Business context and reporting period
The Clorox Company’s unaudited Form 10-Q covers the three and nine months ended March 31, 2016, the third quarter and first nine months of fiscal 2016 (fiscal year ending June 30, 2016). The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 Q3. Clorox operates in Cleaning, Household, Lifestyle and International; Venezuela is reported as a discontinued operation.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $1.426 billion, up 2% from $1.401 billion | $4.161 billion, up 2% from $4.098 billion |
| Gross profit / margin | $646 million; 45.3%, versus 43.2% | $1.871 billion; 45.0%, versus 42.8% |
| Continuing-operations earnings | $159 million, versus $144 million | $483 million, versus $417 million |
| Diluted EPS from continuing operations | $1.21, up 12% from $1.08 | $3.67, up 17% from $3.14 |
| Net earnings | $162 million, versus $174 million | $483 million, versus $389 million |
| Operating cash flow | Not separately presented for the quarter | $447 million total; $436 million from continuing operations, versus $495 million and $481 million, respectively |
Quarterly net earnings included $3 million from discontinued operations, compared with $30 million in the prior-year quarter. Nine-month net earnings included no discontinued-operation earnings in 2016, versus a $28 million loss in 2015.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $414 million at March 31, 2016, compared with $382 million at June 30, 2015. Current assets were $1.590 billion and current liabilities $1.387 billion.
- Debt comprised $432 million of notes and loans payable and $1.796 billion of long-term debt; total debt was $2.228 billion. The $300 million of 3.55% senior notes due in November 2015 was repaid using commercial paper and cash on hand.
- The $1.1 billion revolving credit facility had no borrowings. The company reported a 1.75 consolidated leverage ratio against a 3.50 maximum and compliance with its covenants. A further $25 million of foreign and other credit lines was available.
- Nine-month capital expenditures were $113 million, versus $83 million. The company repurchased $218 million of shares under its Evergreen Program and paid $298 million in dividends; the declared dividend was $0.77 per share for the quarter.
Material changes and management commentary
- Management attributed sales growth to higher volume and price increases, partly offset by unfavorable foreign exchange; volume rose 4% for the quarter and 3% for the nine-month period.
- Gross-margin expansion reflected favorable commodity costs, cost savings and pricing, partly offset by higher manufacturing and logistics costs and foreign exchange. Advertising expense rose 18% for the quarter, mainly to support innovation; R&D was essentially flat.
- Cleaning sales rose 5% and pretax segment earnings rose to $122 million from $100 million for the quarter. Household sales rose 4% and pretax earnings to $113 million from $102 million. Lifestyle sales rose 5%, while pretax earnings slipped to $70 million from $71 million. International sales fell 9% and pretax earnings fell to $11 million from $17 million, with foreign exchange, inflation and higher advertising among the pressures.
- International results were affected by currency devaluation, including Argentina’s peso decline of 38% over the nine months. Management said further Argentine currency volatility and declines were expected and could adversely affect sales, earnings and net monetary assets.
- Operating cash flow from continuing operations declined year over year, primarily due to higher incentive-compensation and tax payments. Capital spending increased for manufacturing efficiencies.
Outlook, risks and unusual items
- The filing provides no specific quantified sales, earnings or EPS guidance. Management’s forward-looking statements are subject to risks including competition, commodity and logistics costs, foreign exchange and inflation, price controls, customer concentration, supply disruptions, product innovation, acquisitions, debt, cybersecurity, litigation and environmental matters.
- Clorox estimated an additional $11 million to $21 million of after-tax Venezuela exit costs through fiscal 2019, bringing the estimated five-year total to $60 million to $70 million. Of the total, $0 million to $5 million was expected to be cash expenditures. Exchange-rate changes and other factors could materially affect estimates. Venezuelan facilities had been occupied by the government; the company reserved its rights.
- Environmental remediation liabilities were $13 million. Management said additional exposure was reasonably possible but not estimable. The company also disclosed various legal proceedings and $10 million of letters of credit, none drawn; it did not expect these matters to have a material adverse effect.
- On May 2, 2016, after quarter-end, Clorox acquired Renew Life for approximately $290 million, subject to customary adjustments. Renew Life reported about $115 million of 2015 sales; the purchase was expected to be funded with debt and cash on hand.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for fiscal 2016 Q3, not 2015 Q3.
- Assess whether continuing margin and EPS gains can persist as advertising, manufacturing and logistics costs, and foreign-exchange pressures evolve.
- Monitor cash conversion, working-capital needs, debt and commercial-paper use, especially following the Renew Life acquisition.
- Review exposure to Argentina and the remaining Venezuela exit costs, including the uncertainty of currency and cash impacts.
- Track segment trends, particularly International performance and Household cat-litter competition, and the company’s reliance on its largest customer, which represented 27% of quarterly sales.