UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-07151
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THE CLOROX COMPANY
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-0595760
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
1221 Broadway - Oakland, California 94612 - 1888
- ---------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, (including area code) (510) 271-7000
--------------
(Former name, former address and former fiscal year, if changed
since last report)
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Indicate by check mark whether the registrant (1) has filed
all report required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
------------ ---------------
As of December 31, 1998 there were 103,723,864 shares outstanding
of the registrant's common stock (par value - $1.00), the
registrant's only outstanding class of stock.
- ---------------------------------------------------------------------
Total pages 24 1
THE CLOROX COMPANY
PART 1. Financial Information Page No.
--------------------- ---------
Item 1. Financial Statements
Condensed Statements of Consolidated
Earnings
Three and Six Months Ended
December 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets
December 31, 1998 and June 30, 1998 4
Condensed Statements of Consolidated
Cash Flows
Six Months Ended December 31, 1998
and 1997 5
Notes to Condensed Consolidated
Financial Statements 6-16
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 17-22
Item 5. Other information 23-24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Earnings
---------------------------------------------
(In thousands, except per-share amounts)
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
12/31/98 12/31/97 12/31/98 12/31/97
---------- ------------ ---------- -----------
Net Sales $ 648,172 $ 591,795 $1,334,055 $ 1,241,079
---------- ------------ ---------- -----------
Costs and Expenses
Cost of products sold 283,927 258,189 572,478 537,883
Selling, delivery and
administration 148,262 139,789 290,880 270,188
Advertising 90,585 83,408 182,177 174,952
Research and development 13,952 13,007 26,901 24,613
Interest expense 16,667 16,525 35,463 32,019
Other (income) expense, net 3,529 (242) 379 (1,601)
---------- ------------ ---------- ------------
Total costs and expenses 556,922 510,676 1,108,278 1,038,054
---------- ----------- ---------- ------------
Earnings before Income Taxes 91,250 81,119 225,777 203,025
Income Taxes 33,304 31,636 82,409 79,179
---------- ------------ ---------- -----------
Net Earnings $ 57,946 $ 49,483 $ 143,368 $ 123,846
========== =========== ========== ============
Earnings per Common Share
Basic $ 0.56 $ 0.48 $ 1.38 $ 1.20
Diluted 0.55 0.47 1.36 1.17
Weighted Average Shares
Outstanding
Basic 103,628 103,393 103,616 103,305
Diluted 105,735 105,429 105,732 105,427
Dividends per Share $ 0.36 $ 0.32 $ 0.72 $ 0.64
See Notes to Condensed Consolidated Financial Statements.
3
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Consolidated Balance Sheets
-------------------------------------
(In thousands)
12/31/98 6/30/98
------------ -----------
ASSETS
Current Assets
Cash and short-term investments $ 102,242 $ 89,681
Accounts receivable, less allowance 365,468 411,868
Inventories 228,742 211,913
Prepaid expenses and other 45,035 45,354
Deferred income taxes 18,753 23,242
------------ -----------
Total current assets 760,240 782,058
Property, Plant and Equipment - Net 604,025 596,293
Brands, Trademarks, Patents and Other Intangibles 1,254,862 1,240,532
Investments in Affiliates 84,247 84,449
Other Assets 343,051 310,018
------------ -----------
Total $ 3,046,425 $ 3,013,350
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 116,528 $ 154,348
Accrued liabilities 183,908 268,583
Short-term debt 659,256 768,616
Income taxes payable 38,855 15,370
Current maturities of long-term debt 1,392 1,517
------------ -----------
Total current liabilities 999,939 1,208,434
Long-term Debt 508,454 316,260
Other Obligations 220,055 203,000
Deferred Income Taxes 178,784 200,421
Stockholders' Equity
Common stock 110,844 110,844
Additional paid-in capital 95,613 84,124
Retained earnings 1,455,702 1,382,943
Treasury shares, at cost (410,845) (391,864)
Accumulated other comprehensive income (loss) (101,083) (89,861)
Other (11,038) (10,951)
------------ -----------
Stockholders' Equity 1,139,193 1,085,235
------------ -----------
Total $ 3,046,425 $ 3,013,350
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Cash Flows
-------------------------------------------------
(In thousands)
Six Months Ended
--------------------------------------
12/31/98 12/31/97
-------------- --------------
Operations:
Net earnings $ 143,368 $ 123,846
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 70,838 65,005
Deferred income taxes 3,528 2,855
Other (6,884) (2,669)
Effects of changes in:
Accounts receivable 49,554 15,750
Inventories (14,628) (48,726)
Prepaid expenses 319 4,597
Accounts payable (39,343) (26,909)
Accrued liabilities (79,011) (84,816)
Income taxes payable 23,368 1,221
-------------- --------------
Net cash provided by operations 151,109 50,154
Investing Activities:
Property, plant and equipment (47,244) (39,681)
Disposal of property, plant and equipment 4,057 1,686
Businesses purchased (57,473) (80,120)
Other (39,437) (48,468)
-------------- --------------
Net cash used for investment (140,097) (166,583)
-------------- --------------
Financing Activities:
Short-term debt borrowings - 13,407
Short-term debt repayments (387,540) (161,719)
Long-term debt and other obligations borrowings 201,235 193,736
Long-term debt and other obligations repayments (6,461) (61,525)
Commercial paper, net 277,480 186,451
Cash dividends (74,574) (65,999)
Treasury stock purchased (32,455) (33,815)
Issuance of common stock under employee stock plans and other 23,864 (4,255)
-------------- --------------
Net cash provided by financing 1,549 66,281
-------------- --------------
Net Increase (Decrease) in Cash and Short-Term Investments 12,561 (50,148)
Cash and Short-Term Investments:
Beginning of period 89,681 101,046
-------------- --------------
End of period $ 102,242 $ 50,898
============== ==============
See Notes to Condensed Financial Statements.
