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, 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 ------- THE CLOROX COMPANY (Exact name of registrant as specified in its charter) Delaware 31-0595760 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification number 1221 Broadway - Oakland, California 94612 - 1888 (Address of principal executive offices) Registrant's telephone number, (510) 271-7000 (including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports 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, 1999 there were 236,516,258 shares outstanding of the registrant's common stock (par value - $1.00), the registrant's only outstanding class of stock.
THE CLOROX COMPANY PART I. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Condensed Statements of Consolidated Earnings Three Months and Six Months Ended December 31, 1999 and 1998 3 Condensed Consolidated Balance Sheets December 31, 1999 and June 30, 1999 4 Condensed Statements of Consolidated Cash Flows Six Months Ended December 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-12
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Earnings (In millions, except share and per-share amounts) <S> <C> <C> Three Months Ended Six Months Ended --------------------- --------------------- 12/31/99 12/31/98 12/31/99 12/31/98 -------- -------- -------- -------- Net Sales $ 954 $ 947 $ 1,896 $ 1,912 Cost and Expenses Cost of products sold 478 459 940 917 Selling, delivery and administration 192 201 374 392 Advertising 110 122 226 237 Research and development 15 15 29 30 Merger, integration and restructuring 6 - 8 - Interest expense 23 25 46 53 Other expense, net 10 7 16 7 -------- -------- -------- -------- Total costs and expenses 834 829 1,639 1,636 -------- -------- -------- -------- Earnings before income taxes 120 118 257 276 Income taxes 44 44 94 102 -------- -------- -------- -------- Net Earnings $ 76 $ 74 $ 163 $ 174 ======== ======== ======== ======== Earnings per Common Share Basic $ 0.32 $ 0.32 $ 0.69 $ 0.74 Diluted 0.32 0.31 0.68 0.73 Weighted Average Shares Outstanding (in thousands) Basic 236,475 234,588 236,747 234,522 Diluted 239,737 239,598 240,211 239,348 Dividends per Share $ 0.20 $ 0.18 $ 0.40 $ 0.35 </TABLE> See Notes to Condensed Consolidated Financial Statements.
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Consolidated Balance Sheets (In millions) 12/31/99 6/30/99 -------- ------- <S> <C> <C> ASSETS - ------ Current Assets Cash and short-term investments $ 159 $ 132 Receivables, net 575 610 Inventories 359 319 Prepaid expenses and other 23 29 Deferred income taxes 24 26 -------- ------- Total current assets 1,140 1,116 Property, Plant and Equipment - Net 1,061 1,054 Brands, Trademarks, Patents and Other Intangibles - Net 1,489 1,497 Investments in Affiliates 115 104 Other Assets 347 361 -------- ------- Total $ 4,152 $ 4,132 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 214 $ 206 Accrued liabilities 325 350 Accrued merger, integration, and restructuring 12 23 Short-term debt and notes payable 697 734 Income taxes payable 36 48 Current maturities of long-term debt 12 7 -------- ------- Total current liabilities 1,296 1,368 Long-term Debt 695 702 Other Obligations 186 255 Deferred Income Taxes 230 237 Stockholders' Equity Common stock 250 250 Additional paid-in capital 128 50 Retained earnings 1,923 1,842 Treasury shares, at cost (374) (392) Accumulated other comprehensive loss (161) (160) Other (21) (20) -------- ------- Stockholders' equity 1,745 1,570 -------- ------- Total $ 4,152 $ 4,132 ======== ======= See Notes to Condensed Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Cash Flows (In millions) Six Months Ended ------------------------------------ 12/31/99 12/31/98 ------------------ ----------------- <S> <C> <C> Operations: Net earnings $ 163 $ 174 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 98 97 Deferred income taxes 9 4 Other 3 (7) Changes in (excluding effects of businesses purchased): Accounts receivable 36 89 Inventories (38) (11) Prepaid expenses and other 6 6 Accounts payable 8 (68) Accrued liabilities (23) (99) Accrued merger, integration, and restructuring (11) (9) Income taxes payable (12) 32 ------------------ ----------------- Net cash provided by operations 239 208 Investing Activities: Purchases of property, plant and equipment (67) (69) Proceeds from disposals of property, plant and equipment 3 4 Businesses purchased (31) (111) Other (27) (46) ------------------ ----------------- Net cash used for investing (122) (222) Financing Activities: Credit facilities and short-term debt repayments, net (37) (69) Long-term debt and other borrowings 14 201 Long-term debt and other repayments (12) (6) First Brands receivables financing program, net - (15) Cash dividends (95) (82) Treasury stock purchased (51) (33) Settlement of share repurchase and options contracts 82 - Issuance of common stock for employee stock plans and other 8 41 ------------------ ----------------- Net cash provided by (used for) financing (91) 37 ------------------ ----------------- Effect on cash of exchange rate changes 1 - Net increase in cash and short-term investments 27 23 Cash and short-term investments: Beginning of period 132 102 ------------------ ----------------- End of period $ 159 $ 125 See Notes to Condensed Consolidated Financial Statements. </TABLE>
PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 1) The condensed consolidated financial statements for the three and six months ended December 31, 1999 and 1998 has not been audited but, in the opinion of management, include 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 Company's results reflect the January 29, 1999 merger with First Brands Corporation ("First Brands"). The merger was accounted for as a pooling of interests and all historical financial information has been restated to include First Brands. The results for the three and six months ended December 31, 1999 and 1998 should not be considered as necessarily indicative of the annual results for the respective years. 2) Inventories at December 31, 1999 and at June 30, 1999 consisted of: 12/31/99 6/30/99 ------------ ------------ Finished goods and work in process $ 248 $ 220 Raw materials and supplies 111 99 ------------ ------------ Total $ 359 $ 319 ============ ============ 3) International acquisitions since June 30, 1999 totaled $31 and were funded using a combination of cash and debt. These acquisitions included an increase in ownership to 100% in Tecnoclor, S.A. in Colombia (previously 72% owned and fully consolidated) and a rubber glove business purchased in Australia. 4) Basic earnings per share (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 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 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 ------------------ ------------------ 12/31/99 12/31/98 12/31/99 12/31/98 -------- -------- -------- -------- Basic 236,475 234,588 236,747 234,522 Stock options 3,225 4,932 3,428 4,744 Other 37 78 36 82 -------- -------- -------- -------- Diluted 239,737 239,598 240,211 239,348 ======== ======== ======== ======== PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 5) Comprehensive income for the Company includes net income and foreign currency translation adjustments that are excluded from net income but included as a separate component of total stockholders' equity. Comprehensive income for the three and six months ended December 31, 1999 and 1998 is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------- -------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Earnings $ 76 $ 74 $ 163 $ 174 Other comprehensive income (loss): Foreign currency translation adjustments 4 8 (1) (14) --------- --------- --------- --------- Total $ 80 $ 82 $ 162 $ 160 ========= ========= ========== ========= </TABLE> 6) On January 29, 1999, the Company completed a merger with First Brands. Related merger, integration, restructuring and asset impairment charges through December 31, 1999 are as follows: <TABLE> <CAPTION> Merger and Asset Integration Restructuring Sub-Total Impairment Total ----------- ------------- --------- ---------- ------ <S> <C> <C> <C> <C> <C> Provision for merger, integration, restructuring, and asset impairment: For the year ended June 30, 1999 $36 $53 $89 $91 $180 For the six months ended December 31, 1999 6 2 8 - 8 ----------- ------------- --------- ---------- ------ Total provision for merger, integration, restructuring and asset impairment through December 31, 1999 42 55 97 $91 $188 ========== ====== Total paid through December 31, 1999 (37) (48) (85) ----------- ------------- --------- Accrued liability as of December 31, 1999 $5 $7 $12 =========== ============= ========= </TABLE> Total merger, integration, restructuring and asset impairment costs are estimated to be approximately $210, including $196 recognized through December 31, 1999 (includes $8 of obsolete inventory written off to cost of sales). The Company expects to incur approximately an additional $14 over the remainder of the fiscal year and such costs will be expensed as merger, integration and restructuring costs as incurred. PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 7) The Company's operating segments are as follows: Household Products: Includes cleaning, bleach and other home care products, and water filtration products marketed in the United States and all products marketed in Canada. U. S. Specialty Products: Includes charcoal, automotive care, cat litter, insecticides, dressings, sauces, professional products and food storage and disposal categories. International: Includes operations outside the United States and Canada. Corporate, Interest and Other: Includes certain non-allocated administrative and sales costs, goodwill amortization, interest income, interest expense, merger, integration and restructuring, and other income and expense. Each segment is individually managed with separate operating results that are reviewed regularly by the chief operating decision maker. The following table shows operating segment information. Net Sales ------------------------------------------ Three Months Ended Six Months Ended --------------------- ------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- -------- -------- -------- Household Products $ 388 $ 381 $ 789 $ 796 U.S. Specialty Products 400 403 804 812 International 166 163 303 304 --------- -------- -------- -------- Total Company $ 954 $ 947 $1,896 $ 1,912 ========= ======== ======== ======== Earnings Before Income Taxes ------------------------------------------ Three Months Ended Six Months Ended --------------------- ------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- -------- -------- -------- Household Products $ 120 $ 122 $ 252 $ 258 U.S. Specialty Products 93 90 190 191 International 26 17 39 26 Corporate, Interest and Other (119) (111) (224) (199) --------- -------- -------- -------- Total Company $ 120 $ 118 $ 257 $ 276 ========= ======== ======== ======== As a result of several executive promotions and management realignments which occurred after June 30, 1999, operating segment information for years ending June 30, 1999 and June 30, 1998 has been restated to reflect the Company's current organizational structure and management responsibilities. The restated information is as follows: PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) <TABLE> (CAPTION> U.S. Corporate