APPENDIX B
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF WORLDWIDE OPERATIONS
CONSOLIDATED RESULTS
DILUTED EARNINGS PER SHARE increased to $1.64 from $1.03 and NET EARNINGS
improved to $394 million from $246 million for the year ended June 30, 2000. The
increase in earnings was principally due to an increase in net sales, cost
savings and a reduction in merger, restructuring and asset impairment costs. The
Company's results reflect the January 29, 1999 merger with First Brands
Corporation ("First Brands"). The merger was accounted for as a pooling of
interests and all historical financial information has been restated to include
First Brands.
NET SALES increased by 2% from 1999 due to a 2% volume increase driven by
product introductions and shipment gains in certain products. These gains were
partly offset by volume losses in the Company's First Brands businesses
resulting from decreased spending for trade promotional support, elimination of
non-core, low-margin items, and changing the pricing structure for the cat
litter business. Products introduced included CLOROX Disinfecting Spray and
Wipes, LIQUID-PLUMR FOAMING PIPE SNAKE drain cleaner, MEADOW FRESH PINE-SOL
cleaner, Ultra CLOROX liquid bleach, CLOROX FRESHCARE dry cleaning care, BRITA
FILL & GO sports bottle, K C MASTERPIECE marinades and new lines of GLADWARE
disposable container products. Volume growth was positively impacted by gains in
shipments of HIDDEN VALLEY Ranch dressing, BRITA faucet-mount filter system, and
KINGSFORD and MATCH LIGHT charcoal products; and the acquisition of the Bon Bril
cleaning utensil and cleaning businesses; the growth was partially offset by
declines in shipments of TILEX FRESH SHOWER daily shower cleaner.
Net sales in 1999 increased by 3% from 1998 due to volume increases in the
Company's businesses (excluding lower sales from former First Brands businesses)
and the acquisition of a business in Korea, partially offset by the unfavorable
mix of certain products sold and currency devaluations. The lower First Brands
sales were mainly the result of the elimination of inefficient trade promotion
practices that had encouraged heavy stocking of inventory by trade customers in
previous years. Record volumes were achieved for the following brands: CLOROX
liquid bleach, FORMULA 409 cleaners, CLOROX CLEAN-UP cleaners, PINE-SOL
cleaners, CLOROX toilet bowl cleaner, TILEX FRESH SHOWER daily shower cleaner,
FRESH STEP and FRESH STEP SCOOP cat litters, KINGSFORD charcoal, HIDDEN VALLEY
dressings and K C MASTERPIECE barbecue sauce. For 1999, significant launches
included CLOROX ADVANTAGE liquid bleach, CLOROX FRESHCARE fabric refresher, and
BRITA faucet-mounted water filters, all in the U.S., and CLOROX liquid bleach in
Brazil.
COST OF PRODUCTS SOLD as a percentage of sales increased to 55.1% in 2000 from
54.5% in 1999 and 54.5% 1998. The increase in cost of products sold as a
percentage of sales from the prior year was primarily due to higher raw material
costs, start-up costs associated with the introduction of products and the
charge of $4 million relating to the write down of the Company's fire logs
inventories to their net realizable value. These increases were partially offset
by cost savings initiatives and trade spending efficiencies in the former First
Brands businesses. Starting in 2000, delivery costs are included in cost of
products sold. Previously such costs were included in selling, delivery and
administration expense but 1999 and 1998 amounts have now been reclassified for
comparative purposes. Reporting delivery costs as cost of products sold had the
impact of increasing cost of products sold, and decreasing gross margin, by six
basis points in years 2000, 1999 and 1998.
Cost of products sold in 1999 reflects the result of numerous cost-savings
projects, including improvements in line production in the U.S. Home Care and
Cleaning businesses, which improved efficiencies by minimizing equipment change
over costs, additional bottle-making capacity added during the year and
improvements in the ARMOR ALL business. These savings offset the effect of
writing off obsolete inventory related to the First Brands businesses totaling
$8 million in 1999.
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SELLING AND ADMINISTRATION EXPENSES, after reclassification of delivery costs as
discussed above, declined by 5% in 2000 due to the on-going benefit of combining
the former First Brands businesses with the Company; savings from lower
commission expense primarily due to the consolidation of the Company's broker
network; the consolidation of the Company's logistic network; and bringing sales
and distribution activities in-house in major Latin America markets. Selling and
administration expense increased 1% to $554 million in 1999 from $548 million in
1998 as the impact of continuing efficiencies exceeded the impact of inflation
and salary rate increases.
ADVERTISING EXPENSE decreased by 2% in 2000 due to an 18% reduction in
sales-promotion spending resulting from the elimination of inefficient promotion
practices on First Brands products. A portion of this savings was re-invested in
media spending which increased 15% compared with the prior year. Advertising
expense declined by 3% in 1999 due to a reduction in sales-promotion spending on
First Brands products that were determined to be ineffective and a shift in
timing of new product advertising spending to 2000.
MERGER, RESTRUCTURING AND ASSET IMPAIRMENT COSTS of $36 million and
$180 million were recognized in 2000 and 1999, respectively. In 2000, the
$36 million included $23 million of First Brands merger-related charges related
to the consolidation of First Brands distribution centers, relocation, and
retention bonuses paid to former First Brands employees; $11 million of
restructuring and asset impairment related to the restructuring of the Company's
Asia operations recognized in the fourth quarter of 2000; and $2 million of
asset impairment losses recognized on property, plant and equipment related to
the Company's fire logs business.
In 1999, the $180 million of merger costs included $36 million of merger-related
charges recognized in connection with the First Brands merger, $53 million of
other restructuring costs and $91 million of provisions for asset impairment.
Restructuring activities in 1999 primarily related to the consolidation of
administration and distribution functions; the reduction in employee headcount
primarily at the First Brands' headquarters location in Danbury, Connecticut and
at sales offices; and the termination of related leases and other contracts.
Asset impairment losses recognized in 1999 were for the write-off of software
development and other costs incurred in connection with the First Brands merger
and the write-down to expected realizable value of certain of the Company's
insecticide and international intangible assets.
INTEREST EXPENSE remained relatively flat year over year. Rising interest rates
offset the effect of refinancing First Brands debt in the prior year. Interest
expense decreased by $7 million in 1999, primarily as a result of refinancing
First Brands debt.
OTHER EXPENSE, NET remained unchanged year over year. Lower amounts of equity
earnings from affiliates and royalty income were mostly offset by decreased
amortization of intangibles and higher interest income. Other expense, net
increased in 1999 primarily due to higher amortization of intangibles; the
effect of currency translation on certain international operations; and
miscellaneous equipment write-downs related to production of CLOROX 2 liquid
bleach.
THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE of $7 million was
recorded in 1998 by First Brands to expense previously capitalized costs related
to business process re-engineering activities (in accordance with the Financial
Accounting Standards Board Emerging Issues Task Force Issue No. 97-13).
THE EFFECTIVE TAX RATE was 36.7%, 42.8% and 37.1% in 2000, 1999 and 1998,
respectively. The higher tax rate in 1999 was primarily attributable to the tax
effect of merger, restructuring and asset impairment costs.
DILUTED EARNINGS PER SHARE increased to $1.64 in 2000 from $1.03 in 1999,
primarily due to lower merger, restructuring and asset impairment costs and to
improved earnings driven by volume growth and cost savings, all as described
above. Merger, restructuring and asset impairment costs had the effect of
reducing diluted earnings per share by $0.11 in 2000, compared with $0.60 in
1999. Diluted earnings per share decreased to $1.03 in 1999 from $1.43 in 1998,
mostly due to merger, restructuring and asset impairment costs, partly offset by
improved earnings in 1999 as compared to 1998, which was primarily attributable
to volume growth and lower advertising expense, as described above.
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SEGMENT RESULTS
U.S. HOUSEHOLD PRODUCTS AND CANADA
2000 vs. 1999: U.S. Household Products and Canada's 2000 net sales increased by
5% while earnings before tax decreased by 2% from 1999 due to higher product
costs and advertising expenditures. The improvement in net sales reflected the
positive impact resulting from the introduction of products which included
CLOROX Disinfecting Spray and Wipes, LIQUID-PLUMR FOAMING PIPE SNAKE drain
cleaner, MEADOW FRESH PINE-SOL cleaner, Ultra CLOROX liquid bleach, CLOROX
FRESHCARE dry cleaning care, BRITA FILL & GO sports bottle, partially offset by
declines in shipments of TILEX FRESH SHOWER daily shower cleaner. Higher resin
and corrugated costs, start-up costs for product launches, a shift in product
costs in the Brita business due to an increase in production of faucet-mount
filter systems introduced in late 1999, and greater costs for additional
components in the BRITA pitchers, all contributed to the increase in cost of
products sold. Advertising expenditures also increased over the prior year due
to the introduction of Ultra CLOROX liquid bleach and other new products.
1999 vs. 1998: U.S. Household Products and Canada's 1999 earnings before tax
increased by 12% from 1998. This increase reflected higher net sales and lower
cost of products sold. The 4% improvement in net sales reflected the positive
impact achieved from record volumes for CLOROX liquid bleach, FORMULA 409
cleaners, CLOROX CLEAN-UP cleaners, PINE-SOL cleaners, CLOROX toilet bowl
cleaner and TILEX FRESH SHOWER daily shower cleaner; and from significant
product launches, including CLOROX ADVANTAGE liquid bleach and CLOROX FRESHCARE
fabric refresher. Cost of products sold improved in 1999 compared with 1998 due
to the result of numerous cost-savings projects, including line dedication in
the U.S. Home Care and Cleaning business, and additional bottle-making capacity
added during the year.
U.S. SPECIALTY PRODUCTS
2000 vs. 1999: U.S. Specialty Products' 2000 earnings before tax increased 10%
over the prior year due to cost savings contributing to the increase in earnings
despite a decline in net sales. Cost savings were achieved from shifting the
manufacture of certain auto products from contract packers to Company
facilities; eliminating unprofitable product lines from the First Brands
businesses; reductions in inefficient coupon spending partially offset by
increased focus on media spending; and efficiencies gained from integrating
former First Brands businesses. These cost savings were partially offset by
higher resin costs and a charge of $4 million relating to the write down of the
Company's fire logs inventories to their net realizable value. Net sales
decreased due to lower volumes from the former First Brands businesses offset by
the favorable results of eliminating First Brand's inefficient trade-promotion
spending practices. Sales volumes decreased in the auto care, GLAD and cat
litter businesses due to the Company's strategic integration of former First
Brands businesses. Auto care volumes declined due to the elimination of
approximately one-half of the recently acquired STP product line to focus on
more strategic and higher-margin products. Volumes in the GLAD business were
lower than the prior year due to the elimination of non-core, low-margin items.
