Clorox Co 10-K for FY2023
Clorox Co (CLX)
10-K
2023-08-10
For: 2023-06-30
View Original
Added on
April 09, 2026
About this 10-K
Clorox Co filed this 10-K on August 10, 2023, covering the fiscal year ended June 30, 2023 (FY2023).
Headline figures
Fiscal year ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.39B
- up 4.0% from $7.11B a year earlier
- Net income
- $149M
- down 67.7% from net income of $462M a year earlier
- Diluted EPS
- $1.20
- down 67.8% from $3.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
__________________
| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
| for the fiscal year ended | ||||||||
| OR | ||||||||
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
| for the transition period from __________to__________. | ||||||||
| Commission file number: | ||||||||
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification Number) | |||||||
| (Address of principal executive offices) (ZIP code) | |||||||||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | |||||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Securities registered pursuant to Section 12(g) of the Act: | |||||||||||||||||
| None | |||||||||||||||||
| (Title of class) | |||||||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging Growth Company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10d-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the registrant’s common stock held by non-affiliates as of December 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $17.3 billion.
As of July 25, 2023, there were 123,825,993 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference:
THE CLOROX COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2023
TABLE OF CONTENTS
| Page | |||||||||||||||||
PART I
This Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (this Report), including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and any such forward-looking statements involve risks, assumptions and uncertainties. Except for historical information, statements about future volumes, sales, organic sales growth, foreign currencies, costs, cost savings, margins, earnings, earnings per share, diluted earnings per share, foreign currency exchange rates, tax rates, cash flows, plans, objectives, expectations, growth or profitability are forward-looking statements based on management’s estimates, beliefs, assumptions and projections. Words such as “could,” “may,” “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “predicts” and variations on such words, and similar expressions that reflect our current views with respect to future events and operational, economic and financial performance, are intended to identify such forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed below. Important factors that could affect performance and cause results to differ materially from management’s expectations are described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report, as updated from time to time in the Company’s U.S. Securities and Exchange Commission (SEC) filings.
The Company’s forward-looking statements in this Report are based on management’s current views, beliefs, assumptions and expectations regarding future events and speak only as of the date of this Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws.
In this Report, unless the context requires otherwise, the terms “the Company,” “Clorox,” “we,” “us” and “our” refer to The Clorox Company and its subsidiaries.
ITEM 1. BUSINESS
Overview of Business
The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with fiscal year 2023 net sales of $7.4 billion and about 8,700 employees worldwide as of June 30, 2023. The Company has operations in approximately 25 countries or territories and sells its products in more than 100 markets, primarily through mass retailers; grocery outlets; warehouse clubs; dollar stores; home hardware centers; drug, pet and military stores; third-party and owned e-commerce channels; and distributors. Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach, cleaning and disinfecting products; Pine-Sol® and Tilex® cleaners; Liquid-Plumr® clog removers; Poett® home care products; Glad® bags and wraps; Fresh Step® cat litter; Kingsford® grilling products; Hidden Valley® dressings, dips, seasonings and sauces; Burt’s Bees® natural personal care products; Brita® water-filtration products; and Natural Vitality®, RenewLife®, NeoCell® and Rainbow Light® vitamins, minerals and supplements. The Company also markets industry-leading products and technologies for professional customers, including those sold under the CloroxPro™ and Clorox Healthcare® brand names. About 80% of the Company’s sales are generated from brands that hold the No. 1 or No. 2 market share positions in their categories. The Company was founded in Oakland, California, in 1913 and is incorporated in Delaware.
The Company's IGNITE strategy accelerates innovation in key areas of the business to drive growth and deliver value for all Company's stakeholders. Since launching in 2019, IGNITE focuses on four strategic choices aimed at fueling long-term, profitable growth; innovating consumer experiences; reimagining how the company and its people work; and continuously evolving the product portfolio. Integrated goals for environmental, social and governance (ESG) performance promote healthy lives, a clean world, thriving communities and strong corporate governance.
Business Performance
Guided by its IGNITE strategy and underpinned by its enduring values, the Company remained focused on making significant investments in its strong brands, strategic digital capabilities and streamlined operating model to drive long-term value creation while supporting category growth and market share improvements.
In fiscal year 2023, inflationary pressures and a recovering supply chain continued to impact global economies, the consumer package goods industry and overall consumer confidence and behaviors. Together these factors created a dynamic operating environment as the Company continued its efforts to drive growth, rebuild margin and deliver transformation.
Despite macroeconomic headwinds and trends in fiscal year 2023, the Company rebuilt gross margin and grew net sales by 4% primarily due to cost-justified pricing actions and continued positive returns from its trademark cost savings program. Diluted
1
net earnings per share (EPS) decreased 68% compared to the year-ago period, largely driven by a noncash impairment charge of $445 million ($362 million after tax) in the Vitamins, Minerals and Supplements business, continued investment in the Company's long-term strategic digital capabilities and productivity enhancements as well as the implementation of the Company's streamlined operating model. Other conditions factoring into the dynamic operating environment included persistently unfavorable commodity costs, higher manufacturing and logistics costs, as well as unfavorable foreign currency exchange rates in key international markets. The Company delivered net sales growth in fiscal year 2023 behind ongoing consumer demand for cleaning and disinfecting products, as well as other household essentials including cat litter, bags and wraps and water-filtration products.
The Company also launched innovations and new products across all major brands in fiscal year 2023, including Clorox® Free & Clear compostable wipes, disinfecting mist and multi-surface cleaner; Glad ForceFlex® MaxStrength trash bags; Fresh Step® Crystals health monitoring cat litter, additional flavors of Hidden Valley® dressing, including Pickle Ranch and Buffalo Ranch; and a new 90%+ recycled paper tube for Burt's Bees lip balm.
The Company's transformation efforts continued throughout fiscal year 2023. As announced in August 2021, the Company is investing approximately $500 million over five years to accelerate its digital transformation and drive related productivity enhancements. This investment, which began in the first quarter of fiscal year 2022, includes replacement of the Company's enterprise resource planning system as well as the implementation of a suite of other digital technologies. Together, these efforts will generate efficiencies and further transform the Company's capabilities in the areas of supply chain, digital commerce, innovation, brand building and more over the long term.
The Company began implementing a streamlined operating model in the first quarter of fiscal year 2023. The streamlined operating model is expected to enhance the Company's ability to respond more quickly to changing consumer behaviors, innovate faster and increase future cash flow as a result of cost savings that will be generated primarily in the areas of selling and administration, supply chain, marketing and research and development. Once fully implemented, the Company expects cost savings of approximately $75 million to $100 million annually, with benefits of about $35 million realized in fiscal year 2023.
Clorox continued to make progress on its ESG goals, which are integrated into the IGNITE strategy and throughout the business. Supporting its Climate Action Plan, the Company joined a consortium of other leading consumer package goods companies that are working together toward science-based targets and informing innovative approaches for the reduction of greenhouse gas emissions across the global supply chain. Also, with a focus on supporting healthy lives, the Company this year strengthened its sick leave policy, now called Health and Mental Well-Being Time Off, to be more inclusive of mental health needs for employees and their families. Finally, the Company and The Clorox Company Foundation expanded its Healthy Parks Project, an environmental justice initiative launched in April 2022 to provide better access to green spaces for underserved communities. With grants totaling $400,000 to date, this initiative has invested both funding and employee volunteer hours to restore community parks in Oakland, California; Atlanta, Georgia; and Durham, North Carolina.
The Company has been broadly recognized throughout fiscal year 2023 for its sustainability efforts. Notable recognitions include being named for the fifth time as a U.S. Environmental Protection Agency Safer Choice Partner of the Year for manufacturing products with ingredients deemed safer for families, pets, workplaces, communities and the environment; No. 2 on Forbes 2022 list of The World's Top Female-Friendly Companies; and, for the first time, No. 1 on Barron’s 100 Most Sustainable U.S. Companies list.
Clorox also continued its longtime commitment to providing value to shareholders through regular dividends. During fiscal year 2023, the Company paid $583 million in dividends to shareholders. In July 2023, Clorox announced an increase of 2% in its quarterly dividend — the 21st consecutive year it has done so.
For fiscal year 2024, Clorox will continue to invest in its brands and capabilities to build a stronger, more resilient company that delivers consistent, profitable growth over time.
For additional information on recent business developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Exhibit 99.1, incorporated herein by reference.
2
Financial Information about Operating Segments and Principal Products
The Company operates through strategic business units (SBUs) which are organized into operating segments. Operating segments are then aggregated into four reportable segments: Health and Wellness, Household, Lifestyle and International. As of the fourth quarter of fiscal year 2023, the Health and Wellness reportable segment is composed of the Cleaning and Professional Products operating segments. The Vitamins, Minerals and Supplements (VMS) operating segment, previously included in the Health and Wellness reportable segment, is presented within Corporate and Other. All periods presented have been recast to reflect this change. The four reportable segments consist of the following:
•Health and Wellness consists of cleaning, disinfecting and professional products mainly marketed and sold in the United States. Products within this segment include home care cleaning products and laundry additives, primarily under the Clorox, Clorox2, Pine-Sol, Scentiva, Tilex, Liquid-Plumr and Formula 409 brands; professional cleaning and disinfecting products under the CloroxPro and Clorox Healthcare brands; and professional food service products under the Hidden Valley brand.
•Household consists of bags and wraps, cat litter and grilling products marketed and sold in the United States. Products within this segment include bags and wraps under the Glad brand; cat litter primarily under the Fresh Step and Scoop Away brands; and grilling products under the Kingsford brand.
•Lifestyle consists of food, natural personal care products and water-filtration products marketed and sold in the United States. Products within this segment include dressings, dips, seasonings and sauces, primarily under the Hidden Valley brand; natural personal care products under the Burt’s Bees brand; and water-filtration products under the Brita brand.
•International consists of products sold outside the United States. Products within this segment include laundry additives; home care products; water-filtration products; digestive health products; grilling products; cat litter; food; bags and wraps; natural personal care products; and professional cleaning and disinfecting products marketed primarily under the Clorox, Ayudin, Clorinda, Poett, Pine-Sol, Glad, Brita, RenewLife, Ever Clean and Burt’s Bees brands.
The Company’s products are marketed and sold globally. The following table provides the Company’s global product lines, which were sold in the United States (including products sold in the Professional Products SBU) and internationally, that accounted for 10% or more of consolidated net sales for the fiscal years ended June 30:
| 2023 | 2022 | 2021 | |||||||||||||||
| Cleaning products | 42 | % | 42 | % | 43 | % | |||||||||||
| Bags and wraps | 16 | % | 16 | % | 14 | % | |||||||||||
| Food products | 11 | % | 11 | % | 10 | % | |||||||||||
| Cat litter products | 10 | % | 9 | % | 8 | % | |||||||||||
Principal Markets and Methods of Distribution
In the United States, most of the Company’s products are nationally advertised and sold to mass retailers, grocery outlets, warehouse clubs, dollar stores, home hardware centers, military stores and other retail outlets primarily through a direct sales force; to grocery stores and grocery wholesalers primarily through a combination of direct sales teams and a network of brokers; and through e-commerce retailers. The Company also sells many of its products through alternative retail channels. Some brands are sold using the direct-to-consumer model. The Company sells institutional, janitorial, food-service and healthcare products through a direct sales force and a network of brokers to distributors and redistributors. Outside the United States, the Company sells products to the retail trade through subsidiaries, licensees, distributors and joint-venture arrangements with local partners.
Sources and Availability of Raw Materials
The Company purchases raw materials from numerous unaffiliated U.S. and international suppliers, some of which are sole source or single-source suppliers. Interruptions in the delivery of these materials could adversely impact the Company. Key raw materials used by the Company include resin, non-woven fabrics for wipes products, sodium hypochlorite, corrugated cardboard, soybean oil, solvent, derivatives of amines and other chemicals and agricultural commodities. While sufficient raw materials were generally available during fiscal year 2023, supply constraints and commodity cost increases for certain raw materials and finished goods were experienced. This is due to supply chain disruptions as well as unfavorable geopolitical and weather events experienced. The Company expects volatility in both commodities and transportation to continue in fiscal year 2024.
3
The Company generally utilizes supply contracts to help ensure availability and a number of forward-purchase contracts to help reduce the volatility of the pricing of raw materials needed in its operations. However, the Company is highly exposed to changes in the prices of commodities and transportation used in manufacturing and shipping of its products. For further information regarding the impact of changes in commodity prices, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1, “Risk Factors – Volatility and increases in the costs of raw materials, energy, transportation, labor and other necessary supplies or services have negatively impacted, and may continue to negatively impact, the Company’s net earnings and cash flow” and “Risk Factors – Supply chain issues can result in product shortages or disruptions to the Company’s business” in Item 1.A.
Patents and Trademarks
Most of the Company’s brand name consumer products are protected by registered trademarks. The Company’s brand names and trademarks are highly important to its business, and the Company vigorously protects its trademarks from apparent infringements. Maintenance of brand equity value is critical to the Company’s success. The Company’s patent rights are also material to its business and are asserted, where appropriate, against apparent infringements.
Seasonality
Most sales of the Company’s grilling products occur during the months of March through September each calendar year. The volume and sales of grilling products may be affected by weather conditions.
Customers
Net sales to the Company’s largest customer, Walmart Stores, Inc. and its affiliates, were 26%, 25%, and 25% of consolidated net sales for each of the fiscal years ended June 30, 2023, 2022 and 2021, respectively, and occurred across all of the Company’s reportable segments. No other individual customer accounted for 10% or more of the Company’s consolidated net sales in any of these fiscal years. The Company’s five largest customers accounted for nearly half of the Company’s consolidated net sales for each of the fiscal years 2023, 2022 and 2021.
Competition
The markets for consumer products are highly competitive. The Company’s products compete with other nationally advertised brands and with “private label” brands within each category. Competition comes from similar and alternative products, some of which are produced and marketed by major multinational or national companies having financial resources greater than those of the Company. In addition, the Company faces competition from retailers, including club stores, grocery stores, drugstores, dollar stores, mass merchandisers, e-commerce retailers and subscription services. Furthermore, heightened competitive activity is expected as inflation continues to increase and consumers experience reduced purchasing power. The Company’s products generally compete on the basis of product performance, brand reputation and recognition, image and price. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising support. If a product gains consumer acceptance, it typically requires continued advertising and promotional support and ongoing product innovation to maintain its relative market position. For further information regarding the intense competition the Company faces, see “Risk Factors – The Company faces intense competition in its markets, which could lead to reduced net sales, net earnings and cash flow” in Item 1.A.
Environmental Matters
For information regarding noncapital expenditures related to environmental matters, see the discussions below under “Risk Factors – Environmental matters create potential liabilities that could adversely affect the Company’s financial condition and results of operations” in Item 1.A. No material capital expenditures relating to environmental compliance are presently anticipated.
HUMAN CAPITAL MANAGEMENT
Purpose and Values
The Clorox Company is led by its purpose to champion people to be well and thrive every single day, including employees, consumers and communities served around the world.
Clorox employees are committed to making a meaningful, positive impact through their work and to authentically living the Company’s values: to do the right thing, put people at the center and play to win. These foundational values underpin everything the Company does and are essential to achieving long-term success.
The Company’s purpose and values also are fully embedded in its IGNITE strategy, which accelerates innovation in key areas of the business to drive growth and deliver value for all Clorox stakeholders. Since launching in 2019, IGNITE focuses on four
4
strategic choices aimed at fueling long-term, profitable growth; innovating consumer experiences; reimagining how the Company and its people work; and continuously evolving the product portfolio. In addition, integrated goals for ESG performance promote healthy lives, a clean world and thriving communities, all supported by strong corporate governance.
Workforce
As of June 30, 2023, the Company employed about 8,700 people worldwide, with 72% in the United States and 28% working outside the United States. Clorox's U.S. workforce includes 46% nonproduction employees and 54% production employees, while the workforce outside the United States includes 57% nonproduction employees and 43% production employees.
In fiscal year 2023, the Company began implementing a streamlined operating model aimed at enhancing the Company's ability to respond more quickly to changing consumer behaviors, innovate faster, and increase future cash flow as a result of cost savings that will be generated primarily in the areas of selling and administration, supply chain, marketing, and research and development. The implementation of this new model resulted in the reduction of certain staffing levels.
Inclusion, Diversity, Equity & Allyship (IDEA)
People are essential to Clorox's efforts to drive growth and deliver value for all stakeholders. One of the ways the Company puts people at the center is by continuing to build a more inclusive and diverse workplace that values diverse backgrounds, experiences and perspectives to create stronger teams, unlock more innovation and – ultimately – contribute to greater success both individually and collectively.
In fiscal year 2023, Clorox continued to make strides on its journey to become a more inclusive and diverse company where employees can be their authentic selves and do their best work. This includes strengthening its inclusion and diversity strategy by adding equity and allyship. This new focus, called IDEA, is intended to help ensure the Company’s processes and programs are fair and equitable, while encouraging all employees to take an active role in practicing allyship.
Clorox continues to conduct annual pay equity analyses for non-production employees in addition to monitoring pay trends throughout the year. This effort proactively identifies potential discrepancies and helps to ensure each employee is compensated fairly, regardless of race, ethnicity or gender. In fiscal year 2023, the Company built on its longstanding commitment to internal pay transparency, opting to also post full salary ranges for all U.S. job applicants, exceeding existing legislative requirements.
More than a dozen employee resource groups (ERGs) help drive inclusion within Clorox and foster belonging, in part through greater understanding of different backgrounds and perspectives. These groups are an important forum for talent recruiting and retention, professional development and open dialog that strengthens the Company’s workplace culture and, through regular volunteer opportunities, the communities employees call home. The ERGs also serve the business by serving as internal focus groups, inspiring product innovations, accelerating product placement plans and deepening knowledge of multicultural consumers.
In fiscal year 2023, Clorox placed first on Barron’s 100 Most Sustainable U.S. Companies list, which considers 230 ESG metrics for the 1,000 largest publicly traded companies by market cap, including the diversity of senior leadership. The Company also was ranked No. 2 out of 400 companies on Forbes’ 2022 list of The World’s Top Female-Friendly Companies and No. 19 out of 200 companies on Forbes’ 2022 list of America’s Best Employers for Veterans. Finally, Clorox was again included in the 2023 Bloomberg Gender-Equality Index, which tracks the performance of public companies committed to transparency in gender-data reporting.
Workforce diversity. As of June 30, 2023, people of color1 represented 42% of Clorox's total U.S. workforce, 17% of U.S. senior executives, 34% of U.S. managers2, 50% of other U.S. nonproduction employees and 44% of U.S. production employees. Women made up 36% of the Company's global workforce, 50% of global senior executives, 49% of global managers, 58% of other global nonproduction employees and 19% of global production employees.
Board and leadership diversity. As of June 30, 2023, the Clorox Executive Committee was composed of 50% women, including Chief Executive Officer Linda Rendle, and 14% people of color. Additionally, 50% of our board is female and 25%
1 Management defines people of color (POC) as any race that is not White (Asian, Black, Latino, Native American, Native Hawaiian, or two or more races). Gender and ethnicity information is provided by employees on a voluntary, self-identification basis. To the extent that the employees do not voluntarily report, the data would not be included in the respective calculation.
2 Management defines manager as an employee at Grade 26 through 31 for U.S. employees and Grade 25 through 31 for employees outside of the United States with regards to the Company’s compensation structure. “Senior Executive” is defined as an employee at Grade 32 or Grade EX. Prior to fiscal year 2023, management defined "manager" as an employee at Grade 27 through 31 for U.S. employees and Grade 26 through 31 for employees outside of the United States. This change was made to expand the Company's focus on building diverse talent pipelines for management roles.
5
are people of color, with our Nominating, Governance and Corporate Responsibility Committee (NGCRC) and our Audit Committee chaired by people of color. Our NGCRC chair is also a woman.
Hiring and Development
Clorox looks to continuously attract, develop and retain the best talent to deliver against its strategy and commitments, prioritizing career growth and leadership development to establish a strong foundation for long-term success. Company investments include a suite of training and education for people managers to help them become effective coaches and leaders; mentoring programs and initiatives to help build a pipeline of diverse talent; and summer internship, co-op and rotational programs for college hires. In addition, the Company works closely with ERGs and establishes partnerships with external organizations focused on advancing equity and opportunity for the communities they represent. Clorox also conducts a robust talent review and leader succession planning process to ensure a strong pipeline for key roles.
Additionally, supported by its strategic investment in digital transformation and related productivity enhancements, the Company continues to introduce and strengthen new ways of working, building upon the hybrid work experience implemented in fiscal year 2022 as well as onboarding new tools and technologies that allow employees to collaborate more effectively, work smarter and make faster, more informed decisions. Finally, in order to attract key prospective talent and help continue to ensure Clorox remains an employer of choice, the Company refreshed its employer value proposition, careers website and talent acquisition strategy targeted at external candidates.
Employee Engagement and Retention
In support of its efforts to actively listen to its workforce, engage in effective two-way dialog and embrace continuous improvement, Clorox conducts both annual and more frequent pulse surveys. The Company surveys its employees to assess their perception of Clorox as a place to work as well as their views of leadership, the Company's IGNITE strategy and related transformation, sense of inclusion and more. In fiscal year 2023, just over 82% of employees said they feel engaged at Clorox, which was in line with the 50th percentile for Fortune 500 benchmarks and above the 50th percentile for industry benchmarks3 and consistent with the Company's fiscal year 2022 results. Company leadership then uses the engagement survey results to develop and deploy related action plans aimed at addressing employee feedback, strengthening the overall workplace culture and, importantly, retaining top talent.
Employee Safety and Well-Being
As a health and wellness company dedicated to helping people be well and thrive every single day, Clorox takes a holistic approach to caring for its global employees, with benefits and programs designed to support physical, mental and financial well-being.
Consistent with its core value of putting people at the center, the Company invests in workplace safety through a combination of education, training and related policies, while operating in compliance with applicable regulations, including Occupational Safety and Health Administration (OSHA) guidelines in the United States. In fiscal year 2023, the Company’s reportable incident rate (RIR) was 0.55. This was significantly lower than the 3.3 average RIR for goods-producing manufacturing companies in 2021, which is the latest available data from the U.S. Bureau of Labor Statistics4.
The Company has continued to prioritize the mental health of its employees, partnering with external vendors to provide free and confidential mental health and lifestyle services as well as other related resources, tools and forums to employees and their families.
The Company also provides parents with support such as paid parental leave, adoption resources and subsidized childcare, and began offering enhanced family-forming benefits in January 2023.
To support employees' financial well-being, the Company provides competitive compensation – including short- and long-term incentives – to attract and retain top talent. In addition, Clorox supports its employees' retirement readiness by contributing up to 10% of an employee's annual salary to their 401(k) plan each year and offering third-party financial planning services.
3 Employee engagement surveys may vary across companies on a year-to-year basis.
4 The Company's fiscal year 2023 RIR of 0.55 means that for every 100 full-time equivalent Clorox employees globally, the Company averaged less than one reportable incident during the past year. The criteria used to determine RIR follows the U.S. Department of Labor’s OSHA guidelines and is applied globally. The RIR does not include workers at offices with fewer than 10 employees, but it does include remote workers.
6
Societal Well-Being
In fiscal year 2023, The Clorox Company Foundation continued to support the Company’s purpose of championing people to be well and thrive every single day by focusing on programs in three key areas: community wellness, disease prevention and disaster relief and preparedness.
The foundation provides cash grants (including matching employee donations) and product donations while implementing cause marketing programs to support communities on important matters including health and safety, education and racial justice.
Finally, in support of the foundation’s community wellness focus, the Company continued to support its Healthy Parks Project in fiscal year 2023 to address environmental justice and provide better access to green spaces in underserved communities. In the project's second year, the Company built upon its initial efforts in Oakland, California, supporting parks organizations in Atlanta, Georgia, and Durham, North Carolina, to benefit the health of local communities where it has a large presence of employees.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available on the Company’s website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at TheCloroxCompany.com under Investors/Financial Information/SEC Filings. Additionally, the Company routinely posts additional important information, including press releases, on its website and recognizes its website as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our website in addition to our SEC filings and public webcasts. These items are available at TheCloroxCompany.com under Investors/Investor News and Events.
Information relating to corporate governance at Clorox, including the Company's Code of Conduct, the Clorox Company Board of Directors Governance Guidelines and Board Committee charters for the Management Development and Compensation Committee, the Audit Committee, and the Nominating, Governance and Corporate Responsibility Committee, is available at TheCloroxCompany.com under Company/Corporate Governance or https://www.thecloroxcompany.com/company/corporate-governance/. The Company will provide any of the foregoing information without charge upon written request to Corporate Communications, The Clorox Company, 1221 Broadway, Oakland, CA 94612-1888. The information contained on the Company's website is not included as a part of, or incorporated by reference into, this Report.
ITEM 1.A. RISK FACTORS
The risks and uncertainties set forth below, as well as other factors described elsewhere in this Report or in other filings by the Company with the SEC, could adversely affect the Company’s business, financial condition and results of operations. Additional risks and uncertainties that are not currently known to the Company or that are not currently believed by the Company to be material may also harm the Company’s business, financial condition and results of operations.
Business and Industry Risks
Unfavorable and uncertain general economic and geopolitical conditions beyond our control could negatively impact our financial results.
Unfavorable general economic factors that are beyond our control have materially adversely affected, and could continue to materially adversely affect, our business, results of operations, financial condition and liquidity. These factors include, but are not limited to, supply chain disruptions, labor shortages, wage pressures, rising inflation and economic slowdown or growing recession risk, as well as housing markets, consumer credit availability, consumer debt levels, fuel and energy costs (for example, the price of gasoline), interest rates, tax rates and policy, unemployment trends, the impact of natural disasters, pandemics, civil disturbances and terrorist activities, foreign currency exchange rate fluctuations, conditions affecting the retail environment for products sold by us and other matters that influence consumer demand, spending and preferences that could impact the demand for our products and negatively impact our net sales and results of operations.
In addition, the COVID-19 pandemic, geopolitical instability, including the conflict in Ukraine and rising tensions between China and Taiwan, actual and potential shifts in U.S. and foreign, trade, economic and other policies, including as a result of escalating trade tensions between the U.S. and its trading partners, including China, as well as other global events, have significantly increased global macroeconomic uncertainty and volatility. Sustained macroeconomic uncertainty and volatility and geopolitical instability could undermine global consumer confidence and could continue to reduce consumers’ purchasing power, thereby reducing demand for our products, and continue to disrupt global supply chains, impacting the availability and
7
cost of transportation, logistics, raw materials, commodities, labor and packaging. This uncertainty and volatility also make it difficult for the Company, as well as its customers, suppliers, distributors and business partners to anticipate the resulting impacts and to accurately forecast and plan future business activities, which may, in turn, cause customers to limit their purchase orders or affect their ability to pay amounts owed to us in a timely manner or at all, or adversely affect our business partners' ability to supply or provide services to us.
We have experienced, and expect to continue to experience, the indirect impacts of the conflict in Ukraine, including increases in the cost of raw and packaging materials and commodities (including the price of oil), supply chain and logistics challenges and foreign currency volatility, and it is not possible to predict the broader or longer-term consequences of this conflict or the sanctions and export controls imposed in response to the conflict. The situation continues to evolve and significant uncertainties regarding the full impact of the conflict in Ukraine or the related impacts on the global economy and geopolitical relations remain.
Increasing unfavorable macroeconomic and geopolitical conditions, including growing recession risk, may also lead to increased credit and collectability risks, higher borrowing costs or reduced availability of capital and credit markets, reduced liquidity, asset impairments, declines in the value of our financial instruments, and failures of counterparties including financial institutions and insurers. If any financial institution party to our credit or other financing arrangements were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us, which could leave us with reduced borrowing capacity. In addition, if any parties with which we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to continue to fund their business and perform their obligations to us could be adversely affected. Any of these factors could negatively and materially impact our business, financial condition, and results of operations.
The changing retail environment and changing consumer preferences could adversely affect the Company’s business, financial condition and results of operations.
The Company’s sales are largely concentrated in the traditional retail grocery, mass retail outlet, warehouse club and dollar store channels, in addition to e-commerce channels. Alternative retail channels, including hard discounters, subscription services and buying clubs, have become and may continue to be more prevalent and popular than traditional retailers. In addition, a growing number of alternative sales channels and business models, such as niche brands, native online brands, private label and store brands, direct-to-consumer brands and channels and discounter channels, have emerged in the markets we serve. In particular, the growing presence of, and increasing sales through, e-commerce retailers have affected, and may continue to affect, consumer behavior or preferences (as consumers increasingly shop online and via mobile and social applications) and market dynamics, including any pricing pressures for consumer goods as retailers face added costs to build their e-commerce capacity. Further, consumer preferences continue to evolve due to a number of factors, including inflation which could cause consumers to purchase a smaller pack or quantity of a product or a lower priced alternative to the Company's products; fragmentation of the consumer market and changes in consumer demographics, which includes the aging of the general population and the emergence of millennial and younger generations who have different spending, consumption and purchasing habits; evolving consumer concerns or perceptions regarding ESG practices of manufacturers, including the sourcing and sustainability of packaging materials, such as single-use plastics; a growing demand for natural or organic products and ingredients; evolving consumer concerns or perceptions (whether accurate or inaccurate) regarding the effects of ingredients or substances present in certain consumer products; changing consumer sentiment toward non-local products or sources; and changing perceptions of environmental impacts (including packaging, energy and water use and waste management). Any significant changes in consumer preferences or behavior, such as less time spent at home, could materially and negatively impact demand for the Company's products and, in turn, the Company's net sales and results of operations. Consumer preferences are also influenced by perception of the Company’s brand image or the brand images of its products, the success of advertising and marketing campaigns, the Company’s ability to engage with consumers in the manner they prefer, including through the use of digital media or assets, and the perception of the Company’s advertising, use of social media and engagement in political and social issues. If we are not successful in continuing to adapt to changing consumer preferences and market dynamics or expanding sales through e-commerce retailers or alternative retail channels, the Company's business, financial condition and results of operations may be negatively impacted. In addition, e-commerce and alternative retail channels may create significant pricing pressures for consumer goods, presenting additional challenges to increasing prices in response to commodity or other cost increases in all of the channels into which the Company sells. If these e-commerce and alternative retail channels were to take significant market share away from traditional retailers and/or the Company is not successful in these channels or business models, its net sales and results of operations may be materially and negatively impacted.
8
Sales growth objectives may be difficult to achieve, the Company may not be able to successfully implement price increases, and market and category declines and changes to the Company’s product and geographic mix may adversely impact the Company’s financial condition and results of operations.
A large percentage of the Company’s revenues comes from mature markets that are subject to high levels of competition. During fiscal year 2023, 84% of the Company’s net sales were attributable to U.S. markets, including U.S. territories. The Company’s ability to achieve sales growth depends on its ability to drive growth through innovation, including as part of its IGNITE Strategy, expand into new products and categories, channels and countries, invest in its established brands and enhanced merchandising, grow categories with retailers and capture market share from competitors. The Company has implemented price increases and may implement additional price increases in the future, which may slow sales growth or create volume declines in the short term as customers and consumers adjust to these price increases. In addition, competitors may or may not take competitive actions, which may lead to sales declines and loss of market share. If the Company is unable to increase market share in existing product lines, develop product innovations, undertake sales, marketing and advertising initiatives that grow its product categories, effectively adopt new technologies, such as artificial intelligence or machine learning, and/or develop, acquire or successfully launch new products or brands, it may not achieve its sales growth objectives. Furthermore, a general decline in the markets for certain product categories has had and may in the future have a negative impact on the Company’s financial condition and results of operations. In addition, changes to the mix of products that the Company sells, as well as the mix of countries in which its products are sold, may adversely impact the Company’s net sales, profitability and cash flow.
The Company faces intense competition in its markets, which could lead to reduced net sales, net earnings and cash flow.
