CHURCH & DWIGHT CO INC quarterly report, Q1 FY2023

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Church & Dwight Co., Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Amounts are in millions except per-share data. Church & Dwight sells household, personal care and specialty chemical products through Consumer Domestic, Consumer International and Specialty Products Division (SPD).

Financial performance

  • Revenue: $1,429.8, up 10.2% year over year. Pricing/product mix contributed 5.7 percentage points, acquired product lines 5.2 points (including Hero Cosmetics), and foreign exchange reduced growth by 0.7 points; product volumes were approximately flat overall.
  • Profitability: Gross profit rose 12.6% to $622.0; gross margin expanded 90 basis points to 43.5%. Operating income increased 4.0% to $291.9, while operating margin declined 120 basis points to 20.4%. Net income was $203.2 versus $204.4; diluted EPS was $0.82 versus $0.83.
  • Costs and margins: Marketing expense rose 20.0% to $122.3, or 8.6% of sales. SG&A rose 22.3% to $207.8, or 14.5% of sales, with Hero-related costs cited as a primary factor. Gross-margin benefits from pricing/mix/volume, productivity, acquisition mix, transportation and foreign exchange were partly offset by higher manufacturing/labor and commodity costs.
  • Cash flow: Operating cash flow was $273.1, up from $152.8, which management attributed to improved working capital and higher cash earnings. Investing used $29.6, including $25.0 of capital expenditures; financing used $311.7, including $255.6 of net debt repayments and $66.3 of dividends. Cash declined to $202.8 from $270.3.
  • Debt and liquidity: Long-term debt was $2,400.1 and short-term borrowings were $18.7 at quarter-end. The company repaid $200.0 of its 2024 term loan. It reported approximately $1,480.0 of availability through its revolving facility and commercial paper program, alongside $202.8 of cash. Current assets were $1,334.9 and current liabilities $1,126.9.
  • Other: The effective tax rate rose to 24.4% from 23.2%. Quarterly dividends paid were $0.27 per share; the board raised the regular quarterly dividend 4% to $0.2725 per share in February. Research and development expense was $26.7.

Changes versus Q1 2022

  • Consumer Domestic sales grew 12.2% to $1,116.9, supported by Hero, pricing and product mix; segment pretax income increased $6.0 to $228.7.
  • Consumer International sales rose 7.5% to $230.6, with volume and pricing gains partly offset by foreign exchange; pretax income decreased $0.7 to $28.9.
  • SPD sales fell 5.9% to $82.3, mainly due to competitive imports in the U.S. dairy market; pretax income declined $4.7 to $6.8.
  • Interest expense increased $12.2 to $28.8, primarily due to higher interest rates. Non-cash compensation expense was $25.8 versus $2.9, reflecting changes to the long-term incentive program and earlier timing of awards.
  • Cash from operations improved, but the cash conversion cycle lengthened to 26 days from 17 days, mainly reflecting increased days inventory outstanding and lower days payable outstanding.

Outlook, risks and unusual items

  • Management expects pricing and productivity to offset inflation in the near term, while acknowledging continued risks from raw-material and labor shortages, input-cost inflation, higher interest rates and uncertain consumer behavior. Conditions were described as improving, but outcomes remain uncertain.
  • Management expects 2023 capital expenditures of approximately $250.0, principally for laundry, litter and vitamin manufacturing capacity. It expects operating cash flow and borrowing capacity to fund operations, debt service, dividends, repurchases and planned investment, and anticipates compliance with the credit agreement’s maximum leverage covenant.
  • The $1.5 billion revolving credit facility matures in 2027 and supports a $1.5 billion commercial paper program; borrowing capacity may be increased by up to $750.0 subject to conditions. The company had $729.7 remaining under its $1.0 billion share repurchase authorization at March 31, 2023.
  • Risks include competition and lower-priced imports, supply and labor disruptions, inflation, weaker discretionary demand, customer acceptance of price increases, foreign exchange and potential legal or regulatory outcomes. Management also highlighted possible future impairment exposure for the TROJAN and WATERPIK trade names; WATERPIK’s fair value exceeded carrying value by only 7% at its October 2022 test. FINISHING TOUCH FLAWLESS had a $411.0 non-cash impairment charge in Q4 2022; further impairment could occur if performance declines.
  • Commitments included approximately $396.7 for purchases and other agreements, and $6.3 of guarantees and letters of credit. The company described ordinary-course legal proceedings whose outcomes may be uncertain and could adversely affect results.

Key facts for investors to verify

  • Whether pricing and productivity continue to offset inflation and whether supply constraints ease without further lost sales.
  • Whether Consumer Domestic growth and Hero integration translate into sustained profit growth, and whether weakness in SPD, vitamins, FINISHING TOUCH FLAWLESS, TROJAN or WATERPIK worsens.
  • Whether operating cash flow remains strong as the cash conversion cycle and inventory levels evolve, and whether planned capital spending stays near the $250.0 estimate.
  • Debt repayment, interest expense, liquidity availability and compliance with the leverage covenant, particularly if rates or operating conditions change.
  • Progress against impairment-sensitive brand forecasts, and any material developments in legal proceedings or acquisition-related indemnities.