NOTE 1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three and nine months ended March 31, 2015 and 2014, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated results of operations, financial position and cash flows of The Clorox Company and its subsidiaries (the Company) for the periods presented. The results for the interim period ended March 31, 2015, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2015, or for any other future period.
Effective September 22, 2014, the Company's Venezuela affiliate, Corporación Clorox de Venezuela S.A. (Clorox Venezuela), discontinued its operations. Consequently, for the three and nine months ended March 31, 2015 and 2014, Clorox Venezuela is reflected as a discontinued operation in the Company's financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company's audited financial statements for the fiscal year ended June 30, 2014, which includes a complete set of footnote disclosures, including the Company's significant accounting policies, filed with the SEC in Exhibit 99.2 of the Company's Current Report on Form 8-K on December 4, 2014.
Recently Issued Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Cost, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2017, with early adoption permitted. The Company is currently evaluating the impact that adoption of ASU 2015-03 will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces most existing U.S. GAAP revenue recognition guidance and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers, including information about significant judgments and changes in judgments. The new guidance is expected to be effective for the Company beginning in the first quarter of fiscal year 2018, with no early adoption permitted. The Company is currently evaluating the impact that adoption of ASU 2014-09 will have on its consolidated financial statements.
In April 2014, the FASB issued ASU No 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (Topic 205), which will change the criteria for reporting discontinued operations. The amendments will also require new disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued operations reporting. The amendments are effective for the Company for new disposals (or classifications as held for sale) of components of the Company, should they occur, beginning in the first quarter of fiscal year 2016. Early adoption is permitted for disposals (or classifications as held for sale) that have not been previously reported. The Company will adopt this ASU beginning in the first quarter of fiscal year 2016, as required. Adoption of the new standard will not impact the Company's reporting or disclosures for discontinued operations of Clorox Venezuela.
NOTE 2. DISCONTINUED OPERATIONS
On September 22, 2014, Clorox Venezuela announced that it was discontinuing its operations, effective immediately, and seeking to sell its assets. Since fiscal year 2012, Clorox Venezuela was required to sell more than two thirds of its products at prices frozen by the Venezuelan government. During this same period, Clorox Venezuela experienced successive years of hyperinflation resulting in significant sustained increases in its input costs, including packaging, raw materials, transportation and wages. As a result, Clorox Venezuela had been selling its products at a loss, resulting in ongoing operating losses. Clorox Venezuela repeatedly met with government authorities in an effort to help them understand the rapidly declining state of the business, including the need for immediate, significant and ongoing price increases and other critical remedial actions to address these adverse impacts. Based on the Venezuelan government's representations, Clorox Venezuela had expected significant price increases would be forthcoming much earlier; however, the price increases subsequently approved were insufficient and would have caused Clorox Venezuela to continue operating at a significant loss into the foreseeable future. As such, Clorox Venezuela was no longer financially viable and was forced to discontinue its operations.
On September 26, 2014, the Company reported that Venezuelan Vice President Jorge Arreaza announced, with endorsement by President Nicolás Maduro, that the Venezuelan government had occupied the Santa Lucía and Guacara production facilities of Clorox Venezuela. On November 6, 2014, the Company reported that the Venezuelan government had published a resolution granting a government-sponsored Special Administrative Board full authority to restart and operate the business formerly operated by Clorox Venezuela, thereby reaffirming the government's expropriation of Clorox Venezuela's assets. Further, President Nicolás Maduro announced the government's intention to facilitate the resumed production of bleach and other cleaning products at Clorox Venezuela plants. He also announced his approval of a financial credit to invest in raw materials and production at the plants. These actions by the Venezuelan government were taken without the consent or involvement of Clorox Venezuela, its parent Clorox Spain S.L. (Clorox Spain) or any of their affiliates. Clorox Venezuela, Clorox Spain and their affiliates reserved their rights under all applicable laws and treaties.
With this exit, the financial results of Clorox Venezuela are reflected as discontinued operations in the Company's condensed consolidated financial statements. The results of Clorox Venezuela have historically been part of the International reportable segment.
Net sales for Clorox Venezuela were $0 and $11 for the three and nine months ended March 31, 2015, respectively, and $20 and $63 for the three and nine months ended March 31, 2014, respectively.