The Company faces intense competition from consumer product companies both in the U.S. and in its international markets. Most of the Company’s products compete with other widely advertised, promoted and merchandised brands within each product category. The Company also faces competition from retailers, including club stores, grocery stores, drugstores, dollar stores, mass merchandisers, e-commerce retailers and subscription services, which are increasingly offering “private label” brands that are typically sold at lower prices and compete with the Company’s products in certain categories. Increased purchases of “private label” products or other lower priced brands could negatively impact net sales of the Company’s higher-margin products or there could be a shift in product mix to lower-margin offerings, especially at a time of ongoing inflationary pressure, and this would negatively impact our net earnings and profits. The Company’s products generally compete on the basis of product performance, brand reputation and recognition, image and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions, and the Company is increasingly using digital media marketing and promotional programs to reach consumers. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If the Company’s advertising, marketing and promotional programs, including its use of digital and social media to reach consumers, are not effective or adequate, the Company’s net sales may be negatively impacted.
Some of the Company’s competitors are larger than the Company and have greater financial resources. These competitors, as well as new market entrants, may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly, adopt new technology, such as artificial intelligence and machine learning, more quickly, successfully and effectively, and respond more effectively to changing business and economic conditions than the Company can. Heightened competitive activity from strong local competitors, other large multinational companies, and new entrants into the market may result in more aggressive product claims and marketing challenges, increased promotional spending and geographic expansion, and marketing of new products. Furthermore, the Company’s competitors may attempt to gain market share by offering products at prices at or below those typically offered by the Company. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and/or net earnings.
Dependence on key customers could adversely affect the Company’s business, financial condition and results of operations.
A limited number of customers account for a large percentage of the Company’s net sales. Net sales to the Company’s largest customer, Walmart Stores, Inc. and its affiliates, were 26%, 25%, and 25% of consolidated net sales for the fiscal years ended June 30, 2023, 2022, and 2021, respectively, and occurred across all of the Company’s reportable segments. The Company’s five largest customers accounted for nearly half of the Company’s consolidated net sales for each of the fiscal years 2023, 2022, and 2021, and a significant portion of the Company’s future revenues may continue to be derived from a small number of customers. As a result, changes in the strategies of the Company’s largest customers, including a reduction in the number of brands they carry, a shift of shelf space to “private label” or competitors’ products or a decision to lower pricing of consumer products, including branded products, may harm the Company’s net sales or net earnings, and reduce the ability of the Company to offer new, innovative products to consumers. In addition, the use of the latest technology by our customers
9
regarding pricing may lead to category pricing pressures. Consistent with the ongoing variability in information technology systems industry-wide, our information technology platforms may not be fully compatible at all times with those used by our customers. Therefore, it may or may not have an impact on our ability to respond to customer demands specific to data or technology. Furthermore, any loss of a key customer or a significant reduction in net sales to a key customer, even if such loss or reduction relates to a key customer of a business unit of the Company, could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s business is based primarily upon individual sales orders, and the Company typically does not enter into long-term contracts with its customers. Accordingly, customers could reduce their purchasing levels or cease buying products from the Company at any time and for any reason. If the Company does not effectively respond to the demands of its customers, they could decrease their purchases from the Company, causing the Company’s net sales and net earnings to decline. Furthermore, unfavorable market conditions or competitive pressures may cause the Company’s customers to reevaluate the number and mix of brands they sell, resulting in lower purchases of the Company’s products by these customers. We regularly review the financial strength of our key customers and, where appropriate, modify customer credit limits, which may have an adverse impact on future sales.
With the growing trend towards retailer consolidation, both in the U.S. and internationally, the continued growth of e-commerce and the integration of traditional and digital operations at key retailers, we are increasingly dependent on certain retailers. This trend has resulted in the increased size and influence of large consolidated retailers, who have in the past changed, and may in the future change, their business strategies, demand lower pricing, or higher trade discounts or impose other burdensome requirements on product suppliers or move away from branded products to “private label”. These large consolidated companies could also exert additional competitive pressure on the Company’s other customers, which could in turn lead to such customers demanding lower pricing, higher trade discounts or special packaging or imposing other onerous requirements on the Company. If the Company ceases doing business with a significant customer or if sales of its products to a significant customer materially decrease due to customer inventory reductions or otherwise, the Company’s business, financial condition and results of operations may be harmed.
Loss of, or inability to attract, key personnel could adversely impact the Company’s business.
The Company’s success depends, in part, on its continuing ability to identify, hire, develop and retain highly qualified and diverse personnel. The labor market for these employees is very competitive, and wages and compensation costs continue to increase. Our ability to attract and retain talent has been and may continue to be impacted by challenges in the labor market, particularly in the U.S., which has experienced wage inflation, sustained labor shortages, a shift toward remote work and the effects of COVID-19. The Company is also in the process of implementing its streamlined operating model and executing organizational change, which may impact hiring and retention efforts. The Company’s ability to attract or retain qualified personnel in the future has been and may continue to be impacted by a number of factors, including the labor market, employee morale, our reputation, competition from other employers and availability of qualified individuals in key geographic areas such as the San Francisco Bay Area. Related activities to identify, hire and onboard qualified talent at increasing compensation costs may require significant time and expense which could further adversely affect the Company’s operations and financial results. The Company’s success also depends on its ability to retain its key personnel, including its executive officers and senior management team, and to continue to implement its succession plans for senior management and other key employees. The unexpected loss or unavailability of one or more of the Company’s key leaders could disrupt its business.
In addition, labor costs in the U.S. continue to rise, and our industry has experienced a shortage of workers. Labor is one of the primary components in the cost of operating our business. If we face labor shortages and increased labor costs as a result of increased competition for employees, higher employee turnover rates, increases in employee benefits costs, or labor union organizing efforts, our operating expenses could increase and our growth and results of operations could be adversely impacted. Labor shortages, higher employee turnover rates and labor union organizing efforts could also lead to disruptions in our business. We may be unable to increase prices of our products in order to pass future increased labor costs onto our customers, in which case our margins would be negatively affected. Additionally, if we increase product prices to cover increased labor costs, the higher prices could adversely affect sales volumes.
Harm to the Company’s reputation or the reputation of one or more of its leading brands or products could have an adverse effect on the business, financial condition and results of operations.
Maintaining a strong reputation with consumers, customers and trade and other third-party partners is critical to the success of the Company’s business. The Company devotes significant time and resources to training programs, relating to, among other things, ethics, compliance and product safety and quality, as well as sustainability goals, and has published ESG goals, including relating to environmental impact and sustainability and inclusion and diversity, as part of its IGNITE Strategy. Despite these efforts or if the Company is not successful in achieving its goals or provides materially inaccurate information,
10
the Company could receive negative publicity, including relating to product safety and ingredients or substances present or allegedly present in the Company’s products or packaging, quality, efficacy, ESG or similar issues, whether real or perceived.
In addition, the Company’s products have, in the past, and could, in the future, face withdrawal, recall or other quality issues, which could lead to decreased demand for and reputational damage to the related brands. The Company’s products, especially its dietary supplement and related products, are dependent on consumers’ perception of their efficacy, safety and quality. Emerging studies have, in the past, and could, in the future, prove or allege that ingredients or substances that are present or allegedly present in our products, the products themselves, or similar products of other companies, are ineffective or harmful to consumers. The Company also licenses certain of its brands to third parties. Such licenses and partnerships may create additional exposure for those brands to product safety, quality, sustainability and other concerns.
Widespread use of social media and networking sites by consumers has greatly increased the accessibility and speed of dissemination of information. Negative publicity, posts or comments about the Company, its brands, its products, its marketing activities, whether accurate or inaccurate, or disclosure of non-public sensitive information about the Company, could be widely disseminated through the use of social media or in other formats. Additionally, marketing initiatives may not have the desired effect on a brand’s or product’s image. Such events, if they were to occur, could harm the Company’s image and adversely affect its business, financial condition and results of operations, as well as require resources to rebuild the Company’s reputation.
The Company may not successfully introduce new products and line extensions, or expand into adjacent categories and countries, which could adversely impact its financial condition and results of operations.
The Company’s future performance and growth depends on innovation and its ability to successfully develop or license capabilities to introduce new products, brands, line extensions and product innovations or enter into or expand into adjacent product categories, sales channels or countries. The Company’s ability to anticipate changes in consumer preferences and quickly innovate in order to adapt its products (including product packaging and sustainability profile) to meet changing consumer demands is essential, especially in light of the reduction in barriers for even small competitors to quickly introduce new brands and products directly to consumers that e-commerce permits. This risk is further heightened by the continued evolution of consumer needs, habits and preferences as a result of shifts in U.S. demographics, reflecting various factors including cultural and socioeconomic changes. The Company cannot be certain that it will successfully achieve its innovation goals. New product and product packaging development and marketing efforts, including efforts to enter markets or product categories in which the Company has limited or no prior experience, not only incur substantial capital expenditures but also contain inherent risks. These risks include product development or launch delays, which could result in the Company not being first to market, and the failure of new products, brands and line extensions to achieve anticipated levels of market acceptance. In addition, success in launching new products is also dependent on the Company’s ability to deliver effective and efficient marketing in an evolving media landscape (including digital), which is subject to dynamic and increasingly restrictive privacy requirements. If product introductions are not successful, costs associated with these efforts may not be fully recouped and the Company’s net earnings or margins could be adversely affected. In addition, if sales generated by new products cause a decline in sales of the Company’s existing products, the Company’s business, financial condition and results of operations could be materially adversely affected.
The COVID-19 pandemic and related impacts has had, and could continue to have, an adverse effect on the Company’s business, financial condition and results of operations.
The COVID-19 pandemic has affected and could continue to negatively affect the Company's business by causing or contributing to, among other things:
• Significant disruptions in business operations and in the ability of significant third-party vendors, manufacturing and other business or commercial partners, including customers, to meet their obligations to us;
• Significant decrease or volatility in sales of or demand for the Company's primary products due to the transition from a pandemic to endemic state;
• Worldwide, regional and local adverse economic and financial market conditions (see "Unfavorable and uncertain general economic and geopolitical conditions beyond our control could negatively impact our financial results" in this section), all of which could impact the manufacturing operations of the Company or third-party partners;
• Adverse impacts on the supply chain, including manufacturing by the Company or third-party partners, due to raw material, packaging or other supply shortages, labor shortages or reduced availability of commercial transport and port operational disruptions; and
11
• Sustained labor shortages or increased turnover rates (see "Loss of or inability to attract key personnel could adversely impact the Company's business" in this section).
Although the World Health Organization and the federal government recently declared an end to COVID-19 as a global and national health emergency, respectively, risks related to COVID-19 have adversely affected and may continue to adversely affect our business, results of operations, cash flows and financial condition.
Acquisitions, new venture investments and divestitures may not be successful, which could have an adverse effect on the Company’s business, financial condition and results of operations.
In connection with the Company’s strategy, the Company expects to continue to seek acquisition, joint venture and investment opportunities. However, the Company may not be able to identify and successfully negotiate suitable strategic transactions at attractive prices. In addition, an increase in regulatory restrictions or continued market volatility could hinder the Company’s ability to execute strategic business activities including any acquisitions or investments. Furthermore, all acquisitions and investments entail numerous risks, including risks relating to the Company’s ability to:
• successfully integrate acquired companies, brands, products, technologies, systems or personnel into the Company’s existing business operations in an effective, timely and cost efficient manner;
• maintain uniform standards, controls, procedures and policies throughout acquired companies, including effective integration of acquired companies into the Company’s internal control over financial reporting;
• successfully enter categories, markets and business models in which the Company may have limited or no prior experience;
• achieve expected synergies and obtain the desired financial or strategic benefits from acquisitions within the anticipated time periods, if at all;
• achieve distribution expansion related to products, categories and markets from acquisition and retain key relationships and or personnel of acquired companies;
• identify and manage any legal or reputational risks that may predate or be associated with a transaction, which could negatively impact the Company following the consummation of such transaction; and
• manage other unanticipated problems or liabilities.
Acquired companies or operations, joint ventures or investments may not be profitable or may not achieve sales levels and profitability and cash flow expectations. Furthermore, acquisitions or ventures could also result in dilutive issuances of equity securities, the incurrence of debt, the assumption of contingent liabilities, such as those relating to advertising claims, environmental issues and litigation, negative reputational issues, an increase in expenses related to intangible assets, including trademarks and goodwill, and increased operating expenses, all of which could adversely affect the Company’s financial condition, margins and results of operations. Future acquisitions of foreign companies or new foreign ventures would subject the Company to local regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, tax or labor laws, government price control, repatriation of profits and liabilities relating to the Foreign Corrupt Practices Act (“FCPA”). In addition, to the extent that the economic benefits associated with an acquisition or investment diminish in the future or the performance of an acquired company or business is less robust than expected, we may be required to record impairments of intangible assets, such as the $362 million post-tax noncash impairment charge that the Company recorded during the third quarter of fiscal year 2023, as a result of an adjustment to the carrying values of goodwill and certain indefinite-lived trademarks in the VMS business. Any impairment charges could adversely affect the Company’s financial condition, margins and results of operations.
The Company has divested and may, in the future, divest certain assets, businesses or brands. With respect to any potential future divestiture, the Company may encounter difficulty finding potential acquirers or other divestiture options on favorable terms. Any future divestiture could affect the profitability of the Company as a result of the gains or losses on such sale of a business or brand, the loss of the operating income or sales resulting from such sale or the costs or liabilities that are not assumed by the acquirer that may negatively impact profitability and cash flow subsequent to any divestiture. The Company may also be required to recognize impairment charges or other losses as a result of a divestiture.
In addition, any potential future acquisitions, new ventures or divestitures may divert the attention of management and resources from other business priorities. The occurrence of any of these risks or uncertainties may have a material adverse effect on the Company’s business, financial condition and results of operations.
12
The performance of strategic alliances and other business relationships could adversely affect our business, reputation, financial condition and results of operations.
We enter into strategic alliances and other business relationships, such as relationships in connection with the co-development of products or devices, or promotion and sales relationships with companies in industries operating in public spaces. These relationships may not generate the level of sales we anticipate when entering into the relationship or may otherwise adversely impact our business, reputation, financial condition and results of operations. Furthermore, such relationships have and, in the future, could create additional exposure to litigation, investigations, disputes or other proceedings, as well as product safety, quality, sustainability and other concerns.
Operational Risks
Volatility and increases in the costs of raw materials, energy, transportation, labor and other necessary supplies or services have negatively impacted, and may continue to negatively impact, the Company’s net earnings and cash flow.
Volatility and increases in the cost of raw materials, including resin, non-woven fabrics for wipes products, sodium hypochlorite, corrugated cardboard and other packaging materials, soybean oil, solvent, derivatives of amines, and other chemicals and agricultural commodities, and rapid increases in the cost of energy, transportation, labor and other necessary supplies or services, have harmed, and are likely to continue to harm, the Company’s results of operations. Significant inflationary pressures have impacted our gross margin in fiscal year 2023, and we expect inflationary pressures to continue into fiscal year 2024. We have also experienced and may continue to experience disruption in our manufacturing operations and supply chain. Many of the raw and packaging materials and supplies used in the production of our products are subject to price volatility and fluctuations in availability caused by many factors, including macroeconomic and geopolitical developments and uncertainty (see "Unfavorable and uncertain general economic and geopolitical conditions beyond our control could negatively impact our financial results" in this section), supplier capacity restraints, changes in supply and demand, weather conditions (including the potential effects of climate change), fire, natural disasters, growing and harvesting conditions, energy costs, health epidemics, pandemics or other contagious outbreaks, labor shortages, currency fluctuations, governmental actions (including import and export requirements such as new or increased tariffs, sanctions, quotas or trade barriers), port congestions or delays, transport capacity constraints, cybersecurity incidents or other disruptions, loss or impairment of key manufacturing sites, acts of terrorism and other factors beyond our control. Although we are unable to predict the impact to our ability to source raw and packaging materials and services in the future, we expect these supply pressures and market disruptions to continue into fiscal year 2024.
If such cost pressures occur or exceed the Company’s estimates and the Company is not able to increase the prices of its products or achieve cost savings to offset such cost increases, its margins would be harmed. In addition, even if the Company increases the prices of its products in response to increases in the cost of commodities or other cost increases, it may not be able to sustain its price increases. Sustained price increases may lead to declines in volume as competitors may not adjust their prices or customers may decide to purchase a lower priced alternative, which could lead to sales declines and loss of market share. The Company’s projections may not accurately predict the volume impact of price increases, which could adversely affect its business, financial condition and results of operations.
To reduce the cost volatility associated with anticipated purchases of certain commodities, the Company uses derivative instruments, including commodity futures and swaps. The extent of the Company’s derivative position at any given time depends on the Company’s assessment of the markets for these commodities, the cost volatility in the markets and the cost of the derivative instruments. Many of the commodities used by the Company in its products do not have actively traded derivative instruments. If the Company does not or is unable to take a derivative position and costs subsequently increase, or if it executes a position and costs subsequently decrease, the Company’s costs may be greater than anticipated or higher than its competitors’ costs and the Company’s financial results and margins could be adversely affected. For further information regarding the Company’s use of derivative instruments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1.
Supply chain issues can result in product shortages or disruptions to the Company’s business.
The Company has a complex global network of suppliers that may, in the future, expand and further evolve in response to market conditions. The Company also relies on a number of - single-source suppliers for certain commodities and raw material inputs, including packaging, product components, finished products and other necessary supplies. The Company has experienced and could continue to experience material disruptions in production and other supply chain issues, including as a result of supply chain dependencies. See "Volatility and increases in the costs of raw materials, energy, transportation, labor and other necessary supplies or services have negatively impacted, and may continue to negatively impact, the Company’s net earnings and cash flow" in this section. This could result in out-of-stock conditions, and its results of operations and relationships with customers could be adversely affected if new or existing suppliers are unable to meet any standards set by the
13
Company, government or industry regulations, or the Company’s customers; if the Company is unable to contract with suppliers at the quantity, quality and price levels needed for its business; if any of the Company’s key suppliers becomes insolvent, ceases or significantly reduces its operations or experiences financial distress; or if any environmental, economic or other outside factors impact its operations. The Company also requires new and existing suppliers to meet its ethical and business partner standards, and if our existing or new suppliers fail to meet such standards or if we are unable to contract with suppliers on favorable terms, our business, results of operations, cash flows and financial condition could be adversely affected. Suppliers may also have to meet governmental and industry standards and any relevant standards required by the Company’s customers, which may require additional investment and time on behalf of suppliers and the Company. In addition, the Company may increase production in-house and reduce its supply and manufacturing arrangements with third parties, which may lead to additional costs connected to such transition and unwinding of certain manufacturing relationships.
Failure of key technology systems, cyber-attacks, privacy breaches or data breaches could have a material adverse effect on the Company’s business, financial condition, results of operations and reputation.
To conduct its business, the Company relies extensively on information and operational technology systems, many of which are managed, hosted, provided and/or used by third parties and their vendors. These systems include, but are not limited to, programs and processes relating to communicating within the Company and with customers, consumers, vendors, investors and other parties; ordering and managing materials from suppliers; converting materials to finished products; receiving and processing purchase orders and shipping products to customers; processing transactions; storing, processing and transmitting data, including personal confidential information and payment card industry data; hosting, processing and sharing confidential and proprietary research, business and financial information; and complying with financial reporting, regulatory, legal and tax requirements. Furthermore, the Company sells certain of its natural personal care products, vitamins, minerals, supplements and other products directly to consumers online and through websites, mobile apps and connected devices, and the Company also engages in online activities, including promotions, rebates and customer loyalty and other programs, through which it may receive personal information. Through the use of any of these information and operational technology systems or processes, the Company or its vendors have in the past and could in the future again experience cyber-attacks, privacy breaches, data breaches or other incidents that may result in unauthorized access, disclosure and misuse of consumer, customer, employee, vendor or Company information, especially as the Company continues operating under a hybrid working model under which employees can work and access the Company’s technology infrastructure remotely.
The Company is in the process of upgrading its enterprise resource planning system but also uses various hardware, software and operating systems that may need to be upgraded or replaced in the near future as such systems cease to be supported by third-party service providers, and may be vulnerable to increased risks, including the risk of security breaches, system failures and disruptions. Any such upgrade could take time, oversight and be costly to the Company. If such systems are not successfully upgraded or replaced in a timely manner, system outages, disruptions or delays, or other issues may arise. If a new system does not function properly, or is not adequately supported by third-party service providers and processes, it could adversely affect the Company’s business and operations, which, in turn, adversely impact the Company’s results of operations and cash flows.
Despite the security measures the Company has in place, the information and operational technology systems, including those of our customers, vendors, suppliers and other third-party service providers with whom we have contracted, have, in the past, and may, in the future, be vulnerable to cyber-threats such as computer viruses or other malicious codes, security breaches, unauthorized access, phishing attacks and other disruptions from employee error, unauthorized uses, system failures, including Internet outages, unintentional or malicious actions of employees or contractors or cyber-attacks by hackers, criminal groups, nation-states and nation-state-sponsored organizations and social-activist organizations. The Company’s information and operational technology systems and its third-party providers’ systems, have been, and will likely continue to be, subject to cyber-threats such as computer viruses or other malicious codes, ransomware, unauthorized access attempts, business email compromise, cyber extortion, denial of service attacks, phishing, social engineering, hacking and other cyberattacks attempting to exploit vulnerabilities. The Company has seen and may continue to see an increase in the number of such attacks as the Company has shifted to a hybrid working model under which employees will continue working remotely and accessing its technology infrastructure remotely. In addition, while we have purchased cybersecurity insurance, costs related to a cyberattack may exceed the amount of insurance coverage or be excluded under the terms of our cybersecurity insurance policy. As cyberattacks increase in frequency and magnitude, we may be unable to obtain cybersecurity insurance in amounts and on terms we view as appropriate for our operations.
To date, the Company is not aware that its business or operations have been materially impacted by these cyberattacks. However, the Company’s security efforts and the efforts of its third-party providers may not prevent or timely detect attacks and resulting breaches or breakdowns of the Company’s, or its third-party service providers’, databases or systems. In addition, if the Company or its third-party providers are unable to effectively resolve such breaches or breakdowns on a timely basis, the Company may experience interruptions in its ability to manage or conduct business, as well as reputational harm, governmental
14
fines, penalties, regulatory proceedings, and litigation and remediation expenses. In addition, such incidents could result in unauthorized disclosure and misuse of material confidential information, including personal information. Cyber threats are becoming more sophisticated, are constantly evolving and are being made by groups and individuals with a wide range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them. We have incurred, and will continue to incur, expenses to comply with privacy and data protection standards and protocols imposed by law, regulation, industry standards and contractual obligations. Increased regulation of data collection, use, and retention practices, including self-regulation and industry standards, changes in existing laws and regulations, including reporting requirements, enactment of new laws and regulations, increased enforcement activity, and changes in interpretation of laws, could increase our cost of compliance and operation, limit our ability to grow our business or otherwise harm our business.
In addition, data breaches or theft of personal information collected by the Company and its third-party service providers as well as data breaches or theft of Company information and assets have occurred in the past and may occur in the future. The Company is subject to the laws and regulations of various countries where it operates or does business related to solicitation, collection, processing, transferring, storing or use of consumer, customer, vendor or employee information or related data. These laws and regulations change frequently, and new legislation continues to be introduced and may be interpreted and applied differently from jurisdiction to jurisdiction and may create inconsistent or conflicting requirements. The changes introduced by data privacy and protection regulations increase the complexity of regulations enacted to protect business and personal data and they subject the Company to additional costs and have required, and may in the future require, costly changes to the Company’s security systems, policies, procedures and practices. These laws and regulations also may result in the Company incurring additional expenses and liabilities in the event of unauthorized access to or disclosure of personal data.
A breach or other breakdown in the Company’s technology, including a cyber-attack, privacy breach, data breach or other incident involving the Company or any of the Company's third-party service providers or vendors, that results in unauthorized disclosure or significant unavailability of business, financial, personal or stakeholder information could adversely affect the Company’s financial condition and results of operations. In addition, if the Company’s service providers, suppliers or customers experience a breach or unauthorized disclosure or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in the Company’s supply chain or reduced customer orders or other business operations disruption, which would adversely affect the Company.
These risks also may be present to the extent any of our partners, distributors, joint venture partners or suppliers using separate information or operational technology systems, not integrated with the systems of the Company, suffers a cybersecurity incident and could result in increased costs related to our involvement in investigations or notifications conducted by these third parties. These risks may also be present to the extent a business we have acquired, that does not use our information or operational technology systems, experiences a system shutdown, service disruption, or cybersecurity incident. In addition, there is a possibility that the continuing conflict in Ukraine could result in cyberattacks that could either directly or indirectly affect our operations.
In addition, we are in the process of a multi-year phased upgrade to our digital capabilities, including replacing our enterprise resource planning system to enhance operating efficiencies and transitioning to a cloud-based platform, as well as the implementation of a suite of other digital technologies. The upgrade poses several challenges, including training of personnel, migration of data and the potential instability of the new system. If we do not allocate and effectively manage the resources necessary to build and sustain the upgraded technology infrastructure, or if we fail to achieve the expected benefits from this enhancement or it does not operate as designed, our business and operations could be adversely affected.
The Company is subject to risks related to its international operations and international trade.
In fiscal year 2023, 16% of the Company’s net sales were attributable to international markets. The Company faces and will continue to face substantial risks associated with its foreign operations, including, but not limited to:
• unfavorable and uncertain macroeconomic and geopolitical conditions (see "Unfavorable and uncertain general economic and geopolitical conditions beyond our control could negatively impact our financial results" in this section) and potential operational or supply chain disruptions as a result of these developments;
• environmental events, civil unrest, work stoppages, labor disputes, widespread health emergencies, pandemics or epidemics, terrorism, kidnapping, and drug‐related or other types of violence;
• foreign currency fluctuations, including devaluations, currency controls and inflation, which may adversely affect the Company’s ability to do business in certain markets and reduce the U.S. dollar value of revenues, profits or cash flows it generates in non-U.S. markets;
• continued high levels of inflation and potential economic and political instability in Argentina, which have required and are likely to continue to require, the Company to record gains and losses in net earnings to reflect the remeasurement of the
15
Company's non‐U.S. dollar monetary assets and liabilities of Argentina, which may result in significant losses and/or devaluation of assets and which may have an adverse effect on the Company's results of operations;
• difficulty in obtaining non-local currency (e.g., U.S. dollars) to pay for the raw materials needed to manufacture the Company’s products and contract-manufactured products;
• the imposition of tariffs, trade restrictions or sanctions, price, profit or other government controls, labor laws, immigration restrictions, travel restrictions, including as a result of COVID-19 or other pandemics or epidemics, import and export laws or other government actions generating a negative impact on the Company’s business, including changes in trade policies that may be implemented and the impact of geopolitical events generally;
• employment litigation related to employees, contractors and suppliers, particularly in Argentina;
• potential loss of distribution channels as a result of retailer consolidation;
• increased credit risk of customers, suppliers and distributors, and defaults on obligations of foreign governments;
• potential harm to third parties, the Company’s employees and/or surrounding communities, and related liabilities and damages to the Company’s reputation, from the use, storage and transportation of chlorine in certain international markets where chlorine is used in the production of bleach, whether such actions are undertaken by the Company or by the Company’s business partners;
• lack of well-established or reliable, and impartial legal systems in certain countries where the Company operates, including difficulties in enforcing intellectual property and contractual rights;
• challenges relating to enforcement of or compliance with local laws and regulations and with U.S. laws affecting operations outside of the U.S., including without limitation, the FCPA;
• continuing legal, political and economic uncertainty from the United Kingdom’s exit from the European Union, including the long-term impact of the bilateral trade and cooperation deal governing the relationship between the United Kingdom and the European Union and the potential for increasing divergence between the European Union and United Kingdom legal regimes; and
• the possibility of nationalization, expropriation of assets or other similar government actions.
All of the foregoing risks could have a significant adverse impact on the Company’s ability to commercialize its products on a competitive basis in international markets and may have a material adverse effect on its business, financial condition and results of operations. The Company’s small sales volume in some countries, relative to some multinational and local competitors, could exacerbate such risks.
For further information regarding Argentina, including its designation as a highly inflationary economy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements in Exhibit 99.1.
Legal and Regulatory Risks
Government regulations could impose material costs.
Generally, the manufacture, processing, formulation, packaging, labeling, storage, distribution, advertising and sale of the Company’s products and the conduct of its business operations must comply with extensive federal, state and foreign laws and regulations. For example, in the U.S., many of the Company’s products are regulated by the Environmental Protection Agency, the Food and Drug Administration (including applicable current good manufacturing practice regulations) and/or the Consumer Product Safety Commission, and the Company’s product claims and advertising are regulated by the Federal Trade Commission, among other regulatory agencies. Additionally, the Company’s and its suppliers’ manufacturing and distribution operations are also subject to regulation by the Occupational Safety and Health Administration. Most states have agencies that regulate in parallel to these federal agencies. The Company’s international operations are also subject to regulation in each of the foreign jurisdictions in which it manufactures or distributes its products. There is also an increased risk of fraud or corruption in certain foreign jurisdictions and related difficulties in maintaining effective internal controls. Additionally, the Company could be subject to future inquiries or investigations by governmental and other regulatory bodies. Any determination that the Company’s operations or activities are not in compliance with applicable law could expose the Company to future impairment charges or significant fines, penalties or other sanctions that may result in a reduction in net income or otherwise adversely impact the business and reputation of the Company.
16
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. Our multi-year phased upgrade to our digital capabilities will result in changes to our processes and procedures which, in turn, could result in changes to our internal controls over financial reporting, which may require significant effort and judgment. Any failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to report its results of operations accurately and on a timely basis, or to detect and prevent fraud and could expose it to regulatory enforcement action and stockholder claims, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may also impact the Company’s effective tax rate and the Company’s results of operations, and changes in tax laws, including additional guidance issued by the U.S. Treasury Department or the U.S. Internal Revenue Service, could create uncertainty, impact our recorded liability in future periods and have a material impact on the Company’s results of operations.
In particular, because of the Company’s extensive international operations, we could be adversely affected by violations, or allegations of violations, of the FCPA and similar international anti-bribery laws. These anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials or other third parties for the purpose of obtaining or retaining business. We cannot provide assurance that our internal controls policies and procedures that mandate compliance with these laws will protect us from reckless, intentional or unintentional criminal acts committed by our employees, joint-venture partners or agents. Alleged or actual violations of these laws could disrupt our business and adversely affect our reputation and our business, financial condition and results of operations.
Federal, state and foreign governments may introduce new or expand existing legislation and regulations, or courts or governmental authorities could impose more stringent interpretations of existing legislation and regulations, affecting the Company’s operations, which may require the Company to increase its resources, capabilities and expertise in certain areas. For example, the Company is subject to regulations regarding the transportation, storage or use of certain chemicals to protect the environment, including as a result of evolving climate change standards, and is and may become subject to increased costs or mandatory funding or financial support requirements for recycling and waste management programs under extended producer responsibility regulation or laws, through plastic or packaging taxes, or restrictions on certain products and materials or on the use of certain types of packaging. Such regulations could negatively impact the Company’s ability to obtain raw materials or could increase its acquisition and compliance costs or cause the Company to contribute funds to recycling and other waste management infrastructure, thus making our products more costly, less competitive than other competitive products or reduce consumer demand. Furthermore, additional or amended legislation in the areas of ESG disclosure, including the SEC’s proposal on climate change disclosure, healthcare reform, sustainability of packaging, including plastic packaging, executive compensation and corporate governance, could also increase the Company’s costs. The Company is also required to comply with increasingly complex and changing laws and regulations enacted to protect business and personal data in the U.S. and other jurisdictions, which have and could continue to subject the Company to additional compliance costs.