Cat litter volumes also declined due to reducing the number of cat litter items,
decreased spending on trade-promotion support and changing the pricing
structure. This decline in volume was offset by higher volumes resulting from
the introduction of K C MASTERPIECE marinades and new lines of GLADWARE
disposable container products and gains in shipments of HIDDEN VALLEY Ranch
dressing and KINGSFORD and MATCH LIGHT charcoal products.
1999 vs. 1998: U.S. Specialty Products' 1999 earnings before tax increased by 7%
from 1998. This increase reflects higher net sales partially offset by higher
costs and expenses. The improvement in net sales is attributable to record
volumes achieved from FRESH STEP and FRESH STEP SCOOP cat litters, KINGSFORD
charcoal, HIDDEN VALLEY dressings and K C MASTERPIECE barbecue sauce. This
increase in net sales was partially offset by lower First Brands sales, due
mainly to the negative impact of eliminating First Brands inefficient
trade-promotional practices that had raised net sales in the prior years. Higher
costs and expenses were partly due to the $8 million write off of obsolete
inventory related to the First Brands
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businesses, offset somewhat by lower advertising expenses due to a reduction in
sales promotion spending on First Brands products.
INTERNATIONAL OPERATIONS
2000 vs. 1999: International's 2000 earnings before tax increased by 35% from
1999, due mostly to a 4% increase in net sales as well as achieving cost savings
from the integration of the sales force and distribution network in Latin
America. Net sales reflect an 8% increase in volumes driven primarily by new
product launches in Latin America and the acquisitions of the Bon Bril cleaning
utensil businesses in Latin America and the Astra rubber glove business in
Australia, partly offset by higher promotional spending.
1999 vs. 1998: International's 1999 earnings before tax decreased by 41% from
1998 mostly due to the impact of unfavorable exchange rates and weakened
performance from the Company's international businesses, reflecting economic
slowdowns in those geographic areas.
CORPORATE, INTEREST AND OTHER
2000 vs. 1999: Corporate, Interest and Other's earnings before tax improved by
23% from 1999 to 2000 mostly due to the impact of merger-related charges as
discussed above and a decrease in pension costs resulting from changes in
actuarial assumptions.
1999 vs. 1998: Corporate, Interest and Other's earnings before tax decreased 40%
from 1998 to 1999 mostly due to merger-related charges.
FINANCIAL POSITION AND LIQUIDITY
CASH FLOWS FROM OPERATIONS
Cash provided by operations was $658 million in 2000, $588 million in 1999 and
$417 million in 1998.
The increase in 2000 reflected higher earnings and increased working capital
partially offset by the use of cash for taxes. Working capital changes from 1999
included increases in accounts receivable, inventories and prepaid expenses and
other, and a decrease in accrued restructuring liabilities; these working
capital increases were offset by increases in accounts payable and accrued
liabilities. The 4% increase in accounts receivable over the prior year
corresponded with a 5% increase in net customer sales in the fourth quarter.
Higher inventory levels in 2000 reflected the impact from new product
introductions, and a build of charcoal inventories due to unseasonably cool
weather. Prepaid expenses and other increased mostly due to an Argentine
forward-purchase agreement, which matures in 2001. Increases in accounts payable
and accrued liabilities are partly attributable to higher purchases and accruals
resulting from new product launches.
The increase in 1999 was due principally to decreased working capital
requirements. Working capital changes from 1998 included decreases in accounts
receivable (excluding the impact of $100 million from the Company's trade
receivable financing program which was discontinued in 1999 and is classified as
financing activities) and inventories, and an increase in accrued restructuring
liabilities, which were offset partially by decreases in accounts payable and
accrued liabilities. The increase in accounts receivable was principally due to
the discontinued receivables financing program, offset by improved collections
from the Company's international businesses and the effect of foreign exchange
translation. These cash flow improvements were offset partially by an overall
increase in June 1999 sales experienced by most of the Company's businesses.
Lower inventory levels in 1999 reflect higher June sales, a decline in
promotional activities, tighter management of back-up stocks and the
implementation of a new international logistics strategy. Accrued restructuring
liabilities include accruals for severance, lease and contract cancellation
costs. Accrued liabilities decreased from 1998 primarily due to the timing of
domestic promotional activities and a reduction in accruals associated with the
acquisition of the ARMOR ALL business. Accounts
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payable decreased from 1998 primarily due to lower purchases resulting from
First Brands' decreased June volume.
BORROWING INFORMATION
The Company's overall level of indebtedness (both short-term and long-term debt)
decreased from $1,443 million at June 30, 1999 to $1,363 million at June 30,
2000.
In 2000, the Company reduced certain of its long-term financing agreements,
entered into a $236 million Canadian dollar denominated commercial paper
agreement that is hedged with a forward currency contract for the same amount,
and entered into a 7.38% bank loan totaling $142 million with principal and
interest due in March 2001.
In 1999, the Company terminated certain of its financing agreements that were in
part offset by increases in commercial paper borrowings and a new financing
arrangement completed during the year. In December 1998, the Company redeemed
preference shares totaling $388 million, which were previously classified as
short-term debt. In February 1999, the Company terminated First Brands'
revolving credit facility agreement and related interest rate swap agreements.
Costs associated with terminating the swap agreements were $3 million and were
included in merger-related costs. In June 1999, the Company terminated its
$100 million program to finance receivables. In 1999, the Company entered into a
$200 million Deutsche mark denominated financing arrangement with private
investors. As part of this financing transaction, the Company entered into a
series of swaps with notional amounts, totaling $200 million, to eliminate
foreign currency exposure risk generated by this Deutsche mark denominated
obligation. The swaps effectively convert the Company's 2.9% fixed Deutsche mark
obligation to a floating U.S. dollar rate of 90 day LIBOR less 278 basis points
or an effective rate of approximately 4.1%. Dividends on the preference shares
were classified as interest expense.
ACQUISITIONS
During 2000, the Company invested $120 million in new international businesses.
These acquisitions included the Bon Bril cleaning utensil businesses in
Colombia, Venezuela and Peru, the Agrocom S.A. distribution business in
Argentina, an increase in ownership to 100% in Clorox de Colombia S.A., formerly
Tecnoclor S.A., (previously 72% owned and fully consolidated), and the ASTRA
rubber glove business purchased in Australia.
During 1999, the Company invested $116 million in new businesses, including the
U.S. acquisition of the HANDI WIPES and WASH 'N DRI businesses. International
acquisitions included the MISTOLIN bleach and household cleaner business in
Venezuela, the HOMEKEEPER insecticide business in Korea, the GUMPTION household
cleaner business in Australia, as well as a 12% increase in ownership in the
Company's joint venture in Colombia, Clorox de Colombia S.A.
During 1998, the Company invested $149 million in new international businesses.
These acquisitions included the CLOROSUL bleach business, the SUPER GLOBO bleach
and cleaner business and the X-14 cleaner business, all in Brazil; the ARELA
cleaner business in Chile; three smaller acquisitions in Southeast Asia,
Australia and New Zealand; and an additional investment in Mexico.
COMMON STOCK DIVIDENDS, COMPANY STOCK PURCHASES AND STOCK AUTHORIZATION
INFORMATION
Dividends paid in 2000 were $189 million or $0.80 per share. On July 19, 2000,
the Company announced a 5% increase in the quarterly dividend rate from $0.20
per share to $0.21 per share. On July 20, 1999, the Company's Board of Directors
authorized a 2-for-1 split of its common stock effective August 23, 1999, in the
form of a stock dividend for stockholders of record at the close of business on
July 30, 1999. The Company also made a 2-for-1 stock split on September 2, 1997
to stockholders of record as of July 28,
B-5
1997. All share and per-share information in the accompanying consolidated
financial statements reflects these stock splits.
In September 1999, in response to declines in the Company's stock price in the
first quarter, the Board of Directors authorized a common stock repurchase and
hedging program intended to reduce or eliminate dilution when shares are issued
in accordance with the Company's various stock compensation plans. The Company
had canceled a prior share repurchase and hedging program (previously authorized
in September 1996 by the Board of Directors to offset the dilutive effects of
employee stock option exercises) when it merged with First Brands. The Company
repurchased a total of 3,123,000 shares for $135 million from inception of the
new program through June 30, 2000 and, under the prior program, 800,000 shares
for $33 million in 1999, and 1,694,000 shares for $83 million in 1998.
On September 15, 1999, the Company settled share repurchase agreements and
options contracts realizing cash proceeds of approximately $76 million. On the
same day, the Company entered into two new share repurchase transactions whereby
the Company contracted for future delivery of 2,260,000 shares on September 15,
2002 and 2,260,000 shares on September 15, 2004, each for a strike price of $43
per share. In November 1999, the Company entered into an agreement to purchase
an additional 1,000,000 shares on December 1, 2003 at a price of $46.32 per
share.
On November 17, 1999, the stockholders approved an amendment of the Company's
Certificate of Incorporation to increase the authorized capital of the Company
to consist of 750,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, each with a par value of $1.00 per share.
LIQUIDITY
In 2000, 1999 and 1998, cash flows from operations exceeded cash needs for
capital expenditures, dividends and scheduled debt service. The Company believes
that cash flow from operations, supplemented by financing expected to be
available from external sources, will provide sufficient liquidity for the
foreseeable future. At June 30, 2000, the Company had credit agreements with
available credit totaling $900 million, which expire on dates through
April 2002. These agreements are available for general corporate purposes and
for the support of additional commercial paper. There were no borrowings under
these agreements at June 30, 2000. The credit agreements require maintenance of
a minimum net worth of $704 million. The Company also established an extendable
commercial note program during the year as a supplement to its commercial paper
program. There are no borrowings under these agreements.
The Company has indentures and loan agreements related to the First Brands
businesses. Such agreements contain certain restrictive covenants and
limitations, the most significant of which relates to the Company's right to
incur certain indebtedness and to engage in certain sale and leaseback
transactions. Based on the Company's working capital requirements, the current
availability under its credit agreements, and its ability to generate positive
cash flows from operations, the Company does not believe that such limitations
will have a material effect on the Company's long-term liquidity. The Company
believes that it will have the funds necessary to meet all of its above
described financing requirements and all other fixed obligations. Should the
Company undertake strategic acquisitions, requiring funds in excess of its
internally generated cash flow, it might be required to incur additional debt.
Depending upon conditions in the financial markets, the availability of
acceptable terms, and other factors, the Company may consider the issuance of
debt or other securities to finance acquisitions, to refinance debt or to fund
other activities for general business purposes.
