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 March 31, 1999
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
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(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 March 31, 1999 there were 118,003,174 shares outstanding of
the registrant's common stock (par value - $1.00), the registrant's
only outstanding class of stock.
Total pages 20 1
THE CLOROX COMPANY
PART 1. Financial Information Page No.
--------------------- ---------
Item 1. Financial Statements
Condensed Statements of Consolidated
Earnings
Three and Nine Months Ended
March 31, 1999 and 1998 3-4
Financial Highlights 5
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and June 30, 1998 6
Condensed Statements of Consolidated
Cash Flows
Nine Months Ended March 31, 1999 and 1998 7
Notes to Condensed Consolidated Financial
Statements 8-12
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 13-19
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 Nine Months Ended
---------------------------------- -----------------------------------
3/31/99 3/31/98 3/31/99 3/31/98
------------- ----------- ------------- ------------
Net Sales $ 991,971 $ 967,446 $ 2,903,602 $ 2,769,019
------------- ----------- ------------- ------------
Costs and Expenses
Cost of products
sold (including
write-down of
obsolete inventory
of $8,145 relating
to First Brands,
see Note 3) 473,369 460,801 1,390,085 1,340,946
Selling, delivery
and administration 194,962 189,030 587,530 552,784
Advertising 123,854 124,161 360,629 352,695
Research and
development 14,491 14,917 44,137 42,327
Interest expense 22,411 26,989 75,077 76,261
Other expense, net 10,105 1,175 17,667 6,089
Merger, integration,
restructuring and
asset impairment 100,394 - 100,394 2,700
------------- ----------- ------------- ------------
Total costs and
expenses 939,586 817,073 2,575,519 2,373,802
------------- ----------- ------------- ------------
Earnings before income
taxes, and cumulative
effect of change in
accounting principle 52,385 150,373 328,083 395,217
Income taxes 30,334 58,386 132,212 153,904
------------- ----------- ------------- ------------
Earnings before
cumulative effect of
change in accounting
principle 22,051 91,987 195,871 241,313
Cumulative effect of
change in accounting
principle, net of taxes - - - (6,922)
------------- ----------- ------------- ------------
Net Earnings $ 22,051 $ 91,987 $ 195,871 $ 234,391
============ ============ ============== ============
See Notes to Condensed Consolidated Financial Statements.
- -Continued-
3
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Earnings
---------------------------------------------
(In thousands, except per-share amounts)
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
3/31/99 3/31/98 3/31/99 3/31/98
------------- ----------- ------------- ------------
Basic earnings per
common share
Earnings before
cumulative effect
of change in
accounting
principle $ 0.19 $ 0.78 $ 1.67 $ 2.06
Cumulative effect
of change in
accounting
principle - - - (0.06)
------------- ----------- ------------- ------------
Earnings per share $ 0.19 $ 0.78 $ 1.67 $ 2.00
============= =========== ============= ============
Diluted earnings per
common share
Earnings before
cumulative effect
of change in
accounting
principle $ 0.18 $ 0.77 $ 1.64 $ 2.01
Cumulative effect
of change in
accounting
principle - - - (0.06)
------------- ----------- ------------- ------------
Earnings per share $ 0.18 $ 0.77 $ 1.64 $ 1.95
============= =========== ============= ============
Weighted average
shares outstanding
Basic 117,897 117,509 117,473 117,305
Diluted 120,220 119,909 119,795 119,921
Dividends per share $ 0.36 $ 0.32 $ 1.06 $ 0.94
See Notes to Condensed Consolidated Financial Statements.
- -Concluded-
4
PART I - FINANCIAL INFORMATION
The Clorox Company and Subsidiaries
Consolidated Financial Highlights
The following presents earnings per common share before restructuring. This
presentation does not replace the generally accepted accounting principle
(GAAP) measurement presented in the Company's Condensed Statement of
Consolidated Earnings.
Because this is a non-GAAP performance measurement it is not necessarily
calculated in the same manner by other companies. Management believes
that this information read in conjunction with the financial statement
presented herein assists the reader in understanding the Company's
performance for the applicable periods.
