CLX

Business Context and Reporting Period

Company: The Clorox Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended September 30, 2008 (First Quarter of Fiscal Year 2009)
Business Overview: A leading manufacturer and marketer of consumer products including bleach, cleaning products, auto-care, cat litter, charcoal, dressings, water-filtration systems, and personal care products. Operations are divided into North America and International segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12% to $1,384 million, driven by a 4% volume increase and price increases. Volume growth was fueled by the acquisition of Burt's Bees Inc. (BBI), the launch of Green Works, and strong performance in Brita and Glad ForceFlex.
• Profitability: Net earnings rose 15% to $128 million. Diluted EPS increased 20% to $0.91, aided by share repurchases reducing the share count.
• Margin Pressure: Gross margin declined 200 basis points to 40.6% due to higher commodity costs (resin, agricultural commodities) and increased energy/manufacturing/logistics costs.
• Restructuring Costs: Charges dropped significantly from $25 million in the prior year to $6 million ($1 million restructuring + $5 million incremental cost of goods sold). The prior year included significant asset impairment charges.
• Cash Flow: Operating cash flow decreased 43% to $93 million, primarily due to higher working capital requirements (inventory builds and receivables) and higher incentive compensation payments.
• Debt Levels: Interest expense increased from $33 million to $42 million due to higher debt levels used to finance the BBI acquisition and share repurchases.

Guidance, Outlook, and Risks

• Restructuring Outlook: The Company anticipates incurring $20 to $25 million in Supply Chain and Other restructuring charges in Fiscal Year 2009. Total anticipated charges for Fiscal Years 2010-2012 are estimated at $24 million.
• Cost Environment: Management cites a challenging cost environment driven by commodity and energy prices. The Company is addressing this through price increases and cost savings programs.
• Market Risks:
  • Credit Markets: Volatility in credit markets has increased commercial paper interest rates (weighted average 5.3% vs 2.9% prior year). The Company maintains a $1.2 billion revolving credit facility.
  • Bankruptcies/Mergers: The filing notes the bankruptcy of Lehman Brothers Holdings and the merger of Wells Fargo and Wachovia. The Company is monitoring these events but expects to meet funding needs.
  • Foreign Exchange: Approximately 20% of sales are international; the Company expects certain foreign currencies to devalue against the U.S. dollar in Fiscal 2009.
• Contingencies:
  • Environmental: A $20 million liability is recorded for environmental remediation, primarily in Dickinson County, Michigan (jointly liable with Ford Motor Co.).
  • Guarantees: Aggregate maximum exposure from indemnification agreements is $291 million, primarily related to the Henkel share exchange transaction.

Investor Verification Checklist

• Commodity Cost Pass-Through: Verify the ability to sustain price increases to offset rising resin and agricultural commodity costs without losing volume.
• Restructuring Execution: Monitor the timeline and cost realization of the Supply Chain restructuring initiative (target completion FY2012).
• Debt Servicing: Assess the impact of rising interest rates on the $3.4 billion debt load and the company's ability to refinance commercial paper.
• Acquisition Integration: Evaluate the financial contribution and integration progress of the Burt's Bees acquisition.
• Environmental Liability: Review updates on the Dickinson County, Michigan remediation costs and Ford Motor Co.'s ability to meet its cost-sharing obligations.