MARKET-SENSITIVE DERIVATIVES AND FINANCIAL INSTRUMENTS
The Company is exposed to the impact of interest rates, foreign currency
fluctuations, commodity prices and changes in the market value of its
investments. The Company has certain restrictions on the usage of derivatives,
including a prohibition of the use of any leveraged instrument. Derivative
contracts are entered into for non-trading purposes with several major credit
worthy institutions, thereby minimizing the risk of
B-6
credit loss. In the normal course of business, the Company employs practices and
procedures to manage its exposure to changes in interest rates, foreign
currencies and commodity prices using a variety of derivative financial and
commodity instruments.
The Company's objective in managing its exposure to changes in interest rates,
foreign currencies and commodity prices is to limit the impact of fluctuations
on earnings, cash flow and, in the case of interest rate changes, to manage
interest rate exposure. To achieve its objectives, the Company primarily uses
swaps and forward and futures contracts to manage its exposures to interest rate
changes in borrowings, foreign currency and commodity risks.
For 2000 and 1999, the Company's exposure to market risk has been estimated
using sensitivity analysis, which is defined as the change in the fair value of
a derivative or financial instrument assuming a hypothetical 10% adverse change
in market rates or prices. The results of the sensitivity analysis are
summarized below. Actual changes in interest rates or market prices may differ
from the hypothetical changes.
The Company has market risk exposure to changing interest rates. Interest rate
risk is managed through the use of a combination of fixed and floating rate
debt. Interest rate swaps may be used to adjust interest rate risk exposures
when appropriate, based on market conditions. These instruments have the effect
of converting fixed rate instruments to floating, or floating to fixed. Changes
in interest rates would result in gains or losses in the market value of the
Company's fixed-rate debt instruments and the Company's interest rate swap
agreements that convert debt instruments from floating to fixed, due to
differences between current market rates and the rates implicit for these
instruments. Based on the results of the sensitivity analysis, at June 30, 2000
and June 30, 1999, the Company's estimated market exposure for interest rates
was $10 million and $13 million, respectively.
The Company seeks to minimize the impact of foreign currency fluctuations by
hedging transactional exposures with foreign currency forward contracts. In
addition, the Company has hedged certain net investments with similar
instruments. The Company's foreign currency transactional exposures exist
primarily with the Canadian dollar, Australian dollar and Japanese yen. The
Company has certain positions in the Argentine peso, which are not accorded
hedge accounting treatment. At June 30, 2000 and June 30, 1999, there were no
material foreign currency transactional exposures that were not hedged. The
foreign exchange sensitivity analysis includes forward contracts and other
financial instruments affected by foreign exchange risk. Based on the
hypothetical change in foreign currency exchange rates, the net unrealized
losses at June 30, 2000 and 1999 would be $23 million and $4 million,
respectively.
Commodity futures and swap contracts are used to manage cost exposures on
certain raw material purchases resulting in relatively stable costs for these
commodities. The commodity price sensitivity analysis includes commodity futures
and swap contracts affected by commodity price risk. Based on the results of the
sensitivity analysis, at June 30, 2000 and June 30, 1999, the Company's
estimated market exposure for commodity prices was $14 million and $17 million,
respectively.
YEAR 2000 COMPLIANCE
In 1997, the Company established a comprehensive corporate-wide program to
address the Year 2000 or "Y2K" problem. This effort encompassed software,
hardware, electronic data interchange, networks, personal computers,
manufacturing and other facilities, embedded chips, century certification,
supplier and customer readiness, contingency planning and domestic and
international operations. Following the Company's January 29, 1999 merger with
First Brands, the Company incorporated First Brands and its subsidiaries into
the Company's Y2K compliance program.
As of December 31, 1999, the Company had completed all of its Y2K compliance
efforts on all of its critical domestic and international business systems, its
critical plant floor equipment, instrumentation and facilities, and its third
party assessment for all of its operations. The Company developed written
B-7
contingency plans for its critical operations and third party relationships, but
did not implement any of these plans because the Company did not experience any
material Y2K related issues with the turnover of the year to 2000.
Y2K costs were expensed as incurred and funded through operating cash flows.
Through the fiscal year ended June 30, 2000, the Company has expensed
incremental remediation costs of $20.5 million and accelerated strategic upgrade
costs of $20.5 million. The Company expensed $4 million in fiscal year 2000 on
Y2K remediation issues. The Company did not defer any critical information
technology projects because of its Year 2000 program efforts, which were
primarily addressed through a joint team of the Company's business and
information technology resources.
ENVIRONMENTAL MATTERS
The Company is committed to an ongoing program of comprehensive, long-term
environmental assessment of its facilities. This program is implemented by the
Company's Department of Health, Safety and Environment with guidance from legal
counsel. During each facility assessment, compliance with applicable
environmental laws and regulations is evaluated and the facility is reviewed in
an effort to identify possible future environmental liabilities. The Company
believes that there are no potential future environmental liabilities that will
have a material adverse effect on its financial position or future operating
results, although no assurance can be given with respect to the ultimate outcome
of any such matters. This premise is based on the probable future costs of
environmental liabilities without an offset for expected insurance recoveries or
discounting for present value.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective July 1, 2000, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company estimates that the transition adjustment to implement this new standard
will be a reduction of net earnings of $2 million (net of tax of $1 million) and
an increase in other comprehensive income of $10 million (net of tax of $7
million). These adjustments will be recognized as of July 1, 2000 as a
cumulative effect of a change in accounting principle. The ongoing effects will
depend on future market conditions and the Company's hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A, which delayed the implementation date
of SAB No. 101 for companies with fiscal years beginning between December 16,
1999 and March 15, 2000. Since the issuance of SAB No. 101 and SAB No. 101A, the
SEC issued SAB No. 101B, which delayed implementation until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB
No. 101 summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Also, in July 2000,
the Financial Accounting Standards Board ("FASB") reached consensus and issued
Emerging Issues Task Force ("EITF") No. 00-14, "Accounting for Coupons, Rebates,
and Discounts," with the same implementation date as SAB No. 101. EITF
No. 00-14 addresses both the accounting for sales subject to rebates and revenue
sharing arrangements as well as coupons and discounts and the income statement
classification of rebates and other discounts. In March 2000, the FASB issued
guidance on stock compensation issues in the form of FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25." The Interpretation clarifies the
application of APB Opinion No. 25 for certain issues. The Interpretation is
effective beginning July 1, 2000. The Company is currently evaluating the impact
of SAB No. 101, as amended, EITF No. 00-14 and Interpretation No. 44 on the
B-8
Company's consolidated financial position and results of operations, but has not
concluded as to the significance of the potential impact, if any, when these new
standards are adopted.
CAUTIONARY STATEMENT
Except for historical information, matters discussed above and in the financial
statements and footnotes, including statements about future plans, objectives,
expectations, growth or profitability, are forward-looking statements based on
management's estimates, assumptions and projections. These forward-looking
statements are subject to risks and uncertainties, and actual results could
differ materially from those discussed in this Appendix B to the 2000 Proxy
Statement of the Company. Important factors that could affect performance and
cause results to differ materially from management's expectations are described
in "Forward-Looking Statements and Risk Factors" in the Company's Annual Report
on Form 10-K for the year ending June 30, 2000, which is expected to be filed
with the SEC on or about September 28, 2000, and in subsequent SEC filings.
Those factors include, but are not limited to, marketplace conditions and
events, the Company's costs, risks inherent in litigation and international
operations, the success of new products, the integration of acquisitions and
mergers, and environmental, regulatory and intellectual property matters. These
forward-looking statements speak only as of the date of this document.
B-9
FINANCIAL HIGHLIGHTS
THE CLOROX COMPANY
YEARS ENDED JUNE 30 2000 1999 % CHANGE
- ------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT SHARE AND PER-SHARE AMOUNTS.
Net Sales................................................... $ 4,083 $ 4,003 2%
Net Earnings................................................ $ 394 $ 246 60%
Stockholders' Equity........................................ $ 1,794 $ 1,570 14%
Per Common Share
Net Earnings
Basic................................................... $ 1.67 $ 1.05 59%
Diluted................................................. $ 1.64 $ 1.03 59%
Dividends................................................. $ 0.80 $ 0.71 13%
Stockholders' Equity...................................... $ 7.62 $ 6.67 14%
Weighted Average Shares Outstanding (in thousands)
Basic..................................................... 236,108 235,364 0%
Diluted................................................... 239,614 240,002 0%
B-10
CONSOLIDATED STATEMENTS OF EARNINGS
THE CLOROX COMPANY
YEARS ENDED JUNE 30 2000 1999 1998
- --------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT SHARE AND PER-SHARE AMOUNTS.
Net Sales................................................... $ 4,083 $ 4,003 $ 3,898
------- ------- -------
Costs and Expenses
Cost of products sold..................................... 2,250 2,181 2,124
Selling and administration................................ 525 554 548
Advertising............................................... 465 474 491
Research and development.................................. 63 63 62
Merger, restructuring and asset impairment................ 36 180 3
Interest expense.......................................... 98 97 104
Other expense -- Net...................................... 24 24 10
------- ------- -------
Total Costs and Expenses................................ 3,461 3,573 3,342
------- ------- -------
Earnings before income taxes and cumulative effect of change
in accounting principle................................... 622 430 556
Income Taxes................................................ 228 184 206
------- ------- -------
Earnings before cumulative effect of change in accounting
principle................................................. 394 246 350
Cumulative effect of change in accounting principle......... - - (7)
------- ------- -------
Net Earnings................................................ $ 394 $ 246 $ 343
======= ======= =======
Earnings per Common Share
Basic
Earnings before cumulative effect of change in
accounting principle.................................. $ 1.67 $ 1.05 $ 1.49
Cumulative effect of change in accounting principle..... - - (.03)
------- ------- -------
Net Earnings.............................................. $ 1.67 $ 1.05 $ 1.46
======= ======= =======
Diluted
Earnings before cumulative effect of change in
accounting principle.................................. $ 1.64 $ 1.03 $ 1.46
Cumulative effect of change in accounting principle..... - - (.03)
------- ------- -------
Net Earnings.............................................. $ 1.64 $ 1.03 $ 1.43
======= ======= =======
Weighted Average Shares Outstanding (in thousands)
Basic..................................................... 236,108 235,364 234,666
Diluted................................................... 239,614 240,002 239,540
See Notes to Consolidated Financial Statements.
