Church & Dwight Co., Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Dollar amounts are in millions except per-share data. Church & Dwight reports Consumer Domestic, Consumer International, Specialty Products Division (SPD), and Corporate.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Net sales | $1,271.1 | $1,194.3 | $2,510.0 | $2,359.5 |
| Gross profit | $552.2 | $559.6 | $1,103.1 | $1,091.6 |
| Gross margin | 43.4% | 46.8% | 44.0% | 46.3% |
| Operating income | $298.7 | $250.7 | $601.3 | $565.3 |
| Net income | $218.3 | $189.7 | $439.0 | $419.5 |
| Diluted EPS | $0.87 | $0.75 | $1.76 | $1.67 |
- Sales rose 6.4% in both the quarter and first half. Q2 growth reflected volume (+4.3%), foreign exchange (+1.7%), pricing/product mix (+0.2%), and acquired product lines net of divestitures (+0.2%).
- Q2 operating margin increased to 23.5% from 21.0%; first-half operating margin was 24.0% in both years. SG&A savings and higher sales supported operating income, while gross margin contracted.
- Operating cash flow was $344.3 for the first half, versus $598.6 in 2020. Investing used $47.6, including $43.3 of capital expenditures; financing used $329.8. Cash ended at $149.8, down from $183.1 at year-end 2020.
- At June 30, short-term borrowings were $233.1 and reported long-term debt was $1,513.8, plus $200.0 of current maturities. The $200.0 term-loan balance was repaid in early July using commercial paper and cash. The company reported approximately $767.0 available through its revolving credit facility and commercial paper program.
- Total current assets were $1,128.7 and current liabilities $1,376.1. Inventories increased to $555.8 from $495.4 at year-end. The filing reports stockholders’ equity of $3,377.2.
Changes and segment performance
- Sales growth was broad-based: Consumer Domestic sales increased 3.1% in Q2, Consumer International 21.0%, and SPD 11.8%. International growth included a 10.6% foreign-exchange benefit; its price/product mix was unfavorable.
- Household product sales declined to $523.0 from $544.7 in Q2, while personal care sales increased to $436.7 from $386.4. Consumer International and SPD also recorded higher sales.
- Q2 gross margin fell 340 basis points. Management attributed pressure chiefly to higher manufacturing and commodity costs (410 bps), transportation (70 bps), and incremental tariffs (50 bps), partly offset by productivity (140 bps) and favorable price/volume/mix (50 bps).
- First-half operating cash flow fell by $254.3, primarily because of working-capital movements, including lower accrued expenses and the prior-year timing of U.S. federal tax payments. The cash conversion cycle increased 10 days to 27 days, with higher inventory and receivables contributing.
- Interest expense declined to $14.1 in Q2 and $28.1 in the first half, mainly due to lower interest rates. The effective tax rate rose to 24.0% for Q2 and 24.1% for the first half, primarily reflecting a lower tax benefit from stock-option exercises.
Outlook, risks and unusual items
- Management said pandemic-related supply constraints, labor and materials shortages, and transportation challenges were limiting the ability to meet demand and driving significant manufacturing and distribution cost inflation. It expected input-cost inflation to continue through the remainder of 2021.
- The company had enacted and was evaluating price increases, reduced some marketing and promotional spending, and was adding short- and long-term manufacturing capacity and qualifying additional suppliers. Management cautioned that customer acceptance and the effectiveness of these actions were not assured.
- Management expected 2021 capital expenditures of approximately $140, primarily for manufacturing capacity in laundry, litter, and vitamins. It said cash from operations and borrowing capacity were expected to fund planned capital spending, debt service, dividends, and share repurchases as implemented. The filing provides no specific sales or EPS forecast.
- The Flawless acquisition earn-out liability was reduced by $38.0 in Q2 and $57.0 in the first half based on updated sales forecasts. These SG&A reductions benefited Q2 diluted EPS by $0.11 after tax and first-half diluted EPS by $0.16 after tax. The liability was $41.0 at June 30 and was expected to be paid in the first half of 2022.
- Management noted impairment risks for the TROJAN trademark amid historical category and sales pressure, although it described a recent recovery as social restrictions eased. The Passport Food Safety business also faced declining demand and competition that could lead to impairment of approximately $22.0 of related net intangible assets.
- Other disclosed exposures include $258.5 of purchase and other commitments, guarantees and letters of credit totaling $4.6, and ordinary-course legal proceedings whose outcomes and potential damages were not predictable or estimable. The company said it expected to remain in compliance with its maximum leverage covenant.
- The Board increased the quarterly dividend from $0.24 to $0.2525 per share in January 2021. No shares were repurchased under the public programs in Q2; $210.0 remained available under the 2017 program at June 30.
Investor verification priorities
- Track whether pricing and productivity offset continued commodity, manufacturing, transportation, and tariff inflation, and whether customer demand can be supplied.
- Review working-capital trends—especially inventory, receivables, and accrued liabilities—and their effect on operating cash flow.
- Monitor the Flawless earn-out remeasurement and payment, and whether the TROJAN and Passport Food Safety businesses avoid impairment.
- Confirm the July term-loan repayment, subsequent borrowing levels, liquidity availability, and covenant compliance.
- Assess the sustainability of earnings growth excluding the favorable Flawless liability adjustment and other year-over-year expense changes.