Item 1. Financial
Statements
The Clorox Company
Condensed Consolidated Statements
of Earnings and Comprehensive Income (Unaudited)
(Dollars in millions,
except per share amounts)
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Net sales
|
$
|
1,426
|
|
$
|
1,401
|
|
|
$
|
4,161
|
|
|
$
|
4,098
|
|
Cost
of products sold
|
|
780
|
|
|
796
|
|
|
|
2,290
|
|
|
|
2,343
|
|
Gross profit
|
|
646
|
|
|
605
|
|
|
|
1,871
|
|
|
|
1,755
|
|
|
Selling and administrative expenses
|
|
204
|
|
|
206
|
|
|
|
581
|
|
|
|
577
|
|
Advertising costs
|
|
146
|
|
|
124
|
|
|
|
395
|
|
|
|
372
|
|
Research and development costs
|
|
35
|
|
|
34
|
|
|
|
99
|
|
|
|
97
|
|
Interest expense
|
|
22
|
|
|
25
|
|
|
|
67
|
|
|
|
77
|
|
Other (income) expense, net
|
|
2
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
Earnings from continuing operations before
income taxes
|
|
237
|
|
|
217
|
|
|
|
731
|
|
|
|
632
|
|
Income taxes on continuing operations
|
|
78
|
|
|
73
|
|
|
|
248
|
|
|
|
215
|
|
Earnings from continuing
operations
|
|
159
|
|
|
144
|
|
|
|
483
|
|
|
|
417
|
|
Earnings (losses) from discontinued operations, net of
tax
|
|
3
|
|
|
30
|
|
|
|
-
|
|
|
|
(28
|
)
|
Net earnings
|
$
|
162
|
|
$
|
174
|
|
|
$
|
483
|
|
|
$
|
389
|
|
|
Net
earnings (losses) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.23
|
|
$
|
1.09
|
|
|
$
|
3.73
|
|
|
$
|
3.20
|
|
Discontinued operations
|
|
0.02
|
|
|
0.22
|
|
|
|
-
|
|
|
|
(0.22
|
)
|
Basic net earnings per
share
|
$
|
1.25
|
|
$
|
1.31
|
|
|
$
|
3.73
|
|
|
$
|
2.98
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.21
|
|
$
|
1.08
|
|
|
$
|
3.67
|
|
|
$
|
3.14
|
|
Discontinued operations
|
|
0.02
|
|
|
0.22
|
|
|
|
-
|
|
|
|
(0.21
|
)
|
Diluted net earnings per
share
|
$
|
1.23
|
|
$
|
1.30
|
|
|
$
|
3.67
|
|
|
$
|
2.93
|
|
|
Weighted average shares outstanding (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
129,690
|
|
|
131,833
|
|
|
|
129,463
|
|
|
|
130,566
|
|
Diluted
|
|
131,647
|
|
|
134,115
|
|
|
|
131,652
|
|
|
|
133,090
|
|
|
Dividend declared per share
|
$
|
0.77
|
|
$
|
0.74
|
|
|
$
|
2.31
|
|
|
$
|
2.22
|
|
|
Comprehensive income
|
$
|
181
|
|
$
|
146
|
|
|
$
|
443
|
|
|
$
|
325
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
2
The Clorox Company
Condensed Consolidated Balance Sheets
(Dollars in millions, except per
share amounts)
|
3/31/2016
|
|
6/30/2015
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
414
|
|
|
$
|
382
|
|
Receivables, net
|
|
530
|
|
|
|
519
|
|
Inventories, net
|
|
460
|
|
|
|
385
|
|
Other current assets
|
|
186
|
|
|
|
143
|
|
Total current assets
|
|
1,590
|
|
|
|
1,429
|
|
Property, plant and equipment, net of accumulated
depreciation
|
|
|
|
|
|
|
|
and amortization of $1,907 and
$1,839, respectively
|
|
887
|
|
|
|
918
|
|
Goodwill
|
|
1,059
|
|
|
|
1,067
|
|
Trademarks, net
|
|
528
|
|
|
|
535
|
|
Other intangible assets, net
|
|
45
|
|
|
|
50
|
|
Other assets
|
|
175
|
|
|
|
165
|
|
Total assets
|
$
|
4,284
|
|
|
$
|
4,164
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Notes and loans
payable
|
$
|
432
|
|
|
$
|
95
|
|
Current
maturities of long-term debt
|
|
-
|
|
|
|
300
|
|
Accounts payable
|
|
436
|
|
|
|
431
|
|
Accrued
liabilities
|
|
519
|
|
|
|
548
|
|
Income taxes payable
|
|
-
|
|
|
|
31
|
|
Total current liabilities
|
|
1,387
|
|
|
|
1,405
|
|
Long-term debt
|
|
1,796
|
|
|
|
1,796
|
|
Other liabilities
|
|
735
|
|
|
|
750
|
|
Deferred income taxes
|
|
107
|
|
|
|
95
|
|
Total liabilities
|
|
4,025
|
|
|
|
4,046
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
Preferred stock: $1.00 par value; 5,000,000 shares authorized;
none
|
|
|
|
|
|
|
|
issued or
outstanding
|
|
-
|
|
|
|
-
|
|
Common stock: $1.00 par value; 750,000,000
shares authorized; 158,741,461 shares
|
|
|
|
|
|
|
|
issued
at both March 31, 2016 and June 30, 2015; and 129,296,653 and
128,614,310
|
|
|
|
|
|
|
|
shares
outstanding at March 31, 2016 and June 30, 2015, respectively
|
|
159
|
|
|
|
159
|
|
Additional paid-in capital
|
|
846
|
|
|
|
775
|
|
Retained earnings
|
|
2,103
|
|
|
|
1,923
|
|
Treasury shares, at cost: 29,444,808 and 30,127,151
shares
|
|
|
|
|
|
|
|
at March 31, 2016 and June 30,
2015, respectively
|
|
(2,307
|
)
|
|
|
(2,237
|
)
|
Accumulated other comprehensive net
loss
|
|
(542
|
)
|
|
|
(502
|
)
|
Stockholders equity
|
|
259
|
|
|
|
118
|
|
Total liabilities and stockholders
equity
|
$
|
4,284
|
|
|
$
|
4,164
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
3
The Clorox Company
Condensed Consolidated Statements
of Cash Flows (Unaudited)
(Dollars in millions)
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
Operating activities:
|
|
|
|
|
|
|
|
Net earnings
|
$
|
483
|
|
|
$
|
389
|
|
Deduct:
Losses from discontinued operations, net of tax
|
|
-
|
|
|
|
(28
|
)
|
Earnings from continuing
operations
|
|
483
|
|
|
|
417
|
|
Adjustments to reconcile earnings from continuing operations to net
cash
|
|
|
|
|
|
|
|
provided by continuing operations:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
122
|
|
|
|
126
|
|
Share-based compensation
|
|
33
|
|
|
|
21
|
|
Deferred income taxes
|
|
10
|
|
|
|
(6
|
)
|
Settlement of interest rate forward contracts
|
|
-
|
|
|
|
(25
|
)
|
Other
|
|
(4
|
)
|
|
|
(6
|
)
|
Changes in:
|
|
|
|
|
|
|
|
Receivables, net
|
|
(24
|
)
|
|
|
3
|
|
Inventories, net
|
|
(86
|
)
|
|
|
(77
|
)
|
Other current assets
|
|
(1
|
)
|
|
|
1
|
|
Accounts payable and accrued liabilities
|
|
(2
|
)
|
|
|
37
|
|
Income taxes payable
|
|
(95
|
)
|
|
|
(10
|
)
|
Net cash provided by continuing
operations
|
|
436
|
|
|
|
481
|
|
Net
cash provided by discontinued operations
|
|
11
|
|
|
|
14
|
|
Net cash provided by operations
|
|
447
|
|
|
|
495
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(113
|
)
|
|
|
(83
|
)
|
Other
|
|
12
|
|
|
|
3
|
|
Net cash used for investing
activities
|
|
(101
|
)
|
|
|
(80
|
)
|
|
Financing activities:
|
|
|
|
|
|
|
|
Notes
and loans payable, net
|
|
337
|
|
|
|
(73
|
)
|
Long-term debt borrowing, net
of issuance costs
|
|
-
|
|
|
|
496
|
|
Long-term debt repayments
|
|
(300
|
)
|
|
|
(575
|
)
|
Treasury stock
purchased
|
|
(216
|
)
|
|
|
(144
|
)
|
Cash
dividends paid
|
|
(298
|
)
|
|
|
(288
|
)
|
Issuance of common stock for
employee stock plans and other
|
|
176
|
|
|
|
236
|
|
Net cash used for financing
activities
|
|
(301
|
)
|
|
|
(348
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
(13
|
)
|
|
|
(18
|
)
|
Net increase in cash and cash
equivalents
|
|
32
|
|
|
|
49
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
382
|
|
|
|
329
|
|
End
of period
|
$
|
414
|
|
|
$
|
378
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
4
The Clorox
Company
Notes to Condensed
Consolidated Financial Statements (Unaudited)
(Dollars in millions, except
per share amounts)
NOTE 1. INTERIM FINANCIAL
STATEMENTS
Basis of
Presentation
The unaudited interim
condensed consolidated financial statements for the three and nine months ended
March 31, 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, 2015, 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 income statement and excess tax benefits to be classified as an operating
activity. The new guidance is effective for the Company beginning in the first
quarter of fiscal year 2018, with early adoption permitted. The Company is
currently evaluating the impact that adoption of this guidance will have on its
consolidated financial statements.
In February 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to
recognize a right-of-use asset and lease liability for all leases with terms of
more than 12 months. Recognition, measurement and presentation will depend on
classification as a finance or 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 adoption
of this guidance will have on its consolidated financial statements.
In November 2015, the FASB
issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes, which requires all deferred tax liabilities and assets to be
classified as noncurrent. The new guidance is effective for the Company
beginning in the first quarter of fiscal year 2018, with early adoption
permitted. The Company does not expect the adoption of this guidance will have a
significant impact 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 new guidance is
effective for the Company beginning in the first quarter of fiscal year 2017,
with early adoption permitted. The Company does not expect the adoption of this
guidance will have a significant impact on its consolidated financial
statements
.
In February 2015, the FASB
issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which
changes the guidance for evaluating whether to consolidate certain legal
entities. The amendments modify the evaluation of whether limited partnerships
and similar legal entities are variable interest entities or voting interest
entities. The new guidance is effective for the Company beginning in the first
quarter of fiscal year 2017, with early adoption permitted. The Company is
currently evaluating the impact that adoption of this guidance will have on its
consolidated financial statements.
5
In May 2014, the FASB issued
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
replaces most existing U.S. GAAP revenue recognition guidance and is intended to
improve and converge with international standards the financial reporting
requirements for revenue from contracts with customers. The core principle of
ASU 2014-09 is that an entity should recognize revenue for the transfer of goods
or services equal to the amount that it expects to be entitled to receive for
those goods or services. ASU 2014-09 also requires additional disclosures about
the nature, timing and uncertainty of revenue and cash flows arising from
contracts with customers, including information about significant judgments and
changes in judgments. The new guidance is effective for the Company beginning in
the first quarter of fiscal year 2019, with the option to early adopt in the
first quarter of fiscal year 2018. The Company is currently evaluating the
impact that adoption of this guidance will have on its consolidated financial
statements.
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 have
historically been part of the International reportable segment.
Net
sales for Clorox Venezuela were $0 for both the three and nine months ended
March 31, 2016, and $0 and $11 for the three and nine months ended March 31,
2015, respectively.
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
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Operating losses from Clorox Venezuela
before income taxes
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
(6
|
)
|
Exit
costs and other related expenses for Clorox Venezuela
|
|
(1
|
)
|
|
|
-
|
|
|
(2
|
)
|
|
|
(77
|
)
|
Total losses from Clorox Venezuela before
income taxes
|
|
(1
|
)
|
|
|
-
|
|
|
(2
|
)
|
|
|
(83
|
)
|
Income tax benefit attributable to Clorox Venezuela
|
|
2
|
|
|
|
-
|
|
|
2
|
|
|
|
25
|
|
Total earnings (losses) from Clorox
Venezuela, net of tax
|
|
1
|
|
|
|
-
|
|
|
-
|
|
|
|
(58
|
)
|
|
Earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other than Clorox Venezuela,
net of tax
|
|
2
|
|
|
|
30
|
|
|
-
|
|
|
|
30
|
|
Earnings (losses) from discontinued
operations, net of tax
|
$
|
3
|
|
|
$
|
30
|
|
$
|
-
|
|
|
$
|
(28
|
)
|
Unrelated to Clorox Venezuela,
in the three months ended March 31, 2015, $30 of gross unrecognized tax benefits
relating to other discontinued operations for periods prior to fiscal year 2015
were recognized upon the expiration of the applicable statute of limitations.
Recognition of these previously disclosed tax benefits had no impact on the
Companys cash flow or earnings from continuing operations for the three or nine
months ended March 31, 2015.
