UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE X SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 THE CLOROX COMPANY (Exact name of registrant as specified in its charter) DELAWARE 31-0595760 (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, (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 September 30, 1998 there were 103,525,444 shares outstanding of the registrant's common stock (par value - $1.00), the registrant's only outstanding class of stock. Total pages 15 1 THE CLOROX COMPANY PART 1. Financial Information Page No. --------------------- --------- Item 1. Financial Statements Condensed Statements of Consolidated Earnings Three Months Ended September 30, 1998 and 1997 3 Consolidated Statements of Comprehensive Income Three Months Ended September 30, 1998 and 1997 4 Condensed Consolidated Balance Sheets September 30, 1998 and June 30, 1998 5 Condensed Statements of Consolidated Cash Flows Three Months Ended September 30, 1998 and 1997 6 Notes to Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-13 Item 6. Other Exhibits 14 2
<TABLE> <CAPTION> 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 ------------------------------------ 9/30/98 9/30/97 ------------- ------------- <S> <C> <C> Net Sales $ 685,883 $ 649,284 Costs and Expenses Cost of products sold 288,551 279,694 Selling, delivery and administration 142,618 130,399 Advertising 91,592 91,544 Research and development 12,949 11,606 Interest expense 18,796 15,494 Other income (3,150) (1,359) ------------- ------------- Total costs and expenses 551,356 527,378 ------------- ------------- Earnings before Income Taxes 134,527 121,906 Income Taxes 49,105 47,543 ------------- ------------- Net Earnings $ 85,422 $ 74,363 ============= ============= Earnings per Common Share Basic $ 0.82 $ 0.72 Diluted 0.81 0.71 Weighted Average Shares Outstanding Basic 103,604 103,217 Diluted 105,637 105,184 Dividends per Share $ 0.36 $ 0.32 See Notes to Condensed Consolidated Financial Statements. </TABLE> 3 PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Consolidated Statements of Comprehensive Income (In thousands) Three Months Ended ---------------------------------- 9/30/98 9/30/97 ------------ ------------ Net Earnings $ 85,422 $ 74,363 ------------ ------------ Other comprehensive income (loss): Foreign currency translation adjustments (17,015) (4,900) ------------ ------------- Comprehensive Income $ 68,407 $ 69,463 ============ ============= 4
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) 9/30/98 6/30/98 ------------- ------------- <S> <C> <C> ASSETS - ------ Current Assets Cash and short-term investments $ 109,156 $ 89,681 Accounts receivable, less allowance 347,342 411,868 Inventories 214,701 211,913 Prepaid expenses and other 45,598 45,354 Deferred income taxes 21,668 23,242 ------------- ------------- Total current assets 738,465 782,058 Property, Plant and Equipment - Net 598,402 596,293 Brands, Trademarks, Patents and Other Intangibles 1,248,899 1,240,532 Investments in Affiliates 89,478 84,449 Other Assets 334,738 310,018 ------------- ------------- Total $ 3,009,982 $ 3,013,350 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 127,363 $ 154,348 Accrued liabilities 192,671 268,583 Short-term debt 666,485 768,616 Income taxes payable 56,437 15,370 Current maturities of long-term debt 1,461 1,517 ------------- ------------- Total current liabilities 1,044,417 1,208,434 Long-term Debt 466,294 316,260 Other Obligations 209,404 203,000 Deferred Income Taxes 188,266 200,421 Stockholders' Equity Common stock 110,844 110,844 Additional paid-in capital 87,776 84,124 Retained earnings 1,432,152 1,382,943 Treasury shares, at cost (415,221) (391,864) Accumulated other comprehensive income (106,876) (89,861) Other (7,074) (10,951) ------------- ------------- Stockholders' Equity 1,101,601 1,085,235 ------------- ------------- Total $ 3,009,982 $ 3,013,350 ============= ============= See Notes to Condensed Consolidated Financial Statements. 5 </TABLE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Cash Flows (In thousands) Three Months Ended ------------------------------------ 9/30/98 9/30/97 ------------- ------------- <S> <C> <C> Operations: Net earnings $ 85,422 $ 74,363 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 34,926 36,680 Deferred income taxes 2,919 2,216 Other (3,384) (9,555) Effects of changes in: Accounts receivable 64,526 16,621 Inventories (1,508) (16,272) Prepaid expenses (244) 5,870 Accounts payable (28,506) 1,524 Accrued liabilities (70,662) (97,749) Income taxes payable 38,484 36,007 ------------- ------------- Net cash provided by operations 121,973 49,705 Investing Activities: Property, plant and equipment (20,898) (18,375) Disposal of property, plant and equipment 128 1,123 Businesses purchased (38,652) (37,910) Other (31,984) (34,915) ------------- ------------- Net cash used for investment (91,406) (90,077) Financing Activities: Short-term debt borrowings - 13,407 Short-term debt repayments (374) (148,312) Long-term debt and other obligations borrowings 149,223 193,287 Long-term debt and other obligations repayments (2,276) (5,434) Commercial paper, net (101,745) 2,821 Cash dividends (37,315) (32,918) Treasury stock purchased (28,109) (4,820) Issuance of common stock under employee stock plans 9,504 8,666 ------------- ------------- Net cash provided by (used for) financing (11,092) 26,697 ------------- ------------- Net (Decrease) Increase in Cash and Short-Term Investments 19,475 (13,675) Cash and Short-Term Investments: Beginning of period 89,681 101,046 ------------- ------------- End of period $ 109,156 $ 87,371 See Notes to Condensed Financial Statements. 6 </TABLE>
PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (1) The summarized consolidated financial information for the three months ended September 30, 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 for the three months ended September 30, 1998 should not be considered as necessarily indicative of the results for the respective year. (2) Inventories at September 30, 1998 and at June 30, 1998 consisted of (in thousands): 9/30/98 6/30/98 ---------- ---------- Finished goods and work in process $ 135,831 $ 130,185 Raw materials and supplies 78,870 81,728 ---------- ---------- Total $ 214,701 $ 211,913 (3) Businesses purchased totalling $38,652,000 and $37,910,000 during the quarters ended September 30, 1998 and 1997, respectively, were funded using a combination of cash and long-term borrowings and were accounted for as purchases. These acquisitions included Mistolin bleach and cleaners business in Venezuela and the Gumption cleaning brand business in Australia. (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. 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 2.91%. 7
PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (5) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all earnings statements issued after December 15, 1997 for all entities with complex capital structures. 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 are 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 earnings per share is reconciled to those used in calculating diluted earnings per share as follows: Weighted Average Number of Shares Outstanding ----------------------- Three Months Ended ----------------------- 9/30/98 9/30/97 ------- ------- Basic 103,604 103,217 Stock options 1,952 1,935 Other 81 32 ------- ------- Diluted 105,637 105,184 ======= ======= (6) Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (FAS 130), Reporting of Comprehensive Income. Comprehensive income includes net income and other revenues, expenses, gains and losses that are excluded from net income but included as a component of stockholders' equity. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires that the Company classify items of other comprehensive income, as defined by FAS 130, by their nature in the financial statements and display accumulated other comprehensive income separately in the equity section of the balance sheet. The financial statements for earlier periods were reclassified for comparative purposes, as required by FAS 130. Comprehensive income for the quarters ended September 30, 1998 and 1997, was $68,407,000 and $69,463,000 respectively. 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. (7) Certain reclassifications of prior periods' amounts relating to accounts receivable and accrued liabilities have been made to conform with the current period presentation. 8
PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (8) Subsequent Event - First Brands Corporation Pending Acquisition On October 18, 1998, the Company entered into a definitive agreement with First Brands Corporation ("First Brands") pursuant to which the Company will acquire First Brands in a merger transaction (the "Merger") valued at approximately $2 billion. First Brands develops, manufactures, markets and sells consumer products under the Glad, Scoop Away, and STP brands, among others. The acquisition is structured to be treated as a pooling of interests for accounting purposes and as a non-taxable transaction to First Brands' stockholders. The transaction is subject to certain conditions, including the approval of First Brands' stockholders and customary regulatory approvals. Although the Company hopes to consummate the acquisition in the quarter ending March 31, 1999, no assurances can be given as to when, or whether, the acquisition will be completed. Under the terms of the merger agreement, which has been approved by the boards of both companies, First Brands' stockholders, in exchange for their shares of First Brands' common stock, will receive the right to receive shares of the Company's common stock. The exchange ratio will depend upon the average closing price of the Company's common stock on the New York Stock Exchange over the ten trading days preceding the fifth trading day before the effective date of the Merger (the "Average Closing Price"). If the Average Closing Price is more than $80 but less than or equal to $115, the exchange ratio will be $39 divided by the Average Closing Price (i.e., First Brands' stockholders will receive $39 in the Company's common stock, based on the Average Closing Price, for each share of First Brands' common stock). If the Average Closing Price is less than or equal to $80, the exchange ratio will be 0.4875 shares of the Company's common stock for each share of First Brands' common stock. If the Average Closing Price is greater than $115, the exchange ratio will be 0.3391 shares of the Company's common stock for each share of First Brands' common stock. Cash will be paid in lieu of fractional shares. As a result of the acquisition, Clorox will also assume approximately $440 million of First Brands' debt. See also the discussion in "Management's Discussion and Analysis" under "Subsequent Event - First Brands Corporation Pending Acquisition". 9
