The Clorox Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended September 30, 2020, compared with the three months ended September 30, 2019, unless otherwise noted. Amounts are in millions except per-share data. The quarter reflects unusually strong demand for many products during the COVID-19 pandemic.
Financial performance
| Metric | Q1 FY2021 | Prior period | Change |
|---|---|---|---|
| Net sales | $1,916 | $1,506 | +27% |
| Gross profit / gross margin | $920 / 48.0% | $663 / 44.0% | Margin +400 bps |
| Earnings before income taxes | $526 | $258 | +104% |
| Net earnings attributable to Clorox | $415 | $203 | +104% |
| Diluted earnings per share | $3.22 | $1.59 | +103% |
| Net cash provided by operations | $383 | $271 | +$112 |
- Sales volume rose 23%; organic sales increased 27%. Growth was broad-based, with volume gains across all four reportable segments. Favorable mix supported sales growth, partly offset by unfavorable foreign exchange.
- Gross margin expansion reflected higher volume, cost savings and favorable mix, partly offset by higher manufacturing and logistics costs. Advertising expense rose to $179 from $137; selling and administrative expense increased to $238 from $211.
- Other income was $80, compared with other expense of $2 in the prior period, primarily due to an $85 noncash, nonrecurring gain from remeasuring Clorox’s previously held Saudi joint-venture investment. The gain materially contributed to reported earnings growth.
- Segment sales and earnings before tax: Health and Wellness $813 and $251; Household $500 and $109; Lifestyle $318 and $102; International $285 and $124. The International earnings increase included the Saudi investment remeasurement gain.
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $860; current assets were $2,144 and current liabilities $1,516. Long-term debt was $2,781, versus $2,780 at June 30, 2020. The filing reports no borrowings under the $1,200 revolving credit facility.
- Operating cash flow was $383. Investing used $151, including $85 for the Saudi joint-venture acquisition; financing used $247, including $140 of dividends and $100 of treasury-stock purchases. Cash, cash equivalents and restricted cash ended at $867.
- Management described liquidity as strong and expected operating cash generation, capital-market access and available credit to support near-term needs. The company reported compliance with credit-facility covenants; its interest-coverage ratio was 16.7 against a 4.0 minimum.
Material changes, outlook and risks
- On July 9, 2020, Clorox increased its ownership in its Saudi joint venture from 30% to 51% and began consolidating it. Consideration was $111, including $100 cash and settlement of preexisting arrangements; the transaction added $212 of goodwill. The acquired business contributed $23 of quarterly sales.
- COVID-19 continued to drive demand, particularly for disinfecting and cleaning products. Management said future effects remain uncertain and depend on the pandemic’s duration and severity, manufacturing and distribution capacity, and government and consumer responses.
- The filing provides no specific sales or earnings guidance for the upcoming period. Management said it expected continued access to credit and anticipated covenant compliance for the foreseeable future.
- Key risks include demand normalization or shifts in consumer preferences, product shortages and supply-chain constraints, higher commodity and transportation costs, competition, dependence on major retailers (Walmart and affiliates represented 25% of sales), foreign-exchange and international risks, and uncertainty surrounding COVID-19. Argentina remained exposed to currency volatility, inflation, recession and price controls.
- Environmental remediation liabilities totaled $28. The company noted potential exposure above the recorded amount for certain matters, including a California site where alternative remediation requirements could increase estimated costs, and a Michigan matter for which additional exposure was not estimable. Management did not expect other disclosed legal matters to materially adversely affect the consolidated financial statements.
Important facts for investors to verify
- How much of the quarter’s unusually high sales and earnings growth persists as pandemic-driven demand changes.
- The contribution of the $85 Saudi joint-venture remeasurement gain to earnings and the final purchase-price allocation, which remained preliminary, including goodwill and tax estimates.
- Whether elevated demand can be met without further supply-chain, manufacturing or logistics cost pressure, and how margins respond.
- Developments in environmental remediation obligations, particularly the California and Michigan matters, and any changes to estimated costs.
- Cash conversion and working-capital needs as sales and inventory levels change; the filing attributes some operating cash-flow pressure to higher receivables and inventory.