Clorox Company 10-K 2009
Documents found in this filing:
for the fiscal year ended June 30,
for the transition period from ______ to ______.
1221 Broadway, Oakland, California
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g)
of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ. No o.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o. No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o. No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o. No þ.
The aggregate market value of the registrants common stock held by non-affiliates on December 31, 2008 (the last day of the most recently completed second quarter) was approximately $7.7 billion.
As of July 31, 2009, there were 139,346,876 shares of the registrants common stock outstanding.
Portions of the registrants definitive proxy statement for the 2009 Annual Meeting of Stockholders (the Proxy Statement), to be filed within 120 days after June 30, 2009, are incorporated by reference into Part III, Items 10 through 14 of this Annual Report on Form 10-K.
THE CLOROX COMPANY
This Annual Report on Form 10-K (this 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 (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and such forward looking statements involve risks and uncertainties. Except for historical information, matters discussed below, including statements about future volume, sales, costs, cost savings, earnings, cash outflows, plans, objectives, expectations, growth, or profitability, are forward looking statements based on managements estimates, assumptions and projections. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, seeks, estimates, and variations on such words, and similar expressions, 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 below. 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 this Annual Report on Form 10-K for the year ended June 30, 2009, as updated from time to time in the Companys SEC filings.
These factors include, but are not limited to:
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.
ITEM 1. BUSINESS
The Company is a leading manufacturer and marketer of consumer products with fiscal year 2009 net sales of $5.5 billion. The Company sells its products primarily through mass merchandisers, grocery stores and other retail outlets. It markets some of consumers most trusted and recognized brand names, including its namesake bleach and cleaning products, Green Works natural cleaners and laundry products, Poett® and Mistolín® cleaning products, Armor All® and STP® auto-care products, Fresh Step® and Scoop Away® cat litter, Kingsford® charcoal, Hidden Valley® and K C Masterpiece® dressings and sauces, Brita® water-filtration systems, Glad® bags, wraps and containers, and Burts Bees® natural personal care products. With approximately 8,300 employees worldwide, the Company manufactures products in more than two dozen countries and markets them in more than 100 countries. The Company was founded in Oakland, Calif., in 1913 and is incorporated in Delaware.
The Company has developed a strategy to guide it through its 100-year anniversary in 2013. The Companys Centennial Strategy is focused on creating value by investing in new and existing categories, sales channels and countries with profitable growth potential, particularly those categories aligned with global consumer trends in the areas of health and wellness, sustainability, affordability and a more multicultural marketplace. It uses economic profit to drive enhanced performance, portfolio choices and resource allocation. Economic profit represents profit generated over and above the cost of capital used by the business to generate that profit. For information on recent business developments, refer to the information set forth under the caption Executive Overview - Fiscal Year 2009 Summary in Managements Discussion and Analysis of Financial Condition and Results of Operations, on pages 1 through 3 of Exhibit 99.1 hereto, incorporated herein by reference.
Financial Information About Operating Segments and Principal Products
Beginning with fiscal year 2009, the Companys segment reporting has been modified and prior periods were updated to conform to the current years presentation of segments. The Company operates through strategic business units which are aggregated into four reportable segments: Cleaning, Lifestyle, Household and International. The four reportable segments consist of the following:
The Company has three product lines that have accounted for 10% or more of total consolidated net sales during each of the past three fiscal years. In fiscal years 2009, 2008 and 2007, respectively, sales of liquid bleach represented approximately 13%, 14% and 14% of the Companys total consolidated net sales. In fiscal years 2009, 2008 and 2007, respectively, sales of trash bags represented approximately 12%, 13% and 14% of the Companys total consolidated net sales. In fiscal years 2009, 2008 and 2007 sales of charcoal represented approximately 10% of the Companys total consolidated net sales.
Information for the last three fiscal years about the results of each of the Companys reportable segments and identifiable assets as of the end of the last two fiscal years, reconciled to the consolidated results, are set forth below. Historical segment financial information presented herein has been revised to reflect the new reportable segments.
Most of the Companys products are nationally advertised and sold within the United States to mass merchandisers, warehouse clubs, and dollar, military and other types of retail stores primarily through a direct sales force, and to grocery stores and grocery wholesalers primarily through a combination of direct sales teams and a network of brokers. Within the United States, the Company also sells institutional, janitorial, healthcare and food-service versions of many of its products through distributors, as well as natural personal care products through the internet. Outside the United States, the Company sells products to the retail trade through subsidiaries, licensees, distributors and joint-venture arrangements with local partners.
For detailed financial information about the Companys foreign and domestic operations, including net sales and long-lived assets by geographic area, see Note 22 Segment Reporting of the Notes to Consolidated Financial Statements beginning on page 60 of Exhibit 99.1 hereto.
