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NOTE 1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three and nine months ended March 31, 2013 and 2012, in the opinion of management, reflect all adjustments (consisting 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) for the periods presented. The results for the interim period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013, or for any future period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2012, which includes a complete set of footnote disclosures, including the Company's significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
Recently Issued Accounting Pronouncements
On February 5, 2013, the Financial Accounting Standards Board (FASB) issued an update to current accounting standards to improve disclosures related to reclassifications out of accumulated other comprehensive income. Substantially all of the information that these amendments require already is required to be disclosed elsewhere in the financial statements. The amendments require an entity to report the effect of significant reclassifications on respective line items in net earnings or cross-reference other required disclosures, depending on the nature of the reclassification. The presentation requirements will be adopted by the Company by the first quarter of fiscal year 2014, as required.
Foreign Currency Transactions and Translation
Venezuela
The financial statements of the Company's subsidiary in Venezuela are consolidated under the rules governing the preparation of financial statements in a highly inflationary economy. As such, the subsidiary's non-U.S dollar (non-USD) monetary assets and liabilities are remeasured into USD each reporting period with the resulting gains and losses reflected in the Company's current net earnings in other expense (income), net.
On February 8, 2013, the Venezuelan government announced a devaluation of the official currency exchange rate (CADIVI) from 4.3 to 6.3 bolívares fuertes (VEF) per USD and the elimination of the alternative currency exchange system (SITME). Prior to February 8, 2013, the Company had been utilizing the rate at which it had been obtaining USD through SITME to remeasure its Venezuelan financial statements, which was 5.7 VEF per USD at the announcement date. In response to these developments, the Company began utilizing the CADIVI rate of 6.3 VEF per USD. The Company recorded a remeasurement loss of $3 related to the devaluation in the three months ended March 31, 2013, which was reflected in other expense (income), net.
In March 2013, the Venezuelan government announced the creation of an alternative currency exchange system (SICAD), which is intended to complement CADIVI. The first SICAD auction occurred on March 25, 2013. Based on a number of factors, including the limited number of SICAD auctions held to date, restrictions placed on the amount of USD available to purchase through the auction process, and the lack of any official data on auction results, the Company does not believe it is appropriate to use the SICAD rate as the official translation rate at this time.
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NOTE 2. INVENTORIES, NET
Inventories, net, consisted of the following as of:
3/31/2013 | 6/30/2012 | |||||||
Finished goods | $ | 382 | $ | 307 | ||||
Raw materials and packaging | 122 | 120 | ||||||
Work in process | 4 | 4 | ||||||
LIFO allowances | (42 | ) | (37 | ) | ||||
Allowances for obsolescence | (12 | ) | (10 | ) | ||||
Total | $ | 454 | $ | 384 |
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NOTE 3. OTHER LIABILITIES
Other liabilities consisted of the following as of:
3/31/2013 | 6/30/2012 | |||||
Employee benefit obligations | $ | 322 | $ | 312 | ||
Venture agreement net terminal obligation | 283 | 281 | ||||
Taxes | 71 | 82 | ||||
Other | 111 | 64 | ||||
Total | $ | 787 | $ | 739 |
In December 2012, the Company completed a sale-leaseback transaction under which it sold its general office building in Oakland, Calif. to an unrelated party for net proceeds of $108 and entered into a 15-year operating lease agreement with the buyer for a portion of the building. In December 2012, the Company recorded a liability of $52 ($3 of which was included in accrued liabilities) for the portion of the total gain on the sale that is equivalent to the present value of the lease payments and will continue to amortize such amount to earnings ratably over the lease term. The Company recorded a gain upon sale in December 2012 of $6, which was included in other expense (income), net, in the condensed consolidated statements of earnings and comprehensive income. As of March 31, 2013, the total deferred gain was $51, $3 of which was included in accrued liabilities.