If the Company is found to be noncompliant with applicable laws and regulations in these or other areas, it could be subject to governmental or regulatory actions, including fines, import detentions, injunctions, product withdrawals or recalls or asset seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on its business. Loss of or failure to obtain necessary permits and registrations, particularly with respect to its charcoal business, could delay or prevent the Company from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect its financial condition and results of operations. In addition, the Company markets and sells products that are subject to regulations relating to dietary supplements. In order to comply with any changes in these laws and regulations, including any changes that result from newly published clinical studies and emerging studies that may assert or prove that ingredients in our products or our products themselves are ineffective or harmful to consumers, the Company may be required to make changes to product formulation, labeling or marketing claims, perform additional testing to substantiate its product claims, make costly changes in its manufacturing processes or supply chain or stop selling certain products until corrective actions have been taken. Any of these developments could increase the Company’s costs significantly, which could have a material adverse effect on the Company’s financial condition and results of operations.
ESG issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and could damage our reputation.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Increased focus and activism related to ESG may hinder the Company’s access to capital, as investors may reconsider their capital investment as a result of their assessment of the Company’s ESG practices. In particular, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, responsible sourcing and other sustainability concerns. Changing consumer preferences may also result in increased demands regarding plastics and packaging materials, including single-use and non-recyclable plastic packaging, and other components of our products and their environmental impact on sustainability; a growing demand for natural or organic products and ingredients; or
17
increased consumer concerns or perceptions (whether accurate or inaccurate) regarding the effects of ingredients or substances present in certain consumer products. These demands could impact the profitability of some of our products, cause us to incur additional costs, to make changes to our operations, or to make additional commitments, set targets or establish additional goals and take actions to meet them, which could expose us to market, operational and execution costs or risks. In addition, governmental and non-governmental organizations, investors, customers, consumers, our employees and other stakeholders have placed increasing importance on ESG matters, and depending on their assessment of our ESG practices, certain investors may reconsider their investment in the Company.
Concern over climate change or plastics and packaging materials, in particular, may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment. Increased regulatory requirements, including in relation to various aspects of ESG including the SEC’s disclosure proposal on climate change, or environmental causes may result in increased compliance or input costs of energy, raw materials or compliance with emissions standards, which may cause disruptions in the manufacture of our products or an increase in operating costs. We may undertake additional costs to control, assess and report on ESG metrics as the nature, scope and complexity of ESG reporting, diligence and disclosure requirements expand. Our ability to achieve any stated goal, target, or objective is subject to numerous factors and conditions, many of which are outside of our control. Any failure to achieve our ESG goals or a perception (whether or not valid) of our failure to act responsibly with respect to the environment or to effectively respond to new, or changes in, legal or regulatory requirements concerning environmental or other ESG matters, or increased operating or manufacturing costs due to increased regulation or environmental causes could adversely affect our business and reputation.
If the Company does not adapt to or comply with new regulations, or fails to meet the ESG goals under its IGNITE Strategy or evolving investor, industry or stakeholder expectations and standards, or if the Company is perceived to have not responded appropriately to the growing concern for or made sufficient progress on certain ESG issues, or is perceived to have made inaccurate ESG claims, these developments could result in negative publicity and increased litigation or regulatory risk. Customers and consumers may also choose to stop purchasing our products or purchase products from another company or a competitor. As a result, the Company’s reputation, business or financial condition may be adversely affected.
Product liability and labeling claims, commercial claims or other legal proceedings could adversely affect the Company’s financial condition and results of operations.
The Company has in the past paid, and may be required in the future to pay, for losses or injuries purportedly caused by its products. Such claims may be based on allegations that, among other things, the Company’s products contain contaminants or provide inadequate instructions or warnings regarding their use, have defective packaging, fail to perform as advertised, or damage property or persons. Product liability, advertising and labeling claims could result in negative publicity that could harm the Company’s reputation, sales and results of operations and the reputation of the Company’s brands. In addition, if any of the Company’s products is found to be defective, the Company may recall such products, which could result in adverse publicity, additional litigation, fines, penalties or other losses. Although the Company maintains product liability insurance coverage, potential product liability claims may be subject to a deductible, exceed the amount of insurance coverage or be excluded under the terms of the policies.
In addition, the Company is, and may in the future become, the subject of, or party to, various pending or threatened legal actions, government investigations and proceedings relating to, among other things, advertising disputes with competitors, consumer class actions, including those related to advertising claims, labor claims, breach of contract claims, antitrust litigation, securities litigation, premises liability claims, data privacy and security disputes, employment litigation related to employees, contractors and suppliers, including class action lawsuits, and litigation in foreign jurisdictions. The Company has been, and may in the future be, subject to additional claims, proceedings and actions as it expands the products within the dietary supplements category. In general, claims made by or against the Company in litigation, investigations, disputes or other proceedings have been and may in the future be expensive and time-consuming to bring or defend against and could result in settlements, injunctions or damages that could significantly affect its business, financial condition and results of operations and harm its reputation. While it is not possible to predict the final resolution of any current or future litigation, investigations, disputes or proceedings and any reserves taken in connection therewith may not be consistent with their final resolutions, the impact of these matters, including any reserves taken in connection with such matters, on the Company’s business, financial condition and results of operations could be material. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements in Exhibit 99.1 for additional information related to these matters.
Environmental matters create potential liabilities that could adversely affect the Company’s financial condition and results of operations.
The Company must comply with various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, water discharges, handling and disposal of solid and hazardous wastes, remediation of
18
contamination associated with the use and disposal of hazardous substances and climate change. The Company has incurred, and will continue to incur, significant expenditures and other costs in complying with environmental laws and regulations and in providing physical security for its worldwide operations, and such expenditures reduce the cash flow available to the Company for other purposes.
The Company is currently involved in or has potential liability with respect to the remediation of past contamination in the operation of some of its current and former facilities. In addition, some of its present and former facilities have or had been in operation for many years and, over that time, some of those facilities may have used substances or generated and disposed of wastes that are or may be considered hazardous. It is possible that those sites, as well as disposal sites owned by third parties to whom the Company has sent waste, may be identified and become the subject of remediation. In addition, the Company also handles and/or transports hazardous substances, including but not limited to chlorine, at some of its international production facilities. A release of such chemicals, whether in transit or at the Company’s facilities, due to accident or an intentional act, could result in substantial liability and business disruptions. The Company could also become subject to additional environmental liabilities in the future, whether as a result of new laws and regulations or otherwise, that could result in a material adverse effect on its financial condition and results of operations.
The Company had a recorded liability of $28 million as of both June 30, 2023 and 2022 for its share of aggregate future remediation costs related to certain environmental matters, including response actions at various locations. Two matters, relating to environmental costs associated with one of the Company’s former operations at a site located in Alameda County, California and another relating to operations in Dickinson County, Michigan account for a significant portion of the recorded liability. The Company’s estimated losses related to these matters are sensitive to a variety of uncertain factors, including the ability of third parties to pay their share of the response and remediation obligations, the efficacy of any remediation efforts, changes in any remediation requirements, and the future availability of alternative clean-up technologies, and the Company’s exposure may exceed the amount recorded for these matters. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements in Exhibit 99.1 for additional information related to these liabilities.
Failure to effectively utilize, successfully assert or successfully defend, the Company’s intellectual property rights could impact its competitiveness. If the Company is found to have infringed the intellectual property rights of others or cannot obtain necessary intellectual property rights, its competitiveness could be negatively impacted.
The Company relies on intellectual property rights based on trademark, trade secret, copyright, and patent laws to protect its brands, products, packaging for its products, inventions and confidential information. There is a risk that the Company will not be able to obtain and perfect its own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions and product innovations. The Company cannot be certain that these rights, if obtained, will not later be invalidated, circumvented or challenged, and the Company could incur significant costs in connection with legal actions to assert its intellectual property rights or to defend those rights from assertions of invalidity. In addition, even if such rights are obtained in the U.S., the laws of some of the other countries in which the Company’s products are or may be sold may not protect intellectual property rights to the same extent as the laws of the U.S. It is also possible that the Company’s brands may not be available for use in certain countries due to prior third party rights, thereby limiting expansion of the Company’s brands. The Company also licenses certain of its brands to third parties and has increased its focus on licensing its intellectual property in connection with the co-development of products or devices, or promotion and sales relationships with companies in industries operating in public spaces. If other parties infringe the Company’s intellectual property rights, they may dilute or diminish the value of the Company’s brands and products in the marketplace, which could diminish the value that consumers associate with the Company’s brands and harm its net sales. The failure to perfect and protect its intellectual property rights could make the Company less competitive and could have a material adverse effect on its business, financial condition and results of operations.
In addition, if the Company is found to have violated the trademark, trade secret, copyright, patent or other intellectual property rights of others, directly or indirectly, through the use of third-party marks, ideas or technologies, such a finding could result in the need to cease use of such trademark, trade secret, copyrighted work or patented invention in the Company’s business as well as the obligation to pay for past infringement. If holders are willing to permit the Company to continue to use such intellectual property rights, they could require a payment of a substantial amount for continued use of those rights. Either ceasing use or paying such amounts could cause the Company to become less competitive and could have a material adverse effect on the Company’s business, financial condition and results of operations. Even if the Company is not found to infringe a third party’s intellectual property rights, the Company could incur material legal costs and related expenses to defend against such claims of infringement and the Company could incur significant costs associated with suspending its use of the challenged intellectual property rights even if it is ultimately found not to have infringed such rights.
19
The Company’s business could be negatively impacted as a result of stockholder activism or an unsolicited takeover proposal or a proxy contest.
In recent years, proxy contests and other forms of stockholder activism have been directed against numerous public companies. During fiscal years 2012 and 2011, the Company was the target of an unsolicited takeover proposal from a stockholder activist, which resulted in significant costs to the Company. If such a proposal were to be made again, the Company would likely incur significant costs, which could have an adverse effect on the Company’s financial condition and results of operations.
Stockholder activists may also seek to involve themselves in the governance, strategic direction and operations of the Company through stockholder proposals or otherwise. Such proposals may disrupt the Company’s business and divert the attention of the Company’s management and employees, and any perceived uncertainties as to the Company’s future direction resulting from such a situation could result in the loss of potential business opportunities, the perception that the Company needs a change in the direction of its business, or the perception that the Company is unstable or lacks continuity, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult for the Company to attract and retain qualified personnel and business partners, which could adversely affect the Company’s business. In addition, actions of activist stockholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our amended and restated bylaws designate specific courts as the exclusive forum for certain stockholder litigation, which could limit our stockholders’ ability to obtain a judicial forum of their choice for disputes with us.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the state courts of Delaware (or if no state court has jurisdiction, the federal district court of the District of Delaware) will, to the fullest extent permitted by law, be the sole and exclusive forum for certain types of actions or proceedings under Delaware statutory or common law. The choice of forum provision in our bylaws does not waive our compliance with our obligations under the federal securities laws and the rules and regulations thereunder. Moreover, the provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or by the Securities Act.
Our exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum of such stockholders’ choice for disputes with us or our directors, officers or employees, which may discourage such lawsuits, even though an action, if successful, might benefit our stockholders. If a court were to find our exclusive forum provision either to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, all of which may increase our costs of litigation. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated bylaws described in the preceding sentences.
Financial and Economic Risks
Profitability and cash flow could suffer if the Company is unable to generate anticipated cost savings, successfully implement its transformational initiatives or strategies, or efficiently manage supply chain and manufacturing processes.
The Company continues to make progress to improve its competitive position, generate efficiencies and transform the Company's operations through implementing certain transformational initiatives (including its previously announced digital capabilities upgrade and productivity enhancements and its streamlined operating model), optimizing its supply chain and generating savings through its long-standing cost savings program intended to reduce material costs and manufacturing inefficiencies and realize productivity gains, distribution and logistical efficiencies and overhead reductions. If the Company cannot successfully implement its transformational initiatives, streamlined operating model, or cost savings plans or optimize its supply chain, the Company may not realize all anticipated operational and efficiency benefits and cost savings, which could adversely affect its business and long-term strategies. The Company also continues to seek to penetrate new markets and introduce new products and product innovations. These goals and strategies may not be implemented or may fail to achieve the desired results. The Company may also not be able to successfully implement any future price increases, which may negatively affect our profitability and cash flow, and any such price increases may also negatively affect sales volumes. In addition, the Company expects to continue to restructure its operations as necessary to improve operational efficiency, including occasionally opening or closing offices, facilities or plants. Gaining additional efficiencies may become increasingly difficult over time, there may be one-time and other costs and negative impacts on sales growth relating to facility or plant closures or other restructurings and anticipated cost savings and the Company’s strategies may not be implemented or may fail to achieve desired results. If the Company is unable to generate anticipated cost savings, successfully implement its strategies, implement new pricing, efficiently manage its supply chain and manufacturing processes, if we are ineffective or slow in developing and implementing our transformational initiatives, or if we are unable to achieve the anticipated benefits or cost savings from our digital capabilities and productivity enhancements or implementation of the streamlined operating model, the Company’s results of operations could suffer. These plans and strategies could also have a negative impact on the Company’s relationships
20
with employees or customers, which could also adversely affect the Company’s business, financial condition and results of operations.
The estimates and assumptions on which the Company’s financial projections are based may prove to be inaccurate, which may cause its actual results to materially differ from such projections, which may adversely affect the Company’s future profitability, cash flows and stock price.
The Company’s financial projections, including any sales or earnings guidance or outlook it may provide from time to time, are dependent on certain estimates and assumptions related to, among other things, category growth, development and launch of innovative new products, market share projections, product pricing and sale, volume and product mix, foreign exchange rates and volatility, tax rates, commodity prices, distribution, cost savings, accruals for estimated liabilities, including litigation reserves, measurement of benefit obligations for pension and other postretirement benefit plans, and the Company’s ability to generate sufficient cash flow to reinvest in its existing business, fund internal growth, repurchase its stock, make acquisitions, pay dividends and meet debt obligations. The Company’s financial projections are based on historical experience, various other estimates and assumptions that the Company believes to be reasonable under the circumstances and at the time they are made, and the Company’s actual results may differ materially from its financial projections. Any material variation between the Company’s financial projections and its actual results may adversely affect the Company’s future profitability, cash flows and stock price.
Increases in the estimated fair value of The Procter & Gamble Co. (“P&G’s”) interest in the Company’s Glad business increase the value of the Company’s obligation to purchase P&G’s interest in the Glad business upon the termination of the venture agreement and may, in the future, adversely affect the Company’s net earnings and cash flow.
In January 2003, the Company entered into a venture agreement with P&G related to the Company’s Glad bags and wraps business. In connection with this agreement, P&G provides research and development support to the Glad business. The agreement with P&G expires in January 2026 unless the parties agree to extend the term. The agreement requires the Company to purchase P&G’s 20% interest at the expiration of its term for cash at fair value as established by predetermined valuation procedures. As of June 30, 2023, 2022 and 2021, the estimated fair value of P&G’s interest was $527 million, $635 million and $613 million, respectively, of which $495 million, $468 million and $432 million, respectively, has been recognized by the Company and is reflected in Other liabilities in the Company’s Consolidated Balance Sheets. The difference between the estimated fair value and the amount recognized, and any future changes in the fair value of P&G’s interest, is charged to Cost of products sold in accordance with the effective interest method over the remaining life of the agreement. As the agreement nears its expiration, there may be increased volatility in the Company’s net earnings and cash flow, as the estimated fair value of P&G’s interest may continue to change up until any such purchase by the Company of P&G’s interest. The final cost of the Company’s repurchase obligation may also differ from the estimated fair value. The key assumptions and estimates used to arrive at the estimated fair value include, but are not limited to, tax rates, the rate at which future cash flows are discounted (discount rate), commodity prices, future volume estimates, net sales and expense growth rates, changes in working capital, capital expenditures, foreign exchange rates, inflation and terminal growth rates. Any changes in such assumptions or estimates could significantly affect such estimated fair value and, accordingly, the value of the Company’s repurchase obligation and may adversely affect the Company’s net earnings up until any such purchase and cash flow at the time of any such purchase. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes to Consolidated Financial Statements in Exhibit 99.1.
The Company’s indebtedness could have a material adverse effect on its business, financial condition and results of operations and prevent the Company from fulfilling its financial obligations, and the Company may not be able to maintain its current credit ratings, continue to pay dividends or repurchase its stock or remain in compliance with existing debt covenants.
As of June 30, 2023, the Company had approximately $2.5 billion of debt. The Company’s indebtedness could have important consequences. For example, it could:
• require the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, which would reduce the availability of its cash flow to fund working capital requirements, capital expenditures, future acquisitions, dividends, repurchase the Company’s common stock and for other general corporate purposes;
• limit the Company’s flexibility in planning for or reacting to general adverse economic conditions or changes in its business and the industries in which it operates;
• place the Company at a competitive disadvantage compared to its competitors that have less debt; and
• limit, along with the financial and other restrictive covenants in the Company’s debt documents, its ability to borrow additional funds.
21
The Company may also incur substantial additional indebtedness in the future to fund acquisitions, repurchase stock or fund other activities for general business purposes.
Further, certain terms of the agreements governing the Company’s over-the-counter derivative instruments contain provisions that require the Company’s credit ratings, assigned by Standard & Poor’s and Moody’s to the Company, to remain at investment-grade or above. As of June 30, 2023, the Company’s Standard & Poor’s and Moody’s ratings were both investment-grade. However, if these credit ratings were to fall below investment-grade, the counterparties to the derivative instruments in net liability positions could request full collateralization, and it may negatively impact the Company’s other financial arrangements, including the supply chain financing arrangement offered by a financial institution to our suppliers, which could, in turn, impact our working capital.
The Company has historically declared and paid quarterly cash dividends on its common stock and has been authorized to repurchase its stock subject to certain limitations under its stock repurchase programs. Any determinations by the board of directors to continue to declare and pay cash dividends on the Company’s common stock or to repurchase the Company’s common stock, however, will be based on a number of factors, including the board of directors’ continuing determination that the repurchase programs and the declaration and payment of dividends are in the best interests of the Company’s stockholders. In the event the Company does not declare and pay a quarterly dividend or discontinues its stock repurchases, the Company’s stock price could be adversely affected.
ITEM 1.B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company owns or leases various manufacturing, distribution, office and research and development facilities, including a leased facility in Pleasanton, CA, which houses the Company’s primary research and development group, as well as other administrative and operational support personnel, and a leased office space in Oakland, CA for its corporate headquarters. Management believes the Company’s facilities are adequate to support the business efficiently.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business in the United States and in international locations, including various lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, commercial, administrative, employment, antitrust, securities, consumer class actions and other matters. Although the results of claims and litigation cannot be predicted with certainty, based on management’s analysis, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for or disclosed in the Company’s consolidated financial statements in Exhibit 99.1, will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial statements taken as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The names, ages, year first elected and current titles of each of the executive officers of the Company as of August 10, 2023, are set forth below:
| Name | Age | Year First Elected Executive Officer | Title | ||||||||
| Linda Rendle | 45 | 2016 | Chief Executive Officer | ||||||||
| Stacey Grier | 60 | 2019 | Executive Vice President – Chief Growth and Strategy Officer | ||||||||
| Angela Hilt | 51 | 2020 | Executive Vice President – Chief Legal Officer | ||||||||
| Kevin B. Jacobsen | 57 | 2018 | Executive Vice President – Chief Financial Officer | ||||||||
| Kirsten Marriner | 50 | 2016 | Executive Vice President – Chief People and Corporate Affairs Officer | ||||||||
| Eric Reynolds | 53 | 2015 | Executive Vice President – Chief Operating Officer | ||||||||
| Chau Banks | 54 | 2020 | Senior Vice President – Chief Information and Data Officer | ||||||||
| Shanique Bonelli-Moore | 43 | 2022 | Vice President – Chief Diversity and Social Impact Officer | ||||||||
Rebecca Dunphey 1 | 45 | 2022 | Group President – Care and Connection | ||||||||
| Matt Gregory | 50 | 2021 | Senior Vice President – Chief Customer Officer | ||||||||
| Chris Hyder | 48 | 2021 | Group President – Health and Hygiene | ||||||||
| Rick McDonald | 63 | 2020 | Senior Vice President – Chief Supply Chain Officer | ||||||||
| Michael Ott | 54 | 2022 | Senior Vice President – Chief Research and Development Officer | ||||||||
| Eric Schwartz | 51 | 2022 | Senior Vice President – Chief Marketing Officer | ||||||||
1 Ms. Dunphey will be resigning from the Company on August 11, 2023. | |||||||||||
There is no family relationship between any of the above-named persons, or between any of such persons and any of the directors of the Company. See Item 10 of Part III of this Report for additional information.
Linda Rendle is the chief executive officer of the Company, a position she has held since September 2020. Prior to this role, she served as the president of the Company from May 2020 to September 2020. She served as executive vice president – cleaning, international, strategy and operations from July 2019 to May 2020. From January 2019 to July 2019, she served as executive vice president – strategy and operations. From June 2018 to January 2019, she served as executive vice president – cleaning and strategy. She served as senior vice president – general manager, cleaning division of the Company, from August 2016 to June 2018, having taken on responsibility for the professional products division in April 2017. She served as vice president – general manager, home care from October 2014 to August 2016. From April 2012 to October 2014, she served as vice president – sales, cleaning division. From August 2011 to April 2012, she served as director of sales planning – litter, food & charcoal. From January 2010 to August 2011, she served as director of sales – supply chain. Ms. Rendle joined the Company in 2003.
Stacey Grier is the executive vice president – chief growth and strategy officer of the Company, a position she has held since March 2022. From January 2019 to March 2022, she served as senior vice president – chief marketing officer, having taken on additional responsibility for enterprise strategy since September 2020. Prior to this role, she served as vice president - brand engagement and enhanced wellness marketing from October 2018 to January 2019. She served as vice president - brand and marketing strategy from October 2016 through October 2018. Prior to joining the Company, she served as chief strategic officer at DDB Worldwide from April 1996 to June 2016. Ms. Grier joined the Company in 2016.
Angela Hilt is the executive vice president – chief legal officer of the Company, a position she has held since October 2022. She was appointed to senior vice president - chief legal officer in December 2020. Prior to this role, she served as vice president – corporate secretary and deputy general counsel from September 2018 to December 2020, and vice president – corporate secretary and associate general counsel from October 2008 to September 2018. She served as senior corporate counsel from December 2005 to October 2008. Ms. Hilt joined the Company in 2005.
Kevin B. Jacobsen is the executive vice president – chief financial officer of the Company, a position he has held since January 2019. Prior to this role, he served as senior vice president – chief financial officer from April 2018 to January 2019. He served as vice president – financial planning and analysis, from November 2011 through March 2018. Mr. Jacobsen joined the Company in 1995 and has held a number of senior leadership roles in the Company’s finance department over the years, including serving as the finance leader for the specialty division, head of finance for Brazil operations, the product supply organization and various business units.
23
Kirsten Marriner is the executive vice president – chief people and corporate affairs officer of the Company, a position she has held since December 2020. She was appointed to executive vice president - chief people officer in January 2019. Prior to this role she served as senior vice president – chief people officer from March 2016 to January 2019. Prior to joining the Company, she served as senior vice president and chief human resources officer at Omnicare, from March 2013 to August 2015. She served in various leadership roles, including as senior vice president, director of talent management and development at Fifth Third Bank, from October 2004 to March 2013. Ms. Marriner joined the Company in 2016.
Eric Reynolds is the executive vice president - chief operating officer of the Company, a position he has held since September 2020. Prior to this role, he served as executive vice president - household and lifestyle of the Company from July 2019 to September 2020. He served as executive vice president – cleaning and Burt’s Bees from January 2019 to July 2019. From January 2015 to January 2019, he served as senior vice president – chief marketing officer. He served as vice president – general manager, Europe, Middle East, Africa and Asia from May 2012 to January 2015. From May 2011 to April 2012, he was director, international business development. From June 2008 to April 2011, he was general manager, Caribbean. Mr. Reynolds joined the Company in 1998.
Chau Banks is the senior vice president – chief information and data officer of the Company, a position she has held since June 2020, having taken on responsibility for enterprise analytics since September 2020. Prior to this role, she served as chief technology and digital officer at Revlon Consumer Products Company from January 2018 to June 2020. From September 2013 to November 2017, she was EVP, CIO and channel integration at New York & Company, Inc. (now RetailWinds Inc.). She has held leadership positions at leading global retailers including COACH, Abercrombie & Fitch and LBrands. She previously served as a management consultant at Capgemini and Ernst & Young. She also previously held positions at Energizer and Kimberly-Clark. Ms. Banks joined the Company in 2020.
Shanique Bonelli-Moore is the vice president – chief diversity and social impact officer of the Company, a position she has held since July 2022. Prior to joining Clorox, she was executive director of inclusion at United Talent Agency from January 2019 to June 2022, and director of corporate communications from April 2018 to December 2018. From November 2016 to April 2018, she was senior director of global internal communications and diversity & inclusion lead at BuzzFeed Entertainment. Earlier in her career, she held positions at leading companies including Anheuser-Busch InBev, NBCUniversal and GE where she focused on corporate communication, diversity, inclusion and belonging.
Rebecca Dunphey is the group president – care and connection of the Company, a position she has held since October 2022. She was appointed to senior vice president – general manager, specialty in March 2022. Prior to joining Clorox, she was president – personal care for Kimberly-Clark North America from October 2020 to March 2022. Previously, she served as Kimberly-Clark’s president – baby & child care from April 2018 to October 2020 and president – adult and feminine care from September 2016 to March 2018. Ms. Dunphey has extensive general management and brand marketing experience across multiple businesses in the consumer packaged goods industry. Ms. Dunphey will be resigning from the Company on August 11, 2023.
Matt Gregory is the senior vice president – chief customer officer of the Company, a position he has held since September 2021. Previously, he was senior vice president, health & beauty from September 2021 to October 2022 (a role he held concurrently with his role as chief customer officer), vice president – general manager, health & beauty from October 2020 to September 2021, and vice president – general manager, Burt’s Bees from December 2017 to September 2020. From February 2015 through December 2017, he was vice president – general manager, charcoal. Mr. Gregory joined Clorox in 2004.
Chris Hyder is the group president – health and hygiene of the Company, a position he has held since October 2022. He was appointed to senior vice president - general manager, cleaning and professional products in September 2021. Previously, he was vice president – general manager, cleaning division since July 2019 and vice president – general manager, homecare from September 2018 to July 2019. From January 2016 through September 2018, he was vice president of marketing – cleaning and general manager – laundry. Mr. Hyder joined the Company in 2003 and subsequently held positions of increasing responsibility.
Rick McDonald is the senior vice president – chief supply chain officer of the Company, a position he has held since December 2020. Prior to this role, he served as vice president – global operations from December 2017 to December 2020. He served as vice president – integration, international division from May 2013 to November 2017. Mr. McDonald has held other leadership roles in the Company’s product supply organization, including vice president – global logistics, and vice president – integrator, cleaning division. Mr. McDonald joined the Company in 1992.
Michael Ott is the senior vice president – chief research & development officer of the Company, a position he has held since June 2022. Previously, he served as interim sustainability officer, a position he held from November 2021 to February 2023, while also serving as vice president, research & development – specialty division, from August 2018 through May 2022. Previously, he was vice president, research & development – cleaning, international, and professional products divisions, from
24
October 2014 to August 2018. Dr. Ott joined the Company in 1996 as a scientist and has since held positions of increasing responsibility in research & development.
Eric Schwartz is the senior vice president and chief marketing officer of the Company, a position he has held since March 2022. Previously, he was senior vice president and general manager – specialty, from July 2019 to March 2022. Prior to joining Clorox, he was chief marketing officer and general manager at Tyson Foods, poultry segment, from January 2017 to February 2019. Earlier in his career, he held positions of increasing responsibility at Tyson Foods and Henkel. Mr. Schwartz rejoined the Company in 2019 after serving as brand manager at the Company from 2000 to 2004.
25
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is listed on the New York Stock Exchange. The ticker symbol is CLX.
Holders
The number of record holders of the Company’s common stock as of July 25, 2023, was 8,914 based on information provided by the Company’s transfer agent.
Equity Compensation Plan Information
See Part III, Item 12 hereof, which is incorporated herein by reference.
Issuer Purchases of Equity Securities
In May 2018, the Board of Directors authorized the Company to repurchase up to $2,000 million in shares of common stock on the open market (Open-Market Program), which has no expiration date.
In August 1999, the Board of Directors authorized a stock repurchase program to reduce or eliminate dilution upon the issuance of common stock pursuant to the Company’s stock compensation plans (the Evergreen Program). In November 2005, the Board of Directors authorized the extension of the Evergreen Program to reduce or eliminate dilution in connection with issuances of common stock pursuant to the Company’s 2005 Stock Incentive Plan. The Evergreen Program has no expiration date and has no specified limit as to dollar amount and therefore is not included in column [d] below.
The following table sets forth the purchases of the Company’s securities by the Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) (17 CFR 240.10b-18(a)(3)) during the fourth quarter of fiscal year 2023.
| [a] | [b] | [c] | [d] | ||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| April 1 to 30, 2023 | — | $ | — | — | $993 million | ||||||||||||||||||
| May 1 to 31, 2023 | — | — | — | $993 million | |||||||||||||||||||
| June 1 to 30, 2023 | — | — | — | $993 million | |||||||||||||||||||
| — | $ | — | — | ||||||||||||||||||||
(1)Average price paid per share in the period includes commission.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information appears under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Exhibit 99.1, which is incorporated herein by reference.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information appears under “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Exhibit 99.1, which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
These statements and data appear in Exhibit 99.1, which is incorporated herein by reference.
26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9.A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and executive vice president – chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the chief executive officer and executive vice president – chief financial officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Report, were effective such that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting is set forth in Exhibit 99.1, and is incorporated herein by reference. The Company’s independent registered public accounting firm, Ernst & Young, LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of June 30, 2023. See “Report of Independent Registered Public Accounting Firm,” which appears in Exhibit 99.1.
Change in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fourth fiscal quarter of the fiscal year ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9.B. OTHER INFORMATION
Rule 10b5-1 trading plans
Each trading plan
ITEM 9.C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See “Information about our Executive Officers” in Part I of this Report.
The Company has adopted a Code of Conduct that applies to its principal executive officer, principal financial officer and principal accounting officer, among others. The Code of Conduct is located on the Company’s website at TheCloroxCompany.com under Company/Leadership and Governance/Codes of Conduct or https://www.thecloroxcompany.com/company/policies-and-practices/codes-of-conduct/. The Company intends to satisfy the requirement under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of its Code of Conduct by posting such information on the Company’s website. The Company’s website also contains its corporate governance guidelines and the charters of its principal board committees.
Information regarding the Company’s directors and corporate governance set forth in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive and director compensation, Management Development and Compensation Committee interlocks and insider participation and the report of the Management Development and Compensation Committee of the Company’s board of directors set forth in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners, management and directors and securities authorized for issuance under equity compensation plans set forth in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence set forth in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services set forth in the Proxy Statement is incorporated herein by reference.
28
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Financial Statements and Schedules:
Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm included in Exhibit 99.1, incorporated herein by reference.
Reports of Ernst & Young, LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42 ).
Consolidated Statements of Earnings for the fiscal years ended June 30, 2023, 2022 and 2021.
Consolidated Statements of Comprehensive Income for the fiscal years ended June 30, 2023, 2022 and 2021.
Consolidated Balance Sheets as of June 30, 2023 and 2022.
Consolidated Statements of Stockholders’ Equity for the fiscal years ended June 30, 2023, 2022 and 2021.
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2023, 2022 and 2021.
Notes to Consolidated Financial Statements.