B-11
CONSOLIDATED BALANCE SHEETS
THE CLOROX COMPANY
YEARS ENDED JUNE 30 2000 1999
- --------------------------------------------------------------------------------
IN MILLIONS, EXCEPT SHARE AND PER-SHARE AMOUNTS.
ASSETS
Current Assets
Cash and short-term investments........................... $ 245 $ 132
Receivables -- Net........................................ 633 610
Inventories............................................... 376 319
Prepaid expenses and other................................ 175 29
Deferred income taxes..................................... 25 26
------ ------
Total current assets.................................... 1,454 1,116
------ ------
Property, Plant and Equipment -- Net........................ 1,079 1,054
------ ------
Brands, Trademarks, Patents and Other Intangibles -- Net.... 1,536 1,497
------ ------
Investments in Affiliates................................... 110 104
------ ------
Other Assets................................................ 174 361
------ ------
Total....................................................... $4,353 $4,132
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 319 $ 206
Accrued liabilities....................................... 395 350
Accrued restructuring..................................... 16 23
Short-term debt and notes payable......................... 768 734
Income taxes payable...................................... 38 48
Current maturities of long-term debt...................... 5 7
------ ------
Total current liabilities............................... 1,541 1,368
------ ------
Long-term Debt.............................................. 590 702
------ ------
Other Obligations........................................... 204 255
------ ------
Deferred Income Taxes....................................... 224 237
------ ------
Stockholders' Equity
Common stock, $1.00 par value, 750,000,000 shares
authorized, 249,826,934 shares issued and 235,361,130
shares and 235,310,754 shares outstanding at June 30,
2000 and 1999, respectively............................. 250 250
Additional paid-in capital................................ 127 50
Retained earnings......................................... 2,068 1,842
Treasury shares, at cost, 14,465,804 shares and 14,516,180
shares at June 30, 2000 and 1999, respectively.......... (451) (392)
Accumulated other comprehensive net losses................ (183) (160)
Other..................................................... (17) (20)
------ ------
Stockholders' equity.................................... 1,794 1,570
------ ------
Total....................................................... $4,353 $4,132
====== ======
See Notes to Consolidated Financial Statements.
B-12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE CLOROX COMPANY
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS SHARES NET LOSSES OTHER TOTAL INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT PER-SHARE AMOUNTS.
Balance, June 30, 1997............... $249 $ - $1,542 $(289) $ (60) $(12) $1,430
Comprehensive income
Net earnings....................... 343 343 $343
Translation adjustments............ (57) (57) (57)
Minimum pension liability
adjustments...................... 1 1 1
----
Total comprehensive income........... $287
====
Dividends ($.63 per share)......... (147) (147)
Employee stock plans and other..... 21 10 35 1 67
Clorox treasury stock acquired and
related premiums................. (83) (83)
First Brands treasury stock
acquired......................... (21) (5) (26)
Share repurchase obligations....... (55) (55)
---- ---- ------ ----- ----- ---- ------
Balance, June 30, 1998............... 249 -- 1,743 (392) (116) (11) 1,473
Comprehensive income
Net earnings....................... 246 246 $246
Translation adjustments............ (43) (43) (43)
Minimum pension liability
adjustments...................... (1) (1) (1)
----
Total comprehensive income........... $202
====
Dividends ($.71 per share)......... (162) (162)
Employee stock plans and other..... 1 50 15 33 (9) 90
Clorox treasury stock acquired..... (33) (33)
---- ---- ------ ----- ----- ---- ------
Balance, June 30, 1999............... 250 50 1,842 (392) (160) (20) 1,570
Comprehensive income
Net earnings....................... 394 394 $394
Translation adjustments............ (23) (23) (23)
----
Total comprehensive income........... $371
====
Dividends ($.80 per share)......... (189) (189)
Employee stock plans and other..... 13 21 21 3 58
Clorox treasury stock acquired and
related premiums................. (12) (135) (147)
Settlement of share repurchase
obligations and option
contracts........................ 76 55 131
---- ---- ------ ----- ----- ---- ------
Balance, June 30, 2000............... $250 $127 $2,068 $(451) $(183) $(17) $1,794
==== ==== ====== ===== ===== ==== ======
See Notes to Consolidated Financial Statements.
B-13
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CLOROX COMPANY
YEARS ENDED JUNE 30 2000 1999 1998
- -----------------------------------------------------------------------------------
IN MILLIONS.
Operations:
Net earnings.............................................. $ 394 $ 246 $ 343
Adjustments to reconcile to net cash provided by
operations:
Provision for inventory write-downs and asset
impairment............................................ 12 99 -
Cumulative effect of change in accounting principle..... - - 7
Depreciation and amortization........................... 201 202 182
Deferred income tax..................................... (16) (29) 52
Other................................................... 11 (14) (1)
Changes in (excluding effects of businesses acquired):
Accounts receivable................................... (19) 24 (76)
Inventories........................................... (55) 40 (47)
Prepaid expenses and other............................ (3) 2 1
Accounts payable...................................... 109 (19) 21
Accrued liabilities................................... 42 (9) (67)
Accrued restructuring................................. (7) 23 3
Income taxes payable.................................. (11) 23 (1)
----- ----- -----
Net cash provided by operations....................... 658 588 417
----- ----- -----
Investing Activities:
Purchases of property, plant and equipment................ (158) (176) (190)
Businesses acquired....................................... (120) (116) (149)
Proceeds from disposals of property, plant and
equipment............................................... 3 16 19
Other..................................................... 15 (37) (81)
----- ----- -----
Net cash used for investing........................... (260) (313) (401)
----- ----- -----
Financing Activities:
Short-term debt and notes payable borrowings (repayments)
-- Net.................................................. 34 (232) 221
Long-term debt and other borrowings....................... 5 205 3
Long-term debt and other repayments....................... (117) (16) (66)
First Brands receivables financing program -- Net......... - (100) 15
Cash dividends............................................ (189) (162) (147)
Treasury stock purchased and related premiums............. (135) (33) (109)
Settlement of share repurchase and option contracts....... 76 - -
Issuance of common stock for employee stock plans and
other................................................... 41 93 64
----- ----- -----
Net cash used for financing........................... (285) (245) (19)
----- ----- -----
Effect on cash of exchange rate changes..................... - - (4)
Net increase (decrease) in cash and short-term
investments............................................... 113 30 (7)
Cash and short-term investments:
Beginning of year......................................... 132 102 109
----- ----- -----
End of year............................................... $ 245 $ 132 $ 102
===== ===== =====
Supplemental Disclosure:
Cash paid for:
Interest (net of amounts capitalized)................... $ 92 $ 98 $ 105
Income taxes............................................ 166 85 113
Non-cash transactions:
Liabilities assumed with businesses purchased........... $ 9 $ - $ 28
Share repurchase and other obligations.................. 55 - 79
See Notes to Consolidated Financial Statements.
B-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The Company is principally engaged in the production and marketing of nondurable
consumer products through grocery stores, mass merchandisers and other retail
outlets. The consolidated financial statements include the statements of the
Company and its majority-owned and controlled subsidiaries. Minority investments
in foreign entities are accounted for under the equity method, the most
significant of which is a 20% equity investment in Henkel Iberica, S.A. of
Spain. All significant intercompany transactions and accounts are eliminated in
consolidation.
MERGER WITH FIRST BRANDS CORPORATION ("FIRST BRANDS")
The Company's results reflect the January 29, 1999 merger with First Brands
Corporation ("First Brands") which was accounted for as a pooling of interests.
All historical financial information has been restated to include First Brands.
Pursuant to the merger agreement, First Brands stockholders obtained the right
to receive .349 of a share of the Company's common stock in exchange for each
share of First Brands common stock, with cash paid in lieu of fractional shares.
Pursuant to the merger, 40.3 million shares of First Brands common stock were
converted into 28.2 million shares of the Company's common stock. In addition,
options to acquire 1.8 million shares of First Brands' common stock were
converted to 1.2 million options to acquire shares of the Company's common
stock. In connection with the merger, the Company also assumed approximately
$435 of First Brands debt.
Additional information pertaining to merger costs is presented in Note 2.
STOCK-SPLIT
On July 20, 1999, the Company's Board of Directors authorized a 2-for-1 split of
its common stock, effective August 23, 1999, in the form of a stock dividend for
stockholders of record at the close of business on July 30, 1999. On July 15,
1997, the Company's Board of Directors authorized a 2-for-1 split of its common
stock, effective September 2, 1997, in the form of a stock dividend for
stockholders of record at the close of business on July 28, 1997. All share and
per-share amounts in the accompanying consolidated financial statements have
been restated to give effect to these stock splits.
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from estimates and
assumptions made.
SHORT-TERM INVESTMENTS
Short-term investments consist of money market and other high quality
instruments with an initial maturity of three months or less. Such investments
are stated at cost, which approximates market value.
B-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost for the majority of
the domestic inventories, excluding First Brands businesses, is determined on
the last-in, first-out (LIFO) method. Cost for other inventories, including
First Brands businesses, is determined on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated by
the straight-line method over estimated useful lives ranging from 20-30 years
for improvements, 20-40 years for buildings and 3-15 years for machinery and
equipment. Carrying values are reviewed periodically and a determination of
impairment is made based on estimates of future cash flows, undiscounted and
without interest charges.
BRANDS, TRADEMARKS, PATENTS AND OTHER INTANGIBLES
Brands, trademarks, patents and other intangible assets arising from
transactions after October 30, 1970 are amortized over their estimated useful
lives not to exceed 40 years. Carrying values are reviewed periodically, and a
determination of impairment is made based on estimates of future cash flows,
undiscounted and without interest charges.
FORWARD-PURCHASE FINANCING AGREEMENTS
In connection with the financing of an acquisition in Argentina in 1996 and the
acquisition of the Brita water systems business in Canada in 1995, the Company
entered into forward-purchase agreements with third parties whereby the Company
has purchased preferred stock of certain of its foreign subsidiaries for future
delivery from third parties who have the right to acquire this preferred stock
according to the terms of certain subscription agreements. In June 2000, the
Brita forward-purchase agreement matured and the third party acquired the
subsidiary preferred stock. The Argentina forward-purchase agreement matures in
2001 and is included in prepaid expenses and other assets. The forward purchases
of the preferred stock are accreted to redemption amounts on a straight-line
basis over five years and the amount of accretion is included in other income.
If the third parties fail to acquire the subsidiary preferred stock at maturity
of the subscription agreements, the accreted amounts of the forward-purchase
agreements will be due to the Company.
ADVERTISING
The Company expenses advertising costs as incurred, although costs incurred
during interim periods are generally expensed ratably in relation to revenues.
