CLOROX CO /DE/, 10-K filed on 8/26/2011
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jun. 30, 2011
Jul. 29, 2011
Dec. 31, 2010
Document and Entity Information
 
 
 
Document Type
10-K 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
CLOROX CO /DE/ 
 
 
Entity Central Index Key
0000021076 
 
 
Current Fiscal Year End Date
--06-30 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
131,473,450 
 
Entity Public Float
 
 
$ 8,600,000,000 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Consolidated Statements of Earnings (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Jun. 30,
2011
2010
2009
Consolidated Statements of Earnings
 
 
 
Net sales
$ 5,231 1
$ 5,234 1
$ 5,158 
Cost of products sold
2,958 1
2,915 1
2,954 
Gross profit
2,273 
2,319 
2,204 
Selling and administrative expenses
735 
734 
703 
Advertising costs
502 
494 
474 
Research and development costs
115 
118 
113 
Restructuring and asset impairment costs
19 
Goodwill impairment
258 
 
 
Interest expense
123 
139 
161 
Other (income) expense, net
(27)
25 
25 
Earnings from continuing operations before income taxes
563 
805 
709 
Income taxes on continuing operations
276 
279 
237 
Earnings from continuing operations
287 1
526 1
472 
Discontinued operations:
 
 
 
Earnings from Auto businesses, net of tax
23 
77 
65 
Gain on sale of Auto businesses, net of tax
247 
 
 
Earnings from discontinued operations
270 1
77 1
65 
Net earnings
$ 557 1
$ 603 1
$ 537 
Basic
 
 
 
Continuing operations
$ 2.09 1
$ 3.73 1
$ 3.36 
Discontinued operations
$ 1.97 1
$ 0.55 1
$ 0.46 
Basic net earnings per share
$ 4.06 1
$ 4.28 1
$ 3.82 
Diluted
 
 
 
Continuing operations
$ 2.07 1
$ 3.69 1
$ 3.33 
Discontinued operations
$ 1.95 1
$ 0.55 1
$ 0.46 
Diluted net earnings per share
$ 4.02 1
$ 4.24 1
$ 3.79 
Weighted average shares outstanding (in thousands)
 
 
 
Basic
136,699 
140,272 
139,015 
Diluted
138,101 
141,534 
140,169 
Consolidated Balance Sheets (USD $)
In Millions
Jun. 30, 2011
Jun. 30, 2010
ASSETS
 
 
Cash and cash equivalents
$ 259 
$ 87 
Receivables, net
525 
540 
Inventories, net
382 
332 
Assets held for sale, net
 
405 
Other current assets
113 
125 
Total current assets
1,279 
1,489 
Property, plant and equipment, net
1,039 
966 
Goodwill
1,070 
1,303 
Trademarks, net
550 
550 
Other intangible assets, net
83 
96 
Other assets
142 
144 
Total assets
4,163 
4,548 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
 
 
Notes and loans payable
459 
371 
Current maturities of long-term debt
 
300 
Accounts payable
423 
409 
Accrued liabilities
442 
491 
Income taxes payable
41 
74 
Total current liabilities
1,365 
1,645 
Long-term debt
2,125 
2,124 
Other liabilities
619 
677 
Deferred income taxes
140 
19 
Total liabilities
4,249 
4,465 
Commitments and contingencies
 
 
Stockholders' (deficit) equity
 
 
Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued or outstanding
 
 
Common stock: $1.00 par value; 750,000,000 shares authorized; 158,741,461 shares issued at June 30, 2011 and 2010; and 131,066,864 and 138,764,511 shares outstanding at June 30, 2011 and 2010, respectively
159 
159 
Additional paid-in capital
632 
617 
Retained earnings
1,143 
920 
Treasury shares, at cost: 27,674,597 and 19,976,950 shares at June 30, 2011 and 2010, respectively
(1,770)
(1,242)
Accumulated other comprehensive net losses
(250)
(371)
Stockholders' (deficit) equity
(86)
83 
Total liabilities and stockholders' (deficit) equity
$ 4,163 
$ 4,548 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2011
Jun. 30, 2010
Consolidated Balance Sheets
 
 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares, authorized
5,000,000 
5,000,000 
Preferred stock, shares, issued
Preferred stock, shares, outstanding
Common stock, par value
$ 1 
$ 1 
Common stock, shares, authorized
750,000,000 
750,000,000 
Common stock, shares, issued
158,741,461 
158,741,461 
Common stock, shares, outstanding
131,066,864 
138,764,511 
Treasury stock, shares
27,674,597 
19,976,950 
Consolidated Statements of Stockholders' (Deficit) Equity (USD $)
In Millions, except Share data in Thousands
Common Stock [Member]
Preferred Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Treasury Shares [Member]
Accumulated Other Comprehensive Net (Losses) Gains [Member]
Total Comprehensive Income [Member]
Total
Balance, amount at Jun. 30, 2008
$ 159 
 
$ 534 
$ 386 
$ (1,270)
$ (179)
 
$ (370)
Balance, shares at Jun. 30, 2008
158,741 
 
 
 
(20,703)
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
Net earnings
 
 
 
537 
 
 
537 
537 
Translation adjustments, net of tax
 
 
 
 
 
(78)
(78)
(78)
Change in valuation of derivatives, net of tax
 
 
 
 
 
(39)
(39)
(39)
Pension and postretirement benefit adjustments, net of tax
 
 
 
 
 
(51)
(51)
(51)
Total comprehensive income
 
 
 
 
 
 
369 
 
Accrued dividends
 
 
 
(264)
 
 
 
(264)
Other
 
 
(2)
 
 
 
Employee stock plans, shares
 
 
 
 
1,120 
 
 
 
Employee stock plans, amount
 
 
40 
(17)
64 
 
 
87 
Balance, amount at Jun. 30, 2009
159 
 
579 
640 
(1,206)
(347)
 
(175)
Balance, shares at Jun. 30, 2009
158,741 
 
 
 
(19,583)
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
Net earnings
 
 
 
603 
 
 
603 
603 1
Translation adjustments, net of tax
 
 
 
 
 
Change in valuation of derivatives, net of tax
 
 
 
 
 
10 
10 
10 
Pension and postretirement benefit adjustments, net of tax
 
 
 
 
 
(43)
(43)
(43)
Total comprehensive income
 
 
 
 
 
 
579 
 
Accrued dividends
 
 
 
(290)
 
 
 
(290)
Other
 
 
 
(7)
 
 
 
(7)
Employee stock plans, shares
 
 
 
 
1,980 
 
 
 
Employee stock plans, amount
 
 
38 
(26)
114 
 
 
126 
Treasury stock purchased, amount
 
 
 
 
(150)
 
 
(150)
Treasury stock purchased, shares
 
 
 
 
(2,374)
 
 
 
Balance, amount at Jun. 30, 2010
159 
 
617 
920 
(1,242)
(371)
 
83 
Balance, shares at Jun. 30, 2010
158,741 
 
 
 
(19,977)
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
Net earnings
 
 
 
557 
 
 
557 
557 1
Translation adjustments, net of tax
 
 
 
 
 
54 
54 
54 
Change in valuation of derivatives, net of tax
 
 
 
 
 
Pension and postretirement benefit adjustments, net of tax
 
 
 
 
 
64 
64 
64 
Total comprehensive income
 
 
 
 
 
 
678 
 
Accrued dividends
 
 
 
(306)
 
 
 
(306)
Employee stock plans and other, shares
 
 
 
 
2,078 
 
 
 
Employee stock plans and other, amount
 
 
15 
(28)
127 
(2)
(2)
112 
Treasury stock purchased, amount
 
 
 
 
(655)
 
 
(655)
Treasury stock purchased, shares
 
 
 
 
(9,776)
 
 
 
Balance, amount at Jun. 30, 2011
$ 159 
 
$ 632 
$ 1,143 
$ (1,770)
$ (250)
 
$ (86)
Balance, shares at Jun. 30, 2011
158,741 
 
 
 
(27,675)
 
 
 
