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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three months ended September 30, 2016 and 2015, 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. However, the financial results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.
Effective September 22, 2014, the Companys 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 condensed consolidated financial statements for all periods presented herein.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (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 Companys Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2016, which includes a complete set of footnote disclosures including the Companys significant accounting policies.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including requiring excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the consolidated statement of earnings. Additionally, the standard requires cash flows from excess tax benefits and deficiencies, previously classified as a financing activity, to be classified as an operating activity in the consolidated statement of cash flows. The Company adopted this guidance in the first quarter of fiscal year 2017. Excess tax benefits of $6 were recognized in the consolidated statement of earnings and classified as an operating activity in the consolidated statement of cash flows during the three months ended September 30, 2016. The prior period consolidated statement of cash flows has not been adjusted as permitted. The adoption resulted in approximately a 2 percentage point benefit to the Companys effective tax rate for the first quarter of fiscal year 2017. The guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company did not make this election and will continue to account for forfeitures on an estimated basis.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation will depend on the classification of the lease as either a finance or an operating lease. ASU 2016-02 also requires expanded disclosures about leasing arrangements. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In April 2015, the FASB issued 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 Company adopted this standard in the first quarter of fiscal year 2017 and retrospectively applied the standard to the June 30, 2016 consolidated balance sheet, resulting in an $8 reduction in Other assets and Long-term debt. The adoption had no impact on the Companys consolidated statement of earnings or consolidated statement of cash flows.
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 or voting interest entities. The Company adopted this standard in the first quarter of fiscal year 2017. The adoption did not have an impact on the Companys 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 the adoption of this guidance will have on its consolidated financial statements.
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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 governments 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 Venezuelas 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 Companys condensed consolidated financial statements for all periods presented. The results of Clorox Venezuela had historically been part of the International reportable segment.
Net sales for Clorox Venezuela were $0 for each of the three months ended September 30, 2016 and 2015.
The following table provides a summary of earnings (losses) from discontinued operations for Clorox Venezuela and earnings (losses) from discontinued operations other than Clorox Venezuela for the periods indicated:
Three Months Ended | |||||||
9/30/2016 | 9/30/2015 | ||||||
Operating losses from Clorox Venezuela before income taxes | $ | - | $ | - | |||
Exit costs and other related expenses for Clorox Venezuela | - | - | |||||
Total losses from Clorox Venezuela before income taxes | - | - | |||||
Income tax benefit attributable to Clorox Venezuela | - | - | |||||
Total losses from Clorox Venezuela, net of tax | - | - | |||||
Gains (losses) from discontinued operations | |||||||
other than Clorox Venezuela, net of tax | - | (1 | ) | ||||
Losses from discontinued operations, net of tax | $ | - | $ | (1 | ) |
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NOTE 3. BUSINESSES ACQUIRED
On May 2, 2016, the Company acquired 100 percent of ReNew Life Holdings Corporation (RenewLife), a leading brand in digestive health. The amount paid was $290 funded through commercial paper. The amount paid of $290 represents the aggregate purchase price less cash acquired. The purchase of the RenewLife business reflects the Companys strategy to acquire leading brands with attractive margins in growth categories. Results for RenewLifes U.S. business are reflected in the Household reportable segment and results for RenewLifes international business are reflected in the International reportable segment.
The assets and liabilities of RenewLife were recorded at their respective estimated fair value as of the date of the acquisition using U.S. GAAP for business combinations. The excess of the purchase price over the fair value of the net identifiable assets acquired was allocated to goodwill. Goodwill recorded primarily reflects the value of expanding the Companys portfolio further into the health and wellness arena.
The following table summarizes the estimated fair value of RenewLifes assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date. Due to the timing of the acquisition, the fair value of the assets acquired and liabilities assumed are based on a preliminary valuation and the Companys estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to goodwill and income taxes. The weighted-average estimated useful life of intangible assets subject to amortization is 15 years.
RenewLife | ||||
Goodwill | $ | 137 | ||
Trademarks | 134 | |||
Customer relationships | 36 | |||
Property, plant and equipment | 3 | |||
Working capital, net | 41 | |||
Deferred income taxes | (61 | ) | ||
Purchase Price | $ | 290 |
Pro forma results reflecting the acquisition were not presented because the acquisition did not meet the threshold requirements for additional disclosure.