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
--------------------------------- -----------------------------------
Earnings per common share
Before restructuring
Basic $ 0.86 $ 0.78 $ 2.34 $ 2.00
Diluted 0.84 0.77 2.29 1.95
Earnings per common share
After restructuring
Basic $ 0.19 $ 0.78 $ 1.67 $ 2.00
Diluted 0.18 0.77 1.64 1.95
5
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Consolidated Balance Sheets
------------------------------------
(In thousands)
3/31/99 6/30/98
------------- -------------
ASSETS
Current Assets
Cash and short-term investments $ 110,307 $ 101,710
Accounts and notes receivable, net 527,772 521,876
Inventories 395,656 367,393
Prepaid expenses and other 24,757 55,524
Deferred income taxes 31,615 35,069
------------- -------------
Total current assets 1,090,107 1,081,572
Property, Plant and Equipment - Net 1,026,944 1,016,048
Brands, Trademarks, Patents and Other Intangibles 1,567,935 1,525,381
Investments in Affiliates 102,648 90,117
Other Assets 343,221 352,115
------------- --------------
Total $ 4,130,855 $ 4,065,233
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 170,867 $ 226,040
Accrued liabilities 254,329 353,184
Accrued merger, integration, and restructuring 23,950 -
Short-term debt and notes payable 841,406 773,178
Income taxes payable 79,979 23,623
Current maturities of long-term debt 5,461 4,901
------------- --------------
Total current liabilities 1,375,992 1,380,926
Long-term Debt 705,065 704,314
Other Obligations 247,073 229,401
Deferred Income Taxes 247,539 279,209
Stockholders' Equity
Common stock 124,916 124,506
Additional paid-in capital 123,795 82,024
Retained earnings 1,867,930 1,785,085
Treasury shares, at cost (405,099) (391,864)
Accumulated other comprehensive loss (148,883) (117,417)
Other (7,473) (10,951)
------------- --------------
Stockholders' Equity 1,555,186 1,471,383
------------- --------------
Total $4,130,855 $ 4,065,233
See Notes to Condensed Consolidated Financial Statements.
6
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Cash Flows
----------------------------------------------
(In thousands)
Nine Months Ended
----------------------------------------
3/31/99 3/31/98
------------------ ---------------
Operations:
Net earnings $ 195,871 $ 234,391
Adjustments to reconcile to net cash provided by
operating activities:
Cumulative effect of change in accounting principle - 6,922
Write-off of obsolete inventory 8,145 -
Write off of software development costs and other 34,274 -
Depreciation and amortization 146,448 129,714
Deferred income taxes 5,405 32,193
Other (2,224) (8,721)
Effects of changes in (excluding effects of businesses
purchased):
Accounts receivable 26,418 (55,737)
Inventories (36,118) (79,212)
Prepaid expenses 5,378 7,169
Accounts payable (52,813) (35,516)
Accrued liabilities (96,583) (130,214)
Accrued merger, integration, and restructuring 23,950 2,700
Income taxes payable 49,908 17,009
------------------ ---------------
Net cash provided by operations 308,059 120,698
Investing Activities:
Property, plant and equipment (110,128) (84,157)
Acquisition of leased assets - (44,208)
Proceeds from disposal of property, plant and equipment 5,003 10,268
Businesses purchased (115,999) (107,777)
Other (26,872) (47,156)
------------------ ---------------
Net cash used for investment (247,996) (273,030)
Financing Activities:
Credit facilities borrowings (repayments), net (197,284) 64,842
Short-term borrowings 69,987 97,940
Long-term debt and other borrowings 201,535 193,736
Long-term debt and other repayments (15,310) (61,549)
Trade accounts receivable financing program, net (20,000) (15,000)
Cash dividends (119,806) (110,278)
Treasury stock purchased (32,455) (66,863)
Issuance of common stock under employee stock plans and other 61,867 26,169
------------------ ---------------
Net cash provided by (used for) financing (51,466) 128,997
Net Increase (Decrease) in Cash and Short-Term Investments 8,597 (23,335)
Cash and Short-Term Investments:
Beginning of period 101,710 108,511
------------------ ---------------
End of period $ 110,307 $ 85,176
See Notes to Condensed Financial Statements.
