CLOROX CO /DE/, 10-K filed on 8/21/2015
Annual Report
DOCUMENT AND ENTITY INFORMATION (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Jun. 30, 2015
Jul. 31, 2015
Dec. 31, 2014
Document and Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jun. 30, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
CLOROX CO /DE/ 
 
 
Entity Central Index Key
0000021076 
 
 
Current Fiscal Year End Date
--06-30 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 13.7 
Entity Common Stock, Shares Outstanding
 
128,643,834 
 
CONSOLIDATED STATEMENT OF EARNINGS (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2013
CONSOLIDATED STATEMENTS OF EARNINGS [Abstract]
 
 
 
Net sales
$ 5,655 
$ 5,514 
$ 5,533 
Cost of products sold
3,190 
3,158 
3,142 
Gross profit
2,465 
2,356 
2,391 
Selling and administrative expenses
798 
751 
793 
Advertising costs
523 
503 
498 
Research and development costs
136 
125 
130 
Interest expense
100 
103 
122 
Other income, net
(13)
(10)
(4)
Earnings from continuing operations before income taxes
921 
884 
852 
Income taxes on continuing operations
315 
305 
279 
Earnings from continuing operations
606 
579 
573 
Losses from discontinued operations, net of tax
(26)
(21)
(1)
Net earnings
$ 580 
$ 558 
$ 572 
Net earnings (losses) per share, Basic
 
 
 
Continuing operations
$ 4.65 
$ 4.47 
$ 4.37 
Discontinued operations
$ (0.20)
$ (0.16)
$ 0.00 
Basic net earnings per share
$ 4.45 
$ 4.31 
$ 4.37 
Net earnings (losses) per share, Diluted
 
 
 
Continuing operations
$ 4.57 
$ 4.39 
$ 4.31 
Discontinued operations
$ (0.20)
$ (0.16)
$ (0.01)
Diluted net earnings per share
$ 4.37 
$ 4.23 
$ 4.30 
Weighted average shares outstanding (in thousands)
 
 
 
Basic
130,310 
129,558 
131,075 
Diluted
132,776 
131,742 
132,969 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [Abstract]
 
 
 
Earnings from continuing operations
$ 606 
$ 579 
$ 573 
Losses from discontinued operations, net of tax
(26)
(21)
(1)
Net earnings
580 
558 
572 
Other comprehensive (losses) income:
 
 
 
Foreign currency adjustments, net of tax
(54)
(37)
(11)
Net unrealized (losses) gains on derivatives, net of tax
(14)
(9)
Pension and postretirement benefit adjustments, net of tax
(17)
(4)
37 
Total other comprehensive (losses) income, net of tax
(85)
(50)
29 
Comprehensive income
$ 495 
$ 508 
$ 601 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Jun. 30, 2015
Jun. 30, 2014
Current assets
 
 
Cash and cash equivalents
$ 382 
$ 329 
Receivables, net
519 
546 
Inventories, net
385 
386 
Other current assets
143 
134 
Total current assets
1,429 
1,395 
Property, plant and equipment, net
918 
977 
Goodwill
1,067 
1,101 
Trademarks, net
535 
547 
Other intangible assets, net
50 
64 
Other assets
165 
174 
Total assets
4,164 
4,258 
Current liabilities
 
 
Notes and loans payable
95 
143 
Current maturities of long-term debt
300 
575 
Accounts payable
431 
440 
Accrued liabilities
548 
472 
Income taxes payable
31 
Total current liabilities
1,405 
1,638 
Long-term debt
1,796 
1,595 
Other liabilities
750 
768 
Deferred income taxes
95 
103 
Total liabilities
4,046 
4,104 
Commitments and contingencies
   
   
Stockholders' equity
 
 
Preferred stock: $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
Common stock: $1.00 par value; 750,000,000 shares authorized; 158,741,461 shares issued at June 30, 2015 and 2014; and 128,614,310 and 128,796,228 shares outstanding at June 30, 2015 and 2014, respectively
159 
159 
Additional paid-in capital
775 
709 
Retained earnings
1,923 
1,739 
Treasury shares, at cost: 30,127,151 and 29,945,233 shares at June 30, 2015 and 2014, respectively
(2,237)
(2,036)
Accumulated other comprehensive net loss
(502)
(417)
Stockholders' equity
118 
154 
Total liabilities and stockholders' equity
$ 4,164 
$ 4,258 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2015
Jun. 30, 2014
CONSOLIDATED BALANCE SHEETS [Abstract]
 
 
Preferred stock, par value
$ 1.00 
$ 1.00 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 1.00 
$ 1.00 
Common stock, shares authorized
750,000,000 
750,000,000 
Common stock, shares issued
158,741,461 
158,741,461 
Common stock, shares outstanding
128,614,310 
128,796,228 
Treasury stock, shares
30,127,151 
29,945,233 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Millions, except Share data in Thousands
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Treasury Shares [Member]
Accumulated Other Comprehensive Net (Losses) Income [Member]
Total
Balance, amount at Jun. 30, 2012
$ 159 
$ 633 
$ 1,350 
$ (1,881)
$ (396)
$ (135)
Balance, shares at Jun. 30, 2012
158,741 
 
 
(29,179)
 
 
Net earnings
 
 
572 
 
 
572 
Other comprehensive (loss) income
 
 
 
 
29 
29 
Accrued dividends
 
 
(348)
 
 
(348)
Stock-based compensation
 
35 
 
 
 
