Church & Dwight Co., Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Amounts are in millions of dollars except per-share data.
Business context
Church & Dwight sells household, personal-care and specialty products through its Consumer Domestic, Consumer International and Specialty Products Division (SPD) segments. FY2020 sales mix was approximately 77%, 17% and 6%, respectively. The portfolio includes ARM & HAMMER, OXICLEAN, TROJAN, WATERPIK and other brands. The December 2020 ZICAM acquisition added cold-remedy products.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $4,895.8 | $4,357.7 | +12.3% |
| Gross profit / margin | $2,214.2 / 45.2% | $1,984.0 / 45.5% | Profit +11.6%; margin -0.3 percentage points |
| Operating income / margin | $1,029.7 / 21.0% | $840.2 / 19.3% | Income +22.6%; margin +1.7 points |
| Net income | $785.9 | $615.9 | +27.6% |
| Diluted EPS | $3.12 | $2.44 | +27.9% |
| Cash from operations | $990.3 | $864.5 | +$125.8 |
FY2020 sales growth reflected 8.1% higher product volumes, 1.5% favorable pricing/product mix and 2.8% from acquired product lines, net of divestitures. Higher manufacturing costs—including pandemic-related costs—tariffs and acquired-business mix reduced gross margin; productivity and favorable price/volume/mix partly offset these pressures. Marketing expense rose 14.8% to $591.2, while SG&A fell 5.6% to $593.3.
Fourth quarter: Sales were $1,295.3 versus $1,144.2 (+13.2%); gross profit was $557.4 versus $524.0 (gross margin approximately 43.0% versus 45.8%); operating income was $190.6 versus $195.2 (-2.4%); net income was $150.2 versus $144.4 (+4.0%); and diluted EPS was $0.59 versus $0.58.
Segments: Consumer Domestic sales increased 14.1% to $3,767.6 and income before tax rose to $832.4 from $645.8. Consumer International sales increased 9.5% to $828.2 and income before tax rose to $105.0 from $74.0. SPD sales increased 0.4% to $300.0, while income before tax fell to $29.7 from $47.3.
Debt, liquidity and capital allocation
At year-end, cash and equivalents were $183.1; total debt, net of debt issuance costs, was $2,163.9, compared with $2,063.1 a year earlier. Short-term borrowings were $351.4 and long-term debt was $1,812.5. The company reported approximately $648.0 of availability through its revolving facility and commercial-paper program. It drew $825.0 on its revolver in March 2020 as a precaution and repaid it in May.
Operating cash flow was $990.3; investing cash outflow was $608.1, including $512.7 for ZICAM and $98.9 of capital expenditures. Financing cash outflow was $360.1, including $300.0 of share repurchases and $237.3 of dividends, partly offset by net short-term borrowing and stock-option proceeds. The company expects 2021 capital expenditures of approximately $180, primarily for laundry, litter and vitamin capacity. It declared a 5.2% quarterly dividend increase in January 2021, to $0.2525 per share.
Material changes, outlook and notable items
- COVID-19 contributed to elevated demand for several cleaning, laundry, baking soda, cat litter and vitamin products, while store closures and lower consumer traffic hurt some personal-care brands. Management cautioned that demand could normalize or be volatile and that recessionary conditions could pressure discretionary products and pricing.
- ZICAM was acquired on December 1, 2020 for $512.7 net of cash acquired, plus $20.0 deferred for seller indemnifications. ZICAM reported approximately $107.0 in 2020 sales. The acquisition was funded with cash and short-term borrowings.
- Reported earnings included a $94.0 reduction in the Flawless acquisition liability, recorded as lower SG&A, and a $10.6 income-tax benefit from settlement of a Brazil-related tax matter. These items boosted the reported year-over-year earnings comparison. The company also recorded a $3.0 gain on the sale of the PERL WEISS brand.
- Management identified competitive 2021 conditions and plans to maintain marketing and trade spending, manage costs, launch differentiated products and pursue acquisitions. No specific 2021 sales or EPS guidance is provided in the supplied filing text.
- Key risks include pandemic-related demand and supply disruptions, higher raw-material and energy costs, retailer pricing pressure, reliance on major customers, regulatory and product-liability exposure, foreign-exchange risk, and competition. Walmart represented 23% of FY2020 sales; the top three customers represented 36%.
- The TROJAN tradename had a $176.4 carrying value, with fair value 53% above carrying value at year-end; continued declines could lead to impairment. The filing also identifies possible impairment risk for Passport Food Safety assets amid sales and profit declines.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.
Important facts for investors to verify
- How much of FY2020’s volume growth reflects durable consumer demand versus pandemic-related stockpiling, and how demand trends develop after reopening.
- How much reported earnings growth depended on the $94.0 Flawless liability adjustment and the $10.6 tax benefit; assess performance excluding these items.
- Whether manufacturing-cost inflation, tariffs and capacity investment affect gross margins and cash conversion in 2021.
- Debt refinancing and liquidity needs around 2022 maturities, including the $300.0 term loan and $700.0 of senior notes due that year.
- Progress in TROJAN and Passport Food Safety, including whether future cash-flow assumptions support their recorded intangible-asset values.
- Customer concentration and bargaining power, particularly Walmart’s 23% share of sales, and the company’s ability to pass cost increases through without losing volume.