Consolidated Statements of Stockholders' (Deficit) Equity (Parenthetical) (USD $)
In Millions
12 Months Ended
Jun. 30,
2011
2010
2009
Consolidated Statements of Stockholders' (Deficit) Equity
 
 
 
Translation adjustments, tax
$ 12 
$ 1 
$ 5 
Change in valuation of derivatives, tax
24 
Pension and postretirement benefit adjustments, tax
$ 39 
$ 26 
$ 31 
Consolidated Statements of Cash Flows (USD $)
In Millions
12 Months Ended
Jun. 30,
2011
2010
2009
Operating activities:
 
 
 
Net earnings
$ 557 1
$ 603 1
$ 537 
Deduct: Earnings from discontinued operations
270 1
77 1
65 
Earnings from continuing operations
287 1
526 1
472 
Adjustments to reconcile earnings from continuing operations to net cash provided by continuing operations:
 
 
 
Depreciation and amortization
173 
183 
188 
Share-based compensation
32 
60 
58 
Deferred income taxes
73 
24 
(1)
Asset impairment costs
 
Goodwill impairment costs
258 
 
 
Other
10 
(15)
Changes in:
 
 
 
Receivables, net
(33)
(21)
(10)
Inventories, net
(37)
(5)
Other current assets
21 
(9)
(8)
Accounts payable and accrued liabilities
(52)
30 
(39)
Income taxes payable
(44)
(20)
Net cash provided by continuing operations
690 
764 
664 
Net cash provided by discontinued operations
55 
74 
Net cash provided by operations
698 
819 
738 
Investing activities:
 
 
 
Capital expenditures
(228)
(201)
(196)
Proceeds from sale of businesses, net of transaction costs
747 
 
 
Businesses acquired, net of cash acquired
 
(19)
 
Other
25 
(9)
 
Net cash provided by (used for) investing activities from continuing operations
544 
(229)
(196)
Net cash used for investing activities by discontinued operations
 
(2)
(1)
Net cash provided by (used for) investing activities
544 
(231)
(197)
Financing activities:
 
 
 
Notes and loans payable, net
87 
(52)
(334)
Long-term debt borrowings, net of issuance costs
 
296 
11 
Long-term debt repayments
(300)
(598)
 
Treasury stock purchased
(655)
(150)
 
Cash dividends paid
(303)
(282)
(258)
Issuance of common stock for employee stock plans and other
93 
80 
41 
Net cash used for financing activities
(1,078)
(706)
(540)
Effect of exchange rate changes on cash and cash equivalents
(1)
(9)
Net increase (decrease) in cash and cash equivalents
172 
(119)
(8)
Cash and cash equivalents:
 
 
 
Beginning of year
87 
206 
214 
End of year
259 
87 
206 
Supplemental cash flow information:
 
 
 
Interest paid
131 
149 
161 
Income taxes paid, net of refunds
295 
301 
275 
Non-cash financing activities:
 
 
 
Dividends declared and accrued, but not paid
$ 80 
$ 78 
$ 70 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations and Basis of Presentation
 
The Company is principally engaged in the production, marketing and sales of consumer products through mass merchandisers, grocery stores and other retail outlets. The consolidated financial statements include the statements of the Company and its majority-owned and controlled subsidiaries. All significant intercompany transactions and accounts were eliminated in consolidation. Certain prior year reclassifications were made in the consolidated financial statements and related notes to consolidated financial statements to conform to the current year presentation.
 
 
Use of Estimates
 
The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Specific areas requiring the application of management's estimates and judgment include assumptions pertaining to accruals for consumer and trade-promotion programs, share-based compensation costs, pension and post-employment benefit costs, future cash flows associated with impairment testing of goodwill and other long-lived assets, credit worthiness of customers, uncertain tax positions, tax valuation allowances and legal, environmental and insurance matters. Actual results could materially differ from estimates and assumptions made.
New Accounting Pronouncements
 
Recently Issued Pronouncements
 
On June 16, 2011, the Financial Accounting Standards Board (FASB) issued new requirements on the presentation of comprehensive income. Companies will be required to present the components of net income and other comprehensive income either in one continuous statement, referred to as the Statement of Comprehensive Income, or in two separate, consecutive statements. Presentation requirements also eliminate the current option to report other comprehensive income and its components in the Statement of Stockholders' Equity. The components recognized in net income or other comprehensive income under current accounting guidance will not change. The presentation requirements are required to be adopted by the Company in the third quarter of fiscal year 2012.
 
On May 12, 2011, the FASB issued new requirements to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Accounting Standards. The new requirements change the application of certain fair value measurement principles and enhance the disclosure requirements for fair value measurements. These new requirements are required to be adopted by the Company in the third quarter of fiscal year 2012 and applied prospectively. The Company does not expect the adoption of the new measurement principals to have a material impact on its consolidated financial statements.
 
Cash and Cash Equivalents
 
Cash equivalents consist of highly liquid instruments, time deposits and money market funds with an initial maturity at purchase of three months or less. The fair value of cash and cash equivalents approximates the carrying amount.
 
The Company's cash position includes amounts held by foreign subsidiaries, and, as a result, the repatriation of certain cash balances from some of the Company's foreign subsidiaries could result in additional tax costs. However, these cash balances are generally available without legal restriction to fund local business operations. In addition, a portion of the Company's cash balances is held in U.S. dollars by foreign subsidiaries, whose functional currency is their local currency. Such U.S. dollar balances are reported on the foreign subsidiaries books, in their functional currency, with the impact from foreign currency exchange rate differences recorded in other (income) expense, net. The Company's cash holdings as of the end of fiscal years 2011 and 2010 were as follows:
 
             
        2011       2010
Non-U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries   $     98   $     42
U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries     15     13
Non-U.S. dollar balances held by U.S. dollar functional currency subsidiaries     26     7
U.S. dollar balances held by U.S. dollar functional currency subsidiaries     120     25
Total   $ 259   $ 87
 

Inventories
 
Inventories are stated at the lower of cost or market. When necessary, the Company provides allowances to adjust the carrying value of its inventory to the lower of cost or market, including any costs to sell or dispose. Appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value for the purposes of determining the lower of cost or market.
 
 
Impairment Review of Goodwill and Indefinite-Lived Intangible Assets
 
The Company tests its goodwill, trademarks with indefinite lives and other indefinite-lived intangible assets annually in the fiscal fourth quarter unless there are indications during a different interim period that these assets may have become impaired. With respect to goodwill, impairment occurs when the carrying amount of a reporting unit's goodwill exceeds its implied fair value. An impairment charge is recorded for the difference between the carrying amount and the implied fair value of the reporting unit's goodwill. For trademarks and other intangible assets with indefinite lives, impairment occurs when the carrying amount of an asset is greater than its estimated fair value. A charge is recorded for the difference between thecarrying amount and the estimated fair value. The Company's estimates of fair value are based primarily on a discounted cash flow approach that requires significant management judgment with respect to future sales volumes, revenue and expense growth rates, changes in working capital, foreign-exchange rates, currency devaluation, inflation, and a perpetuity growth rate.
 
Share-Based Compensation
 
The Company records compensation expense associated with stock options and other forms of equity compensation based on their fair values on the dates they are granted. The expense is recorded by amortizing the fair values on a straight-line basis over the vesting period, adjusted for estimated forfeitures.
 
Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for the options exercised (excess tax benefit) are primarily classified as financing cash flows. For the fiscal years ended June 30, 2011, 2010 and 2009, $9, $10, and $6, respectively, of excess tax benefits were generated from share-based payment arrangements, and were recognized as financing cash flows.
 
 
 
 
 
 
 
 
Selling and Administrative Expenses
 
Selling and administrative expenses represent costs incurred by the Company in generating revenues and managing the business and include market research, commissions and certain administrative expenses. Administrative expenses include salary, benefits, incentive compensation, professional fees and services, software and licensing fees and other operating costs associated with the Company's non-manufacturing, non-research and development staff, facilities and equipment.
.
 
