The Clorox Company — Form 10-Q summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2010 (Clorox fiscal 2010 third quarter), compared with the corresponding 2009 periods. This differs from the “2009 Q3” period in the request metadata. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $1,366 vs. $1,350; +1% | $4,017 vs. $3,950; +2% |
| Gross profit / margin | $617 vs. $611; 45.2% vs. 45.3% | $1,797 vs. $1,659; 44.7% vs. 42.0% |
| Earnings before income taxes | $243 vs. $233 | $650 vs. $550 |
| Net earnings | $165 vs. $153 | $432 vs. $367 |
| Diluted EPS | $1.16 vs. $1.08 | $3.04 vs. $2.59 |
| Operating cash flow | Not provided for the quarter | $443 vs. $423 |
For the nine-month period, operating cash flow less capital expenditures of $111 was $332; this is a simple calculation, not a company-reported free-cash-flow measure. Capital expenditures were $135 in the prior-year period. Cash dividends paid were $211 vs. $193; dividends declared were $1.50 vs. $1.38 per share for the nine-month periods.
Balance sheet and liquidity
At March 31, 2010, cash was $241, total debt was approximately $3,018, and stockholders’ equity was $180, versus a $175 deficit at June 30, 2009. Current assets were $1,338 and current liabilities $1,772. The company reported that working capital improved by $323 since June 30, principally reflecting lower current debt maturities after repayment and reclassification of debt.
Clorox repaid $575 of debt due in January, funded mainly with commercial paper and, to a lesser extent, operating cash. It issued $300 of 3.55% senior notes due November 2015. At March 31, commercial paper outstanding was $584 at a weighted-average rate of 0.3%. The company had an undrawn $1,100 revolving facility expiring April 2013 and reported compliance with its covenants, including a maximum debt-to-EBITDA ratio of 3.25; its reported ratio was 2.43. Management said cash, operating cash generation, and financing access should meet foreseeable operating and capital needs.
Material changes and segment performance
- Drivers of higher earnings: Management cited price increases and cost savings, partly offset by higher trade promotion spending. Nine-month gross-margin improvement reflected cost savings, favorable commodity costs, and pricing. Quarterly gross margin edged down as savings were partly offset by higher commodity costs.
- Cleaning: Nine-month sales were $1,378, up 1%, and pretax earnings were $336, up 11%. Quarterly sales fell 4%, while earnings rose 3%. Savings and lower commodity costs supported earnings; unfavorable product mix and promotions were offsets.
- Household: Nine-month sales declined 5% to $1,123 and pretax earnings fell 7% to $154. Quarterly earnings fell 8% to $72, with higher resin costs and weaker Glad product sales among the pressures.
- Lifestyle: Nine-month sales rose 6% to $638 and pretax earnings rose 15% to $226. Growth included Hidden Valley, Brita, and Burt’s Bees products.
- International: Nine-month sales rose 11% to $878 and pretax earnings rose 15% to $133; quarterly sales increased 9% while pretax earnings were flat at $47. Pricing and demand for disinfectants supported results, while advertising, currency effects, and Venezuela-related losses weighed on earnings.
Sales volume grew 3% in both the quarter and nine-month period. Promotions meant volume growth outpaced sales growth. Clorox identified softer H1N1-related demand growth, competitive pressure and category softness in some Glad products, and the exit from its private-label food-bag business as factors affecting results.
Outlook, risks, and unusual items
- Venezuela: Due to limited access to the official exchange rate, Clorox began translating its Venezuelan subsidiary at the parallel rate effective December 31, 2009; Venezuela was designated hyper-inflationary for U.S. GAAP purposes effective January 1, 2010. The rate was 7.05 VEF per U.S. dollar at March 31. The filing reports $14 of nine-month remeasurement losses and a $16 earnings impact from the exchange-rate accounting change excluding those remeasurement losses. Venezuela represented about 2% of nine-month sales and 1% of assets at period-end.
- Restructuring: The supply-chain and other restructuring plan is expected to continue through fiscal 2012. Clorox estimated fiscal 2010 charges of $17–$23, with about $2 expected to be noncash, and total charges of $10–$12 for fiscal 2011 and 2012.
- Acquisition: Clorox paid $24 for Caltech Industries, a healthcare disinfectants business, in January 2010. The final purchase price remained subject to tax adjustments; acquired goodwill was $9.
- Contingencies: Environmental remediation liabilities were $16 at March 31. A Michigan matter accounts for most of the liability; Clorox is responsible for 24.3% under a cost-sharing arrangement with Ford, but could face greater exposure if Ford cannot pay its share. Potential additional exposure was not estimable. Management said other lawsuits and claims were not expected to have a material adverse effect.
- Other watch items: The Burt’s Bees reporting unit had $614 of goodwill and estimated fair value only about 5% above carrying value; no impairment was identified in the annual review. Wal-Mart and affiliates accounted for 27% of consolidated sales in both current periods. Management provided no specific full-year sales or earnings guidance in the supplied filing text.
Key facts for investors to verify
- Whether pricing and cost savings can continue to offset trade promotions, commodity-cost volatility, and competitive pressure.
- Venezuela’s exchange-rate and hyperinflation effects, including the reported earnings impact and the continuing availability of currency for imports or remittances.
- Debt refinancing, commercial-paper access, liquidity, and covenant headroom following the $575 repayment and changes in current debt classification.
- Execution and remaining costs of the restructuring plan, and whether expected savings are achieved.
- Potential impairment sensitivity at Burt’s Bees, environmental remediation exposure, and concentration risk from Wal-Mart.