The following table provides a summary of benefits (losses) from discontinued operations for Clorox Venezuela and gains (losses) from discontinued operations other than Clorox Venezuela for the periods indicated:
|Three Months Ended||Nine Months Ended|
|Operating losses from Clorox Venezuela||$||-||$||(12)||$||(6)||(18)|
|Exit costs and other related expenses for Clorox Venezuela||-||-||(77)||-|
|Total losses from Clorox Venezuela before income taxes||-||(12)||(83)||(18)|
|Income tax benefit attributable to Clorox Venezuela||-||-||25||2|
|Total losses from Clorox Venezuela, net of tax||-||(12)||(58)||(16)|
|Gains (losses) from discontinued operations other than Clorox Venezuela, net of tax||30||(2)||30||(4)|
|Gains (losses from discontinued operations, net of tax||$||30
Unrelated to Clorox Venezuela, in the three months ended March 31, 2015, $30 of gross unrecognized tax benefits relating to other discontinued operations for periods prior to fiscal year 2015 were recognized upon the expiration of the applicable statute of limitations. Recognition of these previously disclosed tax benefits had no impact on the Company's cash flow or earnings from continuing operations for the three or nine months ended March 31, 2015. See Note 9 Income Taxes below.
Summary of Operating Losses, Asset Charges and Other Costs
The following provides a breakdown of benefits (losses) from discontinued operations for Clorox Venezuela and gains (losses) from discontinued operations other than Clorox Venezuela for the periods indicated:
|Three Months Ended||Nine Months Ended|
|Operating losses from Clorox Venezuela||$||-||$||(6)|
|Net asset charges:|
|Property, plant and equipment||-||(16)|
|Trademark and other intangible assets||-||(6)|
|Other exit and business termination costs:|
|Recognition of deferred foreign currency translation loss||-||(30)|
|Total losses from Clorox Venezuela before income taxes||-||(83)|
|Income tax benefit attributable to Clorox Venezuela||-||25|
|Total losses from Clorox Venezuela, net of tax||-||(58)|
|Gains from discontinued operations other than Clorox Venezuela, net of tax||30||30|
|Gains (losses) from discontinued operations, net of tax||$||
Prior to Clorox Venezuela being consolidated under the rules governing the preparation of financial statements in a highly inflationary economy, cumulative translation gains (losses) were included as a component of accumulated other comprehensive net loss. The charge of $30 to discontinued operations in September 2014 represents the recognition of these losses as a result of Clorox Venezuela discontinuing its operations effective September 22, 2014.
Goodwill related to Clorox Venezuela was previously aggregated and assessed for impairment at the Latin America reporting unit level, which is a component of the Company's International segment. Based on the results of the annual impairment test performed in the fourth quarter of fiscal year 2014, the fair value of the Latin America reporting unit exceeded its recorded value by more than 40%. In the first quarter of fiscal year 2015, after Clorox Venezuela discontinued its operations, the Company reviewed the relative fair value of its components of the Latin America reporting unit and concluded no goodwill should be allocated to the Clorox Venezuela component and that there were no indicators of impairment within the remaining Latin America reporting unit.
Financial Reporting: Hyperinflation and the Selection of Exchange Rates
Due to a sustained inflationary environment, the financial statements of Clorox Venezuela were consolidated under the rules governing the preparation of financial statements in a highly inflationary economy. As such, Clorox Venezuela's non-U.S. dollar (non-USD) monetary assets and liabilities were remeasured into U.S. dollars (USD) each reporting period with the resulting gains and losses reflected in discontinued operations.
For all periods presented prior to March 1, 2014, the Company recorded the results of its business operations and remeasured the non-USD denominated monetary assets and liabilities of Clorox Venezuela using the CENCOEX (previously referred to as CADIVI) rate of 6.3 bolivares fuertes (VEF) per USD. Beginning March 1, 2014, the Company utilized the SICAD I rate for financial reporting purposes. In connection with Clorox Venezuela's announced exit from the country in September 2014, Clorox Venezuela's parent, Clorox Spain, infused cash through SICAD II to settle obligations, including those resulting from the decision to exit. As a result, the Company began utilizing the SICAD II rate in September 2014, which was 49.7 VEF per USD as of September 30, 2014.
Subsequent to Clorox Venezuela discontinuing operations, the Venezuelan government has continued to evolve its currency exchange mechanisms, however these changes have not had a material impact on the Company's financial results (see Major Classes of Remaining Assets and Liabilities below).