 
 
 
 
Discontinued Operations
Discontinued Operations
NOTE 2. DISCONTINUED OPERATIONS
 
In September 2010, the Company entered into a definitive agreement to sell its global auto care businesses (Auto Businesses) to an affiliate of Avista Capital Partners in an all-cash transaction. In November 2010, the Company completed the sale pursuant to the terms of a Purchase and Sale Agreement (Purchase Agreement) and received cash consideration of $755. The Company also received cash flows of approximately $30 related to net working capital that was retained by the Company as part of the sale. Included in earnings from discontinued operations for fiscal year ended June 30, 2011, is an after-tax gain on the transaction of $247.
 
Included in the transaction were substantially all of the Company's Auto Businesses, the majority of which are in the U.S., Australia, Canada and Europe, including the worldwide rights to the market-leading Armor All® and STP® brands. As part of the transaction, the buyer acquired two auto care manufacturing facilities, one in the U.S. and one in the United Kingdom. Employees at these facilities, the Auto Businesses management team and other employees affiliated with the Auto Businesses transferred to the buyer. The results of the Auto Businesses have historically been part of the Company's Cleaning and International reportable segments.
 
As part of the Purchase Agreement, certain transition services are being provided to the buyer for a period of up to eighteen months from the date of sale. The purpose of these services is to provide short-term assistance to the buyer in assuming the operations of the Auto Businesses. These services do not confer to the Company the ability to influence the operating or financial policies of the Auto Businesses under their new ownership. The Company's cash inflows and outflows from these services have not been nor are expected to be significant during the transition period. Income from these transition services for the fiscal year ended June 30, 2011 was $9 and is being reported in other (income) expense, net, in continuing operations. The costs associated with the services are reflected in continuing operations in the consolidated statements of earnings. Aside from the transition services, the Company has included the financial results of the Auto Businesses in discontinued operations for all periods presented. Assets related to the Auto Businesses are presented as assets held for sale, net, on the accompanying consolidated balance sheet as of June 30, 2010. In connection with the discontinued operations presentation, certain financial statement footnotes have also been updated to reflect the impact of discontinued operations.
 
The following table presents the net sales and earnings attributable to the Auto Businesses, which includes the financial results up to November 5, 2010, the date of the sale, as of June 30:
 
  2011       2010       2009
Net sales $       95     $       300     $       292  
Earnings before income taxes $ 34     $ 120     $ 102  
Income tax expense on earnings   (11 )     (43 )     (37 )
Gain on sale, net of tax   247       -       -  
Earnings from discontinued operations $ 270     $ 77     $ 65  
 
 
The major classes of assets and liabilities of the Auto Businesses reflected as assets held for sale, net, as of June 30, 2010 were as follows:
 
  2010
Receivables, net $       4  
Inventories, net   35  
Other current assets   1  
Property, plant and equipment, net   13  
Goodwill   347  
Trademarks and other intangible assets, net   12  
Accounts payable and other liabilities   (7 )
Total $ 405  
    
Businesses Acquired
Businesses Acquired
NOTE 3. BUSINESSES ACQUIRED
 
In January 2010, the Company acquired the assets of Caltech Industries, Inc., a company that provides disinfectants for the health care industry, for an aggregate price of $24, with the objective of expanding the Company's capabilities in the areas of health and wellness. In connection with the purchase, the Company acquired Caltech Industries' workforce. The Company paid for the acquisition in cash.
 
Net assets acquired, at fair value, included $2 of inventory and $4 of other assets, $9 of goodwill, $6 of trademarks, $2 of customer list, $2 of product formulae and $1 of other liabilities. The trademarks, customer list and product formulae are amortized over a period of 315 and 10 years, respectively. Goodwill represents a substantial portion of the acquisition price.
 
Operating results of the acquired business are included in the consolidated net earnings of the Cleaning reportable segment from the acquisition date. Pro forma results of the Company, assuming the acquisition had occurred at the beginning of each period presented, would not be materially different from the results reported.
Restructuring and Asset Impairment
Restructuring and Asset Impairment
NOTE 4. RESTRUCTURING AND ASSET IMPAIRMENT
 
The Company's restructuring plan involves simplifying its supply chain and other activities and includes reducing certain staffing levels, resulting in additional costs, including severance, and certain facilities related costs associated with this activity. The Company may, from time to time, decide to pursue additional restructuring-related initiatives to drive cost savings and efficiencies.
 
The following table summarizes the restructuring costs associated with the Company's restructuring activities by reportable segment, with unallocated amounts set forth in Corporate, for fiscal years ended June 30:
 
  2011       2010       2009
Cleaning $       1   $       2   $       2
Household   -     2     -
International   1     -     2
Corporate   -     -     12
Total Company $ 2   $ 4   $ 16
  
 
Total restructuring costs associated with the restructuring plan since inception were $7 for the Cleaning segment, $2 for the Household segment, $5 for the International segment and $14 for Corporate at June 30, 2011.
 
The accrued restructuring liability as of July 1, 2008 was $4. Since July 1, 2008, the Company has incurred total restructuring charges of $22 and made total restructuring payments of $24. The accrued restructuring liability as of June 30, 2011, was $2.
 
Asset impairment costs were $2 in Corporate, in fiscal year 2011 and $3 in the Household reportable segment for fiscal year 2009. The Company incurred no asset impairment costs for fiscal year 2010.
Inventories, Net
Inventories, Net
NOTE 5. INVENTORIES, NET
 
Inventories, net at June 30 were comprised of the following:
 
  2011       2010
Finished goods $ 315     $ 274  
Raw materials and packaging   104       92  
Work in process   3       4  
LIFO allowances   (29 )     (28 )
Allowances for obsolescence   (11 )     (10 )
Total $       382     $       332  
 
The last-in, first-out (LIFO) method was used to value approximately 37% and 39% of inventories at June 30, 2011 and 2010, respectively. The carrying values for all other inventories, including inventories of all international businesses, are determined on the first-in, first-out (FIFO) method. The effect on earnings of the liquidation of LIFO layers was $1, $3 and $1 for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
 
During fiscal years 2011, 2010 and 2009, the Company's inventory obsolescence expense was $15, $11 and $12, respectively.
 
Other Current Assets
Other Current Assets

NOTE 6. OTHER CURRENT ASSETS

 

Other current assets at June 30 were comprised of the following:

 

 

2011

 

2010

Deferred tax assets

$      

68

 

$      

73

Prepaid expenses

 

36

 

 

40

Other

 

9

 

 

12

Total

$

113

 

$

125

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net
NOTE 7. PROPERTY, PLANT AND EQUIPMENT, NET
 
The components of property, plant and equipment, net, at June 30 were as follows:
 
  2011       2010
Machinery and equipment $       1,540     $       1,474  
Buildings   615       569  
Capitalized software costs   360       302  
Construction in progress   130       165  
Land and improvements   137       126  
Computer equipment   92       92  
    2,874       2,728  
Less: Accumulated depreciation and amortization   (1,835 )     (1,762 )
Total $ 1,039     $ 966  
  
Depreciation and amortization expense related to property, plant and equipment was $153, $163 and $171 in fiscal years 2011, 2010 and 2009, respectively.
Goodwill, Trademarks and Other Intangible Assets
Goodwill, Trademarks and Other Intangible Assets
NOTE 8. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
 
During the fiscal 2011 second quarter, the Company identified challenges in increasing sales for the Burt's Bees business in new international markets in accordance with projections, particularly in the European Union and Asia. Additionally, during the fiscal 2011 second quarter, the Company initiated its process for updating the three-year long-range financial and operating plan for the Burt's Bees business. In addition to slower than projected growth of international sales and challenges in the timing of certain international expansion plans, the domestic natural personal care category had not recovered in accordance with the Company's projections. Following the comprehensive reevaluation, the Company recognized an impairment charge during the fiscal 2011 second quarter.
 
The impairment charge is a result of changes in the assumptions used to determine the fair value of the Burt's Bees business based on slower than forecasted category growth as well as recent challenges in international expansion plans, which have adversely affected the assumptions for international growth and the estimates of expenses necessary to achieve that growth. The revised assumptions reflect somewhat higher cost levels than previously projected. As a result of this assessment, the Company determined that the book value of the Burt's Bees reporting unit exceeded its fair value, resulting in a non-cash impairment charge of $258 recognized in the quarter ended December 31, 2010. The non-cash goodwill impairment charge is based on the Company's current estimates regarding the future financial performance of the Burt's Bees business and macroeconomic factors. There was no substantial tax benefit associated with this non-cash charge.
 
