Business context and reporting period
The Clorox Company’s Form 10-Q reports the fiscal third quarter and nine months ended March 31, 2011, compared with the corresponding 2010 periods. The filing metadata says “2010 Q3,” but the filing itself identifies the reporting period as March 31, 2011. Clorox reports Cleaning, Household, Lifestyle and International segments. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Three months ended March 31, 2011 | Prior year | Nine months ended March 31, 2011 | Prior year |
|---|---|---|---|---|
| Net sales | $1,304 | $1,287 | $3,749 | $3,805 |
| Gross profit | $575 | $574 | $1,628 | $1,686 |
| Gross margin | 44.1% | 44.6% | 43.4% | 44.3% |
| Continuing-operations earnings | $141 | $143 | $118 | $376 |
| Net earnings | $151 | $165 | $388 | $432 |
| Diluted EPS from continuing operations | $1.02 | $1.00 | $0.84 | $2.64 |
| Net cash from continuing operations | — | — | $387 | $421 |
Quarterly sales rose about 1%, while nine-month sales fell about 1%. Nine-month diluted continuing EPS was $2.68 excluding the $1.84-per-share noncash goodwill impairment, versus $2.64 a year earlier; this is a company-presented non-GAAP measure. The nine-month result also includes a $247 after-tax gain on the sale of the Auto Businesses. The reported nine-month effective tax rate was 61.8%, largely because the $258 impairment was not substantially tax-deductible; excluding the impairment, the rate was 33.9%.
For the nine months, operating cash flow was $406, including $19 from discontinued operations, versus $443 a year earlier. Capital expenditures were $159 versus $109. Sale proceeds from the Auto Businesses were $747 net of transaction costs. Financing cash use was $961, including $472 of share repurchases, $230 of dividends and $300 of long-term debt repayments.
At March 31, 2011, cash was $153; current assets were $1,204 and current liabilities $1,232, a $28 working-capital deficit. Notes and loans payable were $343 and long-term debt $2,125, or $2,468 total debt as presented in the filing. Stockholders’ equity was a deficit of $82. The company had a $1,100 undrawn revolving credit facility and reported a debt-to-EBITDA covenant ratio of 2.10 against a maximum of 3.25.
Material changes and management commentary
- Gross margin declined year over year in both periods. Management cited commodity inflation, especially resin, unfavorable product mix, and higher manufacturing and logistics costs; cost savings and pricing partly offset these pressures.
- Quarterly volume increased 1%, but nine-month volume declined 1%. International sales grew 8% in the quarter, aided by pricing and currency; Household sales fell 3% in the quarter and 5% year to date.
- In November 2010 Clorox sold substantially all global Auto Businesses, including Armor All and STP, for $755 cash consideration and received approximately $30 related to retained working capital. The sale’s after-tax gain was $247 for the nine months. Transition services may continue for up to 18 months.
- Clorox recorded a $258 noncash goodwill impairment in fiscal Q2 for Burt’s Bees after slower-than-projected category growth and international expansion challenges. No further adjustment was required in Q3; the related trademarks and definite-lived intangible assets were not impaired.
- Management described liquidity as strong and said operating cash flow, commercial-paper access and the undrawn credit facility should cover operating and capital needs for the foreseeable future. It expected the covenant ratio to increase modestly by fiscal year-end, reflecting planned repurchases and repayment of intercompany borrowings. No specific revenue or earnings guidance is provided in the filing.
Outlook, risks and contingencies
Key risks cited include commodity and energy cost volatility, execution of cost-saving and supply-chain initiatives, consumer response to price increases, competition and customer concentration, international and currency exposure, access to debt markets, and legal, tax, product-liability and environmental matters. Wal-Mart and affiliates accounted for 25% of quarterly sales and 26% of nine-month sales.
Environmental remediation liabilities were $15, including a substantial share of a Michigan matter with an estimated 30-year remediation period; possible additional exposure cannot currently be estimated. Other lawsuits and claims include product, intellectual-property, contract and employment matters; management does not expect their disposition to materially adversely affect the company’s financial statements. Maximum exposure under indemnification agreements was $68, primarily including up to $38 related to the Auto sale; no liability was recorded and management did not anticipate payments. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s fiscal-period description: the actual quarter ended March 31, 2011, despite the request metadata’s “2010 Q3.”
- Assess whether pricing and cost savings can offset continuing commodity, manufacturing and logistics cost pressure and margin erosion.
- Separate recurring operating performance from the Burt’s Bees impairment and Auto Businesses disposal gain when evaluating year-to-date earnings.
- Monitor working-capital needs, cash generation, planned share repurchases, intercompany borrowing repayment and covenant headroom.
- Review Burt’s Bees growth assumptions and the uncertain scale and timing of environmental remediation and other contingent exposures.