The Clorox Company — Fiscal 2011 Second-Quarter 10-Q
Reporting period: Three and six months ended December 31, 2010. Financial statements are unaudited; amounts are in millions except per-share data. Comparisons are with the corresponding prior-year periods.
Key financial results
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Net sales | $1,179 | $1,215 | $2,445 | $2,518 |
| Gross profit | $492 | $529 | $1,053 | $1,112 |
| Gross margin | 41.7% | 43.5% | 43.1% | 44.2% |
| Continuing operations income (loss), after tax | $(163) | $93 | $(23) | $233 |
| Net earnings | $21 | $110 | $237 | $267 |
| Diluted EPS from continuing operations | $(1.17) | $0.66 | $(0.17) | $1.64 |
| Diluted net EPS | $0.15 | $0.77 | $1.70 | $1.88 |
Quarterly and six-month sales each declined 3%. The $258 noncash Burt’s Bees goodwill impairment drove reported continuing-operations losses. Excluding that charge, management reported diluted continuing-operations EPS of $0.68 for the quarter and $1.68 for the six months, versus $0.66 and $1.64, respectively; these are non-GAAP measures.
For the six months, cash from continuing operations was $170, down from $211; cash from all operating activities was $225 versus $246. Investing activities provided $683, including $747 of net sale proceeds from the auto businesses, while financing activities used $622. Capital expenditures were $89. Cash rose to $379 from $87 at June 30, 2010.
At December 31, 2010, current assets were $1,344 and current liabilities $1,176, a $168 excess. Notes and loans payable were $3, current maturities of long-term debt $300, and long-term debt $2,125. The company reported total debt of $2,428 for its credit-covenant calculation. The $300 notes mature in February 2011.
Material changes and business drivers
- Gross margin fell 1.8 percentage points in the quarter and 1.1 points for the six months. Pricing and cost savings partly offset unfavorable mix, manufacturing and logistics costs, foreign exchange, trade promotions, and higher commodity costs.
- Lower sales reflected volume declines, including comparisons against elevated prior-year disinfecting-product shipments during the H1N1 period, and unfavorable foreign exchange. Pricing partly offset these pressures.
- Segment sales for the quarter were Cleaning $354 (down 6%), Household $320 (down 4%), Lifestyle $218 (up 3%), and International $287 (down 1%). Lifestyle results included the $258 impairment. Excluding it, Lifestyle pretax earnings were $66 versus $78.
- Clorox completed the sale of its global auto care businesses in November for $755 cash consideration and expects approximately $30 of additional cash flows related to retained working capital. The sale generated an after-tax gain of $177 in the quarter and $237 for the six months; auto-business results are presented as discontinued operations.
Outlook, risks and unusual items
- No specific consolidated sales or earnings guidance is provided in the supplied filing text. Management said it expects to refinance the $300 of notes maturing in February 2011, citing access to capital markets and strong credit ratings, cash flows and commercial-paper access.
- The $1,100 revolving credit facility, expiring in April 2013, was undrawn. Clorox reported compliance with its debt covenants and a covenant debt-to-EBITDA ratio of 2.01 against a maximum of 3.25.
- Management anticipated using approximately $680 of net auto-sale proceeds to repurchase shares during the fiscal year. It repurchased shares for $134 during the six-month period; the filing says these purchases were under the dilution-offset program, not the separate $750 open-market authorization.
- The Burt’s Bees impairment analysis was preliminary, with finalization expected in the quarter ending March 31, 2011. Additional impairment could result if sales growth, margin expansion or economic and category assumptions weaken; any such charge would be noncash.
- Key stated risks include commodity and energy cost volatility, execution of cost-saving plans, competition and consumer response to pricing, customer concentration, foreign exchange and inflation, international expansion, supply disruption, litigation and environmental exposure, and access to debt markets.
- Environmental remediation liabilities were recorded at $16; additional exposure is possible but not estimable. Other lawsuits and claims were not expected by management to have a material adverse effect. The company also disclosed $66 of maximum exposure under indemnification agreements, primarily related to the auto-business sale, with no liability recorded.
Important facts for investors to verify
- Whether the final Burt’s Bees impairment analysis changed the $258 charge or indicated further impairment risk.
- Completion, terms and cost of refinancing the $300 notes due February 2011.
- Underlying sales volumes, pricing, trade spending, commodity costs and margin trends, especially across the four continuing segments.
- Actual cash received from the auto-business sale and working-capital adjustments, and the scale and timing of planned share repurchases.
- Cash conversion and inventory trends, given lower continuing-operations cash flow and higher inventory balances.
- Developments in environmental remediation, tax audits and other contingencies that could affect future cash needs.