The Clorox Company — Form 10-Q Summary
Business context and period: Unaudited results for the fiscal second quarter and first six months ended December 31, 2012, compared with the corresponding 2011 periods. Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Change year over year | Six months ended Dec. 31, 2012 | Change year over year |
|---|---|---|---|---|
| Net sales | $1,325 | +9% | $2,663 | +5% |
| Gross profit / margin | $563 / 42.5% | Margin +1.0 percentage point | $1,137 / 42.7% | Margin +1.0 percentage point |
| Net earnings | $123 | +$18 | $256 | +$21 |
| Diluted EPS | $0.93 | +18% | $1.94 | +10% |
| Operating cash flow | Not presented separately for the quarter | $325 | Prior period: $168 |
Quarterly gross margin rose from 41.5%; six-month margin rose from 41.7%. Management attributed improvement primarily to cost savings and pricing, partly offset by higher manufacturing, logistics and other supply-chain costs. Dividends declared were $0.64 per share for the quarter and $1.28 for six months, versus $0.60 and $1.20, respectively, in 2011.
Balance sheet and liquidity: At December 31, 2012, cash was $445 (June 30, 2012: $267); current assets were $1,552 and current liabilities $1,373. Total debt was approximately $2,674, including $5 of notes and loans payable, versus $2,721 at June 30, 2012. Stockholders’ equity was $56, compared with a $135 deficit. Cash increased by $178 in the six-month period. Capital expenditures were $102, versus $82.
Material changes and operating drivers
- Quarterly volume increased 5%; six-month volume increased 2%. Sales growth also reflected price increases of about 250 basis points for the quarter and 300 basis points for six months.
- Cleaning delivered the strongest segment growth: sales rose 15% for the quarter and 11% for six months; pretax earnings increased to $100 and $220, respectively.
- Household sales rose 7% for the quarter and 2% for six months. Six-month volume fell 3%, while segment pretax earnings rose to $106.
- Lifestyle sales increased 8% for the quarter and 5% for six months; pretax earnings were broadly stable at $70 and $126.
- International sales rose 3% in both periods, but pretax earnings fell to $25 for the quarter and $53 for six months. Management cited inflation-related manufacturing and logistics costs, Latin American IT implementation and, for six months, unfavorable foreign exchange.
- Higher employee incentive and benefit costs, inflation and Latin American IT implementation contributed to increased selling and administrative expenses. Advertising was approximately flat as a percentage of sales.
Outlook, financing, risks and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management’s discussion emphasizes forward-looking uncertainty; interim results are not necessarily indicative of full-year results.
- Clorox issued $600 of 3.05% senior notes due September 2022, used proceeds in part to repay $350 of 5.45% notes at maturity and to repay commercial paper. It expected $500 of senior notes to mature in March 2013, with repayment anticipated from cash and commercial paper.
- No commercial paper was outstanding at December 31, 2012. The company had a $1.1 billion revolving credit facility with no borrowings; its covenant leverage ratio was 2.35 against a maximum of 3.50, and management reported covenant compliance.
- A December sale-leaseback of the Oakland office building generated $108 net proceeds. Clorox entered a 15-year operating lease for part of the building, recorded a $6 gain and deferred $52 of gain related to lease payments.
- A Brazilian litigation matter resulted in an unfavorable appellate decision. The company estimated a reasonably possible additional loss range of $0–$29, said it would appeal, and noted that a separate Brazilian ruling in January 2013 nullified the arbitration award; Clorox also planned to appeal that ruling. The judgment at issue, including interest and foreign exchange, was approximately $35. Potential related expense or loss would be classified in discontinued operations.
- Environmental remediation liabilities were $14; the company said additional exposure was possible but not estimable. Other disclosed risks include commodity and energy inflation, supply constraints, foreign exchange and political conditions, customer concentration, litigation, and execution of cost-saving and IT initiatives.
- Tax rates were 34.3% for the quarter and 32.9% for six months, above the prior-year rates. A settlement of Canadian tax issues generated a $7 net tax-and-interest benefit in the September 2012 quarter. Wal-Mart and affiliates represented 25% of quarterly and 26% of six-month sales.
Important facts for investors to verify
- Track whether pricing and cost savings continue to offset inflation, supply-chain costs and volume weaknesses, particularly in International.
- Monitor the Brazilian litigation appeals and whether any loss is ultimately incurred within or beyond the disclosed $0–$29 reasonably possible additional-loss range.
- Confirm the March 2013 $500 debt maturity was refinanced or repaid as anticipated, and review subsequent debt, cash and covenant levels.
- Assess the sustainability of operating cash flow and the impact of capital spending, dividends and the Oakland sale-leaseback.
- Review customer concentration, especially Wal-Mart’s 25%–26% share of sales, and the effects of distribution losses in certain product lines.