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NOTE 4. DEBT
In March 2013, $500 in senior notes with an annual fixed interest rate of 5.00% became due and were repaid. The repayment was funded in part with commercial paper borrowings and in part with a portion of the proceeds from the sale-leaseback transaction of the Company's Oakland, Calif. general office building.
In October 2012, $350 in senior notes with an annual fixed interest rate of 5.45% became due and were repaid. The repayment was funded with a portion of the proceeds from the issuance of $600 in senior notes in September 2012 with an annual fixed interest rate of 3.05%. The notes were issued under the Company's existing shelf registration statement, with interest payable semi-annually in March and September and a maturity date of September 15, 2022. The remaining net proceeds were used to repay commercial paper. The notes rank equally with all of the Company's existing and future senior indebtedness.
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NOTE 5. NET EARNINGS PER SHARE
The following is the reconciliation of the weighted average number of shares outstanding (in thousands) used to calculate basic net earnings per share (EPS) to those used to calculate diluted net EPS:
Three Months Ended | Nine Months Ended | |||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||
Basic | 131,619 | 130,266 | 130,960 | 131,116 | ||||
Dilutive effect of stock options and other | 1,856 | 1,341 | 1,669 | 1,453 | ||||
Diluted | 133,475 | 131,607 | 132,629 | 132,569 |
During the three and nine months ended March 31, 2013, the Company included all stock options to purchase shares of the Company's common stock in the calculations of diluted net EPS because the average market price of all outstanding grants was greater than the exercise price.
During both the three and nine months ended March 31, 2012, the Company did not include stock options to purchase approximately 2.0 million shares of the Company's common stock in the calculations of diluted net EPS because their exercise price was greater than the average market price, making them anti-dilutive.
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NOTE 6. COMPREHENSIVE INCOME
Comprehensive income is defined as net earnings and other changes in stockholders' equity (deficit) from transactions and other events from sources other than stockholders. Comprehensive income was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Earnings from continuing operations | $ | 134 | $ | 134 | $ | 390 | $ | 369 | ||||||||
Losses from discontinued operations, net of tax | (1 | ) | (2 | ) | (1 | ) | (2 | ) | ||||||||
Net earnings | 133 | 132 | 389 | 367 | ||||||||||||
Other comprehensive income (losses), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | (5 | ) | 16 | 13 | (21 | ) | ||||||||||
Net derivative adjustments | 1 | 2 | 1 | (33 | ) | |||||||||||
Pension and postretirement benefit adjustments | 2 | 1 | 4 | - | ||||||||||||
Total | $ | 131 | $ | 151 | $ | 407 | $ | 313 |
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NOTE 7. INCOME TAXES
In determining its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The effective tax rate on earnings from continuing operations was 33.9% and 33.2% for the three and nine months ended March 31, 2013, respectively, and 32.2% and 31.7% for the three and nine months ended March 31, 2012, respectively. The lower tax rates for the three and nine months ended March 31, 2012 were primarily due to lower taxes on foreign earnings. The current and prior year periods also reflect benefits from tax settlements.
The balance of unrecognized tax benefits as of March 31, 2013 and June 30, 2012, included potential benefits of $57 and $56, respectively, which, if recognized, would affect the effective tax rate on earnings.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The total balance of accrued interest and penalties related to uncertain tax positions was $8 and $7 as of March 31, 2013 and June 30, 2012, respectively. Interest and penalties included in income tax expense resulted in net expense of $1 for both the three and nine months ended March 31, 2013 and net benefits of $0 and $3 for the three and nine months ended March 31, 2012, respectively.
The Company files income tax returns in U.S. federal and various state, local and foreign jurisdictions. The federal statute of limitations has expired for all tax years through June 30, 2009. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.
Certain issues relating to fiscal years 1996 through 2000 were effectively settled by the Company and the Canadian Revenue Agency during the quarter ended September 30, 2012, resulting in a net benefit of tax and interest of $7. No tax benefits had previously been recognized for these issues in the Company's consolidated financial statements.
