Church & Dwight Co., Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in millions of dollars, except per-share data. Church & Dwight sells household, personal-care and specialty chemical products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,241.0 | $1,089.4 | $3,600.5 | $3,213.5 |
| Gross profit | $565.2 | $507.7 | $1,656.8 | $1,460.0 |
| Gross margin | 45.5% | 46.6% | 46.0% | 45.4% |
| Operating income | $273.8 | $216.8 | $839.1 | $645.0 |
| Operating margin | 22.0% | 19.9% | 23.3% | 20.1% |
| Net income | $216.2 | $157.3 | $635.7 | $471.5 |
| Diluted EPS | $0.85 | $0.62 | $2.52 | $1.87 |
- Sales rose 13.9% in Q3 and 12.0% year to date. Higher volumes were the largest contributor; acquired product lines, principally FLAWLESS, also contributed. Q3 pricing/product mix was slightly unfavorable.
- Q3 gross margin fell 110 basis points, with pandemic-related manufacturing costs, acquired-business mix and the prior-year tariff recovery benefit among the pressures. Year-to-date gross margin rose 60 basis points, supported by favorable price/volume mix and productivity.
- Q3 SG&A declined 27.3%, primarily reflecting a $51.0 reduction in estimated FLAWLESS contingent consideration. For the first nine months, SG&A declined 7.5%, also reflecting the FLAWLESS revaluation and other year-over-year items. Marketing expense increased 36.5% in Q3, reflecting increased investment in product launches, research and digital advertising.
- Q3 diluted EPS increased 37.1%; nine-month diluted EPS increased 34.8%. The company reported effective tax rates of 17.3% for Q3 and 20.2% year to date, versus 21.6% and 20.9%, respectively, in 2019.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $798.2, versus $617.5 in 2019. Management attributed the increase to higher cash earnings and improved working capital. Investing cash outflow was $51.2, compared with $519.0, which included the prior-year $475.0 FLAWLESS acquisition. Financing cash outflow was $353.7.
- Cash and cash equivalents were $549.1 at September 30, 2020, versus $155.7 at year-end 2019. Current assets were $1,444.5 and current liabilities were $971.9.
- Long-term debt was $1,811.9 and short-term borrowings were $1.6. The company repaid the $825.0 drawn under its revolving credit facility in March as a precaution against pandemic uncertainty. It reported approximately $997.0 of availability under its revolving facility and commercial paper program and said it was in compliance with its leverage covenant.
- Inventory increased to $497.7 from $417.4 at year-end. The cash conversion cycle improved to 16 days from 23 days, with receivables factoring contributing to the reduction.
- Nine-month dividends paid were $177.7. The quarterly dividend was raised 5.5% to $0.24 per share; no shares were repurchased under the public programs during the first nine months. Management expected 2020 capital expenditures of approximately $100.0.
Business trends, outlook and risks
- Consumer Domestic sales rose 15.3% in Q3, Consumer International sales rose 14.6%, and Specialty Products Division sales declined 3.4%. Domestic growth included household and personal-care products; management cited strong demand for several cleaning, baking soda, litter, vitamin and nasal-care products. Specialty Products faced weaker Q3 volumes in parts of its animal and food production and bulk sodium bicarbonate businesses.
- Management said pandemic effects were mixed: elevated demand benefited some categories, while store closures, reduced foot traffic and dental-office closures hurt certain personal-care and WaterPik sales. It expanded short-term manufacturing capacity and planned further in-house and third-party capacity investment. Management cautioned that demand may be volatile and pandemic duration and effects were uncertain; the filing provides no specific earnings or sales guidance.
- FLAWLESS contingent consideration was reduced by $51.0 in Q3 and $72.0 for the nine months, based on updated sales forecasts. The nine-month reduction increased diluted EPS by $0.21 after tax, according to management. The remaining $120.0 liability was expected to be paid in the first half of 2022, subject to the acquisition terms.
- Management identified potential impairment risks for the TROJAN tradename, citing declining condom-category sales and competition; its carrying value was $176.4, and fair value exceeded carrying value by 26% at December 31, 2019. Passport Food Safety, affected by pandemic-related plant closures and weaker demand, also faced possible impairment; related assets had a net book value of approximately $23.0.
- Other risks include pandemic-driven demand shifts, recession and retailer financial health, supply-chain or labor disruptions, commodity and transportation costs, foreign exchange and interest-rate volatility, competition, and possible impairment of intangible assets. The Scantibodies dispute was settled in Q3 for an amount described as immaterial. The company also reported ordinary-course legal matters and $284.3 of vendor and other commitments.
Investor verification points
- Separate underlying operating performance from the favorable, noncash FLAWLESS contingent-consideration revaluation and other SG&A comparability items.
- Monitor whether pandemic-driven demand persists, reverses through pantry destocking, or shifts between product categories, and whether increased capacity can meet demand without further margin pressure.
- Track TROJAN and Passport Food Safety performance and the assumptions supporting their intangible-asset valuations and impairment assessments.
- Verify cash generation and working-capital quality, including inventory growth and the effect of receivables factoring.
- Confirm debt, borrowing availability, covenant compliance, planned capital spending and dividend commitments in subsequent filings.