5
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ------------------------------------------------------
(1) The condensed consolidated financial information for the
three and six months ended December 31, 1998 and 1997 has not
been audited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the consolidated results
of operations, financial position, and cash flows of The
Clorox Company and its subsidiaries (the "Company"). The
results of the three and six months ended December 31, 1998
and 1997 should not be considered as necessarily indicative
of the results for the respective year.
(2) Inventories at December 31, 1998 and at June 30, 1998
consisted of (in thousands):
12/31/98 6/30/98
--------- -------
Finished goods and work in process $150,591 $130,185
Raw materials and supplies 78,151 81,728
--------- -------
Total $228,742 $211,913
========= ========
(3) Businesses purchased for the six months ended December 31,
1998 and December 31, 1997 totalling $57,473,000 and $ 80,120,000,
respectively, were funded using a combination of cash and debt
and were accounted for as purchases. These acquisitions in 1998
included a bleach and cleaners business in Venezuela, an
insecticide business in Korea, a cleaning brand business in
Australia and an increase in ownership in Tecnoclor, S.A. in
Colombia.
(4) In July 1998, the Company refinanced $150,000,000 of
commercial paper by entering into a Deutsche Mark denominated
financing arrangement with private investors. In October 1998,
the private investors exercised an option to finance an
additional $50,000,000 under the same terms of this financing
arrangement. The Company entered into a series of swaps with
notional amounts totaling $200,000,000 to eliminate foreign
currency exposure risk generated by this Deutsche Mark
denominated obligation. The swaps effectively convert the
Company's 2.876% fixed Deutsche Mark obligation to a floating
U.S. dollar rate of 90 day LIBOR less 278 basis points or an
effective rate of approximately 3%.
In December 1998, the Company redeemed preference shares totalling
$387,540,000 which was classified as short-term debt.
This financing was replaced with commercial paper
borrowings at a rate of approximately 5.2%.
6
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(5) SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of all earnings statements
issued after December 15, 1997 for all entities with complex
capital structures. Basic EPS is computed by dividing net
earnings by the weighted average number of common shares
outstanding each period. Diluted EPS is computed by dividing
net earnings by the diluted weighted average number of common
shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable
through stock options, restricted stock, warrants and other
convertible securities. The weighted average number of shares
outstanding (denominator) used to calculate basic EPS is reconciled
to those used in calculating diluted EPS as follows (in thousands):
Weighted Average Number of Shares Outstanding
---------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------- -----------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- --------
Basic 103,628 103,393 103,616 103,305
Stock options 2,068 1,987 2,075 2,073
Other 39 49 41 49
-------- --------- -------- --------
Diluted 105,735 105,429 105,732 105,427
======== ========= ======== =========
(6) Effective July 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting of Comprehensive
Income. Comprehensive income for the Company includes net income
and foreign currency translation adjustments that are excluded
from net income but included as a component of total stockholders'
equity. Comprehensive income for the three and six months ended
December 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended Six Months Ended
-------------------------------- ------------------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- ---------
Net Earnings $ 57,946 $ 49,483 $143,368 $123,846
Other comprehensive
income (loss):
Foreign currency
translation
adjustments 5,793 (22,967) (11,222) (27,867)
-------- --------- -------- ---------
Comprehensive Income $ 63,739 $ 26,516 $132,146 $ 95,979
========= ========= ======== ==========
(7) Certain reclassifications of prior periods' amounts have
been made to accounts receivable, accrued liabilities,
interest expense and other (income) expense to conform with
the current period presentation.
7
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(8) Subsequent Event - Completion of First Brands Corporation Merger
On January 29, 1999, the Company completed the First Brands
Corporation ("First Brands") merger when the Company's wholly
owned subsidiary, Pennant, Inc. ("Pennant"), merged into
First Brands. As a result of the merger ("Merger"), First
Brands became a wholly owned subsidiary of the Company and
continues to operate its business as the Company's subsidiary.
First Brands develops, manufactures, markets and sells consumer
products under the Glad, Scoop Away, and STP brands, among
others. The Merger is structured to be treated as a pooling of
interests for accounting purposes.
Pursuant to the Agreement and Plan of Reorganization and Merger
dated as of October 18, 1998 among the Company, First Brands,
and Pennant ("Merger Agreement"), First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each share of
First Brands' common stock, with cash paid in lieu of fractional
shares. Pursuant to the Merger, approximately 40,320,500 shares
of First Brands' common stock were converted into approximately
14,071,850 shares of the Company's common stock. In addition,
options to acquire 1,755,010 shares of First Brands' common
stock were converted to 612,484 options to acquire shares of the
Company's common stock. As a result of the Merger, Clorox also
assumed approximately $440 million of First Brands' debt. See
also the discussion in "Management's Discussion and Analysis"
under "Subsequent Event - Completion of First Brands Corporation
Acquisition."
