Church & Dwight Co., Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the same 2021 periods. Dollar amounts are in millions except per-share data.
Business context and results
Church & Dwight sells household, personal care and specialty chemical products through Consumer Domestic, Consumer International and Specialty Products (SPD). Reported sales include the TheraBreath acquisition, completed in December 2021.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,325.1 | $1,271.1 | $2,622.3 | $2,510.0 |
| Gross profit | $545.3 | $552.2 | $1,097.8 | $1,103.1 |
| Gross margin | 41.2% | 43.4% | 41.9% | 44.0% |
| Operating income | $261.6 | $298.7 | $542.3 | $601.3 |
| Operating margin | 19.8% | 23.5% | 20.7% | 24.0% |
| Net income | $187.1 | $218.3 | $391.5 | $439.0 |
| Diluted EPS | $0.76 | $0.87 | $1.59 | $1.76 |
Cash flow and liquidity: First-half operating cash flow was $310.4, versus $344.3 in 2021; capital expenditures were $38.8, and cash dividends paid were $127.4. Cash and cash equivalents were $639.7 at June 30, up from $240.6 at year-end 2021. Gross debt was approximately $2,807 million, including $699.9 million classified as current; approximate net debt was $2,167 million. The company reported approximately $1,496 million available through its revolving credit facility and commercial paper program.
Material changes versus prior period
- Q2 sales rose 4.2% and first-half sales rose 4.5%. Pricing/product mix contributed 6.3 and 7.2 percentage points, respectively; volume and foreign exchange reduced growth, while acquired product lines contributed 1.8 and 2.1 points.
- Margin pressure was substantial: higher manufacturing costs, including labor and commodities, reduced gross margin by 460 basis points in both comparison periods. Transportation costs, inventory reserves and foreign exchange also weighed on margin; pricing/mix and productivity partly offset these effects.
- Operating income and diluted EPS declined. Comparisons were affected by 2021 reductions in the Flawless acquisition liability that lowered SG&A by $38.0 in Q2 and $57.0 in the first half. Excluding that comparison item is important when assessing underlying expense trends.
- Interest expense increased to $19.3 in Q2 and $35.9 in the first half, primarily due to higher average debt outstanding. First-half operating cash flow was lower, with increased inventory investment a key factor.
- Segment sales grew in Consumer Domestic and SPD, while Consumer International sales were nearly flat for the first half. Segment pretax income declined in Consumer Domestic and Consumer International, while SPD and Corporate income increased.
Outlook, risks and unusual items
- Management expected supply shortages and input-cost inflation to continue at least through 2022. It reported improving household-product fill rates in Q2 and expected further improvement across most categories in the second half.
- The company has implemented or was evaluating price increases, but reported consumer shifts toward lower-cost products and weaker demand for some discretionary brands, including Waterpik and Flawless. Management anticipated second-half market-share gains; this is an expectation, not quantified formal sales or EPS guidance in the provided filing text.
- Management expected 2022 capital expenditures of approximately $180 million, mainly for laundry and cat-litter manufacturing capacity. It stated operating cash flow and borrowing capacity were expected to fund planned investment, dividends, debt service and repurchases.
- Risks include inflation, supply-chain and labor constraints, transportation costs, recessionary pressure on consumer demand, price acceptance, foreign exchange and the Russia-Ukraine conflict. Sales in Russia and Belarus were suspended indefinitely and were described as immaterial.
- The company issued $500 million of 5.00% senior notes due 2052 in June. In July, proceeds repaid the $300 million 2.45% notes due August 2022; remaining proceeds were intended to repay part of the $400 million notes due October 2022. The transaction extends maturities but raises the stated coupon relative to the retired notes.
- The TROJAN trade name was identified as potentially susceptible to future impairment if its fair value declines; management reported a recent sales and profit recovery. The Passport Food Safety business had an $11.3 million intangible-asset impairment in Q4 2021, and further impairment was possible if its recovery strategies fail.
- Commitments included approximately $354.8 million of vendor, licensing and promotion commitments and $5.2 million of guarantees and letters of credit. The filing also describes ordinary-course legal matters whose outcomes and damages are generally uncertain and not estimable from the provided text.
Important facts for investors to verify
- Whether pricing and productivity gains can offset continued input, labor and transportation inflation without further volume or mix deterioration.
- Whether supply availability and fill rates improve as management expected, and whether inventory levels convert into sales and operating cash flow.
- The impact of the 2052 note issuance and July debt repayments on interest expense, leverage and near-term liquidity.
- Performance and impairment assumptions for TROJAN and Passport, along with demand trends for Waterpik, Flawless and vitamin brands.
- Whether the $180 million capital-spending plan, dividends and any share repurchases remain supported by cash generation and available credit.