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, other retail outlets, distributors and medical supply providers. The consolidated financial statements include the statements of the Company and its wholly-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 judgments 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 July 27, 2012, the Financial Accounting Standards Board (FASB) issued new guidance to simplify how entities test indefinite-lived intangible assets for impairment. The new guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative indefinite-lived intangible asset impairment test. The new guidance is effective for annual indefinite-lived intangible asset impairment tests to be performed in fiscal year 2013, with early adoption permitted. The Company will adopt this guidance beginning in fiscal year 2013 and does not expect the adoption to have any impact on its consolidated financial statements.
On June 16, 2011, the 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' (Deficit) 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 first quarter of fiscal year 2013.
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 expense (income), net. The Company's cash holdings were as follows as of June 30:
|Non-U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries||$||81||$||98|
|U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries||35||15|
|Non-U.S. dollar balances held by U.S. dollar functional currency subsidiaries||20||26|
|U.S. dollar balances held by U.S. dollar functional currency subsidiaries||131||120|
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.
Property, Plant and Equipment and Finite-Lived Intangible Assets
Property, plant and equipment and finite-lived intangible assets are stated at cost. Depreciation and amortization expense are calculated by the straight-line method using the estimated useful lives of the related assets. The table below provides estimated useful lives of property, plant and equipment by asset classification.
|Land improvements||10 - 30 years|
|Buildings||10 - 40 years|
|Machinery and equipment||3 - 15 years|
|Computer equipment||3 years|
|Capitalized software costs||3 - 7 years|
Property, plant and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. The Company's impairment review is based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist. Impairment occurs when the book value of the asset exceeds the estimated future undiscounted cash flows generated by the asset and the impairment is viewed as other than temporary. When an impairment is indicated, an impairment charge is recorded for the difference between the book value of the asset and its estimated fair market value. Depending on the asset, estimated fair market value may be determined either by use of a discounted cash flow model, or by reference to estimated selling values of assets in similar condition.
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, the Company performs either a qualitative or quantitative evaluation for each of its reporting units. Factors considered in the qualitative test include reporting unit specific operating results as well as new events and circumstances impacting the operations at the reporting units. For the quantitative test, 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 other intangible assets with indefinite lives, a quantitative test is performed. Impairment occurs when the carrying amount of an asset is greater than its estimated fair value. An impairment charge is recorded for the difference between the carrying 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.
Capitalization of Software Costs
The Company capitalizes significant costs incurred in the acquisition and development of software for internal use, including the costs of the software, materials, consultants, interest and payroll and payroll-related costs for employees incurred in developing internal-use computer software once final selection of the software is made. Costs incurred prior to the final selection of software and costs not qualifying for capitalization are charged to expense. Capitalized software amortization was $18, $19 and $29, in fiscal years 2012, 2011 and 2010.
The Company grants various nonqualified stock-based compensation awards, including stock options and performance units.
For stock options, the Company estimates the fair value of each award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The Company estimates stock option forfeitures based on historical data for each employee grouping and the estimated forfeiture rate is adjusted to reflect actual forfeitures upon vesting of such grouping. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed. The expense is recorded by amortizing the grant date fair values on a straight-line basis over the vesting period, adjusted for estimated forfeitures.
The Company's performance unit grants provide for the issuance of common stock to certain managerial staff and executive management if the Company achieves specified performance targets. The grants generally vest after three years. 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 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, previously recognized compensation expense is adjusted to reflect the expected payout level. If it is determined that the performance goals will be exceeded, additional compensation expense is recognized.
Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for share-based payment arrangements (excess tax benefit) are primarily classified as financing cash flows. For the fiscal years ended June 30, 2012, 2011 and 2010, $10, $9, and $10, respectively, of excess tax benefits were generated from share-based payment arrangements, and were recognized as financing cash flows.
The Company accounts for its defined benefit retirement income and retirement health care plans using actuarial methods. These methods use an attribution approach that generally spreads "plan events" over the service lives of plan participants. Examples of plan events are plan amendments and changes in actuarial assumptions such as the expected return on plan assets, discount rate, rate of compensation increase, and certain employee-related factors, such as retirement age and mortality. The principle underlying the attribution approach is that employees render service over their employment period on a relatively "smooth" basis, and, therefore, the statement of earnings effects of retirement income and retirement health care plans are recognized in the same pattern.
One of the principal assumptions used in the net periodic benefit cost calculation is the expected return on plan assets. The required use of an expected return on plan assets may result in recognized pension expense or income that differs from the actual returns of those plan assets in any given year. Over time, however, the goal is for the expected long-term returns to approximate the actual returns and, therefore, the expectation is that the pattern of income and expense recognition should closely match the pattern of the services provided by the participants. The Company uses a market-related value method for calculating plan assets for purposes of determining the amortization of actuarial gains and losses. This method employs an asset smoothing approach. The differences between actual and expected returns are recognized in the net periodic benefit cost calculation over the average remaining service period of the plan participants using the corridor approach. Under this approach, only actuarial gains (losses) that exceed 5% of the greater of the projected benefit obligation or the market-related value of assets are amortized to pension expense by the Company. In developing its expected return on plan assets, the Company considers the long-term actual returns relative to the mix of investments that comprise its plan assets and also develops estimates of future investment returns by considering external sources.
The Company recognizes an actuarial-based obligation at the onset of disability for certain benefits provided to individuals after employment, but before retirement, that include medical, dental, vision, life and other benefits.
The Company is involved in certain environmental remediation and on-going compliance activities. Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The Company's accruals reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. The aggregate accrual for environmental matters is included in other liabilities in the Company's consolidated balance sheets on an undiscounted basis due to the uncertainty and timing of future payments.