(9) Pro forma financial information
The following unaudited pro forma combined condensed
consolidated financial statements have been prepared to
give effect to the Merger, using the pooling of interests
method of accounting.
No adjustments to the unaudited pro forma combined condensed
consolidated financial information have been made to conform
the accounting policies of the combined company, as the
nature and amounts of such adjustments are deemed insignificant.
Certain reclassifications have been made to conform First
Brands' balance sheet and income and expense to the Company's
classifications as of December 31, 1998. The share information
used in the unaudited pro forma information assumes the actual
exchange ratio of .349.
The unaudited pro forma combined condensed consolidated balance
sheet as of December 31, 1998 gives effect to the Merger as if
it had occurred on December 31, 1998, and combines the unaudited
consolidated balance sheet of the Company and the unaudited
consolidated balance sheet of First Brands as of December 31, 1998.
The unaudited pro forma combined condensed consolidated statements
of earnings for all periods presented give effect to the Merger
as if it had occurred at the beginning of the periods presented.
For purposes of the unaudited pro forma combined condensed
consolidated statements of earnings, First Brands' consolidated
statements of earnings for the three and six months ended
December 31, 1997 and 1998 have been combined with the Company's
consolidated statements of earnings for the three and six months
ended December 31, 1997 and 1998, respectively.
8
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
The Company and First Brands estimate they will incur combined
aggregate direct transaction costs of approximately $15.5
million associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants and other
related costs. These nonrecurring transaction costs will be
charged to operations upon consummation of the Merger. It is
expected that following the Merger, the Company will incur
additional nonrecurring costs currently estimated to be
approximately $125 million, including non-cash charges
currently estimated at $30 million. No estimate for these
charges has been reflected in the pro forma combined
condensed consolidated balance sheet or pro forma combined
condensed statements of earnings. There can be no assurance
that the Company will not incur additional charges in excess
of $140.5 million to reflect transaction costs and costs
associated with the Merger or that management will be successful
in its efforts to integrate the operations of the two companies.
The unaudited pro forma combined condensed consolidated
financial information is presented for illustrative purposes
only and is not necessarily indicative of the financial
position or results of operations that would have actually
been reported had the Merger occurred at the beginning of the
periods presented (or as of December 31, 1998), nor is it
necessarily indicative of the financial position or results of
operations of the Company in the future. Such unaudited pro
forma combined condensed consolidated financial statements are
based upon the respective historical consolidated financial
statements and notes thereto of the Company and First Brands
and do not incorporate, nor do they assume, any benefits from
cost savings or synergies that the Company may realize after the
Merger.
9
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet (a), (b)
(In thousands)
December 31, 1998
----------------------------------------------------------------------
Pro Forma
Adjusments and Pro Forma
Clorox First Brands Reclassifications Combined
------------- ---------------- -------------------- ------------
ASSETS
Current Assets
Cash and short-term investments $ 102,242 $ 22,472 $ $ 124,714
Accounts and notes receivable, net 365,468 106,322 (25,799)(ii) 445,991
Inventories 228,742 151,912 380,654
Prepaid expenses and other 45,035 4,417 49,452
Deferred income taxes 18,753 12,591 31,344
------------- ---------------- -------------------- ------------
Total current assets 760,240 297,714 (25,799) 1,032,155
------------- ---------------- -------------------- ------------
Property, Plant and Equipment - Net 604,025 420,269 1,024,294
Brands, Trademarks, Patents and Other
Intangibles 1,254,862 333,961 1,588,823
Investments in Affiliates 84,247 - 5,853 (ii) 90,100
Other Assets 343,051 48,899 (5,853)(ii) 386,097
------------- ---------------- -------------------- ------------
Total $ 3,046,425 $ 1,100,843 $ (25,799) $ 4,121,469
============== ================= =================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 116,528 $ 43,127 $ $ 159,655
Accrued liabilities 183,908 71,919 (25,799)(ii) 230,028
Accrued merger costs - - 15,500 (i) 15,500
Short-term debt and notes payable 659,256 4,665 663,921
Income taxes payable 38,855 18,417 57,272
Current maturities of long-term debt 1,392 3,280 4,672
------------- ---------------- -------------------- ------------
Total current liabilities 999,939 141,408 (10,299) 1,131,048
Long-term Debt 508,454 429,414 937,868
Other Obligations 220,055 28,248 248,303
Deferred Income Taxes 178,784 79,389 258,173
Stockholders' Equity
Common stock and additional
paid in capital 206,457 152,929 359,386
Retained earnings 1,455,702 424,720 (15,500)(i) 1,864,922
Treasury shares, at cost (410,845) (125,872) (536,717)
Accumulated other comprehensive income (101,083) (29,393) (130,476)
Other (11,038) - (11,038)
------------- ---------------- -------------------- ------------
Stockholders' Equity 1,139,193 422,384 (15,500) 1,546,077
------------- ---------------- -------------------- ------------
Total $ 3,046,425 $ 1,100,843 $ (25,799) $ 4,121,469
============= ================= ==================== =============
See notes to unaudited pro forma combined condensed consolidated financial statements.
