Business Context and Reporting Period
Company: The Clorox Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008 (Fiscal Year 2008, Q3)
Overview: Clorox is a leading manufacturer of consumer products including bleach, cleaning products, auto-care, cat litter, charcoal, dressings, water-filtration, and personal care. In the first quarter of fiscal 2008, the company realigned its operating segments into North America and International. The period includes the impact of the November 2007 acquisition of Burt's Bees Inc. (BBI) and ongoing supply chain restructuring initiatives.
Key Financial Metrics
| Metric (in millions) | Three Months Ended 3/31/2008 | Nine Months Ended 3/31/2008 | Nine Months Ended 3/31/2007 |
|---|---|---|---|
| Net Sales | $1,353 | $3,778 | $3,503 |
| Gross Profit | $538 | $1,545 | $1,497 |
| Gross Margin % | 39.8% | 40.9% | 42.7% |
| Net Earnings | $100 | $303 | $337 |
| Diluted EPS | $0.71 | $2.12 | $2.19 |
| Operating Cash Flow (9mo) | $476 (vs. $427 prior year) | ||
| Cash and Equivalents | $282 (as of 3/31/2008) | ||
| Total Debt (Short + Long Term) | $3,680 (as of 3/31/2008) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9% for the quarter and 8% for the nine-month period compared to the prior year. Growth was driven by volume increases (4% quarterly, 5% YTD) from the BBI acquisition, new product launches (Green Works), and strong performance in Fresh Step and Brita, partially offset by reduced Glad shipments and weather impacts on auto/charcoal businesses.
- Margin Compression: Gross profit margin declined 350 basis points for the quarter and 180 basis points YTD. This was primarily due to increased commodity costs (resin, agricultural commodities), higher manufacturing/logistics costs (diesel), and purchase accounting adjustments related to the BBI acquisition (inventory step-up).
- Earnings Decline: Net earnings decreased 22% for the quarter and 10% YTD. Diluted EPS fell 15% quarterly and 2% YTD. The decline was driven by higher costs, increased interest expense, and restructuring charges, partially offset by share repurchases reducing the share count.
- Debt Increase: Total debt increased significantly due to borrowings used to finance the BBI acquisition ($913 million) and an Accelerated Share Repurchase (ASR) agreement ($750 million). Short-term borrowings (commercial paper) rose to $959 million.
Guidance, Outlook, and Risks
- Restructuring Outlook: The company anticipates total charges of $70 million to $75 million related to supply chain simplification and other restructuring initiatives through fiscal year 2010. Approximately $58 million to $60 million is expected to be incurred in fiscal 2008. Projected annual savings upon completion are estimated at $22 million to $24 million.
- Management Commentary: Management cites a challenging cost environment and competitive marketplace. Strategies to address this include cost savings programs, pricing actions, and product innovation. The BBI acquisition is expected to provide entry into the fast-growing, higher-margin personal care category.
- Key Risks:
- Commodity Volatility: Exposure to price fluctuations in resin, diesel, chlor-alkali, and agricultural commodities.
- Environmental Contingencies: Joint and several liability for remediation costs in Dickinson County, Michigan, with a recorded liability of $20 million. The company cannot accurately predict timing or total exposure.
- Tax Indemnification: Significant potential liability related to tax indemnification obligations from the 2004 share exchange with Henkel, though tax-free treatment appears likely to be sustained.
- Customer Concentration: Wal-Mart Stores, Inc. accounted for 26% of consolidated net sales.
Investor Verification Checklist
- Restructuring Execution: Verify the timing and magnitude of remaining restructuring charges ($58M-$60M expected in FY2008) and the realization of projected $22M-$24M annual savings.
- BBI Integration: Assess the integration progress of Burt's Bees and its contribution to margin expansion in the personal care category.
- Commodity Hedging: Review the effectiveness of derivative instruments in mitigating rising costs for resin and energy.
- Debt Servicing: Monitor interest expense trends given the increased debt load from the BBI acquisition and ASR, and the company's ability to refinance or repay commercial paper.
- Environmental Liability: Track developments in the Dickinson County, Michigan remediation case, specifically the financial stability of the co-responsible party.