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NOTE 8. RETIREMENT INCOME AND HEALTH CARE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost for the Company's retirement income plan:
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Service cost | $ | - | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost | 6 | 8 | 18 | 22 | ||||||||||||
Expected return on plan assets | (7 | ) | (8 | ) | (22 | ) | (23 | ) | ||||||||
Amortization of unrecognized items | 3 | 2 | 9 | 6 | ||||||||||||
Total | $ | 2 | $ | 3 | $ | 7 | $ | 7 |
The net periodic benefit cost for the Company's retirement health care plans was $1 for both the three and nine months ended March 31, 2013, and less than $1 for both the three and nine months ended March 31, 2012.
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NOTE 9. CONTINGENCIES AND GUARANTEES
Contingencies
The Company is involved in certain environmental matters, including response actions at various locations. The Company had a recorded liability of $14 as of both March 31, 2013 and June 30, 2012, for its share of aggregate future remediation costs related to these matters. One matter in Dickinson County, Michigan, for which the Company is jointly and severally liable, accounted for a substantial majority of the recorded liability as of both March 31, 2013 and June 30, 2012. The Company has agreed to be liable for 24.3% of the aggregate remediation and associated costs for this matter pursuant to a cost-sharing arrangement with a third party. With the assistance of environmental consultants, the Company maintains an undiscounted liability representing its current best estimate of its share of the capital expenditures, maintenance and other costs that may be incurred over an estimated 30-year remediation period. Currently, the Company cannot accurately predict the timing of future payments that may be made under this obligation. In addition, the Company's estimated loss exposure is sensitive to a variety of uncertain factors, including the efficacy of remediation efforts, changes in remediation requirements and the future availability of alternative clean-up technologies. Although it is possible that the Company's exposure may exceed the amount recorded, any amount of such additional exposures, or range of exposures, is not estimable at this time.
In October 2012, a Brazilian appellate court issued an adverse decision in a lawsuit pending in Brazil against the Company and one of its wholly-owned subsidiaries, The Glad Products Company ("Glad"). The lawsuit was initially filed in a Brazilian lower court in 2002 by two Brazilian companies and one Uruguayan company (collectively "Petroplus") related to joint venture agreements for the distribution of STP auto-care products in Brazil with three companies that became subsidiaries of the Company as a result of the Company's merger with First Brands Corporation in January 1999 (collectively, "Clorox Subsidiaries"). The pending lawsuit seeks indemnification for damages and losses for alleged breaches of the joint venture agreements and abuse of economic power by the Company and Glad. Petroplus had previously unsuccessfully raised the same claims and sought damages from the Company and the Clorox Subsidiaries in an International Chamber of Commerce ("ICC") arbitration proceeding in Miami filed in 2001. The ICC arbitration panel unanimously ruled against Petroplus in a final decision in November 2003 ("Final ICC Arbitration Award"). The Final ICC Arbitration Award was ratified by the Superior Court of Justice of Brazil in May 2007 ("Foreign Judgment"), and the United States District Court for the Southern District of Florida subsequently confirmed the Final ICC Arbitration Award and recognized and adopted the Foreign Judgment as a judgment of the United States District Court for the Southern District of Florida ("U.S. Judgment"). Despite this, in March 2008 a Brazilian lower court ruled against the Company and Glad in the pending lawsuit and awarded Petroplus R$23 ($13) plus interest. The value of that judgment, including interest and foreign exchange fluctuations as of March 31, 2013, was approximately $37.
Among other defenses, because the Final ICC Arbitration Award, the Foreign Judgment and the U.S. Judgment relate to the same claims as those in the pending lawsuit, the Company believes that Petroplus is precluded from re-litigating these claims. Based on the unfavorable appellate court decision, the Company believes that it is reasonably possible that a loss could be incurred in this matter in excess of amounts accrued, and that the estimated range of such loss in this matter is from $0 to $31. The Company continues to believe that its defenses are meritorious, and has appealed the decision to the highest courts of Brazil, which could take years to resolve. Expenses related to this litigation and any potential additional loss would be reflected in discontinued operations, consistent with the Company's classification of expenses related to its discontinued Brazil operations.