Sales are recognized as revenue when the risk of loss and title pass to the customer and when all of the following have occurred: a firm sales arrangement exists, pricing is fixed or determinable, and collection is reasonably assured. Sales are recorded net of allowances for returns, trade-promotions, coupons and other discounts. The Company routinely commits to one-time or on-going trade-promotion programs with customers and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. Programs include shelf price reductions, end-of-aisle or in-store displays of the Company's products and graphics and other trade-promotion activities conducted by the customer. Coupons are recognized as a liability when distributed based upon expected consumer redemptions. The Company maintains liabilities at the end of each period for the estimated expenses incurred, but unpaid for these programs. Trade-promotion and coupon costs are recorded as a reduction of sales. The Company provides an allowance for doubtful accounts based on its historical experience and a periodic review of its accounts receivable. Receivables were presented net of an allowance for doubtful accounts of $7 and $5 at June 30, 2012 and 2011, respectively. The Company's provision for doubtful accounts was $3 in fiscal year 2012 and less than $1 for fiscal year 2011.
Prior to December 31, 2009, the Company translated its Venezuelan subsidiary's financial statements using Venezuela's official currency exchange rate, which had been fixed by the Venezuelan government at 2.15 bolivar Fuertes (VEFs) to the U.S dollar. Effective December 31, 2009, the Company began translating its Venezuelan subsidiary's financial statements using the then prevailing parallel market currency exchange rate (exchange rates negotiated with local financial intermediaries), the rate at which the Company expected to be able to remit dividends or return capital. The rate used at December 31, 2009, was 5.87 VEFs to the U.S. dollar.
Effective January 1, 2010, the financial statements for the Company's Venezuelan subsidiary are consolidated under the rules governing the translation of financial information in a highly inflationary economy. As such, the subsidiary's non-U.S dollar monetary assets and liabilities are remeasured into U.S dollars each reporting period and the exchange gains and losses from these remeasurements are reflected in the Company's current net earnings.
In May 2010, the Venezuelan government suspended the functioning of the parallel currency exchange market, and in June 2010, established an alternative currency exchange market controlled by the Central Bank of Venezuela. As a result, the Company began utilizing the exchange rate at which the Company was purchasing U.S. dollars through this alternative market as the remeasurement rate for the Company's Venezuelan subsidiary's financial statements. The average exchange rate for U.S. dollars purchased through this alternative market was 5.5 VEFs for both fiscal years ending June 30, 2012 and 2011, and 5.4 VEFs for the fiscal year ended June 30, 2010.
The Company's use of derivative instruments, principally swaps, futures, and forward contracts, is limited to non-trading purposes and is designed to partially manage exposure to changes in interest rates, foreign currencies and commodity prices. The Company's contracts are hedges for transactions with notional balances and periods consistent with the related exposures and do not constitute investments independent of these exposures.
Most commodity derivative contracts, interest rate forwards and foreign-exchange contracts are designated as cash flow hedges of certain raw material, forecasted interest payments and finished goods inventory purchase obligations based on certain hedge criteria. The criteria used to determine if hedge accounting treatment is appropriate are: (a) whether the designation of the hedge is to an underlying exposure and (b) whether there is sufficient correlation between the value of the derivative instrument and the underlying obligation. The changes in the fair value of derivatives are recorded as either assets or liabilities in the balance sheet with an offset to net earnings or other comprehensive income, depending on whether, for accounting purposes, the derivative is designated and qualified as a hedge. The Company de-designates a hedge relationship that is accounted for as a hedge whenever it determines that the hedge relationship is no longer highly effective or that the forecasted transaction is no longer probable. Upon de-designation of a hedge, the portion of gains or losses on the subject derivative instrument that was previously accumulated in other comprehensive income remains in accumulated other comprehensive income until the forecasted transaction is recognized in net earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. From time to time, the Company may have contracts not designated as hedges for accounting purposes, for which it recognizes changes in the fair value of these contracts in other (income) expense, net. Cash flows from hedging activities are classified as operating activities in the consolidated statements of cash flows.
The Company uses different methodologies, when necessary, to estimate the fair value of its derivative contracts. The estimated fair values of the majority of the Company's contracts are based on quoted market prices, traded exchange market prices, or broker price quotations, and represent the estimated amounts that the Company would pay or receive to terminate the contracts.
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 the fiscal year ended June 30, 2011, was an after-tax gain on the transaction of $247. In fiscal year 2012, the Company recognized $1 of additional income tax expense related to the gain on the sale, which was recorded in (losses) earnings from discontinued operations, net of tax.
As part of the Purchase Agreement, certain transition services were provided to the buyer from the date of sale, November 5, 2010, through May 2012, a period of eighteen months. The purpose of the services was to provide short-term assistance to the buyer in assuming the operations of the Auto Businesses. These services did not confer to the Company the ability to influence the operating or financial policies of the Auto Businesses under their new ownership. Income from these transition services for the fiscal years ended June 30, 2012 and 2011, was $6 and $9, respectively, and was reported in other (income) expense, net, in continuing operations in the consolidated statements of earnings. The costs associated with the services were also reflected in continuing operations. Aside from the transition services, the Company included the financial results of the Auto Businesses in discontinued operations for all periods presented.
The following table includes financial results attributable to the Auto Businesses as of June 30:
|Earnings before income taxes||$||-||$||34||$||120|
|Income tax expense on earnings||-||(11||)||(43||)|
|(Loss) gain on sale, net of tax||(1||)||247||-|
|(Losses) earnings from discontinued operations, net of tax||$||(1||)||$||270||$||77|
NOTE 3. BUSINESSES ACQUIRED
Fiscal Year 2012
On December 31, 2011, the Company acquired HealthLink, Aplicare, Inc. and Soy Vay Enterprises, Inc., including each business' workforce, for purchase prices aggregating $97, funded through commercial paper borrowings. The amount paid of $93 represents the aggregate purchase prices less cash acquired. HealthLink, based in Jacksonville, Fla., and Aplicare, Inc., based in Meriden, Conn., are leading providers of infection control products for the health care industry, complementing and expanding the Company's professional products business. Results for these businesses are reflected in the Cleaning reportable segment. Soy Vay Enterprises, Inc., a California-based operation, provides the Company's food products business a presence in the growing market for Asian sauces. Results for this business are reflected in the Lifestyle reportable segment. Pro forma results reflecting the acquisitions were not presented because the acquisitions were not significant, individually or when aggregated, to the Company's consolidated financial results.
