Church & Dwight Co., Inc. — Q2 2010 Form 10-Q
Business context and reporting period
Quarter ended July 2, 2010; the filing also reports the six months ended that date, compared with the periods ended June 26, 2009. Church & Dwight reports Consumer Domestic, Consumer International and Specialty Products segments. The first six months of 2010 were six days longer than the comparable 2009 period, which affects comparisons.
Key financial metrics
| Metric | Q2 2010 | First six months 2010 |
|---|---|---|
| Net sales | $640.9 million, +2.9% | $1,275.4 million, +5.9% |
| Gross profit / gross margin | $290.9 million / 45.4% (45.2% prior year) | $576.4 million / 45.2% (44.1% prior year) |
| Income from operations | $120.0 million, versus $99.0 million | $251.9 million, versus $203.7 million |
| Net income attributable to Church & Dwight | $74.3 million, versus $58.2 million | $154.2 million, versus $120.7 million |
| Diluted EPS | $1.03, versus $0.81 | $2.14, versus $1.69 |
For the first six months, operating cash flow was $123.8 million, down from $194.8 million. Investing used $80.8 million, including the Simply Saline acquisition; financing used $121.0 million, principally reflecting debt repayment and dividends. Cash was $364.3 million at July 2, 2010, down from $447.1 million at year-end 2009. Total debt was $700.9 million and net debt was $336.6 million, compared with $816.3 million and $369.2 million, respectively, at year-end. Available liquidity included $115 million under the receivables securitization facility and approximately $96 million under the revolving credit facility. The company reported covenant ratios well within limits: leverage of 1.3 versus a 3.0 maximum and interest coverage of 17.8 versus a 3.0 minimum.
Material changes versus the prior comparable period
- Q2 sales growth reflected higher volume and foreign exchange, partly offset by lower pricing/mix, divestitures and changed customer delivery arrangements. Company-wide volume rose 6.6%; pricing and mix reduced sales by 2.9%.
- Consumer International sales rose 18.3% in Q2, supported by volume and currency; Consumer Domestic sales declined 0.6%, while Specialty Products sales rose 5.0%.
- Profitability improved with higher volumes, York, Pennsylvania manufacturing efficiencies, lower North Brunswick closure-related costs and lower marketing expense. Higher trade promotion, slotting and commodity costs were offsets.
- Q2 marketing expense fell $10.9 million to $82.8 million. Equity earnings from affiliates declined, primarily because of lower Armand Products earnings. Interest expense also fell, reflecting lower rates and debt, and reversal of interest associated with tax reserves.
- Operating cash flow fell substantially, largely due to working-capital movements, including higher receivables and inventory and lower accounts payable/accruals and taxes payable.
Outlook, risks, contingencies and unusual items
- Management expected operating cash flow and available borrowing capacity to cover capital spending, required debt repayments, pension funding and dividends over the next 12 months. It anticipated continuing the dividend at the then-current rate; on August 4, 2010, the board declared an increase from $0.14 to $0.17 quarterly per share.
- Excluding possible resolutions of uncertain tax positions, management projected an approximately 36% annual effective tax rate for 2010. Tax audits and statute expirations could reduce income tax expense by up to $3 million and pretax interest expense by up to $4 million within six months.
- The company acquired the Simply Saline brand on June 4 for $70.0 million; preliminary allocations included $50.7 million of intangibles and $17.6 million of goodwill. Pro forma results were not presented because the acquisition was not material to consolidated results.
- A $1.1 million environmental remediation charge was recorded in 2010 for a chemical discharge at an international facility; approximately $4.1 million had been accrued cumulatively, and further costs could arise.
- The FTC was investigating whether condom distribution and sales practices involved potentially exclusionary conduct. The company said it believed its practices complied with law; the FTC had made no decision on further action.
- The domestic defined-benefit pension plan was terminated effective April 15, 2010, ending further benefit accruals. Management was assessing how lower interest rates might affect termination costs and cash needs.
- Other exposures include possible FDA labeling restrictions on N-9 condoms, commodity and foreign-exchange movements, customer and supplier financial conditions, competition, consumer demand, litigation and environmental remediation. The filing provides no specific full-year sales or earnings guidance.
Important facts for investors to verify
- Whether volume-led growth can persist as pricing, promotional spending and commodity costs pressure sales and margins.
- Whether lower operating cash flow and planned debt repayments remain manageable alongside the higher dividend and pension-plan termination funding.
- The final Simply Saline purchase-price allocation and the acquired brand’s subsequent contribution to sales and earnings.
- Potential outcomes and financial effects of the FTC inquiry, environmental remediation and tax audits.
- Actual full-year results against management’s tax-rate and liquidity expectations; reported six-month comparisons include six extra days in 2010.