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NOTE 1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three and nine months ended March 31, 2014 and 2013, 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, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014, or for any other future period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2013, which includes a complete set of footnote disclosures, including the Company's significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
Recently Issued Accounting Pronouncements
On April 10, 2014, the Financial Accounting Standards Board (FASB) issued an update to current accounting standards 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.
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NOTE 2. INVENTORIES, NET
Inventories, net, consisted of the following as of:
3/31/2014 | 6/30/2013 | ||||||
Finished goods | $ | 383 | $ | 321 | |||
Raw materials and packaging | 114 | 121 | |||||
Work in process | 2 | 3 | |||||
LIFO allowances | (39 | ) | (40 | ) | |||
Allowances for obsolescence | (13 | ) | (11 | ) | |||
Total | $ | 447 | $ | 394 |
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NOTE 3. 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, 2014, and June 30, 2013, was $4 and $6, respectively. These partnerships are considered to be variable interest entities; 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.
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NOTE 4. OTHER LIABILITIES
Other liabilities consisted of the following as of:
3/31/2014 | 6/30/2013 | ||||
Venture agreement net terminal obligation | $ | 288 | $ | 284 | |
Employee benefit obligations | 287 | 270 | |||
Taxes | 77 | 74 | |||
Other | 112 | 114 | |||
Total | $ | 764 | $ | 742 |
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NOTE 5. 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 | |||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||
Basic | 129,318 | 131,619 | 129,743 | 130,960 | ||||
Dilutive effect of stock options and other | 2,237 | 1,856 | 2,261 | 1,669 | ||||
Diluted | 131,555 | 133,475 | 132,004 | 132,629 |
During the three and nine months ended March 31, 2014 and 2013, the Company included all stock options to purchase shares of the Company's common stock in the calculations of diluted net EPS because the average market price was greater than the exercise price of all outstanding options.
The Company has two share repurchase programs: an open-market repurchase program with an authorized aggregate purchase amount of up to $750, all of which was available for share repurchases as of March 31, 2014, 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 the amount or timing of repurchases.
During the three and nine months ended March 31, 2014 and 2013, the Company did not repurchase any shares under the open-market repurchase program. During the three and nine months ended March 31, 2014, the Company repurchased approximately 1,486 thousand shares and 3,046 thousand shares, respectively, under its Evergreen Program, for an aggregate amount of $130 and $260, respectively. During the three and nine months ended March 31, 2013, the Company did not repurchase any shares under the Evergreen Program.
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NOTE 6. COMPREHENSIVE INCOME
Comprehensive income is defined as net earnings and other changes in stockholders' equity from transactions and other events from sources other than stockholders. Comprehensive income was as follows:
Three Months Ended | Three Months Ended | ||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | ||||||||||||
Net earnings | $ | 137 | 133 | $ | 388 | 389 | |||||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Foreign currency translation adjustments | (28 | ) | (5 | ) | (47 | ) | 13 | ||||||||
Net unrealized (losses) gains on derivatives | (4 | ) | 1 | (2 | ) | 1 | |||||||||
Pension and postretirement benefit adjustments | 1 | 2 | (2 | ) | 4 | ||||||||||
Total other comprehensive (loss) income, net of tax | (31 | ) | (2 | ) | (51 | ) | 18 | ||||||||
Comprehensive income | $ | 106 | $ | 131 | $ | 337 | $ | 407 |
Foreign currency translation adjustments are presented in the table above net of increases in deferred tax liabilities of $6 and $10 for the three and nine months ended March 31, 2014, respectively, and $1 and $5 for the three and nine months ended March 31, 2013, respectively.
On February 5, 2013, the FASB issued an update to current accounting standards related to disclosures of reclassifications out of accumulated other comprehensive income. The presentation requirements were adopted by the Company effective July 1, 2013 and are reflected below.
