Item 1. Financial
Statements
The Clorox
Company
Condensed Consolidated
Statements of Earnings and Comprehensive Income (Unaudited)
(Dollars in
millions, except share and per share data)
|
|
Three Months
Ended
|
|
|
9/30/2016
|
|
9/30/2015
|
Net
sales
|
|
$
|
1,443
|
|
|
$
|
1,390
|
|
Cost of products sold
|
|
|
803
|
|
|
|
765
|
|
Gross
profit
|
|
|
640
|
|
|
|
625
|
|
|
Selling and administrative
expenses
|
|
|
200
|
|
|
|
186
|
|
Advertising
costs
|
|
|
128
|
|
|
|
123
|
|
Research and development costs
|
|
|
31
|
|
|
|
30
|
|
Interest
expense
|
|
|
22
|
|
|
|
23
|
|
Other (income) expense, net
|
|
|
(5
|
)
|
|
|
(1
|
)
|
Earnings
from continuing operations before income taxes
|
|
|
264
|
|
|
|
264
|
|
Income taxes on continuing
operations
|
|
|
85
|
|
|
|
91
|
|
Earnings
from continuing operations
|
|
|
179
|
|
|
|
173
|
|
Earnings (losses) from discontinued
operations, net of tax
|
|
|
-
|
|
|
|
(1
|
)
|
Net
earnings
|
|
$
|
179
|
|
|
$
|
172
|
|
|
Net earnings (losses) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.39
|
|
|
$
|
1.34
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
Basic net earnings per
share
|
|
$
|
1.39
|
|
|
$
|
1.33
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.36
|
|
|
$
|
1.32
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
Diluted net earnings per
share
|
|
$
|
1.36
|
|
|
$
|
1.31
|
|
|
Weighted
average shares outstanding (in thousands)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
129,449
|
|
|
|
129,155
|
|
Diluted
|
|
|
132,193
|
|
|
|
131,220
|
|
|
Dividend declared per share
|
|
$
|
0.80
|
|
|
$
|
0.77
|
|
|
Comprehensive income
|
|
$
|
182
|
|
|
$
|
133
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
2
The Clorox
Company
Condensed Consolidated
Balance Sheets (Unaudited)
(Dollars in millions, except share and per share
data)
|
|
9/30/2016
|
|
6/30/2016
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
408
|
|
|
$
|
401
|
|
Receivables,
net
|
|
|
494
|
|
|
|
569
|
|
Inventories,
net
|
|
|
465
|
|
|
|
443
|
|
Other
current assets
|
|
|
49
|
|
|
|
72
|
|
Total
current assets
|
|
|
1,416
|
|
|
|
1,485
|
|
Property,
plant and equipment, net of accumulated depreciation
|
|
|
|
|
|
|
|
|
and
amortization of $1,944 and $1,911, respectively
|
|
|
917
|
|
|
|
906
|
|
Goodwill
|
|
|
1,196
|
|
|
|
1,197
|
|
Trademarks,
net
|
|
|
657
|
|
|
|
657
|
|
Other
intangible assets, net
|
|
|
76
|
|
|
|
78
|
|
Other
assets
|
|
|
204
|
|
|
|
187
|
|
Total
assets
|
|
$
|
4,466
|
|
|
$
|
4,510
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Notes
and loans payable
|
|
$
|
618
|
|
|
$
|
523
|
|
Current
maturities of long-term debt
|
|
|
-
|
|
|
|
-
|
|
Accounts
payable and accrued liabilities
|
|
|
874
|
|
|
|
1,035
|
|
Income
taxes payable
|
|
|
30
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
1,522
|
|
|
|
1,558
|
|
Long-term
debt
|
|
|
1,789
|
|
|
|
1,789
|
|
Other
liabilities
|
|
|
783
|
|
|
|
784
|
|
Deferred
income taxes
|
|
|
83
|
|
|
|
82
|
|
Total
liabilities
|
|
|
4,177
|
|
|
|
4,213
|
|
|
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
as of September 30, 2016 and June 30, 2016; and 128,707,796 and
129,355,263
|
|
|
|
|
|
|
|
|
shares
outstanding as of September 30, 2016 and June 30, 2016,
respectively
|
|
|
159
|
|
|
|
159
|
|
Additional
paid-in capital
|
|
|
881
|
|
|
|
868
|
|
Retained
earnings
|
|
|
2,238
|
|
|
|
2,163
|
|
Treasury
shares, at cost: 30,033,665 and 29,386,198 shares
|
|
|
|
|
|
|
|
|
as of
September 30, 2016 and June 30, 2016, respectively
|
|
|
(2,422
|
)
|
|
|
(2,323
|
)
|
Accumulated
other comprehensive net (losses) income