Fiscal Year 2010
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, Inc.'s workforce. The Company paid for the acquisition in cash. Results for this business are reflected in the Cleaning reportable segment. Pro forma results were not presented because the acquisition was not significant to the Company's consolidated financial results.
NOTE 4. INVENTORIES, NET
Inventories, net, consisted of the following as of June 30:
|Raw materials and packaging||120||104|
|Work in process||4||3|
|Allowances for obsolescence||(10||)||(11||)|
The last-in, first-out (LIFO) method was used to value approximately 39% and 37% of inventories as of June 30, 2012 and 2011, 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 a benefit of $2, $1 and $3 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
During fiscal years 2012, 2011 and 2010, the Company's inventory obsolescence expense was $13, $15 and $11, respectively.
NOTE 5. OTHER CURRENT ASSETS
Other current assets consisted of the following as of June 30:
|Deferred tax assets||$||92||$||68|
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net, consisted of the following as of June 30:
|Machinery and equipment||$||1,533||$||1,540|
|Capitalized software costs||328||360|
|Construction in progress||149||130|
|Land and improvements||142||137|
|Less: accumulated depreciation and amortization||(1,804||)||(1,835||)|
Depreciation and amortization expense related to property, plant and equipment, net, was $158, $153 and $163 in fiscal years 2012, 2011 and 2010, respectively.
NOTE 7. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
Beginning in the fourth quarter of fiscal year 2012, natural personal care financial results outside the U.S. are being reported in the International segment rather than in the Lifestyle segment because management of the International segment now has primary oversight of natural personal care financial results outside the U.S. All periods presented have been recast to reflect this change. For fiscal year 2011, the Lifestyle and International reportable segments included a noncash goodwill impairment charge of $164 and $94, respectively, for the Burt's Bees business.
Changes in the carrying amount of goodwill, trademarks and other intangible assets for the fiscal years ended June 30, 2012 and 2011, were as follows:
|Balance June 30, 2010||$||275||$||399||$||85||$||544||$||1,303|
|Translation adjustments and other||-||-||-||25||25|
|Balance June 30, 2011||$||275||$||235||$||85||$||475||$||1,070|
|Translation adjustments and other||-||1||-||(15||)||(14||)|
|Balance June 30, 2012||$||323||$||244||$||85||$||460||$||1,112|
|Trademarks||Other intangible assets|
subject to amortization
|Not subject to
|Balance June 30, 2010||$||24||$||526||$||550||$||37||$||59||$||96|
|Translation adjustments and other||2||1||3||3||(2||)||1|
|Balance June 30, 2011||23||527||550||31||52||83|
|Translation adjustments and other||(1||)||-||(1||)||-||(1||)||(1||)|
|Balance June 30, 2012||$||19||$||537||$||556||$||23||$||63||$||86|
Intangible assets subject to amortization were net of total accumulated amortization of $257 and $243 at June 30, 2012 and 2011, respectively, of which $18 and $15, respectively, related to trademarks. Total accumulated amortization included $131 and $129 at June 30, 2012 and 2011, respectively, related to intangible assets subject to amortization that were fully amortized, of which $7 and $5, respectively, related to trademarks. Estimated amortization expense for these intangible assets is $17, $16, $12, $7 and $7 for fiscal years 2013, 2014, 2015, 2016 and 2017.
During the fourth quarter of fiscal year 2012, the Company completed its annual impairment test of goodwill and indefinite-lived intangible assets and no instances of impairment were identified.
During fiscal year 2011, the Company identified challenges in increasing sales for the Burt's Bees business in certain international markets in accordance with projections, particularly in the European Union and Asia. Additionally, during fiscal year 2011, 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 a comprehensive reevaluation, the Company recognized a noncash goodwill impairment charge of $258 during fiscal year 2011.
The impairment charge was 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 challenges in international expansion plans, which adversely affected the original assumptions for international growth and the estimates of expenses necessary to achieve that growth. The revised assumptions reflected 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 noncash goodwill impairment charge of $258 recognized in fiscal year 2011. The noncash goodwill impairment charge was based on the Company's estimates regarding the future financial performance of the Burt's Bees business and macroeconomic factors. There was no substantial tax benefit associated with this noncash charge.
To determine the fair value of the Burt's Bees reporting unit, which was reflected in the Lifestyle reportable segment in fiscal year 2011, the Company used a discounted cash flow (DCF) approach, as it believed this approach was the most reliable indicator of the fair value of the business. Under this approach, the Company estimated the future cash flows of the Burt's Bees reporting unit and discounted these cash flows at a rate of return that reflected its relative risk.
The Company's trademarks and indefinite-lived intangible assets for the Burt's Bees reporting unit were tested for impairment in fiscal year 2011, and the Company concluded that these assets were not impaired. No other instances of impairment were identified during fiscal years 2011 and 2010.
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of June 30:
|Compensation and employee benefit costs||$||165||$||120|
|Trade and sales promotion||105||88|
NOTE 9. DEBT
Notes and loans payable, which mature in less than one year, included the following as of June 30:
The weighted average interest rate on commercial paper was 0.46% and 0.33% as of June 30, 2012 and 2011, respectively. During the fiscal years ended June 30, 2012, 2011 and 2010, the weighted average interest rates on the average balance of notes and loans payable was 0.85%, 0.73% and 0.62%, respectively. The carrying value of notes and loans payable as of June 30, 2012 and 2011 approximated its fair value due to its short maturity.