To determine the fair value of the Burt's Bees reporting unit, which is in the Lifestyle reportable segment, the Company used a discounted cash flow (DCF) approach, as it believes that this approach is the most reliable indicator of the fair value of the business. Under this approach, the Company estimated the future cash flows of the Burt's Bees reporting unit and discounted these cash flows at a rate of return that reflects its relative risk.
 
The Company's trademarks and definite-lived intangible assets for the Burt's Bees reporting unit were included in the impairment testing. The impairment testing concluded that these assets were not impaired.
 
During the fiscal 2011 fourth quarter, the Company completed its annual impairment test of goodwill and indefinite-lived intangible assets and no instances of impairment were identified.
 
 
Changes in the carrying amount of goodwill, trademarks and other intangible assets for the fiscal years ended June 30, 2011 and 2010, were as follows:
 
  Goodwill
  Cleaning       Lifestyle       Household       International       Total
Balance June 30, 2009 $       266   $       623     $       85   $       310   $       1,284  
Acquisitions   9     -       -     -     9  
Translation adjustments and other   -     -       -     10     10  
Balance June 30, 2010   275     623       85     320     1,303  
Non-cash goodwill impairment   -     (258 )     -     -     (258 )
Translation adjustments and other   -     -       -     25     25  
Balance June 30, 2011 $ 275   $ 365     $ 85   $ 345   $ 1,070  
 
  Trademarks   Other intangible assets
subject to amortization
  Subject to
amortization
      Not subject to
amortization
      Total       Technology
and Product
formulae
      Other       Total
Balance June 30, 2009 $            14     $            531     $       545     $            53     $       52     $       105  
Acquisitions   6       -       6       -       4       4  
Amortization   (2 )     -       (2 )     (9 )     (5 )     (14 )
Transfers   5       (5 )     -       (7 )     7       -  
Translation adjustments and other   1       -       1       -       1       1  
Balance June 30, 2010   24       526       550       37       59       96  
Amortization   (3 )     -       (3 )     (9 )     (5 )     (14 )
Translation adjustments and other   2       1       3       3       (2 )     1  
Balance June 30, 2011 $ 23     $ 527     $ 550     $ 31     $ 52     $ 83  
  
Intangible assets subject to amortization were net of total accumulated amortization of $243 and $221 at June 30, 2011 and 2010, respectively, of which $15 and $11, respectively, related to trademarks. Total accumulated amortization included $129 and $95 at June 30, 2011 and 2010, respectively, related to intangible assets subject to amortization that were fully amortized, of which $5 and $4, respectively, related to trademarks. Estimated amortization expense for these intangible assets is $16, $15, $14, $11 and $6 for fiscal years 2012, 2013, 2014, 2015 and 2016.
Accrued Liabilities
Accrued Liabilities

NOTE 9. ACCRUED LIABILITIES

 

Accrued liabilities at June 30 consisted of the following:

 

 

2011

 

2010

Compensation and employee benefit costs

$      

120

 

$      

149

Trade and sales promotion

 

88

 

 

109

Dividends

 

80

 

 

78

Interest

 

32

 

 

40

Other

 

122

 

 

115

Total

$

442

 

$

491

Debt
Debt
NOTE 10. DEBT
 
In fiscal years 2011 and 2010, $300 and $598, respectively, of long-term debt became due and was paid. The Company funded the debt repayments through the issuance of commercial paper and the use of operating cash flows.
 
In November 2009, the Company issued $300 of long-term debt in senior notes. The notes carry an annual fixed interest rate of 3.55% payable semi-annually in May and November. The notes mature on November 1, 2015. Proceeds from the notes were used to repay commercial paper. The notes rank equally with all of the Company's existing and future senior indebtedness.
 
Notes and loans payable, which mature in less than one year, included the following at June 30:
 
  2011       2010
Commercial paper $       456   $       369
Foreign borrowings   3     2
Total $ 459   $ 371
 
The weighted average interest rate on commercial paper was 0.33% and 0.43% at June 30, 2011 and 2010, respectively. During the fiscal years ended June 30, 2011, 2010 and 2009, the weighted average interest rates on the average balance of notes and loans payable was 0.73%, 0.62% and 2.85%, respectively. The carrying value of notes and loans payable at June 30, 2011 and 2010, approximated the fair value of such debt.
 
Long-term debt at June 30 included the following:
 
  2011       2010
Senior unsecured notes and debentures:          
       5.45%, $350 due October 2012 $       350   $       349
       5.00%, $500 due March 2013   500     500
       5.00%, $575 due January 2015   575     575
       3.55%, $300 due November 2015   299     299
       5.95%, $400 due October 2017   398     398
    Foreign borrowings   3     3
    Total $ 2,125   $ 2,124
 
The weighted average interest rate on long-term debt was 5.20% and 5.19% at June 30, 2011 and 2010, respectively. During the fiscal years ended June 30, 2011, 2010 and 2009, the weighted average interest rates on the average balance of long-term debt, including the effect of interest rate swaps, was 5.22%, 5.16% and 5.15%, respectively. The estimated fair value of long-term debt, including current maturities, was $2,303 and $2,635 at June 30, 2011 and 2010, respectively. The Company accounts for its long-term debt at face value, net of any unamortized discounts or premiums. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers.
 
Credit facilities at June 30 were as follows:
 
  2011       2010
Revolving credit line $       1,100   $       1,100
Foreign credit lines   18     23
Other credit lines   13     12
Total $ 1,131   $ 1,135
  
 
 
At June 30, 2011, there were no borrowings under the $1,100 revolving credit agreement, and the Company believes that borrowings under the revolving credit facility are available and will continue to be available for general corporate purposes and to support commercial paper issuances. The $1,100 revolving credit agreement expires in April 2013 and includes certain restrictive covenants. The Company was in compliance with all restrictive covenants and limitations as of June 30, 2011. In addition, of the $31 of foreign and other credit lines at June 30, 2011, $23 was available for borrowing.
 
Long-term debt maturities at June 30, 2011, are $3, $850, zero, $575, $300 and $400 in fiscal years 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.
Financial Instruments and Fair Value Measurements
Financial Instruments and Fair Value Measurements
NOTE 11. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
 
The Company is exposed to certain commodity, interest rate and foreign currency risks relating to its ongoing business operations. The Company may use commodity futures and swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 21 months, are matched to the length of the raw material purchase contracts. The Company may enter into 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 have durations of less than six months. The Company may also enter into certain foreign currency-related derivative contracts to manage a portion of the Company's foreign exchange risk associated with the purchase of inventory. These foreign currency contracts generally have durations no longer than twelve months.
 
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 a hedge, and on the type of the 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 of forecasted purchases of inventory as cash flow hedges. During the fiscal years ended June 30, 2011 and 2010, the Company had no hedging instruments designated as fair value hedges.
 
For derivative instruments designated and qualifying as a cash flow hedge, the effective portion of the gain or loss on the derivative 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 gain at June 30, 2011, expected to be reclassified into earnings within the next twelve months is $3. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During fiscal year 2011, hedge ineffectiveness was not material. The Company dedesignates 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 other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction is recognized in earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. The gain reclassified from OCI to earnings from dedesignated hedges amounted to less than $1 and zero for fiscal years 2011 and 2010, respectively, and was recorded in other (income) expense, net. Changes in the value of derivative instruments after dedesignation are recorded in other (income) expense, net, and amounted to $(6) and $3 for fiscal years 2011 and 2010, respectively.
 