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NOTE 4. INVENTORIES, NET
Inventories, net, consisted of the following as of:
9/30/2016 | 6/30/2016 | |||||||
Finished goods | $ | 374 | $ | 361 | ||||
Raw materials and packaging | 114 | 111 | ||||||
Work in process | 3 | 3 | ||||||
LIFO allowances | (26 | ) | (32 | ) | ||||
Total | $ | 465 | $ | 443 |
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NOTE 5. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis in the condensed 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 entitys own assumptions.
As of September 30, 2016 and June 30, 2016, the Companys financial assets and liabilities that were measured at fair value on a recurring basis during the applicable periods included derivative financial instruments, which were classified as either Level 1 or Level 2, and trust assets to fund certain of the Companys 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, foreign currency and counterparty 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 futures exchanges or commodity derivative dealers.
As of September 30, 2016, the notional amount of commodity derivatives was $24, of which $14 related to jet fuel swaps and $10 related to soybean oil futures. As of June 30, 2016, the notional amount of commodity derivatives was $30, of which $16 related to jet fuel swaps and $14 related to soybean oil futures.
Foreign Currency Risk Management
The Company may also enter into certain over-the-counter derivative contracts to manage a portion of the Companys forecasted foreign currency exposure associated with the purchase of inventory. These foreign currency contracts generally have durations of no longer than 2 years. 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 Companys subsidiaries to hedge forecasted purchases of inventory were $57 as of September 30, 2016, and $84 as of June 30, 2016.
Interest Rate Risk Management
The Company may also enter into over-the-counter interest rate derivative instruments to fix a portion of the benchmark interest rate prior to an anticipated issuance of fixed rate debt or to manage the Companys level of fixed and floating rate debt. The interest rate derivative instruments are measured at fair value using information quoted by U.S. government bond dealers.
As of both September 30, 2016 and June 30, 2016, the Company had no interest rate derivative instruments.
Counterparty Risk Management and Derivative Contract Requirements
The Company utilizes a variety of financial institutions as counterparties for over-the-counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instrument exceeds contractually defined counterparty liability position limits. Of the derivative instruments of $3 and $5 reflected in Accounts payable and accrued liabilities as of September 30, 2016 and June 30, 2016, respectively, $2 and $4, respectively, contained such terms. As of both September 30, 2016 and June 30, 2016, neither the Company nor any counterparty was required to post any collateral as no counterparty liability position limits were exceeded.
Certain terms of the agreements governing the Companys over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poors and Moodys 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 Companys 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 September 30, 2016 and June 30, 2016, the Company and each of its counterparties had been assigned investment grade credit ratings by both Standard & Poors and Moodys.
Certain of the Companys 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 Companys broker for trades conducted on that exchange. As of September 30, 2016 and June 30, 2016, the Company maintained cash margin balances related to exchange-traded futures contracts of $1, which are classified as Other current assets on the condensed consolidated balance sheets.
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 participants in the deferred compensation plans, who are the Companys current and former employees, 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. These 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 interests in mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments.