Long-term debt, carried at face value net of unamortized discounts or premiums, included the following as of June 30:
|Senior unsecured notes and debentures:|
|5.45%, $350 due October 2012||$||350||$||350|
|5.00%, $500 due March 2013||500||500|
|5.00%, $575 due January 2015||575||575|
|3.55%, $300 due November 2015||300||299|
|5.95%, $400 due October 2017||399||398|
|3.80%, $300 due November 2021||297||-|
|Less: Current maturities of long-term debt||(850||)||-|
The weighted average interest rate on long-term debt was 5.18% and 5.20% as of June 30, 2012 and 2011, respectively. During the fiscal years ended June 30, 2012, 2011 and 2010, the weighted average interest rates on the average balance of long-term debt, including the effect of interest rate swaps, was 5.21%, 5.22% and 5.16%, respectively. The estimated fair value of long-term debt, including current maturities, was $2,606 and $2,303 as of June 30, 2012 and 2011, 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.
In November 2011, the Company filed a shelf registration statement with the SEC, which allows the Company to offer and sell an unlimited amount of its senior unsecured indebtedness from time to time. The shelf registration statement will expire in November 2014. Subsequently, in November 2011, the Company issued $300 of senior notes under the shelf registration statement. The notes carry an annual fixed interest rate of 3.80% payable semi-annually in May and November. The notes mature on November 15, 2021. Proceeds from the notes were used to retire commercial paper. The notes rank equally with all of the Company's existing and future senior indebtedness.
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 with commercial paper and operating cash flows.
In fiscal year 2010, the Company issued $300 of long-term debt in senior notes. The notes carry an annual fixed interest rate of 3.55% payable semi-annually in May and November. The notes mature on November 1, 2015. Proceeds from the notes were used to repay commercial paper. The notes rank equally with all of the Company's existing and future senior indebtedness.
The Company's borrowing capacity under other financing arrangements as of June 30 was as follows:
|Revolving credit facility||$||1,100||$||1,100|
|Foreign credit lines||31||18|
|Other credit lines||13||13|
During fiscal year 2012, the Company entered into a new $1.1 billion revolving credit agreement, which expires in May 2017 and concurrently terminated its prior $1.1 billion revolving credit agreement, which was due to mature in April 2013. No termination fees or penalties were incurred by the Company in connection with the termination of the prior credit agreement. As of June 30, 2012, there were no borrowings under the agreement, and the Company believes that borrowings under the revolving credit facility are and will continue to be available for general corporate purposes. The agreement includes certain restrictive covenants and limitations, with which the Company was in compliance as of June 30, 2012.
Of the $44 of foreign and other credit lines at June 30, 2012, $29 was available for borrowing.
Long-term debt maturities as of June 30, 2012, are $850, zero, $575, $300, zero and $700 in fiscal years 2013, 2014, 2015, 2016, 2017 and thereafter, respectively.
Certain terms of the agreements governing the over-the-counter derivative instruments contain provisions that require the credit ratings, as assigned by Standard & Poor's and Moody's to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company's credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of June 30, 2012, the Company and each of its counterparties maintained investment grade ratings with both Standard & Poor's and Moody's.
Fair Value of Derivative Instruments
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as a hedge, and, if so, on the type of the hedging relationship. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument as a fair value hedge or a cash flow hedge. The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges. The Company does not designate its foreign currency forward contracts for certain intercompany transactions as accounting hedges.
During the fiscal years ended June 30, 2012, 2011 and 2010, the Company had no hedging instruments designated as fair value hedges.
The Company's derivative instruments designated as hedging instruments were recorded at fair value in the consolidated balance sheets as of June 30 as follows:
|Balance Sheet classification||2012||2011|
|Foreign exchange contracts||Other current assets||$||1||$||-|
|Interest rate contracts||Other current assets||-||1|
|Commodity purchase contracts||Other current assets||-||4|
|Interest rate contracts||Accrued liabilities||$||3||$||1|
|Commodity purchase contracts||Accrued liabilities||1||-|
During the fiscal year ended June 30, 2012, the Company entered into foreign currency forward contracts that were not designated as accounting hedging instruments. These derivatives are used by the Company to economically hedge foreign exchange risk associated with certain intercompany transactions between subsidiaries in Canada and the U.S. The Company did not enter into any such transactions during the years ended June 30, 2011 and 2010.
The Company's derivative financial instruments not designated as hedging instruments were recorded at fair value in the consolidated balance sheets as of June 30 as follows:
|Balance Sheet classification||2012||2011|
|Commodity purchase contracts||Other current assets||$||-||$||1|
|Foreign exchange contracts||Accrued liabilities||$||-||$||-|
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 as of June 30, 2012, expected to be reclassified into earnings within the next twelve months is $4. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the fiscal years ended June 30, 2012 and 2011, hedge ineffectiveness was not material. The Company de-designates cash flow hedge relationships whenever it determines that the hedge relationships are no longer highly effective or that the forecasted transaction is no longer probable. The portion of gains or losses on the derivative instrument previously accumulated in OCI for de-designated hedges remains in accumulated OCI until the forecasted transaction is recognized in earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. Changes in the value of derivative instruments not designated as accounting hedges are recorded in other (income) expense, net. The effects of derivative instruments designated as hedging instruments on OCI and the consolidated statements of earnings were as follows during the fiscal years ended June 30:
recognized in OCI
|Gains (losses) reclassified from OCI and|
recognized in earnings
|Commodity purchase contracts||$||(1||)||$||8||$||(3||)||$||4||$||3||$||(15||)|
|Interest rate contracts||(39||)||3||-||(2||)||-||-|
|Foreign exchange contracts||3||(4||)||(2||)||2||(3||)||(3||)|
The gains and losses reclassified from OCI and recognized in earnings during the fiscal years ended June 30, 2012, 2011 and 2010 for commodity purchase contracts and foreign exchange contracts were included in cost of products sold. The loss reclassified from OCI and recognized in earnings during the fiscal year ended June 30, 2012 for interest rate contracts was included in interest expense. Of the losses reclassified from OCI and recognized in earnings during fiscal year 2010, $16 was included in cost of products sold and $2 was included in earnings from discontinued operations.
|Employee benefit obligations||$||312||$||215|
|Venture agreement net terminal obligation||281||277|
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, 2012 and 2011, 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.
