Church & Dwight Co., Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter and nine months ended September 30, 2022. Amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,455.9 | $1,317.3 | $4,339.9 | $3,939.6 |
| Gross profit / margin | $646.3 / 44.4% | $549.7 / 41.7% | $1,907.2 / 43.9% | $1,647.5 / 41.8% |
| Income from operations / margin | $255.8 / 17.6% | $253.9 / 19.3% | $841.3 / 19.4% | $796.2 / 20.2% |
| Net income | $177.5 | $187.1 | $601.9 | $578.6 |
| Diluted EPS | $0.71 | $0.76 | $2.43 | $2.35 |
- Q3 sales rose 10.5%; reported drivers were acquired product lines (+5.2%), volume (+2.7%), price/product mix (+2.1%) and foreign exchange (+0.5%). For the first nine months, sales increased 10.2%, including a 5.0% contribution from acquired product lines.
- Q3 gross margin expanded 270 basis points, benefiting from productivity, price/volume/mix, Hero and lower transportation costs; higher manufacturing costs partly offset those gains. Nine-month margin expanded 210 basis points, with higher manufacturing costs the principal offset.
- Operating income increased only 0.7% in Q3 as marketing and SG&A grew faster than sales. SG&A rose 43.6% in the quarter, partly reflecting Hero-related costs and higher incentive compensation. Q3 diluted EPS fell 6.6%; nine-month diluted EPS rose 3.4%.
- Q3 segment sales: Consumer Domestic $1,133.1 (+12.1%), Consumer International $244.4 (+11.2%), and Specialty Products $78.4 (-10.1%). Specialty Products’ lower sales and income primarily reflected competitive imports in the U.S. dairy market.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $795.1, versus $534.1 a year earlier. Management attributed the increase to improved working capital and higher cash earnings; the cash conversion cycle improved by one day to 27 days.
- Investing cash outflow was $128.4, including $121.5 of capital expenditures. Financing cash outflow was $363.0, including $199.9 of dividends and $270.6 of net debt repayments, partly offset by $107.6 from stock option exercises.
- At September 30, cash and equivalents were $573.3, short-term borrowings $3.8 and long-term debt $2,401.5. Long-term debt included a $200.0 term loan due in December 2024; the company repaid $200.0 of that loan during the first quarter.
- The company reported approximately $1,495.0 available through its revolving credit facility and commercial paper program. It stated that operating cash and borrowing capacity should be sufficient for debt service, dividends, repurchases and capital expenditures. Current assets were $1,744.6 and current liabilities $1,188.4.
- Capital expenditures for 2023 were expected to be approximately $230.0, principally for laundry, litter and vitamin manufacturing capacity. The annualized dividend was increased to $1.09 per share; no shares were repurchased in 2023 through September 30.
Outlook, risks and notable items
- The filing provides no specific full-year sales or earnings guidance. Management described inflation, higher interest rates and recession concerns as risks to consumer spending, especially for discretionary brands; it said the timing and effects remain uncertain.
- Waterpik and Flawless face weaker discretionary demand and consumer shifts to lower-priced alternatives. Management cited added promotional and marketing activity, production and inventory management, and development of lower-cost Waterpik products as responses.
- Vitamin brands continue to face residual supply-chain effects and reduced shelf space at some retailers. Specialty Products faces continued low-priced foreign dairy imports. The filing also cites labor, supply-chain, commodity, foreign-exchange and competitive risks.
- Waterpik and Trojan trade names were identified as potentially susceptible to future impairment if performance declines further. At the last annual test (October 1, 2022), fair value exceeded carrying value by 7% for Waterpik and 46% for Trojan; management said its performance expectations had not substantially changed since that test. No current-period impairment charge is reported. The 2022 Flawless impairment charge was $411.0.
- Hero acquisition-related restricted-stock compensation contributed to SG&A; the company also completed a $1.3 goodwill adjustment related to Hero’s acquired tax position. The filing reports ordinary-course legal proceedings whose outcomes and potential damages generally cannot be predicted or estimated.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Consumer Domestic growth and Hero’s contribution persist, and whether higher marketing and SG&A costs moderate.
- Whether Waterpik and Trojan performance supports the assumptions underlying their intangible-asset valuations, and whether Flawless recovery efforts succeed.
- Whether competitive imports continue to pressure Specialty Products sales and profitability.
- Whether operating cash flow, capital spending and debt repayment remain consistent with management’s liquidity expectations.
- How consumer demand, input costs, interest rates, retailer acceptance of pricing and legal contingencies develop after the reporting date.