NOTE 2. RESTRUCTURING

In fiscal year 2008, the Company began a restructuring plan that involves simplifying its supply chain and other restructuring activities (Supply Chain and Other restructuring plan), which was subsequently expanded to include additional costs, primarily severance, associated with the Company’s plan to reduce certain staffing levels.  The Company anticipates the Supply Chain and Other restructuring plan will be completed in fiscal year 2012.  

The following table summarizes restructuring costs associated with the Company’s Supply Chain and Other restructuring plan by affected reportable segment, with unallocated amounts set forth in Corporate:  

For the three months ended December 31, 2009, the Company recognized in cost of products sold restructuring-related costs associated with the Supply Chain and Other restructuring plan of $4.   For the six months ended December 31, 2009, the Company recognized restructuring-related costs associated with the Supply Chain and Other restructuring plan of $1 and $7, included in selling and administrative expenses and cost of products sold, respectively.

For the three and six months ended December 31, 2008, the Company recognized in cost of products sold restructuring-related costs associated with the Supply Chain and Other restructuring plan of $2 and $7, respectively.  

The following table summarizes restructuring-related costs associated with the Company’s Supply Chain and Other restructuring plan by affected reportable segment, with unallocated amounts set forth in Corporate:

Total costs associated with the Supply Chain and Other restructuring plan since inception through December 31, 2009, were $110, of which $34, $43, $12 and $21 related to the Cleaning, Household, International segments and Corporate, respectively.

The Company anticipates incurring approximately $18 to $25 of Supply Chain and Other restructuring-related charges in fiscal year 2010, of which approximately $2 are expected to be noncash related. The Company anticipates approximately $5 to $8 of the fiscal year 2010 charges to be in Corporate and $9 to $11 to be in the Cleaning segment, of which approximately $7 to $9 are expected to be recognized as cost of products sold charges. The remaining estimated charges of $4 to $6 are expected to be recognized as cost of products sold in the Household segment. The total anticipated charges related to the Supply Chain and Other restructuring plan for the fiscal years 2011 and 2012 are estimated to be approximately $10 to $12.

The following table reconciles the accrual for the Supply Chain and Other restructuring charges discussed above:  

The Company may, from time to time, decide to pursue additional restructuring-related initiatives that involve charges in future periods.

NOTE 3. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company is exposed to certain commodity and foreign currency risks relating to its ongoing business operations. The Company uses commodity futures and fixed price swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 18 months, are matched to the length of the raw material purchase contracts. The Company also enters 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 12 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 as cash flow hedges, commodity forward and future contracts of forecasted purchases for raw materials and foreign currency forward contracts of forecasted purchases of inventory. During the three and six months ended December 31, 2009, the Company had no hedging instruments designated as a fair value hedge.

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 the reporting date expected to be reclassified into earnings within the next 12 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 the three and six month periods ended December 31, 2009, the hedge ineffectiveness was not material.

The Company’s derivative financial instruments designated as hedging instruments are recorded at fair value in the condensed consolidated balance sheet as follows:

The effects of derivative instruments on OCI and on the statement of earnings were as follows:

The losses reclassified from OCI and recognized in earnings during the three and six month periods ended December 31, 2009, are included in cost of products sold.

As of December 31, 2009, the net notional value of commodity derivatives was $83, of which $52 related to diesel fuel, $16 related to jet fuel, $13 related to soybean oil and $2 related to unleaded gas.

As of December 31, 2009, the Company had outstanding foreign currency forward contracts used to hedge forecasted purchases of inventory of $36 and $8 related to its subsidiaries in Canada and Australia, 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. There was no collateral posted at December 31, 2009.

Certain terms of the agreements governing the over-the-counter derivative instruments contain provisions that require the credit ratings, as assigned by Standard and 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. As of December 31, 2009, the Company and each of its counterparties maintained investment grade ratings with both Standard and 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 December 31, 2009, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the year were level 2 commodity purchase contracts with a fair value of $7 (included in other current assets), and commodity purchase and foreign exchange contracts with a fair value of $3 and $1, respectively, (included in accrued liabilities).

Commodity purchase contracts are fair valued using market quotations obtained off of the New York Mercantile Exchange.

The foreign exchange contracts are fair valued using foreign exchange rates and forward points quoted by foreign exchange dealers.

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and notes and loans payable approximate their fair values at December 31, 2009 and June 30, 2009, due to the short maturity and nature of those balances. The estimated fair value of long-term debt, including current maturities, was $3,155 and $2,816 at December 31, 2009 and June 30, 2009, 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.

NOTE 4. INVENTORIES, NET

Inventories, net, consisted of the following at:

NOTE 5. OTHER LIABILITIES

Other liabilities consisted of the following at:

NOTE 6. DEBT

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 retire commercial paper.  The notes rank equally with all of the Company’s existing and future senior indebtedness.    

NOTE 7. NET EARNINGS PER SHARE

The Company computes EPS using the two-class method (See Note 1), which is an earnings allocation formula that determines EPS for common stock and participating securities.

EPS for common stock is computed by dividing net earnings applicable to common stock by the weighted average number of common shares outstanding each period on an unrounded basis. Net earnings applicable to common stock includes dividends paid to common shareholders during the period plus a proportionate share of undistributed net earnings which is based on the weighted average number of shares of common stock and participating securities outstanding during the period.