35 
Other employee stock plan activities, amount
 
(7)
(13)
141 
 
121 
Other employee stock plan activities, shares
 
 
 
2,304 
 
 
Treasury stock purchased, amount
 
 
 
(128)
 
(128)
Treasury stock purchased, shares
 
 
 
(1,500)
 
 
Balance, amount at Jun. 30, 2013
159 
661 
1,561 
(1,868)
(367)
146 
Balance, shares at Jun. 30, 2013
158,741 
 
 
(28,375)
 
 
Net earnings
 
 
558 
 
 
558 
Other comprehensive (loss) income
 
 
 
 
(50)
(50)
Accrued dividends
 
 
(374)
 
 
(374)
Stock-based compensation
 
36 
 
 
 
36 
Other employee stock plan activities, amount
 
12 
(6)
92 
 
98 
Other employee stock plan activities, shares
 
 
 
1,476 
 
 
Treasury stock purchased, amount
 
 
 
(260)
 
(260)
Treasury stock purchased, shares
 
 
 
(3,046)
 
 
Balance, amount at Jun. 30, 2014
159 
709 
1,739 
(2,036)
(417)
154 
Balance, shares at Jun. 30, 2014
158,741 
 
 
(29,945)
 
 
Net earnings
 
 
580 
 
 
580 
Other comprehensive (loss) income
 
 
 
 
(85)
(85)
Accrued dividends
 
 
(391)
 
 
(391)
Stock-based compensation
 
32 
 
 
 
32 
Other employee stock plan activities, amount
 
34 
(5)
233 
 
262 
Other employee stock plan activities, shares
 
 
 
(4,198)
 
 
Treasury stock purchased, amount
 
 
 
(434)
 
(434)
Treasury stock purchased, shares
 
 
 
4,016 
 
 
Balance, amount at Jun. 30, 2015
$ 159 
$ 775 
$ 1,923 
$ (2,237)
$ (502)
$ 118 
Balance, shares at Jun. 30, 2015
158,741 
 
 
(30,127)
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2013
Operating activities:
 
 
 
Net earnings
$ 580 
$ 558 
$ 572 
Deduct: Losses from discontinued operations, net of tax
(26)
(21)
(1)
Earnings from continuing operations
606 
579 
573 
Adjustments to reconcile earnings from continuing operations to net cash provided by continuing operations:
 
 
 
Depreciation and amortization
169 
177 
180 
Stock-based compensation
32 
36 
35 
Deferred income taxes
(16)
(21)
(8)
Settlement of interest rate forward contracts
(25)
Other
(17)
20 
Changes in:
 
 
 
Receivables, net
20 
(10)
Inventories, net
(25)
(11)
Other current assets
12 
Accounts payable and accrued liabilities
93 
(12)
(29)
Income taxes payable
29 
(5)
18 
Net cash provided by continuing operations
858 
786 
780 
Net cash provided by (used for) discontinued operations
16 
(19)
(5)
Net cash provided by operations
874 
767 
775 
Investing activities:
 
 
 
Capital expenditures
(125)
(137)
(190)
Proceeds from sale-leasebacks, net of transaction costs
135 
Other
19 
Net cash used for investing activities from continuing operations
(106)
(137)
(51)
Net cash used for investing activities by discontinued operations
(1)
(4)
Net cash used for investing activities
(106)
(138)
(55)
Financing activities:
 
 
 
Notes and loans payable, net
(48)
(60)
(98)
Long-term debt borrowings, net of issuance costs
495 
593 
Long-term debt repayments
(575)
(850)
Treasury stock purchased
(434)
(260)
(128)
Cash dividends paid
(385)
(368)
(335)
Issuance of common stock for employee stock plans and other
251 
96 
133 
Net cash used for financing activities
(696)
(592)
(685)
Effect of exchange rate changes on cash and cash equivalents
(19)
(7)
(3)
Net increase in cash and cash equivalents
53 
30 
32 
Cash and cash equivalents:
 
 
 
Beginning of year
329 
299 
267 
End of year
382 
329 
299 
Supplemental cash flow information:
 
 
 
Interest paid
104 
76 
129 
Income taxes paid, net of refunds
236 
312 
263 
Noncash financing activities:
 
 
 
Cash dividends declared and accrued, but not paid
$ 99 
$ 95 
$ 93 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

The Company is principally engaged in the production, marketing and sales of consumer products through mass retail outlets, e-commerce channels, distributors and medical supply distributors. 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 the consolidated financial statements to conform to the current year presentation.

 

Effective September 22, 2014, the Company's Venezuela affiliate, Corporación Clorox de Venezuela S.A. (Clorox Venezuela), discontinued its operations. Consequently, the Company reclassified the financial results of Clorox Venezuela as a discontinued operation in the consolidated financial statements for all periods presented herein.

 

Use of Estimates

 

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to reach opinions as to estimates and assumptions that affect reported amounts and related disclosures. Specific areas requiring management's opinion on estimates and judgments include assumptions pertaining to accruals for consumer and trade-promotion programs, stock-based compensation costs, pension and post-employment benefit costs, future cash flows associated with impairment testing of goodwill and other long-lived assets, the 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.

