Church & Dwight Co., Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. The company reports Consumer Domestic, Consumer International, and Specialty Products segments.
Financial performance
| Metric | Q1 2022 | Q1 2021 / change |
|---|---|---|
| Net sales | $1,297.2 million | $1,238.9 million; up 4.7% |
| Gross profit / margin | $552.5 million / 42.6% | $550.9 million / 44.5%; margin down 190 bps |
| Operating income / margin | $280.7 million / 21.6% | $302.6 million / 24.4%; income down 7.2% |
| Net income | $204.4 million | $220.7 million |
| Diluted EPS | $0.83 | $0.88; down 5.7% |
| Operating cash flow | $152.8 million | $100.2 million |
- Sales growth reflected pricing/product mix of 7.8% and acquired product lines of 2.3%, offset by a 5.1% decline in volumes and a 0.3% foreign-exchange headwind. TheraBreath, acquired in December 2021, contributed to reported sales.
- Gross-margin pressure primarily reflected higher manufacturing costs, including labor and commodities (450 bps), and transportation costs (100 bps). Favorable price/volume/mix contributed 270 bps, with productivity and acquisition benefits also partly offsetting costs.
- SG&A rose 13.6% to $169.9 million; marketing expense rose 3.2% to $101.9 million. Interest expense increased $2.6 million to $16.6 million, primarily due to higher average debt.
- By segment, Consumer Domestic sales rose 5.6%, Consumer International sales fell 0.8%, and Specialty Products sales rose 9.2%. Segment income before taxes was lower in both consumer segments and higher in Specialty Products.
Liquidity, cash flow, and debt
- Cash and cash equivalents were $174.4 million at March 31, 2022, versus $240.6 million at year-end 2021. The company reported approximately $896 million available through its revolving credit facility and commercial paper program.
- Total reported borrowings were approximately $2.414 billion: $103.0 million of short-term borrowings and $2.311 billion of long-term debt, including $699.7 million classified as current maturities. Senior notes totaling $700 million mature in 2022 (August and October).
- Q1 operating cash flow was $152.8 million; investing cash outflow was $15.7 million, mainly capital spending; financing cash outflow was $202.6 million, including $149.9 million of net debt repayments and $63.7 million of dividends. Cash decreased $66.2 million during the quarter.
- Inventories increased to $598.8 million from $535.4 million at year-end. Management attributed the year-over-year improvement in operating cash flow in part to working-capital movements, including incentive-compensation accruals; it also cited higher inventory to support service levels.
Material changes, outlook, and risks
- Q1 2021 included a $19.0 million reduction in the estimated Flawless acquisition liability, lowering SG&A and increasing after-tax earnings by $14.3 million, or $0.05 per diluted share. This prior-year benefit is a significant comparison item.
- Management said supply-chain constraints, labor shortages, transportation/distribution challenges, and broad-based input-cost inflation were affecting results. It expected shortages to continue at least through the first half of 2022 and inflation at least throughout 2022; it anticipated supply availability might improve in the second half, but gave no assurance.
- The company had enacted and was evaluating price increases, expanding short- and long-term manufacturing capacity, and working with suppliers and retail partners. Management cautioned that customer acceptance of price increases and the effectiveness of mitigation actions were uncertain.
- Management expected 2022 capital expenditures of approximately $200 million, primarily for manufacturing capacity in laundry, litter, and vitamins. It stated that operating cash flow and borrowing capacity were expected to support planned repurchases, debt service, dividends, and capital spending. The filing provides no specific full-year EPS or sales-growth guidance.
- The Russia-Ukraine conflict had contributed to material and transportation cost pressures. Sales in Russia and Belarus were suspended indefinitely but were not material; the company reported no operations in either country. Further geopolitical escalation could affect supply, demand, currency, and markets.
- Potential impairment risks include the TROJAN trade name, whose $176.4 million carrying value exceeded the filing’s stated fair-value cushion by a margin that could erode if performance weakens; the filing reported fair value was 70% above carrying value at December 31, 2021. The Passport Food Safety business had an $11.3 million intangible-asset impairment in Q4 2021 and could face further impairment if recovery plans fail.
- The filing describes ordinary-course legal proceedings and acquisition-related guarantees and indemnifications; outcomes and potential losses were generally not predictable or estimable. It also reported $367.7 million of vendor-related commitments and $5.3 million of guarantees and letters of credit.
Important facts for investors to verify
- Whether pricing and product mix can continue to offset volume declines and persistent manufacturing, commodity, and freight inflation.
- Progress on supply availability, capacity expansion, and the timing of any easing in labor and logistics constraints.
- How the company will refinance or repay the $700 million of 2022 note maturities and maintain liquidity and covenant compliance.
- Whether inventory growth converts into sales and cash, and whether working-capital benefits to operating cash flow are sustainable.
- Performance and impairment indicators for TROJAN and Passport, as well as the effect of the TheraBreath acquisition on results and cash generation.
- Execution of the approximately $200 million capital-spending plan and the balance among investment, dividends, debt reduction, and repurchases.