10
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings (a), (c), (d)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
--------- --------- ---------- ---------
Net Sales $ 946,961 $ 887,768 $1,911,631 $1,801,573
Costs and Expenses
Cost of products sold 458,570 435,147 916,716 880,145
Selling, delivery and administration 201,213 188,560 392,568 363,754
Advertising 122,322 115,660 236,775 228,534
Research and development 15,281 14,499 29,646 27,410
Restructuring - 2,700 - 2,700
Interest expense 25,184 25,517 52,666 49,272
Other (income) expense, net 6,790 2,712 7,562 4,914
--------- --------- ---------- ---------
Total costs and expenses 829,360 784,795 1,635,933 1,556,729
--------- --------- ---------- ---------
Earnings before Income Taxes and
cumulative effect of change in
accounting principle 117,601 102,973 275,698 244,844
Income Taxes 43,523 40,183 101,878 95,518
--------- --------- ---------- ---------
Earnings before cumulative effect of
change in accounting principle $ 74,078 $ 62,790 $ 173,820 $ 149,326
========= ========= ========== =========
Earnings per Common Share
before cumulative effect of change
in accounting principle
Basic $ 0.63 $ 0.54 $ 1.48 $ 1.27
Diluted 0.62 0.52 1.45 1.25
Weighted Average Shares Outstanding
Basic 117,294 117,247 117,261 117,202
Diluted 119,799 119,614 119,674 119,632
See notes to unaudited pro forma combined condensed consolidated financial statements.
11
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(a) Pro forma basis of presentation
The unaudited condensed statements of earnings for the three
and six months ended December 31, 1997 and 1998 reflect the
combination of the statements of earnings of the Company and First
Brands for those periods. No adjustments have been made in these
pro forma combined condensed consolidated financial statements to
conform the accounting policies of the combined company, as the
nature and amounts of such adjustments are deemed insignificant.
The unaudited pro forma combined condensed consolidated
financial statements reflect the issuance of 13,858,522 shares
of the Company's Common Stock in exchange for an aggregate of
39,709,232 shares of First Brands' Common Stock outstanding as
of December 31, 1998 in connection with the Merger, based on the
actual Exchange Ratio of .349 (which uses an average closing
price for the Company's Common Stock of $111.86 per share) as set
forth in the following table:
Shares of First Brands' Common Stock outstanding
as of December 31, 1998 39,709,232
Exchange Ratio .349
--------------
Number of shares of the Company's Common
Stock exchanged for
First Brands Common Stock 13,858,522
Number of shares of the Company's Common
Stock outstanding at
December 31, 1998 103,723,864
--------------
Number of shares of the Company's Common
Stock outstanding at December 31, 1998
after giving effect to the Merger 117,582,386
===============
(b) Unaudited pro forma combined condensed consolidated balance sheet
(i) The Company and First Brands estimate they will incur
combined aggregate direct transaction costs of approximately $15.5
million associated with the Merger, consisting of transaction fees
for investment bankers, attorneys, accountants and other related
costs. These non-recurring transaction costs will be charged
to operations upon consummation of the Merger. These charges
have been reflected in the unaudited pro forma combined condensed
consolidated balance sheet but have not been included in the
unaudited pro forma combined condensed consolidated statement of
earnings.
(ii) Represents certain reclassifications to conform
First Brands' balance sheet classifications to the Company's
balance sheet classifications at December 31, 1998.
12
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(iii) It is expected that, following the Merger, the
Company will incur additional nonrecurring costs currently
estimated to be approximately $125,000,000, including
non-cash charges estimated at $30,000,000, in connection
with the Merger. No estimate for these charges has been
reflected in the pro forma combined condensed consolidated
balance sheet or combined condensed consolidated statements
of earnings. There can be no assurance that the Company
will not incur additional charges in excess of $125,000,000
to reflect additional nonrecurring costs associated with
the Merger, or that management will be successful in its
efforts to integrate the operations of the two companies.
(c) Unaudited pro forma combined condensed consolidated
statement of earnings
The following are certain classifications of historical
results of operations of the Company and First Brands and
their pro forma combined amounts included in the unaudited
pro forma combined condensed consolidated statements of
earnings. Certain reclassifications were made to the
historical results of First Brands to conform to the
Company's classifications. These pro forma amounts
reflect the Merger as if it were effected for all periods
presented on the following two pages.
