Church & Dwight Co., Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Amounts are in millions except per-share data. The company sells household, personal-care and specialty chemical products through Consumer Domestic, Consumer International and Specialty Products Division (SPD).
Financial performance
- Revenue: $1,238.9, up 6.3%. Growth reflected volume (+3.1%), price/mix (+1.8%), foreign exchange (+0.9%) and acquired product lines net of divestiture (+0.5%). Consumer Domestic sales rose 5.8%, International 9.0% and SPD 6.0%.
- Profit and margins: Gross profit was $550.9, up 3.6%, while gross margin declined 120 basis points to 44.5%. Operating income fell 3.8% to $302.6; operating margin declined 260 basis points to 24.4%. Net income was $220.7 versus $229.8; diluted EPS was $0.88 versus $0.92. The effective tax rate was 24.2%, up from 23.2%.
- Costs and drivers: Higher manufacturing costs reduced gross margin by 250 basis points, commodities and transportation by 200 bps, and tariffs by 40 bps; favorable price/volume/mix and productivity offset some pressure. SG&A rose 23.6% to $149.6, including higher Zicam-related costs and amortization, R&D and systems costs, and a smaller favorable Flawless liability adjustment than a year earlier.
- Cash flow: Operating cash flow was $100.2, down from $236.5, mainly from working-capital investment. Inventory increased $46.3 in the cash-flow reconciliation; accounts payable and accrued expenses decreased $168.1. Investing used $30.0, including $26.3 of capital expenditures. Financing used $125.0, including $69.0 of net debt repayments and $61.9 of dividends.
- Liquidity and debt: Cash was $127.5 at quarter-end. Short-term borrowings were $282.2 and long-term debt $1,813.1, totaling approximately $2,095.3. The company reported about $717 of availability through its revolving credit facility and commercial paper program, and stated it expected to remain compliant with its leverage covenant.
- Balance sheet: Current assets were $1,111.8 and current liabilities $1,274.3. Inventories rose to $541.3 from $495.4 at year-end. Total liabilities were $4,169.7 and stockholders’ equity $3,211.2.
Material changes and unusual items
- Q1 sales growth included Zicam, acquired in December 2020; the company reported Zicam 2020 annual sales of approximately $107.0. The filing says pro forma results were not presented because the acquisition’s impact was not material to consolidated results.
- A $19.0 reduction in the estimated Flawless acquisition earn-out liability lowered SG&A expense in Q1 2021 ($0.05 diluted EPS after tax), compared with a $27.0 favorable reduction in Q1 2020 ($0.08 per diluted share). The remaining liability was $79.0 and was reclassified to current liabilities; payment was expected in the first half of 2022.
- Consumer Domestic pretax income declined to $240.9 from $250.8; International was unchanged at $38.2; SPD increased to $9.3 from $8.8. Consumer International’s sales increase benefited from currency exchange.
- Q1 comprehensive income was $243.7, including $24.3 of net-of-tax income from derivative agreements, versus comprehensive income of $197.1 in Q1 2020.
Outlook, commentary and risks
- Management expected 2021 capital expenditures of approximately $140, primarily to expand manufacturing capacity for laundry, litter and vitamins. It said operating cash flow and borrowing capacity were expected to support capital spending, debt service, dividends and share repurchases. No specific revenue or EPS guidance is provided in the supplied filing text.
- COVID-19 continued to support demand for certain products, while retailer closures, reduced foot traffic and social distancing affected other categories. Management cited increased online sales and investments in short- and long-term manufacturing capacity. Raw-material and transportation costs rose, partly due to the pandemic and the Texas freeze.
- Management identified possible impairment risk for the TROJAN trade name as condom-category sales and profits decline amid competition and lower usage; fair value exceeded its $176.4 carrying value by 53% at December 31, 2020. The Passport Food Safety business also faced potential impairment risk from pandemic-related demand weakness and competition; related assets had a net book value of approximately $22.0.
- The company reported ordinary-course legal, regulatory and governmental proceedings, including product liability and purported consumer class actions; outcomes and potential damages were generally not predictable or estimable. It also disclosed $289.8 of purchase and other commitments and guarantees/letters of credit totaling $4.5.
Important facts for investors to verify
- Whether sales growth and pricing/mix can offset elevated manufacturing, commodity and transportation costs and sustain margins.
- Whether working-capital investment—particularly inventory growth—converts into stronger operating cash flow.
- Progress against the $140 capital-spending plan and liquidity/covenant capacity, including upcoming 2022 debt maturities and the Flawless earn-out.
- Updated outlook for TROJAN and Passport Food Safety and any resulting impairment charges.
- How COVID-19 demand patterns, retailer conditions, raw-material availability and costs, and litigation or other contingencies develop.