 
The Company's derivative financial instruments designated as hedging instruments are recorded at fair value in the consolidated balance sheet as follows:
 
                 
                Fair value
    Balance Sheet classification   6/30/2011       6/30/2010
Assets                
Foreign exchange contracts   Other current assets   $           -   $           1
Interest rate contracts   Other current assets     1     -
Commodity purchase contracts   Other current assets     4     -
        $ 5   $ 1
                 
Liabilities                
Interest rate contracts   Accrued liabilities     1     -
Commodity purchase contracts   Accrued liabilities     -     2
        $ 1   $ 2
 
The effects of derivative instruments designated as hedging instruments on OCI and on the consolidated statement of earnings were as follows:
 
                                 
   
Gain (loss)
recognized in OCI
  Gain (loss) reclassified from
OCI and recognized in
earnings
Cash flow hedges       6/30/2011       6/30/2010       6/30/2011       6/30/2010
Commodity purchase contracts   $         8     $         (3 )   $           3     $          (15 )
Interest rate contracts     3       -       -       -  
Foreign exchange contracts     (4 )     (2 )     (3 )     (3 )
Total   $ 7     $ (5 )   $ -     $ (18 )
                                 
The gains (losses) reclassified from OCI and recognized in earnings during fiscal year 2011 for commodity purchase contracts and foreign exchange contracts are included in cost of products sold. Of the losses reclassified from OCI and recognized in earnings during fiscal year 2010, $16 are included in cost of products sold and $2 are included in earnings from discontinued operations.
 
The Company's derivative financial instruments not designated as hedging instruments are recorded at fair value in the consolidated balance sheet.
 
                 
                Fair value
    Balance Sheet classification   6/30/2011       6/30/2010
Assets                
Commodity purchase contracts   Other current assets   $           1   $           -
                 
Liabilities                
Commodity purchase contracts   Accrued liabilities   $ -   $ 1
      
As of June 30, 2011, the net notional value of commodity derivatives was $44, of which $22 related to jet fuel, $16 related to soybean oil, $3 related to crude oil and $3 related to diesel fuel.
 
 
As of June 30, 2011, the net notional value of interest rate forward contracts was $300.
 
As of June 30, 2011, the net notional values of outstanding foreign currency forward contracts related to the Company's subsidiaries in Canada and Australia were $28 and $13, respectively.
 
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. As of June 30, 2011, there were no requirements to post any such collateral.
 
Certain terms of the agreements governing the over-the-counter derivative instruments contain provisions that 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 our credit rating 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 June 30, 2011, the Company and each of its counterparties maintained investment grade ratings with both Standard & Poor's and Moody's.
 
U.S. GAAP prioritizes the inputs used in measuring fair value into the following hierarchy:
 
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.
 
At June 30, 2011, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the year were comprised of derivative financial instruments and were all level 2.
 
Commodity purchase contracts are measured at fair value using market quotations obtained from commodity derivative dealers. The interest rate contracts are measured at fair value using information quoted by U.S. government bond dealers. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.
 
During the fiscal 2011 second quarter, the Company determined that the book value of the Burt's Bees reporting unit exceeded its fair value and recognized a non-cash impairment charge of $258 (See Note 8). The implied fair value was based on significant unobservable inputs, and as a result, the fair value measurement was classified as Level 3. During the fiscal year ended June 30, 2011, the Company did not have any other significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.
 
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values at June 30, 2011 and 2010, due to the short maturity and nature of those balances.
Other Liabilities
Other Liabilities
NOTE 12. OTHER LIABILITIES
 
Other liabilities consisted of the following at June 30: 
 
        2011       2010
Venture agreement net terminal obligation   $      277   $      274
Employee benefit obligations     215     306
Taxes     89     64
Other     38     33
Total   $ 619   $ 677
 
Venture Agreement
 
The Company has an agreement with The Procter & Gamble Company (P&G) for its Glad® plastic bags, wraps and containers business. The Company maintains a net terminal obligation liability, which reflects the estimated value of the contractual requirement to repurchase P&G's interest at the termination of the agreement. As of June 30, 2011 and 2010, P&G had a 20% interest in the venture. The Company pays a royalty to P&G for its interest in the profits, losses and cash flows, as contractually defined, of the Glad® business, which is included in cost of products sold.
 
The agreement, entered into in 2003, has a 20-year term, with a 10-year renewal option and can be terminated under certain circumstances, including at P&G's option upon a change in control of the Company, or, at either party's option, upon the sale of the Glad® business by the Company. Upon termination of the agreement, the Company will purchase P&G's interest for cash at fair value as established by predetermined valuation procedures. Following termination, the Glad® business will retain the exclusive core intellectual property licenses contributed by P&G on a royalty free basis for the licensed products marketed.
Other Contingencies
Other Contingencies
NOTE 13. OTHER CONTINGENCIES
 
The Company is involved in certain environmental matters, including Superfund and other response actions at various locations. The Company has a recorded liability of $15 and $16 at June 30, 2011 and 2010, respectively, 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, accounts for a substantial majority of the recorded liability at both June 30, 2011 and 2010. 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 timing, varying costs and alternative clean-up technologies that may become available in the future. 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.
 
The Company is subject to various other lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Based on the Company's analysis of these claims and litigation, it is the opinion of management that the ultimate disposition of these matters, including the environmental matter described above, 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.
Stockholders' (Deficit) Equity
Stockholders' (Deficit) Equity

NOTE 14. STOCKHOLDERS' (DEFICIT) EQUITY

 

The Company has three share repurchase programs: two open-market purchase programs and a program to offset the impact of share dilution related to share-based awards (the Evergreen Program). In May 2008, the Company's Board of Directors approved an open-market purchase program with a total authorization of $750, of which $229 remains available as of June 30, 2011. In May 2011, the Board of Directors approved a second open-market purchase program with a total authorization of $750, all of which remains available for repurchase as of June 30, 2011. The Evergreen Program has no authorization limit as to amount or timing of repurchases.

 

Total share repurchases in fiscal years 2011 and 2010 were $655 (approximately 9.8 million shares) and $150 (approximately 2.4 million shares), respectively. Share repurchases under the open-market purchase program were $521 (approximately 7.7 million shares) for fiscal year 2011. The Company did not repurchase any shares in fiscal years 2010 and 2009 under the open-market purchase program. Share repurchases under the Evergreen Program were $134 (approximately 2.1 million shares) and $150 (approximately 2.4 million shares) in fiscal years 2011 and 2010, respectively. The Company did not repurchase any shares in fiscal year 2009 under the Evergreen Program.

 

During fiscal years 2011, 2010 and 2009, the Company declared dividends per share of $2.25, $2.05 and $1.88, respectively. During fiscal years 2011, 2010 and 2009, the Company paid dividends per share of $2.20, $2.00 and $1.84, respectively.

 

Accumulated other comprehensive net losses at June 30, 2011, 2010 and 2009 included the following net-of-tax gains (losses):

 

 

 

2011

 

2010

 

2009

Currency translation

 

$     

(157

)

 

$     

(211

)

 

$     

(220

)

Derivatives

 

 

4

 

 

 

1

 

 

 

(9

)

Pension and postretirement benefit adjustments

 

 

(97

)

 

 

(161

)

 

 

(118

)

Total

 

$

(250

)

 

$

(371

)

 

$

(347

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder Rights Plan

 

The Company is authorized to issue up to 5.0 million shares of preferred stock, of which 1.4 million shares have been designated as Series A Junior Participating Preferred Stock in connection with the adoption of a rights agreement (see below). As of June 30, 2011 and 2010, no shares of preferred stock were issued or outstanding. The Company's Board of Directors may issue preferred stock in one or more series from time to time. The Board of Directors is authorized to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof.

 

On July 18, 2011, the Board of Directors adopted a stockholder rights plan (the "Rights Agreement"). Pursuant to the Rights Agreement, the Board of Directors declared a dividend distribution of one right for each share of common stock. Each right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at an initial exercise price of $350 per share. The Rights Agreement is intended to assure that all of the Company's stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to protect stockholders' interests in the event the Company is confronted with coercive or unfair takeover tactics.