The Company purchases raw material from numerous unaffiliated domestic and international suppliers, some of which are sole suppliers. Interruptions in the delivery of these materials or services could adversely impact the Company. Key raw materials used by the Company include resin, jet fuel, chlor-alkali, corrugate, agricultural commodities and other raw materials. Sufficient raw materials were available during fiscal year 2009 and costs for materials continue to be volatile. The Company experienced significant commodity cost pressures, particularly in the first half of fiscal year 2009, and experienced some decline in commodity costs during the second half of the fiscal year. The Company generally utilizes supply and forward-purchase contracts to help ensure availability and help manage the volatility of the pricing of raw materials needed in its operations. However, the Company is nonetheless highly exposed to changes in the price of commodities used as raw materials in the manufacturing of its products. For further information regarding the impact of changes in commodity prices, see Quantitative and Qualitative Disclosure about Market Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 16 through 17 of Exhibit 99.1 hereto and Risk Factors Price increases in raw materials, energy, transportation and other necessary supplies or services could harm the Companys profits in Item 1.A.
Most of the Companys brand name consumer products are protected by registered trademarks. Its brand names and trademarks are highly important to its business, and the Company pursues a course of vigorous action against apparent infringements. Maintenance of brand equity value is critical to the Companys success. The Companys patent rights are also material to its business and are asserted, where appropriate, against apparent infringements.
Most sales of the Companys charcoal products occur in the first six months of each calendar year. A moderate seasonality trend also occurs in the net sales of the Companys Burts Bees® natural personal care products, with slightly more than half of the annual net sales occurring during the months of October through March. Operating cash flow is used to build inventories of those products in the off-season.
In each of fiscal years 2009, 2008 and 2007 net sales to the Companys largest customer, Wal-Mart Stores, Inc. and its domestic and international affiliates, were 27%, 26% and 26%, respectively, of the Companys total consolidated net sales. Order backlog is not a significant factor in the Companys business.
The markets for consumer products are highly competitive. Most of the Companys products compete with other nationally advertised brands within each category and with private label brands and generic nonbranded products in certain categories. Competition is encountered from similar and alternative products, some of which are produced and marketed by major multinational or national companies having financial resources greater than those of the Company. Depending on the product, the Companys products compete on product performance, brand recognition, price, value or other benefits to consumers. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising support. If a product gains consumer acceptance, it normally requires continued advertising and promotional support and ongoing product improvement to maintain its relative market position.
The Company conducts research and development primarily at its Technical Center in Pleasanton, Calif. and also conducts research and development activities in Kennesaw, Ga.; Cincinnati, Oh; Willowbrook, Ill.; and Buenos Aires, Argentina. The Company devotes significant resources and attention to product development, process technology and consumer insight research to develop consumer-preferred products with innovative and distinctive features. The Company incurred expenses of $114 million, $111 million and $108 million in fiscal years 2009, 2008 and 2007, respectively, on direct research activities relating to the development of new products or the maintenance and improvement of existing products. In addition, the Company also obtains technologies for use in its products from third parties. Royalties relating to such technologies are reflected in the Companys cost of sales. For further information regarding the Companys research and development costs, see Research and development costs in Managements Discussion and Analysis of Financial Condition and Results of Operations on page 6 of Exhibit 99.1 hereto.
For information regarding noncapital expenditures related to environmental matters, see the discussions below under Risk Factors Environmental matters create potential liability risks in Item 1.A. No material capital expenditures relating to environmental compliance are presently anticipated.
Number of Persons Employed
At June 30, 2009, the Company employed approximately 8,300 people.
The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available on the Companys Internet Web site, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at www.thecloroxcompany.com under Investors/Financial Information/SEC Filings. Information relating to corporate governance at Clorox, including the Companys Code of Conduct, Board of Directors Governance Guidelines and Board Committee charters, including charters for the Management Development and Compensation Committee, the Audit Committee, the Finance Committee and the Nominating and Governance Committee, is available at www.thecloroxcompany.com under Company Information/Corporate Governance. The Company will provide any of the foregoing information without charge upon written request to Corporate Communications, The Clorox Company, 1221 Broadway, Oakland, CA 94612-1888. The information contained on the Companys Internet Web site is not included as a part of, or incorporated by reference into, this Report.
The following risks and uncertainties, as well as other factors described elsewhere in this Report or in other filings by the Company with the SEC, could adversely affect the Companys business, financial condition and results of operations. Additional risks and uncertainties that are not currently known to the Company or that are not currently believed by the Company to be material may also harm the Companys business operations and financial results.