13
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings
(In thousands)
Three Months Ending December 31, 1998 Six Months Ending December 31, 1998
--------------------------------------------- -----------------------------------------
Pro Forma Pro Forma
Reclass- Pro Forma Reclass- Pro Forma
Clorox First Brands ifications Combined Clorox First Brands ifications Combined
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Net Sales $ 648,172 $ 314,386 $ (15,597) $ 946,961 $1,334,055 $ 605,895 $ (28,319) $1,911,631
Costs and Expenses
Cost of products
sold 283,927 196,158 (21,515) 458,570 572,478 385,017 (40,779) 916,716
Selling, delivery
and administration 148,262 79,319 (26,368) 201,213 290,880 145,039 (43,351) 392,568
Depreciation and
amortization - 3,798 (3,798) - - 7,802 (7,802) -
Advertising 90,585 - 31,737 122,322 182,177 - 54,598 236,775
Research and
development 13,952 - 1,329 15,281 26,901 - 2,745 29,646
Restructuring - - - - - - - -
Interest expense 16,667 7,140 1,377 25,184 35,463 14,339 2,864 52,666
Discount on sale
of receivables - 1,377 (1,377) - - 2,864 (2,864) -
Other (income)
expense, net 3,529 243 3,018 6,790 379 913 6,270 7,562
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Total costs and
expenses 556,922 288,035 (15,597) 829,360 1,108,278 555,974 (28,319) 1,635,933
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
income taxes and
cumulative effect
of change in
accounting principle 91,250 26,351 - 117,601 225,777 49,921 - 275,698
Income Taxes 33,304 10,219 - 43,523 82,409 19,469 - 101,878
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
cumulative effect
of change in
accounting principle $ 57,946 $ 16,132 $ - $ 74,078 $ 143,368 $ 30,452 $ - $ 173,820
========= ============= =========== ========== ========== ============== ========== ==========
14
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings
(In thousands)
Three Months Ending December 31, 1997 Six Months Ending December 31, 1997
--------------------------------------------- -----------------------------------------
Pro Forma Pro Forma
Reclass- Pro Forma Reclass- Pro Forma
Clorox First Brands ifications Combined Clorox First Brands ifications Combined
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Net Sales $ 591,795 $ 309,282 $ (13,309) $ 887,768 $1,241,079 $ 578,762 $ (18,268) $ 1,801,573
Costs and Expenses
Cost of products
sold 258,189 196,994 (20,036) 435,147 537,883 380,189 (37,927) 880,145
Selling, delivery
and administration 139,789 75,406 (26,635) 188,560 270,188 129,317 (35,751) 363,754
Depreciation and
amortization - 3,595 (3,595) - - 7,455 (7,455) -
Advertising 83,408 - 32,252 115,660 174,952 - 53,582 228,534
Research and
development 13,007 - 1,492 14,499 24,613 - 2,797 27,410
Restructuring - 2,700 - 2,700 - 2,700 - 2,700
Interest expense 16,525 7,843 1,149 25,517 32,019 14,957 2,296 49,272
Discount on sale of
receivables - 1,149 (1,149) - - 2,296 (2,296) -
Other (income)
expense, net (242) (259) 3,213 2,712 (1,601) 29 6,486 4,914
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Total costs
and expenses 510,676 287,428 (13,309) 784,795 1,038,054 536,943 (18,268) 1,556,729
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before income
taxes and
cumulative effect of
change in accounting
principle 81,119 21,854 - 102,973 203,025 41,819 - 244,844
Income Taxes 31,636 8,547 - 40,183 79,179 16,339 - 95,518
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
cumulative effect of
change in accounting
principle $ 49,483 $ 13,307 $ - $ 62,790 $ 123,846 $ 25,480 $ - $ 149,326
========= ============= =========== ========== ========== ============== ========== ==========
15
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(d) Unaudited pro forma earnings per share
The following table reconciles the number of shares used in
the pro forma earnings per share computations to the number of s
hares set forth in the Company's and First Brands' historical
statements of earnings (in thousands).
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
--------- ---------- --------- ----------
Shares used in calculations:
Historical basic shares - Clorox 103,628 103,393 103,616 103,305
--------- ---------- --------- ----------
Historical basic shares -
First Brands 39,157 39,696 39,098 39,819
Conversion ratio .349 .349 .349 .349
--------- ---------- --------- ----------
13,666 13,854 13,645 13,897
--------- ---------- --------- ----------
Pro forma combined basic shares 117,294 117,247 117,261 117,202
========= ========== ========= ==========
Historical diluted shares - Clorox 105,735 105,429 105,732 105,427
--------- ---------- --------- ----------
Historical diluted shares -
First Brands 40,299 40,644 39,948 40,703
Conversion ratio .349 .349 .349 .349
--------- ---------- --------- ----------
14,064 14,185 13,942 14,205
--------- ---------- --------- ----------
Pro forma combined
diluted shares 119,799 119,614 119,674 119,632
========= ========== ========= ==========
16
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Results of Operations
- ---------------------
Comparison of the Three Months Ended December 31, 1998
- -------------------------------------------------------
with the Three Months Ended December 31, 1997
- ------------------------------------------------
Diluted earnings per share increased 17% to $0.55 from $0.47 a
year ago and net earnings grew 17% to $57,946,000 from $49,483,000
a year ago.
