Fitch Ratings has upgraded the following ratings on The Clorox Company (Clorox):
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Unsecured bank facility to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB'.
In addition, Fitch has affirmed the following rating:
--Short-term IDR and commercial paper program at 'F2'
The $1.1 billion revolving credit facility and $2.4 billion in unsecured senior notes are affected by the upgrade. The short-term IDR and commercial paper program with $369 million outstanding at June 30, 2010 is affirmed at 'F2'. The Rating Outlook is revised from Positive to Stable.
The upgrade reflects Clorox's consistent ability to generate ample free cash flow which has enabled the company to markedly reduce debt and leverage. As a result, despite a highly promotional and challenged economic environment, the company attained its 2 times (x) to 2.5x leverage target during the latter portion of calendar 2009. This demonstrates the company's ability to perform and manage within their publicly stated goal and is a key factor underpinning the upgrade. Fitch notes that several key product lines compete in categories that have a reasonably strong private label presence that could pressure revenue growth. Nonetheless, the company has a strong financial profile with low business risk. Clorox generated $5.5 billion in revenues for the fiscal year ended June 30, 2010 (FY10), 79% of which were derived from United States. Operating cash flow has increased in each of the past four years supporting annual free cash flow of over $280 million in the same time frame. As a result, the company was able to reduce debt from $3.5 billion to $2.8 billion and attain their leverage target of under 2.5x in the latter portion of 2009 - 2.24x based on the bank covenant definition at FY10. Fitch forecasts free cash flow to be between $270 million and $300 million in the near to intermediate term which will include some technology related capital expenditure increases.
The Stable Outlook is predicated on the company's solid cash flows and credit protection measures. Fitch expects Clorox to balance any acquisition, divestiture or share repurchase program within its 2x to 2.5x leverage target.
Clorox's 2% increase to $5.5 billion in revenues during FY10 was supported mainly by 4.4% of volume and pricing which was partially offset by dilution (1.3%) and negative foreign exchange translation (1.1%). Operating margins have improved steadily as several key commodity prices such as resin used in the production of trash bags and food storage, declined sharply from the peak levels seen in 2008. Commodities used in the manufacturing process such as resin can experience periods of price volatility. However, Clorox has a long history of cost reduction has demonstrated an ability to increase prices and should be able to offset some level of potential commodity price inflation. Leverage, as mentioned previously, has declined with modest EBITDA growth and debt reduction resulting in leverage (debt/EBITDA) under Fitch's definition of 2.19x at FY10.
Liquidity is ample and derived from a $1.1 billion unused revolver expiring April 2013 and significant access to the capital markets. The company is a reasonably large C/P borrower with average outstandings of $459 million during FY10. Cash balances of $87 million are low at less than 2% of total assets at FY10 and over 63% is held outside the U.S. The company has reasonably large debt maturities in the 2011 and 2013 fiscal years. Long-term debt maturities at June 30, 2010 are $300 million maturing on Feb. 1, 2011 (FY11), $3 million in FY12, $850 million in FY13 and $0 in FY14. Fitch expects Clorox to refinance the $300 million 6.125% notes due in February 2011.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'The Clorox Company Credit Update' (Aug. 31, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
The Clorox Company
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=554285
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Contacts:
Fitch Ratings
Primary Analyst:
Grace Barnett, CPA,
+1-212-908-0718
Director
One State Street
New York, NY
10004
or
Wesley Moultrie II, CPA, +1-312-368-3195
Senior
Director
or
Committee Chairperson:
James Rizzo, CFA,
+1-212-908-0548
Senior Director
or
Media Relations:
Cindy
Stoller, New York, +1-212-908-0526
cindy.stoller@fitchratings.com