The Clorox Company — Q1 FY2014 10-Q
Business context and period: Consumer and professional products company with Cleaning, Household, Lifestyle and International segments. This quarter ended September 30, 2013; comparisons are with the three months ended September 30, 2012, unless noted. Dollar amounts are in millions except per-share figures.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $1,364 | $1,338 | +2% |
| Gross profit / gross margin | $585 / 42.9% | $574 / 42.9% | Profit +2%; margin flat |
| Continuing-operations pretax earnings | $208 | $194 | +7% |
| Continuing-operations earnings | $137 | $133 | +3% |
| Net earnings | $136 | $133 | +2% |
| Diluted EPS from continuing operations | $1.04 | $1.01 | +3% |
| Operating cash flow | $178 | $208 | Down $30 |
| Capital expenditures | $27 | $54 | Down $27 |
Net sales increased 2% while volume rose 1%. Price increases contributed 180 basis points and favorable mix 70 basis points, partly offset by a 160-basis-point foreign-exchange impact. Gross margin was unchanged: cost savings and pricing benefits were offset by higher manufacturing, logistics and commodity costs, as well as price controls in Argentina and Venezuela. The effective tax rate rose to 34.1% from 31.6%; the prior-year rate benefited from a favorable tax settlement.
Cash, debt and liquidity: Cash was $323 at September 30, compared with $299 at June 30. Current assets were $1,420 and current liabilities $1,170. Notes and loans payable were $286 and long-term debt $2,170, for total debt of $2,456. The company reported a trailing-four-quarter covenant EBITDA ratio of 2.12 versus 2.74 a year earlier, below its 3.50 maximum. Its $1.1 billion revolving credit facility had no borrowings; the company reported covenant compliance and expected continued compliance. It also had $39 available under foreign and other credit lines.
Operating cash flow fell to $178, primarily due to higher tax payments and increased inventory. Financing used $128, including $130 of treasury-stock purchases and $93 of dividends paid. The declared quarterly dividend was $0.71 per share, up from $0.64. The company had $750 million remaining under its separately authorized open-market repurchase program; the quarter’s repurchases were under its dilution-offset program.
Segment results and material changes
- Cleaning: Sales $479, up 1%; pretax earnings $131, up 9%. Cost savings and higher sales supported earnings; segment volume was flat.
- Household: Sales $372, up 5%; pretax earnings $52, up 4%. Volume rose 2%; higher resin and supply-chain costs partly offset savings and sales growth.
- Lifestyle: Sales $218, up 5%; pretax earnings $53, down 5%. Volume rose 4%, while investments in Burt’s Bees systems and processes weighed on earnings.
- International: Sales $295, down 3%; pretax earnings $28, flat. Foreign exchange, inflation and higher supply-chain costs pressured results; pricing and savings helped offset them.
Interest expense decreased $7 to $26, reflecting a lower weighted-average interest rate after debt issuance and maturities. Net earnings included a $1 after-tax loss from discontinued operations; the filing classifies potential additional costs from the Brazil litigation in discontinued operations. Comprehensive income was $135, versus $160, mainly reflecting lower foreign-currency translation gains.
Outlook, risks and contingencies
The filing provides no specific earnings or sales guidance. Management cited cost savings, volume growth and pricing as contributors to results, while identifying commodity and manufacturing costs, logistics, foreign exchange, inflation and price controls as pressures. It cautioned that interim results are not necessarily indicative of the full fiscal year.
Key stated risks include intense competition; commodity, energy and transportation cost volatility; international political, currency, inflation and regulatory risks; dependence on major customers; execution of cost savings and product innovation; supply disruptions; indebtedness and cash-flow sufficiency; and legal, environmental, tax and information-technology risks. Wal-Mart and affiliates represented 26% of quarterly sales, compared with 27% a year earlier.
Environmental remediation liabilities were $14; the company said additional exposure could exceed the recorded amount, but any excess could not be estimated. In Brazilian litigation brought by Petroplus, the company disclosed a reasonably possible additional loss range of $0–$29 and said its appeal could take years. The judgment, including interest and foreign-exchange movements, was approximately $35 at quarter-end. Management stated that other pending claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether sales and volume trends persist, particularly given competitive pressure on disinfecting wipes and distribution declines in Glad trash bags.
- Whether cost savings and pricing can continue to offset commodity, manufacturing, logistics and international inflation pressures without further margin erosion.
- Developments in Argentina and Venezuela, including price controls, inflation and currency effects.
- Cash generation, inventory levels, repurchases and dividends relative to debt and liquidity needs.
- Progress and potential exposure in the Brazilian Petroplus litigation and environmental remediation matters.