Major Classes of Remaining Assets and Liabilities
The following is a summary of the remaining assets and liabilities for the local books of Clorox Venezuela as of:
|Cash and cash equivalents||$||-||$||5|
|Other current assets||-||2|
|Property, plant and equipment, net||-||16|
|Trademarks and other intangible assets, net||-||6|
|Accounts payable and accrued liabilities||(1)||(11||)|
|Net (liability) asset position||$||(1)||$||42|
In addition to the above, as of March 31, 2015 and June 30, 2014, the Company held $14 and $17, respectively, of tax asset balances related to Clorox Venezuela in the Corporate reportable segment.
NOTE 3. INVENTORIES
Inventories consisted of the following as of:
|Raw materials and packaging||103||108|
|Work in process||2||2|
NOTE 4. OTHER ASSETS
Investments in Low-Income Housing Partnerships
The Company owns, directly or indirectly, limited partnership interests in low-income housing partnerships, which are accounted for using the equity method of accounting. The Company's investment balance as of March 31, 2015 and June 30, 2014 was $1 and $4, respectively. These partnerships are considered to be variable interest entities; however, the Company does not consolidate them because it does not have the power to direct the partnerships' activities that significantly impact their economic performance. The purpose of the partnerships is to develop and operate low-income housing rental properties. The general partners, who typically hold 1% of the partnership interests, are third parties unrelated to the Company and its affiliates, and are responsible for controlling and managing the business and financial operations of the partnerships. As a limited partner, the Company is not responsible for any of the liabilities and obligations of the partnerships nor do the partnerships or their creditors have any recourse to the Company other than for the capital requirements. All available tax benefits from low-income housing tax credits provided by the partnerships were claimed as of fiscal year 2012. The risk that previously claimed low-income housing tax credits might be recaptured or otherwise retroactively invalidated is considered remote.
NOTE 5. OTHER LIABILITIES
Other liabilities consisted of the following as of:
|Venture agreement net terminal obligation||$||293||$||290|
|Employee benefit obligations||281||289|
NOTE 6. DEBT
In December 2014, under a shelf registration statement filed with the SEC that will expire in December 2017, the Company issued $500 of senior notes with an annual fixed interest rate of 3.50%. Interest on the notes is payable semi-annually in June and December and the notes have a maturity date of December 15, 2024. The notes carry an effective interest rate of 4.10%, which includes the impact from the settlement of interest rate forward contracts in December 2014 (see Note 13 Financial Instruments and Fair Value Measurements). The notes rank equally with all of the Company's existing senior indebtedness.
In January 2015, $575 of the Company's senior notes with an annual fixed interest rate of 5.00% matured and were repaid using the net proceeds from the December 2014 debt issuance and commercial paper.
Revolving Credit Agreement
On October 1, 2014, the Company entered into a $1,100 revolving credit agreement (the Credit Agreement), which expires in October 2019. This agreement replaced a prior $1,100 revolving credit agreement in place since May 2012. There were no borrowings under the Credit Agreement as of March 31, 2015, and the Company believes that borrowings under the Credit Agreement are and will continue to be available for general corporate purposes.
NOTE 7. NET EARNINGS PER SHARE (EPS)
The following is the reconciliation of the weighted average number of shares outstanding (in thousands) used to calculate basic net EPS to those used to calculate diluted net EPS:
|Three Months Ended||Nine Months Ended|
|Dilutive effect of stock options and other||2,282||2,237||2,524||2,261|
During the three and nine months ended March 31, 2015, the number of stock options and restricted stock units that were considered antidilutive and excluded from the diluted net EPS calculation were approximately zero and 0.3 million shares, respectively. During the three and nine months ended March 31, 2014, the Company included all stock options and restricted stock units in the calculations of diluted net EPS.
The Company has two share repurchase programs: an open-market purchase program with an authorized aggregate purchase amount of up to $750, all of which was available for share repurchases as of March 31, 2015, and a program to offset the impact of share dilution related to share-based awards (the Evergreen Program), which has no authorization limit as to amount or timing of repurchases.
During the three and nine months ended March 31, 2015, the Company repurchased approximately 1.4 and 1.5 million shares, respectively, under its Evergreen Program, for an aggregate amount of $150 and $158, respectively. During the three and nine months ended March 31, 2014, the Company repurchased approximately 1.5 and 3.0 million shares, respectively, under its Evergreen Program, for an aggregate amount of $130 and $260, respectively.
