Church & Dwight Co., Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with the same 2021 periods. Amounts are in millions except per-share data. The company reports Consumer Domestic, Consumer International and Specialty Products segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,317.3 (+0.4%) | $1,311.4 | $3,939.6 (+3.1%) | $3,821.4 |
| Gross profit / margin | $549.7 / 41.7% | $579.2 / 44.2% | $1,647.5 / 41.8% | $1,682.3 / 44.0% |
| Operating income / margin | $253.9 / 19.3% | $301.4 / 23.0% | $796.2 / 20.2% | $902.7 / 23.6% |
| Net income | $187.1 | $230.4 | $578.6 | $669.4 |
| Diluted EPS | $0.76 | $0.92 | $2.35 | $2.68 |
- Q3 net sales were nearly flat as pricing and mix (+7.8%) and acquired product lines (+2.3%) were offset by lower volume (-8.5%) and foreign exchange (-1.2%). For the first nine months, pricing/mix was +7.4%, acquired lines +2.2%, volume -5.6% and foreign exchange -0.9%.
- Gross margin fell 250 basis points in Q3 and 220 basis points year to date. Higher manufacturing costs, including labor, commodities and transportation, outweighed price/mix and productivity benefits.
- Interest expense rose to $23.7 in Q3 from $13.4 and to $59.6 for nine months from $41.5, reflecting higher average debt and interest rates.
- Operating cash flow was $534.1 for nine months, versus $653.6. Capital spending was $98.1; investing cash outflow was $100.7. Financing cash outflow was $226.0, including $191.2 of dividends.
- At September 30, cash was $437.6. Debt included $3.3 of short-term borrowings, $400.0 current maturities and $2,104.4 long-term debt. The company reported about $1,496 of availability through its revolving facility and commercial paper program. It repaid the $400.0 notes due October 1 after quarter-end.
Material changes and notable items
- Q3 and year-to-date 2021 comparisons benefited from reductions in the estimated Flawless acquisition earn-out liability: $41.0 in Q3 and $98.0 year to date, recorded as lower SG&A. These nonrecurring prior-year benefits materially affect the reported expense and earnings comparisons.
- Q3 Consumer Domestic sales rose 1.2%, Consumer International sales fell 3.2% (including a 7.1% adverse foreign-exchange impact), and Specialty Products sales rose 1.0%. Household products grew while personal-care sales declined.
- Inventory increased to $675.3 from $535.4 at year-end. The cash conversion cycle lengthened to 28 days from 23, mainly due to higher inventory.
- In June, the company issued $500.0 of 5.00% senior notes due 2052; proceeds helped repay $300.0 of 2.45% notes in July and fund repayment of $400.0 of 2.875% notes in October. The new unsecured revolving credit facility is $1,500 and matures in 2027.
- Hero Cosmetics acquisition closed October 13, 2022, after quarter-end, for approximately $565.0 cash and $65.0 in restricted shares subject to employee vesting; it was funded with cash and commercial paper.
Outlook, risks and contingencies
- Management expected supply shortages and input-cost inflation to continue at least through 2022, while reporting improving fill rates and expecting further improvement through year-end. Price increases, capacity additions, supplier engagement and productivity measures are intended to mitigate cost and supply pressures.
- Management forecast 2022 capital expenditures of approximately $170, primarily for laundry and litter manufacturing capacity. It said operating cash flow and borrowing capacity were expected to fund planned dividends, debt service, capital spending and repurchases. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Management cited inflation, recessionary pressure, consumer trade-down, labor and supply constraints, China restrictions, foreign exchange, transportation and commodity costs, competition, and the Russia-Ukraine conflict as risks. Russia and Ukraine operations were nil; sales to Russia and Belarus were suspended and described as immaterial.
- Flawless faced weaker discretionary demand and margin pressure; its approximately $465 carrying value of long-lived assets had projected cash flows only slightly more than 10% above carrying value, creating impairment risk if conditions deteriorate. The filing also identifies impairment sensitivity for the Trojan tradename and Passport business assets.
- The company disclosed ordinary-course legal, regulatory and other proceedings, including potential product liability and consumer class actions; outcomes and damages were not predictable or estimable. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and productivity can offset ongoing labor, commodity, transport and manufacturing-cost inflation without further volume losses.
- Whether inventory normalizes and operating cash flow recovers, given the higher inventory balance and longer cash conversion cycle.
- Debt and liquidity after the October note repayment and Hero acquisition, including commercial paper usage, borrowing availability and interest costs.
- Updated sales, margins and impairment-test headroom for Flawless, Trojan and Passport, and any resulting impairment charges.
- Hero’s final purchase-price allocation, acquired intangible values, and the timing and amount of restricted-stock compensation expense.