Clorox Company — Q1 FY2017 10-Q
Reporting period: Three months ended September 30, 2016; comparisons are with the three months ended September 30, 2015 unless noted. Amounts are in millions of dollars, except per-share data.
Financial performance and position
| Metric | Q1 FY2017 | Prior period |
|---|---|---|
| Net sales | $1,443 | $1,390 |
| Gross profit / gross margin | $640 / 44.4% | $625 / 45.0% |
| Continuing-operations earnings | $179 | $173 |
| Net earnings | $179 | $172 |
| Diluted EPS from continuing operations | $1.36 | $1.32 |
| Effective tax rate | 32.0% | 34.5% |
| Cash from continuing operations | $170 | $135 |
| Capital expenditures | $59 | $28 |
| Cash and cash equivalents, September 30 | $408 | $401 at June 30, 2016 |
| Total debt: notes and loans payable plus long-term debt | $2,407 | $2,312 at June 30, 2016 |
| Current assets / current liabilities | $1,416 / $1,522 | $1,485 / $1,558 at June 30, 2016 |
| Dividend declared per share | $0.80 | $0.77 |
Operating cash flow less capital expenditures was $111, calculated from the reported figures. The company reported a 1.94 consolidated leverage ratio against a maximum covenant of 3.50 and said it was in compliance with its credit agreement. Its $1.1 billion revolving credit facility had no borrowings; $25 of foreign and other credit lines was available.
Changes and operating drivers
- Sales rose 4%; volume increased 8%, supported by higher shipments across all segments and the RenewLife acquisition. Volume growth exceeded sales growth because of unfavorable mix and foreign exchange, partly offset by pricing.
- Gross margin declined 60 basis points. Higher manufacturing and logistics costs, unfavorable product mix and foreign exchange outweighed cost savings, favorable commodity costs and pricing.
- Diluted continuing-operations EPS increased 3%, primarily from higher sales and cost savings, partly offset by higher manufacturing and logistics costs and unfavorable currency.
- Segment sales and pretax earnings: Cleaning $534 and $164, up 7% and 10%; Household $422 and $69, up 3% and down 16%; Lifestyle $236 and $62, up 2% and 5%; International $251 and $27, flat and down 16%.
- Household earnings were pressured by lower charcoal volume, higher trade promotions and manufacturing and logistics costs. International earnings faced unfavorable currency and inflationary cost pressures.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said it expected to remain in compliance with credit covenants for the foreseeable future.
- The company acquired RenewLife in May 2016 for $290, funded through commercial paper. The preliminary purchase-price allocation included $137 goodwill and $134 trademarks; valuation and tax estimates remained subject to change.
- Adoption of share-based compensation accounting guidance produced $6 of excess tax benefits and reduced the effective tax rate by approximately 2 percentage points in the quarter. This benefit contributed to the year-over-year tax-rate decline.
- Capital expenditures increased to $59, principally for manufacturing efficiencies and IT infrastructure. The company repurchased approximately 0.9 million shares for $113 under its Evergreen Program and paid $104 in dividends.
- Venezuela remains a discontinued operation following the 2014 cessation of business and government takeover of facilities. Clorox estimated an additional $1–$11 of after-tax exit costs during the remainder of FY2017 through FY2019; cumulative five-year costs were estimated at $50–$60.
- Argentina’s currency and inflation environment remains challenging. The peso declined 3% in the quarter; management warned further volatility and depreciation could adversely affect sales, earnings and monetary assets, with no assurance mitigation efforts will succeed.
- Environmental remediation liabilities were $13. Management said additional exposure was reasonably possible but not estimable. It did not expect other pending legal matters, individually or in aggregate, to materially adversely affect the financial statements.
- Principal stated risks include competition, commodity and logistics costs, customer concentration, foreign exchange and political risks, acquisitions, product liability, cybersecurity, environmental matters, debt and tax uncertainties. Wal-Mart represented 26% of quarterly sales.
Investor verification points
- Assess whether sales and volume growth are sustainable after separating acquisition contribution, pricing, product mix and foreign exchange effects.
- Track gross-margin recovery and Household and International earnings, given their reported declines and identified cost pressures.
- Verify the repeatability of the lower tax rate, particularly the one-time share-based compensation tax benefit.
- Monitor debt, short-term borrowings, covenant headroom, and the final RenewLife purchase-price allocation.
- Follow Argentina currency and inflation exposure, Venezuela exit costs, and developments in environmental remediation obligations.