 

Rights become exercisable after ten days following the acquisition by a person or group of beneficial ownership of 10% or more of the Company's outstanding common stock. If such a person or group acquires beneficial ownership of 10% or more of the common stock, each right (other than such person's or group's rights, which will become void) will entitle the holder to purchase, at the right's then-current exercise price, common stock having a market value equal to twice the exercise price. In addition, if the Company is acquired in a merger or other business combination transaction after a person has acquired 10% of more of our outstanding common stock, each right will entitle its holder to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice the exercise price. In certain circumstances, the rights may be redeemed by the Company at an initial redemption price of $0.001 per right. If not redeemed, the rights will expire on July 16, 2012.

Earnings Per Share
Earnings Per Share
NOTE 15. EARNINGS PER SHARE
 
The following is the reconciliation of net earnings to net earnings applicable to common stock:
 
        2011       2010       2009
Earnings from continuing operations   $      287   $      526   $      472
Earnings from discontinued operations     270     77     65
Net earnings     557     603     537
Less: Earnings allocated to participating securities     2     3     5
Net earnings applicable to common stock   $ 555   $ 600   $ 532
                   
The following is the reconciliation of the weighted average number of shares outstanding (in thousands) used to calculate basic EPS to those used to calculate diluted EPS:
 
        2011       2010       2009
Basic   136,699   140,272   139,015
Dilutive effect of stock options and other   1,402   1,262   1,154
Diluted   138,101   141,534   140,169
 
During fiscal years 2011, 2010 and 2009, the Company did not include stock options to purchase approximately 2.0 million, 4.0 million and 5.1 million shares, respectively, of the Company's common stock in the calculations of diluted EPS because their exercise price was greater than the average market price, making them anti-dilutive.

Share-Based Compensation Plans
Share-Based Compensation Plans

NOTE 16. SHARE-BASED COMPENSATION PLANS

 

In November 2005, the Company's stockholders approved the 2005 Stock Incentive Plan (2005 Plan). The 2005 Plan permits the Company to grant various nonqualified, share-based compensation awards, including stock options, restricted stock, performance units, deferred stock units, restricted stock units, stock appreciation rights and other stock-based awards. The Company is authorized to grant up to seven million common shares under the 2005 Plan, and, at June 30, 2011, approximately 5 million common shares were available for grant under the plan.

 

Compensation cost and the related income tax benefit recognized in the Company's fiscal years 2011, 2010 and 2009 consolidated financial statements for share-based compensation plans were classified as indicated in the table below.

 

 

 

2011

 

2010

 

2009

Cost of products sold

 

$     

4

 

$     

8

 

$     

8

Selling and administrative expenses

 

 

26

 

 

46

 

 

45

Research and development costs

 

 

2

 

 

6

 

 

5

Total compensation cost

 

$

32

 

$

60

 

$

58

Related income tax benefit

 

$

12

 

$

22

 

$

22

 

 

 

 

 

 

 

 

 

 

Cash received during fiscal years 2011, 2010 and 2009 from stock options exercised under all share-based payment arrangements was $84, $69 and $35, respectively. The Company issues shares for share-based compensation plans from treasury stock. The Company may repurchase shares under its Evergreen Program to offset the estimated impact of share dilution related to share-based awards (See Note 16).

 

Details regarding the valuation and accounting for stock options, restricted stock awards, performance units and deferred stock units for non-employee directors follow.

 

Stock Options

 

The fair value of each stock option award granted during fiscal years 2011, 2010 and 2009 was estimated on the date of grant using the Black-Scholes valuation model and assumptions noted in the following table:

 

 

2011

 

2010

 

2009

Expected life

4.95.9 years

 

5 years

 

5 years

Expected volatility

20.6% to 21.0%

 

21.6% to 22.9%

 

23.4%

Weighted-average volatility

20.6%

 

22.0%

 

23.4%

Risk-free interest rate

1.5%

 

2.2% to 2.4%

 

2.6%

Dividend yield

3.4%-3.6%

 

3.4% to 3.6%

 

3.0%

Weighted-average dividend yield

3.4%

 

3.6%

 

3.0%

 

The expected life of the stock options is based on observed historical exercise patterns. Groups of employees having similar historical exercise behavior are considered separately for valuation purposes. The Company estimates stock option forfeitures based on historical data for each separate employee grouping, and adjusts the rate to expected forfeitures periodically. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed. The expected volatility is based on implied volatility from publicly traded options on the Company's stock at the date of grant, historical implied volatility of the Company's publicly traded options and other factors. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

 

Details of the Company's stock option plan at June 30 are summarized below:

 

 

 

Number of
Shares

 

Weighted-
Average
Exercise
Price

 

Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

 

(In thousands)

 

 

 

 

 

 

 

 

Outstanding at June 30, 2010

 

           10,011

 

 

$

     55

 

6 years

 

$

     68

Granted

 

2,101

 

 

 

66

 

 

 

 

 

Exercised

 

(1,807

)

 

 

47

 

 

 

 

 

Cancelled

 

(351

)

 

 

63

 

 

 

 

 

Outstanding at June 30, 2011

 

9,954

 

 

$

59

 

6 years

 

$

83

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable at June 30, 2011

 

5,692

 

 

$

56

 

5 years

 

$

64

 

The weighted-average fair value per share of each option granted during fiscal years 2011, 2010, and 2009, estimated at the grant date using the Black-Scholes option pricing model, was $8.27, $8.34 and $11.07, respectively. The total intrinsic value of options exercised in fiscal years 2011, 2010 and 2009 was $38, $36 and $16, respectively.

 

Stock option awards outstanding as of June 30, 2011, have been granted at prices that are either equal to or above the market value of the stock on the date of grant. Stock option grants, generally vest over four years and expire no later than ten years after the grant date. The Company generally recognizes compensation expense ratably over the vesting period. At June 30, 2011, there was $18 of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of two years, subject to forfeitures.

 

Restricted Stock Awards

 

The fair value of restricted stock awards is estimated on the date of grant based on the market price of the stock and is amortized to compensation expense on a straight-line basis over the related vesting periods, which are generally three to four years. The total number of restricted stock awards expected to vest is adjusted by estimated forfeiture rates. Restricted stock grants prior to July 1, 2009, receive dividend distributions during their vesting period. Restricted stock grants after July 1, 2009, receive dividends earned during the vesting period upon vesting.

 

At June 30, 2011, there was $1 of total unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of two years. The total fair value of the shares that vested in fiscal years 2011, 2010 and 2009 was $4, $5 and $8, respectively. The weighted-average grant-date fair value of awards granted was $67.58, $58.91 and $63.30 per share for fiscal years 2011, 2010 and 2009, respectively.

 

A summary of the status of the Company's restricted stock awards at June 30 is presented below:

 

 

 

Number of
Shares

 

Weighted-Average
Grant Date
Fair Value
per Share

 

 

(In thousands)

 

 

 

Restricted stock awards at June 30, 2010

 

               112

 

 

$

     62

Granted

 

22

 

 

 

67

Vested

 

(61

)

 

 

62

Forfeited

 

(5

)

 

 

63

Restricted stock awards at June 30, 2011

 

68

 

 

$

64

 

Performance Units

 

The Company's performance unit grants provide for the issuance of common stock to certain managerial staff and executive management if the Company achieves certain performance targets. The performance unit grants vest after three years. Performance unit grants prior to July 1, 2009 receive dividend distributions during their vesting periods. Performance unit grants after July 1, 2009 receive dividends earned during the vesting period upon vesting.

 

The fair value of each grant issued is estimated on the date of grant based on the current market price of the stock. The total amount of compensation expense recognized reflects estimated forfeiture rates, and the initial assumption that performance goals will be achieved. Compensation expense is adjusted, as necessary, on a quarterly basis based on management's assessment of the probability that performance goals will be achieved. If such goals are not met or it is determined that achievement of performance goals is not probable, any previously recognized compensation expense is reversed to reflect the expected payout level. If it is determined that the performance goals will be exceeded, additional compensation expense is recognized, subject to a cap of 150% of target.

 

The number of shares issued will be dependent upon vesting and the achievement of specified performance targets. At June 30, 2011, there was $6 in unrecognized compensation cost related to nonvested performance unit grants that is expected to be recognized over a remaining weighted-average performance period of one year. The weighted-average grant-date fair value of awards granted was $66.48, $57.28 and $63.95 per share for fiscal years 2011, 2010 and 2009, respectively.

