Clorox Company — Form 10-Q Summary
Business context and reporting period
Clorox manufactures and markets consumer and professional products across Cleaning, Household, Lifestyle and International segments. This unaudited report covers the quarter and six months ended December 31, 2019, the second quarter of fiscal 2020; comparisons are with the periods ended December 31, 2018. Amounts are in millions of dollars except per-share data.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,449, down 2% | $2,955, down 3% |
| Gross profit / margin | $639; 44.1%, up 40 bps | $1,302; 44.1%, up 60 bps |
| Net earnings | $185, versus $182 | $388, versus $392 |
| Diluted EPS | $1.46, up 4% | $3.05, up 1% |
| Operating cash flow | $498, versus $449 in the prior-year six months |
Gross-margin gains reflected cost savings and price increases, partly offset by higher trade promotion, manufacturing and logistics costs. Six-month investing cash outflow was $98, including $111 of capital expenditures, versus $77 of investing outflow and $86 of capital expenditures a year earlier. Financing cash outflow was $338 in both six-month periods; current-period dividends paid were $266 and treasury-stock purchases were $195.
At December 31, cash and cash equivalents were $168, current assets $1,303 and current liabilities $1,513. Notes and loans payable were $507 and long-term debt was $2,288. The cash flow statement reports ending cash, cash equivalents and restricted cash of $174. Operating lease liabilities totaled $343, recognized following adoption of the lease accounting standard.
Material changes and segment results
- Household was the main source of weakness: quarterly sales fell 8% and six-month sales fell 11%; segment earnings before tax declined 20% and 41%, respectively. Clorox cited Glad distribution losses and competition, continued RenewLife category and competitive pressure, lower Grilling shipments while working through prior-year retail inventory, and higher trade spending and operating costs.
- Lifestyle sales rose 4% in both periods; segment earnings before tax increased 9% for the quarter and 11% for six months, supported by Burt’s Bees, Hidden Valley and Brita products.
- Cleaning quarterly sales were flat and earnings before tax rose 9%; six-month sales declined 1% while earnings rose 3%. International quarterly sales fell 2% while earnings rose 24%; six-month sales fell 1% while earnings rose 32%, helped by pricing and cost savings.
- Overall volume was flat. Price increases were partly offset by trade promotion, unfavorable foreign exchange and, in the six-month period, unfavorable mix. Segment and consolidated sales changes include these effects.
Outlook, risks and unusual items
The filing provides no specific financial guidance or quantified forecast. Management said liquidity remained strong and expects operating cash generation, access to credit markets and available borrowing capacity to support obligations. A new $1.2 billion revolving credit agreement matures in November 2024; there were no borrowings under it at quarter-end. Clorox reported covenant compliance and an interest coverage ratio of 13.1 against a minimum requirement of 4.0.
Management highlighted intense competition, changing retail channels and consumer preferences, commodity and logistics cost volatility, reliance on major customers, international currency and inflation risks, supply disruption, cybersecurity, legal and regulatory matters, and environmental remediation. Walmart and affiliates accounted for 25% of quarterly and 26% of six-month sales.
Argentina remains exposed to high inflation, recession, peso volatility and foreign-exchange controls that restrict currency conversion and transfers. Management warned these conditions, potential price controls and other restrictions could adversely affect the subsidiary’s liquidity, sales, earnings and cash flows; mitigation efforts cannot be assured.
Environmental remediation liabilities were $27. The Alameda County matter accounts for $14; regulators could require an alternative plan with estimated costs up to $28, or other unestimated actions. The Dickinson County matter accounts for $11, and possible additional exposure is not estimable. Management said other legal matters were not expected to materially adversely affect the financial statements. Lease-standard adoption resulted in a $22 opening retained-earnings adjustment and recognition of lease assets and liabilities; management reported no material effect on earnings or cash flows.
Key facts for investors to verify
- Whether Household’s distribution, competitive and category pressures improve, and whether Grilling inventory normalization is complete.
- Whether gross-margin gains from pricing and cost savings can continue amid trade promotion and manufacturing and logistics costs.
- Developments in Argentina’s currency controls, inflation and price regulation, and their effect on cash mobility and results.
- Environmental remediation developments, particularly potential additional requirements at Alameda County and unestimable Dickinson County exposure.
- Sales concentration with Walmart and affiliates, debt and liquidity levels, and continued compliance with credit covenants.