(b)Exhibits:
INDEX TO EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 3.1 | 10-K | 001-07151 | 3.1 | August 14, 2018 | ||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-07151 | 3.2 | May 26, 2023 | ||||||||||||||||||||||||||||
| 3.3 | 8-K | 001-07151 | 3.1 | July 19, 2011 | ||||||||||||||||||||||||||||
| 4.1 | S-3ASR | 333-200722 | 4.1 | December 4, 2014 | ||||||||||||||||||||||||||||
| 4.2 | S-3ASR | 333-200722 | 4.5 | December 4, 2014 | ||||||||||||||||||||||||||||
| 4.3 | 8-K | 001-07151 | 4.1 | December 9, 2014 | ||||||||||||||||||||||||||||
| 4.4 | 8-K | 001-07151 | 4.1 | September 28, 2017 | ||||||||||||||||||||||||||||
| 4.5 | 8-K | 001-07151 | 4.1 | May 9, 2018 | ||||||||||||||||||||||||||||
| 4.6 | 8-K | 001-07151 | 4.1 | May 8, 2020 | ||||||||||||||||||||||||||||
| 4.7 | 8-K | 001-07151 | 4.1 | May 11, 2022 | ||||||||||||||||||||||||||||
| 4.8 | 10-K | 001-07151 | 4.10 | August 14, 2019 | ||||||||||||||||||||||||||||
| 10.1* | 10-Q | 001-07151 | 10.55 | May 2, 2008 | ||||||||||||||||||||||||||||
| 10.2* | 10-K | 001-07151 | 10(x) | August 27, 2004 | ||||||||||||||||||||||||||||
29
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.3* | 10-K | 001-07151 | 10.3 | August 16, 2016 | ||||||||||||||||||||||||||||
| 10.4* | 10-Q | 001-07151 | 10.1 | May 2, 2023 | ||||||||||||||||||||||||||||
| 10.5* | DEF 14A | 001-07151 | App. A | October 6, 2021 | ||||||||||||||||||||||||||||
| 10.6* | 10-Q | 001-07151 | 10.2 | November 1, 2022 | ||||||||||||||||||||||||||||
| 10.7* | 10-Q | 001-07151 | 10.4 | November 1, 2021 | ||||||||||||||||||||||||||||
| 10.8* | 10-Q | 001-07151 | 10.4 | November 2, 2020 | ||||||||||||||||||||||||||||
| 10.9* | 10-Q | 001-07151 | 10.1 | November 1, 2022 | ||||||||||||||||||||||||||||
| 10.10* | 10-Q | 001-07151 | 10.3 | November 1, 2021 | ||||||||||||||||||||||||||||
| 10.11* | 10-Q | 001-07151 | 10.5 | November 2, 2020 | ||||||||||||||||||||||||||||
| 10.12* | 10-Q | 001-07151 | 10.3 | November 1, 2022 | ||||||||||||||||||||||||||||
| 10.13* | 10-Q | 001-07151 | 10.5 | November 1, 2021 | ||||||||||||||||||||||||||||
| 10.14* | 10-Q | 001-07151 | 10.2 | November 2, 2020 | ||||||||||||||||||||||||||||
| 10.15* | 10-Q | 001-07151 | 10.4 | November 1, 2022 | ||||||||||||||||||||||||||||
| 10.16* | 10-K | 001-07151 | 10.18 | August 19, 2008 | ||||||||||||||||||||||||||||
| 10.17* | 10-K | 001-07151 | 10.18 | August 26, 2011 | ||||||||||||||||||||||||||||
| 10.18* | 10-K | 001-07151 | 10.13 | August 16, 2016 | ||||||||||||||||||||||||||||
| 10.19* | 10-Q | 001-07151 | 10.17 | November 3, 2009 | ||||||||||||||||||||||||||||
| 10.20* | 10-Q | 001-07151 | 10.21 | November 3, 2011 | ||||||||||||||||||||||||||||
| 10.21* | 10-Q | 001-07151 | 10.2 | November 2, 2012 | ||||||||||||||||||||||||||||
| 10.22* | 10-Q | 001-07151 | 10.1 | May 2, 2018 | ||||||||||||||||||||||||||||
| 10.23* | 10-Q | 001-07151 | 10.27 | May 4, 2010 | ||||||||||||||||||||||||||||
| 10.24* | 8-K | 001-07151 | 10.2 | November 17, 2021 | ||||||||||||||||||||||||||||
| 10.25* | 8-K | 001-07151 | 10.3 | November 17, 2021 | ||||||||||||||||||||||||||||
30
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.26* | 10-Q | 001-07151 | 10.27 | May 4, 2011 | ||||||||||||||||||||||||||||
| 10.27* | 10-K | 001-07151 | 10.22 | August 16, 2016 | ||||||||||||||||||||||||||||
| 10.28* | 10-K | 001-07151 | 10.29 | August 26, 2011 | ||||||||||||||||||||||||||||
| 10.29* | 10-K | 001-07151 | 10.24 | August 16, 2016 | ||||||||||||||||||||||||||||
| 10.30* | 10-K | 001-07151 | 10.26 | August 14, 2018 | ||||||||||||||||||||||||||||
| 10.31 | 8-K | 001-07151 | 10.1 | March 28, 2022 | ||||||||||||||||||||||||||||
| 10.32 | 10-K/A | 001-07151 | 10.26 | September 30, 2016 | ||||||||||||||||||||||||||||
| 10.33 | 10-Q | 001-07151 | 10.2 | February 2, 2018 | ||||||||||||||||||||||||||||
| 10.34 | 10-Q | 001-07151 | 10.1 | February 2, 2018 | ||||||||||||||||||||||||||||
| 10.35 | 10-Q | 001-07151 | 10.2 | February 4, 2021 | ||||||||||||||||||||||||||||
| 21 | ||||||||||||||||||||||||||||||||
| 23 | ||||||||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||
| 32 | ||||||||||||||||||||||||||||||||
| 99.1 | ||||||||||||||||||||||||||||||||
| 99.2 | ||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||||||||||||||||||||||||||
31
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). | |||||||||||||||||||||||||||||||
____________________
(*) Indicates a management or director contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
ITEM 16. FORM 10-K SUMMARY
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| THE CLOROX COMPANY | ||||||||
| Date: August 10, 2023 | By: | /s/ Linda Rendle | ||||||
| Linda Rendle | ||||||||
| Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ A. Banse | Director | August 10, 2023 | ||||||||||||
| A. Banse | ||||||||||||||
| /s/ J. Denman | Director | August 10, 2023 | ||||||||||||
| J. Denman | ||||||||||||||
| /s/ S. C. Fleischer | Director | August 10, 2023 | ||||||||||||
| S. C. Fleischer | ||||||||||||||
| /s/ E. Lee | Director | August 10, 2023 | ||||||||||||
| E. Lee | ||||||||||||||
| /s/ A. D. D. Mackay | Director | August 10, 2023 | ||||||||||||
| A. D. D. Mackay | ||||||||||||||
| /s/ P. Parker | Director | August 10, 2023 | ||||||||||||
| P. Parker | ||||||||||||||
| /s/ S. Plaines | Director | August 10, 2023 | ||||||||||||
| S. Plaines | ||||||||||||||
| /s/ M. J. Shattock | Independent Chair | August 10, 2023 | ||||||||||||
| M. J. Shattock | ||||||||||||||
| /s/ K. Tesija | Director | August 10, 2023 | ||||||||||||
| K. Tesija | ||||||||||||||
| /s/ R. J. Weiner | Director | August 10, 2023 | ||||||||||||
| R. J. Weiner | ||||||||||||||
| /s/ C. J. Williams | Director | August 10, 2023 | ||||||||||||
| C. J. Williams | ||||||||||||||
| /s/ L. Rendle | Chief Executive Officer (Principal Executive Officer) | August 10, 2023 | ||||||||||||
| L. Rendle | ||||||||||||||
| /s/ K. B. Jacobsen | Executive Vice President – Chief Financial Officer (Principal Financial Officer) | August 10, 2023 | ||||||||||||
| K. B. Jacobsen | ||||||||||||||
| /s/ L. Peck | Vice President – Chief Accounting Officer and Corporate Controller (Principal Accounting Officer) | August 10, 2023 | ||||||||||||
| L. Peck | ||||||||||||||
33
Exhibit 21
| Name of Company | Jurisdiction of Incorporation | |||||||
| 6570 Donlon Group, LLC | Delaware | |||||||
| A & M Products Manufacturing Company | Delaware | |||||||
| Iodine Holdings, Inc. | Connecticut | |||||||
| Brita Canada Corporation | Nova Scotia | |||||||
| Brita Canada Holdings Corporation | Nova Scotia | |||||||
| Brita GP | Ontario | |||||||
| Brita LP | Ontario | |||||||
| Brita Manufacturing Company | Delaware | |||||||
| The Brita Products Company | Delaware | |||||||
| BGP (Switzerland) S. a. r. l. | Switzerland | |||||||
| Burt’s Bees, Inc. | Delaware | |||||||
| Burt’s Bees International Holdings | Delaware | |||||||
| Burt’s Bees Licensing, LLC | Delaware | |||||||
| The Burt’s Bees Products Company | Delaware | |||||||
| Caltech Industries, Inc. | Michigan | |||||||
| CBee (Europe) Limited | United Kingdom | |||||||
| Chesapeake Assurance Limited | Hawaii | |||||||
| Clorox Africa (Proprietary) Ltd. | South Africa | |||||||
| Clorox Africa Holdings (Proprietary) Ltd. | South Africa | |||||||
| Clorox Argentina S.A. | Argentina | |||||||
| Clorox Australasia Holdings, Inc. | Delaware | |||||||
| Clorox Australia Pty. Ltd. | Australia | |||||||
| Clorox Brazil Holdings LLC | Delaware | |||||||
| Clorox (Cayman Islands) Ltd. | Cayman Islands | |||||||
| Clorox Chile S.A. | Chile | |||||||
| Clorox China (Guangzhou) Ltd. | Guangzhou, P.R.C. | |||||||
| Clorox Commercial Company | Delaware | |||||||
| The Clorox Company of Canada Ltd. | Canada (Federal) | |||||||
| Clorox de Centro America, S.A. | Costa Rica | |||||||
| Clorox de Colombia S.A. | Colombia | |||||||
Clorox de Mexico, S de RL de C.V. | Mexico | |||||||
| Clorox de Panama S.A. | Panama | |||||||
| Clorox del Ecuador S.A. Ecuaclorox | Ecuador | |||||||
| Clorox Diamond Production Company | Delaware | |||||||
| Clorox Healthcare Holdings, LLC | Delaware | |||||||
| Clorox Holdings Pty. Limited | Australia | |||||||
| Clorox Hong Kong Limited | Hong Kong | |||||||
| The Clorox International Company | Delaware | |||||||
| Clorox International Holdings, LLC | Delaware | |||||||
| Clorox International Philippines, Inc. | The Philippines | |||||||
| Clorox Luxembourg S.a.r.l. | Luxembourg | |||||||
| Clorox (Malaysia) Sdn. Bhd. | Malaysia | |||||||
| Clorox Manufacturing Company | Delaware | |||||||
| Clorox Manufacturing Company of Puerto Rico, Inc. | Puerto Rico | |||||||
Clorox Mexico Services Company S de R.L. de C.V. | Mexico | |||||||
| Clorox New Zealand Limited | New Zealand | |||||||
| The Clorox Outdoor Products Company | Delaware | |||||||
| Clorox Peru S.A. | Peru | |||||||
| The Clorox Pet Products Company | Texas | |||||||
| Clorox Professional Products Company | Delaware | |||||||
| The Clorox Sales Company | Delaware | |||||||
| Clorox Services Company | Delaware | |||||||
| Clorox Spain, S.L. | Spain | |||||||
| Clorox Sub-Sahara Africa Limited | Kenya | |||||||
| Clorox (Switzerland) S.a.r.l. | Switzerland | |||||||
| Clorox Uruguay S.A. | Uruguay | |||||||
| The Consumer Learning Center, LLC | Delaware | |||||||
| Corporacion Clorox de Venezuela, S.A. | Venezuela | |||||||
| CLX Realty Co. | Delaware | |||||||
| Everest NeoCell LLC | Delaware | |||||||
| First Brands (Bermuda) Limited | Bermuda | |||||||
| First Brands Corporation | Delaware | |||||||
| First Brands do Brasil Ltda. | Brazil | |||||||
| Fully Will Limited | Hong Kong | |||||||
| Gazoontite, LLC | Delaware | |||||||
| Glad Manufacturing Company | Delaware | |||||||
| The Glad Products Company | Delaware | |||||||
| The Household Cleaning Products Company of Egypt Ltd. | Egypt | |||||||
| The HV Food Products Company | Delaware | |||||||
| HV Manufacturing Company | Delaware | |||||||
| Invermark S.A. | Argentina | |||||||
| Jingles LLC | Delaware | |||||||
| Kaflex S.A. | Argentina | |||||||
| Kingsford Manufacturing Company | Delaware | |||||||
| The Kingsford Products Company, LLC | Delaware | |||||||
| Lerwood Holdings Limited | British Virgin Islands | |||||||
| The Mexco Company | Delaware | |||||||
| Mohamed Ali Abudawood for Industry and Partners for Industry Company Ltd. | Kingdom of Saudi Arabia | |||||||
| National Cleaning Products Company Limited | Kingdom of Saudi Arabia | |||||||
| Nature’s Products, Inc. | Florida | |||||||
| Nutranext, LLC | Delaware | |||||||
| Nutranext Business, LLC | Delaware | |||||||
| Nutranext Direct, LLC | Delaware | |||||||
| Paulsboro Packaging Inc. | New Jersey | |||||||
| Petroplus Productos Automotivos S.A. | Brazil | |||||||
| Petroplus Sul Comercio Exterior S.A. | Brazil | |||||||
| Rainbow Light Nutritional Systems, LLC | Delaware | |||||||
| ReNew Life Formulas, LLC | Delaware | |||||||
| ReNew Life Holdings Corporation | Delaware | |||||||
| Round Ridge Production Company | Delaware | |||||||
| Soy Vay Enterprises, Inc. | California | |||||||
| STP do Brasil Ltda. | Brazil | |||||||
| Yuhan-Clorox Co., Ltd. | Korea | |||||||
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1)Registration Statement (Form S-3 No. 333-264693) and in the related Prospectuses of The Clorox Company, and
(2)Registration Statements (Form S-8 Nos. 33-56563, 33-56565, 33-41131, including post effective amendments No. 1 and No. 2, 333-16969, 333-29375, 333-44675, 333-69455, including post effective amendment No. 1, 333-86783, 333-90386, including the post effective amendment No. 1, 333-131487, 333-193913 and 333-213161) of The Clorox Company;
of our reports dated August 10, 2023, with respect to the consolidated financial statements of The Clorox Company and the effectiveness of internal control over financial reporting of The Clorox Company included in this Annual Report (Form 10-K) of The Clorox Company for the year ended June 30, 2023.
/s/ Ernst & Young LLP
San Francisco, CA
August 10, 2023
Exhibit 31.1
CERTIFICATION
I, Linda Rendle, certify that:
1.I have reviewed this annual report on Form 10-K of The Clorox Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2023
| /s/ Linda Rendle | |||||
| Linda Rendle | |||||
| Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION
I, Kevin B. Jacobsen, certify that:
1.I have reviewed this annual report on Form 10-K of The Clorox Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2023
| /s/ Kevin B. Jacobsen | ||
| Kevin B. Jacobsen | ||
| Executive Vice President - Chief Financial Officer | ||
Exhibit 32
CERTIFICATION
In connection with the periodic report of The Clorox Company (the “Company”) on Form 10-K for the period ended June 30, 2023, as filed with the Securities and Exchange Commission (the “Report”), we, Linda Rendle, Chief Executive Officer of the Company, and Kevin B. Jacobsen, Executive Vice President – Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to our knowledge:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Date: August 10, 2023
| /s/ Linda Rendle | |||||
| Linda Rendle | |||||
| Chief Executive Officer | |||||
| /s/ Kevin B. Jacobsen | |||||
| Kevin B. Jacobsen | |||||
| Executive Vice President – Chief Financial Officer | |||||
Exhibit 99.1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Clorox Company
(Dollars in millions, except per share data)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of The Clorox Company’s (the Company or Clorox) financial statements with a narrative from the perspective of management on the Company’s financial condition, results of operations, liquidity and certain other factors that may affect future results. In certain instances, parenthetical references are made to relevant sections of the Notes to Consolidated Financial Statements to direct the reader to a further detailed discussion. This section should be read in conjunction with the Consolidated Financial Statements and Supplementary Data included in this Annual Report on Form 10-K.
The following sections are included herein:
•Executive Overview
•Results of Operations
•Financial Position and Liquidity
•Contingencies
•Quantitative and Qualitative Disclosures about Market Risk
•Recently Issued Accounting Standards
•Critical Accounting Estimates
•Summary of Non-GAAP Financial Measures
EXECUTIVE OVERVIEW
The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with fiscal year 2023 net sales of $7,389 and about 8,700 employees worldwide as of June 30, 2023. The Company has operations in approximately 25 countries or territories and sells its products in more than 100 markets, primarily through mass retailers; grocery outlets; warehouse clubs; dollar stores; home hardware centers; drug, pet and military stores; third-party and owned e-commerce channels; and distributors. Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach and cleaning and disinfecting products; Pine-Sol and Tilex cleaners; Liquid-Plumr clog removers; Poett home care products; Glad bags and wraps; Fresh Step cat litter; Kingsford grilling products; Hidden Valley dressings, dips, seasonings and sauces; Burt's Bees natural personal care products; Brita water-filtration products; and Natural Vitality, RenewLife, NeoCell and Rainbow Light vitamins, minerals and supplements. The Company also markets industry-leading products and technologies for professional customers, including those sold under the CloroxPro and Clorox Healthcare brand names.
The Company primarily markets its leading brands in midsized categories considered to be financially attractive. Most of the Company’s products, which can be found in about nine of 10 U.S. homes, compete with other nationally advertised brands within each category and with “private label” brands. About 80% of the Company's sales are generated from brands that hold the No. 1 or No. 2 market share position in their categories.
The Company operates through strategic business units (SBUs) which are organized into operating segments. Operating segments are then aggregated into four reportable segments: Health and Wellness, Household, Lifestyle and International. As of the fourth quarter of fiscal year 2023, the Health and Wellness reportable segment is composed of the Cleaning and Professional Products operating segments. The Vitamins, Minerals and Supplements (VMS) operating segment, previously included in the Health and Wellness reportable segment, is presented within Corporate and Other. All periods presented have been recast to reflect this change. The four reportable segments consist of the following:
•Health and Wellness consists of cleaning, disinfecting and professional products mainly marketed and sold in the United States. Products within this segment include home care cleaning and disinfecting products and laundry additives, primarily under the Clorox, Clorox2, Pine-Sol, Scentiva, Tilex, Liquid-Plumr and Formula 409 brands; professional cleaning and disinfecting products under the CloroxPro and Clorox Healthcare brands; and professional food service products under the Hidden Valley brand.
•Household consists of bags and wraps, cat litter and grilling products marketed and sold in the United States. Products within this segment include bags and wraps under the Glad brand; cat litter primarily under the Fresh Step and Scoop Away brands, and grilling products under the Kingsford brand.
1
•Lifestyle consists of food, natural personal care products and water-filtration products marketed and sold in the United States. Products within this segment include dressings, dips, seasonings and sauces, primarily under the Hidden Valley brand; natural personal care products under the Burt’s Bees brand; and water-filtration products under the Brita brand.
•International consists of products sold outside the United States. Products within this segment include laundry additives; home care products; water-filtration products; digestive health products; grilling products; cat litter; food; bags and wraps; natural personal care products; and professional cleaning and disinfecting products marketed primarily under the Clorox, Ayudin, Clorinda, Poett, Pine-Sol, Glad, Brita, RenewLife, Ever Clean and Burt’s Bees brands.
Non-GAAP Financial Measures
This Executive Overview, the succeeding sections of MD&A and Exhibit 99.2 may include certain financial measures that are not defined by accounting principles generally accepted in the United States of America (U.S. GAAP). These measures, which are referred to as non-GAAP measures, are listed below:
•Free cash flow and free cash flow as a percentage of net sales. Free cash flow is calculated as net cash provided by operations less capital expenditures.
•Earnings before interest and income taxes (EBIT) margin (the ratio of EBIT to net sales).
•Adjusted earnings (losses) before interest and income taxes (adjusted EBIT) represents earnings (losses) excluding interest income, interest expense, income taxes and other significant items that are nonrecurring or unusual (such as asset impairments, charges related to the streamlined operating model, charges related to the digital capabilities and productivity enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability).
•Adjusted EBIT margin (the ratio of adjusted EBIT to net sales).
•Economic profit (EP) is defined by the Company as earnings before income taxes, excluding certain U.S. GAAP items (such as asset impairments, charges related to implementation of the streamlined operating model, charges related to digital capabilities and productivity enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability) and interest expense; less income taxes (calculated based on the Company’s effective tax rate excluding the identified U.S. GAAP items), and less after tax profit attributable to noncontrolling interests, and less a capital charge (calculated as average capital employed multiplied by a cost of capital rate).
•Organic sales growth / (decrease) is defined as net sales growth excluding the effect of foreign exchange rate changes and any acquisitions and divestitures.
For a discussion of these measures and the reasons management believes they are useful to investors, refer to “Summary of Non-GAAP Financial Measures” below. To the extent applicable, this MD&A and Exhibit 99.2 include reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.
Fiscal Year 2023 Financial Highlights
A detailed discussion of strategic goals, key initiatives and results of operations is included below. Key fiscal year 2023 financial results are summarized as follows:
•The Company’s fiscal year 2023 net sales increased by 4% to $7,389 from $7,107 in fiscal year 2022, driven by net sales growth across the Household, Health and Wellness and Lifestyle reportable segments, primarily behind pricing.
•Gross margin increased by 360 basis points to 39.4% in fiscal year 2023 from 35.8% in fiscal year 2022. The increase was primarily driven by the benefit of price increases as well as cost savings, partially offset by unfavorable commodity costs and higher manufacturing and logistics costs.
•The Company reported earnings before income taxes of $238 in fiscal year 2023, compared to $607 in fiscal year 2022. The Company reported earnings attributable to Clorox of $149 in fiscal year 2023, compared to $462 in fiscal year 2022. The decrease was primarily due to the noncash impairment charges on assets related to the VMS business, higher selling and administrative expenses, unfavorable commodity costs, higher manufacturing and logistics costs, costs incurred from the implementation of the streamlined operating model, and advertising investments, partially offset by net sales growth as well as the benefit of cost savings.
2
•The Company delivered diluted net earnings per share (EPS) of $1.20 in fiscal year 2023, a decrease of approximately 68%, or $2.53, from fiscal year 2022 diluted net EPS of $3.73. The decrease was mainly due to the decrease in net earnings primarily driven by the noncash impairment charges on assets related to the VMS business.
•EP increased by $115 to $397 in fiscal year 2023, compared to $282 in fiscal year 2022 (refer to the reconciliation of EP to earnings before income taxes in Exhibit 99.2).
•The Company’s net cash provided by operations was $1,158 in fiscal year 2023, compared to $786 in fiscal year 2022. Free cash flow was $930 or 12.6% of net sales in fiscal year 2023, compared to $535 or 7.5% of net sales in fiscal year 2022 (refer to the reconciliation of net cash provided by operations to free cash flow in “Financial Position and Liquidity - Investing - Free Cash Flow”).
•The Company paid $583 in cash dividends to stockholders in fiscal year 2023, compared to $571 in cash dividends in fiscal year 2022. In July 2023, the Company announced an increase of 2% in its quarterly cash dividend from the prior year.
Strategic Goals and Initiatives
The Company's IGNITE strategy — underpinned by its purpose, enduring values and commitment to inclusion, diversity, equity and allyship — accelerates innovation in key areas of the business to drive growth and deliver value for all Clorox stakeholders. Since launching in 2019, IGNITE focuses on four strategic choices aimed at fueling long-term growth; innovating consumer experiences; reimagining how the company and its people work; and continuously evolving the product portfolio. The Company’s long-term financial goals reflected in IGNITE include annual net sales growth of 3% to 5% — increased from 2% to 4% in 2021 — annual adjusted EBIT margin expansion of 25 to 50 basis points and annual free cash flow as a percentage of net sales of 11% to 13%.
Additionally, in August 2021 the Company announced a five-year, $500 strategic investment to accelerate its digital transformation and drive related productivity enhancements. This investment, which began in the first quarter of fiscal year 2022, includes replacement of the Company's enterprise resource planning system as well as the implementation of a suite of other digital technologies. Together, these efforts will generate efficiencies and better position the Company in supply chain, digital commerce, innovation, brand building and more over the long term.
Finally, as announced in August 2022, the Company began implementing in fiscal year 2023 a streamlined operating model that is focused on making the organization more consumer-obsessed, faster and leaner. This new structure prioritizes the Company's business units with a goal of creating more value for all stakeholders, increasing organizational efficiency and moving decision-making to those who are closer to consumers to better anticipate and meet their needs. Once fully implemented in fiscal year 2024, the Company expects annual costs savings of approximately $75 to $100.
Recent Events Affecting the Company
For the fiscal year ended June 30, 2023, the Company continued to experience an inflationary environment marked by persistently unfavorable commodity costs and higher manufacturing and logistics costs. Additionally, the Company is monitoring macroeconomic conditions as a result of increased interest rates and volatility in capital markets. These evolving challenges contributed to a highly dynamic operating environment as the Company continued its efforts to drive growth, rebuild margins and drive its transformation.
While the Company has not experienced significant disruptions in its operations during fiscal year 2023, the risks of future negative impacts due to transportation, logistical or supply constraints and higher commodity costs for certain raw materials remain present, and the Company continues to experience corresponding incremental costs and gross margin pressures. For fiscal year 2024, the Company anticipates the operating environment will remain volatile and challenging. Inflationary headwinds are expected to continue and consumers may feel greater pressure as continued macroeconomic uncertainty impacts spending. The Company will continue to invest in its brands, capabilities and people to deliver consistent, profitable growth over time. The Company announced and began implementing a streamlined operating model in fiscal year 2023 and will continue with its implementation in fiscal year 2024.
The impact of continued inflationary pressures, macroeconomic conditions and geopolitical instability, including the ongoing conflict in Ukraine, rising tensions between China and Taiwan and actual and potential shifts in U.S. and foreign trade, economic and other policies, have increased global macroeconomic and political uncertainty regarding the duration and resolution of the Ukraine conflict, the potential escalation of tensions between China and Taiwan and potential economic and global supply chain disruptions. These factors are difficult to predict considering the rapidly evolving landscape as the Company continues to expect a variable operating environment going forward.
3
For further discussion of the possible impacts of inflationary pressures and other recent events on our business, financial conditions and results of operations, see “Risk Factors” in Part I, Item 1A of this Report.
4
RESULTS OF OPERATIONS
Unless otherwise noted, MD&A compares results of operations from fiscal year 2023 (the current year) to fiscal year 2022 (the prior year), with percentage and basis point calculations based on rounded numbers, except for per share data and the effective tax rate. All periods presented have been recast to reflect the changes in reportable segments noted above. Discussions of fiscal year 2021 items and year-to-year comparisons between fiscal years 2022 and 2021 that were not impacted by the recast that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended 2022.
CONSOLIDATED RESULTS
| % Change | |||||||||||||||||
| 2023 | 2022 | 2023 to 2022 | |||||||||||||||
| Net sales | $ | 7,389 | $ | 7,107 | 4 | % | |||||||||||
| Year Ended June 30, 2023 | ||||||||||||||||||||||||||
| Percentage change versus the year-ago period | ||||||||||||||||||||||||||
| Reported (GAAP) Net Sales Growth / (Decrease) | Reported Volume | Acquisitions & Divestitures | Foreign Exchange Impact | Price/Mix/Other (1) | Organic Sales Growth / (Decrease) (Non-GAAP) (2) | Organic Volume (3) | ||||||||||||||||||||
| Health and Wellness | 4 | % | (16) | % | — | % | — | % | 20 | % | 4 | % | (16) | % | ||||||||||||
| Household | 6 | (7) | — | — | 13 | 6 | (7) | |||||||||||||||||||
| Lifestyle | 7 | (4) | — | — | 11 | 7 | (4) | |||||||||||||||||||
| International | — | (5) | — | (11) | 16 | 11 | (5) | |||||||||||||||||||
Total Company (4) | 4 | % | (10) | % | — | % | (2) | % | 16 | % | 6 | % | (10) | % | ||||||||||||
| Year Ended June 30, 2022 | ||||||||||||||||||||||||||
| Percentage change versus the year-ago period | ||||||||||||||||||||||||||
| Reported (GAAP) Net Sales Growth / (Decrease) | Reported Volume | Acquisitions & Divestitures | Foreign Exchange Impact | Price/Mix/Other (1) | Organic Sales Growth / (Decrease) (Non-GAAP) (2) | Organic Volume (3) | ||||||||||||||||||||
| Health and Wellness | (10) | % | (9) | % | — | % | — | % | (1) | % | (10) | % | (9) | % | ||||||||||||
| Household | — | (3) | — | — | 3 | — | (3) | |||||||||||||||||||
| Lifestyle | 3 | 2 | — | — | 1 | 3 | 2 | |||||||||||||||||||
| International | 2 | (1) | — | (4) | 7 | 6 | (1) | |||||||||||||||||||
Total Company (4) | (3) | % | (5) | % | — | % | (1) | % | 3 | % | (2) | % | (5) | % | ||||||||||||
(1)This represents the net impact on net sales growth / (decrease) from pricing actions, mix and other factors.
(2)Organic sales growth / (decrease) is defined as net sales growth / (decrease) excluding the effect of any acquisitions and divestitures and foreign exchange rate changes. See “Summary of Non-GAAP Financial Measures” below for reconciliation of organic sales growth / (decrease) to net sales growth / (decrease), the most directly comparable GAAP financial measure.
(3)Organic volume represents volume excluding the effect of any acquisitions and divestitures.
(4)Total Company includes Corporate and Other.
Net sales in fiscal year 2023 increased by 4%, driven by net sales growth across the Household, Health and Wellness and Lifestyle reportable segments, primarily behind pricing. Volume decreased by 10% versus the prior year primarily due to pricing actions. The variance between volume and net sales was primarily due to the impact of favorable price mix.
5
| % Change | |||||||||||||||||
| 2023 | 2022 | 2023 to 2022 | |||||||||||||||
| Gross profit | $ | 2,908 | $ | 2,545 | 14 | % | |||||||||||
| Gross margin | 39.4 | % | 35.8 | % | |||||||||||||
Gross margin increased by 360 basis points in fiscal year 2023 from 35.8% to 39.4%. The increase was primarily driven by the benefit of price increases as well as cost savings, partially offset by unfavorable commodity costs and higher manufacturing and logistics costs.
Expenses
| % Change | % of Net sales | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 to 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Selling and administrative expenses | $ | 1,183 | $ | 954 | 24 | % | 16.0% | 13.4% | |||||||||||||||||||||
| Advertising costs | 734 | 709 | 4 | 9.9 | 10.0 | ||||||||||||||||||||||||
| Research and development costs | 138 | 132 | 5 | 1.9 | 1.9 | ||||||||||||||||||||||||
Selling and administrative expenses, as a percentage of net sales, increased by 260 basis points in fiscal year 2023. The increase in selling and administrative expenses was primarily due to higher incentive compensation expense and the Company’s digital capabilities and productivity enhancements investment. See Summary of Non-GAAP Financial Measures for further information regarding this investment.
Advertising costs, as a percentage of net sales, were essentially flat in the current year versus the prior year. The Company continues to support its brands. The Company’s U.S. retail advertising spend as a percentage of net sales was 11% for fiscal year 2023 and 10% for fiscal year 2022, respectively.
Research and development costs, as a percentage of net sales, were essentially flat in the current year as compared to the prior year. The Company continues to invest behind product innovation and cost savings.
Goodwill, trademark and other asset impairments, Interest expense, Other expense (income), net and Effective tax rate on earnings
| 2023 | 2022 | ||||||||||
| Goodwill, trademark and other asset impairments | $ | 445 | $ | — | |||||||
| Interest expense | 90 | 106 | |||||||||
| Other expense (income), net | 80 | 37 | |||||||||
| Effective tax rate on earnings | 32.4% | 22.4 | % | ||||||||
Goodwill, trademark and other asset impairments of $445 in fiscal year 2023 reflect noncash impairment charges to goodwill and certain indefinite-lived trademarks related to the VMS business. See Notes to Consolidated Financial Statements for further information regarding the impairments recorded.