 

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 in the United States and in certain foreign jurisdictions. However, these cash balances are generally available without legal restriction to fund local business operations. In addition, a portion of the Company's cash balance is held in U.S. dollars by foreign subsidiaries, whose functional currency is their local currency. Such U.S. dollar balances are reported on the foreign subsidiaries' books, in their functional currency, with the impact from foreign currency exchange rate differences recorded in other income, net. The Company's cash holdings were as follows as of June 30:

 

2015      2014   
U.S. dollar balances held by U.S. dollar functional currency subsidiaries and at parent  $ 221   $ 180
Non-U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries 142   132
U.S. dollar balances held by non-U.S. dollar functional currency subsidiaries 19   12
Non-U.S. dollar balances held by U.S. dollar functional currency subsidiaries   -   5
Total   $ 382   $ 329


Inventories

 

Inventories are stated at the lower of cost or market. When necessary, the Company provides allowances to adjust the carrying value of its inventory to the lower of cost or market, including any costs to sell or dispose. Appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value for the purposes of determining the lower of cost or market.

 

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 or lives determined by lease contracts for the related assets. The table below provides estimated useful lives of property, plant and equipment by asset classification.

 

Estimated
Useful Lives
Buildings and leasehold improvements     10 - 40 years
Land improvements    10 - 30 years
Machinery and equipment    3 - 15 years
Computer equipment    3 - 5 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 fully recoverable. The risk of impairment is initially assessed 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. When 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.

 

Capitalization of Software Costs

 

The Company capitalizes certain qualifying 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 during the application development stage. Internal and external costs incurred during the preliminary project stage and post implementation-operation stage, mainly training and maintenance costs, are expensed as incurred. Once the application is substantially complete and ready for its intended use, qualifying costs are amortized on a straight-line basis over the software's useful life.


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 for impairment 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 has the option to first assess qualitative factors such as maturity and stability of the reporting unit, magnitude of excess fair value over book value from the prior year's impairment testing, other reporting unit specific operating results as well as new events and circumstances impacting the operations at the reporting unit level. If the result of a qualitative test indicates a potential for impairment of a reporting unit, a quantitative test is performed. The quantitative test is a two-step process. In the first step, the Company compares the estimated fair value of the reporting unit to its carrying value. In all instances, the estimated fair value exceeded the carrying value of the reporting unit. Had the estimated fair value of any reporting unit been less than its carrying value, the Company would have performed a second step to determine the implied fair value of the reporting unit's goodwill. If the carrying amount of a reporting unit's goodwill had exceeded its implied fair value, an impairment charge would have been recorded for the difference between the carrying amount and the implied fair value of the reporting unit's goodwill.


To determine the fair value of a reporting unit as part of its quantitative test, the Company uses a discounted cash flow (DCF) approach, as it believes that this approach is the most reliable indicator of the fair value of its businesses and the fair value of their future earnings and cash flows. Under this approach, the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk. The cash flows used in the DCF are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced, and the broader business strategy for the long term. The other key estimates and factors used in the DCF include, but are not limited to, future sales volumes, revenue and expense growth rates, changes in working capital, foreign exchange rates, currency devaluation, inflation and a perpetuity growth rate. Changes in such estimates or the application of alternative assumptions could produce different results.


For trademarks and other intangible assets with indefinite lives, the Company performs a quantitative analysis to test for impairment and compares the estimated fair value of an asset to its carrying amount. If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value. The Company uses the income approach to estimate the fair value of its trademarks and other intangible assets with indefinite lives. This approach requires significant judgments in determining both the assets' estimated cash flows as well as the appropriate discount and foreign exchange rates applied to those cash flows to determine fair value. Changes in such estimates or the use of alternative assumptions could produce different results.

 

Stock-based Compensation

 

The Company grants various nonqualified stock-based compensation awards to eligible employees, 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. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative catch-up adjustment in the period of change. Compensation 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 performance period is three years and the payout determination is made at the end of the three-year performance period. 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 trued up in the current period to reflect the expected payout level. If it is determined that the performance goals will be exceeded, additional compensation expense is recognized, subject to a cap of 150% of target.

 

Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based payment arrangements (excess tax benefits) are primarily classified as financing cash inflows.

 

Employee Benefits

 

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 or expected lifetime (for frozen plans) 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. The differences between actual and expected returns are recognized in the net periodic benefit cost calculation over the average remaining service period or expected lifetime (for frozen plans) 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.

 

Environmental Costs

 

The Company is involved in certain environmental remediation and ongoing 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 based upon a reasonable estimate of the liability. 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 become 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 accrual for environmental matters is included in Other liabilities in the Company's consolidated balance sheets on an undiscounted basis due to uncertainty regarding the timing of future payments.

 

Revenue Recognition

 

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 ongoing 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 related to these programs for the estimated expenses incurred, but not paid, at the end of each period. Trade-promotion and coupon redemption costs are recorded as a reduction of sales. The Company provides an allowance for doubtful accounts based on its historical experience and ongoing assessment of its customers' credit risk. Receivables were presented net of an allowance for doubtful accounts of $4 and $3 as of June 30, 2015 and 2014, respectively. Receivables, net, included non-customer receivables of $12 and $15 as of June 30, 2015 and 2014, respectively.

 

Cost of Products Sold

 

Cost of products sold represents the costs directly related to the manufacture and distribution of the Company's products and primarily includes raw materials, packaging, contract packer fees, shipping and handling, warehousing, package design, depreciation, amortization, direct and indirect labor and operating costs for the Company's manufacturing and distribution facilities including salary, benefit costs and incentive compensation, and royalties and amortization related to the Company's Glad Venture Agreement (see Note 9).