The Company did not repurchase any shares under the open-market purchase program during the three and nine months ended March 31, 2015 and 2014.
NOTE 8: COMPREHENSIVE INCOME
Comprehensive income was as follows for the periods indicated:
|Three Months Ended||Nine Months Ended|
|Earnings from continuing operations||$||144||$||151||$||417||$||408|
|Earnings (losses) from discontinued operations, net of tax||30||(14||)||(28||)||(20||)|
|Other comprehensive (loss) income, net of tax:|
|Foreign currency adjustments||(32||)||(28||)||(51||)||(47||)|
|Net unrealized income (losses) on derivatives||3||(4||)||(17||)||(2||)|
|Pension and postretirement benefit adjustments||1||1||4||(2||)|
|Total other comprehensive loss, net of tax||(28||)||(31||)||(64||)||(51||)|
Changes in accumulated other comprehensive net losses by component were as follows:
|Three Months Ended||Nine Months Ended|
|Foreign currency adjustments|
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive net losses:
Recognition of deferred foreign currency translation loss
|Income tax benefit (expense)||1||(6||)||7||(10||)|
|Foreign currency adjustments, netof tax||$||(32||)||$||(28||)||$||(51||)||$||(47||)|
|Net unrealized losses on derivatives|
| Other comprehensive income (loss) before reclassifications
|Amounts reclassified from accumulated other comprehensive net losses||3||-||6||-|
|Income tax (expense) benefit||(2||)||2||(2||)||2|
|Net unrealized income (losses) on derivatives, net of tax||$||3||$||(4||)||$||(17||)||$||(2||)|
|Pension and postretirement benefit adjustments|
|Other comprehensive loss before reclassifications||$||-||$||-||$||(2||)||$||(8||)|
|Amounts reclassified from accumulated other comprehensive net losses||2||2||7||5|
|Income tax (expense) benefit||(1||)||(1||)||(1||)||1|
|Pension and postretirement benefit adjustments, net of tax||$||1||$||1||$||4||$||(2||)|
|Total other comprehensive loss, net of tax||$||(28||)||$||(31||)||$||(64||)||$||(51||)|
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.
The effective tax rate on earnings from continuing operations was 33.4% and 34.0% for the three and nine months ended March 31, 2015, respectively, and 33.2% and 34.3% for the three and nine months ended March 31, 2014, respectively. The higher tax rate for the current three-month period was primarily due to higher tax on foreign earnings. The lower tax rate for the current nine-month period was primarily due to higher uncertain tax position releases.
Included in the balance of unrecognized tax benefits as of March 31, 2015 and June 30, 2014, are potential benefits of $28 and $58, respectively, which if recognized, would affect net earnings. In the three months ended March 31 2015, $30 of gross unrecognized tax benefits relating to other discontinued operations for periods prior to fiscal year 2015 were recognized upon the expiration of the applicable statute of limitations. Recognition of these previously disclosed tax benefits had no impact on the Company's cash flow or earnings from continuing operations for the three or nine months ended March 31, 2015.
The total balance of accrued interest and penalties related to uncertain tax positions was $9 and $11 as of March 31, 2015 and June 30, 2014, respectively. Interest and penalties related to uncertain tax positions included in income tax expense resulted in net benefit of $2 for both the three and nine months ended March 31, 2015 and net expense of $2 and $3 for the three and nine months ended March 31, 2014, respectively.
The Company files income tax returns in U.S. federal and various state, local and foreign jurisdictions. The federal statute of limitations has expired for all tax years through June 30, 2011. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.
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 plans:
|Three Months Ended||Nine Months Ended|
|Expected return on plan assets||(5||)||(5||)||(15)||(18||)|
|Amortization of unrecognized items||3||2||9||8|
The net periodic benefit cost for the Company's retirement health care plans was a credit of $1 and $2 for the three and nine months ended March 31, 2015, respectively, and $0 and $1 for the three and nine months ended March 31, 2014, respectively.
NOTE 11. 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 $12 and $14 as of March 31, 2015 and June 30, 2014, 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 March 31, 2015 and June 30, 2014. 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 reasonably possible that the Company's exposure may exceed the amount recorded, any amount of such additional exposures, or range of exposures, is not estimable at this time.
