The Clorox Company — Q2 FY2021 Form 10-Q
Business context and reporting period. Clorox manufactures and markets consumer and professional products through Health and Wellness, Household, Lifestyle and International segments. This filing covers the quarter and six months ended December 31, 2020; comparisons are with the corresponding 2019 periods unless noted. Management attributed higher demand, particularly for cleaning and disinfecting products, to COVID-19 and related changes in consumer behavior.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 |
|---|---|---|
| Net sales | $1.842 billion; +27% | $3.758 billion; +27% |
| Gross profit / margin | $837 million / 45.4%, versus 44.1% | $1.757 billion / 46.8%, versus 44.1% |
| Net earnings attributable to Clorox | $259 million, versus $185 million | $674 million, versus $388 million |
| Diluted EPS | $2.03, versus $1.46; +39% | $5.25, versus $3.05; +72% |
| Operating cash flow | Not separately provided for the quarter | $629 million, versus $498 million |
For the quarter, sales growth was 26% on an organic basis and volume rose 24%. For the six-month period, organic sales growth was 27%, with volume up 24%. Gross-margin gains reflected higher volume, cost savings and favorable mix or lower trade promotion spending; higher manufacturing and logistics costs partly offset those benefits. Advertising expense increased 34% in the quarter and 32% for six months.
Segment sales increased in each segment in the quarter: Health and Wellness 42%, Household 20%, Lifestyle 9% and International 23%. Lifestyle earnings before tax declined 2%, and International earnings before tax declined 3%; other segments reported higher earnings. Wal-Mart Stores and affiliates represented 23% of quarterly sales and 24% of six-month sales.
Financial position and liquidity
At December 31, 2020, cash and cash equivalents were $732 million, total current assets $2.103 billion and current liabilities $1.738 billion. Debt was $2.783 billion, including $300 million current maturities and $2.483 billion long-term debt. The company had a $1.2 billion revolving credit facility with no borrowings; it reported covenant compliance and a 17.9x interest coverage ratio. Management said it expected operating cash generation, capital-market access and credit availability to support liquidity needs.
Six-month investing cash use was $258 million, including $151 million of capital expenditures and $85 million for businesses acquired, net of cash acquired. Financing cash use was $524 million, including $300 million of share repurchases and $280 million of dividends paid to Clorox stockholders. Cash and cash equivalents declined from $871 million at June 30, 2020.
Material changes, unusual items and outlook
- Clorox increased its ownership of its Saudi joint venture to 51% in July 2020 and began consolidating it. The acquisition contributed $46 million of six-month sales. A one-time, non-cash $85 million remeasurement gain on the previously held interest was recognized in the first quarter and substantially increased six-month other income and earnings; it was not a Q2 gain.
- COVID-19 continued to drive elevated demand, while the company cited uncertainty about the pandemic’s duration, future demand, manufacturing and distribution capacity, and potential government actions. Management provided no specific earnings or sales guidance in the supplied filing text.
- Environmental remediation liabilities totaled $28 million. The company noted that regulators could require more costly remediation at one site; at another, additional exposure was reasonably possible but not estimable. Management said other disclosed legal matters were not expected to have a material adverse effect.
- Other risks include supply constraints and product shortages, higher commodity, manufacturing and logistics costs, customer concentration, foreign-exchange and Argentina-related risks, competition, cyber and operational disruptions, and acquisition and integration risks.
Important facts for investors to verify
- Whether unusually strong COVID-related demand and elevated sales volumes persist or normalize, and what that implies for future margins.
- The contribution of the Saudi joint venture and the nonrecurring $85 million gain to reported six-month earnings and EPS.
- Whether higher manufacturing and logistics costs, advertising investment and supply constraints affect profitability or product availability.
- Debt maturities, cash generation, dividend and repurchase commitments, and continued compliance with credit-facility covenants.
- Potential changes in environmental remediation obligations and the company’s exposure to major customers, including Walmart.