In addition, sales volume growth, whether due to acquisitions or to internal growth, can burden management resources and financial controls that, in turn, can have a negative impact on operating results and net earnings. To some extent, the Company sets its expense levels in anticipation of future revenues. If actual revenue falls short of these expectations, operating results and net earnings are likely to be adversely affected.
The Company faces intense competition in its markets, which could lead to reduced profitability.
The Company faces intense competition from consumer product companies both in the U.S. and in its international markets. Most of the Companys products compete with other widely-advertised brands within each product category and with private label brands and generic nonbranded products of grocery chains and wholesale cooperatives in certain categories, which typically are sold at lower prices.
The Companys products generally compete on the basis of product performance, brand recognition, price, value or other benefits to consumers. Advertising, promotion, merchandising and packaging also have a significant impact on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it normally requires continued advertising, promotional support and product improvements to maintain its relative market position.
Some of the Companys competitors are larger and have financial resources greater than those of the Company. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than the Company can. In addition, the Companys competitors may attempt to gain market share by offering products at prices at or below those typically offered by the Company. Competitive activity may require the Company to increase its spending on advertising and promotions or reduce prices and could lead to reduced profits and could adversely affect growth.
Unfavorable general economic conditions and financial market volatility may negatively impact the Companys financial performance and liquidity.
Although the Company continues to devote significant resources to support its brands, unfavorable economic conditions may negatively affect consumer demand for the Companys products. Consumers may reduce discretionary spending due to economic uncertainty or unfavorable economic conditions and this may lead to reduced sales volumes or cause a shift in the Companys product mix from higher margin to lower margin products. Consumers may increase purchases of lower-priced or non-branded products and the Companys competitors may increase levels of promotional activity for lower-priced products as they seek to maintain sales volumes during the downturn.
In addition, global financial markets have experienced unprecedented disruptions during fiscal year 2009 and continuing volatility could harm the Companys business. Although the Company currently generates significant cash flows from ongoing operations and has access to global credit markets through its financing activities and existing credit facilities, if the current credit conditions were to worsen, the Company might not be able to access credit markets on favorable terms, which could adversely affect the Companys ability to borrow. Financial market volatility and unfavorable economic conditions may also adversely affect the financial condition of our customers, suppliers and other business partners. In addition, the decline in the equity markets and the valuation of other assets precipitated by the credit crisis and financial system disruptions has affected the value of the Companys pension plan assets. The lower pension plan asset base has negatively affected the return on plan assets, increased the Companys pension expense and required additional pension funding. If current market conditions worsen or continue for a prolonged period of time, it could have an additional negative impact on future pension expense and cash flow.
Sales growth may be difficult to achieve.
A large percentage of the Companys revenues comes from mature markets that are subject to increased competition. During fiscal year 2009, approximately 80% of the Companys net sales were generated in U.S. markets. U.S. markets for household products are considered mature and are generally characterized by high household penetration. The Companys ability to achieve sales growth will depend on its ability to drive growth through innovation, investment in its established brands and enhanced merchandising and its ability to capture market share from competitors. In addition, price increases may slow sales growth or create declines in sales in the short term as consumers adjust to price increases. If the Company is unable to increase market share in existing product lines, develop product improvements, undertake sales, marketing and advertising initiatives that grow its product categories, and develop, acquire or successfully launch new products, it may not achieve its sales growth objectives.
Operations outside the United States expose the Company to foreign exchange rate risk, uncertain conditions and other risks in international markets.
The Company is exposed to foreign currency exchange rate risk with respect to its sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. Although the Company uses instruments to hedge certain foreign currency risks, these hedges only offset a small portion of the Companys exposure to foreign currency fluctuations and its reported earnings may be affected by changes in foreign exchange rates. Moreover, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time.
In addition to foreign exchange rate risks, the Company faces and will continue to face substantial risks associated with having foreign operations, including:
These risks could have a significant impact on the Companys ability to sell its products on a competitive basis in international markets and may have a material adverse effect on its results of operations or financial position. The Companys small sales volume in some countries, relative to some multinational and local competitors, could exacerbate such risks.
Also, the Companys operations outside the United States are subject to risks relating to compliance with legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, potentially higher incidence of fraud or corruption, credit risk of local customers and distributors, and potentially adverse tax consequences.
The Company may not successfully develop and introduce new products and line extensions.
The Companys future performance and growth depends on its ability to successfully develop and introduce new products and line extensions. The Company cannot be certain that it will successfully achieve those goals. The development and introduction of new products requires substantial and effective research, development and marketing expenditures, which the Company may be unable to recoup if the new products do not gain widespread market acceptance. New product development and marketing efforts, including entering markets or product categories in which the Company has limited or no prior experience, have inherent risks. These risks include product development or launch delays, which could result in the Company not being first to market, the failure of new products and line extensions to achieve anticipated levels of market acceptance, and the cost of failed product introductions.
