Church & Dwight Co., Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. Church & Dwight sells household, personal-care and specialty products through Consumer Domestic, Consumer International and Specialty Products segments.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $2,589.2 million | $2,520.9 million | +2.7% |
| Gross profit / margin | $1,157.8 million / 44.7% | $1,101.0 million / 43.7% | Margin +1.0 percentage point |
| Operating income / margin | $445.0 million / 17.2% | $412.9 million / 16.4% | Income +7.8% |
| Net income attributable to Church & Dwight | $270.7 million | $243.5 million | +11.2% |
| Diluted EPS | $3.75 | $3.41 | +10.0% |
| Operating cash flow | $428.5 million | $400.9 million | +$27.5 million |
| Capital expenditures | $63.8 million | $135.4 million | Down, primarily after completion of the York facility |
Sales growth reflected 5.5% higher volumes and 1.1% favorable foreign exchange, offset by 2.5% lower pricing and mix, 0.9% from changed customer delivery arrangements, and divestitures. Gross-margin gains reflected York facility efficiencies and lower North Brunswick shutdown costs, partly offset by higher commodity and trade-promotion costs. Marketing expense declined 4.4%; SG&A rose to $374.8 million, including the pension settlement charge.
Fourth quarter: Sales were $656.9 million versus $670.8 million in Q4 2009. Net income attributable to the company was $47.0 million versus $52.8 million, and diluted EPS was $0.65 versus $0.74. The 2010 quarter included the approximately $24 million pre-tax pension settlement charge.
Segments and business developments
- Consumer Domestic sales were $1,886.1 million, up 0.2%; income before tax increased to $341.9 million. Volume gains were substantially offset by lower pricing/mix and delivery-arrangement changes.
- Consumer International sales rose 12.8% to $444.0 million, helped by 8.3% volume growth and favorable currency. Income before tax increased to $52.6 million.
- Specialty Products sales increased 5.6% to $259.1 million and income before tax rose to $18.8 million. Results included $9.7 million of environmental, impairment and plant-shutdown costs.
- Acquisitions included Simply Saline for $70 million, Feline Pine for $46 million, and oral-care technology for $10 million. The company sold Brillo and certain Lambert Kay product lines, recording an approximately $1 million gain.
Liquidity, debt and capital allocation
- At year-end, cash was $189.2 million, total debt $339.7 million and net debt $150.5 million. Net debt was $369.2 million at year-end 2009.
- Current assets were $649.5 million and current liabilities $447.1 million. Operating cash flow was $428.5 million; investing cash outflow was $180.4 million and financing cash outflow $503.7 million.
- The company repaid its $408 million term-loan balance and refinanced $250 million of 6% notes with 3.35% senior notes due 2015. The new unsecured revolving facility provides $500 million, with an option to increase by up to a further $500 million subject to conditions.
- The $115 million receivables securitization facility had $90 million drawn at year-end and was renewed in February 2011 through February 14, 2012. Approximately $25 million remained available at year-end.
- Management reported covenant ratios of 0.64 leverage versus a 3.25 maximum, and 18.70 interest coverage versus a 3.00 minimum. It expected operating cash flow and borrowing capacity to fund 2011 capital expenditures of $80–$90 million and dividends; no mandatory debt payments were expected in 2011.
- The board increased the quarterly dividend from $0.17 to $0.34 per share in February 2011, doubling the annualized payout to approximately $97 million.
Outlook, risks and contingencies
- Management expected cash from operations and available borrowing capacity to cover planned capital spending and the increased dividend. The filing does not provide specific 2011 sales or earnings guidance.
- Commodity costs rose in 2010, with palm fatty acid distillate and latex at record levels by year-end. Further raw-material increases could pressure margins if price increases cannot offset them.
- Key risks include intense competition and price concessions, private-label expansion, dependence on major retailers (Wal-Mart and affiliates represented 23% of sales), consumer demand, raw-material and energy volatility, currency exposure, product and regulatory issues, and the planned 2011–2012 information-system transition.
- Brazilian subsidiary QGN faced environmental remediation demands and an approximately $3 million fine, which it contested. The company accrued $3 million in 2009 and a further $4.8 million in 2010; further costs remained possible.
- The FTC had issued a subpoena and civil investigative demand concerning condom distribution practices. The company said it believed its practices complied with law; the FTC had made no decision on further action.
- The company recorded the pension settlement charge after transferring and settling its U.S. hourly pension obligations through annuity contracts. Management said this relieved it of responsibility for that plan; it retained international pension and postretirement obligations.
Most important facts for investors to verify
- Whether volume growth can continue while pricing, promotions and retailer terms weigh on sales and margins.
- Whether elevated commodity costs can be recovered through pricing, and whether York’s production efficiencies persist.
- The eventual remediation plan, fine outcome and total cost of the QGN environmental matter.
- Renewal and availability of the receivables facility and revolving-credit commitments, and the company’s ability to fund the higher dividend alongside planned capital spending and acquisitions.
- Execution and potential disruption from the information-system conversion, plus any outcome or costs from the FTC inquiry.
- Underlying earnings trends apart from the pension settlement charge and favorable tax-audit/statute-of-limitations benefits; confirm quarterly comparisons and reported EPS figures against the audited statements.