Clorox 10-Q Summary
Business context and reporting period
The Clorox Company reported its first fiscal quarter of 2023, the three months ended September 30, 2022, compared with the three months ended September 30, 2021. Clorox sells consumer and professional products through four reportable segments: Health and Wellness, Household, Lifestyle and International.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,740 million | $1,806 million | Down 4% |
| Gross profit / margin | $626 million / 36.0% | $670 million / 37.1% | Margin down 110 basis points |
| Earnings before income taxes | $116 million | $185 million | Down 37% |
| Net earnings attributable to Clorox | $85 million | $142 million | Down 40% |
| Diluted EPS | $0.68 | $1.14 | Down 40% |
| Cash provided by operations | $178 million | $41 million | Up $137 million |
Sales volume fell 15%; favorable price/mix partly offset lower shipments. Organic sales declined 2%, excluding foreign exchange effects. Gross margin pressure reflected higher manufacturing and logistics expenses, unfavorable commodity costs and lower volume, partly offset by price increases and cost savings. Selling and administrative expense rose 11% to $261 million, while advertising expense fell 12% to $161 million, primarily due to spending timing. The effective tax rate was 25.0%, versus 22.6%.
At September 30, cash and cash equivalents were $278 million. Current assets were $1,763 million and current liabilities were $2,010 million. Notes and loans payable were $348 million and long-term debt was $2,475 million. Operating cash flow was $178 million; capital expenditures were $46 million. Cash dividends paid to Clorox shareholders were $145 million. The company reported no borrowing under its $1.2 billion revolving credit agreement and said it was in compliance with its covenants.
Material changes and segment performance
- Net sales decreased across all four segments. Health and Wellness sales fell 4% to $712 million; Household fell 4% to $423 million; Lifestyle fell 3% to $320 million; and International fell 1% to $285 million.
- Segment earnings before income taxes increased 10% in Health and Wellness to $115 million, but decreased 39% in Household to $22 million, 35% in Lifestyle to $60 million and 23% in International to $23 million.
- Clorox attributed lower volume to pricing actions, demand normalization and, in some businesses, supply constraints. Price increases supported reported sales despite volume declines.
- Operating cash flow improved year over year, mainly from lower working capital use and lower employee incentive compensation payments, partly offset by lower cash earnings.
- Walmart and its affiliates represented 27% of consolidated sales, up from 25% a year earlier.
Outlook, risks and unusual items
The filing does not provide a clear company-wide sales or EPS guidance range. Management expected inflation, supply-chain disruption and higher manufacturing, logistics and commodity costs to continue through fiscal 2023. The company planned to respond with pricing, cost reductions and supply-chain actions, while noting risks from transportation and supply constraints, foreign exchange volatility, COVID-19 uncertainty and the conflict in Ukraine.
Clorox began a streamlined operating-model restructuring expected to be completed in fiscal 2024. It anticipates $75 million to $100 million of implementation costs over fiscal 2023 and 2024, including about $35 million in fiscal 2023; $19 million was recognized in the quarter. Management expects annual savings of approximately $75 million to $100 million once fully implemented, with about $25 million of benefits anticipated in fiscal 2023. These are expectations, not guaranteed results.
On October 25, 2022, Clorox announced a voluntary recall of certain Pine-Sol scented products because of a quality issue; Original Pine-Sol was not included. The quarter’s Health and Wellness results included costs associated with the recall, but the filing does not provide a clear total estimate of its financial impact. Environmental remediation liabilities totaled $27 million. The company also described legal and environmental contingencies; management did not expect their ultimate disposition to materially adversely affect the financial statements, while acknowledging uncertainty in certain remediation exposures.
Important facts for investors to verify
- Whether pricing and cost savings can offset persistent inflation and restore gross margins as volume declines.
- Actual restructuring costs, timing and realized savings compared with management’s estimates.
- The recall’s final scope, costs, liabilities and any resulting effect on sales or brand reputation.
- Cash-flow sustainability, working-capital movements, supplier payment terms and the company’s $202 million of payables associated with its voluntary supply-chain-finance program.
- Debt, liquidity and dividend sustainability, particularly given current liabilities exceeding current assets at quarter-end.
- Developments in environmental remediation and other legal contingencies, including exposures that the company says are not currently estimable.