Fiscal Household Specialty Interest & Total Year Products Products International Other Company -------- ----------- ----------- --------------- ------------ ---------- <S> <C> <C> <C> <C> <C> <C> Net Sales 1999 $1,439 $1,856 $ 708 $ - $4,003 1998 1,376 1,796 726 - 3,898 Earnings before Tax 1999 496 456 54 (576) 430 1998 440 426 96 (406) 556 Identifiable Assets 1999 1,253 1,251 1,020 608 4,132 1998 1,192 1,138 1,025 710 4,065 Capital Spending 1999 55 64 27 30 176 1998 32 99 33 26 190 Depreciation and 1999 42 68 41 51 202 Amortization 1998 43 61 40 38 182 Interest Expense 1999 - - - 97 97 1998 - - - 104 104 </TABLE> 8) In September 1999, in response to declines in the Company's stock price in the first quarter, the Board of Directors authorized a common stock repurchase and hedging program intended to reduce or eliminate dilution when shares are issued in accordance with the Company's various stock compensation plans. The Company had canceled a prior share repurchase and hedging program (previously authorized in September 1996 by the Board of Directors to offset the dilutive effects of employee stock exercises) when it merged with First Brands. From inception of the new program through December 31, 1999, a total of 1,123,000 shares were acquired at a cost of $51. PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Diluted earnings per share increased 3% to 32 cents and decreased 7% to 68 cents for the three and six months ended December 31, 1999, respectively. Net earnings increased 3% to $76 million and decreased 6% to $163 million for the three and six months ended December 31, 1999, respectively. The Company's results reflect the January 29, 1999 merger with First Brands Corporation ("First Brands"). The merger was accounted for as a pooling of interests and all historical financial information has been restated to include First Brands. Net sales for the second quarter of fiscal 2000 increased 1% to $954 million mostly due to the results achieved from the Company's household products and international segments partially offset by lower net sales from the Company's U.S. specialty products segment. The increase in household product's net sales resulted mostly from the introduction of new products, such as Clorox Disinfecting Spray, Liquid-Plumr Foaming Pipe Snake, and Clorox FreshCare fabric refresher, partially offset by lower shipments of Brita water filtration systems driven by lower demand for pour-through pitchers, and a decrease in shipments of Clorox liquid bleach and Clorox 2 bleach. International net sales increases reflected higher shipments due to an increase in market share in the Brazilian bleach market and growth in Australia and New Zealand partly attributable to the acquisition of a rubber glove business in Australia; such increases were partially offset by currency devaluations experienced by some of the Company's Latin American businesses. The U.S. specialty products segment's net sales decreased mostly due to the discontinuation of First Brands prior year promotional activities partially offset by higher shipments of charcoal products due to an extended season, and higher shipments of Hidden Valley bottled dressings resulting from strong demand for club-size products. Net sales for the six month period ended December 31, 1999 decreased 1% to $1,896 million mostly due to the discontinuation of prior year First Brands promotional activities, lower shipments of Tilex Fresh Shower due to higher volumes in the prior year during its launch, an increase in international promotional spending during the first quarter of fiscal 2000, and currency devaluations experienced by some of the Company's Latin American businesses. Partially offsetting these decreases were higher shipments from new product launches, the full year results of the Handi Wipes business acquired in the prior year, higher charcoal shipments and international growth. Cost of products sold as a percentage of sales increased to 50.1% from 48.5% and increased to 49.6% from 48.0% for the three and six months ended December 31, 1999, respectively. These increases were mostly due to higher resin prices, somewhat offset by cost savings initiatives throughout the Company's domestic and international business units. Selling, delivery, and administrative expenses decreased 4% to $192 million and decreased 5% to $374 million for the three and six months ended December 31, 1999, respectively, mostly from continued benefits from combining the former First Brands businesses with Clorox. These decreases reflect a savings from lower commission expense primarily due to the consolidation of the Company's broker network. Advertising expense decreased 10% to $110 million and decreased 5% to $226 million for the three and six months ended December 31, 1999, respectively, mostly due to savings resulting from changing certain of First Brands couponing practices. These savings are partially offset by higher media spending to support former First Brands' businesses and the introduction of new products. Merger, integration and restructuring for the six months ended December 31, 1999 primarily reflect relocation expenses and retention bonuses paid to former First Brands employees and costs associated with the closure of First Brands distribution centers. The Company expects to incur approximately an additional $14 million over the remainder of the fiscal year and such costs will be expensed as merger, integration and restructuring costs as incurred. Interest expense decreased to $23 million from $25 million and decreased to $46 million from $53 million for the three and six months ended December 31, 1999, respectively. The decreases are mostly due to the refinancing of former First Brands debt at lower interest rates made possible by Clorox's more favorable credit rating. 