CLX

Business Context and Reporting Period

Company: The Clorox Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 2009
Business Overview: A leading manufacturer and marketer of consumer products including bleach, cleaning products, auto-care, cat litter, charcoal, dressings, water-filtration, and personal care items. Operations are segmented into North America and International.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net earnings increased 53% for the quarter and 21% for the nine-month period compared to the prior year. Diluted EPS rose 52% and 23%, respectively.
• Margin Expansion: Gross margin improved significantly (550 basis points for the quarter, 110 basis points for nine months) driven by price increases, cost savings, and moderating commodity costs, partially offset by higher manufacturing/logistics costs.
• Revenue Stability: Net sales were flat for the quarter (-0.2%) and grew 5% for the nine-month period. Volume declined 3% in the quarter due to the exit from the private-label food bags business and pricing impacts on Glad trash bags, offset by growth in Hidden Valley, Brita, and Kingsford.
• Restructuring Costs: Restructuring and asset impairment costs were $14 million for the quarter and $16 million for the nine months ended March 31, 2009, compared to $7 million and $34 million in the prior year periods. The plan was expanded in February 2009 to include severance for staffing reductions.
• Debt Reduction: The company reduced notes and loans payable significantly, paying down debt using operating cash flows. Current maturities of long-term debt increased to $577 million due to a $575 million note maturing in January 2010.

Guidance, Outlook, and Risks

• Restructuring Outlook: The company anticipates incurring approximately $35 to $37 million in restructuring charges for fiscal year 2009 (approx. $6 million non-cash). Total anticipated charges for fiscal years 2010-2012 are estimated at $25 to $30 million.
• Foreign Exchange: The company expects to incur additional foreign currency transaction losses of approximately $12 to $14 million in the fourth quarter of fiscal 2009 due to devaluation of certain currencies (e.g., Venezuela).
• Pension Plan: Pension plan assets declined 36% in fair value to $201 million. The company made a $10 million discretionary contribution in April 2009 and expects a further $20 million voluntary contribution in Q4 FY2009.
• Liquidity and Credit: The company maintains a $1,100 million revolving credit facility (amended April 2009 to remove Lehman Brothers). The debt-to-EBITDA ratio was 2.85, well below the 3.25 covenant limit. Management believes cash balances and access to credit markets are sufficient for foreseeable needs despite market volatility.
• Risk Factors: Key risks include volatility in commodity costs (resin, agricultural commodities), energy costs, foreign exchange fluctuations, consumer spending levels, and the ability to realize savings from supply chain restructuring.

Investor Verification Checklist

• Debt Maturity: Verify the refinancing status of the $577 million current maturity of long-term debt due in January 2010.
• Restructuring Execution: Monitor the actual cash outflow for the expanded restructuring plan versus the $35-$37 million guidance for FY2009.
• Foreign Currency Impact: Track the realization of the projected $12-$14 million foreign currency transaction loss in Q4 FY2009.
• Pension Funding: Confirm the timing and amount of the additional $20-$40 million voluntary pension contributions planned for late FY2009 and early FY2010.
• Volume Trends: Assess whether volume declines in core categories (bleach, Glad bags) continue to be offset by growth in acquired brands (Burt's Bees) and new products (Green Works).