Interest expense was $90 and $106 in fiscal year 2023 and fiscal year 2022, respectively. The decrease in the current year interest expense was primarily due to a loss on the early extinguishment of debt in the prior year. See Notes to Consolidated Financial Statements for further information regarding the loss on the early extinguishment of debt recorded.
Other expense (income), net was $80 and $37 in fiscal year 2023 and fiscal year 2022, respectively. The variance was primarily due to restructuring and related implementation costs associated with the streamlined operating model incurred in the current year.
Restructuring and related costs
In the first quarter of fiscal year 2023, the Company began recognizing costs related to a plan that involves streamlining its operating model to meet its objectives of driving growth and productivity. The streamlined operating model is expected to enhance the Company’s ability to respond more quickly to changing consumer behaviors and innovate faster. The Company anticipates the implementation of this new model will be completed in fiscal year 2024, with different phases occurring throughout the implementation period.
6
Once fully implemented, the Company expects annual cost savings to be approximately $75 to $100, with benefits of approximately $35 realized in fiscal year 2023. The benefits of the streamlined operating model are currently expected to increase future cash flows as a result of cost savings that will be generated primarily in the areas of selling and administration, supply chain, marketing and research and development.
The Company incurred $60 of costs in fiscal year 2023 and anticipates incurring approximately $30 to $40 in fiscal year 2024 related to this initiative, approximately half of which are expected to include employee-related costs to reduce certain staffing levels such as severance payments, with the remainder for consulting and other costs. Costs incurred are expected to be settled primarily in cash.
Of the restructuring and implementation related costs, net incurred in fiscal year 2023, $41 was related to employee-related costs and $19 was related to other costs. For further details on the streamlined operating model and restructuring, refer to the Notes to Consolidated Financial Statements.
The effective tax rate on earnings was 32.4% and 22.4% in fiscal year 2023 and 2022, respectively. The higher tax rate in fiscal year 2023 compared to fiscal year 2022 was driven by lower pre-tax income due to the VMS impairment charges and the non-deductibility of a portion of those charges.
Diluted net earnings per share
| % Change | |||||||||||||||||
| 2023 | 2022 | 2023 to 2022 | |||||||||||||||
| Diluted net EPS | $ | 1.20 | $ | 3.73 | (68) | % | |||||||||||
Diluted net earnings per share (EPS) decreased by $2.53, or 68%, in fiscal year 2023, primarily due to the noncash impairment charges on assets related to the VMS business, higher selling and administrative expenses, unfavorable commodity costs, higher manufacturing and logistics costs, costs incurred from the implementation of the streamlined operating model, and advertising investments, partially offset by net sales growth as well as the benefit of cost savings.
7
SEGMENT RESULTS
Certain data from prior periods presented have been recast to reflect the changes in reportable segments noted above, and in connection with this change, Corporate was renamed Corporate and Other. Additionally, beginning in the fourth quarter of fiscal year 2023, management changed its measurement of segment profitability disclosed to segment adjusted EBIT. The following presents the results of the Company’s reportable segments and Corporate and Other:
| Net sales | |||||||||||||||||
| Fiscal year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Health and Wellness | $ | 2,532 | $ | 2,427 | $ | 2,690 | |||||||||||
| Household | 2,098 | 1,984 | 1,981 | ||||||||||||||
| Lifestyle | 1,338 | 1,253 | 1,218 | ||||||||||||||
| International | 1,181 | 1,180 | 1,162 | ||||||||||||||
| Corporate and Other | 240 | 263 | 290 | ||||||||||||||
| Total | $ | 7,389 | $ | 7,107 | $ | 7,341 | |||||||||||
Segment adjusted EBIT (1) | |||||||||||||||||
| Fiscal year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Health and Wellness | $ | 594 | $ | 381 | $ | 748 | |||||||||||
| Household | 308 | 234 | 375 | ||||||||||||||
| Lifestyle | 284 | 280 | 320 | ||||||||||||||
| International | 89 | 97 | 119 | ||||||||||||||
| Corporate and Other | (358) | (223) | (293) | ||||||||||||||
| Total | $ | 917 | $ | 769 | $ | 1,269 | |||||||||||
| Interest income | 16 | 5 | 5 | ||||||||||||||
| Interest expense | (90) | (106) | (99) | ||||||||||||||
| VMS impairments | (445) | — | (329) | ||||||||||||||
| Professional Products supplier charge | — | — | (28) | ||||||||||||||
| Saudi JV acquisition gain | — | — | 82 | ||||||||||||||
| Restructuring and related costs | (60) | — | — | ||||||||||||||
| Digital capabilities and productivity enhancements investment | (100) | (61) | — | ||||||||||||||
| Earnings (losses) before income taxes | $ | 238 | $ | 607 | $ | 900 | |||||||||||
(1)See “Summary of Non-GAAP Financial Measures” below for reconciliation of segment adjusted EBIT to earnings (losses) before income taxes, the most directly comparable GAAP financial measure.
8
Health and Wellness
| % Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 to 2022 | 2022 to 2021 | |||||||||||||||||||||||||
| Net sales | $ | 2,532 | $ | 2,427 | $ | 2,690 | 4 | % | (10) | % | |||||||||||||||||||
| Segment adjusted EBIT | 594 | 381 | 748 | 56 | (49) | ||||||||||||||||||||||||
Fiscal year 2023 versus fiscal year 2022: Net sales and segment adjusted EBIT increased by 4% and 56%, respectively, and volume decreased by 16% during fiscal year 2023. The volume decrease was primarily due to pricing actions, partially offset by strong consumption supported by supply chain improvements, mainly in Cleaning. The variance between volume and net sales was primarily due to the benefit of price increases. The increase in segment adjusted EBIT in the current period was primarily due to net sales growth primarily behind pricing, as well as the benefit of cost savings, partially offset by unfavorable commodity costs.
Fiscal year 2022 versus fiscal year 2021: Volume, net sales and segment adjusted EBIT decreased by 9%, 10% and 49%, respectively, during fiscal year 2022. The volume and net sales decreases were primarily due to lower shipments in the Professional Products portfolio due to higher COVID-19 related demand in fiscal year 2021. The decrease in segment adjusted EBIT in fiscal year 2022 was primarily due to higher manufacturing and logistics costs, lower net sales and unfavorable commodity costs, partially offset by lower advertising spending and cost savings.
Household
| % Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 to 2022 | 2022 to 2021 | |||||||||||||||||||||||||
| Net sales | $ | 2,098 | $ | 1,984 | $ | 1,981 | 6 | % | — | % | |||||||||||||||||||
| Segment adjusted EBIT | 308 | 234 | 375 | 32 | (38) | ||||||||||||||||||||||||
Fiscal year 2023 versus fiscal year 2022: Net sales and segment adjusted EBIT increased by 6% and 32%, respectively, and volume decreased by 7% in fiscal year 2023. The volume decrease was primarily driven by lower shipments across all SBUs due to pricing actions, partially offset by merchandising and innovation, mainly in Litter and Glad. The variance between volume and net sales was primarily due to the benefit of price increases. The increase in segment adjusted EBIT was mainly due to net sales growth primarily behind pricing as well as the benefit of cost savings, partially offset by higher manufacturing and logistics costs, unfavorable commodity costs and advertising investments.
Fiscal year 2022 versus fiscal year 2021: Volume and segment adjusted EBIT decreased by 3% and 38%, respectively, and net sales were flat during fiscal year 2022. The volume decrease was primarily driven by lower shipments in Grilling due to higher demand in fiscal year 2021 and impacts from pricing actions in fiscal year 2022. The decrease in segment adjusted EBIT was mainly due to unfavorable commodity costs and higher manufacturing and logistics costs, partially offset by cost saving efforts and the benefits from pricing and lower trade spending.
9
Lifestyle
| % Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 to 2022 | 2022 to 2021 | |||||||||||||||||||||||||
| Net sales | $ | 1,338 | $ | 1,253 | $ | 1,218 | 7 | % | 3 | % | |||||||||||||||||||
| Segment adjusted EBIT | 284 | 280 | 320 | 1 | (13) | ||||||||||||||||||||||||
Fiscal year 2023 versus fiscal year 2022: Net sales and segment adjusted EBIT increased by 7% and 1%, respectively, while volume decreased by 4% during fiscal year 2023. The volume decrease was primarily driven by lower shipments across all SBUs due to pricing actions and supply chain constraints in Natural Personal Care, partially offset by strong consumption in Brita water-filtration products. The variance between volume and net sales was mainly due to the benefit of price increases. The increase in segment adjusted EBIT was primarily due to net sales growth, partially offset by unfavorable commodity costs and higher manufacturing and logistics costs and advertising investments.
Fiscal year 2022 versus fiscal year 2021: Volume and net sales increased by 2% and 3%, respectively, while segment adjusted EBIT decreased by 13% during fiscal year 2022. The volume and net sales increases were primarily driven by higher shipments of Brita water-filtration products due to expanded distribution and merchandising support and Natural Personal Care products primarily due to innovation and strong consumption. The decrease in segment adjusted EBIT was primarily due to unfavorable commodity costs and higher manufacturing and logistics costs, partially offset by net sales growth.
International
| % Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 to 2022 | 2022 to 2021 | |||||||||||||||||||||||||
| Net sales | $ | 1,181 | $ | 1,180 | $ | 1,162 | — | % | 2 | % | |||||||||||||||||||
| Segment adjusted EBIT | 89 | 97 | 119 | (8) | (18) | ||||||||||||||||||||||||
Fiscal year 2023 versus fiscal year 2022: Volume and segment adjusted EBIT decreased by 5% and 8%, respectively, and net sales were essentially flat during fiscal year 2023. The volume decrease was primarily due to pricing actions. The variance between volume and net sales was mainly due to the benefit of price increases, partially offset by the impact of unfavorable foreign exchange rates. The decrease in segment adjusted EBIT was primarily due to unfavorable foreign currency exchange rates, higher manufacturing and logistics costs, increased selling and administrative expenses, unfavorable commodity costs and mix, and lower volume, partially offset by the net impact of pricing.
Fiscal year 2022 versus fiscal year 2021: Volume and segment adjusted EBIT decreased by 1% and 18%, respectively, and net sales increased by 2% during fiscal year 2022. The variance between volume and net sales was mainly due to the benefit of price increases, partially offset by the impact of unfavorable foreign exchange rates. The decrease in segment adjusted EBIT was primarily due to unfavorable commodity costs and higher manufacturing and logistics costs, partially offset by net sales growth all in fiscal year 2022.
Argentina
The business environment in Argentina continues to be challenging due to significant volatility in Argentina’s currency, high inflation, economic recession and temporary price controls. The Company operates in Argentina through certain wholly owned subsidiaries (collectively, “Clorox Argentina”). Clorox Argentina manufactures products at two plants that it owns and operates across Argentina.
Effective July 1, 2018, under the requirements of U.S. GAAP, Argentina was designated as a highly inflationary economy and as a result, the U.S. dollar replaced the Argentine peso as the functional currency of the Company’s subsidiaries in Argentina. Consequently, gains and losses from non-U.S. dollar denominated monetary assets and liabilities of Clorox Argentina are recognized in Other (income) expense, net in the consolidated statements of earnings utilizing the official Argentine government exchange rate.
As of September 2019, the government of Argentina reinstated foreign exchange controls in response to further declines in the value of the Argentine peso, limiting the Company’s ability to convert Argentine pesos to U.S. dollars and transfer U.S. dollars outside of Argentina. As a result of these controls, the spread between the official Argentine government exchange rate and
10
unofficial parallel rates has continued to broaden. As of June 30, 2023 and 2022, the net asset position, excluding goodwill, of Clorox Argentina was $48 and $45, respectively. Of these net assets, cash balances were approximately $28 and $15 as of June 30, 2023 and 2022, respectively. Net sales from Clorox Argentina represented approximately 2% of the Company’s consolidated net sales for the fiscal years ended June 30, 2023 and 2022.
Volatility in the exchange rate is expected to continue, which, along with competition, changes in the retail, labor and macro-economic environment, and implemented and future additional legal limitations instituted to restrict foreign exchange transactions, as well as government price controls, could have an adverse impact on Clorox Argentina’s liquidity, net sales, net earnings, cash flows and net monetary asset position. The Company is closely monitoring developments in Argentina and continues to take steps intended to mitigate the adverse conditions, but there can be no assurances that these actions will be able to mitigate these conditions as they may occur.
Corporate and Other
| % Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 to 2022 | 2022 to 2021 | |||||||||||||||||||||||||
| Net Sales | $ | 240 | $ | 263 | $ | 290 | (9) | % | (9) | % | |||||||||||||||||||
| Segment adjusted EBIT | (358) | (223) | (293) | 61 | % | (24) | % | ||||||||||||||||||||||
Corporate and Other includes certain non-allocated administrative costs, the VMS business and various other non-operating income and expenses.
Fiscal year 2023 versus fiscal year 2022: Net sales decreased by 9% due to lower net sales in the VMS business. The increase in segment adjusted losses before interest and income taxes was primarily due to higher employee incentive compensation expenses.
Fiscal year 2022 versus fiscal year 2021: Net sales decreased by 9% due to lower net sales in the VMS business. The decrease in segment adjusted losses before interest and income taxes was primarily driven by lower employee incentive compensation expenses.
11
FINANCIAL POSITION AND LIQUIDITY
Management’s discussion and analysis of the Company’s financial position and liquidity describes its consolidated operating, investing and financing activities from operations.
The Company’s cash position includes amounts held by foreign subsidiaries and, as a result, the repatriation of certain cash balances from some of the Company’s foreign subsidiaries could result in additional tax costs. However, these cash balances are generally available without legal restriction to fund local business operations. In addition, a portion of the Company’s cash balance is held in U.S. dollars by foreign subsidiaries, whose functional currency is their local currency. Such U.S. dollar balances are reported on the foreign subsidiaries’ books, in their functional currency, with the impact from foreign currency exchange rate differences recorded in Other (income) expense, net.
The Company’s financial condition and liquidity remained strong as of June 30, 2023. The following table summarizes cash activities for the years ended June 30:
| 2023 | 2022 | ||||||||||
| Net cash provided by operations | $ | 1,158 | $ | 786 | |||||||
| Net cash used for investing activities | (223) | (229) | |||||||||
| Net cash used for financing activities | (753) | (689) | |||||||||
Operating Activities
Net cash provided by operations was $1,158 in fiscal year 2023, compared with $786 in fiscal year 2022. The increase was primarily driven by lower working capital, higher cash earnings, lower incentive compensation payments and deferral of tax payments in the current fiscal year, partially offset by cash received from the settlement of interest rate derivative contracts in the prior fiscal year. The decrease in working capital was primarily driven by higher Accounts payable and accrued liabilities due to the timing of payments, lower Inventory mostly driven by optimization of inventory levels in the current fiscal year and a decrease in Accounts receivable due to timing of sales.
Payment Terms Extension and Supply Chain Financing
The Company initiated the extension of its payment terms with its suppliers in the second half of fiscal year 2020 in order to improve working capital as part of and to fund the IGNITE strategy and in keeping with evolving market practices. The Company’s current payment terms do not exceed 120 days in keeping with industry standards. The Company’s operating cash flows are directly impacted as a result of the extension of the payment terms with the suppliers.
As part of those ongoing efforts, the Company has arranged for a global financial institution to offer a voluntary supply chain finance (SCF) program for the benefit of the Company’s suppliers. Leveraging the Company’s credit rating, the SCF program enables suppliers to directly contract with the financial institution to receive payment from the financial institution prior to the payment terms between the Company and the supplier, by selling the Company’s payables to the financial institution. Participation in the program is at the sole discretion of the supplier and the Company has no economic interest in a supplier's decision to enter into the agreement and has no direct financial relationship with the financial institution, as it relates to the SCF program. Once a supplier elects to participate in the SCF program and reaches an agreement with the financial institution, the supplier elects which individual Company invoices to sell to the financial institution. The terms of the Company’s payment obligations are not impacted by a supplier’s participation in the program and as such, the SCF program has no direct impact on the Company’s balance sheets, cash flows or liquidity. No guarantees are provided by the Company or any of our subsidiaries under the SCF program. There would not be an expected material impact to the Company’s liquidity or capital resources if the financial institution or a supplier terminated the SCF arrangement.
All outstanding amounts related to suppliers participating in SCF are recorded within Accounts payable and accrued liabilities in the Consolidated Balance Sheets and the associated payments are included in operating activities within the Consolidated Statements of Cash Flows. As of June 30, 2023 and 2022, the amount due to suppliers participating in SCF and included in Accounts payable and accrued liabilities was $220 and $211, respectively. While the Company does not have direct access to information on, or influence over, which invoices a participating supplier elects to sell to the financial institution, the Company expects that the majority of these amounts have been sold to the financial institution.
12
Investing Activities
Net cash used for investing activities was $223 in fiscal year 2023, as compared to $229 in fiscal year 2022.
Capital expenditures were $228 and $251 in fiscal years 2023 and 2022, respectively. Capital expenditures as a percentage of net sales were 3.1% and 3.5% for fiscal years 2023 and 2022, respectively. The current year-over-year decrease was due to higher spending in the prior period on capital projects to expand production capacity.
Free cash flow
| 2023 | 2022 | ||||||||||
| Net cash provided by operations | $ | 1,158 | $ | 786 | |||||||
| Less: capital expenditures | (228) | (251) | |||||||||
| Free cash flow | $ | 930 | $ | 535 | |||||||
| Free cash flow as a percentage of net sales | 12.6 | % | 7.5 | % | |||||||
Financing Activities
Net cash used for financing activities was $753 in fiscal year 2023, compared with $689 in fiscal year 2022. The year-over-year increase was mainly due to net cash outflows on borrowings in the current year, partially offset by higher proceeds from employee stock option exercises and lower treasury stock purchases.
Capital Resources and Liquidity
The Company's current liabilities may periodically exceed current assets as a result of the Company's debt management policies, including the Company's use of commercial paper borrowings which fluctuates depending on the amount and timing of operating and investing cash flows and payments for shareholder transactions such as dividends. The Company continues to take actions to address some of the effects of such cost increases, which include implementing price increases, driving cost savings and optimizing the Company’s supply chain.
Global financial markets have experienced a significant increase in volatility due to heightened macroeconomic uncertainty and the impacts of cost inflation. Notwithstanding potential unforeseen adverse market conditions and as part of the Company’s regular assessment of its cash needs, the Company believes it will have the funds necessary to support our short- and long-term liquidity and operating needs, including the costs related to the announced streamlined operating model and its digital capabilities and productivity enhancements investment, based on our anticipated ability to generate positive cash flows from operations in the future, access to capital markets enabled by our strong short-term and long-term credit ratings and current borrowing availability.
The Company may consider other transactions that require the issuance of additional long- and/or short-term debt or other securities to finance acquisitions, repurchase stock, refinance debt or fund other activities for general business purposes. Such transactions could require funds in excess of the Company’s current cash levels and available credit lines, and the Company’s access to or cost of such additional funds could be adversely affected by any decrease in credit ratings, which were the following as of June 30:
| 2023 | 2022 | ||||||||||||||||||||||
| Short-term | Long-term | Short-term | Long-term | ||||||||||||||||||||
| Standard and Poor’s | A-2 | BBB+ | A-2 | BBB+ | |||||||||||||||||||
| Moody’s | P-2 | Baa1 | P-2 | Baa1 | |||||||||||||||||||
Credit Arrangements
As of June 30, 2023, the Company maintained a $1,200 revolving credit agreement that matures in March 2027 (the Credit Agreement). There were no borrowings under the Credit Agreement as of June 30, 2023 and June 30, 2022, and the Company believes that borrowings under the Credit Agreement are and will continue to be available for general corporate purposes. The Credit Agreement includes certain restrictive covenants and limitations. The primary restrictive covenant is a minimum ratio of 4.0, calculated as total earnings before interest, taxes, depreciation and amortization and other similar noncash charges and certain other items (Consolidated EBITDA) to total interest expense for the trailing four quarters (Interest Coverage ratio), as defined and described in the Credit Agreement.
The Company was in compliance with all restrictive covenants and limitations in the Credit Agreement as of June 30, 2023, and anticipates being in compliance with all restrictive covenants for the foreseeable future.
13
As of June 30, 2023, the Company maintained $35 of foreign and other credit lines, of which $5 was outstanding and the remainder of $30 was available for borrowing.
As of June 30, 2022, the Company maintained $34 of foreign and other credit lines, of which $4 was outstanding and the remainder of $30 was available for borrowing.
Short-term Borrowings
The Company’s notes and loans payable primarily consist of U.S. commercial paper issued by the parent company and any borrowings under the Credit Agreement. These short-term borrowings have stated maturities of less than one year and provide supplemental funding for supporting operations. The level of U.S. commercial paper borrowings generally fluctuates depending upon the amount and timing of operating cash flows and payments for items such as dividends, income taxes, stock repurchases and pension contributions. The average balance of short-term borrowings outstanding was $232 and $233 for the fiscal years ended June 30, 2023 and 2022, respectively.
Long-term Borrowings
Long-term borrowings, consisting of senior unsecured notes and debentures, were $2,477 and $2,474 as of June 30, 2023 and 2022, respectively.
In May 2022, the Company issued $1,100 in senior notes, which included $500 of senior notes with an annual fixed interest rate of 4.40% payable semi-annually in May and November, final maturity in May 2029 that carry an effective rate of 3.89% (May 2029 senior notes), which includes the impact from the settlement of interest rate contracts in May 2022, and $600 of senior notes with an annual fixed rate of 4.60%, payable semi-annually in May and November, final maturity in May 2032 that carry an effective rate of 3.25% (May 2032 senior notes), which includes the impact from the settlement of interest rate contracts in May 2022. The notes rank equally with all of the Company's existing senior indebtedness. Proceeds from the senior notes were used to redeem prior to maturity $600 of senior notes with an annual fixed interest rate of 3.05% due in September 2022 and $500 of senior notes with an annual fixed interest rate of 3.50% due in December 2024, which were redeemed in June 2022 and for general corporate purposes. In connection with the redemption prior to maturity of the $500 of senior notes due in December 2024, the Company recorded a loss on the early extinguishment of debt of $13, which is included in Interest expense in the Consolidated Statement of Earnings, representing the difference paid in cash between the redemption price and the carrying amount of the debt extinguished of $5 and the accelerated amortization of losses on settlement of interest rate contracts and issuance costs associated with the debt extinguished of $8.
In November 2021, $300 of the Company’s senior notes with annual fixed interest rate of 3.80% became due and were repaid using commercial paper borrowings.
Stock Repurchases and Dividend Payments
As of June 30, 2023, the Company had two stock repurchase programs: an open-market purchase program with an authorized aggregate purchase amount of up to $2,000, which has no expiration date and was authorized by the Board of Directors in May 2018, and a program to offset the anticipated impact of dilution related to stock-based awards (the Evergreen Program), which has no authorization limit on the dollar amount and no expiration date. During the fiscal year ended June 30, 2023, no shares of common stock were purchased. During the fiscal year ended June 30, 2022, the Company purchased 152 thousand shares of common stock at a cost of $25.
Dividends per share and total dividends paid to Clorox stockholders were as follows during the fiscal years ended June 30:
| 2023 | 2022 | ||||||||||
| Dividends per share declared | $ | 4.72 | $ | 3.48 | |||||||
| Dividends per share paid | 4.72 | 4.64 | |||||||||
| Total dividends paid | 583 | 571 | |||||||||
On July 27, 2023, the Company declared a 2% increase in the quarterly dividend, from $1.18 to $1.20 per share, payable on August 25, 2023 to common stockholders of record as of the close of business on August 9, 2023.
On July 12, 2022, the Company declared a 2% increase in the quarterly dividend, from $1.16 to $1.18 per share, payable on August 12, 2022 to common stockholders of record as of the close of business on July 27, 2022.
14
Material Cash Requirements
The following table summarizes the Company’s current and long-term material cash requirements as of June 30, 2023, which we intend to fund primarily with operating cash flows:
| 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Long-term debt maturities including interest payments | $ | 90 | $ | 90 | $ | 90 | $ | 90 | $ | 984 | $ | 1,753 | $ | 3,097 | |||||||||||||||||||||||||||
| Notes and loans payable | 51 | 1 | 1 | 1 | — | — | 54 | ||||||||||||||||||||||||||||||||||
Purchase obligations (1) (4) | 170 | 88 | 54 | 36 | 12 | 40 | 400 | ||||||||||||||||||||||||||||||||||
| Operating and finance leases | 107 | 97 | 80 | 63 | 46 | 72 | 465 | ||||||||||||||||||||||||||||||||||
Payments related to nonqualified retirement income and retirement health care plans (2) | 16 | 16 | 16 | 15 | 14 | 55 | 132 | ||||||||||||||||||||||||||||||||||
Venture Agreement terminal obligation (3) | — | — | 527 | — | — | — | 527 | ||||||||||||||||||||||||||||||||||
| Total | $ | 434 | $ | 292 | $ | 768 | $ | 205 | $ | 1,056 | $ | 1,920 | $ | 4,675 | |||||||||||||||||||||||||||
(1)Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that contain specified or determinable significant terms, including quantity, price and the approximate timing of the transaction. For purchase obligations subject to variable price and/or quantity provisions, an estimate of the price and/or quantity has been made. Examples of the Company’s purchase obligations include contracts to purchase raw materials, commitments to contract manufacturers, commitments for information technology and related services, advertising contracts, capital expenditure agreements, software acquisition and license commitments and service contracts. The raw material contracts included above are entered into during the regular course of business based on expectations of future purchases. Many of these raw material contracts are flexible to allow for changes in the Company’s business and related requirements. If such changes were to occur, the Company believes its exposure could differ from the amounts listed above. Any amounts reflected in the consolidated balance sheets as Accounts payable and accrued liabilities are excluded from the table above, as they are short-term in nature and expected to be paid within one year.
(2)These amounts represent expected payments through 2033. Based on the accounting rules for nonqualified retirement income and retirement health care plans, the liabilities reflected in the Company’s consolidated balance sheets differ from these expected future payments (see Notes to Consolidated Financial Statements).
(3)The Company has a venture agreement with The Procter & Gamble Company (P&G) for the Company’s Glad bags and wraps business (the Venture Agreement). As of June 30, 2023, P&G had a 20% interest in the venture. Upon termination of the agreement in January 2026, the Company is required to purchase P&G’s 20% interest for cash at fair value as established by predetermined valuation procedures. Refer to the Notes to Consolidated Financial Statements for further details.
(4)Includes contracted spend through fiscal year 2026 related to the $500 digital capabilities and productivity enhancements investment, which is expected to be funded through cash generated from operations.
CONTINGENCIES
A summary of contingencies is contained in the Notes to Consolidated Financial Statements and is incorporated herein by reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational company, the Company is exposed to the impact of changes in commodity prices, foreign currency fluctuations, interest-rate risk and other types of market risk.
In the normal course of business, where available at a reasonable cost, the Company manages its exposure to market risk using contractual agreements and a variety of derivative instruments. The Company’s objective in managing its exposure to market risk is to limit the impact of fluctuations on earnings and cash flow through the use of derivative instruments, including exchange-traded futures and options contracts and over-the-counter swaps and forward purchase contracts. Over-the-counter derivative contracts are entered into for non-trading purposes with major credit-worthy institutions, thereby decreasing the risk of credit loss.
The Company uses different methodologies, when necessary, to estimate the fair value of its derivative contracts. The estimated fair values of the majority of the Company’s contracts are based on quoted market prices, exchange-traded market prices or broker price quotations, and represent the estimated amounts that the Company would pay or receive to terminate the contracts.
See Notes to Consolidated Financial Statements for further discussion of derivatives and hedging policies and fair value measurements.
Sensitivity Analysis for Derivative Contracts
For fiscal years 2023 and 2022, the Company’s exposure to market risk was estimated using sensitivity analyses, which illustrates the change in the fair value of a derivative financial instrument assuming hypothetical changes in commodity prices,
15
foreign exchange rates or interest rates. The results of the sensitivity analyses for commodity, foreign currency and interest rate derivative contracts are summarized below. Actual changes in commodity prices, foreign exchange rates or interest rates may differ from the hypothetical changes, and any changes in the fair value of the contracts, real or hypothetical, would be partly to fully offset by an inverse change in the value of the underlying hedged items.
The changes in the fair value of derivatives are recorded as either assets or liabilities in the consolidated balance sheets with an offset to Net earnings or Other comprehensive (loss) income, depending on whether or not, for accounting purposes, the derivative is designated and qualified as an accounting hedge. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument either as a fair value hedge or as a cash flow hedge. The Company designates its commodity swaps and futures contracts for forecasted purchases of raw materials, foreign currency forward contracts for forecasted purchases of inventory, and interest rate contracts for forecasted interest payments as cash flow hedges. During the fiscal years ended June 30, 2023 and 2022, the Company had no hedging instruments designated as fair value hedges. In the event the Company has contracts not designated as hedges for accounting purposes, the Company recognizes the changes in the fair value of these contracts in the consolidated statement of earnings.
Commodity Price Risk
The Company is exposed to changes in the price of commodities used as raw materials in the manufacturing of its products. The Company uses various strategies, where available at a reasonable cost to manage cost exposures on certain raw material purchases with the objective of obtaining more predictable costs for these commodities, including long-term commodity purchase contracts and commodity derivative contracts. During fiscal years 2023 and 2022, the Company had derivative contracts related to raw material exposures for soybean oil used for the Food business and jet fuel used for the Grilling business.
Based on a hypothetical decrease or increase of 10% in these commodity prices as of June 30, 2023, and June 30, 2022, the estimated fair value of the Company’s then-existing commodity derivative contracts would decrease or increase by $4 and $3, respectively, with the corresponding impact included in Other comprehensive (loss) income.
Foreign Currency Risk
The Company seeks to minimize the impact of certain foreign currency fluctuations by hedging transactional exposures related to inventory purchases with foreign currency forward contracts. Based on a hypothetical decrease of 10% in the value of the U.S. dollar as of June 30, 2023 and June 30, 2022, the estimated fair value of the Company’s then-existing foreign currency derivative contracts would decrease by $6 and $3, respectively, with the corresponding impact included in Other comprehensive (loss) income. Based on a hypothetical increase of 10% in the value of the U.S. dollar as of June 30, 2023 and June 30, 2022, the estimated fair value of the Company’s then-existing foreign currency derivative contracts would increase by $5 and $3, respectively.
Interest Rate Risk
The Company can be exposed to interest rate volatility with regard to short-term borrowings, using commercial paper or under the Credit Agreement, in addition to potential changes in interest rates relating to anticipated future issuances of long-term debt. Weighted average interest rates for short-term borrowings using commercial paper were 3.92% during fiscal year 2023 and 0.48% during fiscal year 2022. Assuming average commercial paper borrowing levels during fiscal year 2023, a 100 basis point increase or decrease in interest rates would increase or decrease interest expense from short-term borrowings by approximately $2. Assuming average commercial paper borrowing levels during fiscal year 2022, a 100 basis point increase in interest rates or a decrease in interest rates to zero would increase or decrease interest expense from short-term borrowings by approximately $2 and $1, respectively.
The Company can also be exposed to interest rate volatility with regard to anticipated future issuances of debt. The Company utilizes interest rate contracts to manage our exposure to interest rate volatility related to movements in U.S. Treasury and swap rates. As of June 30, 2023 and 2022, the Company had no outstanding interest rate contracts.
RECENTLY ISSUED ACCOUNTING STANDARDS
A summary of all recently issued accounting standards is contained in Note 1 of the Notes to Consolidated Financial Statements.
16
CRITICAL ACCOUNTING ESTIMATES
The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates or assumptions that are used. The most critical accounting estimates are those that are most important to the portrayal of the Company’s financial condition and results, and require the Company to make the most difficult and subjective judgments, often estimating the outcome of future events that are inherently uncertain. The Company’s most critical accounting estimates are related to:
•Revenue recognition;
•The valuation of goodwill and other intangible assets;
•Income taxes; and
•The Venture Agreement terminal obligation.
