Business context and reporting period
The Clorox Company’s unaudited Form 10-Q covers the three and nine months ended March 31, 2017, compared with the same periods in 2016. The filing is for fiscal 2017 third quarter; this differs from the request metadata, which says “2016 Q3.” Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. Venezuela operations are reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Quarter ended March 31, 2017 | Prior-year quarter | Nine months ended March 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,477 | $1,426 | $4,326 | $4,161 |
| Gross profit / gross margin | $650 / 44.0% | $646 / 45.3% | $1,919 / 44.4% | $1,871 / 45.0% |
| Continuing-operations earnings | $172 | $159 | $501 | $483 |
| Net earnings | $172 | $162 | $500 | $483 |
| Diluted continuing-operations EPS | $1.31 | $1.21 | $3.82 | $3.67 |
- Quarter sales rose 4%; volume increased 7%, with volume growth exceeding sales growth because of unfavorable mix and higher trade promotions, partly offset by pricing. Nine-month sales also rose 4%, with volume up 7%.
- Gross margin declined 130 basis points in the quarter and 60 basis points year to date. Management cited manufacturing and logistics costs and unfavorable mix; quarterly pressures also included commodities and trade promotions. Cost savings and pricing partly offset these effects.
- Quarter diluted EPS increased 8%, principally on sales growth, a lower effective tax rate and a gain on an international facility sale, partly offset by higher demand-building investment and lower gross margin. Nine-month diluted EPS rose 4%; management cited sales growth and lower taxes, partly offset by costs, investment and the Aplicare impairment.
- Effective tax rates were 30.2% for the quarter and 32.1% year to date, versus 33.0% and 34.0%, respectively, a decrease primarily related to excess tax benefits from share-based compensation.
Segments
- Cleaning: quarter sales +7% and pretax earnings +8%; nine-month sales +6% and earnings +2%. Growth reflected shipments and cost savings, partly offset year to date by the Aplicare impairment and higher costs.
- Household: quarter sales +4%, but pretax earnings −6%; nine-month sales +6% and earnings −6%. RenewLife acquisition and cat litter shipments supported sales; higher costs and demand-building investment pressured earnings.
- Lifestyle: quarter sales −3% and pretax earnings −27%; nine-month sales +1% and earnings −5%. Quarterly results were affected by lower shipments and higher promotional and innovation investment.
- International: quarter sales +3% and pretax earnings +82%; nine-month sales were flat and earnings +15%. Quarterly earnings benefited from the facility-sale gain, pricing and savings; currency, inflation and costs were offsets.
Cash flow, liquidity and debt
- Nine-month cash provided by continuing operations was $483, versus $436 a year earlier; total operating cash flow was $482, versus $447. Capital expenditures were $161, up from $113. Investing cash outflow was $136; financing cash outflow was $314.
- Cash and equivalents were $431 at March 31, 2017, versus $401 at June 30, 2016. Notes and loans payable were $650; current maturities of long-term debt were $400; long-term debt was $1,390. Total debt on those balance-sheet lines was $2,440.
- Clorox entered a new $1.1 billion revolving credit agreement maturing February 2022; it had no borrowings under that agreement at quarter-end. It reported a 14.5 interest-coverage ratio against a 4.0 covenant minimum and compliance with covenants.
- Nine-month dividends paid were $309; declared dividends were $2.40 per share. Treasury-stock purchases were $183 year to date; none occurred in the quarter. The $750 million open-market repurchase authorization remained entirely available.
Management commentary, outlook and risks
- The filing gives no specific quantified full-year sales, earnings or margin guidance. Management described liquidity as strong and anticipated covenant compliance for the foreseeable future.
- In the second quarter, Clorox recorded a $21 non-cash impairment charge for Aplicare assets after an FDA warning letter concerning sterilization-process validation, quality controls and environmental monitoring. The business is less than 1% of sales; additional charges may occur while Clorox addresses the warning and considers strategic alternatives.
- Environmental remediation liabilities were $22 at March 31, 2017, versus $14 at June 30, 2016. For an Alameda County site, regulators could require an option with estimated undiscounted costs up to $28; additional exposure at a separate Michigan site is not estimable. Management said other legal matters were not expected to have a material adverse effect overall.
- Clorox said it may incur an additional $0–$10 in after-tax Venezuela exit costs through fiscal 2019. Risks highlighted include competition, commodity and logistics costs, customer concentration, cybersecurity, regulation and product liability, international currency and political risks (including Argentina), acquisitions, environmental matters and debt.
- Management attributed the quarter’s $16 of other income, net, in part to a $10 gain on sale of an international facility. Year-to-date results also included the $21 Aplicare impairment and $9 of Alameda County environmental costs. The filing noted no material change in market risk since June 30, 2016.
Important facts for investors to verify
- Confirm the intended period: this filing reports fiscal 2017 Q3, not fiscal 2016 Q3.
- Assess whether volume growth can translate into sales and margin growth given mix, promotions, manufacturing and logistics costs, and commodity pressures.
- Review the extent of future costs or strategic changes at Aplicare and the potential range and timing of environmental remediation obligations.
- Monitor debt maturities, borrowing needs, covenant headroom and the company’s use of cash for dividends, capital expenditures and repurchases.
- Evaluate currency, inflation and political exposure in international markets, especially Argentina, and the continuing Venezuela exit costs.