7
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 nine months ended March 31, 1999 and 1998 has not been audited but,
in the opinion of management, includes all adjustments (consisting of
normal recurring and merger related 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 for the three and nine months ended March 31,
1999 and 1998 should not be considered as necessarily indicative of the
annual results for the respective years.
As discussed further in Note 7, on January 29, 1999, the Company
completed the First Brands Corporation ("First Brands") merger. The merger
has been accounted for as a pooling of interests.
All historical information has been restated as if the merger had been
in effect for all periods presented.
(2) The Company's subsidiary, First Brands, is engaged in a
program to sell up to $100,000,000 in fractional ownership interest
in a defined pool of eligible trade accounts receivable. As of
March 31, 1999, $80,000,000 had been sold. The amounts sold are
reflected as a reduction in accounts receivable on the accompanying
Condensed Consolidated Balance Sheets and costs associated with this
program are charged to earnings as interest expense when the
receivables are sold. The effective interest rate is approximately 5.6%.
(3) Inventories at March 31, 1999 and at June 30, 1998 consisted
of (in thousands):
3/31/99 6/30/98
------------ ------------
Finished goods and work in process $ 286,588 $ 251,505
Raw materials and supplies 109,068 115,888
------------ ------------
Total $ 395,656 $ 367,393
Obsolete First Brands' inventory totalling $8,145,000 at March 31, 1999
has been written off.
8
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(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 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 classified as short-term debt.
This financing was replaced with commercial paper borrowings.
In February 1999, the Company terminated First Brands'
revolving credit facility agreement. Related interest rate swaps
with notional amounts totalling $150,000,000 were terminated in
March 1999. Costs associated with terminating the swap agreements
were approximately $2,502,000 and are included in merger and
integration costs.
(5) Basic earnings per share is computed by dividing net earnings
by the weighted average number of common shares outstanding each
period. Diluted earnings per share (EPS) are computed by dividing
net earnings by the diluted weighted average number of common
shares outstanding during each 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 earnings per
share is reconciled to those used in calculating diluted earnings
per share as follows (in thousands):
Weighted Average Number of Shares Outstanding
----------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------- --------------------------
3/31/99 3/31/98 3/31/99 3/31/98
-------- ------- ------- -------
Basic 117,897 117,509 117,473 117,305
Stock options 2,305 2,352 2,302 2,568
Other 18 48 20 48
-------- ------- ------- -------
Diluted 120,220 119,909 119,795 119,921
======== ======= ======= ========
9
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(6) 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 nine months ended March 31, 1999 and 1998 is as
follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------------- -----------------------------------
3/31/99 3/31/98 3/31/99 3/31/98
------------- ------------ ------------- -----------
Net Earnings $ 22,051 $ 91,987 $ 195,871 $ 234,391
Other comprehensive
loss:
Foreign currency
translation
adjustments (18,407) (9,437) (31,466) (46,648)
------------- ------------ ------------- -----------
Comprehensive
Income $ 3,644 $ 82,550 $ 164,405 $ 187,743
============= ============= ============== ============
(7) Certain reclassifications of prior periods' amounts have
been made to accounts receivable, accrued liabilities, interest
expense and other expense to conform with the current period
presentation.
(8) On January 29, 1999, the First Brands merger was completed.
As a result of the merger, First Brands became a wholly owned subsidiary o
f the Company and continues to operate its business as a subsidiary.
First Brands develops, manufactures, markets and sells consumer products
under the Glad, Scoop Away, Handi Wipes, and STP brands, among others.