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 September 30, 1998 with the Three Months Ended September 30, 1997 Diluted earnings per share increased 14% to 81 cents from 71 cents a year ago and net earnings grew 15% to $85,422,000 from $74,363,000 a year ago. Net sales increased 6 percent to $685,883,000 due primarily to volume growth. This volume growth was fueled by several factors such as the introduction of new products during the second half of fiscal year 1998; a strong performance from domestic brands including Clorox toilet bowl cleanser and automatic toilet bowl cleaner, Hidden Valley bottled dressings, and Fresh Step Scoop scoopable cat litter; and increased volumes experienced by our Brita, Armor All, and professional products businesses. Products introduced during the second half of fiscal year 1998 that contributed to this volume growth were Tilex Fresh Shower daily shower cleaner, Lemon Fresh Pine-Sol cleaner and antibacterial spray, and Rain Clean Pine-Sol dilutable cleaner. These volume increases were partially offset by volume decreases in our sales of Clorox liquid bleach and insecticides, and a weakened volume performance experienced by our Asian businesses due to an economic downturn in Asian economies. Gross margins as a percent of sales improved a percentage point from the preceding year primarily due to the successful integration of the Armor All business and on-going cost savings programs mostly implemented in the prior year such as the reformulation of certain household products, re-negotiation of freight rates, reduction of packaging costs, and a switch to in-house production from the use of outside co-packers for certain household products. Selling, delivery, and administration expenses increased approximately 9% from a year ago primarily due to continued growth and expenditures related to investment in international infrastructure. Interest expense increased approximately $3,300,000 versus the year ago period primarily due to the issuance of new debt required to fund business growth. Income tax expense as a percent of pretax earnings declined from 39% to 36.5% principally due to international investment activities and international operations. 10
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. Accounts receivable, accounts payable, and accrued liabilities decreased from June 30, 1998 primarily due to normal seasonality of the charcoal, insecticide, and automotive appearance businesses. In September 1996, the Board of Directors authorized a share repurchase program to offset the dilutive effect of employee stock option exercises. During the three month period ended September 30, 1998, 280,000 shares were acquired at a cost of $28,109,000. The Company currently plans to discontinue such share repurchase program in connection with the First Brands Corporation pending acquisition described below. As a result, the issuance of shares pursuant to the Company's stock incentive plans may have a potential 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 2.91%. Management believes the Company has access to additional capital through existing lines of credit and from public and private sources should the need arise. Year 2000 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, PC's, manufacturing and other facilities, embedded chips, century certification, supplier and customer readiness, contingency planning, and domestic and international operations. The Company is currently on schedule and is more than 60% complete as of September 30, 1998. The Company has replaced or upgraded most of its critical business applications and systems and has begun the century testing phase for these critical technology systems. The target date to repair or replace the remaining critical business information systems is March 31, 1999. The Company is assessing its plant floor systems and equipment and the target date to complete manufacturing plant floor and facilities efforts is September 30, 1999. The Company has prioritized its third-party relationships as 11
PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 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), 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 ready, 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 expects to complete all of its contingency planning by June 30, 1999. Y2K costs are expensed as incurred and funded through operating cash flows. Through September 30, 1998, the Company has expensed incremental remediation costs of $17,117,000 with remaining incremental remediation costs estimated at $13,761,000. In addition, through September 30, 1998, the Company has expensed accelerated strategic upgrade costs of $9,609,000 with anticipated remaining accelerated strategic upgrade costs of $6,399,000. The Company has spent approximately 17% of its 1998 fiscal year information technology budget, and expects to spend approximately 12% 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 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. Also, the Company's pending acquisition of First Brands Corporation remains subject to certain closing conditions and is not included in this assessment. Subsequent Event - First Brands Corporation Pending Acquisition On October 18, 1998, the Company entered into a definitive agreement with First Brands Corporation ("First Brands") pursuant to which the Company will acquire First Brands in a merger transaction (the "Merger") valued at approximately $2 billion. First Brands develops, manufactures, markets and sells consumer products under the Glad, Scoop Away, and STP brands, among others. The acquisition is structured to be treated as a pooling of interests for accounting purposes and as a non-taxable transaction to First Brands' stockholders. The transaction is subject to certain conditions, including the approval of First Brands' stockholders and customary regulatory approvals. Although the Company hopes to consummate the acquisition in the quarter ending March 31, 1999, no assurances can be given as to when, or whether, the acquisition will be completed. Under the terms of the merger agreement, which has been approved by the boards of both companies, First Brands' stockholders, in exchange for their shares of First Brands' common stock, will receive the right to receive shares of the Company's common stock. The exchange ratio will depend upon the average closing price of the Company's common stock on the New York Stock Exchange over the ten trading days preceding the fifth trading day before the effective date of the Merger (the "Average Closing Price"). If the Average Closing Price is more than $80 but less than or equal to $115, the exchange ratio will be $39 divided by the Average Closing Price (i.e., First Brands' stockholders will receive $39 in the Company's common stock, based on the Average Closing Price, for each share of First Brands' common stock). If the Average Closing Price is less than or equal to $80, the 12
PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition exchange ratio will be 0.4875 shares of the Company's common stock for each share of First Brands' common stock. If the Average Closing Price is greater than $115, the exchange ratio will be 0.3391 shares of the Company's common stock for each share of First Brands' common stock. Cash will be paid in lieu of fractional shares. As a result of the acquisition, Clorox will also assume approximately $440 million of First Brands' debt. In connection with pooling of interests accounting treatment for the Merger, the Company plans to discontinue its previously announced share repurchase program and may be required to issue additional shares of its common stock to third parties. Any such share issuance may have a dilutive effect. Consummation of the Merger is conditioned upon receipt by each of the Company and First Brands of a letter from their respective independent accountants stating that, in their respective opinions, they concur with the conclusions of the management of the Company and First Brands that the criteria for pooling of interests accounting, which can be assessed at that time, have been met. If after consummation of the merger, events occur that cause the acquisition to no longer qualify for pooling of interests treatment, the purchase method of accounting would be applied, which could have a material adverse effect on the reported operating results of the combined company because of the charges to the Company's earnings from amortization of goodwill required by purchase accounting. As is generally the case with acquisitions, there can be no assurance that the Company will be able to complete the acquisition, successfully integrate or profitably manage the First Brands' businesses. In addition, there can be no assurance that, following the transaction, 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. The Company expects to incur significant costs (in excess of $100 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 a preliminary 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. Cautionary Statement Except for historical information, matters discussed in this Form 10-Q, including statements about future growth or the likelihood of the consummation 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 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, and with respect to the First Brands' transaction, risks related to the conditions necessary to consummate the Merger and subsequent 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. 13
PART II - OTHER INFORMATION Item 6. Other Exhibits Exhibit (10) (viii) Supplemental Executive Retirement Plan restated July 17, 1991, and further amended in May 1994 and January 1996, follows page 14 of this Form 10-Q. Exhibit (10) (xii) Non-Qualified Deferred Compensation Plan, as amended and restated in March 1997, follows thereafter. 14
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: November 10, 1998 BY /s/ HENRY J. SALVO, JR. ------------------- --------------------------- Henry J. Salvo, Jr. Vice-President - Controller 15