Business Context and Reporting Period
Company: The Clorox Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007 (Fiscal Year 2007, Q3)
Business Overview: A leading manufacturer and marketer of consumer products including bleach, cleaning, auto-care, water-filtration, and food products. Operations are reported in three segments: Household Group – North America, Specialty Group, and International.
Key Financial Metrics
| Metric ($ millions) | 3 Months Ended 3/31/07 | 9 Months Ended 3/31/07 | 3 Months Ended 3/31/06 | 9 Months Ended 3/31/06 |
|---|---|---|---|---|
| Net Sales | $1,241 | $3,503 | $1,157 | $3,325 |
| Gross Profit | $537 | $1,497 | $480 | $1,382 |
| Gross Margin % | 43.3% | 42.7% | 41.5% | 41.6% |
| Net Earnings | $129 | $337 | $110 | $302 |
| Diluted EPS | $0.84 | $2.19 | $0.72 | $1.98 |
| Operating Cash Flow (9mo) | $427 (vs. $221 prior year) | |||
| Cash & Equivalents | $171 (as of 3/31/07) | |||
| Total Debt (Current + Long-term) | $2,170 (as of 3/31/07) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7% for the quarter and 5% for the nine-month period, driven by volume growth (8% Q/Q, 2% 9mo/9mo) and prior year price increases.
- Profitability: Diluted EPS from continuing operations rose 17% for the quarter and 10% for the nine-month period. Gross margins expanded by 180 and 110 basis points respectively, aided by cost savings and pricing, partially offset by higher commodity and trade-promotion costs.
- Acquisitions: The company acquired bleach businesses in Canada and Latin America for an aggregate price of $123 million, adding goodwill of $84 million and intangible assets.
- Restructuring: Recorded $9 million in restructuring and asset impairment costs for the quarter (vs. $0 prior year), primarily related to a new Information Technology Services (ITS) agreement with Hewlett-Packard.
- Debt Structure: Current maturities of long-term debt increased significantly due to the reclassification of a $500 million note maturing in December 2007.
Guidance, Outlook, and Risks
- Outlook: Management anticipates incremental administrative expenses in the fourth quarter and fiscal year 2008 to support a refreshed long-term strategy. The company expects to incur approximately $24 million in total administrative and restructuring costs for the ITS Agreement in fiscal 2007.
- Share Repurchases: The company anticipates repurchasing approximately 2 million shares in fiscal 2007 under its "evergreen" program to offset dilution. No open market repurchases were made in the current quarter.
- Accounting Changes: Adoption of SFAS No. 158 (pension accounting) in Q4 2007 is expected to reduce pension benefit assets by approximately $100 million and increase other comprehensive losses by $63 million, with no impact on earnings or cash flows.
- Risks & Contingencies:
- Environmental: A recorded liability of $23 million exists for environmental remediation, primarily in Dickinson County, Michigan. The company shares joint and several liability with another party facing financial challenges.
- Legal: A derivative lawsuit regarding stock option practices was filed in 2006; parties agreed to dismiss the amended complaint pending a Board decision, with no material liability accrued.
- Guarantees: Maximum indemnification exposure is $291 million, primarily related to a tax indemnity with Henkel KGaA (up to $250 million).
Investor Verification Checklist
- ITS Agreement Impact: Verify the long-term cost implications of the $260 million HP IT services agreement and the associated restructuring charges.
- Acquisition Integration: Monitor the closing of the remaining Colombia bleach business acquisition ($3 million) and the integration of Latin American operations.
- Environmental Liability: Assess the financial stability of the co-defendant in the Dickinson County, Michigan remediation case to evaluate potential exposure beyond the recorded $23 million.
- Pension Funding: Review the impact of the Pension Protection Act on future funding requirements, given the company's plan year ending June 30, 2008.
- Customer Concentration: Note that Wal-Mart Stores, Inc. accounts for 26% of consolidated net sales.