Pursuant to the merger, 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, 40,319,500 shares
of First Brands' common stock were converted into 14,071,505 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. In connection with the merger,
Clorox also assumed approximately $435,000,000 of First Brands' debt. There
were no transactions between the Company and First Brands prior to the
merger.
The merger has been accounted for as a pooling of interests. Accordingly,
all historical financial information has been restated as if the merger had
been in effect for all periods presented.
10
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
In connection with the merger, merger and integration (transaction
and other related costs), restructuring and asset impairment costs
were recognized during the quarter ended March 31, 1999. Details of
these costs are as follows (in thousands):
Merger and Integration Restructuring Sub-Total Asset Impairment Total
---------------------- ------------- --------- ---------------- ---------
Transaction fees and
expenses $ 16,604 $ - $ 16,604 $ - $ 16,604
Employee severance and
other related costs 626 33,715 34,341 - 34,341
Contract cancellations - 8,346 8,346 - 8,346
Write-off of software
development and other
costs - 410 410 32,064 32,474
Other 4,269 2,560 6,829 1,800 8,629
---------------------- ------------- --------- ---------------- ---------
Total provision for
merger, integration,
restructuring and
asset impairment 21,499 45,031 66,530 $ 33,864 $100,394
============ ==========
Total paid through
March 31, 1999 (21,342) (21,238) (42,580)
---------------------- ------------- ---------
Accrued liability as of
March 31, 1999 $ 157 $ 23,793 $ 23,950
====================== ============== =========
Restructuring activities primarily relate to the elimination of
redundancies and the consolidation of administration and distribution
functions, the reduction in employee headcount of approximately 270
positions, primarily at the First Brands' headquarters location in
Danbury, Connecticut and at sales offices, and the termination of
lease and other contracts.
It is expected that additional merger and related costs will be
incurred over the calendar year. These costs, which are currently
estimated to be approximately $32,000,000, will be recognized as
incurred and will be reported as merger costs
at that time.
11
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
The following presents certain historical financial data pertaining
to the Company and First Brands prior to the merger in January 1999.
Certain reclassifications were made to the historical results of
First Brands to conform to the Company's classifications.
Six Months Ending December 31, 1998
(In thousands)
------------------------------------------------------------------------------------------------
Clorox First Brands Reclassifications Combined
------------------ ---------------------- ------------------------ -----------
Net Sales $ 1,334,055 $ 605,895 $ (28,319) $ 1,911,631
------------------ ---------------------- ------------------------ -----------
------------------ ---------------------- ------------------------ -----------
Net Earnings $ 143,368 $ 30,452 $ - $ 173,820
------------------ ---------------------- ------------------------ -----------
------------------ ---------------------- ------------------------ -----------
Six Months Ending December 31, 1997
(In thousands)
------------------------------------------------------------------------------------------------
Clorox First Brands Reclassifications Combined
------------------ ---------------------- ------------------------ -----------
Net Sales $ 1,241,079 $ 578,762 $ (18,268) $ 1,801,573
Net Earnings $ 123,846 $ 18,558 $ - $ 142,404
For additional information regarding the merger, refer to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, and the Company's S-4 Registration Statement.
(9) Businesses purchased for the nine months ended March 31, 1999 and
March 31, 1998 totalling $115,999,000 and $ 107,777,000,
respectively, were funded using a combination of cash and debt and
were accounted for as purchases. These acquisitions in fiscal
year 1999 included domestically, the purchase of the Handi Wipes
and Wash 'n Dry business, and internationally, 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.
12
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 March 31, 1999
-----------------------------------------------------
with the Three Months Ended March 31, 1998
-------------------------------------------
On January 29, 1999, the First Brands merger was completed. As a
result of the merger, First Brands became a wholly owned subsidiary of
the Company and continues to operate its business as a subsidiary.
First Brands develops, manufactures, markets and sells consumer products
under the Glad, Scoop Away, Handi Wipes, and STP brands, among others.
The merger was accounted for as a pooling of interests. Accordingly,
all historical financial information has been restated as if the
combination had been in effect for all periods presented. Diluted
earnings per share and net earnings before merger and related costs
are not generally accepted accounting performance measures.
