The Clorox Company — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2012 (Clorox fiscal 2012 third quarter). The request metadata says “2011 Q3,” but the filing itself reports the period ended March 31, 2012. Amounts are in millions except per-share data.
Business context and results
Clorox sells consumer and institutional products through four segments: Cleaning, Household, Lifestyle and International. The company completed the sale of its global auto businesses in fiscal 2011; those results are reported as discontinued operations.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $1,401 vs. $1,304, up 7% | $3,927 vs. $3,749, up 5% |
| Gross profit / gross margin | $593 / 42.3%; prior 44.1% | $1,646 / 41.9%; prior 43.4% |
| Continuing-operations earnings | $134 vs. $141 | $369 vs. $118 |
| Net earnings | $132 vs. $151 | $367 vs. $388 |
| Diluted EPS from continuing operations | $1.02 vs. $1.02 | $2.78 vs. $0.84 |
| Diluted net EPS | $1.01 vs. $1.09 | $2.77 vs. $2.77 |
The prior-year nine-month comparison includes a $258 noncash Burt’s Bees goodwill impairment. Excluding that charge, diluted EPS from continuing operations was $2.68 in the prior period versus $2.78 this period. Prior-period net earnings also included $270 of discontinued-operations earnings, mainly the gain on sale of the auto businesses; current-period discontinued operations recorded a $2 loss.
Cash flow, balance sheet and debt
- Operating cash flow: $325 for nine months, versus $406; continuing-operations cash flow was $333 versus $387.
- Investing cash flow: $200 used, including $119 of capital expenditures and $85 paid for acquisitions. Prior-year investing cash flow included $747 in net proceeds from business sales.
- Financing cash flow: $78 used, including $158 of share repurchases and $237 of dividends paid. Cash dividends declared were $0.60 per share for the quarter, versus $0.55.
- Cash: $303 at March 31, 2012, versus $259 at June 30, 2011.
- Debt: Total debt was $2,850 under the company’s covenant calculation. The balance sheet reported $430 of notes and loans payable, $850 of current maturities of long-term debt and $1,570 of long-term debt. Clorox issued $300 of 3.80% senior notes due November 2021 and used the proceeds to retire commercial paper.
- Liquidity and covenant: A $1.1 billion revolving credit facility had no borrowings and expired in April 2013. Clorox reported a 2.62 total-debt-to-EBITDA ratio against a maximum of 3.25 and stated it was in compliance with covenants. Stockholders’ deficit was $106.
Material changes and segment performance
- Quarterly sales growth reflected 4% volume growth and approximately 520 basis points of price increases. Nine-month volume grew 2%, with approximately 470 basis points of price benefit, partly offset by unfavorable mix.
- Gross margin declined year over year in both periods. Management cited higher commodity costs—especially resin—manufacturing and logistics costs, and, in the quarter, unfavorable mix. Price increases and cost savings partly offset these pressures.
- Quarterly segment sales and pretax earnings: Cleaning $447 and $101; Household $417 and $77; Lifestyle $250 and $77; International $287 and $20. International pretax earnings fell from $39 a year earlier despite higher sales.
- For the nine months, segment sales increased across all four segments. International pretax earnings declined to $93 from $120; management cited inflation-related manufacturing, logistics and administrative costs, commodity costs, unfavorable mix and currency effects.
- Acquisitions of HealthLink, Aplicare and Soy Vay were completed on December 31, 2011, for aggregate purchase prices of $97. They expand healthcare infection-control products and Asian sauces; reported results are in Cleaning and Lifestyle, respectively.
Outlook, risks and unusual items
The filing does not provide a clear quantified full-year earnings or sales guidance figure. Management said it expected to remain in compliance with debt covenants for the foreseeable future. It described liquidity as strong, but cautioned that interim results are not necessarily indicative of full-year results.
Key disclosed risks include commodity and energy cost volatility, supply disruptions, inflation and foreign-exchange exposure, customer concentration (Walmart represented 26% of sales), pricing and competitive responses, acquisitions, information-system investments, and legal, product-liability and environmental matters. Clorox recorded $14 for environmental remediation liabilities, largely related to a Michigan site with an estimated 30-year remediation period; potential additional exposure could not be estimated. Management stated that other pending claims were not expected to have a material adverse effect. Letters of credit totaled $15.
Other notable items include $2 of additional tax expense related to the auto-business sale, favorable tax settlements and statute expirations affecting the current-period tax rate, and a $36 settlement payment on interest-rate forward contracts reflected in operating cash flow. Management reported no material changes in market risk and concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the metadata’s “2011 Q3” label with the filing’s stated March 31, 2012 reporting date and fiscal 2012 third quarter.
- Assess whether pricing and cost savings can continue to offset commodity, manufacturing and logistics inflation without weakening volume or mix.
- Review debt maturities and refinancing needs, particularly the $850 of current maturities, alongside commercial paper and revolving-credit availability.
- Track International segment profitability, acquisition contributions, and the effects of inflation and currency movements.
- Evaluate the range and timing uncertainty of environmental remediation obligations and other contingencies.