The Clorox Company — Form 10-Q Summary
Business context and period. Clorox manufactures and markets consumer and professional products through Cleaning, Household, Lifestyle and International segments. This report covers fiscal first-quarter 2013, the three months ended September 30, 2012, compared with the same quarter in 2011. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $1,338 | $1,305 | +3% |
| Gross profit | $574 | $546 | +5% |
| Gross margin | 42.9% | 41.8% | +1.1 percentage points |
| Earnings before income taxes | $194 | $187 | +4% |
| Net earnings | $133 | $130 | +2% |
| Diluted EPS | $1.01 | $0.98 | +3% |
| Operating cash flow | $208 | $131 | +$77 |
| Capital expenditures | $54 | $37 | +$17 |
Net sales increased despite a 1% decline in volume. Price increases contributed approximately 340 basis points to sales growth; unfavorable foreign exchange reduced growth by approximately 80 basis points. Gross-margin expansion reflected cost savings and pricing, partly offset by manufacturing, logistics and other supply-chain inflation. The effective tax rate was 31.6%, versus 30.5%.
Cash and cash equivalents were $667 at quarter-end, versus $267 at June 30, 2012. Current assets were $1,745 and current liabilities $1,725. Total debt was approximately $3.02 billion under the company’s covenant calculation; stockholders’ deficit was $20. The company reported a 2.74 debt-to-EBITDA covenant ratio against a 3.50 maximum and said it was in compliance.
Clorox issued $600 of 3.05% senior notes due September 2022. It reported no commercial paper outstanding at September 30 and had no borrowings under its $1.1 billion revolving credit facility, which expires in May 2017. The declared dividend was $0.64 per share, compared with $0.60 a year earlier.
Segment results and changes
- Cleaning: Sales rose 8% to $472 and pretax earnings rose 11% to $120. Volume increased 4%, supported by professional products and disinfecting wipes; pricing and cost savings also contributed.
- Household: Sales fell 3% to $355, while pretax earnings rose 19% to $50. Volume declined 7%, including lower charcoal and cat-litter shipments; cost savings supported earnings.
- Lifestyle: Sales increased 1% to $208 and pretax earnings increased 2% to $56. Volume declined 1%; pricing and cost savings helped offset category and competitive pressures.
- International: Sales increased 3% to $303, but pretax earnings fell 30% to $28. Volume declined 2%; inflation, unfavorable currency and higher IT-related costs pressured earnings, partly offset by pricing and savings.
Corporate pretax losses increased to $60 from $58, primarily due to higher interest, employee compensation and benefits, and costs related to the new Pleasanton facility. Interest expense rose to $33 from $29, while prior-year other income included proceeds related to the sale of the global auto-care businesses and equity-investee income. Comprehensive income was $160 versus $66, largely reflecting a year-over-year improvement in foreign-currency translation adjustments.
Outlook, risks and contingencies
The filing provides no specific quantified earnings or sales guidance. Management stated that interim results are not necessarily indicative of full-year results. Its commentary highlights cost savings, pricing, product innovation and investments, while noting exposure to commodity and logistics inflation, foreign exchange, consumer and competitive responses to pricing, customer concentration, and execution risks for IT and cost-saving programs. Wal-Mart and its affiliates represented 27% of sales in both periods.
On October 9, 2012, a Brazilian appellate court issued an unfavorable decision in the Petroplus litigation concerning discontinued Brazil auto-care operations. Clorox said an additional loss beyond amounts accrued was reasonably possible but not estimable, and it planned to appeal. The underlying judgment, including interest and currency movements, was approximately $34 at September 30. The company also recorded $14 for environmental remediation liabilities, with possible additional exposure not estimable. Management said other disclosed claims were not expected to have a material adverse effect in aggregate.
Important facts for investors to verify
- Whether volume trends, pricing and cost savings can offset continuing input-cost inflation and foreign-exchange pressure.
- How the Brazilian litigation develops, including potential losses beyond recorded accruals.
- Debt, interest costs and covenant headroom; the filing reports a 2.74 ratio against a 3.50 maximum.
- Execution and costs of the Pleasanton facility and IT investments, particularly in International operations.
- Environmental remediation exposure and the company’s continued reliance on a major customer representing 27% of sales.