Fair Value of Financial Instruments
The following table summarizes the fair value of the Companys assets and liabilities for which disclosure of fair value is required:
9/30/2016 | 6/30/2016 | |||||||||||||||
Balance sheet classification |
Fair value hierarchy level |
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value | |||||||||||
Assets | ||||||||||||||||
Investments including money market | Cash and cash | |||||||||||||||
funds | equivalents (a) | 1 | $ | 253 | $ | 253 | $ | 234 | $ | 234 | ||||||
Time deposits | Cash and cash | |||||||||||||||
equivalents (a) | 2 | 76 | 76 | 79 | 79 | |||||||||||
Commodity purchase derivative contracts | Other current assets | 1 | 1 | 1 | 1 | 1 | ||||||||||
Foreign exchange derivative contracts | Other current assets | 2 | 1 | 1 | 1 | 1 | ||||||||||
Commodity purchase derivative contracts | Other assets | 2 | 1 | 1 | 1 | 1 | ||||||||||
Trust assets for nonqualified deferred | Other assets | |||||||||||||||
compensation plans | 1 | 62 | 62 | 52 | 52 | |||||||||||
$ | 394 | $ | 394 | $ | 368 | $ | 368 | |||||||||
Liabilities | ||||||||||||||||
Notes and loans payable | Notes and loans payable (b) | 2 | $ | 618 | $ | 618 | $ | 523 | $ | 523 | ||||||
Commodity purchase derivative contracts | Accounts payable and | |||||||||||||||
accrued liabilities | 2 | 1 | 1 | 1 | 1 | |||||||||||
Foreign exchange derivative contracts | Accounts payable and | |||||||||||||||
accrued liabilities | 2 | 2 | 2 | 4 | 4 | |||||||||||
Current maturities of long-term debt | Current maturities of long- | |||||||||||||||
and Long-term debt | term debt and Long-term | |||||||||||||||
debt (c) | 2 | 1,789 | 1,911 | 1,789 | 1,922 | |||||||||||
$ | 2,410 | $ | 2,532 | $ | 2,317 | $ | 2,450 |
____________________
(a) | Cash and 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 and cash equivalents are recorded at cost, which approximates fair value. | |
(b) | Notes and loans payable 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) | Current maturities of long-term debt and Long-term debt are recorded at cost. The fair value of Long-term debt, including current maturities, is determined using secondary market prices quoted by corporate bond dealers, and is 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 Comprehensive income and Net earnings were as follows:
Three Months Ended | ||||||||
Gains (losses) recognized in Other comprehensive income | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Commodity purchase derivative contracts | $ | - | $ | (7 | ) | |||
Interest rate derivative contracts | - | - | ||||||
Foreign exchange derivative contracts | - | 6 | ||||||
Total | $ | - | $ | (1 | ) | |||
Three Months Ended | ||||||||
Gains (losses) reclassified from Accumulated other comprehensive loss and recognized in Net earnings | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Commodity purchase derivative contracts | $ | (1 | ) | $ | 2 | |||
Interest rate derivative contracts | (2 | ) | 2 | |||||
Foreign exchange derivative contracts | (1 | ) | (1 | ) | ||||
Total | $ | (4 | ) | $ | 3 |
The gains (losses) reclassified from Accumulated other comprehensive losses and recognized in Net earnings during the three months ended September 30, 2016 and 2015, for commodity purchase and foreign exchange contracts were included in Cost of products sold, and for interest rate contracts were included in Interest expense.
The estimated amount of the existing net gain (loss) in Accumulated other comprehensive losses as of September 30, 2016, that is expected to be reclassified into Net earnings within the next twelve months is $8. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in Net earnings. During the three months ended September 30, 2016 and 2015, hedge ineffectiveness was not significant.
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NOTE 6. INCOME TAXES
In determining its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The effective tax rate on earnings from continuing operations was 32.0% for the three months ended September 30, 2016, and 34.5% for the three months ended September 30, 2015. This decrease was primarily due to the recognition of excess tax benefits from share-based compensation upon the adoption of ASU No. 2016-09 in the first quarter of fiscal year 2017. Refer to Note 1 for further details.
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NOTE 7. NET EARNINGS PER SHARE (EPS)
The following is a 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 | ||||
9/30/2016 | 9/30/2015 | |||
Basic | 129,449 | 129,155 | ||
Dilutive effect of stock options and other | 2,744 | 2,065 | ||
Diluted | 132,193 | 131,220 | ||
Antidilutive stock options and other | - | 1,271 |
The Company has two share repurchase programs: an open-market purchase program with an authorized aggregate purchase amount of up to $750, all of which was available for share repurchases as of September 30, 2016, and a program to offset the anticipated impact of share dilution related to share-based awards (the Evergreen Program), which has no authorization limit as to amount or timing of repurchases.