In a separate action filed in 2004 by Petroplus, a lower Brazilian court in January 2013 nullified the Final ICC Arbitration Award. The Company believes this judgment is inconsistent with the Foreign Judgment and the U.S. Judgment and that it is without merit. The Company plans to appeal this decision.
Glad and the Clorox Subsidiaries have also filed separate lawsuits against Petroplus alleging misuse of the STP trademark and related matters, which are currently pending before Brazilian courts, and have taken other legal actions against Petroplus, which are pending.
The Company is subject to various other lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, and employee and other matters. Based on management's analysis of these claims and litigation, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Company's consolidated financial statements taken as a whole.
Guarantees
In conjunction with divestitures and other transactions, the Company may provide typical indemnifications (e.g., indemnifications for representations and warranties and retention of previously existing environmental, tax and employee liabilities) that have terms that vary in duration and in the potential amount of the total obligation and, in many circumstances, are not explicitly defined. The Company has not made, nor does it believe that it is probable that it will make, any payments relating to its indemnifications, and believes that any reasonably possible payments would not have a material adverse effect, individually or in the aggregate, on the Company's consolidated financial statements taken as a whole.
As of March 31, 2013, the Company was a party to a letter of credit of $14, related to one of its insurance carriers.
The Company had not recorded any liabilities on the aforementioned guarantees as of March 31, 2013.
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NOTE 10. SEGMENT RESULTS
The Company operates through strategic business units that are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International.
Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, other investments and deferred taxes.
The table below presents reportable segment information and a reconciliation of the segment information to the Company's consolidated net sales and earnings from continuing operations before income taxes, with amounts that are not allocated to the reportable segments reflected in Corporate.
Net sales | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Cleaning | $ | 454 | $ | 447 | $ | 1,351 | $ | 1,256 | ||||||||
Household | 413 | 417 | 1,125 | 1,117 | ||||||||||||
Lifestyle | 245 | 241 | 690 | 666 | ||||||||||||
International | 301 | 296 | 910 | 888 | ||||||||||||
Total | $ | 1,413 | $ | 1,401 | $ | 4,076 | $ | 3,927 | ||||||||
Earnings (losses) from continuing operations before income taxes | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Cleaning | $ | 99 | $ | 101 | $ | 319 | $ | 287 | ||||||||
Household | 76 | 77 | 182 | 153 | ||||||||||||
Lifestyle | 71 | 76 | 197 | 200 | ||||||||||||
International | 20 | 21 | 73 | 94 | ||||||||||||
Corporate | (64 | ) | (77 | ) | (187 | ) | (194 | ) | ||||||||
Total | $ | 202 | $ | 198 | $ | 584 | $ | 540 |
All intersegment sales are eliminated and are not included in the Company's reportable segments' net sales.
Net sales to the Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, as a percentage of consolidated net sales, were 27% and 26% for the three and nine months ended March 31, 2013, respectively, and 26% for both the three and nine months ended March 31, 2012.
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NOTE 11. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions.
As of March 31, 2013 and June 30, 2012, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the year included derivative financial instruments, which were all Level 2.
Financial Risk Management and Derivative Instruments
The Company is exposed to certain commodity, interest rate and foreign currency risks relating to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.
Commodity Price Risk Management
The Company may use commodity exchange traded futures and over-the-counter swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 18 months, are matched to the length of the raw material purchase contracts. Commodity purchase contracts are measured at fair value using market quotations obtained from commodity derivative dealers.