Changes in accumulated other comprehensive net losses by component were as follows:
Foreign | Pension and | |||||||||||||||
currency | Net unrealized | postretirement | ||||||||||||||
translation | losses on | benefit | ||||||||||||||
adjustments | derivatives | adjustments | Total | |||||||||||||
Balance as of June 30, 2013, net of tax | $ | (209 | ) | $ | (30 | ) | $ | (128 | ) | $ | (367 | ) | ||||
Other comprehensive losses before reclassifications | (47 | ) | (2 | ) | (5 | ) | (54 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive net losses | - | - | 3 | 3 | ||||||||||||
Net other comprehensive losses | (47 | ) | (2 | ) | (2 | ) | (51 | ) | ||||||||
Balance as of March 31, 2014, net of tax | $ | (256 | ) | $ | (32 | ) | $ | (130 | ) | $ | (418 | ) |
Pension and postretirement benefit reclassification adjustments are reflected in cost of products sold and selling and administrative expenses.
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NOTE 7. 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 taxable 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 operationswas 35.3% and 35.0% for the three and nine months ended March 31, 2014, respectively, and 33.9% and 33.2% for the three and nine months ended March 31, 2013, respectively. The higher rates for the three and nine months ended March 31, 2014, were driven by the non-tax deductible remeasurement loss (Note 10) and other losses in Venezuela. In addition, the rate for the nine months ended March 31, 2013 was reduced by favorable tax settlements.
The balance of unrecognized tax benefits as of March 31, 2014 and June 30, 2013, included potential net benefits of $27 and $24, respectively, which, if recognized, would reduce the effective tax rate on earnings from continuing operations.
It is reasonably possible that up to $30 of other unrecognized tax benefits may be recognized in the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The total balance of accrued interest and penalties related to uncertain tax positions was $11 and $8 as of March 31, 2014 and June 30, 2013, respectively. Interest and penalties included in income tax expense resulted in a net expense of $2 and $3 for the three and nine months ended March 31, 2014, respectively, and net expense of $1 for both the three and nine months ended March 31, 2013.
The Company files income tax returns in U.S. federal and various state, local and foreign jurisdictions. The U.S. federal statute of limitations has expired for all tax years through June 30, 2010. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.
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NOTE 8. 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 | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Service cost | $ | - | $ | - | $ | 1 | $ | 2 | ||||||||
Interest cost | 7 | 6 | 20 | 18 | ||||||||||||
Expected return on plan assets | (5 | ) | (7 | ) | (18 | ) | (22 | ) | ||||||||
Amortization of unrecognized items | 2 | 3 | 8 | 9 | ||||||||||||
Total | $ | 4 | $ | 2 | $ | 11 | $ | 7 |
The net periodic benefit cost for the Company's retirement health care plans was a benefit of $0 and $1 for the three and nine months ended March 31, 2014, respectively, and expense of $1 for both the three and nine months ended March 31, 2013.
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NOTE 9. 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 $14 and $13 as of March 31, 2014 and June 30, 2013, 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, 2014 and June 30, 2013. 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 was initially filed in a Brazilian lower court in 2002 by two Brazilian companies and one Uruguayan company (collectively, Petroplus) related to joint venture agreements for the distribution of STP auto-care products in Brazil with three companies that became subsidiaries of the Company as a result of the Company's merger with First Brands Corporation in January 1999 (collectively, Clorox Subsidiaries). The pending lawsuit seeks indemnification for damages and losses for alleged breaches of the joint venture agreements and abuse of economic power by the Company and Glad. Petroplus had previously unsuccessfully raised the same claims and sought damages from the Company and the Clorox Subsidiaries in an International Chamber of Commerce (ICC) arbitration proceeding in Miami filed in 2001. The ICC arbitration panel unanimously ruled against Petroplus in 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 and awarded Petroplus R$23 ($13) plus interest. The value of that judgment, including interest and foreign exchange fluctuations as of March 31, 2014, was approximately $37.
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, 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 $31. The Company continues to believe that its defenses are meritorious, and has appealed the decision to the highest courts of Brazil, which could take years to resolve. In the first stage of the appellate process, in December 2013 the appellate court declined to admit the Company's appeals to the highest courts. The Company has now appealed directly to the highest courts. Expenses related to this litigation and any potential additional loss would be reflected in discontinued operations, consistent with the Company's classification of expenses related to its discontinued Brazil operations.
In a separate action filed in 2004 by Petroplus, a lower Brazilian court in January 2013 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.
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 lawsuits, claims and other loss contingencies relating to issues such as contract disputes, product liability, patents and trademarks, advertising, and 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.
