The Clorox Company — Q2 FY2016 Form 10-Q
Business context and period: The filing covers the quarter and six months ended December 31, 2015, for Clorox’s fiscal year ending June 30, 2016. Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. All amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Quarter ended Dec. 31, 2015 | Prior-year quarter | Six months ended Dec. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,345 | $1,345 | $2,735 | $2,697 |
| Gross profit | $600 | $572 | $1,225 | $1,150 |
| Gross margin | 44.6% | 42.5% | 44.8% | 42.6% |
| Continuing-operations earnings | $151 | $128 | $324 | $273 |
| Net earnings | $149 | $125 | $321 | $215 |
| Diluted EPS from continuing operations | $1.14 | $0.97 | $2.46 | $2.07 |
| Operating cash flow from continuing operations | Not separately provided for quarter | Not separately provided for quarter | $178 | $267 |
Quarterly sales were flat; six-month sales rose 1%. Gross margin expanded 210 basis points for the quarter and 220 basis points for the half year. Management attributed the margin improvement mainly to favorable commodity costs, cost savings and pricing, partly offset by higher manufacturing and logistics costs; foreign exchange also weighed on results. Six-month capital expenditures were $68, compared with $60.
Financial position and liquidity
- At December 31, 2015, cash and cash equivalents were $390, versus $382 at June 30, 2015. Current assets were $1,490 and current liabilities were $1,358.
- Debt totaled $2,296: $500 of notes and loans payable and $1,796 of long-term debt. The company repaid $300 of senior notes due in November 2015, using commercial paper borrowings and cash on hand.
- The $1,100 revolving credit facility, expiring October 2019, had no borrowings. The company reported a 1.83 consolidated leverage ratio against a 3.50 maximum and stated it was in compliance with its covenants. It also had $25 available under foreign and other credit lines.
- Financing activities used $104 of cash in the six-month period. Clorox paid $198 in dividends and repurchased $144 of shares under its Evergreen dilution-offset program. No shares were repurchased under its separate open-market program.
Material changes and segment results
- Continuing-operations diluted EPS increased 18% for the quarter and 19% for the six-month period. Management cited gross-margin expansion; lower interest expense also contributed. Six-month net earnings benefited from substantially smaller discontinued-operation losses than in the prior year.
- Cleaning sales grew 2% for the quarter and 4% for six months; pretax continuing earnings rose 15% and 18%, respectively. Household sales rose 1% and 3%, while pretax earnings rose 31% and 45%. Favorable commodity costs, savings and pricing were important contributors to earnings growth in both segments.
- Lifestyle sales rose 2% for the quarter and 4% for six months. Quarterly pretax earnings slipped 1%, reflecting investment to support new products; six-month pretax earnings increased 2%.
- International sales declined 7% for the quarter and 8% for six months, primarily due to unfavorable foreign exchange. Pretax earnings fell 8% in the quarter but increased 8% for six months, supported by pricing, mix and savings.
- Wal-Mart and its affiliates represented 26% of sales in both the current and prior-year periods.
Outlook, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management said financial results in interim periods are not necessarily indicative of full-year or future results.
- Management expected an additional $10–$20 of after-tax Venezuela exit costs during the remainder of FY2016 and FY2017–FY2019, bringing estimated total five-year costs to $60–$70. Of the total, $0–$5 was expected to be after-tax cash expenditures. The estimates could be affected by exchange rates and other external factors.
- Clorox Venezuela ceased operations in September 2014; the Venezuelan government occupied its facilities and authorized a government-sponsored board to operate them. The company reserved its legal rights. Six-month discontinued-operation losses were $3, versus $58 a year earlier.
- Clorox cited Argentina’s price controls, peso depreciation and inflation as ongoing challenges. The peso declined 30% over the six months ended December 31, 2015; further volatility and currency declines were expected to adversely affect results and the net monetary asset position.
- Environmental remediation liabilities were $13 at December 31, 2015. The company said additional exposure was reasonably possible but not estimable. Management did not expect other disclosed litigation or contingencies to have a material adverse effect; $10 of letters of credit were outstanding, with none drawn.
- Key risks include competition, commodity and logistics costs, foreign exchange and inflation, international political and regulatory conditions, customer concentration, supply disruptions, product innovation, cyber and information-technology risks, litigation and environmental obligations.
Important facts for investors to verify
- Whether the margin gains from commodity costs, pricing and savings can persist as manufacturing, logistics and foreign-exchange pressures change.
- The cash-flow impact of working capital: six-month continuing-operations operating cash flow fell to $178 from $267, with management citing higher working capital and tax payments.
- The trajectory of International and Argentina results, currency exposure, and the status and ultimate cost of the Venezuela exit.
- Debt, commercial-paper usage, covenant headroom and the company’s ongoing dividends and share repurchases.
- The sustainability of segment growth and the impact of reliance on Wal-Mart, which accounted for 26% of sales.