Dependence on key customers could adversely affect the Companys business, financial condition and results of operations.
A limited number of customers account for a large percentage of the Companys net sales. The Companys largest customer, Wal-Mart Stores, Inc. and its domestic and international affiliated companies, accounted for approximately 27%, 26% and 26% of the Companys net sales during fiscal years 2009, 2008 and 2007. During fiscal years 2009, 2008, and 2007, the Companys five largest customers accounted for 43%, 42% and 42%, respectively, of its total consolidated net sales. The Company expects that a significant portion of its revenues will continue to be derived from a small number of customers. As a result, changes in the strategies of the Companys largest customers, including shelf simplification or a reduction in the number of brands they carry or a shift of shelf space to private-label or competitors products, may harm the Companys sales.
In addition, the Companys business is based primarily upon individual sales orders, and the Company typically does not enter into long-term contracts with its customers. Accordingly, these customers could reduce their purchasing levels or cease buying products from the Company at any time and for any reason. If the Company does not effectively respond to the demands of its customers, they could decrease their purchases from the Company, causing the Companys sales and profits to decline. In recent years, the Company has seen increasing retailer consolidation both in the U.S. and internationally. This trend has resulted in the increased size and influence of large consolidated retailers, who may demand lower pricing or special packaging, or impose other requirements on product suppliers. These business demands may relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. If the Company ceases doing business with a significant customer or if sales of its products to a significant customer materially decrease, the Companys business, financial condition and results of operations may be harmed.
The Companys financial results could suffer if the Company is unable to implement its strategies or if the Companys strategies do not achieve the intended effects.
There is no assurance that the Company will be able to implement its strategies, including its Centennial Strategy, or will achieve its intended growth targets. If the Company is unable to implement its strategies in accordance with its expectations, the Companys financial results could be adversely affected. Moreover, the Company cannot be certain that implementation of its strategies will necessarily advance the Companys business or financial results.
Profitability could suffer if the Company is unable to generate anticipated savings and efficiencies, including through its supply chain restructuring and operating model changes.
The Companys success and profitability depend on efficient manufacture and production of products. Beginning in fiscal year 2008, the Company began a supply chain restructuring involving closing certain domestic and international manufacturing facilities and redistributing production between the remaining facilities and third-party producers to optimize available capacity and reduce operating costs. Gaining additional efficiencies may become increasingly difficult over time and any failure to successfully execute such changes may result in supply chain interruption, which may negatively impact product volume and margins. In addition, one of the Companys key strategies is to reduce waste, lower costs and increase productivity. The Company sets aggressive annual cost savings targets in support of this strategy. Failure to reduce costs through productivity gains and operating model efficiencies could adversely affect profitability.
Price increases in raw materials, energy, transportation and other necessary supplies or services could harm the Companys profits.
Increases in the cost of raw materials, including resin, chlor-alkali, linerboard, soybean oil, solvent, natural oils, corrugate and other chemicals and agricultural commodities, or increases in the cost of energy, transportation and other necessary services, including the cost of diesel, may harm the Companys profits and operating results. If price increases for any of the primary raw materials or other necessary supplies or services occur and the Company is not able to increase the prices of its products or achieve cost savings to offset such price increases, its profits and operating results will be harmed. In addition, if the Company increases the prices of its products in response to increases in the cost of commodities, and the commodity costs decline, the Company may not be able to sustain its price increases over time. Sustained price increases may lead to declines in volume, and while the Company seeks to project tradeoffs between price increases and volume, its projections may not accurately predict the volume impact of price increases.
For further information regarding the impact of changes in commodity prices, see Quantitative and Qualitative Disclosure about Market Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 16 through 17 of Exhibit 99.1 hereto, incorporated herein by reference.
Reliance on a limited base of suppliers may result in disruption to the Companys business.
The Company relies on a limited number of suppliers, including sole suppliers for certain of its raw materials, packaging, product components, finished products and other necessary supplies. If the Company is unable to maintain supplier arrangements and relationships, or if it is unable to contract with suppliers at the quantity and quality levels needed for its business, or if any of the Companys key suppliers becomes insolvent or experiences other financial distress, the Company could experience disruptions in production and its financial results could be adversely affected.
Acquisitions and new venture investments may not be successful.
