Church & Dwight Co., Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless stated otherwise. Amounts are in millions except per-share data.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date | Change |
|---|---|---|---|
| Net sales | $1,165.2 | $1,044.7 | +11.5% |
| Gross profit / margin | $532.0 / 45.7% | $470.8 / 45.1% | +13.0%; +60 bps |
| Operating income / margin | $314.6 / 27.0% | $240.8 / 23.1% | +30.6%; +390 bps |
| Net income | $229.8 | $175.7 | +30.8% |
| Diluted EPS | $0.92 | $0.70 | +31.4% |
| Operating cash flow | $236.5 | $137.9 | +$98.6 |
Sales growth included 6.9% from volume, 2.3% from price/product mix, 2.7% from acquired product lines net of divestiture, and a 0.4% foreign-exchange headwind. Gross-margin improvement reflected favorable price/volume mix and productivity, partly offset by manufacturing, commodity, transportation, and foreign-exchange costs.
Cash and cash equivalents were $1,046.6 at March 31, versus $155.7 at December 31, 2019. Current assets were $1,828.8 and current liabilities $1,769.0. Short-term borrowings were $971.9 and long-term debt $1,810.8; combined reported debt was approximately $2,782.7. The company drew $825.0 on its revolving facility during March as a precaution amid COVID-19 uncertainty. Operating cash flow less property, plant and equipment additions was approximately $219.7. Dividends paid were $59.0; cash dividend per share was $0.24.
Effective tax rate was 23.2%, compared with 21.9%. Comprehensive income was $197.1, including $32.7 of other comprehensive loss, mainly foreign-exchange translation and derivative losses.
Material changes and segment performance
- Consumer Domestic sales rose 13.5% to $891.0 and pretax income increased to $250.8 from $182.7. Growth reflected volume, pricing/mix, Flawless acquisition contribution, and higher demand for several household and health-care products.
- Consumer International sales rose 6.4% to $198.6 and pretax income increased to $38.2 from $28.4. Foreign exchange was a headwind; Flawless and the Perl Weiss divestiture affected comparability.
- Specialty Products Division sales rose 3.4% to $75.6, but pretax income fell to $8.8 from $12.3, reflecting unfavorable manufacturing costs and price/mix.
- Operating income benefited from a $27.0 reduction in the estimated Flawless contingent consideration liability, recorded as lower SG&A, and a $3.0 gain on the Perl Weiss brand sale. Management said these contributed approximately $0.08 and $0.01, respectively, to diluted EPS after tax.
- Net cash from financing was $670.1, primarily due to net debt borrowings of $719.9. Q1 2019 financing used $344.3, including $300.0 of long-term debt repayments and $100.0 of share repurchases.
Outlook, commentary, and risks
The company provided no specific full-year sales or earnings guidance in the supplied filing text. It expected 2020 capital expenditures of approximately $80.0 and stated that cash, operating cash flow, and remaining borrowing capacity were expected to cover spending needs. Management said it anticipated compliance with the credit agreement’s maximum leverage covenant.
COVID-19 increased demand for certain staples and health products, while temporary dental-office and retailer closures and reduced foot traffic hurt WaterPik and some personal-care products. Management cited uncertainty around demand volatility, pantry loading and subsequent destocking, recessionary pressure, supply-chain continuity, workforce availability, customer credit, and online-channel shifts. Most manufacturing and distribution facilities and key suppliers were operating at quarter-end; the company was adding short-term capacity and using contract manufacturers where possible.
Potential impairment risks were noted for the Trojan tradename, amid category declines and competition, and Passport Food Safety intangibles, amid plant closures and lower demand. The filing also describes uncertainty in estimating intangible-asset cash flows under pandemic conditions. The Scantibodies contract case was remanded for jury trial in April 2020 after an appellate reversal; the company had recorded an immaterial reserve, but stated it could be required to pay all or substantially all of the claimed damages and other amounts, with damages sought in excess of $20.0.
Other items: the board raised the quarterly dividend 5.5% to $0.24 per share; no shares were repurchased under public programs in Q1, and $210.0 remained available under the 2017 program. A $1.1 billion annual raw-material, packaging, and service commitment was not reported; the filing instead disclosed vendor commitments of approximately $273.1 and an annual purchase commitment of 240,000 tons of sodium-based raw materials.
Most important facts for investors to verify
- How much of the sales and earnings increase persists after COVID-related demand surges and the $30.0 combined benefit from the Flawless liability remeasurement and Perl Weiss sale.
- Whether increased borrowing is repaid, and how cash, commercial paper availability, and covenant headroom evolve; management said only approximately $27.0 remained available through the revolving facility and commercial paper program.
- Whether demand, manufacturing costs, supply availability, or retailer conditions materially change as the pandemic and its economic effects continue.
- Whether Trojan or Passport Food Safety asset values require impairment, and the outcome and potential cost of the Scantibodies litigation.
- Whether the filing’s stated approximately $80.0 capital-spending outlook and dividend plans remain consistent with liquidity and operating cash generation.