Church & Dwight Co., Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Church & Dwight sells household and personal care products, international personal care products, and specialty chemical products through its Consumer Domestic, Consumer International, and Specialty Products Division (SPD) segments.
Financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1,311.4 | $1,241.0 | $3,821.4 | $3,600.5 |
| Gross profit | $579.2 | $565.2 | $1,682.3 | $1,656.8 |
| Gross margin | 44.2% | 45.5% | 44.0% | 46.0% |
| Operating income | $301.4 | $273.8 | $902.7 | $839.1 |
| Operating margin | 23.0% | 22.0% | 23.6% | 23.3% |
| Net income | $230.4 | $216.2 | $669.4 | $635.7 |
| Diluted EPS | $0.92 | $0.85 | $2.68 | $2.52 |
- Sales growth: 5.7% in Q3 and 6.1% for nine months. Q3 growth reflected favorable pricing/product mix, foreign exchange, and acquired products, partly offset by a 1.5% decline in volume. Nine-month volume increased 1.9%.
- Margins and costs: Gross margin fell 130 basis points in Q3 and 200 basis points year to date. Higher manufacturing/commodity costs, transportation, and tariffs outweighed pricing and productivity benefits. Operating margin improved, helped by lower marketing and SG&A as a share of sales.
- Cash flow: Nine-month operating cash flow was $653.6, versus $798.2 in 2020. Capital expenditures were $64.1; investing cash outflow was $69.7. Financing cash outflow was $585.4, including $371.6 of net debt repayments, $185.8 of dividends, and $54.9 of treasury-share purchases.
- Balance sheet and liquidity: Cash was $180.0 at September 30, 2021. Short-term borrowings were $279.7; current long-term debt was $299.6 and noncurrent long-term debt was $1,214.8. Total reported borrowings were approximately $1,794.1. The company reported approximately $716.0 of availability through its revolving facility and commercial paper program.
Material changes and drivers
- Consumer Domestic sales rose 4.6% in Q3; Consumer International rose 6.3%; and SPD rose 18.5%. SPD benefited from higher volume, pricing, and reduced competitive imports amid transportation constraints.
- Q3 consolidated sales growth was led by 5.2% pricing/product mix and 1.3% acquired product lines; volume declined 1.5%. The December 2020 ZICAM acquisition contributed to growth.
- Operating results included a $41.0 Q3 reduction in the Flawless acquisition liability, recorded as a reduction in SG&A; the nine-month reduction was $98.0. Management said it did not expect to pay the liability, which was reduced to zero. The Q3 adjustment increased diluted EPS by $0.12 after tax; the nine-month adjustment increased it by $0.29.
- For comparison, the Flawless liability adjustment was a $51.0 reduction in Q3 2020 and $72.0 for the first nine months of 2020. Thus, the year-over-year comparison includes a smaller Q3 benefit but a larger nine-month benefit in 2021. The 2020 nine-month period also included a $3.0 gain from the sale of the PERL WEISS brand.
Outlook, risks, and contingencies
- The filing does not provide a clear numerical full-year sales or EPS forecast. Management expects input-cost inflation to continue through the rest of 2021 and into 2022, and expects supply availability to begin improving in the first half of 2022 for most brands; both expectations are uncertain.
- Management is implementing price increases, expanding short- and long-term manufacturing capacity, working with suppliers, and reducing marketing where shortages limit product availability. Customer acceptance of price increases and the effectiveness of these measures are not assured.
- Planned 2021 capital expenditures were approximately $120.0, primarily for manufacturing capacity in laundry, litter, and vitamins. Management expected operating cash and borrowing capacity to support debt service, dividends, capital spending, and share repurchases.
- COVID-19, labor and raw-material shortages, transportation constraints, inflation, Hurricane Ida-related disruption, and potential demand or supply changes remain risks. The company also identified potential impairment exposure for the TROJAN tradename and Passport Food Safety assets; no impairment charge was reported here.
- Ordinary-course legal, regulatory, product-liability, consumer-class-action, employment, antitrust, and environmental matters are disclosed. Outcomes and potential damages may be uncertain or not estimable.
- After quarter-end, the Board authorized a new share repurchase program of up to $1.0 billion, replacing the 2017 program. The company also reported an October purchase of approximately $75.0 of shares. The company repaid its $300.0 term loan in June and July; senior notes of $300.0 and $400.0 mature in 2022.
Important facts for investors to verify
- How much reported earnings growth depends on the noncash Flawless liability reduction, and how results compare excluding acquisition-related adjustments.
- Whether pricing actions and productivity can offset persistent commodity, manufacturing, freight, and tariff inflation without materially weakening volume or demand.
- Whether supply constraints ease as expected, and how working-capital needs and inventory levels affect operating cash flow.
- Plans and funding for 2022 debt maturities, as well as actual availability under the revolving credit and commercial paper programs.
- Share repurchase pace under the new authorization and its effects on liquidity and per-share results.
- Future performance and impairment assumptions for the TROJAN brand and Passport Food Safety assets, and developments in disclosed legal contingencies.