|
|
|
(567
|
)
|
|
|
(570
|
)
|
Stockholders equity
|
|
|
289
|
|
|
|
297
|
|
Total
liabilities and stockholders equity
|
|
$
|
4,466
|
|
|
$
|
4,510
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
3
The Clorox
Company
Condensed Consolidated
Statements of Cash Flows (Unaudited)
(Dollars in millions)
|
|
Three Months
Ended
|
|
|
9/30/2016
|
|
9/30/2015
|
Operating
activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
179
|
|
|
$
|
172
|
|
Deduct: Losses from
discontinued operations, net of tax
|
|
|
-
|
|
|
|
(1
|
)
|
Earnings from continuing
operations
|
|
|
179
|
|
|
|
173
|
|
Adjustments to reconcile
earnings from continuing operations to net cash
|
|
|
|
|
|
|
|
|
provided
by continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
41
|
|
|
|
41
|
|
Share-based
compensation
|
|
|
12
|
|
|
|
9
|
|
Deferred
income taxes
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Other
|
|
|
(14
|
)
|
|
|
(5
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
74
|
|
|
|
39
|
|
Inventories,
net
|
|
|
(23
|
)
|
|
|
(30
|
)
|
Other
current assets
|
|
|
(6
|
)
|
|
|
(10
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(153
|
)
|
|
|
(95
|
)
|
Income
taxes payable
|
|
|
62
|
|
|
|
18
|
|
Net cash
provided by continuing operations
|
|
|
170
|
|
|
|
135
|
|
Net cash
provided by discontinued operations
|
|
|
-
|
|
|
|
12
|
|
Net cash
provided by operations
|
|
|
170
|
|
|
|
147
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(59
|
)
|
|
|
(28
|
)
|
Other
|
|
|
1
|
|
|
|
12
|
|
Net cash
used for investing activities
|
|
|
(58
|
)
|
|
|
(16
|
)
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Notes and loans payable,
net
|
|
|
95
|
|
|
|
36
|
|
Treasury stock
purchased
|
|
|
(110
|
)
|
|
|
(103
|
)
|
Cash dividends
paid
|
|
|
(104
|
)
|
|
|
(99
|
)
|
Issuance of common stock
for employee stock plans and other
|
|
|
15
|
|
|
|
46
|
|
Net cash
used for financing activities
|
|
|
(104
|
)
|
|
|
(120
|
)
|
Effect of
exchange rate changes on cash and cash equivalents
|
|
|
(1
|
)
|
|
|
(10
|
)
|
Net increase
in cash and cash equivalents
|
|
|
7
|
|
|
|
1
|
|
Cash and
cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
|
401
|
|
|
|
382
|
|
End of
period
|
|
$
|
408
|
|
|
$
|
383
|
|
See Notes to Condensed
Consolidated Financial Statements (Unaudited)
4
The Clorox Company
Notes to Condensed Consolidated
Financial Statements (Unaudited)
(Dollars in millions, except share and per
share data)
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.
5
NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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
|
)
|
6
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.
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
|
|
7
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.
8
NOTE 5. 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 $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.
9
NOTE 5. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
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.
|
10
NOTE 5. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
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.
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.
11
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
|
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
|
|
12
NOTE 8. COMPREHENSIVE
INCOME (Continued)
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.
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.
13
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.
14
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.