INCOME TAXES
The Company uses the asset and liability method to account for income taxes,
including recognition of deferred tax assets and liabilities for the anticipated
future tax consequences attributable to differences between financial statement
amounts and their respective tax bases (see Note 15).
B-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Local currencies are the functional currencies for most of the Company's foreign
operations. Assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Income and expenses are translated at the
average exchange rates during the year. Translation gains and losses and the
effects of exchange rate changes on transactions designated as hedges of net
foreign investments are reported in accumulated other comprehensive income or
loss in stockholders' equity. Transaction and foreign currency translation gains
and losses where the U.S. dollar is the functional currency are included in
other income.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings by the weighted
average number of common shares outstanding each period. Diluted earnings per
share are computed by dividing net earnings by the diluted weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution from common shares issuable through stock
options, restricted stock and performance unit grants.
DERIVATIVE INSTRUMENTS
The use of derivative instruments, principally swap, forward and option
contracts, is limited to non-trading purposes and includes management of
interest rate movements, foreign currency exposure and commodity exposure.
Through June 30, 2000, such derivatives were not recognized as assets or
liabilities in the consolidated balance sheet. Interest rate swap agreements are
accounted for using the settlement basis of accounting. As such, no gains or
losses are recorded for movements in the swaps' values during the term of the
agreements. Foreign currency forward contracts are used to hedge certain
short-term and long-term instruments and to hedge the impact of exchange rate
fluctuations resulting from anticipated inventory purchases and intercompany
transactions. Gains or losses on hedges of existing assets are included in the
carrying amounts and are recognized in earnings when those assets are
liquidated. Gains or losses arising from hedges of firm commitments and
anticipated transactions are recognized in earnings or as an adjustment of
carrying amounts when the hedged transaction occurs. The Company also holds
Argentine foreign currency contracts that are not accorded hedge accounting
treatment. These contracts are accounted for by adjusting the carrying amount of
the contract to market and recognizing any gain or loss in other income or
expense.
STOCK-BASED COMPENSATION
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Restricted stock awards are recorded as compensation cost
over the requisite vesting periods based on the market value on the date of
grant. Compensation cost for shares issued under performance share plans is
recorded based upon the current market value of the Company's stock at the end
of each period.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair-value based method of accounting
B-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for stock-based employee compensation plans. The Company has elected to retain
its current method of accounting as described above and has adopted the
disclosure requirements of SFAS No. 123. (See Note 12).
IMPACT OF NEW ACCOUNTING STANDARDS
Effective July 1, 2000, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company estimates that the transition adjustment to implement this new standard
will be a reduction of net earnings of $2 (net of tax of $1) and an increase in
other comprehensive income of $10 (net of tax of $7). These adjustments will be
recognized as of July 1, 2000 as a cumulative effect of a change in accounting
principle. The ongoing effects will depend on future market conditions and the
Company's hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A, which delayed the implementation date
of SAB No. 101 for companies with fiscal years beginning between December 16,
1999 and March 15, 2000. Since the issuance of SAB No. 101 and SAB No. 101A, the
SEC issued SAB No. 101B, which delayed implementation until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB
No. 101 summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Also, in July 2000,
the Financial Accounting Standards Board ("FASB") reached consensus and issued
Emerging Issues Task Force ("EITF") No. 00-14, "Accounting for Coupons, Rebates,
and Discounts," with the same implementation date as SAB No. 101. EITF
No. 00-14 addresses both the accounting for sales subject to rebates and revenue
sharing arrangements as well as coupons and discounts and the income statement
classification of rebates and other discounts. In March 2000, the FASB issued
guidance on stock compensation issues in the form of FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25." The Interpretation clarifies the
application of APB Opinion No. 25 for certain issues. The Interpretation is
effective beginning July 1, 2000. The Company is currently evaluating the
impacts of SAB No. 101, as amended, EITF No. 00-14 and Interpretation No. 44 on
the Company's consolidated financial position and results of operations, but has
not concluded as to the significance of the potential impact, if any, when these
new standards are adopted.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation. These include the
reclassification of delivery costs to cost of products sold, previously reported
as part of selling, delivery and administration expense, to conform to the
current year's presentation.
B-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGE
In 1998, First Brands changed its accounting policy for costs associated with
the business process re-engineering activities to expense such costs as incurred
in accordance with the FASB Emerging Issues Task Force Issue No. 97-13.
Previously capitalized costs of $11 ($7 after taxes or $0.03 per diluted share)
were charged to operations in 1998 as cumulative effect of change in accounting
principle.
2. MERGER, RESTRUCTURING AND ASSET IMPAIRMENT
Merger, restructuring and asset impairment were $36, $180 and $3 in 2000, 1999
and 1998, respectively. The $36 of merger costs in 2000 includes $23 of merger,
restructuring and asset impairment incurred in connection with the merger of
First Brands, $11 of restructuring and asset impairment related to the
restructuring of the Company's Asia operations recognized in the fourth quarter
of 2000, and $2 of asset impairment losses recognized for the write-down of
property, plant and equipment related to the Company's fire logs business. In
1999, the Company recorded $180 of merger costs that included $156 of merger,
restructuring and asset impairment incurred in connection with the First Brands
merger, and $24 for impairment and write-down of certain insecticide brands and
certain international assets. In 1998, First Brands recorded $3 of restructuring
charges for initiatives aimed at streamlining certain operating and
administrative functions.
Merger, restructuring and asset impairment costs were recognized during 2000 and
1999 in connection with the First Brands merger, Asia restructuring and other
asset impairments. Details of these costs through June 30, 2000 are as follows:
TOTAL MERGER ASSET
MERGER RESTRUCTURING AND RESTRUCTURING IMPAIRMENT TOTAL
-------- ------------- ----------------- ---------- --------
Expense for the year:
June 30, 1999......................... $36 $53 $ 89 $91 $180
June 30, 2000......................... 17 11 28 8 36
--- --- ---- --- ----
Total incurred through June 30, 2000.... 53 64 117 $99 $216
=== ====
Total paid through June 30, 2000........ (48) (53) (101)
--- --- ----
Accrued Restructuring as of June 30,
2000.................................. $ 5 $11 $ 16
=== === ====
First Brand restructuring activities primarily related to the elimination of
redundancies and the consolidation of administration and distribution functions,
the reduction in employee headcount, primarily at the First Brands' headquarters
location in Danbury, Connecticut and at sales offices, and the termination of
lease and other contractual obligations. All merger, restructuring and asset
impairment costs related to the First Brands merger have been recognized through
June 30, 2000.
The Company is restructuring its Asia operations by moving to third-party
distributors in various Asian countries. Asia restructuring activities include
the reduction in employee headcount, the termination of lease obligations,
charges for professional services and the write off of certain assets.
B-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
3. ACQUISITIONS
Acquisitions made in years 2000, 1999 and 1998 were accounted for by the
purchase method and are summarized below.
International acquisitions in 2000 totaled $120. These acquisitions included the
Bon Bril cleaning utensil business in Colombia, Venezuela and Peru, the Agrocom
S.A. distribution business in Argentina, an increase in ownership to 100% in
Clorox de Colombia S.A., formerly Tecnoclor, S.A., (previously 72% owned and
fully consolidated), and the ASTRA rubber glove business purchased in Australia.
Net assets, acquired at fair value, included net working capital assets of $6,
property, plant and equipment of $12, and brands, trademarks and other
intangibles of $94 to be amortized over estimated lives not to exceed 40 years.
In addition, approximately $8 was paid to acquire minority interests in Clorox
de Colombia S.A.
Acquisitions in 1999 totaled $116. These acquisitions included the domestic
purchase of the HANDI WIPES and WASH 'N DRI businesses and the international
purchases of the MISTOLIN bleach and household cleaner business in Venezuela,
the HOMEKEEPER insecticide business in Korea, the GUMPTION household cleaner
business in Australia, as well as a 12% increase in ownership in the Company's
joint venture in Colombia, Clorox de Colombia S.A. Approximately $105 of the
acquisition cost has been allocated to brands, trademarks and other intangibles
to be amortized over estimated lives not to exceed 40 years, with the remainder
of $11 allocated to the fair value of other assets acquired.
International acquisitions in 1998 totaled $149 and included the CLOROSUL bleach
business, the SUPER GLOBO bleach and cleaner business and the X-14 cleaner
business, all in Brazil, the ARELA cleaner business in Chile, three smaller
acquisitions in Southeast Asia, Australia and New Zealand, and an additional
investment in Mexico. Approximately $144 of the acquisition cost has been
allocated to brands, trademarks and other intangibles to be amortized over
estimated lives not to exceed 40 years, with the remainder of $34 allocated to
the fair value of other assets acquired, net of liabilities of $29 assumed.
Operating results of acquired businesses are included in the consolidated net
earnings from the date of acquisition. All acquisitions were funded from cash
provided by operations, long-term debt or commercial paper. In any year
presented, the operating results of businesses acquired were not significant to
the consolidated results.
4. TRADE RECEIVABLE FINANCING PROGRAM
During the fourth quarter of 1999, the Company terminated First Brands' program
to sell up to $100 in fractional ownership interest in a defined pool of
eligible trade accounts receivable. Accounts receivable in the accompanying
consolidated balance sheets were reported net of amounts sold pursuant to this
program and related costs were charged to earnings as interest expense when the
receivables were sold. The effective interest rate for this program was
approximately 5.5% in 1999 and 5.9% in 1998.
5. INVENTORIES
The major classes are:
2000 1999
-------- --------
Finished goods and work in process.......................... $250 $220
Raw materials and supplies.................................. 126 99
---- ----
Total....................................................... $376 $319
==== ====
B-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
5. INVENTORIES (CONTINUED)
Had the cost of LIFO inventories been determined using the FIFO method,
inventory amounts would have been higher by approximately $10 at June 30, 2000
and $12 at June 30, 1999. The LIFO method was used to value approximately 42% of
inventory at June 30, 2000 and 38% at June 30, 1999. Liquidation of LIFO layers
was not material at June 30, 2000 and June 30, 1999.
Inventory of certain First Brands products were written down to their net
realizable value, and cost of products sold includes a corresponding charge of
$4 for the year ended June 30, 2000 and $8 for the year ended June 30, 1999.
6. PROPERTY, PLANT AND EQUIPMENT -- NET
The major classes are:
2000 1999
-------- --------
Land and improvements....................................... $ 91 $ 91
Buildings................................................... 418 391
Machinery and equipment..................................... 1,313 1,198
Construction in progress and other.......................... 135 161
------ ------
Total....................................................... 1,957 1,841
Less accumulated depreciation............................... 878 787
------ ------
Net......................................................... $1,079 $1,054
====== ======
Depreciation expense was $121 in 2000, $115 in 1999 and $109 in 1998.