Net sales increased 10% to $648,172,000 primarily due to a
13% volume increase. Increased trade spending in Latin America
depressed sales growth relative to volume growth. Volume growth
was due to both increases in existing brands and the introduction
of new products. Domestic products such as Formula 409
cleaners, Clorox toilet bowl cleanser, Clorox 2 color-safe
bleach, Hidden Valley bottled dressings, and cat litter
products contributed to this quarterly growth. Introduction
of new products such as Rain Clean Pine-Sol dilutable cleaner,
Lemon Fresh Pine-Sol cleaner and antibacterial spray, and
Tilex Fresh Shower daily shower cleaner also fueled this
volume growth. Clorox liquid bleach volume was favorably
impacted by a second quarter price increase in the prior
year which resulted in lower shipments in the prior year second
quarter. Volume performance of charcoal products benefited
from the late season warm weather extending the barbecue
season. International shipments increased primarily due to
acquisition activity partially offset by lower volumes
experienced by the Company's Asian businesses due to economic
instability. Declines in the Company's Asian operations have
not materially impacted the Company.
Gross margin as a percent of sales remained relatively flat
in comparison with the prior year.
Selling, delivery, and administration expenses increased
approximately 6% from a year ago primarily due to continued
growth and expenditures related to investment in international
infrastructure, partially offset by a reduction in corporate
administration costs primarily due to reduced use of outside
contractors related to the Company's Year 2000 effort.
Increased advertising spending is driven by increased domestic
volume activity and the introduction of new products, partially
offset by lower international spending.
Other expense includes costs associated with the redemption
of redeemable subsidiary preference shares, classifed as short-term
debt, in December 1998, and the effect of translation on certain
international operations.
Income tax expense as a percent of pretax earnings declined to
36.5% from 39% principally due to international investment
activities and international operations.
17
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Results of Operations
- ---------------------
Comparison of the Six Months Ended December 31, 1998
- ----------------------------------------------------
with the Six Months Ended December 31, 1997
- -------------------------------------------
Diluted earnings per share increased 16% to $1.36 from $1.17 a
year ago and net earnings grew 16% to $143,368,000 from
$123,846,000 a year ago.
Net sales increased 7% to $1,334,055,000 primarily due to a 9%
volume increase. The volume growth is attributable primarily
to strong performance from the Company's domestic products,
new product launches, and increased international shipments due
to acquisitions. These increases are partially offset by
weakened volume performance experienced by the Company's Asian
businesses and volume decreases in the Company's insecticide
business.
Gross margin as a percent of sales improved 43 basis points
from the preceding year primarily from on-going cost savings
initiatives programs and lower raw material costs.
Selling, delivery, and administration expenses increased
approximately 8% from a year ago primarily due to continued
growth and expenditures related to investment in international
infrastructure. Increased advertising spending is driven by
increased domestic volume and introduction of new products
partially offset by lower international spending.
Interest expense increased approximately $3,444,000 from the
prior year primarily due to the issuance of new debt to fund
business growth and international acquisitions.
Other expense includes costs associated with the redemption of
redeemable subsidiary preference shares in December 1998,
classifed as short-term debt in December 1998, and
the effect of translation on certain international operations.
Income tax expense as a percent of pretax earnings declined
to 36.5% from 39% principally due to international investment
activities and international operations.
18
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ------------------------------------------------
Liquidity and Capital Resources
- ---------------------------------
The Company's financial position and liquidity remain strong due to
cash provided by operations during the quarter. Normal seasonal
variations experienced by the Company's seasonal businesses
and higher shipment volumes recorded in the prior year fourth
quarter by the Company's domestic household products business
were the primary drivers causing reductions in receivables,
payables, and accrued liabilities and the increase in inventories.
International acquisitions since June 30, 1998 totalled $57,473,000
and were funded using a combination of cash and debt. These
acquisitions included a bleach and cleaners business in Venezuela,
an insecticide business in Korea, a cleaning brand business in
Australia, and an increase in ownership in Tecnoclor, S.A. in
Colombia.
In September 1996, the Board of Directors authorized a share
repurchase program to offset the dilutive effect of employee
stock option exercises. During the six month period ended
December 31, 1998, 400,000 shares were acquired at a cost of
$32,455,000. The Company has discontinued this share repurchase
program in connection with the First Brands Corporation
acquisition described below. As a result, the issuance of shares
pursuant to the Company's stock incentive plans may have a
dilutive effect.
The Company has approved the use of interest rate derivative
instruments such as interest rate swaps in order to manage the
impact of interest rate movements on interest expense. These
instruments have the effect of converting fixed rate interest
to floating, or floating to fixed. The conditions under which
derivatives can be used are set forth in a Company Policy
Statement that includes a specific prohibition on the use of
any leveraged derivatives. In July 1998, the Company refinanced
$150,000,000 of commercial paper by entering into a Deutsche
Mark denominated financing arrangement with private investors.
The private investors exercised an option to finance an
additional $50,000,000 under the same terms of this financing
arrangement in October 1998. The Company entered into a series
of swaps with notional amounts totalling $200,000,000 to
eliminate foreign currency exposure risk generated by this
Deutsche Mark denominated obligation. The swaps effectively
convert the Company's 2.876% fixed Deutsche Mark obligation to
a floating U.S. dollar rate of 90 day LIBOR less 278 basis
points or an effective rate of approximately 3%.
In December 1998, the Company redeemed preference shares
totalling $387,540,000 which was classifed as short-term debt.
This financing was replaced with commercial paper borrowings
at a rate of approximately 5.2%.
As of December 31, 1998, the Company has increased its available
lines of credit from $550 million to $750 million. Management
believes the Company has adequate access to additional capital
from other public and private sources should the need arise.