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 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, 2014 and June 30, 2013.
As of March 31, 2014, the Company was a party to a letter of credit of $12, related to one of its insurance carriers, of which $0 had been drawn upon.
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NOTE 10. SEGMENT RESULTS
The Company operates through strategic business units that are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International.
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.
Net sales | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Cleaning | $ | 437 | $ | 454 | $ | 1,348 | $ | 1,351 | ||||||||
Household | 428 | 413 | 1,152 | 1,125 | ||||||||||||
Lifestyle | 237 | 245 | 692 | 690 | ||||||||||||
International | 284 | 301 | 888 | 910 | ||||||||||||
Total | $ | 1,386 | $ | 1,413 | $ | 4,080 | $ | 4,076 | ||||||||
Earnings (losses) from continuing operations before income taxes | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Cleaning | $ | 93 | $ | 99 | $ | 325 | $ | 319 | ||||||||
Household | 76 | 76 | 169 | 182 | ||||||||||||
Lifestyle | 67 | 71 | 189 | 197 | ||||||||||||
International | 11 | 20 | 69 | 73 | ||||||||||||
Corporate | (33 | ) | (64 | ) | (149 | ) | (187 | ) | ||||||||
Total | $ | 214 | $ | 202 | $ | 603 | $ | 584 |
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% and 26% for the three and nine months ended March 31, 2014, respectively, and 27% and 26% for the three and nine months ended March 31, 2013, respectively.
Venezuela
Net sales from the Company's Venezuela subsidiary (the Venezuela business) represented approximately 1% and 2% of the Company's consolidated net sales for the three and nine months ended March 31, 2014, respectively. The operating environment in Venezuela is challenging, with high inflation, political instability, governmental restrictions in the form of currency exchange, price and margin controls, and the possibility of government actions such as further devaluations, business occupations or intervention and expropriation of assets. In addition, the foreign exchange controls in Venezuela limit the Venezuela business's ability to remit dividends and pay intercompany balances.
Due to a sustained inflationary environment, the financial statements of the Venezuela business are consolidated under the rules governing the preparation of financial statements in a highly inflationary economy. As such, the Venezuela business's non-U.S. dollar (non-USD) monetary assets and liabilities are remeasured into U.S. dollars (USD) each reporting period with the resulting gains and losses reflected in other expense (income), net.
On February 8, 2013, the Venezuelan government announced a devaluation of its currency exchange commission (CADIVI) rate from 4.3 to 6.3 bolivares fuertes (VEF) per USD and the elimination of the alternative currency exchange system, SITME. Prior to February 8, 2013, the Company had been utilizing the rate at which it had been obtaining USD through SITME to remeasure its Venezuelan financial statements, which was 5.7 VEF per USD at the announcement date. In response to these developments, the Company began utilizing the CADIVI rate of 6.3 VEF per USD to translate the financial statements of the Venezuela business.
In March 2013, the Venezuelan government announced the creation of a new alternative currency exchange system, a government-controlled auction process referred to as SICAD I, whereby companies meeting certain qualifications may periodically bid to acquire USD. In January 2014, the Venezuelan government announced further changes to the regulations governing the currency exchange systems. Among the changes was the creation of a new government agency, CENCOEX, to administer the currency exchange mechanism previously administered by CADIVI. Based on an analysis of the newly published exchange regulations and an updated assessment of currency requirements applicable to the Venezuela business, the Company has now concluded that the SICAD I rate is currently the most appropriate rate for the Company to use for financial reporting purposes. Consequently, the Company began using the SICAD I rate to record the results of business operations and remeasure the gain or loss on non-USD monetary assets and liabilities in Venezuela beginning on March 1, 2014. The Company recorded a non-tax deductible remeasurement loss of $12 for the quarter ended March 31, 2014, reflecting the effective devaluation from the CENCOEX rate of 6.3 to the March 28, 2014 posted SICAD I rate of 10.8.
In February 2014, the Venezuelan government established another currency exchange mechanism, SICAD II, that provides an additional method to exchange VEF at exchange rates significantly higher than the CENCOEX and SICAD I rates. As of March 28, 2014, the posted rate of the SICAD II exchange system was 50.8 VEF per USD. The Company is monitoring the evolution of this new currency exchange and related published regulations to assess their implications for business operations, future cash flow, and financial reporting for the Venezuela business.
