Clorox Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014; filed February 5, 2015. Dollar amounts are in millions except per-share data. Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Year-over-year | Six months ended Dec. 31, 2014 | Year-over-year |
|---|---|---|---|---|
| Net sales | $1,345 | +3% | $2,697 | +2% |
| Gross profit / gross margin | $572 / 42.5% | +$17 / +10 bps | $1,150 / 42.6% | +$11 / -40 bps |
| Continuing-operations earnings | $128 | +$10 | $273 | +$16 |
| Net earnings | $125 | +$10 | $215 | -$36 |
| Diluted EPS from continuing operations | $0.97 | +$0.07 | $2.07 | +$0.12 |
| Diluted net EPS | $0.95 | +$0.08 | $1.63 | -$0.27 |
For the quarter, sales growth reflected higher volume and pricing, partly offset by foreign-exchange headwinds. Continuing-operations EPS benefited from higher volume, cost savings, price increases and lower selling and administrative costs; higher commodities, manufacturing/logistics costs, currency effects and demand-building investments were offsets. Six-month continuing EPS also included an $11 one-time benefit from a long-term disability plan change. Six-month net earnings were lower principally because Venezuela exit-related losses increased discontinued-operations losses to $58 after tax, versus $6 in the prior period.
Six-month operating cash flow was $277, including $267 from continuing operations, compared with $210 and $222, respectively, in the prior year. Capital expenditures were $60 versus $63. Cash and equivalents were $819 at December 31, 2014, versus $329 at June 30, 2014. Total debt was $2,672, comprising $877 of notes and loans payable/current maturities and $1,795 of long-term debt. The company issued $500 of 3.50% senior notes due 2024; proceeds were largely held at quarter-end and used in January 2015 to repay part of $575 of notes maturing then. A $1.1 billion revolving credit facility had no borrowings outstanding. The reported covenant leverage ratio was 2.26 against a maximum of 3.50; the company said it was in compliance.
Segment trends and material changes
- Cleaning: Quarterly sales rose 3% to $447 and pretax continuing earnings rose 6% to $107. Six-month sales increased 1% to $917 while pretax earnings were essentially flat at $231.
- Household: Quarterly sales rose 5% to $371 and pretax earnings increased 24% to $51. Six-month sales rose 5% to $763 and pretax earnings increased 11% to $103, supported by volume, pricing and savings, partly offset by promotions, demand investment and resin costs.
- Lifestyle: Quarterly sales rose 4% to $246 and pretax earnings rose 6% to $73. Six-month sales increased 2% to $462 and pretax earnings rose 6% to $129. Burt’s Bees growth was partly offset by weaker Brita shipments.
- International: Quarterly sales fell 2% to $281 and pretax earnings declined 27% to $24; six-month sales fell 1% to $555 and pretax earnings declined 22% to $50. Volume grew, but currency depreciation and Latin American inflation pressured results.
Wal-Mart and its affiliates represented 26% of net sales in both current and prior-year periods. Dividends declared were $0.74 per share for the quarter and $1.48 for six months, compared with $0.71 and $1.42, respectively, in the prior year.
Outlook, risks and unusual items
- No consolidated fiscal-year sales or earnings guidance is stated in the provided filing text. Management cautions that interim results are not necessarily indicative of full-year results.
- Clorox Venezuela discontinued operations effective September 22, 2014, after government price controls, hyperinflation and sustained operating losses made the business unviable. The Venezuelan government occupied the production facilities and authorized a board to restart operations without Clorox’s consent. The company reserved its legal rights.
- Management estimated $60–$65 of after-tax Venezuela exit costs and related expenses in fiscal 2015 and another $10–$15 in fiscal 2016–2018, totaling $70–$80 over three years; estimated after-tax cash expenditures were $5–$10. Exchange-rate changes and other external factors could materially affect these estimates.
- Key pressures and risks include foreign-exchange movements, international inflation and political/regulatory risk, commodity and logistics costs, competition, customer concentration, and the ability to deliver pricing, innovation and cost savings. Management cited resin costs and continued Latin American inflation as current pressures; it expected lower energy costs to benefit results in the second half of fiscal 2015.
- Brazil litigation: an adverse judgment’s value was approximately $34; Clorox disclosed a reasonably possible additional loss range of $0–$28 and continued to appeal. A final decision could occur as early as fiscal Q3 2015. Environmental remediation liability was $13, with potential additional exposure not estimable.
- Unrecognized tax benefits were $61; up to $30 could be recognized within the following 12 months. The company also recorded a $25 settlement loss on interest-rate forward contracts, to be amortized into interest expense over the new notes’ 10-year term.
Important facts for investors to verify
- Whether Venezuela exit costs, asset recovery and exchange-rate changes remain within management’s estimates.
- Whether International segment currency and inflation pressures ease, and whether pricing offsets those pressures.
- Progress and potential outcome of the Brazilian Petroplus litigation and environmental remediation obligations.
- Debt repayment, cash deployment and covenant headroom after the January 2015 repayment of maturing notes.
- Whether volume growth and cost savings can sustain margins amid resin, manufacturing and logistics costs and demand-building investments.