 

Costs associated with developing and designing new packaging are expensed as incurred and include design, artwork, films and labeling. Expenses for fiscal years ended June 30, 2015, 2014 and 2013 were $11, $12 and $10, respectively, all of which were reflected in cost of products sold or discontinued operations, as appropriate, in the consolidated statements of earnings.

 

Selling and Administrative Expenses

 

Selling and administrative expenses represent costs incurred by the Company in generating revenues and managing the business and include market research, commissions and certain administrative expenses. Administrative expenses include salary, benefits, incentive compensation, professional fees and services, software and licensing fees and other operating costs associated with the Company's non-manufacturing, non-research and development staff, facilities and equipment.

 

Advertising and Research and Development Costs

 

The Company expenses advertising and research and development costs in the period incurred.

 

Income Taxes

 

The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax bases. Management reviews the Company's deferred tax assets to determine whether their value can be realized based upon available evidence. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company's tax provision in the period of change. In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet certain recognition thresholds or measurement standards. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled.

 

U.S. income tax expense and foreign withholding taxes are provided on unremitted foreign earnings that are not indefinitely reinvested at the time the earnings are generated. Where foreign earnings are indefinitely reinvested, no provision for U.S. income or foreign withholding taxes is made. When circumstances change and the Company determines that some or all of the undistributed earnings will be remitted in the foreseeable future, the Company accrues an expense in the current period for U.S. income taxes and foreign withholding taxes attributable to the anticipated remittance.

 

Foreign Currency Transactions and Translation

 

Local currencies are the functional currencies for substantially all of the Company's foreign operations. When the transactional currency is different than the functional currency, transaction gains and losses are included as a component of other income, net. In addition, certain assets and liabilities denominated in currencies different than a foreign subsidiary's functional currency are reported on the subsidiary's books in its functional currency, with the impact from exchange rate differences recorded in other income, net. Assets and liabilities of foreign operations are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expenses are translated at the average monthly exchange rates during the year.

 

Gains and losses on foreign currency translations are reported as a component of other comprehensive income. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested. The income tax effect of currency translation adjustments related to foreign subsidiaries and joint ventures for which earnings are not considered indefinitely reinvested is recorded as a component of deferred taxes with an offset to other comprehensive income.

 

Derivative Instruments

 

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 commodity prices, interest rates and foreign currencies. The Company's contracts are hedges for transactions with notional amounts and periods consistent with the related exposures and do not constitute investments independent of these exposures.

 

The changes in the fair value (i.e., gains or losses) of a derivative instrument are recorded as either assets or liabilities in the consolidated balance sheets with an offset to net earnings or other comprehensive income depending on whether, for accounting purposes, it has been designated and qualifies as an accounting hedge and, if so, on the type of hedging relationship. The criteria used to determine if hedge accounting treatment is appropriate are: (a) formal designation and documentation of the hedging relationship, the risk management objective and hedging strategy at hedge inception; (b) eligibility of hedged items, transactions and corresponding hedging instrument; and (c) effectiveness of the hedging relationship both at inception of the hedge and on an ongoing basis in achieving the hedging objectives. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument either as a fair value hedge or as 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 fiscal years ended June 30, 2015, 2014 and 2013, the Company had no hedging instruments designated as fair value hedges.

 

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 and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. 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 in other income, net. Cash flows from hedging activities are classified as operating activities in the consolidated statements of cash flows.

 

The Company de-designates cash flow hedge relationships when it determines that the hedge relationships are 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 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 net earnings immediately if it is determined that there is any ineffectiveness or the forecasted transaction is no longer probable.

 

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.

 

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 February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis,” which changes the guidance for evaluating whether to consolidate certain legal entities. The amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities. 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 2015-02 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 effective for the Company beginning in the first quarter of fiscal year 2019, with the option to early adopt in the first quarter of fiscal year 2018. 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 or other previously discontinued operations.

DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS

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 of 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 consolidated financial statements. The results of Clorox Venezuela have historically been part of the International reportable segment.

 

Net sales for Clorox Venezuela were $11, $77 and $90 for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

 

The following table provides a summary of (losses) gains from discontinued operations for Clorox Venezuela and gains (losses) from discontinued operations other than Clorox Venezuela for the years ended June 30:

 

  2015   2014   2013
Operating (losses) earnings from Clorox Venezuela before income taxes          $ (6 )   $ (23 )   $ 1
Exit costs and other related expenses for Clorox Venezuela   (78 )   -   -
Total losses from Clorox Venezuela before income taxes   (84 )   (23 )   1
Income tax benefit attributable to Clorox Venezuela   29   6   -
Total (losses) gains from Clorox Venezuela, net of tax   (55 )   (17 )   1
                              
Gains (losses) from discontinued operations other than  
   
Clorox Venezuela, net of tax   29   (4 )   (2 )
Losses from discontinued operations, net of tax   $ (26 )   $ (21 )   $ (1 )

Unrelated to Clorox Venezuela, in the fiscal year ended June 30, 2015, $32 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 fiscal years ended June 30, 2015, 2014 and 2013. (See Note 17.)