19
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Year 2000 Compliance
- --------------------
Many financial information and operations systems used today
may be unable to interpret dates after December 31, 1999
because these systems allow only two digits to indicate the
year in a date. Consequently, these systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could
have adverse consequences on the operations of an entity and
the integrity of information processing. This potential
problem is referred to as the "Year 2000" or "Y2K" issue.
In 1997, the Company established a corporate-wide program to
address Y2K issues. This effort is comprehensive and encompasses
software, hardware, electronic data interchange, networks,
personal computers, manufacturing and other facilities,
embedded chips, century certification, supplier and customer
readiness, contingency planning, and domestic and
international operations.
In the United States and Canada, the Company is currently on
schedule and is over 70% complete as of December 31, 1998,
excluding plant floor efforts. The Company has replaced or
upgraded most of its critical business applications and
systems and has completed approximately 20% of its century
testing for these systems. The target date to repair or
replace the remaining critical business information systems
is March 31, 1999. In international operations other than
Canada, the Company is currently in the remediation phase
for its critical business systems and is approximately 75%
complete. The target date to repair or replace the
remaining international systems is June 30, 1999.
The Company has completed the assessment of its plant floor
systems and equipment, and has finalized its remediation
plans for its domestic and Canadian plant facilities. The
Company expects to complete its plant floor assessment and
remediation plans for its international operations by April 30,
1999. The target date to complete all domestic and
international manufacturing plant floor and facilities
efforts is September 30, 1999. The Company has prioritized
its third-party relationships as critical, severe or
sustainable, has completed the assessment phase for third
parties (except for assessment of its key customers which
is scheduled to be complete in March 1999, and certain
international suppliers which is expected to be complete by
June 30, 1999), has requested a Y2K contract warranty in
many new key contracts and is developing contingency plans
for critical third parties, including key customers,
suppliers and other service providers.
If necessary modifications and conversions by the Company
are not made on a timely basis, or if key third parties are
not Y2K compliant, Y2K problems could have a material
adverse effect on the Company's operations. The Company's
most reasonably likely worst case scenario is a regional
utility failure that would interrupt manufacturing
operations and distribution centers in the affected region.
To mitigate this risk, and to address the possible
uncertainty of whether the Company will be able to solve
all potential Y2K issues, the Company has begun contingency
planning for its critical operations, including key third-party
relationships, and will require written contingency plans for
these areas. The Company has completed approximately twenty
percent (20%) of its contingency planning efforts and expects
to complete all of its contingency planning by September 30, 1999.
20
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Y2K costs are expensed as incurred and funded through operating
cash flows. Through December 31, 1998, the Company has
expensed incremental remediation costs of $18.8 million with
remaining incremental remediation costs estimated at $12
million. In addition, through December 31, 1998, the Company
has expensed accelerated strategic upgrade costs of $12.3
million with anticipated remaining accelerated strategic
upgrade costs of $4 million. The Company spent approximately
17% of its 1998 fiscal year information technology budget,
and expects to spend approximately 16% of its 1999 fiscal
year information technology budget, on Y2K remediation issues.
As of December 31, 1998, the Company has spent approximately
40% of its 1999 fiscal year Y2K program budget. The Company
has not deferred any critical information technology projects
because of its Year 2000 program efforts, which are primarily
being addressed through a dedicated team within the Company's
information technology group. Time and cost estimates are
based on currently available information and could be affected
by the ability to correct all relevant computer codes and
equipment, and the Y2K readiness of the Company's business
partners, among other factors.
On January 29, 1999, the Company completed the First Brands
Merger when the Company's wholly owned subsidiary, Pennant,
merged into First Brands. The Company has not yet completed
the assessment of the Merger's impact on its Y2K costs and
the Company's summary above does not include the impact of
the First Brands Merger. The Company expects that its
overall Y2K costs will increase, however, based on a
preliminary Y2K assessment of First Brands' business systems,
plant floors, and facilities. Y2K efforts of both the Company
and First Brands are being combined and the Company will
extend its comprehensive Y2K program to First Brands' Y2K
efforts. Although First Brands' timetables may affect the
target dates and contingency plans of the Company's original
Y2K program, the Company still expects to be Y2K compliant
for the merged companies before the arrival of January 1, 2000.
Subsequent Event - Completion of First Brands Corporation Merger
- ----------------------------------------------------------------
On January 29, 1999, the Company completed the First Brands
Merger when the Company's wholly owned subsidiary, Pennant,
merged into First Brands. As a result of the Merger,
First Brands became a wholly owned subsidiary of the Company
and continues to operate its business as the Company's
subsidiary. First Brands develops, manufactures, markets
and sells consumer products under the Glad, Scoop Away,
and STP brands, among others. The Merger is structured to
be treated as a pooling of interests for accounting purposes.
Pursuant to the Merger Agreement, First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each of their
shares of First Brands' common stock, with cash paid in
lieu of fractional shares. Pursuant to the Merger,
approximately 40,320,500 shares of First Brands' common stock
were converted into approximately 14,071,850 shares of the
Company's common stock. In addition, options to acquire
1,755,010 shares of First Brands' common stock were converted
to options to acquire 612,484 shares of the Company's
common stock. As a result of the Merger, the Company also
assumed approximately $440 million of First Brands' debt.