6
NOTE 3. INVENTORIES,
NET
Inventories, net, consisted of
the following as of:
|
3/31/2016
|
|
6/30/2015
|
Finished goods
|
$
|
379
|
|
|
$
|
316
|
|
Raw
materials and packaging
|
|
110
|
|
|
|
101
|
|
Work in process
|
|
2
|
|
|
|
3
|
|
LIFO
allowances
|
|
(31
|
)
|
|
|
(35
|
)
|
Total
|
$
|
460
|
|
|
$
|
385
|
|
NOTE 4. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Risk Management
and Derivative Instruments
The Company is exposed to
certain commodity, interest rate and foreign currency risks related to its
ongoing business operations and uses derivative instruments to mitigate its
exposure to these risks.
Commodity Price Risk
Management
The Company may use commodity
exchange traded futures and over-the-counter swap contracts to fix the price of
a portion of its forecasted raw material requirements. Contract maturities,
which are generally no longer than 2 years, are matched to the length of the raw
material purchase contracts. Commodity purchase contracts are measured at fair
value using market quotations obtained from commodity futures exchanges or
commodity derivative dealers.
As of March 31, 2016, the
notional amount of commodity derivatives was $40, of which $21 related to jet
fuel swaps and $19 related to soybean oil futures. As of June 30, 2015, the
notional amount of commodity derivatives was $47, of which $27 related to jet
fuel swaps and $20 related to soybean oil futures.
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 March 31, 2016 and
June 30, 2015, the Company had no interest rate derivative instruments.
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 amount of
outstanding foreign currency forward contracts used by the Companys
subsidiaries in Canada, Australia and New Zealand were $58, $40 and $8,
respectively, as of March 31, 2016, and $64, $35 and $6, respectively, as of
June 30, 2015.
7
NOTE 4. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
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 $9 and $8 reflected in accrued liabilities and other
liabilities as of March 31, 2016 and June 30, 2015, respectively, $8 and $8,
respectively, contained such terms. As of both March 31, 2016 and June 30, 2015,
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 March 31, 2016 and June 30,
2015, 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 March 31, 2016 and June 30, 2015, the Company maintained cash
margin balances related to exchange-traded futures contracts of $1 and $2,
respectively, 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 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 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 March 31, 2016 and June
30, 2015, 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.
8
NOTE 4. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The following table summarizes
the fair value of the Companys financial assets and liabilities for which
disclosure of fair value is required:
|
|
|
|
|
|
3/31/2016
|
|
6/30/2015
|
|
|
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
|
|
$
|
232
|
|
$
|
232
|
|
$
|
212
|
|
$
|
212
|
|
|
Cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
equivalents
(a)
|
|
2
|
|
|
86
|
|
|
86
|
|
|
84
|
|
|
84
|
Commodity
purchase derivative contracts
|
|
Other current
assets
|
|
1
|
|
|
3
|
|
|
3
|
|
|
-
|
|
|
-
|
Foreign exchange derivative contracts
|
|
Other current
assets
|
|
2
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
1
|
Trust
assets for nonqualified deferred
|
|
Other assets
|
|
1
|
|
|
50
|
|
|
50
|
|
|
38
|
|
|
38
|
compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
371
|
|
$
|
371
|
|
$
|
335
|
|
$
|
335
|
|
Liabilities
|
|
|
Notes and loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
payable
(b)
|
|
2
|
|
$
|
432
|
|
$
|
432
|
|
$
|
95
|
|
$
|
95
|
Commodity
purchase derivative contracts
|
|
Accrued
liabilities
|
|
2
|
|
|
5
|
|
|
5
|
|
|
8
|
|
|
8
|
Foreign exchange derivative contracts
|
|
Accrued liabilities
|
|
2
|
|
|
3
|
|
|
3
|
|
|
-
|
|
|
-
|
Foreign
exchange derivative contracts
|
|
Other liabilities
|
|
2
|
|
|
1
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
|
Current maturities of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term
|
|
long-term debt and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt and Long-term debt
|
|
Long-term debt
(c)
|
|
2
|
|
|
1,796
|
|
|
1,885
|
|
|
2,096
|
|
|
2,137
|
|
|
|
|
|
|
|
$
|
2,237
|
|
$
|
2,326
|
|
$
|
2,199
|
|
$
|
2,240
|
____________________
(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.
|
9
NOTE 4. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
Commodity, Interest Rate
and Foreign Exchange 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:
|
Gains (losses)
recognized in comprehensive income
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Commodity purchase derivative contracts
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
(16
|
)
|
Interest rate derivative contracts
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Foreign exchange derivative
contracts
|
|
(9
|
)
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
7
|
|
Total
|
$
|
(6
|
)
|
|
$
|
2
|
|
|
$
|
(8
|
)
|
|
$
|
(21
|
)
|
|
|
Gains
(losses) reclassified from accumulated other comprehensive loss
and
recognized in net earnings
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Commodity purchase derivative contracts
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(9
|
)
|
|
$
|
(3
|
)
|
Interest rate derivative contracts
|
|
(2
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(3
|
)
|
Foreign exchange derivative
contracts
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Total
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
|
$
|
(13
|
)
|
|
$
|
(6
|
)
|
The gains (losses)
reclassified from accumulated other comprehensive loss and recognized in net
earnings during the three and nine months ended March 31, 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 March
31, 2016, that is expected to be reclassified into net earnings within the next
twelve months is $(16). 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, 2016 and 2015, hedge ineffectiveness was not
significant.
NOTE 5. DEBT
In November 2015, $300 of the
Companys senior notes with an annual fixed interest rate of 3.55% became due
and were repaid using commercial paper borrowings and cash on hand.
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 33.0% and 34.0% for the current three and nine
months ended March 31, 2016, and 33.4% and 34.0% for the three and nine months
ended March 31, 2015, respectively.
10
NOTE 7. NET EARNINGS PER
SHARE (EPS)
The following is the
reconciliation of the weighted average number of shares outstanding (in
thousands) used to calculate basic net EPS to those used to calculate diluted
net EPS:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Basic
|
129,690
|
|
131,833
|
|
129,463
|
|
130,566
|
Dilutive effect of stock options and
other
|
1,957
|
|
2,282
|
|
2,189
|
|
2,524
|
Diluted
|
131,647
|
|
134,115
|
|
131,652
|
|
133,090
|
|
Antidilutive stock options and
other
(a)
|
14
|
|
13
|
|
40
|
|
269
|
____________________
(a) Shares are considered
antidilutive if the impact of their conversion would cause an increase in
earnings per share amounts or a decrease in loss per share amounts.