 

Summary of Operating Losses, Asset Charges and Other Costs

 

The following provides a breakdown of (losses) gains from discontinued operations for Clorox Venezuela and gains from discontinued operations other than Clorox Venezuela for the fiscal year ended June 30:

 

2015  
Operating losses from Clorox Venezuela before income taxes        $ (6 )
Net asset charges:
Inventories (11 )
Property, plant and equipment   (16 )
Trademark and other intangible assets   (6 )
Other assets   (2 )
Other exit and business termination costs:  
Severance   (3 )
Recognition of deferred foreign currency translation loss   (30 )
Other   (10 )
Total losses from Clorox Venezuela before income taxes   (84 )
Income tax benefit attributable to Clorox Venezuela   29
Total losses from Clorox Venezuela, net of tax   (55 )
         
Gains from discontinued operations other than  
Clorox Venezuela, net of tax   29
Losses from discontinued operations, net of tax   $ (26 )
 

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 (losses) income. 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. 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 that 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. Based on the results of the annual impairment test performed in the fourth quarter of fiscal year 2015, the fair value of the Latin America reporting unit exceeded its recorded value by approximately 79%.

Financial Reporting: Hyperinflation and the Selection of Exchange Rates

Due to a sustained inflationary environment, the financial statements of Clorox Venezuela are 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 now reflected in discontinued operations.

 

Subsequent to Clorox Venezuela discontinuing operations in September 2014, 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 because the balance of net bolivar assets and liabilities on the local books of Clorox Venezuela was $0 as of June 30, 2015. As of June 30, 2014, the local books of Clorox Venezuela carried a net asset position of $42. In addition, as of June 30, 2015 and 2014, the Company held $13 and $17, respectively, of tax asset balances related to Clorox Venezuela in Corporate in the reconciliation of the results of the Company's reportable segments to consolidated results.

INVENTORIES
INVENTORIES

NOTE 3. INVENTORIES

 

Inventories consisted of the following as of June 30:

 

  2015   2014
Finished goods   $ 316   $ 312
Raw materials and packaging             101   108
Work in process   3   2
LIFO allowances   (35 )   (36 )
Total   $ 385
  $ 386

 

The last-in, first-out (LIFO) method was used to value approximately 38% and 34% of inventories as of June 30, 2015 and 2014, 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 $0, $2 and $3 for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

 

The Company had inventory consigned to others of $2 and $4 as of June 30, 2015 and 2014, respectively.

OTHER CURRENT ASSETS
OTHER CURRENT ASSETS

NOTE 4. OTHER CURRENT ASSETS

Other current assets consisted of the following as of June 30:

 

  2015       2014  
Deferred tax assets         $ 99   $ 81
Prepaid expenses 39   42
Other 5   11
Total   $ 143   $ 134
 

As of June 30, 2015 and 2014, Other in the table above included $3 and $9 of restricted cash, respectively. As of June 30, 2015 and 2014, the Company had restricted cash of $3 and $3, respectively, held in escrow related to fiscal year 2012 acquisitions. Additionally, as of June 30, 2015 and 2014, restricted cash of $0 and $5, respectively, was held by a foreign subsidiary as a prepayment received for intercompany services. 

PROPERTY, PLANT AND EQUIPMENT, NET
PROPERTY, PLANT AND EQUIPMENT, NET

NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, net, consisted of the following as of June 30:

 

2015      2014   
Machinery and equipment $ 1,608   $ 1,593
Buildings 515   506
Capitalized software costs 371   374
Land and improvements   122   122
Construction in progress   65   79
Computer equipment   76   79
  2,757   2,753
Less: accumulated depreciation and amortization           (1,839 )   (1,776 )
Total   $ 918   $ 977

  

Included in Machinery and equipment above are $12 and $0 of equipment under capital leases as of June 30, 2015 and 2014, respectively. Accumulated depreciation for assets under capital leases was $2 and $0 as of June 30, 2015 and 2014, respectively.

Included in Land and improvements above are $2 and $0 of asset retirement obligations as of June 30, 2015 and 2014, respectively, for two leased properties.The liability of $2 incurred in fiscal year 2015 was recorded in Other liabilities.

Depreciation and amortization expense related to property, plant and equipment, net, was $157, $161 and $162 in fiscal years 2015, 2014 and 2013,respectively, which includes depreciation of assets under capital leases. This also includes amortization of capitalized software of $19, $22 and $21 in fiscal years 2015, 2014 and 2013, respectively.

 

Non-cash capital expenditures were $18, $0 and $0 in fiscal years 2015, 2014 and 2013, respectively.

GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS

NOTE 6. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill by reportable segment for the fiscal years ended June 30, 2015 and 2014, were as follows:

 

  Goodwill
  Cleaning      Lifestyle      Household      International      Total   
Balance June 30, 2013   323     244     85     $ 453     $ 1,105  
Effect of foreign currency translation     -       -       -       (4 )     (4
Balance June 30, 2014  
323  
244  
85  
449  
1,101
Effect of foreign currency translation     -       -       -       (34     (34
Balance June 30, 2015   $ 323   $ 244   $ 85   $ 415   $ 1,067

  

During the fourth quarter of fiscal years 2015, 2014 and 2013, the Company completed its annual impairment tests of goodwill and no instances of impairment were identified.