 

A summary of the status of the Company's performance unit awards at June 30 is presented below:

 

 

 

Number of
Shares

 

Weighted-Average
Grant Date
Fair Value
per Share

 

 

(In thousands)

 

 

 

Performance unit awards at June 30, 2010

 

            1,551

 

 

$

59

Granted

 

472

 

 

 

66

Vested and distributed

 

(425

)

 

 

61

Forfeited

 

(119

)

 

 

61

Performance unit awards at June 30, 2011

 

1,479

 

 

$

60

Performance units vested and deferred at June 30, 2011

 

276

 

 

$

51

 

 

 

 

 

 

 

The nonvested performance units outstanding at June 30, 2011 and 2010, were 1,202,628 and 1,298,382, respectively, and the weighted average grant date fair value was $62.55 and $60.68 per share, respectively. Total shares vested during fiscal year 2011 were 448,076 which had a weighted average grant date fair value per share of $61.16. The total fair value of shares vested was $27, $33 and $26 during fiscal years 2011, 2010 and 2009, respectively. Upon vesting, the recipients of the grants receive the distribution as shares or, if previously elected by eligible recipients as deferred stock. During fiscal years 2011 and 2010, $25 and $29, respectively, of the vested awards were paid by the issuance of shares. During fiscal years 2011 and 2010, $2 and $4, respectively, of the vested awards were deferred. As of June 30, 2011 and 2010 the total market value of shares vested and deferred was $14 and $13, respectively, and was reflected as a component of additional paid-in capital on the consolidated balance sheets. Deferred shares receive dividend distributions during their deferral period.

 

Deferred Stock Units for Nonemployee Directors

 

Nonemployee directors receive annual grants of deferred stock units under the Company's director compensation program and can elect to receive all or a portion of their annual retainers and fees in the form of deferred stock units. The deferred stock units receive dividend distributions, which are reinvested as deferred stock units, and are recognized at their fair value on the date of grant. Each deferred stock unit represents the right to receive one share of the Company's common stock following the termination of a director's service.

 

During fiscal year 2011, the Company granted 23,149 deferred stock units, reinvested dividends of 6,395 units and distributed 213 shares, which had a weighted-average fair value on grant date of $64.02, $66.43 and $57.64 per share, respectively. As of June 30, 2011, 209,157 units were outstanding, which had a weighted-average fair value on grant date of $57.77 per share.
Leases and Other Commitments
Leases and Other Commitments
NOTE 17. LEASES AND OTHER COMMITMENTS
 
The Company leases transportation equipment, certain information technology equipment and various manufacturing, warehousing, and office facilities. The Company's leases are classified as operating leases, and the Company's existing contracts will expire by 2020. The Company expects that in the normal course of business, existing contracts will be renewed or replaced by other leases. The future minimum rental payments required under the Company's existing non-cancelable lease agreements at June 30, 2011, are $33, $31, $28, $26, $24 and $112 in fiscal years 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.
 
Rental expense for all operating leases was $62, $59, and $62 in fiscal years 2011, 2010 and 2009, respectively. Certain space not occupied by the Company in its headquarters building is rented to other tenants under operating leases expiring through 2015. Future minimum rentals to be received under these leases total $4 and do not exceed $2 in any one year.
 
The Company is also party to certain purchase obligations, which are defined as purchase agreements that are enforceable and legally-binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. Examples of the Company's purchase obligations include contracts to purchase raw materials, commitments to contract manufacturers, commitments for information technology and related services, advertising contracts, utility agreements, capital expenditure agreements, software acquisition and license commitments, and service contracts. At June 30, 2011, the Company's purchase obligations, including the services related to the Information Technology Services (ITS) Agreement, totaled $301, $96, $57, $31, $19 and $30 for fiscal years 2012 through 2016, and thereafter, respectively. Estimates for the ITS Agreement are based on an annual service fee that is adjusted periodically based upon updates to services and equipment provided. Included in the ITS Agreement are certain acceleration payment clauses if the Company terminates the contract without cause.
 
Beginning in the fourth quarter of fiscal year 2012, the Company expects to begin the process of relocating certain staff from its general office in Oakland, Calif. and from its current research and development facility in Pleasanton, Calif., to a new facility also located in Pleasanton, Calif. The new Pleasanton facility consists of approximately 343,000 square feet of leased space and will house the Company's research and development group, as well as other administrative and operational support personnel. The Company expects to complete the relocation in the first quarter of fiscal year 2013. The future minimum rental payments required under the Company's existing non-cancelable lease agreement for the Pleasanton facility at June 30, 2011, are zero, $4, $6, $6 , $6 and $49 in fiscal years 2012 through 2016, and thereafter, respectively.
Other (Income) Expense, Net
Other Expense (Income), Net

NOTE 18. OTHER (INCOME) EXPENSE, NET

 

The major components of other (income) expense, net, for the fiscal years ended June 30 were:

 

 

 

2011

 

2010

 

2009

Low-income housing partnership (gains) losses

 

$     

(13

)

 

$     

1

 

 

$     

3

 

Income from transition services (Note 2)

 

 

(9

)

 

 

-

 

 

 

-

 

Equity in earnings of unconsolidated affiliates

 

 

(8

)

 

 

(9

)

 

 

(8

)

Interest income

 

 

(3

)

 

 

(3

)

 

 

(4

)

Foreign exchange transaction (gains) losses, net (Note 1)

 

 

(2

)

 

 

26

 

 

 

27

 

Amortization of trademarks and other intangible assets (Note 8)

 

 

9

 

 

 

9

 

 

 

7

 

Other

 

 

(1

)

 

 

1

 

 

 

-

 

Total

 

$

(27

)

 

$

25

 

 

$

25

 

 

The Company owns, directly or indirectly, limited partnership interests of up to 99% in 36 low-income housing partnerships. The Company sold three properties in fiscal year 2011 and recognized a gain of $13.

 

Approximately 90% of the fiscal year 2010 foreign exchange transaction losses, net, were related to the remeasurement losses for the Company's Venezuelan subsidiary (see Note 1).

 

Approximately 70% of the fiscal year 2009 foreign exchange transaction losses, net, were related to transactions to convert local currency to U.S. dollars by the Company's Venezuelan subsidiary.

Income Taxes
Income Taxes
NOTE 19. INCOME TAXES
 
The provision for income taxes on continuing operations, by tax jurisdiction, consisted of the following for the fiscal years ended June 30:
 
        2011       2010       2009
Current                    
       Federal   $      139   $      193   $      164  
       State     19     23     35  
       Foreign     45     39     39  
Total current     203     255     238  
                     
Deferred                    
       Federal     71     18     2  
       State     2     2     3  
       Foreign     -     4     (6 )
Total deferred     73     24     (1 )
Total   $ 276   $ 279   $ 237  
                     
The components of earnings from continuing operations before income taxes, by tax jurisdiction, were as follows for the fiscal years ended June 30:
 
        2011       2010       2009
United States   $      446   $      664   $      573
Foreign     117     141     136
Total   $ 563   $ 805   $ 709
                   
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate on continuing operations follows for the fiscal years ended June 30:
 
        2011       2010       2009
Statutory federal tax rate   35.0 %   35.0 %   35.0 %
State taxes (net of federal tax benefits)   2.3     2.2     3.5  
Tax differential on foreign earnings   (1.0 )   (1.0 )   (2.0 )
Net adjustment of prior year federal and state tax accruals   (0.6 )   (0.4 )   (2.3 )
Domestic manufacturing deduction   (3.5 )   (1.8 )   (1.8 )
Non-cash goodwill impairment   16.0     -     -  
Other differences   0.8     0.7     1.1  
Effective tax rate   49.0 %   34.7 %   33.5 %
                   
 
The substantially different effective tax rate in fiscal year 2011 versus fiscal year 2010 primarily resulted from the 16.0% impact of the non-deductible non-cash goodwill impairment charge of $258 related to the Burt's Bees reporting unit as there was no substantial tax benefit associated with this non-cash charge.
 