As of March 31, 2014, using the SICAD I rate of 10.8, the Venezuela business had total assets of $71 including cash and cash equivalents of $9, a long-term value added tax (VAT) receivable from the Venezuelan government of $8 and intangible assets excluding goodwill of $6. The Company also had net deferred tax assets of $14 related to foreign tax credits attributable to the Venezuela business as of March 31, 2014. As a result of the devaluation from the CENCOEX rate to the SICAD I rate, which drove the $12 non-tax deductible remeasurement loss referred to above, the Company also evaluated the impact of the currency devaluation and other business factors on the recorded values of its assets, including goodwill, intangible asset groupings containing Venezuela assets, and deferred tax balances related to the Venezuela business. As a result of this evaluation, the Company identified indications of impairment and recorded noncash tax deductible intangible asset impairment charges on trademark values totaling $4 and noncash non-tax deductible increases in deferred tax valuation allowances of $2 during the three months ended March 31, 2014. The aggregate impact of these noncash charges on the Company's condensed consolidated statements of earnings and comprehensive income for the three months ended March 31, 2014, was to reduce earnings from continuing operations by $18.
The Company continues to closely monitor developments in this volatile environment, assess evolving business risks and actively manage its investments in Venezuela.
Argentina
The operating environment in Argentina also presents challenges, including price controls on some of the Company's products, a devaluing currency, and inflation. For the year ended June 30, 2013 and the nine months ended March 31, 2014, the value of the Argentine peso (ARS) per USD declined 16% and 33%, respectively. Were the ARS to continue to decline in the future, it could have an additional adverse impact on the Company's net sales and net earnings. As of March 31, 2014, using an exchange rate of 8.0 ARS per USD, the Company's Argentina subsidiary had cash and cash equivalents of $21 and total assets of $93. For the nine months ended March 31, 2014 and the year ended June 30, 2013, net sales from the Company's Argentina subsidiary represented approximately 3% of the Company's consolidated net sales for those periods. The Company is closely monitoring developments in Argentina and is taking steps intended to mitigate the adverse conditions.
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NOTE 11. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value in the consolidated balance sheets are required to be classified and disclosed in one of the following three categories:
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, 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 non-qualified deferred compensation plans, which were classified as Level 1. As of June 30, 2013, 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.
Fair Value of Financial Instruments
Derivatives
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. The Company does not designate its foreign currency forward contracts for intercompany transactions as accounting hedges. During the three and nine months ended March 31, 2014 and 2013, the Company had no hedging instruments designated as fair value hedges.
Trust Assets
Beginning in December 2013, the Company holds mutual funds and cash equivalents as part of trusts related to certain of its non-qualified 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 derivatives designated as hedging instruments and trust assets related to certain of the Company's non-qualified deferred compensation plans were recorded at fair value in the condensed consolidated balance sheets as follows:
Balance sheet | 3/31/2014 | 6/30/2013 | ||||||||||||
classification | Level 1 | Level 2 | Level 1 | Level 2 | ||||||||||
Assets | ||||||||||||||
Foreign exchange derivative contracts | Other current assets | $ | - | $ | - | $ | - | $ | 4 | |||||
Trust assets for non-qualified deferred compensation plans | Other assets | 30 | - | - | - | |||||||||
$ | 30 | $ | - | $ | - | $ | 4 | |||||||
Liabilities | ||||||||||||||
Commodity purchase derivative contracts | Accrued liabilities | $ | - | $ | 2 | $ | - | $ | 3 | |||||
Interest rate contracts | Accrued liabilities | - | 4 | - | - | |||||||||
Foreign exchange derivative contracts | Accrued liabilities | - | 1 | - | - | |||||||||
$ | - | $ | 7 | $ | - | $ | 3 |
For derivative instruments designated and qualifying as cash flow hedges, the effective portion of gains or losses is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The estimated amount of the existing net loss in OCI as of March 31, 2014, expected to be reclassified into earnings within the next 12 months was $6. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the three and nine months ended March 31, 2014 and 2013, respectively, hedge ineffectiveness was not significant. The Company de-designates cash flow hedge relationships whenever it determines that the hedge relationships are no longer highly effective or that the forecasted transaction is no longer probable. The portion of gains or losses on the derivative instrument previously accumulated in OCI for de-designated hedges remains in accumulated OCI until the forecasted transaction is recognized in earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. Changes in the value of derivative instruments not designated as accounting hedges are recorded in other expense (income), net.