The Company’s critical accounting estimates have been reviewed with the Audit Committee of the Board of Directors. A summary of the Company’s significant accounting policies is contained in Note 1 of Notes to Consolidated Financial Statements.
Revenue Recognition
The Company’s revenue is primarily generated from the sale of finished products to customers. This revenue is reported net of certain variable consideration provided to customers, generally in the form of one-time and ongoing trade-promotion programs. These trade-promotion programs include shelf price reductions, in-store merchandising, consumer coupons and other trade-related activities. Amounts accrued for trade-promotions are based on various factors such as contractual terms and sales volumes, and also incorporate estimates that include customer participation rates, the rate at which customers will achieve program performance criteria, product availability and historical consumer redemption rates. The actual amounts remitted to customers for these activities may differ from the Company’s estimates, depending on how actual results of the programs compare to the estimates. If the Company’s trade promotion accrual estimates as of June 30, 2023 were to increase or decrease by 10%, the impact on net sales would be approximately $15.
Goodwill and Other Intangible Assets
The Company tests its goodwill and other indefinite-lived intangible assets for impairment annually in the fiscal fourth quarter unless there are indications during a different interim period that these assets may have become impaired.
Goodwill
For fiscal year 2023, the Company’s SBUs were organized into the reporting units used for goodwill impairment testing purposes. These reporting units, which are also the Company’s operating segments, are the level at which discrete financial information is available and reviewed by the manager of the respective operating segments. The respective operating segment managers, who have responsibility for operating decisions, allocating resources and assessing performance within their respective segments, do not review financial information for components that are below the operating segment level.
In its evaluation of goodwill impairment, the Company has the option to first assess qualitative factors such as the maturity and stability of the reporting unit, the magnitude of the excess fair value over the carrying value from a prior period’s impairment testing, other reporting unit operating results, microeconomic and macroeconomic factors, as well as new events and circumstances impacting the operations at the reporting unit level. If the test indicates a potential for impairment, a quantitative test is performed. In the quantitative test, the Company compares the estimated fair value of each reporting unit to its carrying value. If the estimated fair value of any reporting unit is less than its carrying value, an impairment charge is recorded for the difference between the carrying value and the fair value of the reporting unit.
Determining the fair value of a reporting unit requires significant judgments, assumptions and estimates by management which are subject to uncertainty. The Company uses a discounted cash flow (DCF) method under the income approach for its quantitative test, as it believes that this approach is the most reliable indicator of the fair value of its businesses and the fair value of their future earnings and cash flows. Under this approach, the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk. The cash flows used in the DCF method are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced and the long-term business strategy. The other key estimates and factors used in the DCF method include, but are not limited to, net sales and expense growth rates, commodity prices, foreign exchange rates, inflation and a terminal growth
17
rate. Future changes in the judgments, assumptions and estimates that are used in the impairment testing for goodwill could result in significantly different estimates of the fair values and future impairment charges.
During the third quarter of fiscal year 2023, management made a decision to narrow the focus on core brands and streamline investment levels in the VMS business. As a result, revisions were made to the internal financial projections and operational plans of the VMS business reflecting the Company's current estimates regarding the future financial performance of these operations and macroeconomic factors. The revised estimated cash flows reflect lower sales growth expectations and lower investment levels. These events were considered a triggering event requiring interim impairment assessments to be performed as part of the preparation of the quarterly financial statements on the global indefinite-lived trademarks, other long-term assets and the VMS reporting unit. Based on the outcome of these assessments, a $306 goodwill impairment charge was recorded during the third quarter of fiscal year 2023. There is no remaining goodwill associated with the impaired reporting unit.
No heightened risk of impairment or impairments were identified in fiscal year 2023 as a result of the Company’s impairment review performed annually during the fourth quarter or during any other quarters of fiscal year 2023, except for the VMS reporting unit discussed above.
Trademarks and Other Indefinite-Lived Intangible Assets
For trademarks and other intangible assets with indefinite lives, the Company has the option to first assess qualitative factors, such as the maturity and stability of the trademark or other intangible asset, the magnitude of the excess fair value over carrying value from a prior period’s impairment testing, other specific operating results, as well as new events and circumstances impacting the significant inputs used to determine the fair value of the intangible asset. If the result of a qualitative test indicates that it is more likely than not that the asset is impaired, a quantitative test is performed. When a quantitative test is performed, the estimated fair value of an asset is compared to its carrying value. If the carrying value of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying value and the estimated fair value. The Company uses a DCF method under the relief from royalty income approach to estimate the fair value of its trademarks and other intangible assets with indefinite lives. This approach requires significant judgments in determining the royalty rates and the assets’ estimated cash flows, including consideration of related net sales growth rates, as well as the appropriate discount and foreign exchange rates applied to those cash flows to determine fair value. Future changes in such estimates or the use of alternative assumptions could result in significantly different estimates of the fair values.
During the third quarter of fiscal year 2023, as a result of the interim impairment assessments performed on various VMS assets as noted above, an impairment charge of $139 was recorded to indefinite-lived intangible assets associated with the VMS business. The useful lives of the impaired trademarks, with a remaining net carrying value of $28 as of March 31, 2023, were changed from indefinite to finite beginning on April 1, 2023.
No heightened risk of impairment or other significant impairments were identified in fiscal year 2023, except for the VMS assets discussed above.
Finite-Lived Intangible Assets
Finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying value of an asset (or asset group) may not be recoverable. The Company’s impairment review requires significant judgment by management, including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and proceeds from the disposal of the assets. The Company reviews business plans for possible impairment indicators. The risk of impairment is initially assessed based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist. The asset (or asset group) is not recoverable when the carrying value of the asset exceeds the estimated future undiscounted cash flows generated by the asset. When impairment is indicated, an impairment charge is recorded for the difference between the asset’s (or asset group’s) carrying value and its estimated fair value. Depending on the asset, estimated fair value may be determined either by use of a DCF method or, if available, by reference to estimated selling values of assets in similar condition. These approaches require significant judgments in determining the assumptions utilized in the DCF or the selection of comparable assets, as applicable. Future changes in such estimates or the use of alternative assumptions could result in significantly different estimates of the fair values.
No significant impairments for finite-lived intangible assets were identified in fiscal year 2023.
Income Taxes
The Company’s effective tax rate is based on income by tax jurisdiction, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which the Company operates. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions.
18
The Company maintains valuation allowances when it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account many factors, including the specific tax jurisdiction, both historical and projected future earnings, carryback and carryforward periods and tax planning strategies. Many of the judgments made in adjusting valuation allowances involve assumptions and estimates that are highly subjective. Valuation allowances maintained by the Company relate mostly to deferred tax assets arising from the Company’s currently anticipated inability to use net operating losses and tax credits in certain foreign countries.
In addition to valuation allowances, the Company establishes uncertain tax positions when such tax positions do not meet certain recognition thresholds or measurement standards as defined by generally accepted accounting principles. These uncertain tax positions are adjusted as a result of changes in factors such as tax legislation, interpretations of laws by courts, rulings by tax authorities, new audit developments, changes in estimates and the expiration of the statute of limitations. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled. Many of the judgments made in adjusting uncertain tax positions involve assumptions and estimates regarding audit outcomes and the timing of audit settlements, which are often uncertain and subject to change.
Venture Agreement Terminal Obligation
The Company has a Venture Agreement with P&G for the Company’s Glad bags and wraps business. As of June 30, 2023 and June 30, 2022, P&G had a 20% interest in the venture. Upon termination of the agreement, currently set for January 2026, unless the parties agree to a further extension, the Company is required to purchase P&G’s 20% interest for cash at fair value as established by predetermined valuation procedures. The Company’s obligation to purchase P&G’s interest is reflected in Other liabilities. The $108 decrease in the estimated fair value of P&G’s interest since June 30, 2022 was attributable to an increase in the discount rate and a decrease in the estimated future cash flows since the prior valuation. The difference between the estimated fair value and the amount recognized, and any future changes in the fair value of P&G’s interest, is charged to Cost of products sold in accordance with the effective interest method over the remaining life of the agreement. See Notes to Consolidated Financial Statements for additional information on the Venture Agreement.
The estimated fair value of P&G’s interest may increase or decrease up until any such purchase by the Company of P&G’s interest. The Company uses the DCF method under the income approach to estimate the fair value of P&G’s interest. Under this approach, the Company estimates the future cash flows and discounts these cash flows at a rate of return that reflects its risk. The cash flows used are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced and the long-term business strategy. The other key assumptions and estimates used include, but are not limited to, net sales and expense growth rates, commodity prices, foreign exchange rates, discount rates, inflation and terminal growth rates. Fair value determination requires significant judgment, assumptions and market factors which are uncertain and subject to change. Changes in the judgments, assumptions and market factors used could result in significantly different estimates of fair value. For perspective, if the discount rate as of June 30, 2023 were to increase or decrease by 100 basis points, the estimated fair value of P&G’s interest would decrease by approximately $54 or increase by approximately $69, respectively. Such changes would affect the amount of future charges to Cost of products sold.
SUMMARY OF NON-GAAP FINANCIAL MEASURES
The non-GAAP financial measures that may be included in this MD&A and Exhibit 99.2 and the reasons management believes they are useful to investors are described below. These measures should be considered supplemental in nature and are not intended to be a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, these measures may not be the same as similarly named measures presented by other companies.
Free cash flow is calculated as net cash provided by operations less capital expenditures. The Company’s management uses this measure and Free cash flow as a percentage of net sales to help assess the cash generation ability of the business and funds available for investing activities, such as acquisitions, investing in the business to drive growth and financing activities, including debt payments, dividend payments and stock repurchases. Free cash flow does not represent cash available only for discretionary expenditures since the Company has mandatory debt service requirements and other contractual and non-discretionary expenditures. Refer to “Free cash flow” and “Free cash flow as a percentage of net sales” above for a reconciliation of these non-GAAP measures.
EBIT represents earnings before income taxes, interest income and interest expense. EBIT margin is the ratio of EBIT to net sales. The Company’s management believes these measures provide useful additional information to investors to enhance their understanding about trends in the Company’s operations and are useful for period-over-period comparisons.
Adjusted earnings (losses) before interest and income taxes (adjusted EBIT) represents earnings (losses) before income taxes excluding interest income, interest expense and other significant items that are nonrecurring or unusual (such as asset impairments, charges related to the streamlined operating model, charges related to the digital capabilities and productivity
19
enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability). The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. Management believes that the presentation of adjusted EBIT is useful to investors to assess operating performance on a consistent basis by removing the impact of the items that management believes does not directly reflect the performance of each segment's underlying operations. Adjusted EBIT margin is the ratio of adjusted EBIT to net sales.
| Reconciliation of Earnings (losses) before income taxes to Adjusted EBIT | |||||||||||||||||
| Fiscal year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Earnings (losses) before income taxes | $ | 238 | $ | 607 | $ | 900 | |||||||||||
| Interest income | (16) | (5) | (5) | ||||||||||||||
| Interest expense | 90 | 106 | 99 | ||||||||||||||
VMS impairments (1) (2) | 445 | — | 329 | ||||||||||||||
Professional Products supplier charge (3) | — | — | 28 | ||||||||||||||
Saudi JV acquisition gain (4) | — | — | (82) | ||||||||||||||
Streamlined operating model (5) | 60 | — | — | ||||||||||||||
Digital capabilities and productivity enhancements investment (6) | 100 | 61 | — | ||||||||||||||
| Adjusted EBIT | $ | 917 | $ | 769 | $ | 1,269 | |||||||||||
(1)Represents a noncash impairment charge of $445 related to the VMS business recorded in fiscal year 2023. As a result of the segment changes noted above, $433 and $12 was recast from the third quarter fiscal year 2023 interim reporting period for the Health and Wellness and International reportable segments, respectively.
(2)Represents a noncash impairment charge of $329 related to the VMS business recorded in fiscal year 2021. As a result of the segment reporting changes noted above, $329 was recast from the fiscal year 2021 reporting period from the Health and Wellness reportable segment.
(3)Represents noncash charges of $28 on investments and related arrangements made with a Professional Products business supplier. As a result of the segment changes noted above, this amount was recast from the fiscal year 2021 reporting period for the Health and Wellness reportable segment.
(4)Represents an $82 noncash net gain from the remeasurement of the Company’s previously held investment in its Saudi joint venture. As a result of the segment changes noted above, this amount was recast from the fiscal year 2021 reporting period for the International reportable segment.
(5)Represents restructuring and related implementation costs, net for the streamlined operating model. As a result of the segment changes noted above, this amount was recast from the fiscal year 2023 reporting period for Corporate and Other. See Notes to Consolidated Financial Statements for additional information.
Due to the nonrecurring and unusual nature of these costs, the company's management believes presenting these costs as an adjustment in the non-GAAP results provides additional information to investors about trends in the company's operations and is useful for period over period comparisons. It also allows investors to view underlying operating results in the same manner as they are viewed by company management.
(6)Represents expenses related to the Company's digital capabilities and productivity enhancements investment. As a result of the segment changes noted above, these amounts were recast from the fiscal year 2023 and fiscal year 2022 reporting periods for Corporate and Other.
Due to the nature, scope and magnitude of this investment, these costs are considered by management to represent incremental transformational costs above the historical normal level of spending for information technology to support operations. Since these strategic investments, including incremental operating costs, will cease at the end of the investment period, are not expected to recur in the foreseeable future and are not considered representative of the company's underlying operating performance, the company's management believes presenting these costs as an adjustment in the non-GAAP results provides additional information to investors about trends in the company's operations and is useful for period-over-period comparisons. It also allows investors to view underlying operating results in the same manner as they are viewed by company management.
Of the total $500 million investment, approximately 65% is expected to represent incremental operating costs primarily recorded within selling and administrative expenses to be adjusted from reported Earnings (losses) before income taxes for purposes of disclosing adjusted EBIT over the course of the next five years. About 70% of these operating costs are expected to be related to the implementation of the ERP, with the remaining costs primarily related to the implementation of complementary technologies.
During the fiscal years ended June 30, 2023 and 2022, the Company incurred approximately $100 and $61, respectively, of operating expenses related to its digital capabilities and productivity enhancements investment. The expenses relate to the following:
20
| Fiscal year | |||||||||||
| 2023 | 2022 | ||||||||||
External consulting fees (1) | $ | 79 | $ | 43 | |||||||
IT project personnel costs (2) | 6 | 11 | |||||||||
Other (3) | 15 | 7 | |||||||||
| Total | $ | 100 | $ | 61 | |||||||
(1)Comprised of third-party consulting fees incurred to assist in the project management and the preliminary project stage of this transformative investment. The company relies on consultants for certain capabilities required for these programs that the company does not maintain internally. These costs support the implementation of these programs incremental to the company's normal IT costs and will not be incurred following implementation.
(2)Comprised of labor costs associated with internal IT project management teams that are utilized to oversee the new system implementations. Given the magnitude and transformative nature of the implementations planned, the necessary project management costs are incremental to the historical levels of spend and will no longer be incurred subsequent to implementation. As a result of this long-term strategic investment, the company considers these costs not reflective of the ongoing costs to operate its business.
(3)Comprised of various other expenses associated with the company’s new system implementations, including company personnel dedicated to the project that have been backfilled with either permanent or temporary resources in positions that are considered part of normal operating expenses.
Economic profit (EP) is defined by the Company as earnings before income taxes, excluding certain U.S. GAAP items (such as asset impairments, charges related to implementation of the streamlined operating model, charges related to digital capabilities and productivity enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability) and interest expense; less income taxes (calculated based on the Company’s effective tax rate excluding the identified U.S. GAAP items), and less after tax profit attributable to noncontrolling interests, and less a capital charge (calculated as average capital employed multiplied by a cost of capital rate). EP is a key financial metric that the Company’s management uses to evaluate business performance and allocate resources, and is a component in determining employee incentive compensation. The Company’s management believes EP provides additional perspective to investors about financial returns generated by the business and represents profit generated over and above the cost of capital used by the business to generate that profit. Refer to Exhibit 99.2 for a reconciliation of EP to earnings before income taxes.
Organic sales growth / (decrease) is defined as net sales growth / (decrease) excluding the effect of foreign exchange rate changes and any acquisitions and divestitures. Management believes that the presentation of organic sales growth / (decrease) is useful to investors because it excludes sales from any acquisitions and divestitures, which results in a comparison of sales only from the businesses that the Company was operating and expects to continue to operate throughout the relevant periods, and the Company’s estimate of the impact of foreign exchange rate changes, which are difficult to predict, and out of the control of the Company and management.
21
The following table provides a reconciliation of organic sales growth / (decrease) (non-GAAP) to net sales growth / (decrease) (GAAP), the most comparable GAAP measure:
| Year Ended June 30, 2023 | ||||||||||||||||||||
| Percentage change versus the year-ago period | ||||||||||||||||||||
| Health and Wellness | Household | Lifestyle | International | Total Company (1) | ||||||||||||||||
| Net sales growth / (decrease) (GAAP) | 4 | % | 6 | % | 7 | % | — | % | 4 | % | ||||||||||
| Add: Foreign Exchange | — | — | — | 11 | 2 | |||||||||||||||
| Add/(Subtract): Divestitures/Acquisitions | — | — | — | — | — | |||||||||||||||
| Organic sales growth / (decrease) (non-GAAP) | 4 | % | 6 | % | 7 | % | 11 | % | 6 | % | ||||||||||
| Year Ended June 30, 2022 | ||||||||||||||||||||
| Percentage change versus the year-ago period | ||||||||||||||||||||
| Health and Wellness | Household | Lifestyle | International | Total Company (1) | ||||||||||||||||
| Net sales growth / (decrease) (GAAP) | (10) | % | — | % | 3 | % | 2 | % | (3) | % | ||||||||||
| Add: Foreign Exchange | — | — | — | 4 | 1 | |||||||||||||||
| Add/(Subtract): Divestitures/Acquisitions | — | — | — | — | — | |||||||||||||||
| Organic sales growth / (decrease) (non-GAAP) | (10) | % | 0 | % | 3 | % | 6 | % | (2) | % | ||||||||||
(1) Total company includes Corporate and Other.
22
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this Report), including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and any such forward-looking statements involve risks, assumptions and uncertainties. Except for historical information, statements about future volumes, sales, organic sales growth, foreign currencies, costs, cost savings, margins, earnings, earnings per share, diluted earnings per share, foreign currency exchange rates, tax rates, cash flows, plans, objectives, expectations, growth or profitability are forward-looking statements based on management’s estimates, beliefs, assumptions and projections. Words such as “could,” “may,” “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “predicts,” and variations on such words, and similar expressions that reflect our current views with respect to future events and operational, economic and financial performance are intended to identify such forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed. Important factors that could affect performance and cause results to differ materially from management’s expectations are described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report, as updated from time to time in the Company’s Securities and Exchange Commission filings. These factors include, but are not limited to:
•unfavorable general economic and geopolitical conditions beyond our control, including recent supply chain disruptions, labor shortages, wage pressures, rising inflation, fuel and energy costs, foreign currency exchange rate fluctuations, weather events or natural disasters, disease outbreaks or pandemics, such as COVID-19, terrorism, and unstable geopolitical conditions, including the conflict in Ukraine, as well as macroeconomic and geopolitical volatility and uncertainty as a result of a number of these and other factors, including rising tensions between China and Taiwan and actual and potential shifts between the U.S. and its trading partners, especially China;
•volatility and increases in the costs of raw materials, energy, transportation, labor and other necessary supplies or services;
•the impact of the changing retail environment, including the growth of alternative retail channels and business models, and changing consumer preferences;
•the ability of the Company to drive sales growth, increase prices and market share, grow its product categories and manage favorable product and geographic mix;
•risks related to supply chain issues, product shortages and disruptions to the business, as a result of increased supply chain dependencies due to an expanded supplier network and a reliance on certain single-source suppliers;
•intense competition in the Company’s markets;
•risks related to the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions, especially at a time when a large number of the Company’s employees are working remotely and accessing its technology infrastructure remotely;
•the ability of the Company to implement and generate cost savings and efficiencies, and successfully implement its transformational initiatives or strategies, including achieving anticipated benefits and cost savings from the implementation of the streamlined operating model and digital capabilities upgrade and productivity enhancements;
•dependence on key customers and risks related to customer consolidation and ordering patterns;
•the Company’s ability to attract and retain key personnel, which may continue to be impacted by challenges in the labor market, such as wage inflation and sustained labor shortages;
•the Company’s ability to maintain its business reputation and the reputation of its brands and products;
•lower revenue, increased costs or reputational harm resulting from government actions and compliance with regulations, or any material costs imposed by changes in regulation;
•changes to our processes and procedures as a result of our digital capabilities upgrade and productivity enhancements that may result in changes to the Company's internal controls over financial reporting;
•the ability of the Company to successfully manage global political, legal, tax and regulatory risks, including changes in regulatory or administrative activity;
23
•risks related to international operations and international trade, including changing macroeconomic conditions as a result of inflation, volatile commodity prices and increases in raw and packaging materials prices, labor, energy and logistics; global economic or political instability; foreign currency fluctuations, such as devaluations, and foreign currency exchange rate controls; changes in governmental policies, including trade, travel or immigration restrictions, new or additional tariffs, and price or other controls; labor claims and civil unrest; continued high levels of inflation in Argentina; potential operational or supply chain disruptions from wars and military conflicts, including the conflict in Ukraine; impact of the United Kingdom’s exit from the European Union; potential negative impact and liabilities from the use, storage and transportation of chlorine in certain international markets where chlorine is used in the production of bleach; widespread health emergencies, such as COVID-19; and the possibility of nationalization, expropriation of assets or other government action;
•the impact of Environmental, Social, and Governance (ESG) issues, including those related to climate change and sustainability on our sales, operating costs or reputation;
•the ability of the Company to innovate and to develop and introduce commercially successful products, or expand into adjacent categories and countries;
•the impact of product liability claims, labor claims and other legal, governmental or tax proceedings, including in foreign jurisdictions and in connection with any product recalls;
•the COVID-19 pandemic and related impacts, including on the availability of, and efficiency of the supply, manufacturing and distribution systems for, the Company’s products, including any significant disruption to such systems; on the demand for and sales of the Company’s products; and on worldwide, regional and local adverse economic conditions;
•risks relating to acquisitions, new ventures and divestitures, and associated costs, including for asset impairment charges related to, among others, intangible assets, including trademarks and goodwill, in particular the impairment charges related to the carrying value of the Company's VMS business; and the ability to complete announced transactions and, if completed, integration costs and potential contingent liabilities related to those transactions;
•the accuracy of the Company’s estimates and assumptions on which its financial projections, including any sales or earnings guidance or outlook it may provide from time to time, are based;
•risks related to additional increases in the estimated fair value of P&G’s interest in the Glad business;
•environmental matters, including costs associated with the remediation and monitoring of past contamination, and possible increases in costs resulting from actions by relevant regulators, and the handling and/or transportation of hazardous substances;
•the Company’s ability to effectively utilize, assert and defend its intellectual property rights, and any infringement or claimed infringement by the Company of third-party intellectual property rights;
•the performance of strategic alliances and other business relationships;
•the effect of the Company’s indebtedness and credit rating on its business operations and financial results and the Company’s ability to access capital markets and other funding sources, as well as the cost of capital to the Company;
•the Company’s ability to pay and declare dividends or repurchase its stock in the future;
•the impacts of potential stockholder activism; and
•risks related to any litigation associated with the exclusive forum provision in the Company’s bylaws.
The Company’s forward-looking statements in this Report are based on management’s current views, beliefs, assumptions and expectations regarding future events and speak only as of the date of this Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws. In this Report, unless the context requires otherwise, the terms “the Company,” “Clorox,” “we,” “us,” and “our” refer to The Clorox Company and its subsidiaries.
24
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework published in 2013. Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2023, and concluded that it is effective.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of June 30, 2023, as stated in their report, which is included herein.
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Clorox Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Clorox Company (the Company) as of June 30, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 10, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
26
Valuation of Venture Agreement Terminal Obligation | |||||
Description of the Matter | As discussed in Note 9 of the consolidated financial statements, the Company has an agreement with The Proctor & Gamble Company (P&G) for the Company’s Glad bags and wraps business, for which the Company is required to purchase P&G’s 20% interest in the venture for cash at fair value of the global Glad business upon termination of the agreement. At June 30, 2023, the fair value of $495 million has been recognized as a venture agreement terminal obligation and represented 9% of total liabilities. Auditing the Company’s Glad venture agreement terminal obligation is complex and highly judgmental and required the involvement of a valuation specialist due to the significant judgment in estimating the fair value of the global Glad business. In particular, the fair value estimate is sensitive to assumptions such as net sales growth rates, gross margins, discount rate and commodity prices. These assumptions are sensitive to and affected by expected future market or economic conditions, particularly those in emerging markets, and industry and company-specific qualitative factors. | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the venture agreement terminal obligation valuation review process. This included controls over the Company’s budgetary and forecasting process used to develop the estimated fair value of the global Glad business. We also tested management’s controls over the data used in their valuation models and review of the significant assumptions such as estimation of net sales, expense growth rates, terminal growth rates and commodity prices. To test the estimated fair value of the venture agreement terminal obligation, we performed audit procedures that included, among others, assessing the methodologies, testing the significant assumptions discussed above used to develop estimates of future earnings and cash flows, and testing the completeness and accuracy of the underlying data. We compared the significant assumptions used by management to current industry and economic trends, the Company’s historical results and other guideline companies within the same industry, and we evaluated whether changes in the Company’s business, including shifts in consumer demands and commodity prices, would affect the significant assumptions. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the venture agreement terminal obligation resulting from changes in these assumptions. We involved our valuation specialists to assist in reviewing the valuation methodology and testing the terminal growth rates and discount rates. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
August 10, 2023
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Clorox Company
Opinion on Internal Control Over Financial Reporting
We have audited The Clorox Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Clorox Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of The Clorox Company as of June 30, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated August 10, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
August 10, 2023
28
CONSOLIDATED STATEMENTS OF EARNINGS
The Clorox Company
Years ended June 30
| Dollars in millions, except per share data | 2023 | 2022 | 2021 | |||||||||||||||||
| Net sales | $ | $ | $ | |||||||||||||||||
| Cost of products sold | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Selling and administrative expenses | ||||||||||||||||||||
| Advertising costs | ||||||||||||||||||||
| Research and development costs | ||||||||||||||||||||
| Goodwill, trademark and other asset impairments | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Other (income) expense, net | ( | |||||||||||||||||||
| Earnings before income taxes | ||||||||||||||||||||
| Income taxes | ||||||||||||||||||||
| Net earnings | ||||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interests | ||||||||||||||||||||
| Net earnings attributable to Clorox | $ | $ | $ | |||||||||||||||||
| Net earnings per share attributable to Clorox | ||||||||||||||||||||
| Basic net earnings per share | $ | $ | $ | |||||||||||||||||
| Diluted net earnings per share | $ | $ | $ | |||||||||||||||||
| Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The Clorox Company
Years ended June 30 | ||||||||||||||||||||
| Dollars in millions | 2023 | 2022 | 2021 | |||||||||||||||||
| Net earnings | $ | $ | $ | |||||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||
| Foreign currency adjustments, net of tax | ( | |||||||||||||||||||
| Net unrealized gains (losses) on derivatives, net of tax | ( | |||||||||||||||||||
| Pension and postretirement benefit adjustments, net of tax | ||||||||||||||||||||
| Total other comprehensive (loss) income, net of tax | ( | |||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | ||||||||||||||||||||
| Total comprehensive income attributable to Clorox | $ | $ | $ | |||||||||||||||||
See Notes to Consolidated Financial Statements
30
CONSOLIDATED BALANCE SHEETS
The Clorox Company
| As of June 30 | ||||||||||||||
| Dollars in millions, except per share data | 2023 | 2022 | ||||||||||||
ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Receivables, net | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Trademarks, net | ||||||||||||||
| Other intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Notes and loans payable | $ | $ | ||||||||||||
| Current operating lease liabilities | ||||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Stockholders’ equity | ||||||||||||||
Preferred stock: $ | ||||||||||||||
Common stock: $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
Treasury stock, at cost: | ( | ( | ||||||||||||
| Accumulated other comprehensive net (loss) income | ( | ( | ||||||||||||
| Total Clorox stockholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The Clorox Company
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Net (Loss) Income | Noncontrolling interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions except per share data; shares in thousands) | Amount | Shares | Retained Earnings | Amount | Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | $ | ( | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to Clorox stockholders ($ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Business combinations including purchase accounting adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other employee stock plan activities | — | — | ( | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock retirement | ( | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to Clorox stockholders ($ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other employee stock plan activities | — | — | ( | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends to Clorox stockholders ($ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other employee stock plan activities | — | — | ( | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Clorox Company
| Years ended June 30 | ||||||||||||||||||||
| Dollars in millions | 2023 | 2022 | 2021 | |||||||||||||||||
| Operating activities: | ||||||||||||||||||||
| Net earnings | $ | $ | $ | |||||||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operations: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||||||||
| Goodwill, trademark and other asset impairments | ||||||||||||||||||||
| Settlement of interest rate derivative contracts | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Changes in: | ||||||||||||||||||||
| Receivables, net | ( | ( | ||||||||||||||||||
| Inventories, net | ( | ( | ||||||||||||||||||
| Prepaid expenses and other current assets | ( | ( | ||||||||||||||||||
| Accounts payable and accrued liabilities | ( | |||||||||||||||||||
| Operating lease right-of-use assets and liabilities, net | ( | ( | ||||||||||||||||||
| Income taxes payable/prepaid | ( | |||||||||||||||||||
| Net cash provided by operations | ||||||||||||||||||||
| Investing activities: | ||||||||||||||||||||
| Capital expenditures | ( | ( | ( | |||||||||||||||||
| Businesses acquired, net of cash acquired | ( | |||||||||||||||||||
| Other | ( | |||||||||||||||||||
| Net cash used for investing activities | ( | ( | ( | |||||||||||||||||
| Financing activities: | ||||||||||||||||||||
| Notes and loans payable, net | ( | |||||||||||||||||||
| Long-term debt repayments | ( | |||||||||||||||||||
| Long-term debt borrowings, net of issuance costs paid | ||||||||||||||||||||
| Treasury stock purchased | ( | ( | ||||||||||||||||||
| Cash dividends paid to Clorox stockholders | ( | ( | ( | |||||||||||||||||
| Cash dividends paid to noncontrolling interests | ( | ( | ( | |||||||||||||||||
| Issuance of common stock for employee stock plans and other | ||||||||||||||||||||
| Net cash used for financing activities | ( | ( | ( | |||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | |||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ( | ||||||||||||||||||
| Cash, cash equivalents and restricted cash: | ||||||||||||||||||||
| Beginning of year | ||||||||||||||||||||
| End of year | $ | $ | $ | |||||||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||
| Interest paid | $ | $ | $ | |||||||||||||||||
| Income taxes paid, net of refunds | ||||||||||||||||||||
| Noncash financing activities: | ||||||||||||||||||||
| Cash dividends declared and accrued, but not paid | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Clorox Company
(Dollars in millions, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The Company is principally engaged in the production, marketing and sale of consumer products through mass retailers, grocery outlets, warehouse clubs, dollar stores, home hardware centers, drug, pet and military stores, third-party and owned e-commerce channels, and distributors. The consolidated financial statements include the statements of the Company and its wholly owned and controlled subsidiaries. All significant intercompany transactions and accounts were eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to reach opinions as to estimates and assumptions that affect reported amounts and related disclosures. Specific areas requiring the application of management’s estimates and judgments include, among others, assumptions pertaining to accruals for consumer and trade-promotion programs, future cash flows associated with impairment testing of goodwill and other long-lived assets, uncertain tax positions, tax valuation allowances, the valuation of the Venture Agreement terminal obligation, stock-based compensation, retirement income plans, as well as legal, environmental and insurance matters, and the valuation of assets acquired and liabilities assumed in connection with a business combination. Actual results could materially differ from estimates and assumptions made.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid interest-bearing accounts, time deposits held by financial institutions and money market funds with an initial maturity at purchase of 90 days or less. The fair value of cash and cash equivalents approximates the carrying amount.
