchases of 240,000 tons of sodium-based raw materials under a supplier partnership.
Investor verification points
- Assess whether price increases and cost-reduction actions offset commodity inflation and trade-promotion pressure, and whether gross margins stabilize.
- Track Consumer Domestic profitability and the growth and earnings contribution from BATISTE and other acquired product lines.
- Verify actual spending, transition charges, timing, and benefits for the Victorville project, and the financial impact of the headquarters lease.
- Monitor cash generation, dividends, any share repurchases, and available borrowing capacity after acquisition and planned investment spending.
- Follow developments in the FTC investigation, Brazilian environmental matter, N-9 regulation, and uncertain tax positions; the filing said tax liabilities could decrease by approximately $14.9 million within twelve months, but the effective-tax-rate impact was not estimable.