The Company has two share
repurchase programs: an open-market purchase program with an authorized
aggregate purchase amount of up to $750, all of which was available for share
repurchases as of March 31, 2016, and a program to offset the anticipated impact
of share dilution related to share-based awards (the Evergreen Program), which
has no specified cap. During the three and nine months ended March 31, 2016, the
Company repurchased approximately 0.6 million shares and 1.9 million shares,
respectively, under its Evergreen Program for an aggregate cost of $74 and $218,
respectively. During the three and nine months ended March 31, 2015, the Company
repurchased 1.4 and 1.5 million shares, respectively, under its Evergreen
Program for an aggregate amount of $150 and $158, respectively. The Company did
not repurchase any shares under the open-market purchase program during the
three and nine months ended March 31, 2016 and 2015.
NOTE 8. COMPREHENSIVE
INCOME
Comprehensive income was as
follows for the periods indicated:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Earnings from continuing operations
|
$
|
159
|
|
|
$
|
144
|
|
|
$
|
483
|
|
|
$
|
417
|
|
Earnings (losses) from discontinued operations,
net of tax
|
|
3
|
|
|
|
30
|
|
|
|
-
|
|
|
|
(28
|
)
|
Net
earnings
|
|
162
|
|
|
|
174
|
|
|
|
483
|
|
|
|
389
|
|
Other comprehensive income (loss), net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
20
|
|
|
|
(32
|
)
|
|
|
(47
|
)
|
|
|
(51
|
)
|
Net
unrealized gains (losses) on derivatives
|
|
(1
|
)
|
|
|
3
|
|
|
|
4
|
|
|
|
(17
|
)
|
Pension
and postretirement benefit adjustments
|
|
-
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Total other comprehensive income (loss), net of
tax
|
|
19
|
|
|
|
(28
|
)
|
|
|
(40
|
)
|
|
|
(64
|
)
|
Comprehensive income
|
$
|
181
|
|
|
$
|
146
|
|
|
$
|
443
|
|
|
$
|
325
|
|
11
Changes in accumulated other
comprehensive net loss by component were as follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Foreign currency
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gains (losses) before reclassifications
|
$
|
21
|
|
|
$
|
(33
|
)
|
|
$
|
(40
|
)
|
|
$
|
(88
|
)
|
Reclassification
of (gains) losses into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of deferred foreign currency translation loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Income
tax benefit (expense)
|
|
(1
|
)
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
7
|
|
Foreign currency
adjustments, net of tax
|
$
|
20
|
|
|
$
|
(32
|
)
|
|
$
|
(47
|
)
|
|
$
|
(51
|
)
|
|
Net unrealized gains
(losses) on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gains (losses) before reclassifications
|
$
|
(6
|
)
|
|
$
|
2
|
|
|
$
|
(8
|
)
|
|
$
|
(21
|
)
|
Reclassification
of (gains) losses into earnings
|
|
5
|
|
|
|
3
|
|
|
|
13
|
|
|
|
6
|
|
Income
tax benefit (expense)
|
|
-
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Net unrealized
gains (losses) on derivatives, net of tax
|
$
|
(1
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
(17
|
)
|
|
Pension and postretirement benefit adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gains (losses) before reclassifications
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
Reclassification
of (gains) losses into earnings
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
7
|
|
Income
tax benefit (expense)
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Pension and
postretirement benefit adjustments, net of tax
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of
tax
|
$
|
19
|
|
|
$
|
(28
|
)
|
|
$
|
(40
|
)
|
|
$
|
(64
|
)
|
Included in foreign currency
adjustments are re-measurement losses on long-term intercompany loans where
settlement is not planned or anticipated in the foreseeable future. For the
three and nine months ended March 31, 2016, other comprehensive net income
(loss) on these loans totaled $0 and $(11), respectively. For the three and nine
months ended March 31, 2015, other comprehensive net income (loss) on these
loans totaled $(4) and $(8), respectively. There were no amounts reclassified
from accumulated other comprehensive net loss for the periods presented related
to long-term intercompany loans where settlement is not planned or anticipated
in the foreseeable future.
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
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Service cost
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
6
|
|
|
|
7
|
|
|
|
19
|
|
|
|
19
|
|
Expected return on plan assets
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(13
|
)
|
|
|
(15
|
)
|
Amortization of unrecognized items
|
|
2
|
|
|
|
3
|
|
|
|
7
|
|
|
|
9
|
|
Total
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
14
|
|
|
$
|
14
|
|
The net periodic benefit cost
for the Companys retirement health care plans was a credit of $1 for both the
three and nine months ended March 31, 2016, and a credit of $1 and $2 for the
three and nine months ended March 31, 2015, respectively.
In the three and nine months
ended March 31, 2016, the Company made $0 and $15 in discretionary contributions
to the domestic qualified retirement income plan, respectively.
12
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 $12 as of March 31, 2016 and
June 30, 2015, 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, 2016 and June 30, 2015.
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
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 March 31, 2016.
As of March 31, 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.
NOTE 11. SEGMENT
RESULTS
The Company operates through
strategic business units that are aggregated into four reportable segments:
Cleaning, Household, Lifestyle and International. As a result of Clorox
Venezuela being reported as discontinued operations, the results of Clorox
Venezuela are no longer included in the International reportable segment.
13
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 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
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Cleaning
|
$
|
465
|
|
$
|
442
|
|
$
|
1,419
|
|
$
|
1,359
|
Household
|
|
467
|
|
|
451
|
|
|
1,253
|
|
|
1,214
|
Lifestyle
|
|
254
|
|
|
243
|
|
|
736
|
|
|
705
|
International
|
|
240
|
|
|
265
|
|
|
753
|
|
|
820
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
$
|
1,426
|
|
$
|
1,401
|
|
$
|
4,161
|
|
$
|
4,098
|
|
Earnings (losses)
from continuing operations before income taxes
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
3/31/2016
|
|
3/31/2015
|
|
3/31/2016
|
|
3/31/2015
|
Cleaning
|
$
|
122
|
|
|
$
|
100
|
|
|
$
|
394
|
|
|
$
|
331
|
|
Household
|
|
113
|
|
|
|
102
|
|
|
|
262
|
|
|
|
205
|
|
Lifestyle
|
|
70
|
|
|
|
71
|
|
|
|
201
|
|
|
|
200
|
|
International
|
|
11
|
|
|
|
17
|
|
|
|
65
|
|
|
|
67
|
|
Corporate
|
|
(79
|
)
|
|
|
(73
|
)
|
|
|
(191
|
)
|
|
|
(171
|
)
|
Total
|
$
|
237
|
|
|
$
|
217
|
|
|
$
|
731
|
|
|
$
|
632
|
|
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
condensed consolidated net sales, were 27% for each of the three and nine months
ended March 31, 2016, and 27% and 26% for the three and nine months ended March
31, 2015, respectively.