NOTE 12. OTHER CONTINGENCIES AND GUARANTEES
The Company is involved in certain environmental matters, including response actions at various locations. The Company had a recorded liability of $14 and $15 as of June 30, 2012 and 2011, 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, accounted for a substantial majority of the recorded liability as of both June 30, 2012 and 2011. 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.
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 the Company'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 or disclosed below, will not have a material adverse effect, individually or in the aggregate, on the Company's consolidated financial statements taken as a whole.
On August 7, 2012, an appellate court hearing was convened in a lawsuit pending in Brazil against the Company and one of its wholly-owned subsidiaries, The Glad Products Company ("Glad"). The pending 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 numerous rulings in 2001 through 2003, reaching a final decision against Petroplus 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$22,952,678 ($13) plus interest. The current value of that judgment, including interest and foreign exchange fluctuation as of August 14, 2012, is approximately $34.
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. Prior to the August 2012 court hearing, the Company viewed a potential loss in excess of amounts accrued in connection with this matter as remote. Based on the proceedings in August, the Company now believes that it is reasonably possible that a loss could be incurred in this matter in excess of amounts accrued, although it is unable to reasonably estimate the amount of any such additional loss. The Company continues to believe that its defenses are meritorious. If the appellate court rules against the Company and Glad, they plan to appeal 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.
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.
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 June 30, 2012, the Company was a party to a letter of credit of $15, related to one of its insurance carriers.
The Company had not recorded any liabilities on any of the aforementioned guarantees as of June 30, 2012.
NOTE 13. 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 $71 remained available as of June 30, 2012. In May 2011, the board of directors approved a second open-market purchase program with a total authorization of $750, all of which remained available for repurchase as of June 30, 2012. The Evergreen Program has no authorization limit as to amount or timing of repurchases. The purpose of the Evergreen Program is to offset the impact of share dilution related to share-based awards.
Share repurchases under authorized programs were as follows during the fiscal years ended June 30:
|Open-market purchase programs||$||158||2,429||$||521||7,654||$||-||-|
During fiscal years 2012, 2011 and 2010, the Company declared dividends per share of $2.44, $2.25 and $2.05, respectively, and paid dividends per share of $2.40, $2.20 and $2.00, respectively.
Accumulated other comprehensive net losses at June 30, 2012, 2011 and 2010 included the following net-of-tax gains (losses):
|Pension and postretirement benefit adjustments||(165||)||(97||)||(161||)|
Preferred Stock and 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, 2012 and 2011, 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 (the "Rights"). Each Right entitled 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 expired on July 16, 2012.
NOTE 16. 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 2024. 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, 2012, are expected to be $38, $34, $30, $28, $26 and $95 in fiscal years 2013, 2014, 2015, 2016, 2017 and thereafter, respectively.
In the fourth quarter of fiscal year 2012, the Company began the process of relocating certain employees from its general office building in Oakland, Calif. to a new facility located in Pleasanton Calif. Employees from its Technical and Data Center in Pleasanton, Calif. are also expected to be relocated to the new facility by the end of fiscal year 2013. The new 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 future minimum rental payments required under the Company's existing non-cancelable lease agreement for the new facility at June 30, 2012, are expected to be $4, $6, $6, $7, $7 and $43 in fiscal years 2013, 2014, 2015, 2016, 2017 and thereafter, respectively. These amounts are included in the Company's future minimum rental payments disclosed above.
Rental expense for all operating leases was $68, $62 and $59 in fiscal years 2012, 2011 and 2010, respectively. Certain space not occupied by the Company in its general office building is rented to other tenants under operating leases expiring through 2017. Future minimum rentals to be received under these leases total $3 and do not exceed $1 in any one year.
The Company is also a 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, 2012, the Company's purchase obligations, including the services related to the Information Technology Services (ITS) Agreement, totaled $382, $169, $88, $28, $25 and $48 for fiscal years 2013 through 2017, and thereafter, respectively. Estimates for the ITS Agreement are based on an annual service fee that is adjusted periodically based upon updates to services and equipment provided. Included in the ITS Agreement are certain acceleration payment clauses if the Company terminates the contract without cause.
NOTE 17. OTHER (INCOME) EXPENSE, NET
The major components of other (income) expense, net, for the fiscal years ended June 30 were:
|Income from equity investees||$||(11||)||$||(8||)||$||(9||)|
|Income from transition services (Note 2)||(6||)||(9||)||-|
|Low-income housing partnership (gains) losses||(2||)||(13||)||1|
|Amortization of trademarks and other intangible assets (Note 7)||9||9||9|
|Foreign exchange transaction losses (gains), net (Note 1)||1||(2||)||26|
As of June 30, 2012, the Company owns, directly or indirectly, limited partnership interests of up to 99% in 24 low-income housing partnerships. In fiscal year 2011, the Company sold three properties and recognized a gain of $13.
Approximately $24 of the fiscal year 2010 foreign exchange transaction losses, net, represent remeasurement losses for the Company's Venezuelan subsidiary (see Note 1).
