Business Context and Reporting Period
Company: The Clorox Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended December 31, 2008 (Fiscal Year 2009, Q2)
Business Overview: A leading manufacturer and marketer of consumer products including bleach, cleaning products, auto-care, cat litter, dressings, water-filtration systems, and personal care items. Operations are segmented into North America and International.
Key Financial Metrics
(Dollars in millions, except per share amounts)
| Metric | Three Months Ended 12/31/2008 | Six Months Ended 12/31/2008 |
|---|---|---|
| Net Sales | $1,216 | $2,600 |
| Gross Profit | $486 | $1,048 |
| Gross Margin | 40.0% | 40.3% |
| Net Earnings | $86 | $214 |
| Diluted EPS | $0.62 | $1.52 |
| Operating Cash Flow (6mo) | $191 | |
| Total Debt (Notes + Long-term) | $3,355 | |
| Cash and Equivalents | $97 | |
| Working Capital | $(389) (Current Assets $1,041 - Current Liab $1,430) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3% for the quarter and 7% for the six-month period compared to the prior year. Growth was driven by price increases and volume gains from the Burt's Bees acquisition and new product launches (Green Works), partially offset by volume declines in Glad trash bags and Clorox bleach due to pricing impacts.
- Profitability: Diluted EPS decreased 5% for the quarter ($0.62 vs. $0.65) due to higher commodity costs (resin), manufacturing/logistics costs, and a higher effective tax rate. However, for the six-month period, EPS increased 8% ($1.52 vs. $1.41) driven by volume growth, price increases, and significantly lower restructuring charges compared to the prior year.
- Restructuring Costs: Restructuring and asset impairment costs were $3 million for the quarter and $9 million for the six months ended Dec 31, 2008. This is a significant decrease from $2 million and $32 million, respectively, in the prior year periods, which included a $24 million asset impairment charge.
- Segment Performance:
- North America: Sales up 3% (quarter) and 7% (six months); Earnings before tax up 6% and 11%.
- International: Sales flat (quarter) and up 7% (six months); Earnings before tax down 24% and 23% due to unfavorable foreign exchange and higher costs.
- Liquidity: Cash and cash equivalents decreased from $214 million to $97 million. Net cash provided by operations was $191 million for the six months, down from $311 million in the prior year, primarily due to the timing of tax and interest payments.
Guidance, Outlook, and Risks
- Restructuring Outlook: The Company expanded its "Supply Chain and Other" restructuring plan in February 2009. It anticipates incurring approximately $35 to $37 million in 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.
- Cost Environment: Management cites a volatile cost environment driven by commodity costs (resin, agricultural commodities) and energy-related manufacturing/logistics costs. The Company is addressing this through price increases and cost savings programs.
- Foreign Exchange: Approximately 20% of net sales are generated outside the U.S. The Company experienced devaluation of certain foreign currencies versus the U.S. Dollar and expects continued devaluation in fiscal year 2009.
- Pension Assets: The fair value of pension plan assets declined approximately 28% to $227 million. While no contributions are required in fiscal 2009, the Company is considering a voluntary contribution of $20 to $25 million in the fourth quarter.
- Debt Markets: The Company maintains a $1.2 billion revolving credit facility (EBITDA ratio 3.11). While credit markets experienced volatility, the Company believes current cash and access to funds are sufficient to meet needs. Lehman Brothers Bank, FSB is a participant in the credit facility; the Company is monitoring the situation but expects the facility to remain substantially satisfied.
- Contingencies: The Company has a recorded environmental liability of $20 million, primarily related to a joint and several liability with Ford Motor Co. in Dickinson County, Michigan. The Company is unable to estimate the maximum potential liability for a tax indemnification agreement with Henkel, though it notes the exposure could be significant.
Investor Verification Checklist
- Commodity Hedging: Verify the effectiveness of commodity futures and swap contracts in mitigating rising resin and energy costs, given the $44 million fair value liability in commodity contracts.
- Restructuring Execution: Monitor the actual costs incurred against the $35-$37 million guidance for fiscal 2009 and the timeline for the supply chain restructuring completion (fiscal 2012).
- Foreign Exchange Impact: Assess the sensitivity of International segment earnings to further currency devaluation, which significantly impacted the 24% earnings decline in that segment.
- Debt Covenant Compliance: Confirm continued compliance with the 3.25x debt-to-EBITDA covenant under the revolving credit facility amidst potential earnings volatility.
- Environmental Liability: Review updates on the Dickinson County, Michigan remediation costs and the financial stability of Ford Motor Co. regarding the cost-sharing arrangement.