NOTE 12. SUBSEQUENT EVENTS
On May 2, 2016, the Company
acquired 100 percent of Renew Life Holdings Corporation (Renew Life), a leading
brand in dietary health, with an emphasis on digestive health. Renew Life was
founded in 1997, and is based in Palm Harbor, Florida. The total purchase price
was approximately $290, but may ultimately be adjusted for any cash acquired,
working capital adjustments and any amounts to be paid by the Company pending
final cash settlements. Results for Renew Lifes domestic business will be
reflected in the Household reportable segment and results for Renew Lifes
international business will be reflected in the International reportable
segment.
Purchase accounting for this
acquisition will be included in the Companys fourth quarter results subject to
customary closing adjustments. Pro forma results reflecting the acquisition will
not be presented because the acquisition is not significant to the Companys
consolidated financial results.
14
RESULTS OF
OPERATIONS
CONSOLIDATED RESULTS
FROM CONTINUING OPERATIONS
|
Three Months
Ended
|
|
|
|
|
% of Net
Sales
|
|
3/31/2016
|
|
3/31/2015
|
|
% Change
|
|
3/31/2016
|
|
3/31/2015
|
Diluted net earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing
operations
|
$
|
1.21
|
|
$
|
1.08
|
|
12
|
%
|
|
|
|
|
|
|
Net
sales
|
|
1,426
|
|
|
1,401
|
|
2
|
|
|
100
|
%
|
|
100
|
%
|
Gross profit
|
|
646
|
|
|
605
|
|
7
|
|
|
45.3
|
|
|
43.2
|
|
Selling and administrative expenses
|
|
204
|
|
|
206
|
|
(1
|
)
|
|
14.3
|
|
|
14.7
|
|
Advertising costs
|
|
146
|
|
|
124
|
|
18
|
|
|
10.2
|
|
|
8.9
|
|
Research and development costs
|
|
35
|
|
|
34
|
|
3
|
|
|
2.5
|
|
|
2.4
|
|
Interest expense
|
|
22
|
|
|
25
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
% of Net
Sales
|
|
3/31/2016
|
|
3/31/2015
|
|
% Change
|
|
3/31/2016
|
|
3/31/2015
|
Diluted net earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing
operations
|
$
|
3.67
|
|
$
|
3.14
|
|
17
|
%
|
|
|
|
|
|
|
Net
sales
|
|
4,161
|
|
|
4,098
|
|
2
|
|
|
100
|
%
|
|
100
|
%
|
Gross profit
|
|
1,871
|
|
|
1,755
|
|
7
|
|
|
45.0
|
|
|
42.8
|
|
Selling and administrative expenses
|
|
581
|
|
|
577
|
|
1
|
|
|
14.0
|
|
|
14.1
|
|
Advertising costs
|
|
395
|
|
|
372
|
|
6
|
|
|
9.5
|
|
|
9.1
|
|
Research and development costs
|
|
99
|
|
|
97
|
|
2
|
|
|
2.4
|
|
|
2.4
|
|
Interest expense
|
|
67
|
|
|
77
|
|
(13
|
)
|
|
|
|
|
|
|
Diluted net earnings per
share from continuing operations
increased $0.13, or 12%, and
$0.53, or 17%, respectively in the current quarter and year, primarily due to
gross margin expansion and net sales growth, partially offset by higher
advertising costs and the impact of unfavorable foreign currency exchange rates.
Net
sales
increased for the
quarter
versus the year-ago period, primarily due to
higher volume and the benefit of price increases, partially offset by the impact
of unfavorable foreign currency exchange rates. Volume in the third quarter
increased by 4%, driven by higher shipments across all segments.
Net sales increased in the
current nine-month period primarily due to higher volume and the benefit of
price increases, partially offset by the impact of unfavorable foreign currency
exchange rates and higher trade promotion spending. Volume in the current
nine-month period increased by 3%, driven by higher shipments across all
segments.
Gross
margin
,
defined as gross profit as a percentage of net sales, increased 210 basis
points in the current quarter. The increase was driven by the benefits of
favorable commodity costs, strong cost savings and price increases, partially
offset by higher manufacturing and logistics costs and the impact of unfavorable
foreign currency exchange rates.
Gross margin increased in the
current nine-month period by 220 basis points driven by the benefits of
favorable commodity costs, strong cost savings and price increases, partially
offset by higher manufacturing and logistics costs and the impact of unfavorable
foreign currency exchange rates.
Selling and
administrative expenses,
as a
percentage of net sales, remained essentially flat in the three- and nine-month
periods.
16
Advertising
costs
, as a percentage of net
sales, increased by 130 basis points in the current quarter and 40 basis points
in the current nine-month period, mainly to support innovation across the
Companys global portfolio. The Companys U.S. retail advertising spend in the
current quarter and year-ago quarter was 11% and 10%, respectively.
Research and development
costs
remained essentially flat in the current three-
and nine-month periods, reflecting the Companys continued support of its new
products and established brands with an emphasis on innovation.
Interest
expense
decreased in the
current three- and nine-month periods, primarily due to a lower weighted-average
interest rate on long-term debt.
The effective tax rate
on earnings from continuing operations
was 33.0% and 34.0 % for the current three- and
nine-month periods, and 33.4% and 34.0% for the prior year three- and nine-month
periods, respectively.
DISCONTINUED OPERATIONS
Since the exit of Clorox
Venezuela in the first quarter of fiscal year 2015, the Company has recognized
$49 in after-tax exit costs and other related expenses within discontinued
operations related to the exit of Clorox Venezuela. The Company believes it is
reasonably possible that it will recognize an additional $11 to $21 in after-tax
exit costs and other related expenses within discontinued operations related to
the exit of Clorox Venezuela during the remainder of fiscal year 2016 and fiscal
years 2017 through 2019, for a total of $60 to $70 over the entire five-year
period. Of this total, the Company believes $0 to $5 will be after-tax cash
expenditures. Further significant changes to the exchange rate used for
financial reporting purposes, among many other external factors, could have a
significant impact on the above estimated costs.
See Notes to the Condensed
Consolidated Financial Statements for more information regarding discontinued
operations of Clorox Venezuela.