NOTE 18. INCOME TAXES
The provision for income taxes on continuing operations, by tax jurisdiction, consisted of the following as of June 30:
The components of earnings from continuing operations before income taxes, by tax jurisdiction, consisted of the following as of June 30:
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate on continuing operations follows as of June 30:
|Statutory federal tax rate||35.0||%||35.0||%||35.0||%|
|State taxes (net of federal tax benefits)||1.1||2.3||2.2|
|Tax differential on foreign earnings||(2.5||)||(1.0||)||(1.0||)|
|Domestic manufacturing deduction||(2.2||)||(3.5||)||(1.8||)|
|Noncash goodwill impairment||-||16.0||-|
|Effective tax rate||31.4||%||49.0||%||34.7||%|
The substantially different effective tax rate in fiscal year 2011 primarily resulted from the 16.0% impact of the non-deductible noncash goodwill impairment charge of $258 related to the Burt's Bees reporting unit as there was no substantial tax benefit associated with this noncash charge.
Applicable U.S. income taxes and foreign withholding taxes have not been provided on approximately $146 of undistributed earnings of certain foreign subsidiaries at June 30, 2012, 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 $36. 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.
Tax benefits resulting from share-based payment arrangements that are in excess of the tax benefits recorded in net earnings over the vesting period of those arrangements are recorded as increases to additional paid-in capital. Excess tax benefits of approximately $10, $9, and $10, were realized and recorded to additional paid-in capital for the fiscal years 2012, 2011 and 2010, respectively. The components of deferred tax assets (liabilities) as of June 30 are shown below:
|Deferred tax assets|
|Compensation and benefit programs||$||203||$||157|
|Basis difference related to Venture Agreement||30||30|
|Accruals and reserves||49||34|
|Net operating loss and tax credit carryforwards||21||18|
|Total deferred tax assets||328||274|
|Deferred tax liabilities|
|Fixed and intangible assets||(268||)||(258||)|
|Low-income housing partnerships||(29||)||(27||)|
|Total deferred tax liabilities||(329||)||(320||)|
|Net deferred tax liabilities||$||(1||)||$||(46||)|
The Company periodically reviews its deferred tax assets for recoverability. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. Details of the valuation allowance were as follows as of June 30:
|Valuation allowance at beginning of year||$||(14||)||$||(12||)|
|Net decrease in realizability of foreign deferred tax assets||(3||)||(1||)|
|Net increase in foreign net operating loss carryforward and other||(3||)||(1||)|
|Valuation allowance at end of year||$||(20||)||$||(14||)|
At June 30, 2012, the Company had foreign tax credit carryforwards of $7 for U.S. income tax purposes. Tax benefits from foreign net operating loss carryforwards of $8 have expiration dates between fiscal years 2013 and 2021. Tax benefits from foreign net operating loss carryforwards of $6 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 audits of 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 June 30, 2008. 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, 2012 and 2011, the total balance of accrued interest and penalties related to uncertain tax positions was $7 and $8, respectively. Interest and penalties included in income tax expense resulted in a net benefit of $3, a net benefit of $3 and a net expense of $5 in fiscal years 2012, 2011 and 2010, respectively. The following is a reconciliation of the beginning and ending amounts of the Company's gross unrecognized tax benefits:
|Unrecognized tax benefits - July 1||$||97||$||84||$||98|
|Gross increases - tax positions in prior periods||4||3||10|
|Gross decreases - tax positions in prior periods||(16||)||(9||)||(15||)|
|Gross increases - current period tax positions||6||45||5|
|Gross decreases - current period tax positions||(1||)||-||-|
|Unrecognized tax benefits - June 30||$||80||$||97||$||84|
Included in the balance of unrecognized tax benefits at June 30, 2012, 2011 and 2010, are potential benefits of $56, $68 and $57, respectively, which if recognized, would affect the effective tax rate on earnings.
In the twelve months succeeding June 30, 2012, audit resolutions could potentially reduce total unrecognized tax benefits by up to $4, primarily as a result of cash settlement payments. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.
NOTE 19. EMPLOYEE BENEFIT PLANS
Retirement Income Plans
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. As of June 30, 2012, 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. The Company is the sole contributor to the plan in amounts deemed necessary to provide benefits and to the extent deductible for federal income tax purposes. Assets of the plan consist primarily of investments in cash equivalents, mutual funds and common collective trusts.
The Company did not make any contributions to its domestic qualified retirement income plan during the fiscal year 2012. It contributed $15 and $43 in fiscal years 2011 and 2010, respectively. Contributions made to the domestic non-qualified retirement income plans were $11, $8 and $8 in fiscal years 2012, 2011 and 2010, respectively. The Company has also contributed $1, $1, and $2 to its foreign retirement income plans for fiscal years 2012, 2011 and 2010, 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 postretirement benefit obligation (APBO) was 7.8% for medical and 8.7% for prescription drugs for fiscal year 2012. These rates have been assumed to gradually decrease each year until an assumed ultimate trend of 4.5% is reached in 2028. The health care cost trend rate assumption has an effect on the amounts reported. The effect of a hypothetical 100 basis point increase or decrease in the assumed domestic health care cost trend rate on the total service and interest cost components, and the postretirement benefit obligation would have been $1 for the fiscal year ended June 30, 2012, and less than $1 for both fiscal years ended June 30, 2011 and 2010.
