Church & Dwight Co., Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are in millions except per-share data.
Business context and results
Church & Dwight sells household and personal-care products, personal-care products internationally, and specialty chemical products. COVID-19 increased demand for several household and health products, while closures and reduced consumer activity hurt Waterpik and certain discretionary personal-care brands.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,194.3 | $1,079.4 | $2,359.5 | $2,124.1 |
| Gross profit | $559.6 | $481.5 | $1,091.6 | $952.3 |
| Gross margin | 46.8% | 44.6% | 46.3% | 44.8% |
| Operating income | $250.7 | $187.4 | $565.3 | $428.2 |
| Operating margin | 21.0% | 17.3% | 24.0% | 20.1% |
| Net income | $189.7 | $138.5 | $419.5 | $314.2 |
| Diluted EPS | $0.75 | $0.55 | $1.67 | $1.25 |
Financial position, cash flow and liquidity
- First-half operating cash flow was $598.6, versus $351.2 in 2019. Investing cash outflow was $26.4 (versus $502.4, including the prior-year $475.0 Flawless acquisition); financing cash outflow was $274.0.
- Cash was $451.7 at June 30, up from $155.7 at year-end 2019. Current assets were $1,276.7 and current liabilities $996.6.
- Short-term borrowings were $65.8 and long-term debt was $1,811.4. The company drew $825.0 under its revolving facility in March as a precaution and repaid it in May. At quarter-end, approximately $933.0 was available through the revolver and commercial-paper program.
- First-half operating cash flow benefited from higher cash earnings and working-capital movements, including an $81.0 deferral of U.S. federal tax payments into Q3. The cash conversion cycle improved to 17 days from 24 days.
- Capital expenditures were expected to be approximately $100.0 for 2020. The quarterly dividend increased 5.5% to $0.24 per share; first-half dividends paid were $118.1. No program repurchases were made in the first half.
Material changes and management commentary
- Q2 sales rose 10.6%; first-half sales rose 11.1%. For Q2, volume contributed 4.9 percentage points, price/mix 3.5 points, acquisitions net of divestitures 2.9 points, and foreign exchange reduced growth by 0.7 points.
- Consumer Domestic led growth: Q2 sales increased 13.6% to $931.1, supported by household products, vitamins and other brands, including pandemic-related demand. Consumer International sales rose 0.5% to $187.5; Specialty Products Division sales rose 3.0% to $75.7.
- Q2 gross margin expanded 220 basis points, reflecting favorable price/volume mix and productivity, partly offset by higher manufacturing costs, including pandemic-related costs. Marketing expense declined as a share of sales amid retailer out-of-stocks; management said this reduction was not expected to continue and planned increased investment in launches, research and digital advertising in H2.
- Management said it was increasing short-term manufacturing capacity for cleaning and health products and planned longer-term capacity investment. It expected cash, operating cash flow and borrowing capacity to meet spending needs and said it anticipated continued compliance with the credit agreement’s maximum leverage covenant.
Outlook, risks and unusual items
- The filing gives no specific full-year sales or EPS guidance. Management cautioned that demand may be volatile, pantry destocking or recession could weaken sales, and some discretionary products may face price pressure. Supply-chain disruption, capacity constraints, customer financial stress and increased online purchasing are additional risks.
- Flawless contingent consideration was valued at $171.0 at June 30, against a potential maximum payment of $425.0. Its fair-value estimate declined by $21.0 in the first half, reducing SG&A, although the liability increased by $6.0 in Q2.
- The German PERL WEISS brand sale generated $7.0 cash proceeds and a $3.0 gain in Q1. The Agro acquisition earnout was settled for $14.5 in April.
- Management identified potential impairment risks for the TROJAN tradename amid declining condom sales and for Passport Food Safety assets amid pandemic-related pressure and competition. The 2020 goodwill impairment test found reporting-unit fair values substantially above carrying values.
- In the Scantibodies contract dispute, an appellate court reversed a prior summary judgment in April 2020 and remanded the case for jury trial. The plaintiff seeks more than $20.0 plus other relief; the company’s reserve is immaterial, and it said it could be required to pay all or substantially all of the amounts sought.
Important facts for investors to verify
- Whether pandemic-driven demand persists or reverses through destocking, recession, store disruption or shifts in product mix.
- Progress and costs of capacity expansion, and whether higher manufacturing costs or planned marketing investment affect margins.
- Flawless sales performance and earnout remeasurement, including the potential cash obligation of up to $425.0.
- Developments in TROJAN and Passport Food Safety performance and any resulting impairment charges.
- Developments in the Scantibodies litigation and the potential exposure beyond the immaterial reserve.
- Liquidity, working-capital cash-flow effects, and compliance with debt covenants as economic conditions evolve.