Clorox Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2011. Amounts are in millions, except per-share data. The company sells consumer and institutional products across Cleaning, Household, Lifestyle and International segments.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,221 | $1,179 | $2,526 | $2,445 |
| Gross profit | $507 | $492 | $1,053 | $1,053 |
| Gross margin | 41.5% | 41.7% | 41.7% | 43.1% |
| Continuing-operations earnings | $105 | $(163) | $235 | $(23) |
| Net earnings | $105 | $21 | $235 | $237 |
| Diluted EPS from continuing operations | $0.79 | $(1.17) | $1.76 | $(0.17) |
- Sales rose 4% in the quarter and 3% for six months. Management attributed growth chiefly to price increases; quarterly volume was flat, while six-month volume increased 1%. Price gains were partly offset by unfavorable mix.
- Gross margin declined year over year. Higher commodity costs, manufacturing and logistics costs, and unfavorable mix outweighed price increases and cost savings. Management said resin was a primary source of commodity pressure.
- Prior-year continuing results included a $258 non-cash goodwill impairment charge for Burt’s Bees. Excluding that charge, diluted continuing-operations EPS was $0.68 for the prior-year quarter and $1.68 for the prior-year six months, versus $0.79 and $1.76, respectively, in the current periods.
- Net earnings comparisons also reflect the prior-year sale of the Auto Businesses: discontinued operations contributed $184 in the prior-year quarter and $260 for the prior-year six months, including sale gains.
- Cash provided by continuing operations was $168 for the six months, compared with $170 a year earlier. Capital expenditures were $82, versus $89. The filing does not provide a full-year cash-flow outlook.
- At December 31, cash was $297; current assets were $1,348 and current liabilities $1,637. Total debt, including current maturities, was $2,896; long-term debt was $2,070. Stockholders’ deficit was $199.
- The company issued $300 of 3.80% senior notes due November 15, 2021, and used the proceeds to retire commercial paper. Commercial paper outstanding was $463. A $1.1 billion revolving credit facility had no borrowings; the company reported compliance with its covenants. Its contract-defined debt-to-EBITDA ratio was 2.63 against a maximum of 3.25.
Segment results and material changes
- Cleaning: Quarterly sales rose 5% to $370 and pretax continuing earnings rose to $78 from $64. Six-month sales were $809 and earnings $186, broadly level with the prior year.
- Household: Quarterly sales rose 4% to $334 and pretax earnings increased to $34 from $25. Six-month sales rose 4% to $700, while earnings slipped to $76 from $78, with commodity and logistics costs cited.
- Lifestyle: Quarterly sales rose 6% to $230; pretax earnings were $70 versus a prior-year loss of $192, which included the $258 impairment. Excluding that charge, prior-year quarterly earnings were $66. Six-month sales rose 6% to $444; earnings before the impairment were flat at $124.
- International: Quarterly sales were flat at $287 and pretax earnings declined 22% to $32. Six-month sales rose 4% to $573, while earnings fell 10% to $73, amid higher manufacturing, logistics and commodity costs, including inflationary pressures in Argentina and Venezuela.
- The company acquired HealthLink, Aplicare and Soy Vay on December 31 for aggregate purchase prices of $97; $85 was paid during the quarter and funded through commercial paper. Purchase accounting was preliminary.
- Quarterly diluted EPS also benefited from lower weighted-average shares, primarily due to repurchases. The company repurchased $158 of shares during the six months and declared dividends of $1.20 per share, versus $1.10 a year earlier.
Outlook, risks and contingencies
- The filing provides no specific numerical sales, earnings or margin guidance. Management said current-period EPS improvement versus the prior year, after excluding the prior-year impairment, reflected pricing and cost savings, partly offset by higher commodities, manufacturing and logistics costs.
- Key stated risks include volatile commodity and energy costs, execution of cost-saving programs, supply constraints, pricing and consumer response, competition, customer concentration, international currency and political conditions, information-system implementation, acquisitions, and legal, product-liability and environmental matters.
- Wal-Mart and affiliates represented 26% of sales in both the current quarter and six-month period.
- Environmental remediation liabilities were recorded at $15. The company said additional exposure could exceed the recorded amount, but could not estimate any additional amount or range. Management did not expect the disclosed litigation and claims, including environmental matters, to materially adversely affect the consolidated financial statements.
- The company had $15 of letters of credit, primarily associated with an insurance carrier, and reported no recorded liabilities for the described guarantees. Management stated that disclosure controls were effective.
Important facts for investors to verify
- How pricing, volume and mix develop as commodity, manufacturing and logistics costs affect margins.
- Whether the company maintains covenant headroom and liquidity given $2,896 of total debt and $350 of current maturities.
- Integration and performance of the three acquisitions, including final purchase accounting and funding.
- International segment profitability and exposure to inflation and currency conditions, particularly in Argentina and Venezuela.
- Potential variability in environmental remediation costs and the effect of customer concentration.