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 fourth quarter of fiscal 1999 were the primary drivers causing reductions in receivables and accrued liabilities and the increase in inventories. International acquisitions since June 30, 1999 totaled $31 million and were funded using a combination of cash and debt. These acquisitions included an increase in ownership to 100% (from 72%) in Tecnoclor, S.A. in Colombia and a rubber glove business purchased in Australia. In September 1999, in response to declines in the Company's stock price in the first quarter, the Board of Directors authorized a common stock repurchase and hedging program intended to reduce or eliminate dilution when shares are issued in accordance with the Company's various stock compensation plans. The Company had canceled a prior share repurchase and hedging program (previously authorized in September 1996 by the Board of Directors to offset the dilutive effects of employee stock exercises) when it merged with First Brands. During the six month period ended December 31, 1999, a total of 1,123,000 shares were acquired at a cost of $51 million. On September 15, 1999, the Company settled prior share repurchase agreements and options contracts realizing cash proceeds of approximately $82 million. On the same day, the Company entered into two new share repurchase transactions whereby the Company contracted for future delivery of 2,260,000 shares on September 15, 2002 and 2,260,000 shares on September 15, 2004, each for a strike price of $43 per share. In November 1999, the Company entered into an agreement to purchase an additional 1,000,000 shares on December 1, 2003 at a price of $46.32 per share. On November 17, 1999, the stockholders approved an amendment of the Company's Certificate of Incorporation to increase the authorized capital of the Company to consist of 750,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, each with a par value of $1.00 per share. Management believes the Company has access to sufficient capital through existing lines of credit and, should the need arise, from other public and private sources. Year 2000 Compliance In 1997, the Company established a comprehensive corporate-wide program to address what is commonly referred to as the "Year 2000" or "Y2K" problem. This effort encompassed 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. Following the Company's January 29, 1999 merger with First Brands, the Company incorporated First Brands (since renamed The Glad Products Company) and its subsidiaries into the Company's comprehensive Y2K compliance program. As of December 31, 1999, the Company completed all of its Y2K compliance efforts on all of its critical domestic and international business systems, through retirement, upgrades or replacements, its critical plant floor equipment, instrumentation and facilities, and its third party assessment for all of its operations. The Company developed written contingency plans for its critical operations and third party relationships, including key customers, suppliers and other service providers. The Company did not implement any of its contingency plans because it did not experience any material Y2K related issues with the arrival of the new millennium. Y2K costs were expensed as incurred and funded through operating cash flows. Through December 31, 1999, the Company has expensed incremental remediation costs of $20 million and accelerated strategic upgrade costs of $20 million. The Company spent approximately 6.4% of its 1999 fiscal year information technology budget on Y2K remediation issues. The Company has not deferred any critical information technology projects because of its Year 2000 program efforts, which were primarily addressed through a joint team of the Company's business and information technology resources. PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Cautionary Statement Except for historical information, matters discussed above and in the financial statements and footnotes, including statements about future growth, profitability, costs, expectations, plans or objectives, are forward-looking statements based on management's estimates, assumptions and projections. These forward-looking statements are subject to risks and uncertainties, and actual results could differ materially from those discussed above and in the financial statements and footnotes. Important factors that could affect performance and cause results to differ materially from management's expectations are described in "Forward-Looking Statements and Risk Factors" in the Company's Annual Report on Form 10-K for the year ending June 30, 1999, and in the Company's subsequent SEC filings. Those factors include, but are not limited to, marketplace conditions and events, competitors' actions, the Company's costs, risks inherent in litigation and international operations, the success of new products, the integration of acquisitions and mergers, including First Brands, and environmental, regulatory and intellectual property matters. . PART I - FINANCIAL INFORMATION (Continued) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3) (iii) Restated Certificate of Incorporation (10) Material Contracts (XIX) Agreement between Henkel KGaA and the Company, November 2, 1999
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 14, 2000 BY /S/ GREGORY S. FRANK Gregory S. Frank Vice-President - Controller INDEX TO EXHIBITS Exhibit Number Description of Exhibit - -------------- ------------------------------------- 3(iii) Restated Certificate of Incorporation 10(XIX) Agreement between Henkel KGaA and the Company, November 2, 1999