Financial Information Related to Retirement Income and Retirement Health Care
Summarized information for the Company's retirement income and retirement health care plans at and for the fiscal years ended June 30 is as follows:
|Change in benefit obligations:|
|Projected benefit obligation at beginning of year||$||566||$||560||$||58||$||78|
|Employee contributions to deferred compensation plans||5||7||-||-|
|Actuarial (gain) loss||82||(12||)||3||(23||)|
|Curtailment (gain) loss||-||(1||)||-||-|
|Projected benefit obligation at end of year||646||566||63||58|
|Change in plan assets:|
|Fair value of assets at beginning of year||410||335||-||-|
|Actual return on plan assets||9||80||-||-|
|Employer contributions to qualified and nonqualified plans||12||24||1||1|
|Fair value of plan assets at end of year||394||410||-||-|
|Accrued benefit cost, net funded status||$||(252||)||$||156||$||(63||)||$||(58||)|
|Amount recognized in the balance sheets consists of:|
|Pension benefit assets||$||-||$||1||$||-||$||-|
|Current accrued benefit liability||(14||)||(11||)||(6||)||(5||)|
|Non-current accrued benefit liability||(238||)||(146||)||(57||)||(53||)|
|Accrued benefit cost, net||$||(252||)||$||(156||)||$||(63||)||$||(58||)|
Information for retirement income plans with an accumulated benefit obligation (ABO) in excess of plan assets as of June 30 follows:
|Projected benefit obligation||$||561||$||473||$||84||$||71|
|Accumulated benefit obligation||561||469||84||71|
|Fair value of plan assets||393||388||-||-|
The ABO for all pension plans was $561, $490 and $490, respectively, as of June 30, 2012, 2011 and 2010. The ABO for all retirement income plans increased by $85 in fiscal year 2012, primarily due to a decrease in the discount rate. The net costs of the retirement income and health care plans for the fiscal years ended June 30 include the following components:
|Retirement Income||Retirement Health Care|
|Expected return on plan assets||(31||)||(33||)||(31||)||-||-||-|
|Amortization of unrecognized items||8||17||9||(3||)||(2||)||(2||)|
Items not yet recognized as a component of postretirement expense as of June 30, 2012, consisted of:
|Net actuarial loss (gain)||$||286||$||(22||)|
|Prior service cost (benefit)||1||(2||)|
|Net deferred income tax (assets) liabilities||(107||)||9|
|Accumulated other comprehensive loss (income)||$||180||$||(15||)|
Net actuarial loss (gain) recorded in accumulated other comprehensive net losses for the fiscal year ended June 30, 2012, included the following:
|Net actuarial loss (gain) at beginning of year||$||186||$||(28||)|
|Amortization during the year||(7||)||2|
|Loss during the year||107||4|
|Net actuarial loss (gain) at end of year||$||286||$||(22||)|
The Company uses the straight line amortization method for unrecognized prior service costs and benefits. In fiscal year 2013, the Company expects to recognize, on a pretax basis, approximately less than $1 of the prior service cost and $12 of the net actuarial loss, and approximately $1 of the prior service credit and $2 of the net actuarial gain, as a component of net periodic benefit cost for the retirement income and retirement health care plans, respectively.
Weighted-average assumptions used to estimate the actuarial present value of benefit obligations as of June 30 are as follows:
|Retirement Income||Retirement Health Care|
|Rate of compensation increase||3.71||%||3.93||%||n/a||n/a|
Weighted-average assumptions used to estimate the net periodic pension and other postretirement benefit costs as of June 30 are as follows:
|Rate of compensation increase||3.93||%||4.20||%||4.22||%|
|Expected return on plan assets||8.12||%||8.11||%||8.11||%|
|Retirement Health Care|
The expected long-term rate of return assumption is based on an analysis of historical experience of the portfolio and the summation of prospective returns for each asset class in proportion to the fund's current asset allocation.
Expected benefit payments for the Company's pension and other postretirement plans as of June 30 are as follows:
|Fiscal years 2018 — 2021||189||19|
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.
The target allocations and weighted average asset allocations by asset category of the investment portfolio for the Company's domestic retirement income plans as of June 30 are:
|% Target||% of Plan Assets|
The target asset allocation is determined based on the optimal balance between risk and return and, at times, may be adjusted to achieve the plan's overall investment objective to generate sufficient resources to pay current and projected plan obligations over the life of the domestic qualified retirement income plan.
The following table sets forth by level, within the fair value hierarchy, the retirement income plans' assets carried at fair value as of June 30:
|Level 1||Level 2||Total|
|International equity funds||-||116||116|
|Domestic equity funds||-||106||106|
|Real Estate fund||-||21||21|
|Total common/collective trusts||-||392||392|
|Total assets at fair value||$||2||$||392||$||394|
|Level 1||Level 2||Total|
|Domestic equity fund||96||-||96|
|International equity funds||75||-||75|
|Real Estate fund||19||-||19|
|Total mutual funds||238||-||238|
|Domestic equity fund||-||96||96|
|International equity funds||-||11||11|
|Total common/collective trusts||-||169||169|
|Total assets at fair value||$||241||$||169||$||410|
The carrying value of cash equivalents approximates their fair value as of June 30, 2012 and 2011.
Mutual funds are valued at quoted market prices, which represent the net asset values of shares held by the plans as of June 30, 2011. As of June 30, 2012, the plan is not invested in mutual funds.
Common/collective trust funds are valued at a net asset value unit price determined by the portfolio's sponsor based on the fair value of underlying assets held by the common collective trust fund on June 30, 2012 and 2011.
The common/collective trusts are invested in various trusts that attempt to achieve their investment objectives by investing primarily in other collective investment funds which have characteristics consistent with each trust's overall investment objective and strategy.
Defined Contribution Plans
The Company has defined contribution plans for most of its domestic employees. The plans include The Clorox Company 401(k) Plan. Effective July 1, 2011, The Clorox Company 401(k) Plan was amended to enhance the matching of employee contributions and to provide for a fixed and non-discretionary annual contribution in place of the profit sharing component. Prior to July 1, 2011, Company contributions to the profit sharing component above 3% of employee eligible earnings were discretionary and were based on certain Company performance targets for eligible employees. The aggregate cost of the defined contribution plans was $46, $21, and $33 in fiscal years 2012, 2011 and 2010, respectively. Included in the 2011 and 2010 costs was $17, and $29, respectively, of profit sharing contributions. The Company also has defined contribution plans for certain of its international employees. The aggregate cost of these foreign plans was $1, $1 and $3 in fiscal years 2012, 2011 and 2010, respectively.