Diluted earnings per share decreased 77% to $0.18 from $0.77 a year ago
and net earnings decreased 76% to $22,051,000 from $91,987,000 a year
ago primarily due to merger and related costs incurred in the third
quarter. Before merger and related costs, diluted earnings per share
increased 9% to $0.84 and net earnings increased 10% to $100,900,000.
Third quarter sales rose 3% to $991,971,000 from $967,446,000 a
year ago. Domestic brands contributing to the quarterly sales
growth include the Pine Sol and Tilex franchises, Clorox liquid
bleach, Kingsford and Match Light charcoal briquets, Kingsford
lighter fluid, Hidden Valley dressings, Fresh Step Scoop cat
litter, Gladware line and the recently acquired Handi Wipes product
line. This growth in sales is partially offset by unfavorable
foreign exchange rates and also by a decrease in sales from the
Glad Lock product lines and Jonny Cat and Everfresh brands due
to higher sales in the prior year caused by greater promotional
activities.
Gross margin, before the $8,145,000 merger related write off of
First Brands' obsolete inventory, improved in comparison with the
prior year. This improvement reflects lower raw material costs
and efficiencies resulting from the Company's on-going cost
savings programs. The Company expects to see continued improvements
as cost savings programs are implemented as part of the First
Brands' integration.
Selling, delivery, and administrative expenses have increased
primarily due to continued growth. However, in the future, the
Company expects to see reductions in administrative expenses
resulting from the restructuring activities relating to the First
Brands' integration. Advertising spending decreased slightly due
to higher prior year spending for national launches on Lemon Fresh
Pine-Sol cleaner and antibacterial spray and Rain Clean Pine-Sol
dilutable cleaner.
The increase in other expense reflects a lower level of sales of
non-operating property, costs associated with the redemption of
redeemable subsidiary preference shares, higher amortization of
intangibles, and lower equity income.
13
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
---------------------------------------------
Merger and integration (transaction and other related costs) of
$21,499,000 were recognized in the quarter ended March 31, 1999.
In addition, other restructuring costs and provisions for asset
impairment of $45,031,000 and $33,864,000, respectively, were
recognized during the quarter. Restructuring activities primarily
relate to the elimination of redundancies and the consolidation
of administration and distribution functions, the reduction in
employee headcount of approximately 270 positions, primarily at
the First Brands' headquarters location in Danbury, Connecticut
and at sales offices, and the termination of lease and other
contracts. It is expected that additional merger costs will be
incurred over the calendar year. These costs which are currently
estimated to be approximately $32,000,000 will be recognized as
incurred and will be reported as merger costs.
Income tax expense as a percent of pretax earnings increased to
57.9% from 38.8% principally due to non-deductible merger related
costs recorded in the third quarter. Excluding the impact of
non-deductible merger related costs, the Company's tax rate
would have decreased to 37.3% from 38.8%.
14
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 Nine Months Ended March 31, 1999
---------------------------------------------------
with the Nine Months Ended March 31, 1998
------------------------------------------
Diluted earnings per share decreased 16% to $1.64 from $1.95 a year
ago and net earnings decreased 16% to $195,871,000 from $234,391,000
a year ago primarily due to merger and related costs incurred in
the third quarter. Before merger and related costs, diluted
earnings per share increased 17% to $2.29 and net earnings
increased 17% to $274,600,000. Diluted earnings per share and
net earnings before merger and related costs are not generally
accepted accounting performance measures.
Net sales increased 5% to $2,903,602,000 from $2,769,019,000 a
year ago. The year to date increase in sales is attributable
primarily to strong performance from most domestic products,
new product launches, and domestic and international acquisition
activity. These increases are partially offset by unfavorable
exchange rates, and weakened performance from the Company's
international businesses reflecting economic problems in those
geographic areas.