7. BRANDS, TRADEMARKS, PATENTS AND OTHER INTANGIBLES -- NET
The major classes are:
2000 1999
-------- --------
Brands and trademarks....................................... $1,771 $1,681
Patents and other intangibles............................... 320 316
------ ------
Total....................................................... 2,091 1,997
Less accumulated amortization............................... 555 500
------ ------
Net......................................................... $1,536 $1,497
====== ======
At June 30, 2000 and 1999, respectively, brands and trademarks totaling $1,484
and $1,480 are amortized over 40 years, $39 and $27 are amortized over 30 years,
$202 and $132 are amortized over 20 years and $4 (none in 1999) are amortized
over 10 years. Amounts totaling $42 relating to transactions prior to
October 31, 1970 are not amortized. Patents and other intangibles are amortized
over lives ranging from 2 to 20 years.
8. ACCRUED LIABILITIES
Advertising costs included in accrued liabilities at June 30, 2000 and 1999 were
$138 and $157, respectively.
B-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
9. DEBT
Short-term debt and notes payable include:
2000 1999
-------- --------
Commercial paper............................................ $613 $726
Notes payable and other..................................... 155 8
---- ----
Total....................................................... $768 $734
==== ====
In 2000, the Company issued $236 of Canadian dollar denominated commercial paper
that is hedged with a forward currency contract for the same amount. Also in
2000, the Company entered into a 7.38% bank loan totaling $142 with principal
and interest due in March 2001.
In 1999, the Company redeemed preference shares totaling $388, which had been
classified as other short-term debt. These shares were issued in 1998 and 1997
when the Company entered into sterling denominated agreements for the issuance
of redeemable subsidiary preference shares to private investors. The Company
also terminated related swap agreements that covered both foreign currency and
interest rate exposures. Costs to terminate the swap agreements were
approximately $7 and are included in other expense, net. Dividend payments on
the preference shares were classified as interest expense.
Long-term debt includes:
2000 1999
-------- --------
8.8% Non-callable notes due August 2001(a).................. $200 $200
Preferred interest transferable securities due July 2003
with a preferred dividend rate of 2.9%(b)................. 200 200
7 1/4% senior notes due 2007(c)............................. 150 150
Bank loans due through March 2007, at a rate of 5.9% in 2000
and rates ranging from 5.9% to 7.9% in 1998............... 13 98
Australian and New Zealand credit facility, $32 seven-year
term, expiring March 2004, interest at local "Bill Rate"
plus .7%(d)............................................... 10 35
Other....................................................... 17 19
---- ----
Total....................................................... $590 $702
==== ====
- ---------
(a) At June 30, 2000 and June 30, 1999, the Company had interest rate swaps that
converted $50 of the 8.8% note from a fixed to a floating rate resulting in
effective borrowing rates of 8.6% in 2000, 8.1% in 1999 and 8.3% in 1998.
(b) In 1999, the Company entered into a Deutsche mark denominated financing
arrangement with private investors. The Company also entered into a series
of swaps with notional amounts totaling $200 to eliminate foreign currency
exposure risks. The swaps effectively convert the Company's 2.9% fixed
Deutsche mark obligation to a floating U.S. dollar rate of 90 day LIBOR less
278 basis points (effective rate of approximately 4.1%). Dividend payments
on preference shares are classified as interest expense.
B-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
9. DEBT (CONTINUED)
(c) The 7 1/4% Note Indenture contains certain restrictive covenants and
limitations, the most significant of which relates to the Company's right to
incur debt and to engage in certain sale and leaseback transactions.
(d) The seven-year $32 Australian and New Zealand credit facility is composed of
(1) amounts used to acquire Clorox Australia Pty. Limited, formerly
NationalPak Pty. Limited, and Clorox New Zealand Limited, formerly
NationalPak New Zealand Limited (the acquisition borrowing for New Zealand
was repaid in 2000) and (2) amounts used for working capital needs. There
are fixed periodic payments associated with the acquisition borrowing. The
working capital borrowing can be drawn on and repaid at Clorox Australia
Pty. Limited and Clorox New Zealand Limited's discretion. The facility is
secured by the accounts receivable, inventory and fixed assets of Clorox
Australia Pty. Limited and Clorox New Zealand Limited (approximately $10 at
June 30, 2000). At June 30, 2000 and June 30, 1999, the Company had interest
rate swaps totaling $9 and $26, respectively, that converted the Company's
variable rate debt into fixed obligations.
The weighted average interest rate for short-term debt outstanding was 6.4%,
5.2% and 5.1% for 2000, 1999 and 1998, respectively. At June 30, 2000 and 1999,
net of foreign currency swap agreements, the fair value of long-term debt was
$600 and $723, respectively, and the fair values of short-term debt approximate
the carrying value for those years.
The Company has credit agreements totaling up to $900 that expire on dates
through April 2002. There are no borrowings under any of these agreements. They
are available for general corporate purposes and for the support of additional
commercial paper issuance. The credit agreements require maintenance of minimum
net worth of $704.
Long-term debt maturities as of June 30, 2000 are $5, $207, $10, $216, $2 and
$155 in 2001, 2002, 2003, 2004, 2005 and thereafter, respectively.
10. DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments, principally swaps, forward
contracts and options to enhance its ability to manage risk, including interest
rate, foreign currency, commodity prices and share repurchases which exist as
part of its ongoing business operations. These contracts hedge transactions and
balances for periods consistent with the related exposures and do not constitute
investments independent of these exposures. The Company is not a party to any
leveraged contracts.
Interest rate swap agreements are used to manage interest rate exposure and to
achieve a desired proportion of variable and fixed rate debt. Amounts paid or
received on hedges related to debt are included in interest expense. At
June 30, 2000 and June 30, 1999, the notional amount of interest rate swaps was
$261 and $278, and the unrealized losses were approximately $11 and $4,
respectively. (See Note 9).
The Company uses foreign exchange contracts, including forward currency
contracts, a call option contract and swap contracts, to hedge existing
foreign-exchange exposures. Foreign currency contracts require the Company, at a
future date, either to buy or sell foreign currency in exchange for U.S. dollars
to offset an underlying exposure. Such currency contracts existed at June 30,
2000 and 1999 for Canadian dollars, Japanese yen, Australian dollars and certain
other currencies. The call option contract is for purchases
B-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
10. DERIVATIVE INSTRUMENTS (CONTINUED)
denominated in Deutsche marks. Foreign exchange contracts with notional amounts
totaling $262 and $67 were outstanding at June 30, 2000 and 1999, respectively.
Unrealized losses related to these contracts were approximately $2 at June 30,
1999 (none at June 30, 2000). Contracts outstanding as of June 30, 2000 will
mature over the next year. The Company manages its future Deutsche mark exposure
with foreign currency swap agreements (see Note 9). These agreements provide for
an exchange of notional amounts at a future date, enabling the Company to offset
future foreign currency cash exposures and converting Deutsche mark liability to
U.S. dollar liability, thus mitigating exposure to increasing costs associated
with foreign currency movements. The Company also holds Argentine foreign
currency contracts which are not accorded hedge accounting treatment. The
notional amounts on these contracts totaled $38 at June 30, 2000. Losses
recognized in 2000 on the Company's Argentine foreign currency contract were
insignificant.
The Company uses commodity futures contracts to hedge the price on a portion of
raw material purchases used in the manufacturing process and swap contracts to
hedge the market risk of diesel fuel included as part of carrier contracts.
Contract maturities are correlated to actual purchases and contract gains and
losses are reflected as adjustments of the cost of the related item. The Company
also uses swap contracts and an option contract with various maturities
partially to stabilize the cost of its polyethylene resin requirements. These
contracts cover a portion of the Company's domestic and foreign resin
requirements. Unrealized (gains) or losses on open contracts at June 30, 2000
and June 30, 1999 were approximately $(14) and $6, respectively.
Equity put options and forward contracts are used in connection with the
Company's common share repurchase programs (see Note 11).
The carrying values of cash, short-term investments, accounts and notes
receivable, notes payable, accounts payable, forward purchase financing
agreements and other derivative financial instruments approximate their fair
values at June 30, 2000 and 1999. The Company has used market information for
similar instruments and applied judgment in estimating fair values. See Note 9
for fair values of short-term and long-term debt.
Exposure to counterparty credit risk is considered low because these agreements
have been entered into with major credit worthy institutions with strong credit
ratings, and they are expected to perform fully under the terms of the
agreements.
11. STOCKHOLDERS' EQUITY
In addition to common stock, the Company is authorized to issue 5 million shares
of preferred stock with a par value of $1 per share, none of which is
outstanding.
In September 1999, in response to declines in the Company's stock price in the
first quarter, the Board of Directors authorized a common stock repurchase and
hedging program intended to reduce or eliminate dilution when shares are issued
in accordance with the Company's various stock compensation plans. The Company
had canceled a prior share repurchase and hedging program (previously authorized
in September 1996 by the Board of Directors to offset the dilutive effects of
employee stock exercises) when it merged with First Brands. The Company
repurchased a total of 3,123,000 shares for $135 from inception of the new
program through June 30, 2000 and, under the prior program, 800,000 shares for
$33 in 1999, and 1,694,000 shares for $83 in 1998.
B-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On September 15, 1999, the Company settled share repurchase agreements and
options contracts realizing net cash proceeds of approximately $76 million. On
the same day, the Company entered into two new share repurchase transactions
whereby the Company contracted for future delivery of 2,260,000 shares on
September 15, 2002 and 2,260,000 shares on September 15, 2004, each for a strike
price of $43 per share. In November 1999, the Company entered into an agreement
to purchase an additional 1,000,000 shares on December 1, 2003 at a price of
$46.32 per share.
On November 17, 1999, the stockholders approved an amendment of the Company's
Certificate of Incorporation to increase the authorized capital of the Company
to consist of 750,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, each with a par value of $1.00 per share.
12. STOCK COMPENSATION PLANS
At June 30, 2000, the Company had stock-based compensation plans that include
the pre-merger plans of First Brands, including various stock option plans that
provide for the granting of stock options to officers, key employees and
directors. The 1996 Stock Incentive Plan ("1996 Plan") and the 1993 Directors'
Stock Option Plan are the only plans with stock option awards currently
available for grant; the 1996 Plan, the 1993 Directors' Stock Option Plan and
prior plans have shares exercisable at June 30, 2000. The Company is authorized
to grant options for up to 14 million common shares under the 1996 Plan, of
which 9 million have been granted. Options outstanding under the Company's plans
(except First Brands options which became exercisable upon the merger) have been
granted at prices which are either equal to or above the market value of the
stock on the date of grant, vest over a one to seven-year period, and expire no
later than ten years after the grant date.