15
RESULTS OF
OPERATIONS
CONSOLIDATED RESULTS
FROM CONTINUING OPERATIONS
|
|
Three Months
Ended
|
|
|
|
% of Net
Sales
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
|
9/30/2016
|
|
9/30/2015
|
Diluted net earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing
operations
|
|
$
|
1.36
|
|
$
|
1.32
|
|
3
|
%
|
|
|
|
|
|
|
Net
sales
|
|
|
1,443
|
|
|
1,390
|
|
4
|
|
|
100
|
%
|
|
100
|
%
|
Gross profit
|
|
|
640
|
|
|
625
|
|
2
|
|
|
44.4
|
|
|
45.0
|
|
Selling and administrative expenses
|
|
|
200
|
|
|
186
|
|
8
|
|
|
13.9
|
|
|
13.4
|
|
Advertising costs
|
|
|
128
|
|
|
123
|
|
4
|
|
|
8.9
|
|
|
8.8
|
|
Research and development costs
|
|
|
31
|
|
|
30
|
|
3
|
|
|
2.1
|
|
|
2.2
|
|
Interest expense
|
|
|
22
|
|
|
23
|
|
(4
|
)
|
|
1.5
|
|
|
1.7
|
|
Diluted net earnings per
share from continuing operations
increased $0.04, or 3%, in the current period. Diluted net earnings per
share increased primarily due to higher net sales and cost savings, partially
offset by increased manufacturing and logistics costs and unfavorable foreign
currency exchange rates.
Net
sales
in the current
period
increased 4%. Volume increased 8% reflecting higher shipments in all reportable
segments, including the benefit from the acquisition of RenewLife. Volume
outpaced net sales primarily due to unfavorable product mix and foreign currency
exchange rates, partially offset by the benefit of price increases.
Gross
margin
,
defined as gross profit as a percentage of net
sales, decreased 60 basis points in the current period. The decrease was driven
by higher manufacturing and logistics costs and unfavorable product mix and
foreign currency exchange rates, partially offset by strong cost savings,
favorable commodity costs and the benefit of price increases.
Selling and
administrative expenses,
as a
percentage of net sales, increased 50 basis points in the current period,
primarily due to the impact of RenewLife and increased performance-based
compensation costs.
Advertising
costs
, as a percentage of net
sales, remained essentially flat in the current period. The Companys U.S.
retail advertising spend in the current period and prior period was
approximately 10% of net sales.
Research and development
costs
remained essentially flat in the current period,
reflecting the Companys continued support of its new products and established
brands with an emphasis on innovation.
Interest
expense
remained essentially
flat in the current period.
The effective tax rate
on earnings from continuing operations
was 32.0% and 34.5% for the current and prior
period, respectively. This decrease was primarily due to the recognition of
excess tax benefits from share-based compensation upon the adoption of
Accounting Standards Update No. 2016-09 in the first quarter of fiscal year
2017. See Notes to the Condensed Consolidated Financial Statements for more
information.
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 $1 to $11 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 2017 and fiscal
years 2018 through 2019, for a total of $50 to $60 over the entire five-year
period.
See Notes to the Condensed
Consolidated Financial Statements for more information regarding discontinued
operations of Clorox Venezuela.
17
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
|
|
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
Net
sales
|
|
$
|
534
|
|
$
|
497
|
|
7
|
%
|
Earnings
from continuing operations before income taxes
|
|
|
164
|
|
|
149
|
|
10
|
|
Volume, net sales and earnings
from continuing operations before income taxes increased by 13%, 7% and 10%,
respectively, in the current period. Both volume and net sales growth were
driven mainly by higher shipments across several Clorox
®
branded
products within Home Care, primarily Clorox
®
disinfecting wipes
resulting from expanded club-channel distribution and increased merchandising
support, and in Professional Products across cleaning products. Volume outpaced
net sales due to unfavorable product mix. The increase in earnings from
continuing operations before income taxes was mainly due to net sales growth and
strong cost savings.