The effects of derivative instruments designated as hedging instruments on OCI and the condensed consolidated statements of earnings and comprehensive income were as follows:
Gain (loss) recognized in OCI | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Commodity purchase contracts | $ | - | $ | - | $ | 1 | $ | 2 | ||||||||
Interest rate contracts | (4 | ) | - | (4 | ) | (1 | ) | |||||||||
Foreign exchange contracts | (2 | ) | - | (1 | ) | (1 | ) | |||||||||
Total | $ | (6 | ) | $ | - | $ | (4 | ) | $ | - | ||||||
Gain (loss) reclassified from OCI and recognized in earnings | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Interest rate contracts | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) | ||||
Foreign exchange contracts | 1 | - | 3 | - | ||||||||||||
Total | $ | - | $ | (1 | ) | $ | - | $ | (3 | ) |
The gains and losses reclassified from OCI and recognized in earnings during the three and nine months ended March 31, 2014 and 2013, for foreign exchange contracts were included in cost of products sold. The losses reclassified from OCI and recognized in earnings during the three and nine months ended March 31, 2014 and 2013, for interest rate contracts were included in interest expense.
The gain from derivatives not designated as accounting hedges was $0 for both the three and nine months ended March 31, 2014, and $0 for both the three and nine months ended March 31, 2013, and was reflected in other expense (income), net.
Changes in the value of the trust assets related to certain of the Company's non-qualified deferred compensation plans are recorded in other expense (income), net, in the condensed consolidated statements of earnings and comprehensive income. For both the three and nine months ended March 31, 2014, the Company reflected $0 in other expense (income), net, related to these assets.
Other
The carrying values of cash and cash equivalents, accounts receivable, notes and loans payable and accounts payable approximated their fair values as of March 31, 2014 and June 30, 2013, due to their short maturity and nature. The estimated fair value of long-term debt, including current maturities, was $2,257 and $2,263 as of March 31, 2014, and June 30, 2013, respectively. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers, and was classified as Level 2. The Company accounts for its long-term debt at face value, net of any unamortized discounts or premiums.
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Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three and nine months ended March 31, 2014 and 2013, 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, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014, or for any other future period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2013, which includes a complete set of footnote disclosures, including the Company's significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
Recently Issued Accounting Pronouncements
On April 10, 2014, the Financial Accounting Standards Board (FASB) issued an update to current accounting standards 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.
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3/31/2014 | 6/30/2013 | ||||||
Finished goods | $ | 383 | $ | 321 | |||
Raw materials and packaging | 114 | 121 | |||||
Work in process | 2 | 3 | |||||
LIFO allowances | (39 | ) | (40 | ) | |||
Allowances for obsolescence | (13 | ) | (11 | ) | |||
Total | $ | 447 | $ | 394 |
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3/31/2014 | 6/30/2013 | ||||
Venture agreement net terminal obligation | $ | 288 | $ | 284 | |
Employee benefit obligations | 287 | 270 | |||
Taxes | 77 | 74 | |||
Other | 112 | 114 | |||
Total | $ | 764 | $ | 742 |
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Three Months Ended | Nine Months Ended | |||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||
Basic | 129,318 | 131,619 | 129,743 | 130,960 | ||||
Dilutive effect of stock options and other | 2,237 | 1,856 | 2,261 | 1,669 | ||||
Diluted | 131,555 | 133,475 | 132,004 | 132,629 |