As of March 31, 2013, the notional amount of commodity derivatives was $39, of which $21 related to jet fuel and $18 related to soybean oil. As of June 30, 2012, the notional amount of commodity derivatives was $39, of which $22 related to jet fuel, $14 related to soybean oil and $3 related to crude oil.
Interest Rate Risk Management
The Company may enter into over-the-counter interest rate forward contracts to fix a portion of the benchmark interest rate prior to the anticipated issuance of fixed rate debt. These interest rate forward contracts generally have durations of less than 12 months. The interest rate contracts are measured at fair value using information quoted by U.S. government bond dealers. During the nine months ended March 31, 2013 and 2012, the Company paid $4 and $36 to settle interest rate forward contracts, respectively, which were reflected in operating cash flows.
As of March 31, 2013 and June 30, 2012, the notional amount of interest rate forward contracts was $0 and $250, respectively. The contracts outstanding as of June 30, 2012 were related to the anticipated issuance of long-term debt issued in September 2012.
Foreign Currency Risk Management
The Company may also enter into certain over-the-counter foreign currency-related derivative contracts to manage a portion of the Company's foreign exchange risk associated with the purchase of inventory and certain intercompany transactions between subsidiaries in Canada and the U.S. These foreign currency contracts generally have durations of no longer than 20 months. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.
The notional amount of outstanding foreign currency forward contracts used by the Company's subsidiaries in Canada, Australia and New Zealand to hedge forecasted purchases of inventory were $30, $25 and $3, respectively, as of March 31, 2013, and $28, $0 and $0, respectively, as of June 30, 2012. The notional amount of outstanding foreign currency forward contracts used by the Company to economically hedge foreign exchange risk associated with certain intercompany transactions was $17 as of both March 31, 2013 and June 30, 2012.
Counterparty Risk Management
Certain terms of the agreements governing the Company's over-the-counter derivative instruments require the Company or the counterparty to post collateral when the fair value of the derivative instruments exceeds contractually defined counterparty liability position limits. The fair value of derivative instruments subject to such terms was $0 and $4 as of March 31, 2013 and June 30, 2012, respectively, and was reflected in accrued liabilities in the condensed consolidated balance sheets. As of March 31, 2013, the Company was not required to post any collateral.
Certain terms of the agreements governing the Company's over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poor's and Moody's to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company's credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of March 31, 2013, the Company and each of its counterparties maintained investment grade ratings with both Standard & Poor's and Moody's.
Fair Value of Derivative Instruments
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as an accounting hedge, and, if so, on the type of hedging relationship. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument as a fair value hedge or a cash flow hedge. The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges. The Company does not designate its foreign currency forward contracts for intercompany transactions as accounting hedges. During the three and nine months ended March 31, 2013 and 2012, respectively, the Company had no hedging instruments designated as fair value hedges. The Company's derivative instruments were recorded at fair value in the condensed consolidated balance sheets and were not significant.
For derivative instruments designated and qualifying as cash flow hedges, the effective portion of gains or losses is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The estimated amount of the existing net loss in OCI as of March 31, 2013, expected to be reclassified into earnings within the next twelve months is $3. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the three and nine months ended March 31, 2013 and 2012, respectively, hedge ineffectiveness was not material. The Company de-designates cash flow hedge relationships whenever it determines that the hedge relationships are no longer highly effective or that the forecasted transaction is no longer probable. The portion of gains or losses on the derivative instrument previously accumulated in OCI for de-designated hedges remains in accumulated OCI until the forecasted transaction is recognized in earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. Changes in the value of derivative instruments not designated as accounting hedges are recorded in other expense (income), net.