NOTE 20. SEGMENT REPORTING
The Company operates through strategic business units that are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International. Beginning in the fourth quarter of fiscal year 2012, natural personal care financial results outside the U.S. are being reported in the International segment rather than in the Lifestyle segment because management of the International segment now has primary oversight of natural personal care financial results outside the U.S. All periods presented have been recast to reflect this change. The four reportable segments consist of the following:
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.
|Earnings (losses) from continuing|
|operations before income taxes||2012||381||298||265||119||(272||)||791|
|Income from equity investees||2012||-||-||-||11||-||11|
|Depreciation and amortization||2012||45||73||18||25||17||178|
|Significant noncash charges included|
|in earnings before income taxes:|
|Noncash goodwill impairment||2012||-||-||-||-||-||-|
Fiscal year 2011 earnings (losses) from continuing operations before income taxes for the Lifestyle and International reportable segments included a noncash goodwill impairment charge of $164 and $94, respectively, for the Burt's Bees business. Fiscal year 2011 diluted net earnings per share from continuing operations included the impact of $1.86 from this noncash goodwill impairment charge.
Fiscal years 2011 and 2010 net sales for the International segment included $34 and $29, respectively, that was previously reported in the Lifestyle segment. Fiscal years 2011 and 2010 earnings (losses) from continuing operations before income taxes for the International segment also included $92 and $1 of losses, respectively, that were previously reported in the Lifestyle segment. In addition, total assets for fiscal year 2011 for the International segment included $264 that was previously reported in the Lifestyle segment.
Total assets for Corporate included $267 and $259 of cash and cash equivalents for fiscal years 2012 and 2011, respectively.
All intersegment sales are eliminated and are not included in the Company's reportable segments' net sales.
Net sales to the Company's largest customer, Walmart Stores, Inc. and its affiliates, were 26%, 27% and 27% for the fiscal years ended 2012, 2011 and 2010, respectively, of consolidated net sales and occurred in each of the Company's reportable segments. No other customers exceeded 10% of consolidated net sales in any year. During fiscal years 2012, 2011 and 2010, the Company's five largest customers accounted for 44%, 44% and 45% of its net sales, respectively.
The Company has three product lines that have accounted for 10% or more of consolidated net sales during each of the past three fiscal years. In fiscal years 2012, 2011 and 2010, respectively, sales of liquid bleach represented approximately 13%, 14% and 13% of the Company's consolidated net sales, approximately 26%, 27% and 28% of net sales in the Cleaning segment and approximately 22%, 23% and 22% of net sales in the International segment. In fiscal years 2012, 2011 and 2010, respectively, sales of trash bags represented approximately 13%, 13% and 12% of the Company's consolidated net sales, approximately 35%, 34% and 31% of net sales in the Household segment and approximately 10%, 11% and 10% of net sales in the International segment. Sales of charcoal represented approximately 11% of the Company's consolidated net sales in each of the fiscal years 2012, 2011 and 2010 and approximately 35%, 34% and 36% of net sales in the Household segment, respectively.
Net sales and long-lived assets by geographic area as of and for the fiscal years ended June 30 were as follows:
|Property, plant and equipment, net||2012||$||906||$||175||$||1,081|
|September 30||December 31||March 31||June 30||Total Year|
|Fiscal year ended June 30, 2012|
|Cost of products sold||$||759||$||714||$||808||$||883||$||3,164|
|Earnings from continuing operations||$||130||$||105||$||134||$||174||$||543|
|Losses from discontinued operations,|
|net of tax||$||-||$||-||$||(2||)||$||-||$||(2||)|
|Per common share:|
|Basic net earnings per share||$||0.99||$||0.79||$||1.02||$||1.34||$||4.14|
|Diluted net earnings per share||$||0.98||$||0.79||$||1.01||$||1.32||$||4.09|
|Dividends declared per common share||$||0.60||$||0.60||$||0.60||$||0.64||$||2.44|
|Market price (NYSE)|
|Fiscal year ended June 30, 2011|
|Cost of products sold||$||705||$||687||$||729||$||837||$||2,958|
|Earnings (losses) from continuing operations||$||140||$||(163||)||$||141||$||169||$||287|
|Earnings from discontinued operations,|
|net of tax||$||76||$||184||$||10||$||-||$||270|
|Per common share:|
|Basic net earnings per share||$||1.54||$||0.15||$||1.10||$||1.27||$||4.06|
|Diluted net earnings per share||$||1.52||$||0.15||$||1.09||$||1.26||$||4.02|
|Dividends declared per common share||$||0.55||$||0.55||$||0.55||$||0.60||$||2.25|
|Market price (NYSE)|
Fiscal year 2011 earnings (losses) from continuing operations and net earnings included a $258 noncash goodwill impairment charge recognized for the Burt's Bees business. Fiscal year 2011 diluted net earnings per share from continuing operations included the impact of $1.86 from this noncash goodwill impairment charge.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in millions)
|Column A||Column B||Column C||Column D||Column E|
|Balance at||Charged to||Charged||Credited to||Credited||Balance at|
|beginning||costs and||to other||costs and||to other||end|
|Description||of period||expenses||accounts||expenses||accounts||of period|
|Allowance for doubtful accounts|
|Year ended June 30, 2012||$||(5||)||$||(3||)||$||-||$||1||$||-||$||(7||)|
|Year ended June 30, 2011||(6||)||-||-||1||-||(5||)|
|Year ended June 30, 2010||(6||)||-||-||-||-||(6||)|
|Year ended June 30, 2012||$||(29||)||$||(8||)||$||-||$||-||$||-||$||(37||)|
|Year ended June 30, 2011||(28||)||(1||)||-||-||-||(29||)|
|Year ended June 30, 2010||(31||)||-||-||3||-||(28||)|
|Valuation allowance on deferred tax assets|
|Year ended June 30, 2012||$||(14||)||$||(6||)||$||-||$||-||$||-||$||(20||)|
|Year ended June 30, 2011||(12||)||(2||)||-||-||-||(14||)|
|Year ended June 30, 2010||(6||)||(6||)||-||-||-||(12||)|
|Allowance for inventory obsolescence|