As is generally the case with mergers, there can be no
assurance that the Company will be able to successfully
integrate or profitably manage the First Brands businesses.
In addition, there can be no assurance that, following the
Merger, the First Brands businesses will achieve sales levels,
profitability, cost savings or synergies that justify the
investment made or that the acquisition will be accretive to
earnings in any future period.
21
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Subsequent Event - Completion of First Brands Corporation Merger
- ----------------------------------------------------------------
(Continued)
- ------------
The Company expects to incur significant costs (currently
estimated to be approximately $140.5 million, including non-cash
charges currently estimated at $30 million) in connection with
the Merger to reflect transaction-related expenses as well as
expenses relating to the integration of First Brands. This
amount is an estimate only and is therefore subject to change.
In addition, there can be no assurance that the Company will
not incur additional costs associated with the Merger.
22
PART I - FINANCIAL INFORMATION (Continued)
Item 5. Other Information
- ---------------------------
Acquisition or Disposition of Assets
- ------------------------------------
On January 29, 1999, the Company completed the First Brands
Merger as discussed in Item 2. First Brands develops,
manufactures, markets and sells consumer products under
the Glad, Scoop Away, and STP brands, among others. The
Merger is structured to be treated as a pooling of
interests for accounting purposes.
Pursuant to the Merger Agreement, First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each of their
shares of First Brands' common stock, with cash paid in
lieu of fractional shares. Pursuant to the Merger,
approximately 40,320,500 shares of First Brands' common
stock were converted into approximately 14,071,850 shares
of the Company's common stock. In addition, options to
acquire 1,755,010 shares of First Brands' common stock were
converted to options to acquire 612,484 shares of the
Company's common stock. As a result of the Merger, the
Company also assumed approximately $440 million of First
Brands' debt.
Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Merged.
First Brands' statements of earnings and cash flow and balance
sheets for the fiscal years ended June 30, 1996, June 30, 1997
and June 30, 1998 are hereby incorporated by reference to the
First Brands Annual Report on Form 10-K for and as of the year
ended June 30, 1998. First Brands' statements of earnings and
cash flow and balance sheets for the three months ended
September 30, 1997 and September 30, 1998, respectively, are
hereby incorporated by reference to the First Brands' Quarterly
Report on Form 10-Q for and as of the quarter ended September 30,
1998. The pertinent portions of those reports so incorporated
by reference are attached as Exhibits 99.1 and 99.2, respectively.
(b) Pro Forma Financial Information.
Pro forma financial information relating to the First Brands
merger is contained in (i) Footnote 9 to the financial statements
included in this Form 10-Q and (ii) the Proxy Statement/Prospectus
contained in the Company's Form S-4 Registration Statement
(333-69455) ("S-4 Registration Statement"), which information
is incorporated herein by this reference.
23
PART I - FINANCIAL INFORMATION (Continued)
Item 5. Other Information
- ---------------------------
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Reorganization and Merger,
dated as of October 18, 1998, by and among the
Company, First Brands and Pennant (filed as
Appendix A to the S-4 Registration Statement
(333-69455), which appendix is incorporated
herein by this reference)
99.1 First Brands' consolidated statements of income and
cash flow for the fiscal years ended June 30,
1996, June 30, 1997 and June 30, 1998 and
consolidated balance sheet as of June 30, 1997
and June 30, 1998 (pages 17 to 32 of the First
Brands' Annual Report on Form 10-K for and as
of the year ended June 30, 1998)
99.2 First Brands' consolidated statements of income
and cash flow for the three months ended September 30,
1997 and September 30, 1998 and consolidated balance
sheet as of June 30, 1997 and September 30, 1998
(pages 3 to 9 of the First Brands' Quarterly Report
on Form 10-Q for and as of the quarter ended
September 30, 1998)
99.3 Consent of Independent Auditor of First Brands to
inclusion of Exhibits 99.1 and 99.2
Cautionary Statement
- ---------------------
Except for historical information, matters discussed in this
Form 10-Q, including statements about future growth or the
realization of benefits from the First Brands' transaction, are
forward-looking statements based on management's estimates,
assumptions and projections. In addition to the factors discussed
in this Form 10-Q, important factors that could cause results to
differ materially from management's expectations are described
in "Forward-Looking Statements and Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report on Form 10-K for the year
ending June 30, 1998, as updated from time to time in the
Company's SEC filings. Those factors include, but are not
limited to, marketplace conditions and events, the Company's
cost, risks inherent in international operations, the success
of new products, integration of acquisitions, and environmental,
regulatory and intellectual property matters, and with respect
to the First Brands' transaction, risks related to the
successful management of the acquired businesses.
The acquisition of First Brands can be expected to present
challenges to management, including the integration of the
operations, technologies and personnel of the companies, and
special risks, including unanticipated liabilities and
contingencies, and diversion of management attention.
24
S I G N A T U R E
-----------------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE CLOROX COMPANY
(Registrant)
DATE February 12, 1999 BY /s/ HENRY J. SALVO, JR.
----------------- ----------------------
Henry J. Salvo, Jr.
Vice-President - Controller