  

The changes in the carrying amount of trademarks and other intangible assets for the fiscal years ended June 30, 2015 and 2014, were as follows:

  

As of June 30, 2015              As of June 30, 2014

Gross

carrying

amount

 

 

 Accumulated

amortization 

 

 

 Net

carrying

amount 

 

 

Gross
carrying
amount
 
    Accumulated amortization     

 Net

carrying

amount 

 
Trademarks not subject to amortization $ 524     $ -     524     $ 533   $ -   $ 533
Trademarks subject to amortization   33       22       11     36   22   14
Other intangible assets:                            
Technology and product formulae   137       133       4     139   129   10
Other   188       142       46     194   140   54
Total 882     297     $ 585     $ 902   $ 291   $ 611

Amortization expense relating to our intangible assets was $12, $15 and $15 for the years ended June 30, 2015, 2014 and 2013, respectively. Estimated amortization expense for these intangible assets is $8, $8, $7, $7 and $6 for fiscal years 2016, 2017, 2018, 2019 and 2020, respectively.


In the first quarter of fiscal year 2015, the Company recorded impairment of trademarks and other intangible assets of $6 related to the discontinuation of operations in Venezuela. This amount is included as part of losses from discontinued operations, net of tax.

 

In fiscal year 2014, as a result of the effective devaluation of the Venezuelan currency in the third quarter, the Company assessed whether recorded values of intangible assets attributable to the Venezuela subsidiary and goodwill of the reporting unit that included Venezuela were impaired. As a result of its assessment, the Company identified indications of impairment and recorded noncash tax deductible impairment charges on trademark values totaling $4, which is reflected in the International reportable segment. Of this amount, $3 is related to continuing operations and is reflected in Other income, net and $1 is related to trademarks held on the books of Clorox Venezuela and is reflected in losses from discontinued operations, net. The Company used the income approach to estimate the fair value of the trademarks, and as such, the fair value measurement was classified as Level 3. For a further discussion of Clorox Venezuela's intangible and other asset balances, see Note 2.

 

In fiscal year 2014, the Company entered into an exclusivity agreement with a manufacturer. In connection with the agreement, the Company recorded an Other intangible asset valued at $4 that will be amortized over the 7-year term of the agreement. The agreement may be renewed for an additional 3 years at no cost upon mutual consent.

 

During the fourth quarter of fiscal years 2015, 2014 and 2013, the Company completed its annual impairment tests of indefinite-lived intangible assets and no instances of impairment were identified.

ACCRUED LIABILITIES
ACCRUED LIABILITIES

NOTE 7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of June 30:

 

   2015            2014      
Compensation and employee benefit costs           
$ 189   $ 102
Trade and sales promotion 115   113
Dividends 103   100
Royalties   16   11
Insurance   15   18
Interest
  14   27
Derivatives   8   17
Other   88   84
Total   $ 548   $ 472
DEBT
DEBT

NOTE 8. DEBT

 

Notes and loans payable, which mature in less than one year, included the following as of June 30:

 

2015      2014   
Commercial paper $ 93   $ 141
Foreign borrowings 2   2
Total $ 95   $ 143

 

The weighted average interest rates incurred on average outstanding notes and loans payable during the fiscal years ended June 30, 2015, 2014 and 2013, including fees associated with the Company's undrawn revolving credit facility, were 2.05%, 0.97% and 1.68%, respectively. The weighted average effective interest rates on commercial paper balances as of June 30, 2015 and 2014, were 0.39% and 0.28%, respectively.

 

Long-term debt, carried at face value net of unamortized discounts or premiums, included the following as of June 30:

 

2015   2014
Senior unsecured notes and debentures:    
5.00%, $575 due January 2015 $ -   $ 575
3.55%, $300 due November 2015 300   300
5.95%, $400 due October 2017   399   399
3.80%, $300 due November 2021   298   298
3.05%, $600 due September 2022   599   598
3.50%, $500 due December 2024   500   -
Total   2,096   2,170
Less: Current maturities of long-term debt   (300 )   (575 )
Long-term debt   $ 1,796   $ 1,595

 

The weighted average interest rates incurred on average outstanding long-term debt during the fiscal years ended June 30, 2015, 2014 and 2013, were 4.44%, 4.56% and 4.76%, respectively. The weighted average effective interest rates on long-term debt balances as of June 30, 2015 and 2014, were 4.31% and 4.56%, respectively.

 

In January 2015, $575 of the Company's senior notes with an annual fixed interest rate of 5.00% became due and were repaid using the net proceeds from the December 2014 debt issuance and commercial paper borrowings.

 

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 10). The notes rank equally with all of the Company's existing senior indebtedness.

 

In March 2013, $500 in senior notes with an annual fixed interest rate of 5.00% became due and were repaid. The repayment was funded in part with commercial paper borrowings and in part with a portion of the proceeds from the sale-leaseback transaction of the Company's Oakland, Calif., general office building (see Note 9).


In October 2012, $350 in senior notes with an annual fixed interest rate of 5.45% became due and were repaid. The repayment was funded with a portion of the proceeds from the September 2012 issuance of $600 in senior notes with an annual fixed interest rate of 3.05%, payable semi-annually in March and September, and a maturity date of September 15, 2022. The remaining proceeds from the September 2012 issuance were used to repay commercial paper. The September 2012 notes were issued under the Company's shelf registration statement filed in November 2011 and rank equally with all of the Company's existing senior indebtedness.

 

The Company's borrowing capacity under other financing arrangements as of June 30 was as follows:

 

  2015      2014   
Revolving credit facility   $ 1,100   $ 1,100
Foreign credit lines   11   31
Other credit lines   18   13
Total   $ 1,129   $ 1,144

 

As of June 30, 2015, the Company had a $1,100 revolving credit agreement (the Credit Agreement), which expires in October 2019. The Credit Agreement replaced a prior $1,100 revolving credit agreement in place since May 2012. There were no borrowings under the Credit Agreement as of June 30, 2015 or 2014, and the Company believes that borrowings under the Credit Agreement 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, 2015.