Household
|
|
Three Months
Ended
|
|
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
Net
sales
|
|
$
|
422
|
|
$
|
411
|
|
3
|
%
|
Earnings
from continuing operations before income taxes
|
|
|
69
|
|
|
82
|
|
(16
|
)
|
Volume and net sales increased
by 6% and 3%, respectively, while earnings from continuing operations before
income taxes decreased 16% in the current period. Both volume growth and net
sales growth were driven by the acquisition of RenewLife, partially offset by
lower shipments of Charcoal. Volume outpaced net sales, primarily due to higher
trade promotion spending. The decrease in earnings from continuing operations
before income taxes was mainly due to lower volume in Charcoal, higher trade
promotion
spending and
higher manufacturing and
logistics costs, partially offset by the benefit of favorable commodity costs.
Lifestyle
|
|
Three Months
Ended
|
|
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
Net
sales
|
|
$
|
236
|
|
$
|
231
|
|
2
|
%
|
Earnings
from continuing operations before income taxes
|
|
|
62
|
|
|
59
|
|
5
|
|
Volume, net sales, and
earnings from continuing operations before income taxes increased by 1%, 2% and
5%, respectively, in the current period. Both volume growth and net sales growth
were primarily driven by higher shipments in the Burts Bees Natural Personal
Care business largely due to innovation in lip color. Net sales growth outpaced
volume, primarily due to decreased trade promotion spending. The increase in
earnings from continuing operations before income taxes was primarily due to net
sales growth, cost savings and favorable commodity costs, partially offset by
higher manufacturing and logistics costs.
18
International
|
|
Three Months
Ended
|
|
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
Net
sales
|
|
$
|
251
|
|
$
|
251
|
|
-
|
%
|
Earnings
from continuing operations before income taxes
|
|
|
27
|
|
|
32
|
|
(16
|
)
|
Volume increased 4%, net sales
were flat and earnings from continuing operations before income taxes decreased
by 16% in the current period. Volume grew due to higher shipments, mainly in
Canada, which included the benefit from the RenewLife acquisition and in the
Burts Bees
Natural
Personal Care Asia business, partially offset by lower shipments in certain
Latin American countries, including Argentina. Volume outpaced net sales due to
unfavorable foreign exchange rates, partially offset by the benefit of price
increases. The decrease in earnings from continuing operations before income
taxes was primarily due to unfavorable foreign currency exchange rates,
inflationary pressure on manufacturing and logistics costs, partially offset by
the benefit of price increases.
Argentina
The Company operates in
Argentina through certain wholly owned subsidiaries (collectively, Clorox
Argentina). Net sales from Clorox Argentina represented approximately 3% of the
Companys consolidated net sales for each of the three months ended September
30, 2016 and the
fiscal
year ended June 30, 2016. The operating environment in
Argentina continues to present business challenges, including significant
devaluing of Argentinas 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 other 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 three months ended
September 30, 2016 and the year ended June 30, 2016, the value of the Argentine
peso (ARS) declined 3% and 39%, respectively. As of September 30, 2016, using
the exchange rate of 15.4 ARS per USD, Clorox Argentina had total assets of $74,
including cash and cash equivalents of $10, net receivables of $19, inventories
of $19, net property, plant and equipment of $17 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.
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, other current assets, property and equipment,
other investments and deferred taxes.
|
|
Three Months
Ended
|
|
|
|
|
9/30/2016
|
|
9/30/2015
|
|
% Change
|
Losses from
continuing operations before income taxes
|
|
$
|
(58
|
)
|
|
$
|
(58
|
)
|
|
-
|
%
|
There was no significant
change in losses from continuing operations before income taxes in the current
period.
19
FINANCIAL POSITION AND
LIQUIDITY
Operating
Activities
The Companys financial
condition and liquidity remained strong as of September 30, 2016. Net cash
provided by continuing operations was $170 in the current period, compared with
$135 in the prior period. The year-over-year increase was primarily related to
higher tax payments in the prior period.
Investing Activities
Capital expenditures were $59
in the current period, compared with $28 in the prior period. Capital spending
as a percentage of net sales was approximately 4% and 2% in the three months
ended September 30, 2016 and 2015, respectively. The year-over-year increase was
due to additional capital spending for manufacturing efficiencies and
information technology infrastructure in the current period. Prior period
investing activities also included proceeds from the sale of the Companys
corporate jet.