As of June 30, 2023, 2022, 2021 and 2020, the Company had $1 3 5 8
Inventories
The Company values its inventories using both the First-In, First-Out (FIFO) and the Last-In, First-Out (LIFO) methods. The FIFO inventory is stated at the lower of cost or net realizable value, which includes any costs to sell or dispose. In addition, appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value. The LIFO inventory is stated at the lower of cost or market.
34
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment and Finite-Lived Intangible Assets
Property, plant and equipment and finite-lived intangible assets are stated at cost. Depreciation and amortization expense are primarily calculated by the straight-line method using the estimated useful lives or lives determined by reference to the related lease contract in the case of leasehold improvements. The table below provides estimated useful lives of property, plant and equipment by asset classification.
Estimated Useful Lives | |||||
| Buildings and leasehold improvements | |||||
| Land improvements | |||||
| Machinery and equipment | |||||
| Computer equipment | |||||
| Capitalized software costs | |||||
Finite-lived intangible assets are amortized over their estimated useful lives, which range from 7 to 30 years.
Property, plant and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be fully recoverable. The risk of impairment is initially assessed based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist. Impairment occurs when the carrying value of the asset (or asset group) exceeds the estimated future undiscounted cash flows generated by the asset (or asset group). When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset (or asset group) and its estimated fair market value. Depending on the asset, estimated fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition.
Capitalization of Software Costs
The Company capitalizes certain qualifying costs incurred in the acquisition and development of software for internal use, including the costs of the software, materials, consultants, interest and payroll and payroll-related costs for employees during the application development stage. Internal and external costs incurred during the preliminary project stage and post implementation-operation stage, mainly training and maintenance costs, are expensed as incurred. Once the application is substantially complete and ready for its intended use, qualifying costs are amortized on a straight-line basis over the software’s estimated useful life. Capitalized internal use software is included in Property, plant and equipment. Capitalized software as a service is included in Prepaid expenses and other current assets or Other assets and is amortized using the straight-line method over the term of the hosting arrangement which is typically no greater than 10 years.
Business Combinations
The Company records acquired businesses within the consolidated financial statements using the acquisition method prospectively from the acquisition date. Under the acquisition method, once control is obtained, assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, are recorded at their respective fair values on the acquisition date. The Company’s estimates of fair value are inherently uncertain and subject to refinement. The excess of the total of the purchase consideration, fair value of the noncontrolling interest and fair value of the previously held equity interest over the identifiable assets acquired and liabilities assumed is recorded as goodwill. Measurement period adjustments to the fair values of the identifiable assets acquired and liabilities assumed with the corresponding offset to goodwill, if applicable, are applied in the reporting period in which the adjustment amounts are determined based on new information obtained during the measurement period. In the event of a step acquisition, the Company records a gain or loss in Other income (expense), net on the consolidated statement of earnings as a result of remeasuring a previously held equity interest to fair value on the acquisition date. Transaction expenses are recognized separately from the business combination and are expensed as incurred.
Impairment Review of Goodwill and Indefinite-Lived Intangible Assets
The Company tests its goodwill, trademarks with indefinite lives and other indefinite-lived intangible assets annually for impairment in the fiscal fourth quarter unless there are indications during a different interim period that these assets may have become impaired.
With respect to goodwill, the Company has the option to first assess qualitative factors, such as the maturity and stability of the reporting unit, the magnitude of the excess fair value over carrying value from a previous period’s impairment testing, other reporting unit specific operating results, microeconomic and macroeconomic factors, as well as new events and circumstances impacting the operations at the reporting unit level. The Company operates through strategic business units (SBUs) that are organized into the Company's operating segments. Reporting units for goodwill impairment testing purposes were identified as
35
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the Company's individual operating segments. If the result of a qualitative test indicates a potential for impairment of a reporting unit, a quantitative test is performed. In the quantitative test, the Company compares the estimated fair value of the reporting unit to its carrying value. If the estimated fair value of any reporting unit is less than its carrying value, an impairment charge is recorded for the difference between the carrying value and the fair value of the reporting unit.
To determine the fair value of a reporting unit as part of its quantitative test, the Company uses the discounted cash flow (DCF) method under the income approach, as it believes that this approach is the most reliable indicator of the fair value of its businesses and the fair value of its future earnings and cash flows. Under this approach, which requires significant judgments, the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk. The cash flows used in the DCF method are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced, and the broader business strategy for the long term. The other key estimates and factors used in the DCF method include, but are not limited to, net sales and expense growth rates, commodity prices, foreign exchange rates, inflation and a terminal growth rate. Changes in such estimates or the application of alternative assumptions could produce different results.
Leases
The Company determines whether an arrangement contains a lease at inception by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration and other facts and circumstances. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date and initial direct costs incurred by the Company and excludes any lease incentives received from the lessor. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The lease term may include an option to extend or terminate the lease when it is reasonably certain that the Company will exercise that option as of the commencement date of the lease, and is reviewed in subsequent periods if a triggering event occurs. As the Company’s leases typically do not contain a readily determinable implicit rate, the Company determines the present value of the lease liability using its incremental borrowing rate at the lease commencement date based on the lease term and the currency of the lease on a collateralized basis. Variable lease payments are the portion of lease payments that are not fixed over the lease term. Variable lease payments are expensed as incurred, and include certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease, as applicable. The Company elected to combine lease and non-lease components as a single lease component and to exclude short-term leases, defined as leases with an initial term of 12 months or less, from its consolidated balance sheet.
Restructuring Liabilities
The Company incurs restructuring costs in connection with workforce reductions; consolidation or closure of a facility; sale or termination of a line of business; and other actions. Such costs include employee termination benefits (one-time arrangements and benefits attributable to prior service), termination of contractual obligations, noncash asset charges and other direct incremental costs.
The Company records employee termination liabilities once they are both probable and estimable for severance provided under the Company’s existing severance policy. Employee termination liabilities outside of the Company’s existing severance policy are recognized at the time relevant employees are notified, unless the employees will be retained to render service beyond a minimum retention period for transition purposes, in which case the liability is recognized ratably over the future service period. Other costs associated with a restructuring plan or exit or disposal activities, such as consulting and professional fees, facility exit costs, employee relocation, outplacement costs, accelerated depreciation or asset impairments associated with a restructuring plan, are recognized in the period in which the liability is incurred or the asset is impaired.
36
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based Compensation
The Company grants various nonqualified stock-based compensation awards to eligible employees, including stock options, restricted stock awards and performance shares.
For stock options, the Company estimates the fair value of each award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The Company estimates stock option forfeitures based on historical data for each employee grouping. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. Compensation expense is recorded by amortizing the grant date fair values on a straight-line basis over the vesting period, adjusted for estimated forfeitures.
For restricted stock awards, the fair value of each grant issued is estimated on the date of grant based on the current market price of the stock. Forfeitures are estimated based on historical data. The total number of restricted stock awards expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. Compensation expense is recorded by amortizing the grant date fair values on a straight-line basis over the vesting period, adjusted for estimated forfeitures.
The Company’s performance shares provide for the issuance of common stock to certain managerial staff and executive management if the Company achieves specified performance targets. The number of shares issued is dependent upon the achievement of specified performance targets. The performance period is three years and the payout determination is made at the end of the three-year performance period. Performance shares receive dividends earned during the vesting period upon vesting. The fair value of each grant issued is estimated on the date of grant based on the current market price of the stock. The total amount of compensation expense recognized reflects estimated forfeiture rates and management’s assessment of the probability that performance goals will be achieved. A cumulative adjustment is recognized to compensation expense in the current period to reflect any changes in the probability of achievement of performance goals.
Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based payment arrangements (excess tax benefits) are classified as operating cash inflows.
Employee Benefits
The Company accounts for its retirement income and retirement health care plans using actuarial methods. These methods use an attribution approach that generally spreads “plan events” over the service lives or expected lifetime (for frozen plans) of plan participants. Examples of plan events are plan amendments and changes in actuarial assumptions such as the expected return on plan assets, discount rate, rate of compensation increase and certain employee-related factors, such as retirement age and mortality. The principle underlying the attribution approach is that employees render service over their employment period on a relatively “smooth” basis and, therefore, the statement of earnings effects of retirement income and retirement health care plans are recognized in the same pattern. One of the principal assumptions used in the net periodic benefit cost calculation is the expected return on plan assets. The expected return on plan assets may result in recognized expense or income that differs from the actual returns of those plan assets in any given year. Over time, however, the goal is for the expected long-term returns to approximate the actual returns and, therefore, the expectation is that the pattern of income and expense recognition should closely match the pattern of the services provided by the participants. The Company uses a market-related value method for calculating plan assets for purposes of determining the amortization of actuarial gains and losses. The differences between actual and expected returns are recognized in the net periodic benefit cost calculation over the average remaining service period or expected lifetime (for frozen plans) of the plan participants using the corridor approach. Under this approach, only actuarial gains (losses) that exceed 5 % of the greater of the projected benefit obligation or the market-related value of assets are amortized to the Company’s net periodic benefit cost. In developing its expected return on plan assets, the Company considers the long-term actual returns relative to the mix of investments that comprise its plan assets and also develops estimates of future investment returns by considering external sources.
The Company recognizes an actuarial-based obligation at the onset of disability for certain benefits provided to individuals after employment, but before retirement, that includes medical, dental, vision, life and other benefits.
37
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Environmental Costs
The Company is involved in certain environmental remediation and ongoing compliance activities. Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and based upon a reasonable estimate of the liability. The Company’s accruals reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. The accrual for environmental matters is included in Accounts payable and accrued liabilities and Other liabilities in the Company’s consolidated balance sheets on an undiscounted basis due to uncertainty regarding the timing of future payments.
Revenue Recognition
The Company’s revenue is primarily generated from the sale of finished product to customers. Revenue is recognized at the point in time when performance obligations under the terms of customer contracts are satisfied, which is when ownership, risks and rewards transfer, and can be on the date of shipment or the date of receipt by the customer, depending upon the particular customer arrangement. Shipping and handling activities are accounted for as contract fulfillment costs and included within Cost of products sold. After the completion of the performance obligation, there is an unconditional right to consideration as outlined in the contract. A right is considered unconditional if nothing other than the passage of time is required before payment of that consideration is due. The Company typically collects its customer receivables within two months. All performance obligations under the terms of contracts with customers have an original duration of one year or less .
The Company has trade promotion programs, which primarily include shelf price reductions, in-store merchandising and consumer coupons. The costs of such activities, defined as variable consideration under ASC 606, “Revenue from Contracts with Customers,” are netted against sales and recorded when the related sales take place. Accruals for trade promotion programs are established based on the Company’s best estimate of the amounts necessary to settle existing and future obligations for products sold as of the balance sheet date. Amounts accrued for trade-promotions are based on various factors such as contractual terms and sales volumes, and also incorporate estimates that include customer participation rates, the rate at which customers will achieve program performance criteria, product availability and historical consumer redemption rates.
Cost of Products Sold
Cost of products sold represents the costs directly related to the manufacture and distribution of the Company’s products and primarily includes raw materials, packaging, contract manufacturing fees, shipping and handling, warehousing, package design, depreciation, amortization, direct and indirect labor and operating costs for the Company’s manufacturing and distribution facilities, including salary, benefit costs and incentive compensation, and royalties and other charges related to the Company’s Glad Venture Agreement (See Note 9).
Selling and Administrative Expenses
Selling and administrative expenses represent costs incurred by the Company in generating revenues and managing the business and include market research, commissions and certain administrative expenses. Administrative expenses include salary, benefits, incentive compensation, professional fees and services and other operating costs (such as software and licensing costs) associated with the Company’s non-manufacturing, non-research and development operations.
Advertising and Research and Development Costs
The Company expenses advertising and research and development costs in the period incurred.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax basis. Management reviews the Company’s deferred tax assets to determine whether their value can be realized based upon
38
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Transactions and Translation
Local currencies are the functional currencies for substantially all of the Company’s foreign operations. When the transactional currency is different than the functional currency, transaction gains and losses are included as a component of Other (income) expense, net. In addition, certain assets and liabilities denominated in currencies other than a foreign subsidiary’s functional currency are reported on the subsidiary’s books in its functional currency, with the impact from exchange rate differences recorded in Other (income) expense, net. Assets and liabilities of foreign operations are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expenses are translated at the respective average monthly exchange rates during the year.
Gains and losses on foreign currency translations are reported as a component of Other comprehensive (loss) income. The income tax effect of currency translation adjustments is recorded as a component of deferred taxes with an offset to Other comprehensive (loss) income where appropriate.
Effective July 1, 2018, under the requirements of U.S. GAAP, Argentina was designated as a highly inflationary economy, since it has experienced cumulative inflation of approximately 100 percent or more over a three-year period. As a result, beginning July 1, 2018, the U.S. dollar replaced the Argentine peso as the functional currency of the Company’s subsidiaries in Argentina (collectively, “Clorox Argentina”). Consequently, gains and losses from non-U.S. dollar denominated monetary assets and liabilities for Clorox Argentina are recognized in Other (income) expense, net in the consolidated statement of earnings.
Derivative Instruments
The Company’s use of derivative instruments, principally exchange-traded futures and options contracts, and over-the counter swaps and forward contracts, is limited to non-trading purposes and is designed to partially manage exposure to changes in commodity prices, foreign currencies and interest rates. The Company’s contracts are hedges for transactions with notional amounts and periods consistent with the related exposures and do not constitute investments independent of these exposures.
The changes in the fair value (i.e., gains or losses) of a derivative instrument are recorded as either assets or liabilities in the consolidated balance sheets with an offset to Net earnings or Other comprehensive (loss) income depending on whether, for accounting purposes, it has been designated and qualifies as an accounting hedge and, if so, on the type of hedging relationship. The criteria used to determine if hedge accounting treatment is appropriate are: (a) formal designation and documentation of the hedging relationship, the risk management objective and hedging strategy at hedge inception; (b) eligibility of hedged items, transactions and corresponding hedging instrument; and (c) effectiveness of the hedging relationship both at inception of the hedge and on an ongoing basis in achieving the hedging objectives. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument either as a fair value hedge or as a cash flow hedge. The Company designates its commodity futures, options and swaps contracts for forecasted purchases of raw materials, foreign currency forward contracts for forecasted purchases of inventory and interest rate contracts for forecasted interest payments as cash flow hedges. During the fiscal years ended June 30, 2023, 2022 and 2021, the Company had no
For derivative instruments designated and qualifying as cash flow hedges, gains or losses are reported as a component of Other comprehensive (loss) income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. From time to time, the Company may have contracts not designated as hedges for accounting purposes, for which it recognizes changes in the fair value in the consolidated statement of earnings in the current period. Cash flows from hedging activities are classified as operating activities in the consolidated statements of cash flows.
39
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards
Recently Issued Accounting Standards Not Yet Adopted
In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” These amendments require disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. As these amendments relate to disclosures only, there are no impacts expected to the Company’s consolidated results of operations, financial position and cash flows.
40
NOTE 2. BUSINESS ACQUIRED
Saudi Joint Venture Acquisition
On July 9, 2020, the Company increased its investment in each of the two entities comprising its joint venture in the Kingdom of Saudi Arabia (Saudi joint venture). The joint venture offers customers in the Gulf region a range of cleaning and disinfecting products. The Company had previously accounted for its 30 percent investment of $27 as of June 30, 2020, under the equity method of accounting. Subsequent to the closing of this transaction, the Company's total ownership interest in each of the entities increased to 51 percent. The Company has consolidated this joint venture into its consolidated financial statements from the date of acquisition and reflects operations within the International reportable segment. The equity and income attributable to the other joint venture owners is recorded and presented as noncontrolling interests.
The total purchase consideration of $111 consisted of $100 cash paid, which was sourced from operations, and $11 from the net effective settlement of preexisting arrangements between the Company and the joint venture. The assets and liabilities of the joint venture were recorded at their respective estimated fair value as of the acquisition date using generally accepted accounting principles for business combinations. The excess of the purchase price over the fair value of the net identifiable assets acquired was allocated to goodwill in the International reportable segment in the amount of $208 . The goodwill is primarily attributable to the synergies expected to arise after the acquisition and reflected the value of further growth anticipated in the Gulf region. None of the goodwill is deductible for tax purposes.
As a result of this transaction, the carrying value of the Company’s previously held equity investment was remeasured to fair value, and resulted in an $85 nonrecurring, noncash gain recorded in Other (income) expense, net in the consolidated statement of earnings and adjusted in Other operating activities in the consolidated statement of cash flows for the first quarter of fiscal year 2021. The fair values of the noncontrolling interests and previously held equity interest were determined using the DCF method under the income approach. Under this approach, the Company estimated future cash flows and discounts these cash flows at a rate of return that reflected the entities’ relative risk.
The purchase price allocation was finalized during the second quarter of fiscal year 2021. The following table summarizes the final purchase price allocation for the fair value of the joint venture’s assets acquired and liabilities assumed and the related deferred income taxes as of the acquisition date. The finite-lived intangibles acquired primarily represent the Company reacquiring previously licensed trademarks and customer relationships. The weighted-average estimated useful life of intangible assets subject to amortization was 9 years.
| Joint Venture | |||||
| Goodwill | $ | ||||
| Reacquired rights (included in Other intangible assets, net) | |||||
| Property, plant and equipment | |||||
| Customer relationships (included in Other intangible assets, net) | |||||
Working capital, net (includes cash acquired of $ | |||||
| Noncurrent liabilities, net | ( | ||||
| Deferred income taxes | ( | ||||
| Total fair value of net assets | |||||
| Less: Fair value of noncontrolling interests | ( | ||||
| Less: Fair value of previously held equity interest | ( | ||||
| Total purchase consideration | $ | ||||
41
NOTE 3. RESTRUCTURING AND RELATED COSTS (Continued)
NOTE 3. RESTRUCTURING AND RELATED COSTS
Beginning in the first quarter of fiscal year 2023, the Company recognized costs related to a plan that involves streamlining its operating model to meet its objectives of driving growth and productivity. The streamlined operating model is expected to enhance the Company’s ability to respond more quickly to changing consumer behaviors and innovate faster. The Company anticipates the implementation of this new model will be completed in fiscal year 2024, with different phases occurring throughout the implementation period.
The Company incurred $60 of costs in fiscal year 2023 and anticipates incurring approximately $30 to $40 in fiscal year 2024 related to this initiative, of which approximately half are expected to include employee-related costs to reduce certain staffing levels such as severance payments, with the remainder for consulting and other costs. Costs incurred are expected to be settled primarily in cash.
The total restructuring and related implementation costs, net associated with the Company’s streamlined operating model plan as reflected in the Consolidated Statements of Earnings and Comprehensive Income for the fiscal year ended June 30 were:
| 2023 | |||||||||||||||||||||||
| $ | ( | ||||||||||||||||||||||
| ( | |||||||||||||||||||||||
| Other (income) expense, net: | |||||||||||||||||||||||
Total, net | $ | ||||||||||||||||||||||
Employee-related costs primarily include severance and other termination benefits calculated based on salary levels, prior service and statutory requirements. Other costs primarily include consulting fees incurred for the organizational design and implementation of the streamlined operating model, related processes and other professional fees incurred.
The Company may, from time to time, decide to pursue additional restructuring-related initiatives that involve costs in future periods.
The following table reconciles the accrual for the streamlined operating model restructuring and related implementation costs discussed above, which are recorded within Accounts payable and accrued liabilities in the Consolidated Balance Sheets as follows for the fiscal years ended June 30:
| Employee-Related Costs | Other | Total | |||||||||||||||
Accrual Balance as of June 30, 2022 | $ | $ | $ | ||||||||||||||
Charges | |||||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||
Accrual Balance as of June 30, 2023 | $ | $ | $ | ||||||||||||||
42
NOTE 4. INVENTORIES, NET
Inventories, net consisted of the following as of June 30:
| 2023 | 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials and packaging | |||||||||||
| Work in process | |||||||||||
| LIFO allowances | ( | ( | |||||||||
| Total inventories, net | |||||||||||
Non-current inventories, net (1) | |||||||||||
| Total current inventories, net | $ | $ | |||||||||
(1)Non-current inventories, net is recorded in Other assets.
The LIFO method was used to value approximately 36
NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET
| 2023 | 2022 | ||||||||||
| Land and improvements | $ | $ | |||||||||
| Buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Capitalized software costs | |||||||||||
| Computer equipment | |||||||||||
| Construction in progress | |||||||||||
| Total | |||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
Depreciation and amortization expense related to property, plant and equipment, net, was $
Noncash capital expenditures were $9 , $6 and $13 for fiscal years, 2023, 2022 and 2021, respectively. There were no
43
NOTE 6. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reportable segment and Corporate and Other for the fiscal years ended June 30, 2023 and 2022 were as follows:
| Goodwill | |||||||||||||||||||||||||||||||||||
Health and Wellness (1) | Household | Lifestyle | International | Corporate and Other (1) | Total | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Effect of foreign currency translation | ( | ( | |||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goodwill impairment | ( | ( | |||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) $306 of goodwill related to the VMS reporting unit previously included within Health and Wellness was recast to Corporate and Other as a result of segment changes effective in the fourth quarter of fiscal year 2023. See Note 19 for more information.
The changes in the carrying amount of trademarks and other intangible assets for the fiscal years ended June 30, 2023 and 2022 were as follows:
| As of June 30, 2023 | As of June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization / Impairments | Net carrying amount | Gross carrying amount | Accumulated amortization / Impairments | Net carrying amount | ||||||||||||||||||||||||||||||
Trademarks with indefinite lives (1) | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||
Trademarks with finite lives (1) | |||||||||||||||||||||||||||||||||||
| Other intangible assets with finite lives | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) As of June 30, 2023 reflects changes to the useful lives of certain VMS and International indefinite-lived trademarks to finite-lived effective April 1, 2023.
Amortization expense relating to the Company’s intangible assets was $30 , $31 and $32 for the years ended June 30, 2023, 2022 and 2021, respectively. Estimated amortization expense for these intangible assets is $29 , $28 , $28 , $29 and $28 for fiscal years 2024, 2025, 2026, 2027 and 2028, respectively.
Fiscal Year 2023 Impairments
During the third quarter of fiscal year 2023, management made a decision to narrow the focus on core brands and streamline investment levels in the VMS business. As a result, revisions were made to the internal financial projections and operational plans of the VMS business reflecting the Company’s current estimates regarding the future financial performance of these operations and macroeconomic factors. The revised estimated future cash flows reflect lower sales growth expectations and lower investment levels. These revisions were considered a triggering event requiring interim impairment assessments to be performed as part of the preparation of the quarterly financial statements on the global indefinite-lived trademarks, other long-term assets and the VMS reporting unit.
Based on the outcome of these assessments, the following pre-tax, noncash impairment charges were recorded during fiscal year 2023:
| Impairment Charges | |||||||||||
| VMS reporting unit | International reporting unit | Total | |||||||||
| Goodwill | $ | $ | $ | ||||||||
| Trademarks, net | |||||||||||
| Total | $ | $ | $ | ||||||||
In connection with recognizing these impairment charges, the Company recognized tax benefits related to the impairments of $83 due to the partial tax deductibility of these charges.
44
To determine the estimated fair values of the global indefinite-lived trademarks related to the VMS business, the Company used the DCF method under the relief from royalty income approach. This approach requires significant judgments in determining the royalty rates and the assets’ estimated cash flows as well as the appropriate discount rates applied to those cash flows to determine fair value. As a result of the interim impairment test, the Company concluded that the carrying value of the global indefinite-lived trademarks exceeded their estimated fair value, and recorded impairment charges of $139 . In addition, the useful lives of the impaired trademarks, with a remaining net carrying value of $28 as of March 31, 2023, were changed from indefinite to finite beginning on April 1, 2023, which reflects the remaining expected useful lives of the trademarks based on the most recent financial and operational plans. The weighted-average estimated useful life of these trademarks is 20 years.
After adjusting the carrying values of the global indefinite-lived trademarks and concluding that the carrying amounts of the other long-lived assets were recoverable, the Company completed a quantitative impairment test for goodwill and recorded a goodwill impairment charge of $306 in the VMS reporting unit. To determine the fair value of the VMS reporting unit, the Company used a DCF method under the income approach. In accordance with this approach, the Company estimated the future cash flows of the VMS reporting unit and discounted these cash flows at a rate of return that reflects its relative risk. The other key estimates and factors used in the DCF method include, but are not limited to, net sales and expense growth rates and a terminal growth rate. The decrease in projected cash flows due to the revisions adversely impacted key assumptions used in determining the fair value of the VMS reporting unit and assets contained therein, primarily projected net sales. There is no remaining goodwill associated with the impaired reporting unit.
Fiscal Year 2021 Impairments
During fiscal year 2021, as a result of lower than expected actual and projected net sales growth and operating performance for the VMS business, a strategic review was initiated by management that resulted in updated financial and operational plans. These events were considered a triggering event requiring interim impairment assessments to be performed on the VMS reporting unit, indefinite-lived trademarks and other assets. Based on the outcome of these assessments, the following pre-tax impairment charges were recorded during fiscal year 2021:
| Impairment Charges | |||||
| VMS reporting unit | |||||
| Goodwill | $ | ||||
| Trademarks, net | |||||
| Other intangible assets, net | |||||
| Property, plant and equipment, net | |||||
| Total | $ | ||||
In connection with recognizing these impairment charges, the Company recognized tax benefits related to the impairments of $62 due to the partial tax deductibility of these charges.
The fiscal year 2021 impairment charges were a result of a higher level of competitive activity than originally assumed, accelerated declines in certain channels where the business was over-developed and higher than anticipated investments to grow the business, which adversely affected the assumptions used to determine the fair value of the respective assets held by the VMS reporting unit for growth and the estimates of expenses necessary to achieve that growth. These impairment charges were based on the Company’s estimates regarding the future financial performance of the VMS business and macroeconomic factors.
To determine the estimated fair values of the VMS related indefinite-lived trademarks, the Company used the relief from royalty income approach. This approach required significant judgments in determining the royalty rates and the assets’ estimated cash flows as well as the appropriate discount rates applied to those cash flows to determine fair value.
To determine the fair value of the VMS reporting unit, the Company used the DCF method under the income approach. Under this approach, the Company estimated the future cash flows of the VMS reporting unit and discounted these cash flows at a rate of return that reflected its relative risk. The other key estimates and factors used in the DCF method included, but were not limited to, net sales and expense growth rates, and a terminal growth rate.
Additionally, during fiscal year 2021, an impairment charge of $14 was recorded within Cost of products sold related to other intangible assets with finite lives that were no longer expected to be recoverable due to a pending exit from a Professional Products SBU supplier relationship. The remaining carrying value of these assets was $0 following the impairment charge.
45
NOTE 6. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS (Continued)
46
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| 2023 | 2022 | ||||||||||
| Accounts payable | $ | $ | |||||||||
| Compensation and employee benefit costs | |||||||||||
| Trade and sales promotion costs | |||||||||||
| Dividends | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
NOTE 8. DEBT
Short-term borrowings
Notes and loans payable are borrowings that mature in less than one year, primarily consisting of U.S. commercial paper issued by the Company and borrowings under the Company's revolving credit agreements. Notes and loans payable were $50 and $237 as of June 30, 2023 and 2022, respectively.
The weighted average interest rates incurred on average outstanding notes and loans payable during the fiscal years ended June 30, 2023, 2022, and 2021, including fees associated with the Company’s revolving credit agreements, were 3.48 %, 0.54 % and 0 % respectively. The Company had no material outstanding notes and loans payable during the fiscal year ended June 30, 2021.
Long-term borrowings
| 2023 | 2022 | ||||||||||
| Senior unsecured notes and debentures: | |||||||||||
| Total | |||||||||||
| Less: Current maturities of long-term debt | |||||||||||
| Long-term debt | $ | $ | |||||||||
In May 2022, the Company issued $1,100 in senior notes, which included $500 of senior notes with an annual fixed interest rate of 4.40 %, payable semi-annually in May and November, final maturity in May 2029 that carry an effective rate of 3.89 % (May 2029 senior notes), which includes the impact from the settlement of interest rate contracts in May 2022, and $600 of senior notes with an annual fixed rate of 4.60 %, payable semi-annually in May and November, final maturity in May 2032 that carry an effective rate of 3.25 % (May 2032 senior notes), which includes the impact from the settlement of interest rate contracts in May 2022. The notes rank equally with all of the Company's existing senior indebtedness. Proceeds from the senior notes were used to redeem prior to maturity $600 of senior notes with an annual fixed interest rate of 3.05 % due in September 2022 and $500 of senior notes with an annual fixed interest rate of 3.50 % due in December 2024, which were redeemed in June 2022 prior to their maturities, and for general corporate purposes. In connection with the redemption prior to maturity of the $500 of senior notes due in December 2024, the Company recorded a loss on the early extinguishment of debt of $13 , which is included in Interest expense in the Consolidated Statements of Earnings, representing the difference paid in cash between the redemption price and the carrying amount of the debt extinguished of $5 and the accelerated amortization of losses on settlement of interest rate contracts and issuance costs associated with the debt extinguished of $8 .
In November 2021, $300 of the Company’s senior notes with annual fixed interest rate of 3.80 % became due and were repaid using commercial paper borrowings.
47
NOTE 8. DEBT (Continued)
The weighted average interest rates incurred on average outstanding long-term debt during the fiscal years ended June 30, 2023, 2022 and 2021, were 3.25 %, 3.25 % and 3.49 %, respectively. The weighted average effective interest rates on long-term debt balances as of both June 30, 2023 and 2022 were 3.25 % and 3.37 %, respectively.
Long-term debt maturities as of June 30, 2023, were $0 900 in fiscal year 2028 and $1,600 thereafter.
Credit arrangements
As of June 30, 2023, the Company maintained a $1,200 revolving credit agreement (the Credit Agreement) that matures in March 2027. There were no
| 2023 | 2022 | ||||||||||
| Revolving credit facility | $ | $ | |||||||||
| Foreign and other credit lines | |||||||||||
| Total | $ | $ | |||||||||
Of the $35 of foreign and other credit lines as of June 30, 2023, $5 was outstanding and the remainder of $30 was available for borrowing. Of the $34 of foreign and other credit lines as of June 30, 2022, $4 was outstanding and the remainder of $30 was available for borrowing.
NOTE 9. OTHER LIABILITIES
| 2023 | 2022 | ||||||||||
| Venture Agreement terminal obligation, net | $ | $ | |||||||||
| Employee benefit obligations | |||||||||||
| Taxes | |||||||||||
| Environmental liabilities | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
Venture Agreement
The Company has an agreement with The Procter & Gamble Company (P&G) for the Company’s Glad bags and wraps business. In connection with this agreement, P&G provides research and development (R&D) support to the Glad business. As of June 30, 2023 and 2022, P&G had a 20 seven years or agree to take some other relevant action. The agreement can be terminated under certain circumstances, including at P&G’s option upon a change in control of the Company or, at either party’s option, upon the sale of the Glad business by the Company.
Upon termination of the agreement, the Company is required to purchase P&G’s 20 % interest for cash at fair value as established by predetermined valuation procedures. As of June 30, 2023, the estimated fair value of P&G’s interest in the venture was $527 , of which $495 has been recognized and is reflected in Other liabilities as noted in the table above. The estimated fair value of P&G's interest in the venture was $635 as of June 30, 2022. The difference between the estimated fair value and the amount recognized, and any future changes in the fair value of P&G’s interest, is charged to Cost of products sold in accordance with the effective interest method over the remaining life of the agreement. Following termination, the Glad business will retain the exclusive core intellectual property licenses contributed by P&G on a royalty-free basis for the licensed products marketed.
48
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Risk Management and Derivative Instruments
The Company is exposed to certain commodity, foreign currency and interest rate risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.