Applicable U.S. income taxes and foreign withholding taxes have not been provided on approximately $124 of undistributed earnings of certain foreign subsidiaries at June 30, 2011, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately $33. Applicable U.S. income and foreign withholding taxes are provided on these earnings in the periods in which they are no longer considered indefinitely reinvested.
 
With respect to the Company's stock option plans, realized tax benefits in excess of tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits of approximately $9, $10, and $6, were realized and recorded to additional paid-in capital for the fiscal years 2011, 2010 and 2009, respectively.
 
The components of deferred tax (liabilities) assets at June 30 are shown below:
 
        2011       2010
Deferred tax assets                
       Compensation and benefit programs   $         157     $         201  
       Basis difference related to Venture Agreement     30       30  
       Accruals and reserves     34       25  
       Inventory costs     13       13  
       Net operating loss and tax credit carryforwards     18       14  
       Other     36       49  
              Subtotal     288       332  
       Valuation allowance     (14 )     (12 )
       Total deferred tax assets     274       320  
                 
Deferred tax liabilities                
       Fixed and intangible assets     (258 )     (188 )
       Low-income housing partnerships     (27 )     (28 )
       Other     (35 )     (30 )
       Total deferred tax liabilities     (320 )     (246 )
       Net deferred tax (liabilities) assets   $ (46 )   $ 74  
   
The net deferred tax (liabilities) assets included in the consolidated balance sheet at June 30 were as follows:
 
    2011   2010
Current deferred tax assets   $         68     $         73  
Noncurrent deferred tax assets     26       25  
Noncurrent deferred tax liabilities     (140 )     (19 )
Deferred tax liabilities included in assets held for sale, net     -       (5 )
Net deferred tax (liabilities) assets   $ (46 )   $ 74  
                 
 
The Company periodically reviews its deferred tax assets for recoverability. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. Details of the valuation allowance at June 30 were as follows:
 
        2011       2010
Valuation allowance at beginning of year   $      (12 )   $      (6 )
Net decrease in realizability of foreign deferred tax assets     (1 )     (5 )
Increase in foreign net operating loss carryforward and other     (1 )     (1 )
Valuation allowance at end of year   $ (14 )   $ (12 )
                 
At June 30, 2011, the Company had no foreign tax credit carryforwards for U.S. income tax purposes. Tax benefits from foreign net operating loss carryforwards of $8 have expiration dates between fiscal years 2012 and 2020. Tax benefits from foreign net operating loss carryforwards of $3 may be carried forward indefinitely.
 
The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions. In the first quarter of fiscal year 2010, the Company paid federal tax and interest of $8 related to the 2004 and 2006 fiscal tax years. In the first quarter of fiscal year 2011, certain issues relating to 2003, 2004 and 2006 were effectively settled by the Company and the IRS Appeals Division. Tax and interest payments of $18 were made with respect to these issues in the second quarter of fiscal year 2011. Interest payments of $4 were made with respect to these issues in the third quarter of fiscal year 2011. No tax benefits had previously been recognized for the issues related to the 2003, 2004 and 2006 tax settlements. The federal statute of limitations has expired for all tax years through 2006. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.
 
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of June 30, 2011 and 2010, the total balance of accrued interest and penalties related to uncertain tax positions was $8 and $22, respectively. For fiscal years 2011, 2010 and 2009, income tax expense includes a benefit of $3, expense of $5 and expense of $2, respectively, in interest and penalties.
 
The following is a reconciliation of the beginning and ending amounts of the Company's gross unrecognized tax benefits:
 
  2011       2010       2009
Unrecognized tax benefits - July 1 $         84     $         98     $         115  
Gross increases - tax positions in prior periods   3       10       2  
Gross decreases - tax positions in prior periods   (9 )     (15 )     (9 )
Gross increases - current period tax positions   45       5       5  
Gross decreases - current period tax positions   -       -       (2 )
Settlements   (26 )     (14 )     (13 )
Unrecognized tax benefits - June 30 $ 97     $ 84     $ 98  
                       
Included in the balance of unrecognized tax benefits at June 30, 2011, 2010 and 2009, are potential benefits of $68, $57 and $64, respectively, which if recognized, would affect the effective tax rate on earnings.
 
In the twelve months succeeding June 30, 2011, audit resolutions could potentially reduce total unrecognized tax benefits by up to $11, primarily as a result of cash settlement payments. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

Employee Benefit Plans
Employee Benefit Plans

NOTE 20. EMPLOYEE BENEFIT PLANS

 

Retirement Income Plans

 

The Company has qualified and nonqualified defined benefit plans that cover substantially all domestic employees and certain international employees. As of June 30, 2011, the benefits of the domestic qualified plan are based on either employee years of service and compensation or a stated dollar amount per years of service. Effective July 1, 2011, and as part of a set of long-term, cost neutral enhancements to the Company's overall employee benefit plans, the domestic qualified plan was frozen for service accrual and eligibility purposes, however, interest credits will continue to accrue on participant balances. The Company is the sole contributor to the plans in amounts deemed necessary to provide benefits and to the extent deductible for federal income tax purposes. Assets of the plans consist primarily of investments in cash equivalents, mutual funds and common collective trusts.

 

The Company made contributions of $15, $43, and $30 to its domestic qualified retirement income plan in fiscal years 2011, 2010 and 2009, respectively. Contributions made to the domestic non-qualified retirement income plans were $8, $8 and $7 in fiscal years 2011, 2010 and 2009, respectively. The Company has also contributed $1, $2, and $1 to its foreign retirement income plans for fiscal years 2011, 2010 and 2009, respectively. The Company's funding policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit tax laws plus additional amounts as the Company may determine to be appropriate.

 

Retirement Health Care

 

The Company provides certain health care benefits for employees who meet age, participation and length of service requirements at retirement. The plans pay stated percentages of covered expenses after annual deductibles have been met. Benefits paid take into consideration payments by Medicare for the domestic plan. The plans are funded as claims are paid, and the Company has the right to modify or terminate certain of these plans.

 

 

The assumed domestic health care cost trend rate used in measuring the accumulated post-retirement benefit obligation (APBO) was 8.1% for medical and 9.2% for prescription drugs for fiscal year 2011. These rates have been assumed to gradually decrease each year until an assumed ultimate trend of 4.5% is reached in 2028. The healthcare cost trend rate assumption has an effect on the amounts reported. The effect of a 100 basis point increase or decrease in the assumed domestic healthcare cost trend rate on the total service and interest cost components, and the postretirement benefit obligation was less than $1, respectively, for all three years ended June 30, 2011, 2010 and 2009.

 

Summarized information for the Company's retirement income and healthcare plans at and for the fiscal years ended June 30 is as follows:

 

                               

 

Retirement
Income

 

Retirement
Health Care

 

2011

 

2010

 

2011

 

2010

Change in benefit obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

$

560

 

 

$

468

 

 

$

78

 

 

$

70

 

       Service cost

 

12

 

 

 

9

 

 

 

2

 

 

 

2

 

       Interest cost

 

29

 

 

 

30

 

 

 

4

 

 

 

4

 

       Employee contributions to deferred compensation plans

 

7

 

 

 

6

 

 

 

-

 

 

 

-

 

       Actuarial (gain) loss

 

(12

)

 

 

80

 

 

 

(23

)

 

 

4

 

       Plan amendments

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

       Curtailment (gain) loss

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

       Translation adjustment

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

       Benefits paid

 

(32

)

 

 

(33

)

 

 

(1

)

 

 

(2

)

       Projected benefit obligation at end of year

 

566

 

 

 

560

 

 

 

58

 

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Fair value of assets at beginning of year

 

335

 

 

 

275

 

 

 

-

 

 

 

-

 

       Actual return on plan assets

 

80

 

 

 

39

 

 

 

-

 

 

 

-

 

       Employer contributions to qualified and nonqualified plans

 

24

 

 

 

53

 

 

 

1

 

 

 

2

 

       Translation adjustment

 

3

 

 

 

1

 

 

 

-

 

 

 

-

 

       Benefits paid