Church & Dwight Co., Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Church & Dwight sells household and personal care products, international personal care products, and specialty chemicals through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1,454.2 million (+9.7%) | $1,325.1 million | $2,884.0 million (+10.0%) | $2,622.3 million |
| Gross profit / margin | $638.9 million / 43.9% | $545.3 million / 41.2% | $1,260.9 million / 43.7% | $1,097.8 million / 41.9% |
| Operating income / margin | $293.6 million / 20.2% | $261.6 million / 19.8% | $585.5 million / 20.3% | $542.3 million / 20.7% |
| Net income | $221.2 million | $187.1 million | $424.4 million | $391.5 million |
| Diluted EPS | $0.89 (+17.1%) | $0.76 | $1.72 (+8.2%) | $1.59 |
| Interest expense | $27.9 million | $19.3 million | $56.7 million | $35.9 million |
Q2 gross margin improved 270 basis points, chiefly from price/mix, productivity, acquisition mix, and lower transportation costs, partly offset by higher manufacturing, labor, and commodity costs. First-half gross margin improved 180 basis points, while operating margin declined 40 basis points as operating expenses grew faster than sales.
Cash flow, debt, and liquidity
- First-half operating cash flow was $509.2 million, versus $310.4 million a year earlier. Management attributed the increase to improved working capital and higher cash earnings.
- Investing cash outflow was $69.2 million, including $63.2 million of capital expenditures. Financing cash outflow was $315.4 million, including $200.0 million of long-term debt repayments, net short-term debt repayments, and $133.0 million of dividends.
- Cash was $396.9 million at June 30, 2023, compared with $270.3 million at year-end 2022 and $639.7 million at June 30, 2022.
- Short-term borrowings were $4.0 million and long-term debt was $2,400.9 million, down from $74.0 million and $2,599.5 million, respectively, at December 31, 2022. The company repaid $200.0 million of its term loan in Q1.
- Church & Dwight reported approximately $1.495 billion available through its revolving credit facility and commercial paper program. It stated that operating cash flow and borrowing capacity should be sufficient for planned uses and that it expects to remain compliant with its credit covenant.
Material changes and segment trends
- Sales growth reflected pricing/product mix of 5.8% and acquired product lines of 4.5%, partly offset by volume decline of 0.4% and foreign exchange of 0.2%. Hero, acquired in October 2022, contributed to reported growth.
- Consumer Domestic sales rose 12.3% in Q2; pretax income increased to $230.7 million from $201.7 million. Growth included Hero and stronger sales in several brands, partly offset by declines in Waterpik, Flawless, and First Response.
- Consumer International sales increased 4.9%, but pretax income declined to $27.5 million from $28.5 million, reflecting higher manufacturing and commodity costs, among other items.
- SPD sales fell 6.5% and pretax income declined to $9.2 million from $12.4 million, primarily due to competitive imports in the domestic dairy business.
- Marketing expense rose 28.5% in Q2 as marketing spending increased with improved product fill rates. SG&A rose 17.9%, reflecting the Hero acquisition, higher incentive compensation, and product and technology investments.
Outlook, risks, and unusual items
- Management said pricing and productivity are expected to offset inflation in the near term, but raw-material and labor shortages and input-cost inflation may continue. The filing provides no quantified full-year sales or EPS guidance in the text presented.
- Management expects 2023 capital expenditures of approximately $250 million, primarily for manufacturing capacity in laundry, litter, and vitamins. The company also increased its regular quarterly dividend by 4% to $0.2725 per share.
- Inflation and recession concerns are pressuring discretionary brands Waterpik and Flawless, with consumers shifting toward lower-cost alternatives. The company is adjusting production and inventory, increasing promotions and marketing, and developing lower-cost Waterpik products. Vitamin brands face lingering supply-chain and shelf-space impacts; SPD faces low-priced foreign competition.
- Waterpik’s trade name had only 7% fair-value headroom over carrying value at the October 2022 impairment test; Trojan’s had 46%. Further declines in expected cash flows could trigger impairment. A $411.0 million non-cash impairment of Flawless intangible assets was recorded in Q4 2022; further deterioration could result in another charge.
- Other notable items: the effective tax rate fell to 17.9% for Q2 and 21.1% for the first half, primarily due to tax benefits from higher stock-option exercises. No shares were repurchased under the public repurchase program in Q2; reported purchases were shares withheld for employee tax obligations.
- The filing describes ordinary-course legal and regulatory proceedings, including product liability and purported consumer class actions; outcomes and potential damages generally were not reasonably predictable or estimable. Vendor, materials, services, licensing, and promotion commitments totaled approximately $363.4 million at June 30.
Key facts for investors to verify
- Whether price increases and productivity can sustain margin gains as manufacturing, labor, and commodity costs remain elevated.
- Whether Waterpik and Flawless demand stabilizes, and whether the Waterpik and Trojan intangible-asset fair-value cushions remain adequate.
- Whether Consumer International and SPD profitability recover amid cost pressure and competition, and whether vitamin shelf-space issues ease.
- Whether working-capital performance, planned capital spending, debt repayment, and liquidity remain consistent with management’s expectations.
- Whether the tax-rate benefit from stock-option exercises is temporary and how higher interest expense affects future earnings.