Financing Activities
Net cash used for financing
activities was $104 in the current period, compared with $120 in the prior
period. The change was primarily due to an increase in cash sourced from notes
and loan payable borrowings, partially offset by a decline in proceeds from the
issuance of stock for employee stock plans.
Credit
Arrangements
As of September 30, 2016, the
Company had a $1,100 revolving credit agreement (the Credit Agreement) that
expires in October 2019. As of September 30, 2016, 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 as of September 30, 2016,
using Consolidated EBITDA for the trailing four quarters, as contractually
defined:
|
|
9/30/2016
|
Earnings
from continuing operations
|
|
$
|
654
|
Add
back:
|
|
|
|
Interest expense
|
|
|
87
|
Income tax
expense
|
|
|
329
|
Depreciation and
amortization
|
|
|
165
|
Noncash intangible asset
impairment charges
|
|
|
9
|
Deduct:
|
|
|
|
Interest income
|
|
|
5
|
Consolidated
EBITDA
|
|
$
|
1,239
|
Total
debt
|
|
$
|
2,407
|
Consolidated
Leverage ratio
|
|
|
1.94
|
The Company was in compliance
with all restrictive covenants and limitations in the Credit Agreement as of
September 30, 2016, and anticipates being in compliance with all restrictive
covenants for the foreseeable future. The Company continues to monitor the
financial markets and assess its ability to fully draw on its revolving credit
agreement, and currently expects that any drawing on the agreement will be fully
funded.
Of the $29 of foreign and
other credit lines as of September 30, 2016, $4 was outstanding and the
remainder of $25 was available for borrowing.
20
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 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.
During the three months ended
September 30, 2016 and 2015, the Company repurchased approximately 0.9 million
and 1.0 million shares, respectively, under its Evergreen Program, for an
aggregate amount of $113 and $112, respectively. The Company did not repurchase
any shares under the open-market purchase program during the three months ended
September 30, 2016 and 2015.
During the three months ended
September 30, 2016 and 2015, the Company paid dividends per share of $0.80 and
$0.77, respectively, aggregating to $104 and $99, respectively.
CONTINGENCIES
See Notes to Condensed
Consolidated Financial Statements for information on the Companys
contingencies.
RECENTLY ISSUED ACCOUNTING
STANDARDS
See Notes to Condensed
Consolidated Financial Statements for a summary of recently issued accounting
standards relevant to the Company.
21
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, predicts, 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 herein. 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,
2016, 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 price and market share, grow its product categories and
achieve favorable product and geographic mix;
|
●
|
volatility and increases in commodity costs
such as resin, sodium hypochlorite and agricultural commodities, and
increases in energy, transportation or other costs;
|
●
|
dependence on key customers and risks
related to customer consolidation and ordering patterns;
|
●
|
risks related to
reliance on information technology systems, including potential security
breaches, cyber-attacks, privacy breaches or data breaches that result in
the unauthorized disclosure of consumer, customer, employee or Company
information, or service interruptions;
|
●
|
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 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; and the possibility of
nationalization, expropriation of assets or other government action;
|
●
|
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 ability of the Company to develop and
introduce commercially successful products;
|
●
|
supply disruptions and other risks inherent
in reliance on a limited base of suppliers;
|
●
|
the impact of product liability claims,
labor claims and other legal proceedings, including in foreign
jurisdictions
|
●
|
the success of the Companys business strategies;
|
●
|
the ability of the Company to implement and
generate anticipated cost savings and efficiencies;
|
●
|
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;
|
●
|
risks related to the potential increase in
the Companys purchase price for P&Gs interest in the
Glad
®
business
and the impact from the decision on whether or not to extend the term of
the related agreement with P&G;
|
●
|
the effect of the Companys indebtedness and
credit rating on its business operations and financial results;
|
●
|
risks related to the Companys
discontinuation of operations in Venezuela;
|
●
|
the Companys ability to pay and declare
dividends or repurchase its stock in the future;
|
●
|
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 projections are based; and
|
●
|
the impacts of potential stockholder activism.
|
22
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.