The Clorox Company — Form 10-Q summary
Business context and period. Clorox manufactures and markets consumer and professional products across Cleaning, Household, Lifestyle and International segments. This filing covers the three months ended September 30, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended September 30, 2017 unless noted. Figures are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,563 | $1,500 | +4% |
| Gross profit / gross margin | $678 / 43.4% | $673 / 44.9% | Margin down 150 bps |
| Earnings before income taxes | $268 | $279 | Down 4% |
| Net earnings | $210 | $192 | +9% |
| Diluted EPS | $1.62 | $1.46 | +11% |
| Effective tax rate | 21.5% | 31.3% | Down 9.8 percentage points |
| Cash from continuing operations | $259 | $259 | Flat |
| Capital expenditures | $36 | $49 | Down $13 |
Sales volume increased 5%, exceeding sales growth largely because of unfavorable foreign exchange, mainly in Argentina, and unfavorable mix; price increases partly offset those effects. Gross margin contracted as higher manufacturing and logistics expenses and unfavorable commodity costs outweighed cost savings and pricing. EPS growth reflected the lower tax rate, sales growth and savings, partly offset by those cost pressures. Interest expense was $24, compared with $21.
At September 30, 2018, cash and cash equivalents were $162; current assets were $1,317 and current liabilities $1,235. Short-term notes and loans payable were $280 and long-term debt was $2,285, for reported borrowings of $2,565. Cash, cash equivalents and restricted cash totaled $165 at quarter-end. The company reported a $1.1 billion revolving credit facility with no borrowings and a 14.7x trailing interest coverage ratio against a 4.0x minimum covenant; it was in compliance. Financing used $192, including $203 of treasury-stock purchases and $122 of dividends paid. Declared dividends were $0.96 per share, versus $0.84 a year earlier.
Material changes and segment results
- Cleaning: Sales rose 2% to $571; pretax segment earnings rose 5% to $180. Volume fell 1%; pricing and savings supported results.
- Household: Sales were approximately flat at $442, while pretax segment earnings fell 19% to $59. Volume declined 2%; higher manufacturing/logistics and commodity costs were key pressures.
- Lifestyle: Sales rose 26% to $309, substantially reflecting the April 2018 Nutranext acquisition and growth in Burt’s Bees and food products. Volume rose 35%, but pretax segment earnings declined 3% to $62, with costs partly offset by sales growth.
- International: Sales fell 5% to $241, while pretax segment earnings rose 22% to $28. Volume increased 2%; unfavorable currency effects, particularly in Argentina, reduced sales.
Net sales to Walmart and affiliates represented 25% of consolidated sales, versus 26% in the prior-year quarter. Nutranext was acquired for $681 and added $411 of preliminary goodwill; its results are included in Lifestyle. The purchase-price allocation remained subject to finalization, particularly for goodwill and income taxes.
Outlook, risks and notable items
The filing provides no specific numerical earnings or sales guidance. Management said it expects to meet financing requirements through working capital, future operating cash flows, investment-grade credit ratings and access to credit markets. It described liquidity as strong. Forward-looking results remain subject to risks including competition and changing retail channels, commodity and logistics costs, customer concentration, acquisitions and integration, cybersecurity, and international economic and currency conditions.
- Argentina remained exposed to significant currency devaluation, high inflation and recession. It was treated as a highly inflationary economy from July 1, 2018, with the U.S. dollar becoming the functional currency of Clorox Argentina subsidiaries. Further currency volatility could adversely affect sales, earnings and cash flows.
- The Tax Act drove much of the year-over-year tax-rate reduction. The company continued to treat certain tax effects as provisional; prior-year results included $81 of tax benefits recorded in the enactment period.
- Environmental remediation liabilities totaled $28. A California site accounted for $14; regulators could require alternatives with estimated costs up to $28 for that site. The company’s $12 share of a Michigan remediation matter could increase, but additional exposure was not estimable.
- Clorox Venezuela remains in discontinued operations; the company said further exit-related costs were possible but not expected to be significant.
- Revenue-recognition guidance was adopted July 1, 2018. The company expected no material annual impact, but noted interim-period timing effects for certain trade promotions; the opening retained-earnings adjustment was immaterial.
Investor verification points
- Track whether sales growth, pricing and cost savings can offset manufacturing, logistics and commodity inflation, especially given the 150-basis-point gross-margin decline.
- Assess Argentina’s currency and inflation effects and their impact on International sales, earnings and cash flows.
- Monitor Household earnings and Lifestyle profitability, including Nutranext integration, acquisition accounting and expected contribution.
- Review cash generation, share repurchases, dividends and debt levels alongside the company’s stated liquidity and covenant headroom.
- Follow the final Tax Act accounting and developments in environmental remediation estimates and other contingencies.