Share repurchases under authorized programs were as follows during the three months ended September 30:
Three Months Ended | ||||||||||
9/30/2016 | 9/30/2015 | |||||||||
Amount | Shares (in 000's) |
Amount | Shares (in 000's) | |||||||
Open-market purchase programs | $ | - | - | $ | - | - | ||||
Evergreen Program | 113 | 883 | 112 | 1,006 | ||||||
Total | $ | 113 | 883 | $ | 112 | 1,006 |
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NOTE 8. COMPREHENSIVE INCOME
Comprehensive income was as follows for the periods indicated:
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Earnings from continuing operations | $ | 179 | $ | 173 | ||||
Earnings (losses) from discontinued operations, net of tax | - | (1 | ) | |||||
Net earnings | 179 | 172 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation adjustments | (1 | ) | (43 | ) | ||||
Net unrealized gains (losses) on derivatives | 3 | 3 | ||||||
Pension and postretirement benefit adjustments | 1 | 1 | ||||||
Total other comprehensive income (loss), net of tax | 3 | (39 | ) | |||||
Comprehensive income | $ | 182 | $ | 133 |
Changes in Accumulated other comprehensive net (losses) income by component were as follows for the three months ended September 30:
Foreign currency translation adjustments |
Net unrealized gains (losses) on derivatives |
Pension and postretirement benefit adjustments |
Accumulated other comprehensive (losses) income | |||||||||||||
Balance as of June 30, 2015 | $ | (300 | ) | $ | (53 | ) | $ | (149 | ) | $ | (502 | ) | ||||
Other comprehensive (loss) income before | ||||||||||||||||
reclassifications | (41 | ) | - | - | (41 | ) | ||||||||||
Amounts reclassified from accumulated other | ||||||||||||||||
comprehensive net losses | - | 3 | 1 | 4 | ||||||||||||
Income tax benefit (expense) | (2 | ) | - | - | (2 | ) | ||||||||||
Net current period other comprehensive income (loss) | (43 | ) | 3 | 1 | (39 | ) | ||||||||||
Balance as of September 30, 2015 | $ | (343 | ) | $ | (50 | ) | $ | (148 | ) | $ | (541 | ) | ||||
Balance as of June 30, 2016 | $ | (353 | ) | $ | (44 | ) | $ | (173 | ) | $ | (570 | ) | ||||
Other comprehensive (loss) income before | ||||||||||||||||
reclassifications | (1 | ) | - | - | (1 | ) | ||||||||||
Amounts reclassified from accumulated other | ||||||||||||||||
comprehensive net losses | - | 4 | 2 | 6 | ||||||||||||
Income tax benefit (expense) | - | (1 | ) | (1 | ) | (2 | ) | |||||||||
Net current period other comprehensive income (loss) | (1 | ) | 3 | 1 | 3 | |||||||||||
Balance as of September 30, 2016 | $ | (354 | ) | $ | (41 | ) | $ | (172 | ) | $ | (567 | ) |
Included in foreign currency translation adjustments are re-measurement losses on long-term intercompany loans where settlement is not planned or anticipated in the foreseeable future. For the three months ended September 30, 2016 and 2015, Other comprehensive income (loss) on these loans totaled $0 and $(5), respectively, and there were no amounts reclassified from Accumulated other comprehensive net (losses) income.
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NOTE 9. EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost for the Companys retirement income plans:
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Service cost | $ | - | $ | - | ||||
Interest cost | 5 | 7 | ||||||
Expected return on plan assets | (5 | ) | (4 | ) | ||||
Amortization of unrecognized items | 3 | 2 | ||||||
Total | $ | 3 | $ | 5 |
The net periodic benefit cost for the Companys retirement health care plans was $0 for each of the three months ended September 30, 2016 and 2015.
During the three months ended September 30, 2016, the Company made $15 in discretionary contributions to the domestic qualified retirement income plan.
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NOTE 10. 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 $13 and $14 as of September 30, 2016 and June 30, 2016, 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 September 30, 2016 and June 30, 2016. 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 Companys 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 Companys exposure may exceed the amount recorded, any amount of such additional exposures, or range of exposures, is not estimable at this time.
The Company is subject to various legal proceedings, claims and other loss contingencies, including, without limitation, loss contingencies relating to contractual arrangements, product liability, patents and trademarks, advertising, labor and employment, environmental, health and safety and other matters. With respect to these proceedings, claims and other loss contingencies, while considerable uncertainty exists, in the opinion of management at this time, the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, either individually or in the aggregate, on the Companys condensed 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, either individually or in the aggregate, on the Companys condensed consolidated financial statements taken as a whole.
