Clorox Company — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2017 (fiscal Q2 and first half of FY2018). Dollar amounts are in millions except per-share data. Comparisons are with the corresponding prior-year periods unless noted.
Business context and results
Clorox manufactures and markets consumer and professional products through four reportable segments: Cleaning, Household, Lifestyle and International. It reported continuing operations; its Venezuela business remains classified as discontinued operations.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,416, up 1% | $2,916, up 2% |
| Gross profit / gross margin | $609 / 43.0%, down from 44.7% | $1,282 / 44.0%, down from 44.5% |
| Earnings before tax | $227, flat | $506, up from $491 |
| Net earnings | $233, versus $149 | $425, versus $328 |
| Diluted EPS from continuing operations | $1.77, versus $1.14 | $3.23, versus $2.51 |
| Operating cash flow | Not separately presented | $322, versus $271 |
Sales growth reflected higher volume and pricing, partly offset by unfavorable mix. Gross margin pressure came mainly from higher manufacturing, logistics and commodity costs, partly offset by cost savings. Advertising expense rose 9% in the quarter and 7% for the half, primarily to support innovation.
Net earnings and EPS benefited substantially from the Tax Act, rather than solely from operating improvement. The effective tax rate was (3.1)% for the quarter and 15.9% for the half, versus 34.1% and 33.0%. The company recorded an $81 provisional Tax Act benefit, comprising a $60 deferred-tax benefit and $28 current-tax benefit, partly offset by $7 of transition-tax expense. Excluding this unusual tax effect, the filing does not provide a single adjusted earnings figure.
Segments and notable changes
- Cleaning: Sales rose 1% for the quarter and 3% for the half; pretax segment earnings rose 16% and 9%. Growth included disinfecting wipes and Scentiva; comparisons also benefited from the prior-year $21 Aplicare impairment charge. Aplicare was sold in August 2017.
- Household: Quarterly sales fell 3% and pretax earnings fell 24%; for the half, sales rose 1% while earnings fell 9%. Quarterly results reflected lower Glad pricing, unfavorable mix and higher costs.
- Lifestyle: Sales increased 3% for the quarter and 4% for the half, while pretax earnings declined 10% and 4%, respectively, as higher manufacturing, logistics and advertising costs offset growth.
- International: Sales increased 4% for the quarter and 3% for the half; pretax earnings declined 18% and 16%. Inflationary costs and, for the half, unfavorable commodity costs weighed on results.
- Wal-Mart and affiliates represented 26% of consolidated sales in both periods. Venezuela had no sales and insignificant discontinued-operation losses in the periods presented.
Cash flow, balance sheet and liquidity
Six-month operating cash flow was $322; capital expenditures were $89, versus $117 a year earlier. Investing used $74, while financing used $177, including $217 of dividends paid, $70 of treasury-share purchases and debt activity. Cash increased $71 to $489 from June 30, 2017.
At December 31, 2017, current assets were $1,680 and current liabilities $1,380. Notes and loans payable were $495 and long-term debt was $1,788, for total reported debt of $2,283; at June 30, 2017, those balances totaled $2,195, including $400 of current maturities. Clorox issued $400 of 3.10% senior notes due 2027 and repaid $400 of 5.95% notes due in October, using commercial paper for the repayment. The $1.1 billion revolving credit facility had no borrowings; the company reported a 15.2 interest-coverage ratio and compliance with covenants.
Management stated liquidity was strong and expected to meet financing requirements through operating cash flow and access to credit. Dividends declared were $0.84 per share for the quarter and $1.68 for the half. The $750 million open-market repurchase authorization remained unused; Evergreen repurchases were $63 for the half.
Outlook, risks and contingencies
The filing gives no specific sales, earnings or EPS guidance. Management expected the Tax Act to reduce future effective tax rates and eventually benefit cash flow, but its accounting impacts remained provisional and under review. Clorox expected existing foreign tax-credit carryforwards to fully offset its one-time transition-tax liability.
- Key operating risks include competition, commodity, manufacturing and logistics cost inflation, customer concentration, product innovation and execution, and international currency and economic conditions. Argentina faced high inflation and currency depreciation; the peso declined 14% against the U.S. dollar during the six months.
- The Glad venture agreement with P&G was extended to January 2026. Clorox must purchase P&G’s 20% interest for cash upon termination. Its estimated fair value was $630, of which $327 was recognized as a liability; valuation changes can affect cost of products sold and the eventual cash requirement.
- Environmental remediation liabilities totaled $28. The Alameda County matter included a $14 recorded liability, but regulators could require measures estimated to cost up to $28; additional exposure for a Michigan matter was not estimable.
- Other risks include uncertainty in the final Tax Act impact, potential changes in the Glad obligation, legal proceedings, cyber and supply risks, and the ongoing Venezuela exit. Management did not expect currently known legal matters, in aggregate, to materially adversely affect the financial statements.
Important facts for investors to verify
- How much of earnings and EPS improvement reflects the provisional $81 Tax Act benefit, and how will subsequent tax guidance change the estimates?
- Whether cost inflation and unfavorable mix continue to pressure gross margin and segment earnings.
- Assumptions underlying the $630 estimated fair value of P&G’s Glad interest, the recognized $327 liability and potential future cash obligation.
- Developments in environmental remediation requirements, especially the Alameda County and Michigan matters.
- Whether international inflation and currency declines, particularly in Argentina, further affect sales, earnings and cash flows.