Clorox Company — Q1 FY2024 Form 10-Q
Reporting period: Three months ended September 30, 2023, compared with the three months ended September 30, 2022, unless otherwise noted. Clorox sells consumer and professional products across four reportable segments: Health and Wellness, Household, Lifestyle and International.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $1.386 billion | $1.740 billion |
| Gross profit / gross margin | $532 million / 38.4% | $626 million / 36.0% |
| Earnings before income taxes | $29 million | $116 million |
| Net earnings attributable to Clorox | $22 million | $85 million |
| Diluted EPS | $0.17 | $0.68 |
| Adjusted EBIT (non-GAAP) | $91 million | $175 million |
| Net cash provided by operations | $20 million | $178 million |
- Reported sales fell 20%; volume declined 26%, partly offset by an 8% favorable price/mix impact. Organic sales decreased 18%.
- Gross margin improved 240 basis points, primarily from pricing and cost savings, partly offset by lower volume. Adjusted EBIT and diluted EPS declined 48% and 75%, respectively.
- Segment sales were down 23% in Health and Wellness, 23% in Household, 28% in Lifestyle, and 5% in International. Segment adjusted EBIT declined in the first three segments; International EBIT rose 48% to $34 million, mainly reflecting pricing.
Financial position and liquidity
- At September 30, 2023, cash and equivalents were $518 million, versus $367 million at June 30, 2023. Current assets were $1.911 billion and current liabilities $2.228 billion.
- Short-term notes and loans payable were $347 million, up from $50 million at fiscal year-end; long-term debt was $2.478 billion. Total reported borrowings were $2.825 billion.
- Operating cash flow was $20 million; investing cash outflow was $23 million; financing cash inflow was $155 million, including $298 million of net short-term borrowings. Clorox paid $149 million in dividends.
- The company reported no borrowings under its $1.2 billion revolving credit agreement and said it was compliant with its covenants. Management believes available funding and anticipated operating cash flows will support liquidity needs.
- Total stockholders’ equity was $131 million, down from $388 million; Clorox stockholders’ equity was a $37 million deficit.
Material changes, outlook and risks
- Cyberattack: Unauthorized activity identified in August disrupted operations through the quarter, delaying orders and causing product outages. Clorox attributed much of the sales and earnings decline to the disruption. It incurred $24 million of incremental costs, recognized no insurance recoveries, and expects additional costs. Automated ordering had largely resumed; operational impacts were expected to continue, but lessen, in Q2. The attack is expected to negatively affect FY2024 results, although some missed sales may be recovered as customers rebuild inventories.
- Costs and initiatives: Management described the operating environment as volatile and challenging, citing inflation, commodity and logistics costs, macroeconomic uncertainty, and geopolitical risks. A streamlined operating model is expected to deliver annual savings of $75–$100 million once implemented; Clorox expects $45–$50 million of benefits in FY2024 and $30–$40 million of implementation costs. It also incurred $27 million in Q1 expenses for its digital capabilities and productivity investment.
- Other unusual items: Selling and administrative expense rose 6%, with management citing an arbitral decision relating to a commercial dispute, cyberattack costs and digital investment costs, partly offset by savings. The filing text does not provide a clear value for the arbitral decision’s impact.
- Pension: Clorox expected a one-time, non-cash settlement charge of approximately $165 million before tax in Q2 FY2024 as it settled its fully funded domestic pension plan. The annuity purchase was completed October 10, 2023, and lump-sum payments were made October 31.
- Other exposure: Environmental remediation liabilities totaled $28 million. Additional costs at the California site could reach approximately $28 million in aggregate over an estimated 30 years; possible additional exposure for the Michigan matter was not estimable. Management said other legal matters were not expected to materially affect the consolidated financial statements.
- The filing provides no quantified FY2024 sales or EPS guidance in the text presented. It does state that inflationary pressures and consumer and operating uncertainties are expected to persist.
Key facts for investors to verify
- How quickly operations, order fulfillment and customer inventories normalize after the cyberattack, and the total disruption, remediation and insurance-recovery impact.
- Whether price increases and cost savings can offset persistent inflation and restore margins as sales volumes recover.
- The timing and realized benefits of the streamlined operating model and digital investment, including related costs.
- The final pension settlement charge and its effect on reported Q2 earnings.
- Short-term borrowing needs, cash generation and dividend funding, given lower operating cash flow and the decline in equity.