Gross margin, before the $8,145,000 merger related write off of
First Brands' obsolete inventory, improved in comparison with the
prior year. This improvement reflects lower raw material costs
and efficiencies resulting from the Company's on-going cost
savings programs. The Company expects to see continued improvements
as cost savings programs are implemented as part of the First
Brands' integration.
Selling, delivery, and administrative expenses have increased
primarily due to continued growth. However, in the future, the
Company expects to see reductions in administrative expenses
resulting from the restructuring activities relating to the First
Brands' integration. Increased advertising spending is driven by
increased domestic volume, and the introduction of new products
offset by lower international spending by some of the Company's
Asian businesses.
Research and development costs have increased slightly from the
prior year. The Company expects this trend to continue as it
supports the First Brands' businesses.
The increase in other expense principally results from higher
amortization of intangibles, costs associated with the redemption
of redeemable subsidiary preference shares, the effect of translation
on certain international operations, and a lower level of sales
of non-operating property offset partially by higher interest income.
Merger and integration (transaction and other related costs) of
$21,499,000 were recognized in the quarter ended March 31, 1999.
In addition, other restructuring costs and provisions for asset
impairment of $45,031,000 and $33,864,000, respectively, were
recognized during the quarter. Restructuring activities primarily
relate to the elimination of redundancies and the consolidation
of administration and distribution functions, the reduction in
employee headcount of approximately 270 positions, primarily at
the First Brands' headquarters location in Danbury, Connecticut
and at sales offices, and the termination of lease and other
contracts. It is expected that additional merger costs will be
incurred over the calendar year. These costs which are currently
estimated to be approximately $32,000,000 will be recognized as
incurred and will be reported as merger costs at that time.
The prior year restructuring of $2,700,000 reflects an increase to
the $19,000,000 restructuring recorded in fiscal year 1997 by the
Company's subsidiary, First Brands. The restructuring was for
initiatives aimed at streamlining certain operating and administrative
functions, reducing costs and improving operating efficiencies.
Substantially all of these restructuring liabilities had been paid
or settled during fiscal year 1998.
15
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
---------------------------------------------
Income tax expense as a percent of pretax earnings increased to 40.3%
from 38.9% principally due to non-deductible merger related costs
recorded in the third quarter. Excluding the impact of non-deductible
merger related costs, the Company's tax rate would have decreased to
37.1% from 38.9%.
The prior year cumulative effect of change in accounting principle
of $6,922,000 was recorded by the Company's subsidiary, First
Brands, to expense previously capitalized costs related to certain
business process re-engineering activities (in accordance with the
Financial Accounting Standards Board Emerging Issues Task Force
Issue No. 97-13).
16
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. The increase
in inventories reflects seasonality partly offset by the merger
related write down of First Brands' obsolete inventory. The
reduction in accounts payable and accrued liabilities since June 30,
1998, is due in part to seasonality and to higher levels of
promotional activities in the domestic household and First Brands'
businesses recorded at June 30, 1998.
Businesses purchased since June 30, 1998 totalled $115,999,000 and
were funded using a combination of cash and debt. These acquisitions
were accounted for as purchases and included domestically, the Handi
Wipes and Wash 'N Dry business and internationally, 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 nine month period ended March 31, 1999, 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
merger. 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 were classified as short-term debt. This
financing was replaced with commercial paper borrowings.
In February 1999, the Company terminated First Brands' revolving
credit facility agreement. Related interest rate swaps with
notional amounts totalling $150,000,000 were terminated in March
1999. Costs associated with terminating the swap agreements were
approximately $2,502,000 and were included in merger and integration
costs.
The Company's subsidiary, First Brands, is engaged in a program to
sell up to $100,000,000 in fractional ownership interest in a
defined pool of eligible trade accounts receivable. As of March 31,
1999, $80,000,000 was outstanding. The Company currently plans to
terminate this program in the fourth quarter of fiscal year 1999
and to refinance the debt with commercial paper borrowings.
As of March 31, 1999, the Company has increased its available lines
of credit from $550 million to $1.05 billion. Management believes
the Company has adequate access to additional capital from other
public and private sources should the need arise.
