The Clorox Company — Form 10-Q summary
Period: The supplied filing is for the quarter ended March 31, 2014, and covers the third quarter of fiscal 2014—not 2013 Q3 as stated in the request metadata. Dollar amounts are in millions except per-share data.
Business context and results
Clorox sells consumer and professional products in the United States and internationally through four segments: Cleaning, Household, Lifestyle and International. The filing reports unaudited results for the three and nine months ended March 31, 2014, compared with the corresponding 2013 periods.
| Metric | Quarter 2014 | Quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,386 | $1,413 | $4,080 | $4,076 |
| Gross profit | $579 | $595 | $1,721 | $1,732 |
| Gross margin | 41.8% | 42.1% | 42.2% | 42.5% |
| Earnings from continuing operations | $139 | $134 | $392 | $390 |
| Net earnings | $137 | $133 | $388 | $389 |
| Diluted EPS from continuing operations | $1.05 | $1.00 | $2.97 | $2.94 |
| Diluted net EPS | $1.04 | $1.00 | $2.94 | $2.94 |
| Interest expense | $25 | $30 | $77 | $96 |
| Effective tax rate, continuing operations | 35.3% | 33.9% | 35.0% | 33.2% |
Quarterly sales fell 2% and volume fell 1%; nine-month sales were essentially flat while volume rose 1%. Higher cost savings, price increases and favorable mix supported earnings, offset by higher commodity and manufacturing/logistics costs, foreign exchange impacts and higher tax rates. Gross margin declined 30 basis points in both periods.
Segments and material changes
- Cleaning: Quarterly sales were $437, down 4%; pretax segment earnings were $93, down 6%. Nine-month sales were $1,348, essentially flat; earnings rose to $325 from $319.
- Household: Quarterly sales were $428, up 4%, with earnings of $76, flat. Nine-month sales increased 2% to $1,152, while earnings declined 7% to $169, chiefly reflecting higher commodity and supply-chain costs.
- Lifestyle: Quarterly sales were $237, down 3%, and earnings were $67, down 6%. Nine-month sales were $692, essentially flat, and earnings declined 4% to $189.
- International: Quarterly sales were $284, down 6%, and earnings were $11, down 45%. Nine-month sales were $888, down 2%, and earnings were $69, down 5%. Unfavorable foreign exchange and inflationary manufacturing/logistics costs weighed on results.
Clorox cited lost distribution of Clorox disinfecting wipes at a major retailer and heightened category competition, along with weaker Brita shipments. Household growth included Kingsford charcoal, Scoop Away cat litter and Glad OdorShield products. Wal-Mart and its affiliates accounted for 27% of quarterly sales and 26% of nine-month sales.
Cash flow, balance sheet and capital allocation
- For the first nine months, operating cash flow was $430, including $434 from continuing operations, versus $485 and $486, respectively, a year earlier. Management attributed the decline in continuing operating cash flow mainly to the timing of tax payments and funding of non-qualified deferred compensation liabilities.
- Capital expenditures were $88, down from $134. Cash and cash equivalents were $364 at March 31, 2014, versus $299 at June 30, 2013.
- Total debt was $2,564, compared with $2,372 at June 30, 2013. This included $394 of notes and loans payable, $575 of current maturities and $1,595 of long-term debt. Current liabilities exceeded current assets by $318, primarily because of the $575 current debt maturity.
- Management expected to repay the $575 maturity through a combination of refinancing and operating cash flows. A $1.1 billion revolving credit facility, expiring May 2017, had no borrowings; the company reported compliance with its covenants. Its defined debt/Adjusted EBITDA ratio was 2.22 against a maximum of 3.50.
- Nine-month dividends paid were $277, or $2.13 per share, versus $250, or $1.92 per share. The company repurchased $260 of shares under its Evergreen dilution-offset program; no shares were bought under the separate $750 million open-market authorization.
Outlook, risks and unusual items
- Venezuela: Clorox began using the SICAD I rate of 10.8 bolivares per U.S. dollar for reporting from March 1, 2014, and recorded a $12 non-tax-deductible remeasurement loss. It also recorded $4 of trademark impairment and a $2 increase in deferred-tax valuation allowances. The combined effect reduced continuing-operations earnings by $18. Venezuela represented about 1% of quarterly and 2% of nine-month consolidated sales, and operated at a loss for the nine months.
- Management said Venezuela losses could continue through the rest of fiscal 2014 and beyond if price controls prevent increases sufficient to offset inflation. Based on current cash-flow projections, the business could lack working capital to sustain operations through fiscal 2015 without further company support or other funding actions. Additional currency devaluations, controls, inflation or government intervention could cause further adverse effects; a hypothetical move from 10.8 to 50.0 VEF/USD was estimated to cause about $9 of additional non-tax-deductible remeasurement losses.
- Argentina and other operating risks: The Argentine peso declined 33% against the U.S. dollar over the nine months; price controls and inflation also posed risks. The filing highlights commodity-cost volatility, competition, customer concentration, international currency and political risks, supply disruptions, litigation and potential impairment charges.
- Contingencies: Recorded environmental remediation liabilities were $14. A Brazilian discontinued-operations lawsuit had an estimated additional loss range of $0–$31; the company continued to contest the matter. Management said other outstanding claims were not expected to have a material adverse effect in aggregate.
- No general company earnings or sales guidance is provided in the supplied filing text. Management described overall financial condition and liquidity as strong, while noting the Venezuela outlook and risks above. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Confirm the reporting period: the filing is for March 31, 2014, despite the request’s “2013 Q3” label.
- Track refinancing and repayment of the $575 million current debt maturity, along with cash generation and covenant headroom.
- Monitor Venezuelan exchange-rate policy, price controls, funding needs, and possible further impairment or remeasurement charges.
- Assess whether competitive pressure and the major-retailer disinfecting-wipes distribution loss affect future volume and sales.
- Follow resin and other input costs, foreign exchange, inflation, and the unresolved Brazilian litigation exposure.