In connection with the Companys Centennial Strategy, the Company may seek to increase growth through acquisitions. Not only is the identification of good acquisition candidates difficult and competitive, but these transactions also involve numerous risks, including the ability to:
Companies or operations acquired or joint ventures created may not be profitable or may not achieve sales levels and profitability that justify the investments made. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, the assumption of contingent liabilities, the increase in amortization expenses related to certain intangible assets and increased operating expenses, which could adversely affect the Companys results of operations and financial condition. Future acquisitions of foreign companies would increase the Companys exposure to foreign exchange risks. In addition, to the extent that the economic benefits associated with any of the Companys acquisitions diminish in the future, the Company may be required to record additional write-downs of goodwill, intangible assets or other assets associated with such acquisitions, which could adversely affect its operating results.
In November 2007, the Company acquired Burts Bees Inc., a leading manufacturer and marketer of natural personal care products, for an aggregate purchase price of $913 million (excluding $25 million of associated tax benefits). There is no assurance that the Company will be able to achieve the sales and profit growth or increased distribution in the Burts Bees business that management has projected.
Additional government regulations could impose material costs.
Generally, the manufacture, packaging, labeling, storage, distribution and advertising of the Companys products and the conduct of its business operations must all comply with extensive federal, state and foreign laws and regulations. For example, in the United States, many of the Companys products are regulated by the Environmental Protection Agency, the Food and Drug Administration and the Consumer Product Safety Commission and the Companys product claims and advertising are regulated by the Federal Trade Commission. In addition, security at certain of our facilities is regulated by the Department of Homeland Security. Most states have agencies that regulate in parallel to these federal agencies. In addition, the Companys international operations are subject to regulation in each of the foreign jurisdictions in which it manufactures or distributes its products. If the Company is found to be out of compliance with applicable laws and regulations in these or other areas, it could be subject to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on its business. Loss of or failure to obtain necessary permits and registrations could delay or prevent the Company from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results, particularly with respect to its charcoal business. It is possible that the federal government will increase regulation of the transportation, storage or use of certain chemicals to enhance homeland security or protect the environment and that such regulation could negatively impact the Companys ability to obtain raw material or increase costs. In addition, pending legislative initiatives, such as in the areas of healthcare reform, taxation of foreign profits and corporate governance and executive compensation, could also increase the Company's costs.
Product liability claims could adversely affect the Companys sales and operating results.
The Company may be required to pay for losses or injuries purportedly caused by its products. Claims could be based on allegations that, among other things, the Companys products contain contaminants or provide inadequate instructions regarding their use, or inadequate warnings concerning interactions with other substances or damage property. Product liability claims could result in negative publicity that could harm the Companys sales and operating results. In addition, if one of the Companys products is found to be defective, the Company could be required to recall it, which could result in adverse publicity and significant expenses. Although the Company maintains product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or certain product liability claims may be excluded under the terms of the policy.
Environmental matters create potential liability risks.
The Company must comply with various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, water discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. The Company is currently involved in or has potential liability with respect to the remediation of past contamination in the operation of some of its currently and formerly owned and leased facilities. In addition, some of its present and former facilities have been or had been in operation for many years and, over that time, some of these facilities may have used substances or generated and disposed of wastes that are or may be considered hazardous. It is possible that those sites, as well as disposal sites owned by third parties to whom the Company has sent waste, may in the future be identified and become the subject of remediation. It is possible that the Company could become subject to additional environmental liabilities in the future that could result in a material adverse effect on its results of operations or financial condition.
At June 30, 2009, the Company had a recorded liability of $19 million for its future remediation costs. One matter in Dickinson County, Michigan, for which the Company is jointly and severally liable, accounts for a substantial majority of the recorded liability. The Company is subject to a cost-sharing arrangement with Ford Motor Co. (Ford) for this matter, under which the Company has agreed to be liable for 24.3% of the aggregate remediation and associated costs, other than legal fees, as it and Ford are each responsible for their own such fees. If Ford is unable to pay its share of the response and remediation obligations, the Company would likely be responsible for such obligations. In October 2004, the Company and Ford agreed to a consent judgment with the Michigan Department of Environmental Quality, which sets forth certain remediation goals and monitoring activities. Based on the current status of this matter, and with the assistance of environmental consultants, the Company maintains an undiscounted liability representing its best estimate of its share of costs associated with the capital expenditures, maintenance and other costs to be incurred over an estimated 30-year remediation period. The most significant components of the liability relate to the estimated costs associated with the remediation of groundwater contamination and excess levels of subterranean methane deposits. Currently, the Company cannot accurately predict the timing of the payments that will likely be made under this estimated obligation. In addition, the estimated loss exposure is sensitive to a variety of uncertain factors, including the efficacy of remediation efforts, changes in remediation requirements and the timing, varying costs and alternative clean-up technologies that may become available in the future. Although it is 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 also handles and/or transports hazardous substances, including but not limited to chlorine, at its plant sites, including the rail transit of liquid chlorine from its point of origin to the Companys manufacturing facilities. A release of such chemicals, whether in transit or at our facilities, due to accident or an intentional act, could result in substantial liability. The Company has incurred, and will continue to incur, significant capital and operating expenditures and other costs in complying with environmental laws and regulations and in providing physical security for its worldwide operations, and such expenditures reduce the cash flow available to the Company for other purposes.