17
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, PCs,
manufacturing and other facilities, embedded chips, century
certification, supplier and customer readiness, contingency planning,
and domestic and international operations.
On January 29, 1999, the First Brands merger was completed. The
Company has completed the inventory and assessment of First Brands'
major United States and Canadian systems and has incorporated First
Brands and its subsidiaries into the Company's comprehensive Y2K
compliance program. The Company expects to complete all major Y2K
compliance efforts, including First Brands and its subsidiaries and
all international and domestic operations, by September 30, 1999.
As of March 31, 1999, without including the First Brands' businesses,
the Company has upgraded or replaced 85% of its critical United
States and Canadian business systems, and has century certified
95% of these systems through testing. The Company is currently
upgrading or migrating the First Brands' businesses into the
Company's already Y2K compliant business systems to capture
merger-related synergies and leverage the Company's completed
work. The Company expects to complete the work for First Brands'
critical systems by July 1, 1999.
The upgrade or replacement of the Company's international systems,
excluding First Brands' businesses, is 85% complete as of
March 31, 1999. The Company has begun to inventory First Brands'
major systems at international locations other than Canada. The
target date to complete all international Y2K work is September 30, 1999.
The Company has finalized its remediation plans and work is
underway for its United States and Canadian plant facilities
(other than the First Brands' facilities). Plant floor assessments
are 30% complete as of March 31, 1999 for the Company's international
locations owned prior to the merger. For both international and
domestic First Brands' locations, the Company is currently assessing
the plant floor systems and equipment. The Company expects to
complete all plant floor remediation by September 30, 1999.
The Company has prioritized its third-party relationships as
critical, severe or sustainable, and has completed its assessment
of third parties for all operations, other than for First Brands.
The Company is implementing the same approach for third party
vendors and customers of the First Brands' operations and expects
to complete this process by July 31, 1999. The Company 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.
18
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
---------------------------------------------
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 potential Y2K issues,
the Company has begun contingency planning for its critical
operations, which includes key third-party relationships and
written contingency plans. The Company has completed approximately
60% percent of its contingency planning efforts for the United
States and Canada, excluding the First Brands' operations. The
assessment is complete for international locations and planning has
started. Many of the completed contingency plans will be used for
First Brands' operations due to common third-party relationships
and critical operations, and work is underway to identify additional
requirements unique to the First Brands' businesses. The Company
expects to complete all of its contingency planning by September 30,
1999.
Y2K costs are expensed as incurred and funded through operating cash
flows. Through March 31, 1999, excluding First Brands' operations,
the Company has expensed incremental remediation costs of $21,800,000
with remaining incremental remediation costs estimated at $7,000,000.
In addition, through March 31, 1999, excluding First Brands' operations,
the Company has expensed accelerated strategic upgrade costs of
$12,100,000 with anticipated remaining accelerated strategic upgrade
costs of $4,900,000. Estimated Y2K costs for First Brands'
operations are $2,900,000 in remediation costs and $1,400,000 for
accelerated strategic upgrade costs. The Company expects to spend
approximately 16% of its 1999 fiscal year information technology budget,
and approximately 6.4% of its fiscal year 2000 budget, on Y2K remediation
issues. As of March 31, 1999, the Company has spent approximately 10%
of its 1999 fiscal year budget on remediation efforts. The Company has
not deferred any critical information technology projects because of its
Year 2000 program efforts, which are primarily being addressed through
a joint team of the Company business and information technology
resources. 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.
Cautionary Statement
Except for historical information, matters discussed in this
Form 10-Q, including statements about future growth are
forward-looking statements based on management's estimates,
assumptions and projections. 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 SEC 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 costs, risks
inherent in international operations, the success of new products,
integration of acquisitions, and environmental, regulatory and
intellectual property matters. The First Brands merger can be
expected to continue 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.
19
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 May 13, 1999 BY /s/ HENRY J. SALVO. JR.
------------- ---------------------------
Henry J. Salvo, Jr.
Vice-President - Controller