Church & Dwight Co., Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended April 1, 2011; comparable quarter ended April 2, 2010. Dollar amounts are in millions except per-share data. The company sells household, personal-care and specialty chemical products. The filing notes that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $642.3 | $634.6 | +1.2% |
| Gross profit / margin | $288.1 / 44.9% | $285.5 / 45.0% | Margin down 0.1 percentage point |
| Operating income | $131.1 | $132.0 | Down $0.9 |
| Income before tax | $131.6 | $125.4 | +4.9% |
| Net income | $83.6 | $80.0 | +4.5% |
| Diluted EPS | $1.15 | $1.11 | +3.6% |
| Operating cash flow | $79.5 | $72.0 | Up $7.5 |
Gross margin was pressured by higher commodity costs and unfavorable pricing and sales mix, partly offset by manufacturing cost reductions. Operating income declined as SG&A rose $3.2, including higher legal, acquisition-related transition and amortization costs; Q1 2010 also included a $1.0 gain on a product-line sale. Interest expense fell $5.5 to $2.7, primarily reflecting lower average debt. Effective tax rate was 36.5%, versus 36.2%.
Segments and material comparisons
- Consumer Domestic: Sales of $471.1, up 0.9%; pretax income of $104.8, up $5.7. Volume and acquired product lines contributed, while pricing/mix and customer delivery changes offset growth.
- Consumer International: Sales of $109.6, up 6.8%; pretax income of $19.0, up $3.4. Growth reflected higher volume and favorable foreign exchange.
- Specialty Products: Sales of $61.6, down 5.5%; pretax income of $5.6, down $3.8. Lower volume and higher manufacturing costs outweighed higher prices and favorable mix.
- Consolidated sales growth included volume (+3.2%), acquisitions (+1.4%) and foreign exchange (+0.7%), offset by pricing/mix (-2.0%), delivery-arrangement changes (-0.8%), divestitures (-0.4%) and a discontinued product line (-0.9%).
Liquidity, debt and cash flow
At April 1, 2011, cash was $159.1, total debt $249.7 and net debt $90.6, compared with $189.2, $339.7 and $150.5, respectively, at December 31, 2010. The company repaid the $90.0 balance on its receivables securitization facility; no short-term borrowings remained. Long-term debt was a $250.0 face-value 3.35% senior note due December 2015, reported net of discount at $249.7.
Current assets were $663.2 and current liabilities $360.5 (current ratio approximately 1.84). Operating cash flow was $79.5; investing activities used $6.1, including $6.8 of capital expenditures; financing activities used $106.4, mainly the $90.0 debt repayment and $24.3 of dividends. Cash declined $30.1 during the quarter. The company reported $115.0 available on its renewed receivables facility and approximately $500 available under its revolving credit facility, with a further potential $500 commitment increase subject to lender agreement and conditions. It stated that it expected cash flow and borrowing capacity to cover planned investment and dividends.
Debt covenants were comfortably met: leverage ratio 0.51 versus a maximum of 3.25; interest coverage 19.24 versus a minimum of 3.00. All outstanding debt carried a fixed 3.35% rate.
Outlook, risks and unusual items
- No specific sales or EPS forecast is provided in the filing. Management projected a 2011 annual effective tax rate of approximately 35%, including an estimated $6 tax benefit to be recognized in Q2 from New Jersey tax-law changes.
- Management estimated 2011 capital expenditures of approximately $80. The company planned to relocate cat-litter manufacturing and distribution operations to Victorville, California, with the new site also producing liquid laundry detergent. The filing describes approximately $30 of project capital expenditures and gives differing transition-cost estimates: $8 in the subsequent-events note versus $5 in MD&A. It expected $11 of project capital expenditures in 2011 and cited transition effects of about $0.04 per share in 2011 and $0.03 in 2012.
- Commodity and energy costs, consumer demand, competition and private-label pressure, customer and supplier financial condition, currency movements, and economic and credit-market conditions could affect results and liquidity. Diesel hedges covered approximately 23% of 2011 requirements through September 30; foreign-exchange and equity derivatives also expose results to fair-value changes.
- Contingencies include a Brazilian environmental remediation matter and approximately $3 fine (with $7.8 accrued cumulatively for remediation, fines and related costs); an FTC investigation into U.S. condom distribution practices; and potential FDA labeling restrictions for condoms containing nonoxynol-9. The company said it could not predict final FDA requirements or whether additional environmental costs would arise.
- The company had $145.4 of commitments through 2014 for raw materials, packaging and services, principally increased by a new information-systems agreement. It also has a 240,000-ton annual purchase commitment for sodium-based raw materials at market prices.
- On May 5, 2011, the board announced a two-for-one stock split, payable June 1 to holders of record May 16. This occurred after quarter-end.
Key facts for investors to verify
- Reconcile the Victorville transition-cost estimates of $8 in the subsequent-events note and $5 in MD&A, and assess total project costs and timing.
- Monitor whether sales growth and cost reductions can offset commodity inflation, promotional spending and weaker Specialty Products performance.
- Track the FTC inquiry, Brazilian environmental remediation and fine, and any FDA action on N-9 condom labeling.
- Confirm the expected Q2 recognition and full-year impact of the New Jersey tax benefit and projected 35% annual tax rate.
- Assess cash conversion and working-capital movements: receivables, inventories and payables used cash, while timing of income-tax payments supported reported operating cash flow.