Church & Dwight Co., Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter figures are also summarized below. Amounts are in U.S. dollars, millions, except per-share data.
Business context and reporting period
Church & Dwight develops, manufactures and markets household, personal-care and specialty products, led by brands including ARM & HAMMER, TROJAN, OXICLEAN and NAIR. FY 2011 sales mix was approximately 72% Consumer Domestic, 19% Consumer International and 9% Specialty Products.
Comparability is affected by a reporting-calendar change: three foreign subsidiaries contributed 13 months of results in 2011, adding $14.3 million to annual sales, with a negligible net-income effect. The company also reported approximately $9 million of fourth-quarter customer orders brought forward ahead of its U.S. information-systems implementation.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Net sales | $2,749.3 | $2,589.2 | Up 6.2% |
| Gross profit / gross margin | $1,214.5 / 44.2% | $1,157.8 / 44.7% | Margin down 0.5 percentage point |
| Operating income / operating margin | $492.6 / 17.9% | $445.0 / 17.2% | Operating income up 10.7% |
| Net income | $309.6 | $270.7 | Up 14.4% |
| Diluted EPS | $2.12 | $1.87 | Up 13.4%; figures reflect the two-for-one stock split |
| Operating cash flow | $437.8 | $428.5 | Up $9.3 |
| Capital expenditures | $76.6 | $63.8 | Up $12.8 |
| Cash / total debt | $251.4 / $252.3 | $189.2 / $339.7 | Net debt fell to $0.9 from $150.5 |
For Q4 2011, net sales were $731.1 million versus $656.9 million in Q4 2010; operating income was $117.4 million versus $80.0 million; net income was $63.8 million versus $47.0 million; and diluted EPS was $0.44 versus $0.33. Q4 included a $13 million deferred-tax valuation charge, partly offsetting earnings, and the additional foreign-subsidiary reporting month.
At year-end, current assets were $755.2 million and current liabilities $383.6 million. The company reported approximately $500 million of combined commercial-paper and revolving-credit borrowing capacity; it issued no commercial paper in 2011. Its $250 million 3.35% senior notes mature in 2015. Leverage and interest-coverage ratios were 0.5 and 65.3, respectively, against maximum and minimum covenant thresholds of 3.25 and 3.00.
Material changes versus prior period
- Sales growth reflected higher consumer volumes, acquisitions, foreign exchange and the extra reporting month; pricing contributed little overall. Specialty Products volumes were essentially unchanged.
- Consumer International sales rose 14.7% to $509.1 million, including favorable currency, acquisition and calendar effects. Consumer Domestic sales rose 4.9% to $1,979.1 million. Specialty Products sales rose 0.8% to $261.1 million, with pricing offset by a discontinued product line.
- Gross margin declined as higher commodity costs, unfavorable mix and trade promotion spending more than offset cost savings and pricing actions. Raw-material and energy costs continued to rise.
- Interest expense declined to $8.7 million from $27.8 million, reflecting lower average debt and refinancing. The effective tax rate increased to 37.4% from 35.3%, including a $13 million Brazilian deferred-tax valuation allowance.
- The company acquired BATISTE for $64.8 million and invested $3.2 million in Natronx. It repurchased approximately 1.8 million shares for $80.1 million and paid $97.4 million in dividends.
Outlook, risks, contingencies and unusual items
- Management expected FY 2012 capital expenditures of approximately $70–75 million and stated operating cash flows plus borrowing capacity were expected to fund investment, dividends, repurchases as implemented and Natronx commitments. No specific 2012 sales or EPS guidance is provided in the filing text.
- The company expected to invest approximately $35 million in the Victorville, California facility and incur about $7 million in transition costs through 2012. It forecast approximately $11 million for information-systems upgrades and $24 million for Victorville in 2012 capital spending. A higher quarterly dividend of $0.24 per share was announced in February 2012.
- FDA matters are a notable risk: the company disclosed a May 2011 warning letter concerning medical-device reporting and complaint handling, further FDA observations in February 2012, and an FDA safety communication about SPINBRUSH injuries. The company said it intended to cooperate; additional enforcement, notices or recalls could materially affect results.
- Brazilian environmental matters remain unresolved. QGN had accrued approximately $7.8 million through 2010 for remediation, fines and related costs and had spent $1.7 million by year-end 2011. Further landfill-removal requirements could materially increase costs. A portion of the Brazilian chemical business, with approximately $40 million annual revenue, was classified as held for sale while strategic options were explored.
- Other contingencies include an FTC investigation and Mayer Labs antitrust litigation over condom distribution practices, with claimed damages of $2.6–$3.1 million subject to possible trebling and a pending sanctions motion; and litigation with SPD concerning FIRST RESPONSE advertising claims. Outcomes were described as uncertain.
- Key business risks include commodity inflation and inability to pass costs through, intense competition and private-label pressure, customer concentration (Wal-Mart and affiliates were 23% of sales), foreign exchange, regulatory compliance, product liability, and execution of systems and facility transitions.
- Unusual accounting/reporting items include the extra subsidiary reporting month and the Q4 Brazilian deferred-tax valuation charge. The company reported effective internal controls and unqualified audit opinions on its financial statements and internal controls.
Investor verification priorities
- Separate underlying sales growth from the $14.3 million calendar effect, approximately $9 million of advance orders, acquisitions and foreign-exchange contributions.
- Assess whether pricing and cost savings can offset continued commodity inflation and pressure on the 44.2% gross margin.
- Monitor the FDA’s response to the SPINBRUSH and quality-system matters, including potential enforcement or recall costs.
- Track the Brazilian business sale process, remediation requirements, and any change to the accrued environmental liability.
- Review outcomes of the Mayer Labs/FTC and SPD matters, including sanctions exposure and possible effects on sales or advertising.
- Confirm execution and funding of the Victorville move, information-systems upgrades, Natronx investment and planned shareholder returns.