The effects of derivative instruments designated as hedging instruments on OCI and the condensed consolidated statements of earnings and comprehensive income were as follows:
(Loss) gain recognized in OCI | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Commodity purchase contracts | $ | - | $ | 4 | $ | 2 | $ | 4 | ||||||||
Interest rate contracts | - | - | (1 | ) | (36 | ) | ||||||||||
Foreign exchange contracts | - | - | (1 | ) | 2 | |||||||||||
Total | $ | - | $ | 4 | $ | - | $ | (30 | ) | |||||||
(Loss) gain reclassified from OCI and recognized in earnings | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Commodity purchase contracts | $ | - | $ | 1 | $ | - | $ | 3 | ||||||||
Interest rate contracts | (1 | ) | (1 | ) | (3 | ) | (1 | ) | ||||||||
Foreign exchange contracts | - | 1 | - | 1 | ||||||||||||
Total | $ | (1 | ) | $ | 1 | $ | (3 | ) | $ | 3 |
The losses reclassified from OCI and recognized in earnings during each of the three and nine-month periods ended March 31, 2013 and 2012 for interest rate contracts were included in interest expense.
The gains reclassified from OCI and recognized in earnings during each of the three and nine-month periods ended March 31, 2013 and 2012 for commodity purchase contracts and foreign exchange contracts were included in cost of products sold.
The gain (loss) from derivatives not designated as accounting hedges was $0 for each of the three and nine-month periods ended March 31, 2013 and 2012.
Other
The carrying values of cash and cash equivalents, accounts receivable, notes and loans payable and accounts payable approximated their fair values as of March 31, 2013 and June 30, 2012, due to their short maturity and nature. The estimated fair value of long-term debt, including current maturities, was $2,330 and $2,606 as of March 31, 2013 and June 30, 2012, respectively. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers, and was classified as Level 2. The Company accounts for its long-term debt at face value, net of any unamortized discounts or premiums.
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Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three and nine months ended March 31, 2013 and 2012, in the opinion of management, reflect all adjustments (consisting 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) for the periods presented. The results for the interim period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013, or for any future period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2012, which includes a complete set of footnote disclosures, including the Company's significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
Recently Issued Accounting Pronouncements
On February 5, 2013, the Financial Accounting Standards Board (FASB) issued an update to current accounting standards to improve disclosures related to reclassifications out of accumulated other comprehensive income. Substantially all of the information that these amendments require already is required to be disclosed elsewhere in the financial statements. The amendments require an entity to report the effect of significant reclassifications on respective line items in net earnings or cross-reference other required disclosures, depending on the nature of the reclassification. The presentation requirements will be adopted by the Company by the first quarter of fiscal year 2014, as required.
Foreign Currency Transactions and Translation
Venezuela
The financial statements of the Company's subsidiary in Venezuela are consolidated under the rules governing the preparation of financial statements in a highly inflationary economy. As such, the subsidiary's non-U.S dollar (non-USD) monetary assets and liabilities are remeasured into USD each reporting period with the resulting gains and losses reflected in the Company's current net earnings in other expense (income), net.
On February 8, 2013, the Venezuelan government announced a devaluation of the official currency exchange rate (CADIVI) from 4.3 to 6.3 bolívares fuertes (VEF) per USD and the elimination of the alternative currency exchange system (SITME). Prior to February 8, 2013, the Company had been utilizing the rate at which it had been obtaining USD through SITME to remeasure its Venezuelan financial statements, which was 5.7 VEF per USD at the announcement date. In response to these developments, the Company began utilizing the CADIVI rate of 6.3 VEF per USD. The Company recorded a remeasurement loss of $3 related to the devaluation in the three months ended March 31, 2013, which was reflected in other expense (income), net.
In March 2013, the Venezuelan government announced the creation of an alternative currency exchange system (SICAD), which is intended to complement CADIVI. The first SICAD auction occurred on March 25, 2013. Based on a number of factors, including the limited number of SICAD auctions held to date, restrictions placed on the amount of USD available to purchase through the auction process, and the lack of any official data on auction results, the Company does not believe it is appropriate to use the SICAD rate as the official translation rate at this time.
