Clorox Company — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2018 (fiscal 2018 third quarter), not 2017 Q3 as indicated in the request metadata. Amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended Mar. 31, 2018 | Prior-year quarter | Nine months ended Mar. 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,517 | $1,477 | $4,433 | $4,326 |
| Gross profit | $649 | $650 | $1,931 | $1,919 |
| Gross margin | 42.8% | 44.0% | 43.6% | 44.4% |
| Net earnings | $181 | $172 | $606 | $500 |
| Diluted EPS, continuing operations | $1.37 | $1.31 | $4.60 | $3.82 |
| Net cash from continuing operations | Not stated for the quarter | $574 | $483 |
- Quarterly sales rose 3%, with volume up 3%; price increases were partly offset by unfavorable mix. Nine-month sales increased 2%, while volume rose 3%.
- Quarterly gross margin declined 120 basis points; the nine-month margin fell 80 basis points. Management cited higher manufacturing and logistics costs and unfavorable commodity costs, partly offset by cost savings and pricing.
- Nine-month diluted EPS increased 20%, primarily reflecting a lower effective tax rate and higher sales, partly offset by lower gross margin. The nine-month tax rate was 19.0% versus 32.1%; it included an $81 provisional Tax Act benefit recorded in the second quarter.
- Cash and cash equivalents were $1,174 at March 31, 2018, versus $418 at June 30, 2017. Current assets were $2,373 and current liabilities $2,013. Notes and loans payable were $1,066, and long-term debt was $1,789.
- Nine-month capital expenditures were $126, down from $161. Cash dividends paid were $326, compared with $309; declared dividends per share were $2.64 versus $2.40.
Segments and changes versus prior year
- Cleaning: Quarterly sales rose 3% to $513 and pretax segment earnings increased 2% to $135. Growth reflected Home Care shipments, including disinfecting wipes and Scentiva; higher costs partly offset gains.
- Household: Quarterly sales rose 1% to $493, but pretax segment earnings fell 17% to $88. Higher manufacturing, logistics and commodity costs weighed on results; poor weather hurt charcoal shipments.
- Lifestyle: Quarterly sales increased 2% to $252 and pretax segment earnings rose 8% to $55. Nine-month pretax earnings were down 1% to $188.
- International: Quarterly sales increased 4% to $259 and pretax segment earnings rose 15% to $23. Nine-month pretax segment earnings fell 8% to $69, with inflationary costs and unfavorable commodities among the pressures.
- Wal-Mart and affiliates represented 25% of quarterly sales and 26% of nine-month sales, versus 27% and 26%, respectively, in the comparable periods.
Liquidity, outlook, risks and unusual items
- Operating cash flow increased to $574 for the nine months, mainly due to lower tax and employee incentive compensation payments, partly offset by working-capital changes. Financing activities provided $292, compared with $314 used in the prior-year period; increased short-term borrowing was a primary factor.
- Clorox had $1,350 of revolving credit capacity, with no borrowings under those facilities at March 31. It reported covenant compliance and a 15.5 interest coverage ratio against a minimum covenant of 4.0. Management said liquidity was strong and expected to repay increased borrowings using long-term debt and cash repatriated from foreign subsidiaries.
- On April 2, 2018, after quarter-end, Clorox acquired Nutranext for $700, funded with commercial paper. Nutranext generated approximately $200 in calendar-year 2017 sales. Purchase accounting was to be reflected in the fourth fiscal quarter.
- The Tax Act drove the lower reported tax rate; its accounting remained provisional. The company said the transition tax was expected to be offset by existing foreign tax credit carryforwards.
- The estimated fair value of P&G’s 20% Glad venture interest was $630, versus $458 at June 30, 2017; $334 was recognized in other liabilities. The agreement was extended through January 2026. Changes in estimates can affect future cost of products sold and the eventual cash obligation.
- Recorded environmental remediation liabilities totaled $28. The company noted that regulatory requirements could increase costs at the Alameda County site; additional exposure at the Dickinson County site was not estimable. Management did not expect other disclosed proceedings to have a material adverse effect.
- Management provided no specific financial guidance in the supplied filing text. Risks highlighted include commodity and logistics inflation, competition, customer concentration, foreign-exchange and inflation pressures in Argentina, acquisition integration, tax uncertainty, environmental matters, and cyber and supply disruptions.
Investor verification points
- Confirm the period: the filing is for fiscal 2018 Q3, ended March 31, 2018.
- Assess whether pricing, cost savings and volume can offset continued manufacturing, logistics and commodity pressure on margins.
- Separate underlying earnings trends from the $81 provisional Tax Act benefit when evaluating nine-month EPS growth.
- Track commercial-paper borrowings and funding plans following the $700 Nutranext acquisition.
- Monitor the Glad venture valuation and related recognized liability, as well as environmental remediation estimates and Argentina currency exposure.
- Evaluate customer concentration, particularly Wal-Mart’s share of sales.