Failure to maximize, successfully assert or successfully defend the Companys intellectual property rights could impact its competitiveness.
The Company relies on intellectual property rights based on trademark, trade secret, patent and copyright laws to protect its brands, its products, and the packaging for those products. The Company cannot be certain that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that the Company will not be able to obtain and perfect its own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. The Company cannot be certain that these rights, if obtained, will not later be invalidated, circumvented or challenged, and the Company could incur significant costs in connection with legal actions to assert its intellectual property rights, or to defend those rights from assertions of invalidity. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which the Companys products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe the Companys intellectual property rights, they may dilute the value of the Companys brands in the marketplace, which could diminish the value that consumers associate with the Companys brands and harm its sales. The failure to perfect or successfully assert its intellectual property rights could make the Company less competitive and could have a material adverse effect on its business, operating results and financial condition.
If the Company is found to have infringed the intellectual property rights of others or cannot obtain necessary intellectual property rights from others, its competitiveness could be negatively impacted.
If the Company is found to have violated the trademark, trade secret, copyright, patent or other intellectual property rights of others, such a finding could result in the need to cease use of a trademark, trade secret, copyrighted work or patented invention in the Companys business and the obligation to pay a substantial amount for past infringement. In some instances, the Company may not be able to obtain the intellectual property rights necessary to support new product introductions or on-going sales. It could also be necessary to pay a substantial amount in the future for rights if holders are willing to permit the Company to continue to use the intellectual property rights. Either having to cease use or pay such amounts could make the Company less competitive and could have a material adverse impact on its business, operating results and financial condition.
The Companys substantial indebtedness could adversely affect its operations and financial results and prevent the Company from fulfilling its obligations.
The Company has a significant amount of indebtedness. As of June 30, 2009, the Company had $3.1 billion of debt. The Companys substantial indebtedness could have important consequences. For example, it could:
The Company may not have sufficient cash to service its indebtedness and pay cash dividends.
The Companys ability to repay and refinance its indebtedness and to fund capital expenditures depends on the Companys cash flow. In addition, the Companys ability to pay cash dividends depends on cash flow and net profits (as defined by Delaware law). The Companys cash flow and net profits are often subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Companys control, and such factors may limit the Companys ability to repay indebtedness and pay cash dividends.
The Company may incur substantially more debt, which could further exacerbate the risks described above.
The Company may incur substantial additional indebtedness in the future to fund acquisitions, to repurchase shares or to fund other activities for general business purposes, subject to compliance with the Companys existing restrictive debt covenants. As of June 30, 2009, the Company could add approximately $600 million in incremental debt and remain in compliance with restrictive debt covenants. If new debt is added to the current debt levels, the related risks that the Company now faces could intensify. In addition, the cost of incurring additional debt could increase due to possible additional downgrades in the Companys credit rating.
The facilities of the Company and its suppliers are subject to disruption by events beyond the Companys control.
Operations at the facilities of the Company and its suppliers are subject to disruption for a variety of reasons, including work stoppages, disease outbreaks or pandemics, acts of war, terrorism, , fire, earthquakes, flooding or other natural disasters. In addition, the Companys corporate headquarters and Technical Center are located near major earthquake fault lines in California. If a major disruption were to occur, it could result in harm to people or the natural environment, temporary loss of access to critical data, delays in shipments of products to customers or suspension of operations.
The Companys continued growth and expansion and increasing reliance on third party service providers could adversely affect its internal control over financial reporting, which could harm its business and financial results.
Clorox management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Companys financial statements would be prevented or detected. The Companys continuing growth and expansion in domestic and globally dispersed markets will place significant additional pressure on the Companys system of internal control over financial reporting. Moreover, the Company increasingly engages the services of third parties to assist with business operations and financial reporting processes, which inserts additional monitoring obligations and risk into the system of internal control. Any failure to maintain an effective system of internal control over financial reporting could limit the Companys ability to report its financial results accurately and on a timely basis or to detect and prevent fraud.
Harm to the Companys reputation or the reputation of one or more of its leading brands could have an adverse effect on the business.