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Three Months Ended | Three Months Ended | ||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | ||||||||||||
Net earnings | $ | 137 | 133 | $ | 388 | 389 | |||||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Foreign currency translation adjustments | (28 | ) | (5 | ) | (47 | ) | 13 | ||||||||
Net unrealized (losses) gains on derivatives | (4 | ) | 1 | (2 | ) | 1 | |||||||||
Pension and postretirement benefit adjustments | 1 | 2 | (2 | ) | 4 | ||||||||||
Total other comprehensive (loss) income, net of tax | (31 | ) | (2 | ) | (51 | ) | 18 | ||||||||
Comprehensive income | $ | 106 | $ | 131 | $ | 337 | $ | 407 |
Foreign | Pension and | |||||||||||||||
currency | Net unrealized | postretirement | ||||||||||||||
translation | losses on | benefit | ||||||||||||||
adjustments | derivatives | adjustments | Total | |||||||||||||
Balance as of June 30, 2013, net of tax | $ | (209 | ) | $ | (30 | ) | $ | (128 | ) | $ | (367 | ) | ||||
Other comprehensive losses before reclassifications | (47 | ) | (2 | ) | (5 | ) | (54 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive net losses | - | - | 3 | 3 | ||||||||||||
Net other comprehensive losses | (47 | ) | (2 | ) | (2 | ) | (51 | ) | ||||||||
Balance as of March 31, 2014, net of tax | $ | (256 | ) | $ | (32 | ) | $ | (130 | ) | $ | (418 | ) |
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Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Service cost | $ | - | $ | - | $ | 1 | $ | 2 | ||||||||
Interest cost | 7 | 6 | 20 | 18 | ||||||||||||
Expected return on plan assets | (5 | ) | (7 | ) | (18 | ) | (22 | ) | ||||||||
Amortization of unrecognized items | 2 | 3 | 8 | 9 | ||||||||||||
Total | $ | 4 | $ | 2 | $ | 11 | $ | 7 |
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Net sales | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Cleaning | $ | 437 | $ | 454 | $ | 1,348 | $ | 1,351 | ||||||||
Household | 428 | 413 | 1,152 | 1,125 | ||||||||||||
Lifestyle | 237 | 245 | 692 | 690 | ||||||||||||
International | 284 | 301 | 888 | 910 | ||||||||||||
Total | $ | 1,386 | $ | 1,413 | $ | 4,080 | $ | 4,076 | ||||||||
Earnings (losses) from continuing operations before income taxes | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Cleaning | $ | 93 | $ | 99 | $ | 325 | $ | 319 | ||||||||
Household | 76 | 76 | 169 | 182 | ||||||||||||
Lifestyle | 67 | 71 | 189 | 197 | ||||||||||||
International | 11 | 20 | 69 | 73 | ||||||||||||
Corporate | (33 | ) | (64 | ) | (149 | ) | (187 | ) | ||||||||
Total | $ | 214 | $ | 202 | $ | 603 | $ | 584 |
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Balance sheet | 3/31/2014 | 6/30/2013 | ||||||||||||
classification | Level 1 | Level 2 | Level 1 | Level 2 | ||||||||||
Assets | ||||||||||||||
Foreign exchange derivative contracts | Other current assets | $ | - | $ | - | $ | - | $ | 4 | |||||
Trust assets for non-qualified deferred compensation plans | Other assets | 30 | - | - | - | |||||||||
$ | 30 | $ | - | $ | - | $ | 4 | |||||||
Liabilities | ||||||||||||||
Commodity purchase derivative contracts | Accrued liabilities | $ | - | $ | 2 | $ | - | $ | 3 | |||||
Interest rate contracts | Accrued liabilities | - | 4 | - | - | |||||||||
Foreign exchange derivative contracts | Accrued liabilities | - | 1 | - | - | |||||||||
$ | - | $ | 7 | $ | - | $ | 3 |
Gain (loss) recognized in OCI | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Commodity purchase contracts | $ | - | $ | - | $ | 1 | $ | 2 | ||||||||
Interest rate contracts | (4 | ) | - | (4 | ) | (1 | ) | |||||||||
Foreign exchange contracts | (2 | ) | - | (1 | ) | (1 | ) | |||||||||
Total | $ | (6 | ) | $ | - | $ | (4 | ) | $ | - | ||||||
Gain (loss) reclassified from OCI and recognized in earnings | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2014 | 3/31/2013 | 3/31/2014 | 3/31/2013 | |||||||||||||
Interest rate contracts | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) | ||||
Foreign exchange contracts | 1 | - | 3 | - | ||||||||||||
Total | $ | - | $ | (1 | ) | $ | - | $ | (3 | ) |
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