The Company had not recorded any liabilities on the aforementioned guarantees as of September 30, 2016.
As of September 30, 2016, the Company was a party to letters of credit of $10 primarily related to one of its insurance carriers, of which $0 had been drawn upon.
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NOTE 11. SEGMENT RESULTS
The Company operates through strategic business units that are aggregated into four reportable segments based on the economics and nature of the products sold: Cleaning, Household, Lifestyle and International. As a result of Clorox Venezuela being reported as discontinued operations, the results of Clorox Venezuela are no longer included in the International reportable segment.
Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, other current assets, property and equipment, other investments and deferred taxes.
The table below presents reportable segment information and a reconciliation of the segment information to the Companys 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 | Earnings (losses) from continuing operations before income taxes | |||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||
9/30/2016 | 9/30/2015 | 9/30/2016 | 9/30/2015 | |||||||||||
Cleaning | $ | 534 | $ | 497 | $ | 164 | $ | 149 | ||||||
Household | 422 | 411 | 69 | 82 | ||||||||||
Lifestyle | 236 | 231 | 62 | 59 | ||||||||||
International | 251 | 251 | 27 | 32 | ||||||||||
Corporate | - | - | (58 | ) | (58 | ) | ||||||||
Total | $ | 1,443 | $ | 1,390 | $ | 264 | $ | 264 |
All intersegment sales are eliminated and are not included in the Companys reportable segments net sales.
Net sales to the Companys largest customer, Wal-Mart Stores, Inc. and its affiliates, as a percentage of consolidated net sales, were 26% and 27% for the three months ended September 30, 2016 and 2015, respectively.
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Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three months ended September 30, 2016 and 2015, 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. However, the financial results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.
Effective September 22, 2014, the Companys 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 condensed consolidated financial statements for all periods presented herein.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (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 Companys Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2016, which includes a complete set of footnote disclosures including the Companys significant accounting policies.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including requiring excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the consolidated statement of earnings. Additionally, the standard requires cash flows from excess tax benefits and deficiencies, previously classified as a financing activity, to be classified as an operating activity in the consolidated statement of cash flows. The Company adopted this guidance in the first quarter of fiscal year 2017. Excess tax benefits of $6 were recognized in the consolidated statement of earnings and classified as an operating activity in the consolidated statement of cash flows during the three months ended September 30, 2016. The prior period consolidated statement of cash flows has not been adjusted as permitted. The adoption resulted in approximately a 2 percentage point benefit to the Companys effective tax rate for the first quarter of fiscal year 2017. The guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company did not make this election and will continue to account for forfeitures on an estimated basis.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation will depend on the classification of the lease as either a finance or an operating lease. ASU 2016-02 also requires expanded disclosures about leasing arrangements. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In April 2015, the FASB issued 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 Company adopted this standard in the first quarter of fiscal year 2017 and retrospectively applied the standard to the June 30, 2016 consolidated balance sheet, resulting in an $8 reduction in Other assets and Long-term debt. The adoption had no impact on the Companys consolidated statement of earnings or consolidated statement of cash flows.
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 or voting interest entities. The Company adopted this standard in the first quarter of fiscal year 2017. The adoption did not have an impact on the Companys 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 the adoption of this guidance will have on its consolidated financial statements.
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The following table provides a summary of earnings (losses) from discontinued operations for Clorox Venezuela and earnings (losses) from discontinued operations other than Clorox Venezuela for the periods indicated:
Three Months Ended | |||||||
9/30/2016 | 9/30/2015 | ||||||
Operating losses from Clorox Venezuela before income taxes | $ | - | $ | - | |||
Exit costs and other related expenses for Clorox Venezuela | - | - | |||||
Total losses from Clorox Venezuela before income taxes | - | - | |||||
Income tax benefit attributable to Clorox Venezuela | - | - | |||||
Total losses from Clorox Venezuela, net of tax | - | - | |||||
Gains (losses) from discontinued operations | |||||||
other than Clorox Venezuela, net of tax | - | (1 | ) | ||||
Losses from discontinued operations, net of tax | $ | - | $ | (1 | ) |
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The following table summarizes the estimated fair value of RenewLifes assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date. Due to the timing of the acquisition, the fair value of the assets acquired and liabilities assumed are based on a preliminary valuation and the Companys estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to goodwill and income taxes. The weighted-average estimated useful life of intangible assets subject to amortization is 15 years.