Maintaining a strong reputation with consumers, customers and trade partners is critical to the success of the Companys business. The Company devotes significant time and resources to programs designed to protect and preserve the Companys reputation and the reputation of its brands. These programs include ethics and compliance, sustainability, and product safety and quality initiatives, among others. Despite these efforts, adverse publicity about the Company, including product safety or quality or similar concerns, whether real or perceived, could harm the Companys image and result in an adverse effect on its business, as well as require resources to rebuild its reputation.
Resolutions of tax disputes may impact the Companys earnings and cash flow.
Significant judgment is required in determining the Companys effective tax rate and in evaluating its tax positions. On July 1, 2007, the Company adopted FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes an Interpretation of Financial Accounting Standards Board Statement No. 109. The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by FIN 48. Changes to uncertain tax positions, including related interest and penalties, impact the Companys effective tax rate. When particular tax matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Companys effective tax rate in the year of resolution. Unfavorable resolution of any tax matter could increase the effective tax rate. Any resolution of a tax issue may require the use of cash in the year of resolution. For additional information, refer to the information set forth in Note 20 - Income Taxes of the Notes to Consolidated Financial Statements beginning on page 53 of Exhibit 99.1 hereto, incorporated herein by reference.
ITEM 2. PROPERTIES
Production and Distribution Facilities
The Company owns or leases and operates 23 manufacturing facilities in North America and owns and operates 17 manufacturing facilities outside North America. The Company also leases seven regional distribution centers in North America and several other warehouse facilities. Management believes the Companys production and distribution facilities, together with additional facilities owned or leased and operated by various unaffiliated finished product suppliers and distribution center service providers that serve the Company, are adequate to support the business efficiently and that the Companys properties and equipment have generally been well maintained. The Company has announced a supply chain restructuring that it expects to complete by fiscal year 2012, which involves closing certain domestic and international manufacturing facilities. For additional information, see Restructuring and asset impairment costs in Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 6 through 8 of Exhibit 99.1 hereto, incorporated herein by reference.
Offices and Research and Development Facilities
The Company owns its general office building located in Oakland, Calif., its Technical Center and Data Center located in Pleasanton, Calif. and its research and development facility at its plant in Buenos Aires, Argentina. The Company also leases certain research and development centers and engineering research facilities in Willowbrook, Ill., and Kennesaw, Ga. Leased sales and other facilities are located at a number of other locations.
None of the Companys owned facilities are encumbered to secure debt owed by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Companys consolidated financial statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, year first elected an executive officer and current titles of each of the executive officers of the Company as of July 31, 2009, are set forth below:
There is no family relationship between any of the above-named persons, or between any of such persons and any of the directors of the Company. See Item 10 of Part III of this Report for additional information regarding the Companys executive officers.
Donald R. Knauss was elected chairman and chief executive officer of the Company in October 2006. He was executive vice president of The Coca-Cola Company and president and chief operating officer for Coca-Cola North America from February 2004 until August 2006. Previously, he was president of the Retail Division of Coca-Cola North America from January 2003 through February 2004.
Lawrence S. Peiros was elected executive vice president and chief operating officer North America effective January 2007. From January 1999 through January 2007, he served as group vice president household.
Daniel J. Heinrich was elected executive vice president chief financial officer effective June 2009. From July 2004 until June 2009, he served as senior vice president chief financial officer. From October 2003 to June 2004, he served as vice president chief financial officer.
Frank A. Tataseo was elected executive vice president strategy & growth, bags & wraps and away from home effective January 2009. From January 2007 to November 2008, he served as executive vice president - functional operations. From July 2004 through January 2007, he served as group vice president functional operations. He served as senior vice president sales from September 1999 through June 2004.
M. Beth Springer was elected executive vice president - international and natural personal care effective January 2009. She served as executive vice president strategy & growth from January 2007 until January 2009. From January 2005 through January 2007, she served as group vice president specialty. She served as vice president, general manager of Glad Products from October 2002 through December 2004.
Jacqueline P. Kane was elected senior vice president human resources & corporate affairs effective January 2005. She joined the Company as vice president human resources in March 2004 and was elected senior vice president human resources in July 2004. From September 2000 to February 2004, she was employed by Hewlett-Packard Company, most recently as vice president of executive leadership and human resources for corporate functions.
Laura Stein was elected senior vice president general counsel effective January 2005. She also served as secretary from September 2005 through May 2007. From January 2000 through January 2005, she was senior vice president general counsel for H.J. Heinz Company.
Thomas P. Britanik was elected senior vice president chief marketing officer effective June 2009. He previously held the position of vice president marketing from February 2008 to May 2009. From July 2005 through January 2008, he served as vice president general manager, U.S. auto-care and Brita®. He held vice president positions in the customer capability development and marketing, litter, food & charcoal business units prior to July 2005.