SEGMENT RESULTS FROM
CONTINUING OPERATIONS
The following sections present
the results from operations of the Companys reportable segments and certain
unallocated costs reflected in Corporate:
Cleaning
|
Three Months Ended
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
3/31/2016
|
|
3/31/2015
|
|
% Change
|
|
3/31/2016
|
|
3/31/2015
|
|
% Change
|
Net
sales
|
$
|
465
|
|
$
|
442
|
|
5
|
%
|
|
$
|
1,419
|
|
$
|
1,359
|
|
4
|
%
|
Earnings from continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
122
|
|
|
100
|
|
22
|
|
|
|
394
|
|
|
331
|
|
19
|
|
Volume, net sales and earnings
from continuing operations before income taxes increased in the current quarter.
Both volume and net sales in the Cleaning segment increased 5% driven primarily
by higher shipments in Home Care, mainly due to Clorox
®
disinfecting
wipes behind increased merchandising support, and higher shipments in
Professional Products, namely in the cleaning and healthcare products. These
increases were partially offset by lower shipments in Laundry, primarily due to
category softness in Clorox 2
®
and the impact of the February 2015
price increase on Clorox
®
liquid bleach. The increase in earnings
from continuing operations before income taxes was mainly due to net sales
growth, the benefits of favorable commodity costs, primarily from resin, and
strong cost savings, partially offset by higher manufacturing and logistics
costs.
Volume, net sales and earnings
from continuing operations before income taxes increased in the current
nine-month period. Both volume and net sales in the Cleaning segment increased
4% driven primarily by higher shipments across several Home Care brands,
including Clorox
®
disinfecting wipes behind increased merchandising
support, and in Professional Products, mainly in the cleaning products. These
increases were partially offset by lower shipments in Laundry, primarily due to
the impact of the February 2015 price increase on Clorox
®
liquid
bleach. The increase in earnings from continuing operations before income taxes
was mainly due to net sales growth, the benefits of favorable commodity costs,
primarily from resin, and strong cost savings, partially offset by higher
manufacturing and logistics costs.
17
Household
|
Three Months
Ended
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
Net
sales
|
$
|
467
|
|
$
|
451
|
|
4
|
%
|
|
$
|
1,253
|
|
$
|
1,214
|
|
3
|
%
|
Earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
113
|
|
|
102
|
|
11
|
|
|
|
262
|
|
|
205
|
|
28
|
|
Volume, net sales and earnings
from continuing operations before income taxes increased in the current quarter.
Volume increased in the Household segment by 3%, primarily driven by higher
shipments of Charcoal, reflecting favorable weather, increased merchandising
activities and distribution gains, and increased shipments across a number of
Glad
®
products, including continued strength in premium trash bags.
Cat Litter volumes declined due to continued competitive activity, partially
offset by gains from the launch of new products. Net sales growth outpaced
volume growth primarily due to favorable brand mix, partially offset by
increased trade promotion spending. The increase in earnings from continuing
operations before income taxes was mainly due to net sales growth and the
benefit of favorable commodity costs, primarily in resin, partially offset by
higher advertising costs.
Volume, net sales and earnings
from continuing operations before income taxes increased in the current
nine-month period. Volume increased in the Household segment by 1%, primarily
driven by higher shipments of Charcoal behind increased merchandising support
and distribution gains, and increased shipments across several Glad
®
products, including continued strength in premium trash bags. The increases were
offset by lower shipments of Cat Litter, largely due to continuing competitive
activity. Net sales growth outpaced volume growth, primarily due to favorable
product mix, partially offset by higher trade promotion spending, mainly in the
Bags and Wraps business. The increase in earnings from continuing operations
before income taxes was mainly due to the net sales growth, the benefit of
favorable commodity costs, primarily in resin, and strong cost savings,
partially offset by increased manufacturing and logistics
costs.
Lifestyle
|
Three Months
Ended
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
Net
sales
|
$
|
254
|
|
$
|
243
|
|
5
|
%
|
|
$
|
736
|
|
$
|
705
|
|
4
|
%
|
Earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
70
|
|
|
71
|
|
(1
|
)
|
|
|
201
|
|
|
200
|
|
1
|
|
Volume and net sales
increased, while earnings from continuing operations before income taxes
declined slightly in the current quarter. Volume in the Lifestyle segment
increased 4%, primarily driven by higher shipments of Natural Personal Care
products largely due to product innovation in lip color and face care, along
with continued growth in lip care, and increased shipments of faucet mount and
pour through water-filtration products. Net sales growth outpaced volume growth
primarily due to favorable product mix. The decrease in earnings from continuing
operations before income taxes was primarily due to increased advertising costs
to support new products, partially offset by net sales growth.
Volume, net sales, and
earnings from continuing operations before income taxes increased in the current
nine-month period. Volume in the Lifestyle segment increased 5%, primarily
driven by higher shipments of Natural Personal Care and Food products largely
due to product innovation in lip color and face care, along with bottled salad
dressings. Volume growth outpaced net sales growth primarily due to higher trade
promotion spending. The increase in earnings from continuing operations before
income taxes was mainly due to net sales growth and the benefit of cost savings,
partially offset by increased advertising costs to support new products.
18
International
|
Three Months
Ended
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
Net
sales
|
$
|
240
|
|
$
|
265
|
|
(9
|
)%
|
|
$
|
753
|
|
$
|
820
|
|
(8
|
)%
|
Earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
11
|
|
|
17
|
|
(35
|
)
|
|
|
65
|
|
|
67
|
|
(3
|
)
|
Volume increased, while net
sales and earnings from continuing operations before income taxes decreased in
the current quarter. Volume in the International segment increased 4% driven by
higher shipments, primarily in Europe, Mexico, and Canada. The decline in net
sales was mainly due to the impact of unfavorable foreign currency exchange
rates, of which more than half was related to the recent devaluation of the
Argentine peso, partially offset by the benefit of price increases. The decrease
in earnings from continuing operations before income taxes was primarily due to
lower net sales, higher advertising costs and continued inflationary pressure on
manufacturing and logistics costs, partially offset by favorable commodity costs
and volume growth.
Volume increased, while net
sales and earnings from continuing operations before income taxes decreased in
the current nine-month period. Volume in the International segment increased 1%
driven by higher shipments, primarily in Europe, Mexico and Canada, which offset
lower shipments in certain other Latin American countries largely due to the
impact of price increases taken to offset inflationary pressures. The decline in
net sales was primarily due to the impact of unfavorable foreign currency
exchange rates mainly in Latin American countries, partially offset by the
benefit of price increases. The decrease in earnings from continuing operations
before income taxes was primarily due to lower net sales, inflationary pressure
on manufacturing and logistics costs and higher advertising costs, offset by
cost savings.