In October 2012, a Brazilian appellate court issued an adverse decision in a lawsuit pending in Brazil against the Company and one of its wholly owned subsidiaries, The Glad Products Company (Glad). The lawsuit, which was initially filed in a Brazilian lower court in 2002 by two Brazilian companies and one Uruguayan company (collectively, Petroplus), relates 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, Florida, filed in 2001. The ICC arbitration panel unanimously ruled against Petroplus in a final decision in November 2003 (Final ICC Arbitration Award). The Final ICC Arbitration Award was ratified by the Superior Court of Justice of Brazil in May 2007 (Foreign Judgment), and the United States District Court for the Southern District of Florida subsequently confirmed the Final ICC Arbitration Award and recognized and adopted the Foreign Judgment as a judgment of the United States District Court for the Southern District of Florida (U.S. Judgment). Despite this, in March 2008, a Brazilian lower court ruled against the Company and Glad in the pending lawsuit. The value of the judgment against the Company, including interest and foreign exchange fluctuations as of March 31, 2015, was approximately $29.
Among other defenses, because the Final ICC Arbitration Award, the Foreign Judgment and the U.S. Judgment relate to the same claims as those in the pending lawsuit, the Company believes that Petroplus is precluded from re-litigating these claims. Based on the unfavorable appellate court decision, however, the Company believes that it is reasonably possible that a loss could be incurred in this matter in excess of amounts accrued, and that the estimated range of such loss in this matter is from $0 to $24.
The Company continues to believe that its defenses are meritorious, and has appealed the decision to the highest courts of Brazil. In December 2013, in the first stage of the appellate process, the appellate court declined to admit the Company's appeals to the highest courts. The Company then appealed directly to the highest courts. While in May 2014 the Superior Court of Justice originally agreed to consider the Company's appeal, in December 2014 the same court declined to admit the appeal based on procedural grounds. The Company is appealing that decision. It is possible that a final decision in this case could be issued as early as the fourth quarter of fiscal year 2015. Expenses related to this litigation have been, and any potential additional loss would be, reflected in discontinued operations, consistent with the Company's classification of expenses related to its discontinued Brazil operations.
In a separate action filed in 2004 by Petroplus, in January 2013, a lower Brazilian court nullified the Final ICC Arbitration Award. The Company believes this judgment is inconsistent with the Foreign Judgment and the U.S. Judgment and that it is without merit. The Company appealed this decision, and the lower court decision was overturned by the appellate court in April 2014. Petroplus has appealed this decision to Brazil's highest court.
Glad and the Clorox Subsidiaries have also filed separate lawsuits against Petroplus alleging misuse of the STP trademark and related matters, which are currently pending before Brazilian courts, and have taken other legal actions against Petroplus, which are pending. Additionally, in November 2013, the Clorox Subsidiaries initiated a new ICC arbitration seeking damages against Petroplus.
The Company is subject to various other lawsuits, claims and loss contingencies relating to issues such as contract disputes, product liability, patents and trademarks, advertising, commercial, administrative, employee and other matters. Based on management's analysis, 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.
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 material 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.
The Company had not recorded any liabilities on the aforementioned guarantees as of March 31, 2015.
As of March 31, 2015, the Company was a party to letters of credit of $11, primarily related to one of its insurance carriers, of which $0 had been drawn upon.
NOTE 12. SEGMENT RESULTS
The Company operates through strategic business units that are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International. As a result of Clorox Venezuela being reported as discontinued operations, the results of Clorox Venezuela are no longer included in earnings from continuing operations of the International reportable segment (see Note 2 Discontinued Operations).
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, property and equipment, other investments and deferred taxes.
The table below presents reportable segment information and a reconciliation of the segment information to the Company's consolidated net sales and earnings from continuing operations before income taxes, with amounts that are not allocated to the reportable segments reflected in Corporate.
|Three Months Ended||Nine Months Ended|
|Earnings (losses) from continuing operations before income taxes|
|Three Months Ended||Nine Months Ended|
All intersegment sales are eliminated and are not included in the Company's reportable segments' net sales.
Net sales to the Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, as a percentage of consolidated net sales, were 27% for each of the three months ended March 31, 2015 and 2014, and 26% for each of the nine months ended March 31, 2015 and 2014.
NOTE 13. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are required to be classified and disclosed in one of the following fair value hierarchies:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions.
As of March 31, 2015 and June 30, 2014, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the period included derivative financial instruments, which were all Level 2, and trust assets to fund certain of the Company's nonqualified deferred compensation plans, which were classified as Level 1.