 

Of the $29 of foreign and other credit lines as of June 30, 2015, $4 was outstanding and the remainder of $25 was available for borrowing. Of the $44 of foreign and other credit lines as of June 30, 2014, $5 was outstanding and the remainder of $39 was available for borrowing. As of June 30, 2014, $7 of the foreign credit lines related to Clorox Venezuela, of which $1 was outstanding.

 

Long-term debt maturities as of June 30, 2015, are $300, $0, $400, $0, $0 and $1,400 in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively. 

OTHER LIABILITIES
OTHER LIABILITIES

NOTE 9. OTHER LIABILITIES

 

Other liabilities consisted of the following as of June 30:

 

  2015          2014     
Employee benefit obligations $ 299   $ 289
Venture agreement net terminal obligation       294   290
Taxes 38   76
Other   119   113
Total   $ 750   $ 768

 

Venture Agreement

 

The Company has an agreement with The Procter & Gamble Company (P&G) for its Glad® plastic bags, wraps and containers business. The Company maintains a net terminal obligation liability, which reflects the estimated value of the contractual requirement to repurchase P&G's interest at the termination of the agreement. As of June 30, 2015 and 2014, 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 by mutual agreement 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.

 

Deferred Gain on Sale-leaseback Transaction

 

In December 2012, the Company completed a sale-leaseback transaction under which it sold its general office building in Oakland, Calif. to an unrelated third party for net proceeds of $108 and entered into a 15-year operating lease agreement with renewal options with the buyer for a portion of the building. The Company deferred recognition of the portion of the total gain on the sale that was equivalent to the present value of the lease payments and will continue to amortize such amount to earnings ratably over the lease term. As of June 30, 2015 and 2014, the long-term portion of the deferred gain of $40 and $43, respectively, was included in Other in the table above. 

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

NOTE 10. 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 three categories of the fair value 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.

 

As of June 30, 2015 and 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 classified as 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 June 30, 2015, the notional amount of commodity derivatives was $47, of which $27 related to jet fuel swaps and $20 related to soybean oil futures. As of June 30, 2014, the notional amount of commodity derivatives was $36, of which $19 related to jet fuel swaps and $17 related to soybean oil futures.

 

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 June 30, 2015 and 2014, the notional amount of interest rate forward contracts was $0 and $288, respectively.

 

During fiscal year 2015, 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 consolidated statements of cash flows for the fiscal year ended June 30, 2015. The loss is reflected in accumulated other comprehensive net loss on the consolidated balance sheet as of June 30, 2015, and will be amortized into interest expense on the consolidated statements of earnings 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 16 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 $64, $35 and $6, respectively, as of June 30, 2015, and $54, $28 and $5, respectively, as of June 30, 2014.

 

Counterparty Risk Management

 

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 $8 and $17 of the derivative instruments reflected in accrued liabilities as of June 30, 2015 and 2014, respectively, $8 and $11, respectively, contained such terms. As of both June 30, 2015 and 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 June 30, 2015 and 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 June 30, 2015 and June 30, 2014, the Company maintained cash margin balances related to exchange-traded futures contracts of $2 and $1, respectively, which are classified as Other current assets on the consolidated balance sheets.

 

Fair Value of Financial Instruments

 

The following table summarizes the Company's assets and liabilities that were measured at fair value in the consolidated balance sheets as of June 30::

 


    2015          2014       

Balance sheet classification

 

Fair value
hierarchy
level 

Carrying
Amount

 

 

Estimated
Fair
Value

 

 

Carrying
Amount

 

 

Estimated
Fair
Value

 

 Assets                                        
Investments including money market funds (a) Cash and cash
equivalents
  1 $ 212   $ 212   $ 150   $ 150
Time deposits (a)    Cash and cash
equivalents
  2     84       84       75       75  
Foreign exchange derivative contracts Other current assets   2 1   1   -   -
Interest rate contracts   Other current assets    2     -       -       -       -  
Commodity purchase derivative contracts Other current assets   2   -   -   1   1
Trust assets for nonqualified deferred              
compensation plans Other assets   1   38   38   31   31
          $ 335   $ 335   $ 257   $ 257
Liabilities            
Commodity purchase derivative contracts Accrued liabilities   2   $ 8   $ 8   $ 1   $ 1
Interest rate derivative contracts Accrued liabilities   2 -   -   13   13
Foreign exchange derivative contracts Accrued liabilities   2   -   -   3   3
Commodity purchase derivative contracts   Other liabilities   2   -   -   -   -
Notes and loans payable (b)   Notes and loans
payable
  2   95   95   143   143
Long-term debt (c)   Other liabilities   2   2,096   2,137   2,170   2,265
          $ 2,199   $ 2,240   $ 2,330   $ 2,425

 

(a)
Cash equivalents are composed of time deposits and other interest bearing investments including money market funds with original maturity dates of 90 days or less. Cash equivalents are recorded at cost, which approximates fair value.

(b)
Short-term debt is composed of U.S. commercial paper and/or other similar short-term debts issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.

(c)
Long-term debt, which is recorded at cost, includes the current portion of debt instruments, which approximates fair value. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers, and was classified as Level 2.