Argentina
The Company operates in
Argentina through certain wholly owned subsidiaries (collectively, Clorox
Argentina). Net sales from Clorox Argentina represented approximately 4% for
both the nine months ended March 31, 2016 and the year ended June 30, 2015,
respectively, of the Companys consolidated net sales for those periods. The
operating environment in Argentina continues to present business challenges,
including price controls on some of the Companys products, a devaluing currency
and inflation.
Clorox Argentina manufactures
products at three plants that it owns and operates across Argentina and markets
those products to consumers throughout the country. Products are advertised
nationally and sold to consumers through wholesalers and retail outlets located
throughout Argentina. Sales are made primarily through the use of Clorox
Argentinas sales force. Small amounts of products produced in Argentina are
exported each year, including sales to the Companys subsidiaries located
primarily in Latin America. Clorox Argentina obtains its raw materials almost
entirely from local sources. The Company also conducts research and development
activities at its owned facility in Buenos Aires, Argentina. Additionally,
Clorox Argentina performs marketing, legal, and various other shared service
activities to support the Companys Latin American operations. Clorox Argentina
in turn benefits from shared service activities performed within other
geographic locations, such as information technology support and manufacturing
technical assistance.
For the nine months ended
March 31, 2016 and the year ended June 30, 2015, the value of the Argentine peso
(ARS) declined 38% and 10%, respectively. As of March 31, 2016, using the
exchange rate of 14.6 ARS per USD, Clorox Argentina had total assets of $82,
including cash and cash equivalents of $28, net receivables of $15, inventories
of $18, net property, plant and equipment of $13 and intangible assets excluding
goodwill of $3. Although Argentina is not currently designated as a highly
inflationary economy for accounting purposes, further volatility and declines in
the exchange rate are expected in the future, which would have an additional
adverse impact on Clorox Argentinas net sales, net earnings, and net monetary
asset position.
The Company is closely
monitoring developments in Argentina and is taking steps intended to mitigate
the adverse conditions, but there can be no assurances that the Company will be
able to mitigate these conditions.
19
Corporate
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.
|
Three Months
Ended
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
|
3/31/2016
|
|
3/31/2015
|
|
%
Change
|
Losses from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income
taxes
|
$
|
79
|
|
$
|
73
|
|
8
|
%
|
|
$
|
191
|
|
$
|
171
|
|
12
|
%
|
The increase in losses from
continuing operations before income taxes attributable to Corporate in the
current quarter is primarily driven by higher information technology and other
spending to support the Companys initiatives, partially offset by lower
interest expense following the maturity of senior notes in January 2015 and the
issuance of senior notes in December 2014 at a lower effective interest
rate.
The increase in losses from
continuing operations before income taxes attributable to Corporate in the
current nine-month period was primarily due to a one-time benefit in the prior
period of $11 related to a change in the companys long-term disability plan,
higher employee incentive compensation costs and increased information
technology and other spending to support the Companys initiatives. This was
partially offset by lower interest expense primarily due to a lower
weighted-average interest rate on long-term debt resulting from the issuance of
senior notes in December 2014 and the maturities of senior notes in January 2015
and decreases in foreign currency exchange losses.
20
FINANCIAL CONDITION,
LIQUIDITY AND CAPITAL RESOURCES
Operating
Activities
The Companys financial
condition and liquidity
remained
strong as of March 31, 2016. Net cash provided by
continuing operations was $436 in the current nine-month period, compared with
$481 in the prior nine-month period. The year-over-year decrease
reflected
higher
performance-based employee incentive compensation payments related to the
Companys strong 2015 fiscal year results and higher tax payments in the current
year. These factors were partially offset by earnings from continuing operations
in the current nine-month period of 2016 and $25 million in prior year payments
to settle interest-rate hedges related to the Companys issuance of long-term
debt.
Investing Activities
Capital expenditures were $113
in the current nine-month period, compared with $83 in the prior nine-month
period. Capital spending as a percentage of net sales was approximately 3% and
2% in the nine months ended March 31, 2016 and 2015, respectively. The increase
in the current nine-month period was due to additional capital spending for
manufacturing efficiencies. Current period investing activities also
included
proceeds from the sale of the Companys corporate jet.
On May 2, 2016, the Company
acquired 100 percent of Renew Life, a leading brand in dietary health, with an
emphasis on digestive health. Renew Life was founded in 1997, and is based in
Palm Harbor, Florida. The total purchase price was approximately $290, funded
through a combination of debt and cash on hand, but may ultimately be adjusted
for any cash acquired, working capital adjustments and any amounts to be paid by
the Company pending final cash settlements. In calendar year 2015, Renew Life
generated sales of about $115 and had total gross margin in line with the
Company average. Results for Renew Lifes domestic business will be reflected in
the Household reportable segment and results for Renew Lifes international
business will be reflected in the International reportable segment.
Purchase accounting for this
acquisition will be included in the Companys fourth quarter results subject to
customary closing adjustments. Pro forma results reflecting the acquisition will
not be presented because the acquisition is not significant to the Companys
consolidated financial results.
Financing Activities
Net cash used for financing
activities was $301 in the current nine-month period, compared with $348 in the
prior nine-month period. The change was primarily due to the application of
higher free cash flow in the prior period to pay down notes payable balances,
partially offset by an increase in treasury stock purchases
and cash dividends, and a
decrease in the
issuance of common stock for employee stock
plans.
Current nine-month period
financing activities also include a repayment of $300 of the Companys senior
notes with an annual fixed interest rate of 3.55% that became due in November
2015 and were repaid using commercial paper borrowings and cash on
hand.
Share repurchases and
dividends
The Company has two share
repurchase programs: an open-market purchase program with an authorized
aggregate purchase amount of up to $750, all of which was available for share
repurchases as of March 31, 2016, and a program to offset the impact of share
dilution related to share-based awards (the Evergreen Program), which has no
specified cap.
During the current three- and
nine-month periods ended March 31, 2016, the Company repurchased approximately
0.6 million shares and 1.9 million shares, respectively, under its Evergreen
Program, for an aggregate amount of $74 and $218, respectively. During the prior
comparable periods, the Company repurchased approximately 1.4 and 1.5 million
shares, respectively, under its Evergreen Program, for an aggregate amount of
$150 and $158, respectively. The Company did not repurchase any shares under the
open-market purchase program during the current or prior periods.
During the current three- and
nine-month periods, the Company paid dividends per share of $0.77 and $2.31,
respectively, equivalent to $100 and $298, respectively. During the prior
comparable periods, the Company paid dividends per share of $0.74 and $2.22,
respectively, equivalent to $97 and $288, respectively.
