The Clorox Company — Form 10-Q Summary
Reporting period: Three months ended September 30, 2010 (first quarter of fiscal 2011). Unaudited results; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Net sales | $1,266 | $1,303 |
| Gross profit / margin | $561 / 44.3% | $583 / 44.7% |
| Continuing-operations pretax earnings | $202 | $217 |
| Continuing-operations earnings | $140 | $140 |
| Net earnings | $216 | $157 |
| Diluted EPS, continuing operations / total | $0.98 / $1.52 | $0.99 / $1.11 |
| Operating cash flow, continuing operations | $126 | $77 |
| Capital expenditures | $34 | $34 |
Net earnings included a $60 deferred tax benefit related to the planned Auto Businesses sale; discontinued operations contributed $76 of earnings versus $17 a year earlier. Excluding that benefit, continuing-operations earnings were flat, while diluted continuing-operations EPS declined one cent. Cash and equivalents were $286 at quarter-end, up $199 from June 30, 2010. Total debt was $2,930, including $300 of senior notes due February 2011. The company reported a 2.40 debt-to-EBITDA covenant ratio and compliance with covenants.
Changes and operating drivers
- Sales fell 3%; volume declined 2%. Management cited lower shipments in Glad food storage, Scoop Away cat litter, Kingsford charcoal, Hidden Valley bottled dressings and disinfecting products, including a comparison against prior-period H1N1-related shipments.
- Gross margin declined 0.4 percentage points. Unfavorable commodities and other items reduced margin by about 2.4 percentage points, largely offset by cost savings of about 2.0 points.
- Continuing-operations diluted EPS was affected by commodity costs, higher selling and administrative expenses, lower sales and unfavorable foreign exchange, particularly in Venezuela; cost savings and price increases partly offset these pressures. Venezuela currency effects reduced diluted EPS by $0.07, versus $0.04 a year earlier.
- Segment sales and pretax earnings: Cleaning $449 and $121 (sales down 1%, earnings up 2%); Household $354 and $53 (down 7% and 4%); Lifestyle $201 and $58 (up 1%, down 12%); International $262 and $40 (down 2% and 7%).
Liquidity, transactions and outlook
Operating cash flow from continuing operations increased to $126, primarily due to working-capital changes and an $18 lower pension contribution. Cash flow from all operations was $148. Commercial paper outstanding was $503; the company had an undrawn $1,100 revolving credit facility and said it planned to refinance the $300 notes due February 2011. Current liabilities exceeded current assets excluding assets held for sale by $448.
In September, Clorox agreed to sell substantially all global auto care businesses, including Armor All and STP, to an affiliate of Avista Capital Partners for approximately $780 in cash, subject to closing adjustments, approvals and other conditions. Closing was expected by calendar year-end 2010. The company anticipated using net proceeds for share repurchases and projected repurchasing 12–13 million shares over the next two fiscal quarters, including dilution-offset purchases.
Management described liquidity as strong and expected operating cash flows, commercial-paper access, the credit facility and planned refinancing to meet foreseeable operating and capital needs. This is not a specific earnings or sales forecast. Key stated risks include commodity and energy costs, foreign exchange and inflation, competition and consumer response to pricing, customer concentration, execution of cost-saving programs and the auto-care divestiture, and legal, environmental and tax matters.
Risks, contingencies and unusual items
- The $60 tax benefit associated with the planned sale materially boosted reported net earnings; the transaction remained subject to closing conditions.
- Environmental remediation liability was $16, largely related to a Michigan site where Clorox is jointly and severally liable and has a cost-sharing arrangement with Ford. Potential additional exposure was not estimable.
- Goodwill and indefinite-lived intangible impairment reviews identified no impairment, but the Burt’s Bees reporting unit’s estimated fair value exceeded carrying value by approximately 5%; a shortfall in growth or margin assumptions could create impairment risk.
- Wal-Mart and its affiliates represented 27% of consolidated sales. The filing also noted restrictions on U.S. dollars available for Venezuelan operations and related currency and supply impacts.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the auto-care sale closed, final proceeds after working-capital adjustments, and the actual use of proceeds.
- Whether the planned refinancing of the February 2011 notes was completed and on what terms.
- Subsequent share repurchases versus the 12–13 million-share projection and their effect on debt and EPS.
- Whether commodity, Venezuela foreign-exchange, inflation and volume pressures persisted, and whether cost savings offset them.
- Developments in environmental remediation exposure, tax audits and Burt’s Bees goodwill valuation.