The Clorox Company — Form 10-Q Summary
Period clarification: The filing is for the quarter and nine months ended March 31, 2020 (Clorox fiscal Q3 2020), not 2019 Q3. Dollar amounts are in millions unless noted.
Business context and period
Clorox sells consumer and professional products across Cleaning, Household, Lifestyle and International segments. The quarter’s results were strongly affected by COVID-19-driven demand, particularly for disinfecting products. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2020 | Year-over-year | Nine months ended Mar. 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Net sales | $1,783 | +15% | $4,738 | +3% |
| Gross profit | $832 | +24% | $2,134 | +7% |
| Gross margin | 46.7% | +330 bps | 45.0% | +150 bps |
| Net earnings | $241 | vs. $187 | $629 | vs. $579 |
| Diluted EPS | $1.89 | +31% | $4.94 | +11% |
For the nine months, cash provided by operations was $806, capital expenditures were $158, cash used for investing was $145, and cash used for financing was $261. Cash and cash equivalents were $496 at March 31, 2020, compared with $111 at June 30, 2019.
At March 31, short-term borrowings were $638 and long-term debt was $2,288. Clorox had $450 drawn on its $1,200 revolving credit facility, primarily to repay maturing commercial paper amid COVID-19-related credit-market uncertainty. It reported a 13.7x interest coverage ratio and compliance with credit covenants; management said it expected continued access to the facility. Current assets were $1,750 and current liabilities were $1,794.
Material changes and segment performance
- Quarterly sales rose 15%; volume increased 18%, while unfavorable foreign exchange and price/mix reduced sales growth. Nine-month sales rose 3%, with volume up 6%.
- Quarterly Cleaning sales increased 32% and segment earnings before tax rose 71%, led by higher demand for disinfecting wipes, sprays and bleach. Nine-month sales increased 10%.
- Household quarterly sales increased 2%, but nine-month sales declined 6%; nine-month segment earnings before tax fell 15%, reflecting lower Glad Bags and Wraps, RenewLife and Grilling shipments.
- Lifestyle quarterly and nine-month sales rose 10% and 6%, respectively. International sales rose 11% for the quarter and 3% for nine months; foreign exchange was a headwind.
- Gross-margin expansion reflected higher volume and cost savings, partly offset by promotions. Selling and administrative expense as a share of sales increased 120 bps in the quarter, mainly from higher incentive compensation.
Outlook, risks and unusual items
Management expected strong demand for disinfecting products to continue through the rest of fiscal 2020, but provided no quantified earnings or sales guidance in the supplied filing text. The duration and effects of the pandemic were described as uncertain. Clorox reported increased manufacturing capacity and no material supply or distribution disruption to date, while noting higher transportation, logistics, production compensation, health-screening and sanitation costs.
Other notable items include $19 of quarterly other expense, versus $2 of other income in the prior-year quarter, primarily associated with revaluation of nonqualified deferred-compensation trust assets. Nine-month net earnings included a lower effective tax rate of 20.4% versus 20.8%. Adoption of lease accounting added $297 of operating lease right-of-use assets and $342 of operating lease liabilities; the company recorded a $22 opening retained-earnings adjustment.
Environmental remediation liabilities totaled $27. The company noted possible additional exposure at a California site and that further exposure for a Michigan matter was not estimable. Argentina faces currency controls, high inflation and economic weakness; management warned these conditions could adversely affect its operations and financial results. Wal-Mart and affiliates accounted for 25% of sales in both comparative periods.
Important facts for investors to verify
- Whether elevated COVID-19 demand persists and how capacity, supply availability and added operating costs affect margins.
- Whether Household segment declines and competitive or distribution pressures continue.
- Cash conversion and working-capital trends, and the use of revolving credit and commercial paper as markets evolve.
- Developments in Argentina, including currency controls and inflation, and any changes in environmental remediation estimates.
- Quarterly segment results, customer concentration and the company’s subsequent guidance and disclosures.