The Clorox Company — Form 10-Q Summary
Business context and reporting period
Quarter ended December 31, 2009 (the second quarter of fiscal 2010); comparisons are with the quarter and six months ended December 31, 2008. Clorox sells consumer products across Cleaning, Household, Lifestyle and International segments. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,279 million, up 5% | $2,651 million, up 2% |
| Gross profit / gross margin | $561 million / 43.9% (prior: 40.0%) | $1,180 million / 44.5% (prior: 40.3%) |
| Earnings before income taxes | $163 million (prior: $131 million) | $407 million (prior: $317 million) |
| Net earnings | $110 million (prior: $86 million) | $267 million (prior: $214 million) |
| Diluted EPS | $0.77 (prior: $0.61) | $1.88 (prior: $1.51) |
| Operating cash flow | $246 million for six months (prior: $191 million) |
Gross-margin improvement reflected lower commodity costs, cost savings and pricing, partly offset by higher manufacturing and logistics costs, trade promotions and product mix. Operating cash flow also benefited from working-capital changes and higher earnings, partly offset by a voluntary $33 million pension contribution. Capital expenditures were $76 million for the half-year, versus $84 million.
At December 31, cash was $154 million and total debt was approximately $3,035 million, including current maturities. Stockholders’ equity was $27 million, compared with a $175 million deficit at June 30, 2009. Working capital remained negative, at approximately $269 million, but improved by $488 million from June 30, principally as commercial paper was repaid. The company declared dividends of $0.50 per share for the quarter and $1.00 per share for the half-year.
Changes versus the prior comparable periods
- Quarterly volume grew 5%, largely from H1N1-related disinfectant shipments; six-month volume rose 3%. Brita also contributed, while Glad products faced competitive pressure.
- Segment sales and pretax earnings for the quarter: Cleaning $424 million and $85 million; Household $334 million and $27 million; Lifestyle $212 million and $78 million; International $309 million and $39 million. Household sales declined 6%; the other segments grew.
- Advertising rose 19% in the quarter and 12% for the half-year. Interest expense fell $7 million and $13 million, respectively, reflecting lower average debt and interest rates.
- Venezuela’s exchange-rate change produced a $12 million pretax remeasurement loss. International results also included Venezuela transaction losses of $7 million in the quarter and $15 million year to date.
Outlook, risks and unusual items
- Management estimated Venezuela-related pretax currency losses of approximately $20 million, or about $0.09 per diluted share, in the second half of fiscal 2010, and an approximately 2% reduction in net sales for that period. Venezuela was designated hyper-inflationary effective January 1, 2010; its monetary assets and transactions are to be remeasured using the parallel-market rate.
- The supply-chain and other restructuring plan is expected to continue through fiscal 2012. Estimated charges are $18–$25 million in fiscal 2010 (about $2 million expected to be noncash) and $10–$12 million across fiscal 2011 and 2012.
- In November 2009, Clorox issued $300 million of 3.55% senior notes due November 1, 2015, using proceeds to retire commercial paper. A $575 million debt maturity was paid in January 2010, funded with commercial paper and, to a lesser extent, operating cash flows.
- The company reported a $1.1 billion revolving credit facility with no borrowings and a 2.45 debt-to-EBITDA ratio against a 3.25 maximum covenant. Management said it expected adequate funding and continued covenant compliance, while noting that market volatility could raise borrowing costs or constrain access to debt markets.
- Clorox acquired Caltech Industries’ health-care disinfectant assets for $23 million in cash in January 2010. Environmental remediation liabilities were $18 million; the company noted possible additional exposure that it could not estimate, including potential responsibility if Ford cannot meet its share of a major remediation obligation.
- Other risks include commodity-cost volatility, competition, customer concentration (Wal-Mart represented 26% of sales), international and currency exposure, and litigation. Management stated that other disclosed lawsuits and claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether H1N1-driven disinfectant demand and other volume gains persist after the reported periods.
- The realized scale of Venezuela currency losses, sales effects and exposure under hyper-inflationary accounting.
- Debt refinancing and liquidity following the January $575 million maturity, including commercial-paper market access and covenant headroom.
- Whether gross-margin gains from commodities, pricing and savings can offset advertising, promotion, mix and manufacturing costs.
- Actual restructuring charges and cash costs, and developments in environmental remediation and tax audits.