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