21
Credit
Arrangements
As of March 31, 2016, the
Company had a $1,100 revolving credit agreement (the Credit Agreement) which
expires in October 2019. There were no borrowings under the Credit Agreement,
and the Company believes that borrowings under the Credit Agreement are and will
continue to be available for general corporate purposes. The Credit Agreement
includes certain restrictive covenants and limitations. The primary restrictive
covenant is a maximum ratio of total debt to earnings before interest, taxes,
depreciation and amortization and intangible asset impairment (Consolidated
EBITDA) for the trailing four quarters (Consolidated Leverage ratio), as defined
and described in the Credit Agreement, of 3.50.
The following table sets forth
the calculation of the Consolidated Leverage ratio using Consolidated EBITDA for
the trailing four quarters, as defined in the Credit Agreement:
|
3/31/2016
|
Earnings from continuing
operations
|
$
|
672
|
Add
back:
|
|
|
Interest expense
|
|
90
|
Income tax expense
|
|
348
|
Depreciation and amortization
|
|
165
|
Noncash intangible asset
impairment charges
|
|
6
|
Deduct:
|
|
|
Interest income
|
|
5
|
Consolidated EBITDA
|
$
|
1,276
|
Total debt
|
$
|
2,228
|
Consolidated Leverage ratio
|
|
1.75
|
The Company was in compliance
with all restrictive covenants and limitations in the Credit Agreement as of
March 31, 2016, and anticipates being in compliance with all restrictive
covenants for the foreseeable future.
As of March 31, 2016, the
Company had $28 of foreign and other credit lines, of which $3 was outstanding
and the remaining $25 was available for borrowing.
CONTINGENCIES
See Notes to Condensed
Consolidated Financial Statements for information on the Companys
contingencies.
OFF-BALANCE SHEET
ARRANGEMENTS
See Notes to Condensed
Consolidated Financial Statements for information on the Companys off-balance
sheet arrangements.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
See Notes to Condensed
Consolidated Financial Statements for a summary of recently issued accounting
pronouncements relevant to the Company.
22
Cautionary
Statement
This Quarterly Report on Form 10-Q (the Report),
including the exhibits hereto and the information incorporated by reference
herein, contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and such forward-looking statements involve
risks and uncertainties. Except for historical information, statements about
future volume, sales, foreign currencies, costs, cost savings, margin, earnings,
earnings per share, diluted earnings per share, foreign currency exchange rates,
cash flows, plans, objectives, expectations, growth or profitability are
forward-looking statements based on managements estimates, assumptions and
projections. Words such as could, may, expects, anticipates, targets,
goals, projects, intends, plans, believes, seeks, estimates and
variations on such words, and similar expressions that reflect our current views
with respect to future events and operational and financial performance, are
intended to identify such forward-looking statements. These forward-looking
statements are only predictions, subject to risks and uncertainties, and actual
results could differ materially from those discussed. Important factors that
could affect performance and cause results to differ materially from
managements expectations are described in the sections entitled Risk Factors
and Managements Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on Form 10-K for the fiscal year ended June 30,
2015, as updated from time to time in the Companys Securities and Exchange
Commission filings. These factors include, but are not limited to:
●
|
intense competition in
the Companys markets;
|
●
|
worldwide, regional
and local economic conditions and financial market volatility;
|
●
|
the ability of the
Company to drive sales growth, increase prices and market share, grow its
product categories and achieve favorable product and geographic mix;
|
●
|
risks related to
international operations, including political instability;
government-imposed price controls or other regulations; foreign currency
exchange rate controls, including periodic changes in such controls,
fluctuations and devaluations; labor claims, labor unrest and inflationary
pressures, particularly in Argentina; and potential harm and liabilities
from the use, storage and transportation of chlorine in certain
international markets where chlorine is used in the production of
bleach;
|
●
|
risks related to the
possibility of nationalization, expropriation of assets or other
government action in foreign jurisdictions;
|
●
|
risks related to the
Companys discontinuation of operations in Venezuela;
|
●
|
volatility and
increases in commodity costs such as resin, sodium hypochlorite and
agricultural commodities, and increases in energy, transportation or other
costs;
|
●
|
supply disruptions and
other risks inherent in reliance on a limited base of suppliers;
|
●
|
the ability of the
Company to develop and introduce commercially successful products;
|
●
|
dependence on key
customers and risks related to customer consolidation and ordering
patterns;
|
●
|
costs resulting from
government regulations;
|
●
|
the ability of the
Company to successfully manage global political, legal, tax and regulatory
risks, including changes in regulatory or administrative activity;
|
●
|
risks related to
reliance on information technology systems, including potential security
breaches, cyber-attacks or privacy breaches that result in the
unauthorized disclosure of consumer, customer, employee or Company
information, or service interruptions;
|
●
|
risks relating to
acquisitions, new ventures and divestitures, and associated costs,
including the potential for asset impairment charges related to, among
others, intangible assets and goodwill;
|
●
|
the success of the
Companys business strategies;
|
●
|
the ability of the
Company to implement and generate anticipated cost savings and
efficiencies;
|
●
|
the impact of product
liability claims, labor claims and other legal proceedings, including in
foreign jurisdictions;
|
●
|
the Companys ability
to attract and retain key personnel;
|
●
|
the Companys ability
to maintain its business reputation and the reputation of its
brands;
|
●
|
environmental matters,
including costs associated with the remediation of past contamination and
the handling and/or transportation of hazardous substances;
|
●
|
the impact of natural
disasters, terrorism and other events beyond the Companys control;
|
●
|
the Companys ability
to maximize, assert and defend its intellectual property rights;
|
●
|
any infringement or
claimed infringement by the Company of third-party intellectual property
rights;
|
●
|
the effect of the
Companys indebtedness and credit rating on its operations and financial
results;
|
●
|
the Companys ability
to maintain an effective system of internal controls, including after
completing acquisitions;
|
●
|
uncertainties relating
to tax positions, tax disputes and changes in the Companys tax
rate;
|
●
|
the accuracy of the
Companys estimates and assumptions on which its financial statement
projections are based;
|
●
|
the Companys ability
to pay and declare dividends or repurchase its stock in the future;
and
|
●
|
the impacts of
potential stockholder activism.
|
23
The Companys forward-looking
statements in this Report are based on managements current views and
assumptions regarding future events and speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by the federal securities laws.
In this Report, unless the
context requires otherwise, the terms the Company and Clorox refer to The
Clorox Company and its subsidiaries.