The status of the Company's stock option plans at June 30 is summarized below:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
-------------- ----------------
(IN THOUSANDS)
Outstanding at June 30, 1997.................... 14,226 $18
Granted......................................... 1,282 36
Exercised....................................... (2,630) 14
Cancelled....................................... (438) 25
------ ---
Outstanding at June 30, 1998.................... 12,440 21
Granted......................................... 4,590 60
Exercised....................................... (3,174) 20
Cancelled....................................... (216) 35
------ ---
Outstanding at June 30, 1999.................... 13,640 34
Granted......................................... 3,104 40
Exercised....................................... (1,381) 20
Cancelled....................................... (301) 44
------ ---
Outstanding at June 30, 2000.................... 15,062 $36
====== ===
Options exercisable at:
June 30, 2000................................... 7,687 $21
June 30, 1999................................... 7,618 19
June 30, 1998................................... 8,204 17
B-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
12. STOCK COMPENSATION PLANS (CONTINUED)
Had compensation expense for the Company's various stock-based compensation
plans been determined based upon fair values at the grant dates for awards under
those plans in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would have been
reduced to the following pro forma amounts. The pro forma effects of applying
SFAS No. 123 are not indicative of future amounts because this statement does
not apply to awards granted prior to 1996.
2000 1999 1998
-------- -------- --------
Earnings before cumulative effect of change in
accounting principle
As reported.......................................... $ 394 $ 246 $ 350
Pro forma............................................ 373 235 343
Earnings per share before cumulative effect of change
in accounting principle
Basic
As reported........................................ $1.67 $1.05 $1.49
Pro forma.......................................... 1.58 1.00 1.46
Diluted
As reported........................................ $1.64 $1.03 $1.46
Pro forma.......................................... 1.56 0.98 1.43
The weighted average fair value of each option granted during 2000, 1999 and
1998, estimated on the grant date using the Black-Scholes option pricing model,
was $12.43 per share, $13.16 per share and $8.83 per share, respectively. The
following assumptions were used to estimate the fair value of the 2000, 1999 and
1998 option grants:
COMBINED COMBINED CLOROX FIRST BRANDS
2000 1999 1998 1998
------------ ------------ ------------ ------------
Dividend yield....................... 1.8% 1.3% 2% 1.5%
Expected volatility.................. 36.5% 29.5% 21% 42.6%
Risk-free interest rate.............. 5.7% to 6.8% 4.4% to 5.7% 5.3% to 6.5% 5.5%
Expected life........................ 3 to 6 years 3 to 6 years 3 to 5 years 7.7 years
Summary information about the Company's stock options outstanding at June 30,
2000 is as follows (number of shares in thousands):
RANGE OF WEIGHTED AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICE AT 6/30/00 PERIODS IN YEARS EXERCISE PRICE AT 6/30/00 EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 9 - $20 4,621 3.7 $16 4,621 $16
21 - 32 2,004 6.2 23 2,001 23
32 - 44 4,465 9.0 37 1,021 37
44 - 55 590 9.0 52 40 48
56 - 67 3,382 8.9 66 4 59
- --------------------- ------ --- --- ----- ---
$ 9 - $67 15,062 8.0 $36 7,687 $21
===================== ====== === === ===== ===
B-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
13. LEASES
The Company leases transportation equipment and various manufacturing,
warehousing and office facilities. Most leases are classified as operating
leases and will expire over the next 16 years. Future total minimum lease
payments are $59, and do not exceed $19 in any one year. Rental expense was $49
in 2000, $36 in 1999 and $40 in 1998.
Space not occupied by the Company in its headquarters building is let to other
tenants under operating leases expiring by 2008. Future minimum rentals to be
received total $4 and do not exceed $2 in any one year.
14. OTHER (INCOME) EXPENSE, NET
The major components are:
2000 1999 1998
-------- -------- --------
Amortization of intangibles.............................. $ 55 $ 61 $ 57
Equity in earnings of affiliates......................... (16) (21) (17)
Interest income.......................................... (10) (7) (5)
Royalty income........................................... (6) (7) (11)
Other, net............................................... 1 (2) (14)
---- ---- ----
Total.................................................... $ 24 $ 24 $ 10
==== ==== ====
15. INCOME TAXES
The provision for income taxes is:
2000 1999 1998
-------- -------- --------
Current
Federal............................................... $193 $175 $119
State................................................. 25 25 16
Foreign............................................... 25 13 19
---- ---- ----
Total current........................................... 243 213 154
---- ---- ----
Deferred
Federal............................................... (11) (26) 43
State................................................. - (2) 7
Foreign............................................... (4) (1) 2
---- ---- ----
Total deferred.......................................... (15) (29) 52
---- ---- ----
Total................................................... $228 $184 $206
==== ==== ====
The effective income tax rates were 36.7%, 42.8% and 37.1% in 2000, 1999 and
1998, respectively. The primary differences between the U.S. statutory rate of
35% and the effective tax rate in each year are due to state income taxes, net
of federal benefits, of 2.7%, 3% and 2.9%, in 2000, 1999 and 1998, respectively,
and merger-related and restructuring costs of 5.9% in 1999.
B-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
15. INCOME TAXES (CONTINUED)
Undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely totaled $163 at June 30, 2000.
The net deferred income tax assets (liabilities), both current and non-current
at June 30, result from the tax effects of the following temporary differences:
2000 1999
-------- --------
Amortization and depreciation............................... $(183) $(190)
Safe harbor lease agreements................................ (16) (18)
Unremitted foreign earnings................................. (37) (41)
Post employment benefits.................................... 29 36
Merger related and restructuring costs...................... 24 20
Income previously recorded for book purposes................ (19) (13)
Other....................................................... 3 (5)
----- -----
Deferred tax liabilities -- Net............................. $(199) $(211)
===== =====
16. EMPLOYEE BENEFIT PLANS
RETIREMENT INCOME PLANS
The Company has defined benefit pension plans for substantially all its domestic
employees and certain of its international subsidiaries. Benefits are based on
either employee years of service and compensation or a stated dollar amount per
year of service. The Company is the sole contributor to the plans in amounts
deemed necessary to provide benefits and to the extent deductible for federal
income tax purposes. Assets of the plans consist primarily of stocks and bonds.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for those pension plans with accumulated benefit obligations in
excess of plan assets were $35, $28 and $27, respectively, as of June 30, 2000
and $2, $1 and $0, respectively, as of June 30, 1999.
The $1 curtailment gain in 2000 relates to the closure of certain facilities
associated with the First Brands merger. The $7 cost of special termination
benefits in 1999 relates to termination benefits related to the First Brands
merger.
RETIREMENT HEALTH CARE
The Company provides certain health care benefits for employees who meet age,
participation and length of service requirements at retirement. The plans pay
stated percentages of covered expenses after annual deductibles have been met.
Benefits paid take into consideration payments by Medicare. The plans are
unfunded and the Company has the right to modify or terminate certain of these
plans.
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation ("APBO") was 9% for years 2000 and 2001.
These rates were assumed to gradually decrease to 6% for 2003 and remain at that
level for years thereafter. Changes in these rates can have a significant effect
on amounts reported. A one percentage point increase in the trend rates would
increase the June 30,
B-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
2000 APBO by $8 and increase expense in 2000 by $2. The discount rate used to
determine the APBO was 8.25%.
Summarized information for the Company's retirement income and retirement health
care plans are as follows:
RETIREMENT
RETIREMENT INCOME PLANS HEALTH CARE
-------------------------- ----------------------
2000 1999 2000 1999
----------- ------------ -------- --------
Change in benefit obligations
Benefit obligation at beginning of year.......... $247 $267 $ 77 $ 73
Service cost..................................... 10 12 3 3
Interest cost.................................... 19 19 5 5
Plan amendments.................................. - (9) - -
Reduction in prior service cost due to
remeasurement.................................. 2 (1) - -
Actuarial (gain)/loss............................ (6) (21) (2) -
Benefits paid.................................... (20) (27) (4) (4)
Special termination benefits..................... - 7 - -
---- ---- ---- ----
Benefit obligation at end of year................ 252 247 79 77
Change in plan assets
Fair value of assets at beginning of year........ 324 307 - -
Actual return on plan assets..................... 23 36 - -
Employer contribution............................ - 8 4 4
Benefits paid.................................... (21) (27) (4) (4)
Effect of foreign currency changes............... - - - -
---- ---- ---- ----
Fair value of plan assets at end of year......... 326 324 - -
Funded (unfunded) status......................... 74 77 (79) (77)
Unrecognized transition obligation/(asset)....... - (2) 7 7
Unrecognized prior service cost.................. (9) (14) 2 2
Unrecognized (gain)/loss......................... (49) (54) (8) (7)
---- ---- ---- ----
Prepaid/(accrued) benefit cost................... $ 16 $ 7 $(78) $(75)
==== ==== ==== ====
Amount recognized in the balance sheets consists
of:
Prepaid benefit cost............................. $ 31 $ 25 $ - $ -
Accrued benefit liability........................ (15) (18) (78) (75)
Accumulated other comprehensive income........... - - - -
---- ---- ---- ----
Net amount recognized............................ $ 16 $ 7 $(78) $(75)
==== ==== ==== ====
2000 1999 2000 1999
----------- ------------ -------- --------
Weighted average assumptions as of June 30:
Discount rate.................................... 6% to 8.25% 6% to 7.75% 8.25% 7.75%
Rate of compensation increase.................... 3% to 8.25% 3% to 7% N/A N/A
Expected return on plan assets................... 7% to 9.5% 7% to 9.5% N/A N/A
B-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
RETIREMENT RETIREMENT
INCOME PLANS HEALTH CARE
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Components of net periodic benefit cost
Service cost.......................................... $ 10 $ 12 $ 10 $ 3 $ 3 $ 3
Employee contributions................................ - - - - - -
Interest cost......................................... 19 19 18 5 5 5
Expected return on plan assets........................ (30) (26) (23) - - -
Amortization of unrecognized items
Transition obligation/(asset)....................... (2) (2) (2) 1 1 1
Prior service cost.................................. (1) - (1) - - -
Net (gain)/loss..................................... (3) 3 - (1) - (1)
---- ---- ---- --- --- ---
Total net periodic benefit cost (income).............. (7) 6 2 8 9 8
Termination benefits and curtailment (gains)/
losses.............................................. (1) 1 (1) - 1 -
Termination benefits related to First Brands merger... - 6 - - - -
---- ---- ---- --- --- ---
Total expense (income)................................ $ (8) $ 13 $ 1 $ 8 $10 $ 8
==== ==== ==== === === ===
The expenses of employee termination related to the First Brands merger were
charged to merger, restructuring and asset impairment costs. The Company has
defined contribution plans for most of its domestic employees not covered by
collective bargaining agreements. Cost is based on the Company's profitability
and on participants' deferrals. The aggregate cost of the defined contribution
plans was $16 in 2000, $21 in 1999 and $26 in 1998.
