Business context and reporting period
The Clorox Company’s Form 10-Q covers the three and six months ended December 31, 2013 (fiscal Q2 and first half of fiscal 2014). Clorox sells consumer and professional products through four segments: Cleaning, Household, Lifestyle and International. All dollar amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Three months ended Dec. 31, 2013 | Prior-year quarter | Six months ended Dec. 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,330 | $1,325 | $2,694 | $2,663 |
| Gross profit | $557 | $563 | $1,142 | $1,137 |
| Gross margin | 41.9% | 42.5% | 42.4% | 42.7% |
| Continuing-operations earnings | $116 | $123 | $253 | $256 |
| Net earnings | $115 | $123 | $251 | $256 |
| Diluted EPS from continuing operations | $0.88 | $0.93 | $1.92 | $1.94 |
- Quarterly sales increased 0.4% and volume increased 1%; first-half sales and volume each rose 1%. Quarterly diluted continuing-operations EPS fell 5%, while first-half EPS fell 1%.
- For the first half, continuing-operations operating cash flow was $212, versus $325 a year earlier; total operating cash flow was $210. Capital expenditures were $63, versus $102. Cash increased to $341 from $299 at June 30, 2013.
- At December 31, 2013, current assets were $1,500 and current liabilities $1,181. Notes and loans payable were $342 and long-term debt was $2,170; total debt was $2,512. The $1.1 billion revolving credit facility had no borrowings, and $56 of $60 in foreign and other credit lines was available.
- The trailing-four-quarter covenant EBITDA ratio was 2.19x, below the 3.50x maximum; Clorox reported compliance with its credit covenants and expected continued compliance.
- Dividends declared were $0.71 per share for the quarter and $1.42 for the first half. First-half cash dividends paid were $184; the company repurchased about 1.6 million shares for $130 under its dilution-offset program.
Material changes and segment results
- Quarterly gross margin declined 60 basis points, primarily from higher resin costs and manufacturing and logistics expenses; cost savings and pricing partly offset the increases. First-half gross margin declined 30 basis points.
- Management attributed lower quarterly EPS to commodity and manufacturing/logistics costs, higher advertising and sales-promotion spending, unfavorable foreign exchange and a higher effective tax rate. The prior-year quarter included a gain on the Oakland office sale-leaseback. Savings, pricing and higher volume partly offset these pressures.
- Quarterly segment sales and pretax earnings: Cleaning $432 and $101 (sales +2%); Household $352 and $41 (sales -1%); Lifestyle $237 and $69 (sales flat); International $309 and $30 (sales +1%). Household earnings fell from $56, chiefly due to commodity and supply-chain costs. International earnings rose from $25, with pricing and savings partly offset by currency and inflationary costs.
- Wal-Mart and affiliates accounted for 26% of sales in both the quarter and first half, compared with 25% in the prior-year quarter.
Outlook, risks, contingencies and unusual items
- The filing provides no specific quantitative earnings or sales guidance. Management described financial condition and liquidity as strong; results for this interim period are not necessarily indicative of the full fiscal year.
- Venezuela’s subsidiary operated at a loss in the first half. Currency controls, price and margin restrictions, high inflation, and possible further devaluation or government intervention pose risks; Clorox said the business may continue to lose money while conditions persist. Venezuela represented about 2% of consolidated sales. A hypothetical 50% devaluation from the official rate would produce an estimated $11 remeasurement loss, based on the subsidiary’s net monetary asset position.
- Argentina faced inflation, price controls and currency depreciation. The peso fell a further 19% after quarter-end through January 31, 2014; the company anticipated a small third-quarter remeasurement impact based on its $3 net monetary asset position.
- Environmental remediation liabilities were $14; additional exposure is possible but not estimable. In the Brazilian Petroplus litigation, the company disclosed a reasonably possible additional loss range of $0–$28, with appeals pending. The underlying judgment, including interest and currency changes, was approximately $34; related expenses and potential losses are classified in discontinued operations.
- Other stated risks include commodity-cost volatility, competition, foreign exchange, customer concentration, supply disruptions, legal and regulatory matters, and execution of cost savings and product initiatives. Management said market risk had not materially changed since June 30, 2013.
Important facts for investors to verify
- Whether pricing and cost savings can offset resin, manufacturing, logistics and inflationary pressures and restore gross margin.
- Whether volume trends and segment profitability improve, particularly in Household and in challenged product categories.
- Developments in Venezuelan and Argentine currency, pricing and regulatory conditions, including resulting sales, cash-flow and impairment effects.
- Updates to the Petroplus litigation and environmental remediation exposure, as well as the company’s ability to sustain cash generation, dividends and share repurchases.