RenewLife | ||||
Goodwill | $ | 137 | ||
Trademarks | 134 | |||
Customer relationships | 36 | |||
Property, plant and equipment | 3 | |||
Working capital, net | 41 | |||
Deferred income taxes | (61 | ) | ||
Purchase Price | $ | 290 |
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Inventories, net, consisted of the following as of:
9/30/2016 | 6/30/2016 | |||||||
Finished goods | $ | 374 | $ | 361 | ||||
Raw materials and packaging | 114 | 111 | ||||||
Work in process | 3 | 3 | ||||||
LIFO allowances | (26 | ) | (32 | ) | ||||
Total | $ | 465 | $ | 443 |
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The following table summarizes the fair value of the Companys assets and liabilities for which disclosure of fair value is required:
9/30/2016 | 6/30/2016 | |||||||||||||||
Balance sheet classification |
Fair value hierarchy level |
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value | |||||||||||
Assets | ||||||||||||||||
Investments including money market | Cash and cash | |||||||||||||||
funds | equivalents (a) | 1 | $ | 253 | $ | 253 | $ | 234 | $ | 234 | ||||||
Time deposits | Cash and cash | |||||||||||||||
equivalents (a) | 2 | 76 | 76 | 79 | 79 | |||||||||||
Commodity purchase derivative contracts | Other current assets | 1 | 1 | 1 | 1 | 1 | ||||||||||
Foreign exchange derivative contracts | Other current assets | 2 | 1 | 1 | 1 | 1 | ||||||||||
Commodity purchase derivative contracts | Other assets | 2 | 1 | 1 | 1 | 1 | ||||||||||
Trust assets for nonqualified deferred | Other assets | |||||||||||||||
compensation plans | 1 | 62 | 62 | 52 | 52 | |||||||||||
$ | 394 | $ | 394 | $ | 368 | $ | 368 | |||||||||
Liabilities | ||||||||||||||||
Notes and loans payable | Notes and loans payable (b) | 2 | $ | 618 | $ | 618 | $ | 523 | $ | 523 | ||||||
Commodity purchase derivative contracts | Accounts payable and | |||||||||||||||
accrued liabilities | 2 | 1 | 1 | 1 | 1 | |||||||||||
Foreign exchange derivative contracts | Accounts payable and | |||||||||||||||
accrued liabilities | 2 | 2 | 2 | 4 | 4 | |||||||||||
Current maturities of long-term debt | Current maturities of long- | |||||||||||||||
and Long-term debt | term debt and Long-term | |||||||||||||||
debt (c) | 2 | 1,789 | 1,911 | 1,789 | 1,922 | |||||||||||
$ | 2,410 | $ | 2,532 | $ | 2,317 | $ | 2,450 |
____________________
(a) | Cash and 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 and cash equivalents are recorded at cost, which approximates fair value. | |
(b) | Notes and loans payable 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) | Current maturities of long-term debt and Long-term debt are recorded at cost. The fair value of Long-term debt, including current maturities, is determined using secondary market prices quoted by corporate bond dealers, and is classified as Level 2. |
Three Months Ended | ||||||||
Gains (losses) recognized in Other comprehensive income | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Commodity purchase derivative contracts | $ | - | $ | (7 | ) | |||
Interest rate derivative contracts | - | - | ||||||
Foreign exchange derivative contracts | - | 6 | ||||||
Total | $ | - | $ | (1 | ) | |||
Three Months Ended | ||||||||
Gains (losses) reclassified from Accumulated other comprehensive loss and recognized in Net earnings | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Commodity purchase derivative contracts | $ | (1 | ) | $ | 2 | |||
Interest rate derivative contracts | (2 | ) | 2 | |||||
Foreign exchange derivative contracts | (1 | ) | (1 | ) | ||||
Total | $ | (4 | ) | $ | 3 |
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The following is a 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 | ||||
9/30/2016 | 9/30/2015 | |||
Basic | 129,449 | 129,155 | ||
Dilutive effect of stock options and other | 2,744 | 2,065 | ||
