Clorox Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2010, the three months ended September 30, 2009; comparative period is the three months ended September 30, 2008. The filing is unaudited.
Business context and financial results
Clorox sells consumer products across Cleaning, Household, Lifestyle and International segments. Net sales were $1.372 billion, down 1% year over year, while volume increased 1%. Net earnings rose to $157 million from $128 million; diluted EPS increased to $1.11 from $0.90.
- Gross profit was $619 million, up 10%; gross margin expanded to 45.1% from 40.6%.
- Selling and administrative expenses fell 5% to $175 million. Advertising increased 7% to $127 million; research and development was $27 million in both periods.
- Interest expense declined to $36 million from $42 million. Other expense, net rose to $8 million from $3 million, primarily due to foreign-exchange transaction losses. The effective tax rate was 35.5%, versus 31.4%.
- Operating cash flow was $94 million, compared with $93 million. Capital expenditures were $34 million, implying approximate operating cash flow less capital expenditures of $60 million. Cash dividends paid were $70 million; the declared dividend was $0.50 per share, versus $0.46.
- Cash and cash equivalents were $237 million at quarter-end. Current assets were $1.201 billion and current liabilities $1.866 billion; working capital was negative $665 million, improved by $92 million from June 30, 2009.
- Total debt, including notes and loans payable and current and long-term debt, was approximately $3.169 billion. Stockholders’ deficit was $47 million. Commercial paper outstanding was $455 million, at a 0.3% weighted-average rate.
Segment performance and material changes
- Cleaning: Sales rose 3% to $503 million; pretax earnings increased 19% to $137 million. Disinfecting wipes demand associated with H1N1, Pine-Sol and toilet-bowl-cleaner shipments contributed to volume growth. Lower commodity costs, savings and pricing supported earnings.
- Household: Sales and pretax earnings each fell 11%, to $381 million and $55 million. Glad shipments were pressured by category softness, competition and the exit from a private-label food-bags business; lower input costs and savings partly offset the decline.
- Lifestyle: Sales rose 3% to $200 million; pretax earnings increased 18% to $66 million, supported by Hidden Valley dressing shipments, commodity costs and foreign exchange.
- International: Sales rose 4% to $288 million; pretax earnings increased 38% to $47 million. Volume and pricing contributed, partly offset by unfavorable currency effects and $9 million of foreign-currency transaction losses.
Management attributed higher EPS principally to favorable commodity costs, pricing, cost savings and lower interest expense, partly offset by higher advertising, unfavorable product mix, and increased manufacturing, logistics and trade-spending costs. Pricing actions benefited sales by approximately 270 basis points, while foreign exchange, mix and trade spending each pressured sales growth. Walmart and its affiliates represented 28% of sales, up from 27%.
Outlook, risks and unusual items
- The filing provides no specific full-year sales or EPS guidance. Management said cash, operating cash generation and external funding sources should meet foreseeable operating and capital needs.
- Management expected to repay $575 million of debt due in January 2010 using partial refinancing through long- and short-term debt and operating cash flows.
- The supply-chain and other restructuring program is expected to continue through fiscal 2012. Estimated fiscal 2010 charges are $18 million to $25 million, including approximately $2 million noncash; anticipated charges for fiscal 2011 and 2012 total approximately $10 million to $12 million. Accrued restructuring liability was $14 million.
- The company contributed $33 million voluntarily to its U.S. pension plan; it said no fiscal 2010 contribution is required under current funding rules.
- Venezuela currency-remittance restrictions contributed to approximately $8 million of foreign-currency transaction losses during the quarter. The filing also cites potential volatility in debt markets, commodity costs, foreign exchange, competition, consumer demand and customer-specific ordering.
- Environmental remediation liability was $19 million. Clorox noted potential additional exposure could exceed the recorded amount, but could not estimate it; the company’s cost-sharing counterpart, Ford, could affect its obligations if unable to pay its share. Management did not expect other pending claims and litigation to have a material adverse effect.
- A new EPS accounting standard was adopted retrospectively, reducing previously reported September 2008 basic and diluted EPS by $0.01 each. The company reported no material impact from the other newly adopted standards described.
Most important facts for investors to verify
- Whether sales and margins can sustain improvement, particularly given Household weakness, competitive trade spending and unfavorable mix.
- Commercial-paper and refinancing access for the $575 million January 2010 maturity; the company reported a 2.61 debt-to-EBITDA covenant ratio versus a 3.25 maximum and compliance with covenants.
- Progress, cash costs and realized savings from restructuring, including whether projected fiscal 2010 charges remain within the stated range.
- Exposure to currency restrictions and exchange-rate movements, especially in Venezuela, and the continuing concentration of sales with Walmart.
- Developments in tax audits and uncertain tax positions: unrecognized tax benefits were $85 million, and audit resolutions could reduce them by up to $26 million within the next twelve months, primarily through cash settlements.
- Environmental remediation estimates and the potential effect if Ford cannot meet its share of obligations.