17. INDUSTRY SEGMENT INFORMATION
Information regarding the Company's operating segments is shown below. Each
segment is individually managed with separate operating results that are
reviewed regularly by the chief operating decision maker. The operating segments
include:
- U. S. Household Products and Canada: Includes cleaning, bleach and other
home care products, and water filtration products, and all products
marketed in Canada.
- U. S. Specialty Products: Includes charcoal, automotive care, cat litter,
insecticides, food products, professional products and the food storage
and disposal categories.
- International Operations: Includes operations outside the United States
and Canada.
- Corporate, Interest and Other: Includes certain non-allocated
administrative costs, goodwill amortization, interest income, interest
expense, merger-related costs, and other income and expense. Corporate
assets include cash, marketable securities, the Company's headquarters and
research and development facilities.
B-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
17. INDUSTRY SEGMENT INFORMATION (CONTINUED)
The following table represents operating segment information. Operating segment
information for years ending June 30, 1999 and June 30, 1998 has been restated
to reflect the Company's current organizational structure and management
responsibilities.
U.S. HOUSEHOLD U.S. CORPORATE
FISCAL PRODUCTS AND SPECIALTY INTEREST & TOTAL
YEAR CANADA PRODUCTS INTERNATIONAL OTHER COMPANY
-------- -------------- --------- ------------- ---------- --------
Net Sales............................... 2000 $1,629 $1,826 $ 628 - $4,083
1999 1,545 1,856 602 - 4,003
1998 1,489 1,796 613 - 3,898
Earnings before Tax..................... 2000 500 506 81 $(465) 622
1999 510 461 60 (601) 430
1998 454 431 101 (430) 556
Identifiable Assets..................... 2000 1,048 1,510 1,037 758 4,353
1999 1,322 1,220 922 668 4,132
1998 1,267 1,138 950 710 4,065
Capital Spending........................ 2000 49 52 21 36 158
1999 59 64 23 30 176
1998 36 99 29 26 190
Depreciation and Amortization........... 2000 48 69 36 48 201
1999 45 68 38 51 202
1998 46 61 37 38 182
Interest Expense........................ 2000 - - - 98 98
1999 - - - 97 97
1998 - - - 104 104
Sales to the Company's largest customer, Wal-Mart Stores, Inc. and its
affiliates, were 18%, 18% and 15% of consolidated net sales in 2000, 1999 and
1998, respectively.
18. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has obligations to certain suppliers to purchase raw materials, at
various prices for estimated annual requirements for periods through
September 2010. Estimated purchase commitments based on estimated annual
requirements and current market prices are no greater than $6 in any year for
the next five years.
The Company is subject to various lawsuits and claims, which include contract
disputes, environmental issues, product liability, patent and trademark matters,
advertising and taxes. Although the results of litigation cannot be predicted
with certainty, it is the opinion of management, after consultation with
counsel, that the ultimate disposition of these matters, to the extent not
previously provided for, will not have a material adverse effect, individually
or in the aggregate, on the Company's consolidated financial statements taken as
a whole.
B-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE CLOROX COMPANY
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
19. EARNINGS PER SHARE
A reconciliation of the weighted average number of shares outstanding (in
thousands) used to calculate basic and diluted earnings per share is as follows:
2000 1999 1998
-------- -------- --------
Basic............................................ 236,108 235,364 234,666
Stock options and other.......................... 3,506 4,638 4,874
------- ------- -------
Diluted.......................................... 239,614 240,002 239,540
======= ======= =======
B-32
RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The Company's management is responsible for the integrity and objectivity of the
above financial statements. In fulfilling this responsibility, management
maintains an effective system of internal accounting controls and supports a
comprehensive internal audit program.
The Board of Directors has an Audit Committee consisting of independent
directors. The Audit Committee meets regularly with management, internal
auditors and Deloitte & Touche LLP, independent auditors. Deloitte & Touche LLP
and the internal auditors have full authority to meet with the Audit Committee,
either with or without management representatives present.
Deloitte & Touche LLP have completed their audit of the accompanying
consolidated financial statements. Their report appears below.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of The Clorox Company:
We have audited the accompanying consolidated balance sheets of The Clorox
Company and its subsidiaries (the "Company") as of June 30, 2000 and 1999, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for the years ended June 30, 2000, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of the Company and First Brands Corporation, which has been accounted for
as a pooling of interests as described in Note 1 to the consolidated financial
statements. We did not audit the statements of earnings, stockholders' equity
and cash flows of First Brands Corporation for the year ended June 30, 1998,
which statements reflect total revenues of $1,203,670,000 and net income of
$45,408,000. These statements were audited by other auditors whose report (which
contains an explanatory paragraph as to the change in accounting principle
described in Note 1 to the consolidated financial statements) has been furnished
to us, and our opinion, insofar as it relates to the amounts included for First
Brands Corporation for 1998, is based solely on the report of such other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors referred to above provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors
referred to above, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
June 30, 2000 and 1999, and the results of its operations and its cash flows for
the years ended June 30, 2000, 1999, and 1998 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Oakland, California
August 25, 2000
B-33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of First Brands Corporation:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of First Brands Corporation and
subsidiaries for the year ended June 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of First Brands Corporation and subsidiaries for the year ended June 30, 1998,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for business process re-engineering costs
effective October 1, 1997.
/s/ KPMG LLP
KPMG LLP
New York, New York
August 6, 1998
B-34
QUARTERLY DATA
THE CLOROX COMPANY
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER(2) QUARTER(2) YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT PER-SHARE AMOUNTS.
Year ended June 30, 2000
Net Sales........................... $ 942 $ 954 $ 1,034 $ 1,153 $ 4,083
Cost of Products Sold............... 517 535 573 625 2,250
Net Earnings........................ 87 76 106 125 394
Per Common Share (1)
Net Earnings
Basic............................. $ 0.37 $ 0.32 $ 0.45 $ 0.53 $ 1.67
Diluted........................... 0.36 0.32 0.44 0.52 1.64
Dividends........................... 0.20 0.20 0.20 0.20 0.80
Market Price (NYSE)
High.............................. 58 1/4 56 56 3/8 47 58 1/4
Low............................... 37 9/16 37 1/2 29 1/16 32 3/8 29 1/16
Year-end.......................... 44 13/16
Year ended June 30, 1999
Net Sales........................... $ 964 $ 947 $ 992 $ 1,100 $ 4,003
Cost of Products Sold(3)............ 519 517 533 612 2,181
Net Earnings........................ 100 74 22 50 246
Per Common Share(1)
Net Earnings
Basic............................. $ 0.42 $ 0.32 $ 0.09 $ 0.21 $ 1.05
Diluted........................... 0.42 0.31 0.09 0.21 1.03
Dividends........................... 0.17 0.18 0.18 0.18 0.71
Market Price (NYSE)
High.............................. 55 15/16 58 11/16 66 15/32 62 7/8 66 15/32
Low............................... 39 11/16 40 53 29/32 46 1/4 39 11/16
Year-end.......................... 53 13/32
- ---------
(1) Due to rounding, EPS for the year may not equal the sum of the quarterly
EPS.
(2) Net earnings for the fourth quarter of 2000 include Asia restructuring
costs. Net earnings for the third and fourth quarters of 1999 include the
effect of significant merger, restructuring, and asset impairment costs.
(3) Delivery costs, previously reported as part of selling, delivery and
administration, are now included in cost of products sold. Selling, delivery
and administration expense and cost of products sold for prior periods have
been restated to conform to the current presentation.
B-35
FIVE-YEAR FINANCIAL SUMMARY
THE CLOROX COMPANY
YEARS ENDED JUNE 30 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA.
OPERATIONS
Net sales.................................... $ 4,083 $ 4,003 $ 3,898 $ 3,623 $ 3,265
------- ------- ------- ------- -------
Percent change............................... 2.0 2.7 7.6 11.0 9.0
------- ------- ------- ------- -------
Cost of products sold(1)..................... 2,250 2,181 2,124 1,976 1,817
Operating expenses(1)........................ 1,053 1,091 1,101 1,045 893
Other........................................ 122 121 114 84 76
Merger, restructuring and asset impairment... 36 180 3 19 -
------- ------- ------- ------- -------
Total costs and expenses..................... 3,461 3,573 3,342 3,124 2,786
------- ------- ------- ------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle... 622 430 556 499 479
Income taxes................................. 228 184 206 199 192
------- ------- ------- ------- -------
Earnings before cumulative effect of change
in accounting principle.................... 394 246 350 300 287
Cumulative effect of change in accounting
principle.................................. - - (7) - -
------- ------- ------- ------- -------
Net earnings................................. $ 394 $ 246 $ 343 $ 300 $ 287
======= ======= ======= ======= =======
Percent change................................. 60.2 (28.3) 14.3 4.5 19.6
COMMON STOCK
Weighted average shares outstanding (in
thousands)
Basic...................................... 236,108 235,364 234,666 235,042 236,818
Diluted.................................... 239,614 240,002 239,540 239,346 239,746
Net earnings per common share
Basic...................................... $ 1.67 $ 1.05 $ 1.46 $ 1.27 $ 1.21
Diluted.................................... 1.64 1.03 1.43 1.25 1.20
Dividends per common share................... 0.80 0.71 0.63 0.56 0.51
Stockholders' equity per common share at end
of year.................................... 7.62 6.67 6.32 6.10 5.74
OTHER DATA
Property, plant and equipment -- Net......... 1,079 1,054 1,016 948 871
Property additions........................... 158 176 190 161 137
Long-term debt............................... 590 702 704 946 556
Percent return on net sales.................. 9.6 6.1 8.8 8.3 8.8
Total assets................................. 4,353 4,132 4,065 3,799 3,017
Stockholders' equity......................... 1,794 1,570 1,473 1,430 1,349
Percent return on average stockholders'
equity..................................... 23.4 16.1 23.9 21.7 21.9
- ---------
(1) Delivery costs, previously included above in operating expense, are now
included in cost of products sold. Prior period amounts have been
reclassified to conform to the current period presentation.
B-36