The Clorox Company — Form 10-Q Summary
Business context and reporting period: Clorox reported its first fiscal quarter of fiscal 2016, the three months ended September 30, 2015, compared with the same quarter of 2014. The company sells consumer and professional products across Cleaning, Household, Lifestyle and International segments. Venezuela results are presented as discontinued operations.
Key financial results
| Metric | Quarter ended Sep. 30, 2015 | Quarter ended Sep. 30, 2014 | Change |
|---|---|---|---|
| Net sales | $1,390 million | $1,352 million | +3% |
| Gross profit | $625 million | $578 million | +8% |
| Gross margin | 45.0% | 42.8% | +220 basis points |
| Earnings from continuing operations | $173 million | $145 million | +19% |
| Diluted EPS from continuing operations | $1.32 | $1.10 | +20% |
| Net earnings | $172 million | $90 million | Includes discontinued-operation losses of $1 million versus $55 million |
| Cash from continuing operations | $135 million | $234 million | Down $99 million |
| Cash from operations | $147 million | $243 million | Down $96 million |
Sales and volume each rose 3%. Management attributed earnings growth to volume, cost savings, price increases and favorable commodity costs, partly offset by higher demand-building investments. Higher manufacturing and logistics costs also partly offset gross-margin improvement. Selling and administrative expense and advertising were roughly flat as a percentage of sales.
Segments
- Cleaning: Sales $497 million, up 6%; pretax earnings from continuing operations $149 million, up 20%.
- Household: Sales $411 million, up 5%; pretax earnings $82 million, up 58%.
- Lifestyle: Sales $231 million, up 7%; pretax earnings $59 million, up 5%.
- International: Sales $251 million, down 8%; pretax earnings $32 million, up 23%. Flat volume was more than offset in reported sales by unfavorable foreign exchange.
Financial position and liquidity
- At September 30, 2015, cash and cash equivalents were $383 million; total assets were $4,095 million.
- Notes and loans payable were $131 million, current maturities of long-term debt were $300 million, and long-term debt was $1,796 million. Total debt was $2,227 million.
- Net cash provided by continuing operations fell to $135 million from $234 million, reflecting unfavorable working-capital changes, including incentive-compensation payments, collection timing and higher tax payments, as well as a $15 million pension contribution.
- Capital expenditures were $28 million. Cash dividends paid were $99 million, or $0.77 per share, compared with $95 million, or $0.74 per share.
- Clorox repurchased approximately 1.0 million shares for $112 million under its Evergreen dilution-offset program. Its separate $750 million open-market repurchase authorization remained fully available.
- The company had a $1.1 billion revolving credit agreement with no borrowings outstanding. Its covenant leverage ratio was 1.81 against a maximum of 3.50; management reported covenant compliance and expected continued compliance for the foreseeable future.
Material changes, outlook and risks
- Compared with the prior quarter, reported net earnings benefited from the absence of the prior-year $55 million after-tax Venezuela discontinued-operation loss, which included $73 million of exit costs before tax. Current-quarter continuing-operations results also included no prior-year one-time $11 million benefit from changes to the long-term disability plan.
- Clorox estimated an additional $11 million to $21 million of after-tax Venezuela exit costs during fiscal 2016–2019, bringing estimated total five-year costs to $60 million–$70 million. Of the total, estimated after-tax cash expenditures were $0–$5 million. Management cautioned that exchange rates and other external factors could materially affect these estimates.
- No specific earnings or sales guidance is provided in the filing. Management said quarterly results are not necessarily indicative of full-year results.
- Key stated risks include intense competition; commodity, energy, transportation and manufacturing-cost volatility; foreign-exchange and inflation exposure; international political and regulatory risks, including government action and price controls; reliance on key customers and suppliers; product, legal and environmental liabilities; and risks related to debt, taxes, cybersecurity and execution of cost savings and innovation.
- Environmental remediation liabilities were $12 million; additional exposure is reasonably possible but not estimable. A Brazilian litigation judgment was set aside by Brazil’s highest court in August 2015 and will be reheard; Clorox said it did not currently expect a material effect from the case.
- Foreign-currency translation contributed to a $39 million net-of-tax other comprehensive loss, leaving comprehensive income at $133 million versus $91 million a year earlier.
Most important facts for investors to verify
- Whether sales growth, volume gains and the 220-basis-point gross-margin expansion persist, especially as demand-building, manufacturing and logistics costs evolve.
- Whether cash generation recovers from the decline in operating cash flow and how working capital, pension contributions, dividends and repurchases affect liquidity.
- The realized impact of foreign exchange, inflation and pricing on International results and the company’s broader earnings.
- Actual timing and amount of Venezuela exit costs and cash expenditures relative to management’s estimates.
- Debt levels, covenant headroom and the company’s continued compliance with its credit agreement.