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3/31/2013 | 6/30/2012 | |||||||
Finished goods | $ | 382 | $ | 307 | ||||
Raw materials and packaging | 122 | 120 | ||||||
Work in process | 4 | 4 | ||||||
LIFO allowances | (42 | ) | (37 | ) | ||||
Allowances for obsolescence | (12 | ) | (10 | ) | ||||
Total | $ | 454 | $ | 384 |
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3/31/2013 | 6/30/2012 | |||||
Employee benefit obligations | $ | 322 | $ | 312 | ||
Venture agreement net terminal obligation | 283 | 281 | ||||
Taxes | 71 | 82 | ||||
Other | 111 | 64 | ||||
Total | $ | 787 | $ | 739 |
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Three Months Ended | Nine Months Ended | |||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||
Basic | 131,619 | 130,266 | 130,960 | 131,116 | ||||
Dilutive effect of stock options and other | 1,856 | 1,341 | 1,669 | 1,453 | ||||
Diluted | 133,475 | 131,607 | 132,629 | 132,569 |
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Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Earnings from continuing operations | $ | 134 | $ | 134 | $ | 390 | $ | 369 | ||||||||
Losses from discontinued operations, net of tax | (1 | ) | (2 | ) | (1 | ) | (2 | ) | ||||||||
Net earnings | 133 | 132 | 389 | 367 | ||||||||||||
Other comprehensive income (losses), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | (5 | ) | 16 | 13 | (21 | ) | ||||||||||
Net derivative adjustments | 1 | 2 | 1 | (33 | ) | |||||||||||
Pension and postretirement benefit adjustments | 2 | 1 | 4 | - | ||||||||||||
Total | $ | 131 | $ | 151 | $ | 407 | $ | 313 |
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Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Service cost | $ | - | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost | 6 | 8 | 18 | 22 | ||||||||||||
Expected return on plan assets | (7 | ) | (8 | ) | (22 | ) | (23 | ) | ||||||||
Amortization of unrecognized items | 3 | 2 | 9 | 6 | ||||||||||||
Total | $ | 2 | $ | 3 | $ | 7 | $ | 7 |
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Net sales | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Cleaning | $ | 454 | $ | 447 | $ | 1,351 | $ | 1,256 | ||||||||
Household | 413 | 417 | 1,125 | 1,117 | ||||||||||||
Lifestyle | 245 | 241 | 690 | 666 | ||||||||||||
International | 301 | 296 | 910 | 888 | ||||||||||||
Total | $ | 1,413 | $ | 1,401 | $ | 4,076 | $ | 3,927 |
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Cleaning | $ | 99 | $ | 101 | $ | 319 | $ | 287 | ||||||||
Household | 76 | 77 | 182 | 153 | ||||||||||||
Lifestyle | 71 | 76 | 197 | 200 | ||||||||||||
International | 20 | 21 | 73 | 94 | ||||||||||||
Corporate | (64 | ) | (77 | ) | (187 | ) | (194 | ) | ||||||||
Total | $ | 202 | $ | 198 | $ | 584 | $ | 540 |
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(Loss) gain recognized in OCI | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Commodity purchase contracts | $ | - | $ | 4 | $ | 2 | $ | 4 | ||||||||
Interest rate contracts | - | - | (1 | ) | (36 | ) | ||||||||||
Foreign exchange contracts | - | - | (1 | ) | 2 | |||||||||||
Total | $ | - | $ | 4 | $ | - | $ | (30 | ) | |||||||
(Loss) gain reclassified from OCI and recognized in earnings | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2013 | 3/31/2012 | 3/31/2013 | 3/31/2012 | |||||||||||||
Commodity purchase contracts | $ | - | $ | 1 | $ | - | $ | 3 | ||||||||
Interest rate contracts | (1 | ) | (1 | ) | (3 | ) | (1 | ) | ||||||||
Foreign exchange contracts | - | 1 | - | 1 | ||||||||||||
Total | $ | (1 | ) | $ | 1 | $ | (3 | ) | $ | 3 |
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