Diluted EPS for common stock reflects the earnings dilution that could occur from common shares that may be issued through stock options, restricted stock awards, performance units and restricted stock units, that are not participating securities. Excluded from this calculation are amounts allocated to participating securities.

The following are reconciliations of net earnings to net earnings applicable to common stock, and the number of common shares outstanding (in thousands) used to calculate basic EPS to those used to calculate diluted EPS:

During the three and six months ended December 31, 2009, the Company did not include stock options to purchase 4,126 thousand and 4,150 thousand shares, respectively, of the Company’s common stock, in the calculations of diluted EPS because their inclusion would be anti-dilutive.  

During the three and six months ended December 31, 2008, the Company did not include stock options to purchase 5,000 thousand of the Company’s common stock, in the calculations of diluted EPS because their inclusion would be anti-dilutive.

During the three and six months ended December 31, 2009, the Company issued 450 thousand and 1,312 thousand shares, respectively, of the Company’s common stock.  

During the three and six months ended December 31, 2008, the Company issued 325 thousand and 1,180 thousand shares, respectively, of the Company’s common stock.

The Company did not repurchase any shares during the three and six months ended December 31, 2009 and 2008.

NOTE 8. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes net earnings and certain adjustments that are excluded from net earnings, but included as a separate component of stockholders’ equity (deficit), net of tax. Comprehensive income (loss) was as follows:

NOTE 9. INCOME TAXES

In determining its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

As of December 31, 2009 and June 30, 2009, the total amount of unrecognized tax benefits was $86 and $98, respectively, of which $86 and $91, respectively, would reduce income tax expense and the effective tax rate if recognized.

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2009 and June 30, 2009, the total balance of accrued interest and penalties related to uncertain tax positions was $20 and $17, respectively. Interest and penalties included in income tax expense were $2 and $5 for the three and six months ended December 31, 2009, and $1 and $(1) for the three and six months ended December 31, 2008, respectively.

The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions. Certain issues relating to 2003, 2004 and 2006 are under review by the IRS Appeals Division. The Company made payments of tax and interest to the IRS related to fiscal years 2004 and 2006 in the first quarter of fiscal year 2010 of $8. No tax benefits had previously been recognized for these payments. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.

In the twelve months succeeding December 31, 2009, audit resolutions could potentially reduce total unrecognized tax benefits by up to $26, primarily as a result of cash settlement payments. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

NOTE 10. RETIREMENT INCOME AND HEALTH CARE BENEFIT PLANS

The following table summarizes the components of net periodic benefit cost for the Company’s retirement income and health care plans:

During its first quarter of fiscal year 2010, the Company made a $33 discretionary contribution to the U.S. pension plan.  Based on current pension funding rules, the Company is not required to make any contributions in fiscal year 2010.

NOTE 11. 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 $18 and $19 at December 31, 2009 and June 30, 2009, respectively, for its share of the related aggregate future remediation cost. 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 December 31, 2009 and June 30, 2009. The Company is subject to a cost-sharing arrangement with Ford Motor Co. (Ford) for this matter, under which the Company has agreed to be liable for 24.3% of the aggregate remediation and associated costs, other than legal fees, as the Company and Ford are each responsible for their own such fees. If Ford is unable to pay its share of the response and remediation obligations, the Company would likely be responsible for such obligations. In October 2004, the Company and Ford agreed to a consent judgment with the Michigan Department of Environmental Quality, which sets forth certain remediation goals and monitoring activities. Based on the current status of this matter, and with the assistance of environmental consultants, the Company maintains an undiscounted liability representing its best estimate of its share of costs associated with the capital expenditures, maintenance and other costs to be incurred over an estimated 30-year remediation period. The most significant components of the liability relate to the estimated costs associated with the remediation of groundwater contamination and excess levels of subterranean methane deposits. The Company made payments of less than $1 during each of the three and six months ended December 31, 2009 and 2008, towards remediation efforts. Currently, the Company cannot accurately predict the timing of the payments that will likely be made under this estimated 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. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial statements taken as a whole.

NOTE 12. SEGMENT RESULTS

The Company operates through strategic business units which are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International. The four reportable segments consist of the following:

• Household consists of charcoal, cat litter and plastic bags, wraps and container products marketed and sold in the United States. Products within this segment include plastic bags, wraps and containers, under the Glad^® brand; cat litter products, under the Fresh Step^®, Scoop Away ^® and Ever Clean^® brands; and charcoal products under the Kingsford^® and Match Light^® brands.

• Lifestyle consists of food products and water-filtration systems and filters marketed and sold in the United States and all natural personal care products. Products within this segment include dressings and sauces, primarily under the Hidden Valley^® and K C Masterpiece^® brands, water-filtration systems and filters under the Brita^® brand; and all natural personal care products under the Burt’s Bees^® brand.

• International consists of products sold outside the United States, excluding natural personal care products.

All intersegment sales are eliminated and are not included in the Company’s reportable segments’ net sales.

Net sales to the Company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, were 26% of consolidated net sales for the three and six months ended December 31, 2009 and 2008.  

NOTE 13. SUBSEQUENT EVENTS

In January 2010, the Company acquired the assets of Caltech Industries, a company which provides disinfectants for the health care industry, for an aggregate price of $23, 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’ facility and its employees.  The transaction was structured as an all cash acquisition.