The Clorox Company — Form 10-Q Summary
Business context and period: First quarter of fiscal 2018, three months ended September 30, 2017, compared with the three months ended September 30, 2016. Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. Unless noted, amounts are in millions of dollars.
Financial performance
- Sales: $1,500, up 4% from $1,443. Volume rose 4%; management cited higher shipments and price increases, partly offset by unfavorable mix.
- Profit and margins: Gross profit was $673, up 5%; gross margin improved 50 basis points to 44.9%. Continuing-operations earnings and net earnings were $192, versus $179. Diluted EPS was $1.46, up 7% from $1.36.
- Costs and taxes: Selling and administrative expense was $204; advertising was $134; R&D was $32. The effective tax rate declined to 31.3% from 32.0%, primarily due to higher excess tax benefits from stock-based compensation.
- Cash flow: Cash from continuing operations was $257, compared with $170; total operating cash flow was $258. Capital expenditures were $49. Cash used for investing was $36 and cash used for financing was $176. Cash and cash equivalents ended the quarter at $468, up from $418 at June 30, 2017.
- Debt and liquidity: The balance sheet reported $13 of notes and loans payable, $400 of current maturities of long-term debt and $1,787 of long-term debt. Clorox issued $400 of 3.10% senior notes due 2027 in September, using proceeds to repay commercial paper. In October, it used commercial paper to repay $400 of 5.95% notes. The $1.1 billion revolving credit facility had no borrowings; the company reported a 15.1 interest coverage ratio against a 4.0 minimum covenant and compliance with its covenants.
- Shareholder returns: Dividends declared were $0.84 per share, versus $0.80; dividends paid totaled $108. Evergreen-program repurchases were $60, compared with $113. The separate $750 million open-market repurchase authorization remained unused and available.
Changes versus prior period
- Gross margin expanded on cost savings and pricing, partly offset by unfavorable commodity costs and higher manufacturing and logistics costs.
- Cleaning sales and pretax segment earnings each increased 5%; Household sales rose 5% and earnings 6%; Lifestyle sales rose 4% and earnings 3%.
- International sales increased 1%, but segment pretax earnings fell 15% to $23, reflecting inflationary manufacturing, logistics and administrative costs and unfavorable commodities.
- Operating cash flow increased primarily due to lower employee incentive compensation payments and higher earnings. The decrease in financing cash use versus operating cash flow context reflected debt movements; financing cash used was higher than the prior-year $104, primarily because of lower short-term debt, partly offset by note proceeds and reduced treasury-stock purchases.
Outlook, risks and notable items
- The filing provides no specific quarterly or full-year sales, earnings or EPS guidance. Management said it expects to meet financing requirements through working capital, anticipated operating cash flow, investment-grade credit ratings and credit-market access.
- Management identified competitive pressure; commodity, energy, transport and other cost volatility; ability to grow sales, pricing and market share; customer concentration; innovation and cost-savings execution; cybersecurity; international political, currency and inflation risks; indebtedness; and environmental and legal matters as risks. Wal-Mart and affiliates accounted for 26% of sales in both periods.
- Argentina remained exposed to high inflation and currency devaluation; the peso declined 6% against the U.S. dollar during the quarter. Further volatility and depreciation could adversely affect sales and earnings.
- Environmental remediation liabilities totaled $28. The Alameda County matter includes $14 recorded, while regulators could require alternatives estimated to cost up to $28 over 30 years. Clorox also recorded $12 for a Michigan remediation matter; additional exposure is reasonably possible but not estimable.
- Venezuela remained in discontinued operations, with no sales in either quarter and insignificant losses. Clorox said future exit-related costs may occur but are not expected to be significant.
- The company sold the Aplicare business in August 2017. Its FY2017 sales were $46; prior-year comparative segment results were not restated in the filing.
Important facts for investors to verify
- Whether sales growth, pricing and cost savings can offset unfavorable mix, commodities and manufacturing and logistics inflation.
- Whether International earnings stabilize, particularly amid Argentina’s inflation and currency pressures.
- Debt refinancing and liquidity after the October repayment of the 5.95% notes, including ongoing covenant compliance.
- Potential changes to environmental remediation estimates and any further costs related to Venezuela.
- Customer concentration and the effect of evolving retail channels and customer ordering patterns.