Clorox Company — Form 10-Q Summary
Business context and period: This quarterly report covers the three months ended September 30, 2014, the first quarter of fiscal 2015. Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. Unless otherwise noted, comparisons are with the quarter ended September 30, 2013. Dollars are in millions except per-share amounts.
Financial performance
- Sales: Net sales were $1,352, up 1% from $1,343. Volume rose 1%; pricing contributed 180 basis points and volume 150 basis points, offset by 190 basis points of unfavorable currency and 80 basis points of higher trade promotion spending.
- Profit and margins: Gross profit was $578, down from $584; gross margin fell 70 basis points to 42.8%. Continuing-operations earnings were $145 versus $139. Diluted continuing-operations EPS increased 5% to $1.10 from $1.05. Net earnings declined to $90 from $136, reflecting discontinued-operations losses of $55 versus $3. The quarter included an $11 one-time benefit related to changes to the long-term disability plan.
- Costs: Selling and administrative expense decreased 7% to $180; advertising was $121, approximately flat, and research and development was $30 versus $31. Management cited higher manufacturing and logistics costs, promotions and commodities as gross-margin pressures, partly offset by cost savings and pricing.
- Cash flow: Cash from continuing operations was $234, compared with $184; total operating cash flow was $243 versus $178. Capital expenditures were $29. Cash dividends paid were $95. Cash increased $26 during the quarter to $355.
- Balance sheet and liquidity: Total debt was $2,224, including $575 of current maturities; cash was $355. Current liabilities exceeded current assets by $182, primarily because of the current debt maturities. Management expected repayment to be funded through refinancing and operating cash flow. The company reported a 1.90 consolidated leverage ratio against a maximum covenant ratio of 3.50 and said it was in compliance with covenants.
- Dividends and repurchases: The declared dividend was $0.74 per share, up from $0.71. The company repurchased $8 of shares under its dilution-offset program; no purchases were made under its separate $750 million authorization, which remained fully available.
Changes by segment
- Cleaning: Sales fell 2% to $470 and pretax continuing-operations earnings declined 5% to $124. Management cited distribution loss for disinfecting wipes and lower bleach shipments.
- Household: Sales rose 5% to $392 while pretax earnings were flat at $52. Volume increased 4%, led by Kingsford charcoal and Glad Odor Shield bags; higher costs and demand-building investment offset growth and savings.
- Lifestyle: Sales declined 1% to $216; pretax earnings increased 6% to $56. Burt’s Bees growth was offset by softer Hidden Valley and Brita shipments.
- International: Sales were flat at $274, while pretax earnings fell 16% to $26. Volume increased 5%, but currency headwinds, inflation and higher manufacturing, logistics and selling costs weighed on results.
Material events, outlook and risks
- Venezuela exit: Clorox Venezuela discontinued operations effective September 22, 2014, after government price controls and hyperinflation left the business selling at losses. The Venezuelan government occupied its Santa Lucía and Guacara facilities. The company recorded $79 of pretax exit-related and operating losses ($55 after tax), including asset write-downs and a $30 foreign-currency translation loss. Venezuela revenue was $11 versus $23 a year earlier.
- Management said it was reasonably possible that additional after-tax exit costs would total $60–$65 in fiscal 2015 and $10–$15 in fiscal 2016–2018, or $70–$80 over the three-year period; estimated after-tax cash expenditures were $5–$10. These estimates could change materially, including with exchange-rate changes and other external factors.
- The company used a rate of 49.7 bolívares fuertes per U.S. dollar for Venezuela reporting at September 30, 2014. It stated that uncertainty from the government’s occupation affected the recoverability of remaining assets.
- Debt refinancing: A new $1.1 billion revolving credit agreement replaced the prior facility on October 1, 2014, and runs through October 2019. No borrowings were outstanding under the facility at quarter-end.
- Contingencies: Environmental remediation liabilities were $13; the company noted possible additional exposure that it could not estimate. In Brazilian litigation related to discontinued operations, the company reported a possible loss above accrued amounts in a range of $0–$30 and continued to pursue appeals. Other legal matters were not expected by management to have a material adverse effect overall.
- Other risks and outlook: Management discussed currency and political risks, particularly in Venezuela and Argentina; commodity and logistics costs; competition, customer concentration and execution of cost savings and growth initiatives. Wal-Mart and its affiliates accounted for 26% of sales in both periods. The filing did not provide quantified consolidated sales or EPS guidance for the fiscal year.
- The company said market risk had not materially changed since June 30, 2014, and that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, cash costs and potential further charges associated with the Venezuela shutdown, asset occupation and any asset-sale efforts.
- Whether the $575 of current debt maturities is refinanced or repaid as anticipated, and continued compliance with the leverage covenant.
- Whether pricing and cost savings can offset inflation, currency effects, commodity costs and manufacturing and logistics pressures, especially in International.
- Developments in the Brazilian Petroplus litigation and environmental remediation exposure.
- The durability of sales and volume trends, including the Cleaning segment’s distribution losses and dependence on major customers.