The Clorox Company — Q2 FY2019 Form 10-Q
Business context and period. Clorox manufactures and markets consumer and professional products across Cleaning, Household, Lifestyle and International. This report covers the quarter and six months ended December 31, 2018; comparisons are with the periods ended December 31, 2017.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $1.473 billion | $1.416 billion | $3.036 billion | $2.916 billion |
| Gross profit | $643 million | $609 million | $1.321 billion | $1.282 billion |
| Gross margin | 43.7% | 43.0% | 43.5% | 44.0% |
| Net earnings | $182 million | $233 million | $392 million | $425 million |
| Diluted EPS | $1.40 | $1.77 | $3.02 | $3.23 |
| Operating cash flow | Not presented by quarter | $449 million | $324 million |
- Quarterly sales rose 4%; volume increased 5%. Price increases partly offset unfavorable foreign exchange and mix. Six-month sales also grew 4%.
- Quarterly gross margin improved 70 basis points on pricing and cost savings, partly offset by higher manufacturing, logistics and commodity costs. Six-month margin declined 50 basis points as cost pressures outweighed pricing and savings.
- Quarterly diluted EPS fell 21%, primarily because the prior-year quarter included a $0.40-per-share one-time Tax Act benefit. Six-month EPS declined 7%, with the higher current-period effective tax rate a key factor.
- Six-month operating cash flow was $449 million, versus $324 million. Capital expenditures were $86 million; investing cash outflow was $77 million and financing cash outflow was $338 million. Higher repurchases and dividends contributed to the increased financing outflow.
Financial position and segment changes
- At December 31, 2018, cash and cash equivalents were $162 million; current assets were $1.365 billion and current liabilities $1.186 billion. Notes and loans payable were $235 million and long-term debt was $2.285 billion.
- The revolving credit agreement had $1.1 billion of capacity and no borrowings. Clorox reported a 14.1x interest-coverage ratio against a 4.0x minimum and said it was in covenant compliance.
- Cleaning: Q2 sales increased 6% to $500 million and pretax segment earnings increased 12% to $135 million, supported by pricing, mix and savings.
- Household: Q2 sales declined 4% to $393 million and pretax segment earnings declined 15% to $46 million. Glad bags and wraps faced competition and distribution losses; charcoal shipments and consumption were also lower.
- Lifestyle: Q2 sales increased 25% to $335 million, largely reflecting the Nutranext acquisition and Burt’s Bees growth. Pretax segment earnings rose 13% to $78 million.
- International: Q2 sales declined 8% to $245 million, mainly due to foreign exchange, while pretax segment earnings increased 9% to $25 million, helped by pricing.
Outlook, risks and unusual items
- No specific full-year sales, earnings or EPS guidance is provided in the supplied filing text. Management said it expects sufficient liquidity to meet financing needs and fixed obligations and anticipates continued compliance with credit covenants.
- Argentina was treated as a highly inflationary economy from July 1, 2018, and the U.S. dollar became the functional currency of Clorox’s Argentine subsidiaries. Management cited currency volatility, high inflation and recession as ongoing risks to sales, earnings and cash flow.
- Clorox identified competition, commodity and logistics costs, customer concentration, retail-channel changes, foreign currency, acquisition integration, cyber risks and environmental matters among factors that could affect results. Walmart and affiliates accounted for 24% of quarterly sales and 25% of six-month sales.
- Environmental remediation liabilities totaled $28 million. A California site liability was $14 million; regulators could require a different option with estimated costs up to $28 million for that site. Further exposure in a Michigan matter is possible but not estimable. Management said other legal matters were not expected to have a material adverse effect.
- Nutranext, acquired in April 2018 for $681 million, contributed to Lifestyle growth. Its purchase-price allocation remained preliminary, particularly for goodwill and income taxes.
- The prior-year tax comparison was unusual: Clorox recorded $81 million of Tax Act benefits in Q2 FY2018. The company reported that its accounting for the enactment-date tax effects was complete by December 31, 2018, with subsequent measurement adjustments insignificant.
Important facts for investors to verify
- Whether Household’s competitive and distribution pressures, and lower charcoal demand, persist or improve.
- How much Lifestyle growth reflects Nutranext versus organic performance, and the final acquisition valuation and integration effects.
- Whether price increases and cost savings continue to offset commodity, manufacturing and logistics inflation.
- The effects of Argentine currency devaluation and inflation, and any changes in environmental remediation estimates.
- Cash generation, debt levels and capital returns: six-month dividends paid were $245 million and treasury-stock purchases were $243 million.