Financial Risk Management and Derivative Instruments
The Company is exposed to certain commodity, interest rate and foreign currency risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.
Commodity Price Risk Management
The Company may use commodity exchange traded futures and over-the-counter swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 2 years, are matched to the length of the raw material purchase contracts. Commodity purchase contracts are measured at fair value using market quotations obtained from commodity derivative dealers.
As of March 31, 2015, the notional amount of commodity derivatives was $56, of which $30 related to jet fuel and $26 related to soybean oil. As of June 30, 2014, the notional amount of commodity derivatives was $36, of which $19 related to jet fuel and $17 related to soybean oil.
Interest Rate Risk Management
The Company may enter into over-the-counter interest rate forward contracts to fix a portion of the benchmark interest rate prior to the anticipated issuance of fixed rate debt. These interest rate forward contracts generally have durations of less than 12 months. The interest rate contracts are measured at fair value using information quoted by U.S. government bond dealers.
As of March 31, 2015 and June 30, 2014, the notional amounts of interest rate forward contracts were $0 and $288, respectively.
In December 2014, the Company paid $25 to settle interest rate forward contracts related to the December 2014 issuance of $500 in senior notes. The settlement payments are reflected as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2015. The loss is reflected in accumulated other comprehensive net loss on the Condensed Consolidated Balance Sheet as of March 31, 2015, and will be amortized into interest expense on the Condensed Consolidated Statement of Earnings and Comprehensive Income over the 10-year term of the notes.
Foreign Currency Risk Management
The Company may also enter into certain over-the-counter foreign currency-related derivative contracts to manage a portion of the Company's forecasted foreign currency exposure associated with the purchase of inventory and certain intercompany transactions. These foreign currency contracts generally have durations of no longer than 20 months. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.
The notional amounts of outstanding foreign currency forward contracts used by the Company's subsidiaries in Canada, Australia and New Zealand to hedge forecasted purchases of inventory were $83, $42 and $7, respectively, as of March 31, 2015, and $54, $28 and $5, respectively, as of June 30, 2014.
Counterparty Risk Management and Broker Margin Requirements
The Company utilizes a variety of financial institutions as counterparties for over-the counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instruments exceeds contractually defined counterparty liability position limits. Of the $14 and $17 of derivative instruments reflected in a liability position as of March 31, 2015 and June 30, 2014, respectively, $6 and $11, respectively, contained such terms. As of both March 31, 2015 and June 30, 2014, neither the Company nor any counterparty was required to post any collateral.
Certain terms of the agreements governing the Company's over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poor's and Moody's to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company's credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions.
As of both March 31, 2015 and June 30, 2014, the Company and each of its counterparties had been assigned investment grade ratings by both Standard & Poor's and Moody's.
Certain of the Company's exchange-traded futures contracts used for commodity price risk management include requirements for the Company to post collateral in the form of a cash margin account held by the Company's broker for trades conducted on that exchange. As of March 31, 2015 and June 30, 2014, the Company maintained cash margin balances related to exchange-traded futures contracts of $4 and $1, respectively, which are classified as other current assets on the Condensed Consolidated Balance Sheets.
Fair Value of Derivative Instruments
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as an accounting hedge and, if so, on the type of hedging relationship. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument as a fair value hedge or a cash flow hedge. The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges. During the three and nine months ended March 31, 2015 and 2014, the Company had no hedging instruments designated as fair value hedges.
The Company has held mutual funds and cash equivalents as part of trusts related to certain of its nonqualified deferred compensation plans. The trusts represent variable interest entities for which the Company is considered the primary beneficiary, and therefore, trust assets are consolidated and included in other assets in the Condensed Consolidated Balance Sheets. The mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments. The participants in the deferred compensation plans may select among certain mutual funds in which their compensation deferrals are invested in accordance with the terms of the plans and within the confines of the trusts which hold the marketable securities.
The Company's derivative instruments designated as hedging instruments and trust assets related to certain of the Company's nonqualified deferred compensation plans were recorded at fair value in the consolidated balance sheets as follows:
|classification||Level 1||Level 2||Level 1||Level 2|
|Foreign exchange derivative contracts||Other current assets||$||-||$||5||$||-||$||-|
|Commodity purchase derivative contracts||Other current assets||-||-||-||1|
|Trust assets for nonqualified deferred|
|compensation plans||Other assets|