Wayne Delker was elected senior vice president chief innovation officer effective June 2009. He joined the Company in August 1999 as vice president global research & development and served in that position through May 2009.
Benno Dorer was elected senior vice president general manager, cleaning division effective June 2009. From October 2007 to May 2009, he held the title of vice president general manager, cleaning division. He previously held the position of vice president general manager, household division from March 2007 to October 2007. He joined the Company in January 2005 as vice president general manager, Glad® Products and served in that position through March 2007. From January 2003 through January 2005, he was vice president marketing, Glad® joint venture for Procter & Gamble.
James Foster was elected senior vice president chief product supply officer effective June 2009. From April 2009 to May 2009, he served as vice president product supply. From October 2007 through April 2009, he served as vice president manufacturing. He held the position of vice president product supply, specialty products groups from July 2004 through September 2007. From August 2002 through March 2004, he held the position of director, manufacturing charcoal and litter.
Grant J. LaMontagne was elected senior vice president chief customer officer effective June 2009. From July 2004 to May 2009 he served as vice president sales. He held the position of vice president specialty sales, from July 1994 to July 2004.
George Roeth was elected senior vice president general manager, specialty division effective June 2009. He held the title of vice president general manager, specialty division from February 2007 through May 2009. From April 2004 through February 2007, he served as vice president general manager, litter, food & charcoal. He served as vice president growth and marketing from July 2003 through April 2004.
The Companys common stock is listed on the New York Stock Exchange. The high and low sales prices quoted for the New York Stock Exchange-Composite Transactions Report for each quarterly period during the past two fiscal years appear in Note 24 Unaudited Quarterly Data of the Notes to Consolidated Financial Statements, which appears on page 63 of Exhibit 99.1 hereto, incorporated herein by reference.
The number of record holders of the Companys common stock as of July 31, 2009, was 12,627 based on information provided by the Companys transfer agent.
The amount of quarterly dividends declared with respect to the Companys common stock during the past two fiscal years appears in Note 24 Unaudited Quarterly Data of the Notes to Consolidated Financial Statements, which appears on page 63 of Exhibit 99.1 hereto, incorporated herein by reference.
Equity Compensation Plan Information
This information appears in Part III, Item 12 hereof.
Issuer Purchases of Equity Securities
The following table sets out the purchases of the Companys securities by the Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) (17 CFR 240.10b-18(a)(3)) during the fourth quarter of fiscal year 2009.
ITEM 6. SELECTED FINANCIAL DATA
This information appears under Five-Year Financial Summary, on page 67 of Exhibit 99.1 hereto, incorporated herein by reference.
This information appears under Managements Discussion and Analysis of Financial Condition and Results of Operations, on pages 1 through 23 of Exhibit 99.1 hereto, incorporated herein by reference.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information appears under Quantitative and Qualitative Disclosure about Market Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations, on pages 16 through 17 of Exhibit 99.1 hereto, incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
These statements and data appear on pages 24 through 63 of Exhibit 99.1 hereto, incorporated herein by reference.
ITEM 9.A. CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures, as of the end of the period covered by this report, were effective such that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during the Companys fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Managements report on internal control over financial reporting is set forth on page 64 of Exhibit 99.1 hereto, and is incorporated herein by reference. The Companys independent registered public accounting firm, Ernst & Young, LLP, has audited the effectiveness of the Companys internal control over financial reporting as of June 30, 2009, and has expressed an unqualified opinion in their report, which appears on page 65 of Exhibit 99.1 hereto.
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, information regarding the executive officers of the registrant is reported in Part I of this Report.
The Company has adopted a Code of Conduct that applies to its principal executive officer, principal financial officer and controller, among others. The Code of Conduct is located on the Companys Internet Web site at www.thecloroxcompany.com under Company Information/Corporate Governance. The Company intends to satisfy the requirement under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of its Code of Conduct by posting such information on the Companys Internet Web site. The Companys Internet Web site also contains its corporate governance guidelines and the charters of its principal board committees.
Information regarding the Companys directors, compliance with Section 16(a) of the Exchange Act and corporate governance set forth in the Proxy Statement are incorporated herein by reference.
The information regarding executive compensation and the report of the Compensation Committee of the Companys board of directors set forth in the Proxy Statement are incorporated herein by reference.
The information regarding security ownership of certain beneficial owners and management and equity compensation plan information set forth in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information regarding certain relationships and related transactions, director independence and securities authorized for issuance under equity compensation plans, set forth in the Proxy Statement, is incorporated herein by reference.
The information regarding principal accountant fees and services set forth in the Proxy Statement is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.