Diluted | 132,193 | 131,220 | ||
Antidilutive stock options and other | - | 1,271 |
Share repurchases under authorized programs were as follows during the three months ended September 30:
Three Months Ended | ||||||||||
9/30/2016 | 9/30/2015 | |||||||||
Amount | Shares (in 000's) |
Amount | Shares (in 000's) | |||||||
Open-market purchase programs | $ | - | - | $ | - | - | ||||
Evergreen Program | 113 | 883 | 112 | 1,006 | ||||||
Total | $ | 113 | 883 | $ | 112 | 1,006 |
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Comprehensive income was as follows for the periods indicated:
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Earnings from continuing operations | $ | 179 | $ | 173 | ||||
Earnings (losses) from discontinued operations, net of tax | - | (1 | ) | |||||
Net earnings | 179 | 172 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation adjustments | (1 | ) | (43 | ) | ||||
Net unrealized gains (losses) on derivatives | 3 | 3 | ||||||
Pension and postretirement benefit adjustments | 1 | 1 | ||||||
Total other comprehensive income (loss), net of tax | 3 | (39 | ) | |||||
Comprehensive income | $ | 182 | $ | 133 |
Changes in Accumulated other comprehensive net (losses) income by component were as follows for the three months ended September 30:
Foreign currency translation adjustments |
Net unrealized gains (losses) on derivatives |
Pension and postretirement benefit adjustments |
Accumulated other comprehensive (losses) income | |||||||||||||
Balance as of June 30, 2015 | $ | (300 | ) | $ | (53 | ) | $ | (149 | ) | $ | (502 | ) | ||||
Other comprehensive (loss) income before | ||||||||||||||||
reclassifications | (41 | ) | - | - | (41 | ) | ||||||||||
Amounts reclassified from accumulated other | ||||||||||||||||
comprehensive net losses | - | 3 | 1 | 4 | ||||||||||||
Income tax benefit (expense) | (2 | ) | - | - | (2 | ) | ||||||||||
Net current period other comprehensive income (loss) | (43 | ) | 3 | 1 | (39 | ) | ||||||||||
Balance as of September 30, 2015 | $ | (343 | ) | $ | (50 | ) | $ | (148 | ) | $ | (541 | ) | ||||
Balance as of June 30, 2016 | $ | (353 | ) | $ | (44 | ) | $ | (173 | ) | $ | (570 | ) | ||||
Other comprehensive (loss) income before | ||||||||||||||||
reclassifications | (1 | ) | - | - | (1 | ) | ||||||||||
Amounts reclassified from accumulated other | ||||||||||||||||
comprehensive net losses | - | 4 | 2 | 6 | ||||||||||||
Income tax benefit (expense) | - | (1 | ) | (1 | ) | (2 | ) | |||||||||
Net current period other comprehensive income (loss) | (1 | ) | 3 | 1 | 3 | |||||||||||
Balance as of September 30, 2016 | $ | (354 | ) | $ | (41 | ) | $ | (172 | ) | $ | (567 | ) |
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The following table summarizes the components of net periodic benefit cost for the Companys retirement income plans:
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Service cost | $ | - | $ | - | ||||
Interest cost | 5 | 7 | ||||||
Expected return on plan assets | (5 | ) | (4 | ) | ||||
Amortization of unrecognized items | 3 | 2 | ||||||
Total | $ | 3 | $ | 5 |
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The table below presents reportable segment information and a reconciliation of the segment information to the Companys 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 | Earnings (losses) from continuing operations before income taxes | |||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||
9/30/2016 | 9/30/2015 | 9/30/2016 | 9/30/2015 | |||||||||||
Cleaning | $ | 534 | $ | 497 | $ | 164 | $ | 149 | ||||||
Household | 422 | 411 | 69 | 82 | ||||||||||
Lifestyle | 236 | 231 | 62 | 59 | ||||||||||
International | 251 | 251 | 27 | 32 | ||||||||||
Corporate | - | - | (58 | ) | (58 | ) | ||||||||
Total | $ | 1,443 | $ | 1,390 | $ | 264 | $ | 264 |
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