   

Derivatives

 

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 effects of derivative instruments designated as hedging instruments on other comprehensive net (losses) income and the consolidated statements of earnings and the consolidated statements of comprehensive income were as follows during the fiscal years ended June 30:

 

Gains (losses)
recognized in other comprehensive net loss

  Gains (losses) reclassified from
accumulated other comprehensive net
loss 
and recognized in earnings
2015   2014   2013   2015   2014   2013
Commodity purchase derivative contracts $ (13 )   $ 2   $ (1 )   $ (5 )   $ -   $ -
Interest rate derivative contracts (12 )   (13 )   (1 )   (5 )   (4 )   (3 )
Foreign exchange derivative contracts   7   (3 )   3   3   4   -
Total   $ (18 )   $ (14 )   $ 1   $ (7 )   $ -   $ (3 )

 

The gains (losses) reclassified from accumulated other comprehensive net (losses) income and recognized in earnings during the fiscal years ended June 30, 2015, 2014 and 2013, for commodity purchase and foreign exchange contracts were included in cost of products sold. The losses reclassified from accumulated other comprehensive net (losses) income and recognized in earnings during the fiscal years ended June 30, 2015, 2014 and 2013, for interest rate contracts were included in interest expense.

The estimated amount of the existing net loss in accumulated other comprehensive net (losses) income as of June 30, 2015, which is expected to be reclassified into earnings within the next twelve months is $13. 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 each of the fiscal years ended June 30, 2015, 2014 and 2013, hedge ineffectiveness was not significant.

 

Trust Assets

 

The Company has held interests in mutual funds and cash equivalents as part of trust assets 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 consolidated balance sheets. The interests in 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 value of the trust assets related to certain of the Company's nonqualified deferred compensation plans increased by $7 as compared to June 30, 2014, primarily due to current quarter employees' contributions to these plans and market returns.

OTHER CONTINGENCIES AND GUARANTEES
OTHER CONTINGENCIES AND GUARANTEES

NOTE 11. OTHER CONTINGENCIES AND GUARANTEES

 

Contingencies

 

The Company is involved in certain environmental matters, including response actions at various locations. The Company had a recorded liability of $12 and $14 as of June 30, 2015 and 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 June 30, 2015 and 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 June 30, 2015, was approximately $32.

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 $26.

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 successfully appealed that decision and the court agreed to admit the appeal in March 2015. The appeal is currently pending and it is possible that a final decision in this case could be issued as early as the first quarter of fiscal year 2016. 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, employment claims 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.

 

Guarantees

 

In conjunction with divestitures and other transactions, the Company may provide typical indemnifications (e.g., indemnifications for representations and warranties and retention of previously existing environmental, tax and employee liabilities) that have terms that vary in duration and in the potential amount of the total obligation and, in many circumstances, are not explicitly defined. The Company has not made, nor does it believe that it is probable that it will make, any 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 indemnifications as of June 30, 2015 and 2014.

 

As of June 30, 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.

LEASES AND OTHER COMMITMENTS
LEASES AND OTHER COMMITMENTS

NOTE 12. LEASES AND OTHER COMMITMENTS

 

The Company leases transportation and manufacturing equipment, certain information technology equipment and various manufacturing, warehousing, and office facilities. The majority of the Company's leases are classified as operating leases, and the Company's existing contracts will expire by 2027. The Company expects that, in the normal course of business, existing contracts will be renewed or replaced by other leases. Rental expense for all operating leases was $76, $71 and $71 in fiscal years 2015, 2014 and 2013, respectively.

 

The future minimum annual lease commitments required under the Company's existing non-cancelable operating and capital lease agreements as of June 30, 2015, were as follows:

 

      Operating        Capital   
Year             leases

leases
2016       $ 50
$ 3
2017  
46

3
2018  
42

2
2019  
34

1
2020  
29

-
Thereafter                   
100

-
Total   $ 301
$ 9

 

Included within the future minimum lease commitments for operating leases disclosed above are future minimum rental payments required under the Company's existing non-cancelable lease agreements for the corporate headquarters and primary research and development facility as of June 30, 2015, in the amounts of  $6, $7, $7, $7, $7 and $22 in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively.

 

The Company is also a party to certain purchase obligations, which are defined as purchase agreements that are enforceable and legally binding and that contain specified or determinable 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, capital expenditure agreements, software acquisition and license commitments and service contracts. The Company enters into purchase obligations during the regular course of business based on expectations of future needs. Many of these purchase obligations contracts are short term in nature and are flexible to allow for changes in the Company's business and related requirements. As of June 30, 2015, the Company's purchase obligations totaled $176, $57, $37, $30, $7 and $0 for fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter, respectively. 

STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY

NOTE 13. STOCKHOLDERS' EQUITY

 

On May 13, 2013, the Company's board of directors terminated the share repurchase programs previously authorized on May 13, 2008, and May 18, 2011, and authorized a new share repurchase program for an aggregate purchase amount of up to $750. This open market share repurchase program is in addition to the Company's evergreen repurchase program (Evergreen Program), the purpose of which is to offset the impact of stock dilution related to stock-based awards. The Evergreen Program has no authorization limit as to amount or timing of repurchases.

 

Share repurchases under authorized programs were as follows during the fiscal years ended June 30:

2015          2014          2013       
Amount      Shares
(in 000's)
    Amount      Shares
(in 000's)
    Amount      Shares
(in 000's)
 
Open-market purchase programs        $ -     -   $ -     -   $ -     -
Evergreen Program 434     4,016