Business context and reporting period
The Clorox Company’s fiscal 2020 first quarter covered the three months ended September 30, 2019; comparisons are with the same quarter of 2018. Clorox sells consumer and professional products through four reportable segments: Cleaning, Household, Lifestyle and International. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,506 million | $1,563 million | Down 4% |
| Gross profit | $663 million | $678 million | Down 2% |
| Gross margin | 44.0% | 43.4% | Up 60 basis points |
| Earnings before income taxes | $258 million | $268 million | Down 4% |
| Net earnings | $203 million | $210 million | Down 3% |
| Diluted EPS | $1.59 | $1.62 | Down 2% |
| Operating cash flow | $271 million | $259 million | Up $12 million |
Cost of products sold was $843 million, versus $885 million. Gross-margin expansion reflected cost savings and price increases, partly offset by higher trade promotion spending and manufacturing and logistics costs. The effective tax rate was 21.5% in both periods; interest expense was $25 million, compared with $24 million.
Capital expenditures were $54 million, versus $36 million. Investing cash outflow was $42 million; financing cash outflow was $183 million. Cash, cash equivalents and restricted cash ended the quarter at $157 million, compared with $165 million a year earlier. The balance sheet reported cash and cash equivalents of $150 million at September 30.
At September 30, notes and loans payable were $449 million and long-term debt was $2,287 million. The company had no borrowings under its $1.1 billion revolving credit agreement, which matures in February 2022, and reported a 13.2 times interest coverage ratio against a 4.0 minimum covenant. Clorox said it was in compliance with its covenants and expected to remain so. Total liabilities were $4,847 million and stockholders’ equity was $550 million.
Material changes and segment performance
- Total sales declined 4%; volume was flat. The filing attributes the sales decline to higher trade promotions, unfavorable mix and foreign exchange, partly offset by price increases. Organic sales declined 2% (a non-GAAP measure).
- Cleaning: Sales fell 2% to $562 million and pretax earnings fell 1% to $178 million. Higher shipments in professional products and home care were partly offset by lower laundry shipments; unfavorable mix weighed on sales.
- Household: Sales fell 14% to $381 million and pretax earnings fell 58% to $25 million. Lower Glad shipments, reduced charcoal merchandising support, lower RenewLife consumption and increased trade promotions contributed to the decline.
- Lifestyle: Sales rose 4% to $322 million and pretax earnings rose 13% to $70 million, led by Burt’s Bees face- and lip-care growth and innovation.
- International: Sales were flat at $241 million; pretax earnings rose 39% to $39 million. Price increases supported earnings, while currency movements, including Argentine peso devaluation, were a headwind.
Wal-Mart Stores, Inc. and its affiliates accounted for 26% of consolidated sales, up from 25%. Diluted weighted-average shares declined to 127.5 million from 129.9 million. Clorox repurchased $104 million of shares through its Evergreen Program and paid $133 million in dividends; declared dividends were $1.06 per share, versus $0.96.
Outlook, commentary, risks and unusual items
The filing does not provide specific numerical sales, earnings or EPS guidance. Management characterized financial condition and liquidity as strong and said it expected to generate positive operating cash flow and meet financing requirements and fixed obligations. It cited competition, customer concentration, changing retail channels and consumer preferences, commodity and logistics costs, foreign exchange, innovation, supply continuity, cyber risks, regulation, legal matters and environmental obligations among risks to future results.
- Argentina remains exposed to high inflation, recession, peso volatility and foreign-exchange controls reinstated in September 2019, which limit conversion and transfer of U.S. dollars. Clorox Argentina represented about 2% of consolidated sales; its net assets excluding goodwill were $34 million and cash was about $2 million at quarter-end. Management warned these conditions could adversely affect liquidity, sales, earnings and cash flows.
- Environmental remediation liabilities totaled $27 million. A California site accounted for $14 million; regulators could require other measures with estimated costs of up to $28 million over an estimated 30-year period. A Michigan matter accounted for $11 million; additional exposure is reasonably possible but not estimable.
- Clorox adopted lease accounting (ASC 842) on July 1, 2019, recognizing $312 million of operating lease right-of-use assets and $347 million of operating lease liabilities at September 30. Adoption included a $22 million credit to opening retained earnings and did not materially affect quarterly earnings or cash flows. Comparative-period balances were not restated.
- Management reported no material change in market risk since June 30, 2019. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Household sales and earnings stabilize after distribution losses, reduced merchandising support and higher promotional spending.
- Whether cost savings and pricing continue to offset trade promotions, manufacturing and logistics costs, and unfavorable mix.
- Developments in Argentina’s exchange controls, currency, inflation and potential effects on cash repatriation and reported results.
- Debt, covenant headroom, cash generation, capital spending, share repurchases and dividend payments.
- Potential changes in environmental remediation requirements and resulting costs beyond recorded liabilities.
- Lease obligations and the impact of the new accounting standard when assessing balance-sheet comparisons with prior periods.