Commodity Price Risk Management
The Company may use commodity futures, options and swap contracts to limit the impact of price volatility on a portion of its forecasted raw material requirements. These commodity derivatives may be exchange traded or over-the-counter contracts and generally have original contractual maturities of less than 2 years. Commodity purchase and option contracts are measured at fair value using market quotations obtained from the Chicago Board of Trade commodity futures exchange and commodity derivative dealers.
As of June 30, 2023, the notional amount of commodity derivatives was $41 , of which $29 related to soybean oil futures used for the Food products business and $12 related to jet fuel swaps used for the Grilling business. As of June 30, 2022, the notional amount of commodity derivatives was $27 , of which $18 related to soybean oil futures and $9 related to jet fuel swaps.
Foreign Currency Risk Management
The Company may also enter into certain over-the-counter derivative contracts to manage a portion of the Company’s forecasted foreign currency exposure associated with the purchase of inventory. These foreign currency contracts generally have original contractual maturities of less than 2 years. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.
The notional amounts of outstanding foreign currency forward contracts used by the Company’s subsidiaries to hedge forecasted purchases of inventory were $51 and $31 , respectively, as of June 30, 2023 and 2022.
Interest Rate Risk Management
The Company may enter into over-the-counter interest rate contracts to fix a portion of the benchmark interest rate prior to the anticipated issuance of fixed rate debt. These interest rate contracts generally have original contractual maturities of less than 3 years. The interest rate contracts are measured at fair value using information quoted by bond dealers.
The Company held no interest rate contracts as of both June 30, 2023 and 2022.
During fiscal year 2022, the Company entered into an additional $650 of interest rate contracts. All contracts represented interest rate swap lock agreements to manage the exposure to interest rate volatility associated with future interest payments on forecasted debt issuance, and were terminated in May 2022 upon issuance of $1,100 in senior notes (See Note 8). These contracts resulted in a $114 gain recorded in Other comprehensive (loss) income, comprised of $25 attributable to the May 2029 senior notes and $89 attributable to the May 2032 senior notes, which is being amortized into Interest expense in the consolidated statements of earnings over the 7 -year and 10 -year term of the notes.
Commodity, Foreign Exchange and Interest Rate Derivatives
The Company designates its commodity forward, futures and options contracts for forecasted purchases of raw materials, foreign currency forward contracts for forecasted purchases of inventory, and interest rate contracts for forecasted interest payments as cash flow hedges.
| Gains (losses) recognized in Other comprehensive (loss) income | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Commodity purchase derivative contracts | $ | ( | $ | $ | |||||||||||||
| Foreign exchange derivative contracts | |||||||||||||||||
| Interest rate derivative contracts | |||||||||||||||||
| Total | $ | ( | $ | $ | |||||||||||||
49
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
Location of gains (losses) reclassified from Accumulated other comprehensive net (loss) income into Net earnings | Gains (losses) reclassified from Accumulated other comprehensive net (loss) income and recognized in Net earnings | |||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Commodity purchase derivative contracts | Cost of products sold | $ | $ | $ | ||||||||||||||||
| Foreign exchange derivative contracts | Cost of products sold | |||||||||||||||||||
| Interest rate derivative contracts | Interest expense | ( | ( | |||||||||||||||||
| Total | $ | $ | $ | ( | ||||||||||||||||
The estimated amount of the existing net gain (loss) in Accumulated other comprehensive net (loss) income as of June 30, 2023 that is expected to be reclassified into Net earnings within the next twelve months is $11 .
Counterparty Risk Management and Derivative Contract Requirements
The Company utilizes a variety of financial institutions as counterparties for over-the-counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instruments exceeds contractually defined counterparty liability position limits. Of the over-the-counter derivative instruments in liability positions, $1 and $0 contained such terms as of June 30, 2023 and 2022, respectively. As of both June 30, 2023 and 2022, neither the Company nor any counterparty was required to post any collateral as no counterparty liability position limits were exceeded.
Certain terms of the agreements governing the Company’s over-the-counter derivative instruments require the Company's credit ratings, as assigned by Standard & Poor’s and Moody’s to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company’s credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of both June 30, 2023 and 2022, the Company and each of its counterparties had been assigned investment grade ratings by both Standard & Poor’s and Moody’s.
Certain of the Company’s exchange-traded futures and options contracts used for commodity price risk management include requirements for the Company to post collateral in the form of a cash margin account held by the Company’s broker for trades conducted on that exchange. As of June 30, 2023 and 2022, the Company maintained required cash margin balances related to exchange-traded futures and options contracts of $0 and $1 , respectively, which are classified as Prepaid expenses and other current assets on the consolidated balance sheets.
Trust Assets
The Company holds interests in mutual funds and cash equivalents as part of trust assets related to its nonqualified deferred compensation plans. The participants in the nonqualified deferred compensation plans, who are the Company’s current and former employees, may select among certain mutual funds in which their compensation deferrals are invested in accordance with the terms of the plans and within the confines of the trusts, which hold the marketable securities. The trusts represent variable interest entities for which the Company is considered the primary beneficiary, and, therefore, trust assets are consolidated and included in Other assets in the consolidated balance sheets. The gains and losses on the trust assets are recorded in Other (income) expense, net in the consolidated statements of earnings. The interests in mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments.
As of June 30, 2023, the balance of the trust assets related to the Company’s nonqualified deferred compensation plans increased by $10 as compared to June 30, 2022.
Fair Value of Financial Instruments
Financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are required to be classified and disclosed in one of the following three categories of the fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
50
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
All of the Company's derivative instruments qualify for hedge accounting. The following table provides information about the balance sheet classification and the fair values of the Company's derivative instruments:
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Balance Sheet Classification | Fair Value Hierarchy Level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Commodity purchase options contracts | Prepaid expenses and other current assets | 1 | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commodity purchase swaps contracts | Prepaid expenses and other current assets | 2 | |||||||||||||||||||||||||||||||||
| Foreign exchange forward contracts | Prepaid expenses and other current assets | 2 | |||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Commodity purchase futures contracts | Accounts payable and accrued liabilities | 1 | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commodity purchase swaps contracts | Accounts payable and accrued liabilities | 2 | |||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
51
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The following table provides information about the balance sheet classification and the fair values of the Company's other assets and liabilities for which disclosure of fair value is required:
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Balance sheet classification | Fair value hierarchy level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Interest-bearing investments, including money market funds | Cash and cash equivalents (1) | 1 | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Time deposits | Cash and cash equivalents (1) | 2 | |||||||||||||||||||||||||||||||||
| Trust assets for nonqualified deferred compensation plans | Other assets | 1 | |||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Notes and loans payable | Notes and loans payable (2) | 2 | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Current maturities of long-term debt and Long-term debt | Current maturities of long- term debt and Long-term debt (3) | 2 | |||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)Cash and cash equivalents are composed of time deposits and other interest-bearing investments, including money market funds with original maturity dates of 90 days or less. Cash and cash equivalents are recorded at cost, which approximates fair value.
(2)Notes and loans payable are composed of outstanding U.S. commercial paper balances and/or amounts drawn on the Company’s credit agreements, all of which are recorded at cost, which approximates fair value.
(3)Current maturities of long-term debt and Long-term debt are recorded at cost. The fair value of Long-term debt, including current maturities, was determined using secondary market prices quoted by corporate bond dealers, and is classified as Level 2.
Furthermore, impairment charges of $445 were record during fiscal year 2023, of which $306 and $139 related to goodwill and certain indefinite-lived trademarks, respectively. Additionally, impairment charges of $343 were recorded during the fiscal year 2021, of which $228 , $93 , and $22 related to goodwill, certain indefinite-lived trademarks and other assets, respectively. These adjustments were included as noncash charges in the consolidated statements of earnings. The nonrecurring fair values utilized included unobservable Level 3 inputs based on management’s best estimates and assumptions. See Note 6 for additional information.
NOTE 11. OTHER CONTINGENCIES, GUARANTEES AND COMMITMENTS
Contingencies
The Company is involved in certain environmental matters, including response actions at various locations. The Company had recorded liabilities totaling $28
One matter, which accounted for $12 and $14 of the recorded liability as of June 30, 2023 and 2022, respectively, relates to environmental costs associated with one of the Company’s former operations at a site located in Alameda County, California. In November 2016, at the request of regulators and with the assistance of environmental consultants, the Company submitted a Feasibility Study that evaluated various options for managing groundwater at the site and included estimates of the related costs. Following further discussions with the regulators in 2017, the Company recorded an undiscounted liability for costs estimated to be incurred over a 30 -year period, based on one of the options in the Feasibility Study related to groundwater. In September 2021, as a result of an additional study and further discussions with regulators, the Company submitted a Soil Vapor Intrusion Report to the regulators. In January 2023, the regulators issued a new order directing the Company and the current property owner to conduct a Remedial Investigation and then prepare a Feasibility Study to evaluate and remediate impacts to soil, soil vapor and indoor air. While the Company believes its latest estimates of remediation costs (including any related to soil, soil vapor and indoor air impacts) are reasonable, the ultimate remediation requirements are not yet finalized and the regulators could require the Company to implement remediation actions for a longer period or take additional actions, which could include estimated undiscounted costs in the aggregate of up to approximately $28 over an estimated 30-year period, or require the Company to take different actions and incur additional costs.
Another matter in Dickinson County, Michigan, at the site of one of the Company’s former operations for which the Company is jointly and severally liable, accounted for $10 and $9 of the recorded liability as of June 30, 2023 and 2022, respectively.
52
NOTE 11. OTHER CONTINGENCIES, GUARANTEES AND COMMITMENTS (Continued)
This amount reflects the Company’s agreement to be liable for 24.3 % of the aggregate remediation and associated costs for this matter pursuant to a cost-sharing agreement with a third party. If the third party is unable to pay its share of the response and remediation obligations, the Company may be responsible for such obligations. With the assistance of environmental consultants, the Company maintains an undiscounted liability representing its current best estimate of its share of the capital expenditures, maintenance and other costs that may be incurred over an estimated 30-year remediation period. Although it is reasonably possible that the Company’s exposure may exceed the amount recorded for the Dickinson County matter, any amount of such additional exposures, or range of exposures, is not estimable at this time.
The Company’s estimated losses related to these matters are sensitive to a variety of uncertain factors, including the efficacy of any remediation efforts, changes in any remediation requirements and the future availability of alternative clean-up technologies. The Company is subject to various legal proceedings, claims and other loss contingencies, including, without limitation, loss contingencies relating to contractual arrangements (including costs connected to the transition and unwinding of certain supply and manufacturing relationships), product liability, patents and trademarks, advertising, labor and employment, environmental, health and safety and other matters. With respect to these proceedings, claims and other loss contingencies, while considerable uncertainty exists, in the opinion of management at this time, the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, either individually or in the aggregate, on the Company’s consolidated financial statements taken as a whole.
Guarantees
In conjunction with divestitures and other transactions, the Company may provide typical indemnifications (e.g., indemnifications for representations and warranties and retention of previously existing environmental, tax and employee liabilities) that have terms that vary in duration and in the potential amount of the total obligation and, in many circumstances, are not explicitly defined. The Company has not made, nor does it believe that it is probable that it will make, any material payments relating to its indemnifications, and believes that any reasonably possible payments would not have a material adverse effect, either individually or in the aggregate, on the Company’s consolidated financial statements taken as a whole.
The Company had not recorded any material liabilities on the aforementioned guarantees as of both June 30, 2023 and 2022.
The Company was a party to letters of credit of $14 0
Commitments
The Company is a party to certain purchase obligations, which are defined as purchase agreements that are enforceable and legally binding and that contain specified or determinable significant terms, including quantity, price and the approximate timing of the transaction. For purchase obligations subject to variable price and/or quantity provisions, an estimate of the price and/or quantity must be made. Examples of the Company’s purchase obligations include contracts to purchase raw materials, commitments to contract manufacturers, commitments for information technology and related services, advertising contracts, capital expenditure agreements, software acquisition and license commitments and service contracts. The Company enters into purchase obligations based on expectations of future business needs. Many of these purchase obligations are flexible to allow for changes in the Company’s business and related requirements. As of June 30, 2023, the Company’s purchase obligations by purchase date were approximately as follows:
| Year | Purchase Obligations | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
53
NOTE 12. LEASES
The Company leases various property, plant and equipment, including office, warehousing, manufacturing and research and development facilities and equipment. These leases have remaining lease terms of up to 34 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
| Balance sheet classification | 2023 | 2022 | ||||||||||||
| Operating leases | ||||||||||||||
| Right-of-use assets | Operating lease right-of-use assets | $ | $ | |||||||||||
| Current lease liabilities | Current operating lease liabilities | $ | $ | |||||||||||
| Non-current lease liabilities | Long-term operating lease liabilities | |||||||||||||
| Total operating lease liabilities | $ | $ | ||||||||||||
| Finance leases | ||||||||||||||
| Right-of-use assets | $ | $ | ||||||||||||
| Current lease liabilities | $ | $ | ||||||||||||
| Non-current lease liabilities | ||||||||||||||
| Total finance lease liabilities | $ | $ | ||||||||||||
Components of lease cost were as follows for the fiscal years ended June 30:
| 2023 | 2022 | |||||||||||||
| Operating lease cost | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||
| Amortization of right-of-use assets | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total finance lease cost | $ | $ | ||||||||||||
| Variable lease cost | $ | $ | ||||||||||||
| Short term lease cost | $ | $ | ||||||||||||
Supplemental cash flow information and noncash activity related to the Company’s leases were as follows during fiscal years ended June 30:
| 2023 | 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases, net | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | $ | |||||||||
| Finance leases | |||||||||||
54
NOTE 12. LEASES (Continued)
| 2023 | |||||
| Weighted-average remaining lease term: | |||||
| Operating leases | |||||
| Finance leases | |||||
| Weighted-average discount rate: | |||||
| Operating leases | % | ||||
| Finance leases | % | ||||
| Year | Operating leases | Finance leases | |||||||||
| 2024 | $ | $ | |||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | $ | $ | |||||||||
| Less: Imputed interest | |||||||||||
| Total lease liabilities | $ | $ | |||||||||
Operating and finance lease payments presented in the table above exclude $2 and $0 , respectively, of minimum lease payments signed but not yet commenced as of June 30, 2023.
On May 25, 2022, the Company completed an asset sale-leaseback transaction on a plant in Ontario, Canada. The Company received proceeds of $16 , net of selling costs, which had a carrying value of $2 , and resulted in a $14 gain on the transaction which was recognized in Other (income) expense, net. The leaseback is accounted for as an operating lease. The term of the lease at inception date is 10 years, with the option to terminate the lease at 7 years.
NOTE 13. STOCKHOLDERS' EQUITY
On November 18, 2020 the Company retired 28 million shares of its treasury stock. These shares are now authorized but unissued. There was no effect on the Company’s overall equity position as a result of the retirement.
| 2023 | 2022 | 2021 | |||||||||||||||
| Dividends per share paid | $ | $ | $ | ||||||||||||||
On July 27, 2023, a cash dividend was declared in the amount of $1.20 per share payable on August 25, 2023 to common stockholders of record as of the close of business on August 09, 2023.
55
NOTE 13. STOCKHOLDERS' EQUITY (Continued)
Accumulated Other Comprehensive Net (Loss) Income
| Foreign currency translation adjustments | Net unrealized gains (losses) on derivatives | Pension and postretirement benefit adjustments | Accumulated other comprehensive net (loss) income | ||||||||||||||||||||
| Balance June 30, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive net (loss) income | ( | ||||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | ( | ( | |||||||||||||||||||
Net current period other comprehensive (loss) income | |||||||||||||||||||||||
| Balance June 30, 2021 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive net (loss) income | ( | ||||||||||||||||||||||
| Income tax benefit (expense) | ( | ||||||||||||||||||||||
Net current period other comprehensive (loss) income | ( | ||||||||||||||||||||||
| Balance June 30, 2022 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive net (loss) income | ( | ( | |||||||||||||||||||||
| Income tax benefit (expense) | ( | ||||||||||||||||||||||
Net current period other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Balance June 30, 2023 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Included in foreign currency translation adjustments are re-measurement losses on long-term intercompany loans where settlement is not planned or anticipated in the foreseeable future. There were $0 , $0 , and $11 associated with these loans reclassified from Accumulated other comprehensive net (loss) income for the fiscal years ended June 30, 2023, 2022, and 2021, respectively.
NOTE 14. NET EARNINGS PER SHARE (EPS)
| 2023 | 2022 | 2021 | |||||||||||||||
| Basic | |||||||||||||||||
| Dilutive effect of stock options and other | |||||||||||||||||
| Diluted | |||||||||||||||||
| Antidilutive stock options and other | |||||||||||||||||
Basic net earnings per share and Diluted net earnings per share are calculated on Net earnings attributable to Clorox.
56
NOTE 15. STOCK-BASED COMPENSATION PLANS
In November 2021, the Company’s stockholders voted to approve the amended and restated 2005 Stock Incentive Plan (the Plan). The Plan permits the Company to grant various nonqualified stock-based compensation awards, including stock options, restricted stock, performance shares, deferred stock units, stock appreciation rights and other stock-based awards. The Plan as amended and restated provides that the maximum number of shares which may be issued under the Plan will be 5 million common shares that may be issued for stock-based compensation purposes. As of June 30, 2023, the Company was authorized to grant up to approximately 5 million common shares, plus additional shares equal to shares that are potentially deliverable under an award that expires or are canceled, forfeited or settled without the delivery of shares, under the Plan. As of June 30, 2023, approximately 4 million common shares remained available for grant.
| 2023 | 2022 | 2021 | |||||||||||||||
| Cost of products sold | $ | $ | $ | ||||||||||||||
| Selling and administrative expenses | |||||||||||||||||
| Research and development costs | |||||||||||||||||
| Total compensation costs | $ | $ | $ | ||||||||||||||
| Related income tax benefit | $ | $ | $ | ||||||||||||||
Cash received during fiscal years 2023, 2022 and 2021 from stock options exercised under all stock-based payment arrangements was $52 , $35 and $133 , respectively. The Company issues shares for stock-based compensation plans from treasury stock. The Company may repurchase stock under its Evergreen Program to offset the estimated impact of dilution related to stock-based awards.
Details regarding the valuation and accounting for stock options, restricted stock awards, performance shares and deferred stock units for non-employee directors follow.
Stock Options
| 2023 | 2022 | 2021 | |||||||||||||||
| Expected life | |||||||||||||||||
| Weighted-average expected life | |||||||||||||||||
| Expected volatility | |||||||||||||||||
| Weighted-average volatility | |||||||||||||||||
| Risk-free interest rate | |||||||||||||||||
| Weighted-average risk-free interest rate | |||||||||||||||||
| Dividend yield | |||||||||||||||||
| Weighted-average dividend yield | |||||||||||||||||
The expected life of the stock options is based on historical exercise patterns. The expected volatility is based on implied volatility from publicly traded options on the Company’s stock at the date of grant, historical implied volatility of the Company’s publicly traded options and other factors. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.
57
NOTE 15. STOCK-BASED COMPENSATION PLANS (Continued)
| Number of Shares (In thousands) | Weighted- Average Exercise Price per Share | Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding as of June 30, 2022 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Canceled | ( | ||||||||||||||||||||||
| Options outstanding as of June 30, 2023 | $ | $ | |||||||||||||||||||||
| Options vested as of June 30, 2023 | $ | $ | |||||||||||||||||||||
The weighted-average fair value per share of each option granted during fiscal years 2023, 2022 and 2021, estimated at the grant date using the Black-Scholes option pricing model, was $26.95 , $22.26 and $30.90 , respectively. The total intrinsic value of options exercised in fiscal years 2023, 2022 and 2021 was $27 , $18 and $109 , respectively.
Stock option awards outstanding as of June 30, 2023, have been granted at prices that are equal to the market value of the stock on the date of grant. Stock option grants generally vest over 4 years and expire no later than 10 years after the grant date. The Company recognizes compensation expense on a straight-line basis over the vesting period. As of June 30, 2023, there was $11 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 2 years, subject to forfeiture changes.
Restricted Stock Awards
The fair value of restricted stock awards is estimated on the date of grant based on the market price of the stock and is amortized to compensation expense on a straight-line basis over the related vesting periods, which are generally 3 to 4 years. The total number of restricted stock awards expected to vest is adjusted by actual and estimated forfeitures. Restricted stock awards receive dividend distributions earned during the vesting period upon vesting.
As of June 30, 2023, there was $38 of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2 years. The total fair value of the shares that vested in each of the fiscal years 2023, 2022 and 2021 was $22 , $20 and $15 , respectively. The weighted-average grant-date fair value of awards granted was $143.20 , $157.50 and $210.78 per share for fiscal years 2023, 2022 and 2021, respectively.
| Number of Shares (In thousands) | Weighted-Average Grant Date Fair Value per Share | ||||||||||
| Restricted stock awards as of June 30, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Restricted stock awards as of June 30, 2023 | $ | ||||||||||
Performance Shares
The fair value of performance shares is estimated on the date of grant based on the market price of the stock and is amortized to compensation expense on a straight line basis over the related vesting periods, which are generally 3 years.
As of June 30, 2023, there was $32 in unrecognized compensation cost related to non-vested performance shares that is expected to be recognized over a remaining weighted-average performance period of 2 years. The weighted-average grant-date fair value of awards granted was $141.90 , $162.46 and $212.00 per share for fiscal years 2023, 2022 and 2021, respectively.
58
NOTE 15. STOCK-BASED COMPENSATION PLANS (Continued)
| Number of Shares (In thousands) | Weighted-Average Grant Date Fair Value per Share | ||||||||||
| Performance share awards as of June 30, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Distributed | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Performance share awards as of June 30, 2023 | $ | ||||||||||
| Performance shares vested and deferred as of June 30, 2023 | $ | ||||||||||
The non-vested performance shares outstanding as of June 30, 2023 and 2022 were 306,000 and 255,000 , respectively, and the weighted average grant date fair value was $162.77 and $173.38 per share, respectively. During fiscal year 2023, 77,000 shares vested. The total fair value of shares vested was $12 , $11 and $26 during fiscal years 2023, 2022 and 2021, respectively. Upon vesting, the recipients of the grants receive the distribution as shares or, if previously elected by eligible recipients, as deferred stock. Deferred shares continue to earn dividends, which are also deferred.
Deferred Stock Units for Nonemployee Directors
Nonemployee directors receive annual grants of deferred stock units under the Company’s director compensation program and can elect to receive all or a portion of their annual retainers and fees in the form of deferred stock units. The deferred stock units receive dividend distributions, which are reinvested as deferred stock units, and are recognized at their fair value on the date of grant. Each deferred stock unit represents the right to receive one share of the Company’s common stock following the completion of a director’s service.
During fiscal year 2023, the Company granted 18,000 deferred stock units, reinvested dividends of 4,000 units and distributed 39,000 shares, which had a weighted-average fair value on the grant date of $142.10 , $151.35 and $95.38 per share, respectively. As of June 30, 2023, 128,000 units were outstanding, which had a weighted-average fair value on the grant date of $130.49 per share.
NOTE 16. OTHER (INCOME) EXPENSE, NET
The major components of Other (income) expense, net, for the fiscal years ended June 30 were:
| 2023 | 2022 | 2021 | |||||||||||||||
| Amortization of trademarks and other intangible assets | $ | $ | $ | ||||||||||||||
| Trust investment (gains) losses, net | ( | ( | |||||||||||||||
Net periodic benefit cost | |||||||||||||||||
| Foreign exchange transaction (gains) losses, net | |||||||||||||||||
| Income from equity investees | ( | ( | ( | ||||||||||||||
| Interest income | ( | ( | ( | ||||||||||||||
Restructuring costs (1) | |||||||||||||||||
| Gain on sale-leaseback transaction | ( | ||||||||||||||||
Gain on previously held equity investment (2) | ( | ||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Total | $ | $ | $ | ( | |||||||||||||
(1)Restructuring costs related to the Company's streamlined operating model plan (see Note 3).
(2)Nonrecurring, noncash gain from the remeasurement of the Company’s previously held investment in its Saudi joint venture (see Note 2).
59
NOTE 17. INCOME TAXES
| 2023 | 2022 | 2021 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| Total current | $ | $ | $ | ||||||||||||||
| Deferred | |||||||||||||||||
| Federal | $ | ( | $ | $ | ( | ||||||||||||
| State | ( | ( | ( | ||||||||||||||
| Foreign | ( | ||||||||||||||||
| Total deferred | ( | ( | |||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| United States | $ | $ | $ | ||||||||||||||
| Foreign | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Statutory federal tax rate | % | % | % | ||||||||||||||
| State taxes (net of federal tax benefits) | |||||||||||||||||
| Foreign tax rate differential | |||||||||||||||||
| Federal excess tax benefits | ( | ( | ( | ||||||||||||||
| Net U.S. tax on foreign income | ( | ( | ( | ||||||||||||||
| VMS goodwill impairment | |||||||||||||||||
| Federal research and development credits | ( | ( | ( | ||||||||||||||
| Other differences | ( | ( | |||||||||||||||
| Effective tax rate | % | % | % | ||||||||||||||
The Inflation Reduction Act (the “Act”) was signed into law on August 16, 2022. The Act introduces a new 15% corporate minimum tax for certain large corporations that becomes effective at the beginning of the Company’s fiscal 2024 and it imposes a 1% excise tax on the value of share repurchases, net of new share issuances, after December 31, 2022. These provisions, as well as the other corporate tax changes included in the Act, are not expected to have a material impact on the Company’s financial statements.
Per U.S. GAAP, foreign withholding taxes are provided on unremitted foreign earnings that are not indefinitely reinvested at the time the earnings are generated. The Company regularly reviews and assesses whether there are any changes to its indefinite reinvestment assertion. No ne of the undistributed earnings of its foreign subsidiaries were indefinitely reinvested. As a result, the Company is providing foreign withholding taxes on the undistributed earnings of all foreign subsidiaries where applicable. These withholding taxes had no significant impact on the Company’s consolidated results.
60
NOTE 17. INCOME TAXES (Continued)
The components of net deferred tax assets (liabilities) as of June 30 are shown below:
| 2023 | 2022 | ||||||||||
| Deferred tax assets | |||||||||||
| Compensation and benefit programs | $ | $ | |||||||||
| Net operating loss and tax credit carryforwards | |||||||||||
| Operating and finance lease liabilities | |||||||||||
| Accruals and reserves | |||||||||||
| Capitalized research and development | |||||||||||
| Inventory costs | |||||||||||
| Other | |||||||||||
| Subtotal | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total deferred tax assets | $ | $ | |||||||||
| Deferred tax liabilities | |||||||||||
| Fixed and intangible assets | $ | ( | $ | ( | |||||||
| Lease right-of-use assets | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Total deferred tax liabilities | ( | ( | |||||||||
| Net deferred tax assets (liabilities) | $ | $ | ( | ||||||||
| The net deferred tax assets and liabilities included in the consolidated balance sheet at June 30 were as follows: | |||||||||||
Net deferred tax assets (1) | $ | $ | |||||||||
| Net deferred tax liabilities | ( | ( | |||||||||
| Net deferred tax assets (liabilities) | $ | $ | ( | ||||||||
(1)Net deferred tax assets are recorded in Other assets.
The Company reviews its deferred tax assets for recoverability on a quarterly basis. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. Details of the valuation allowance were as follows as of June 30:
| 2023 | 2022 | 2021 | |||||||||||||||
| Valuation allowance at beginning of year | $ | ( | $ | ( | $ | ( | |||||||||||
| Net decrease/(increase) for other foreign deferred tax assets | ( | ( | ( | ||||||||||||||
| Net decrease/(increase) for foreign and U.S. net operating loss carryforwards and tax credits | ( | ( | ( | ||||||||||||||
| Valuation allowance at end of year | $ | ( | $ | ( | $ | ( | |||||||||||
As of June 30, 2023, the Company had foreign tax credit carryforwards of $18 for U.S. income tax purposes with expiration dates between fiscal years 2026 and 2033. Tax credit carryforwards in U.S. jurisdictions of $5 have expiration dates between fiscal year 2024 and 2033. Tax credit carryforwards in U.S. jurisdictions of $2 can be carried forward indefinitely. Tax credit carryforwards in foreign jurisdictions of $29 can be carried forward indefinitely. Tax benefits from net operating loss carryforwards in U.S. jurisdictions of $4 have expiration dates between fiscal years 2030 and 2042. Tax benefits from net operating loss carryforwards in U.S. jurisdictions of $6 can be carried forward indefinitely. Tax benefits from foreign net operating loss carryforwards of $21 have expiration dates between fiscal years 2024 and 2040. Tax benefits from foreign net operating loss carryforwards of $9 can be carried forward indefinitely.
The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions. The federal statute of limitations has expired for all tax years through June 30, 2015. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.
61
NOTE 17. INCOME TAXES (Continued)
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of June 30, 2023 and 2022, the total balance of accrued interest and penalties related to uncertain tax positions was $2 and $2 , respectively. Interest and penalties related to uncertain tax positions included in income tax expense resulted in a net benefit of $0
| 2023 | 2022 | 2021 | |||||||||||||||
| Unrecognized tax benefits at beginning of year | $ | $ | $ | ||||||||||||||
| Gross increases - tax positions in prior periods | |||||||||||||||||
| Gross decreases - tax positions in prior periods | ( | ( | ( | ||||||||||||||
| Gross increases - current period tax positions | |||||||||||||||||
| Gross decreases - current period tax positions | |||||||||||||||||
| Lapse of applicable statute of limitations | ( | ||||||||||||||||
| Settlements | |||||||||||||||||
| Unrecognized tax benefits at end of year | $ | $ | $ | ||||||||||||||
Included in the balance of unrecognized tax benefits as of June 30, 2023, 2022 and 2021, were potential benefits of $14 , $14 and $17 , respectively, which if recognized, would affect the effective tax rate. Unrecognized tax benefits are not expected to significantly increase or decrease within the next 12 months.
NOTE 18. EMPLOYEE BENEFIT PLANS
Retirement Income Plans
The Company has various retirement income plans for eligible domestic and international employees. As of June 30, 2023 and 2022, the domestic retirement income plans were frozen and the benefits of the domestic retirement income plans were generally based on either employee years of service and compensation or a stated dollar amount per year of service.
The Company contributed $14 , $15 and $14 to its domestic retirement income plans during fiscal years 2023, 2022 and 2021, respectively. The Company’s funding policy is to contribute amounts sufficient to meet benefit payments and minimum funding requirements as set forth in employee benefit tax laws plus additional amounts as the Company may determine to be appropriate.
The Company has a domestic qualified pension plan (the Plan). The Plan is frozen for all participants. The Plan generally was frozen effective June 30, 2011 for all employees, except for certain collectively bargained employees, whose Plan freeze was effective January 1, 2019. As a result of the Plan freeze, no employees are eligible to commence participation in the Plan or accrue any additional benefits under the Plan.
On May 17, 2022, the Company’s Board of Directors approved a resolution to terminate the Plan. The amendment will allow the settlement of the pension obligation with either a lump sum payout or a purchased annuity. It is expected to take 18 to 24 months to complete the termination from the date of the approved resolution to terminate the Plan.
As of June 30, 2023, the Company recorded net unrealized losses of $136 , net of tax, ($179 before taxes) in Accumulated other comprehensive net (loss) income on its consolidated balance sheet related to the Plan. These net unrealized losses will be recognized in the Company’s consolidated statement of income as payments are made to settle lump sum elections and to purchase group annuity contracts. Final settlement is dependent on market conditions, which could affect discount rates and returns on plan assets as well as final elections received from plan participants. Currently, there is not enough information available to determine the ultimate charge of the termination.
Retirement Health Care Plans
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 or stated reimbursements up to a specified dollar subsidy amount. Benefits paid take into consideration payments by Medicare for the domestic plan. The plans are funded as claims are paid, and the Company has the right to modify or terminate certain plans.
62
NOTE 18. EMPLOYEE BENEFIT PLANS (Continued)
Benefit Obligation and Funded Status
| Retirement Income | Retirement Health Care | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Change in benefit obligations: | |||||||||||||||||||||||
| Benefit obligation as of beginning of year | $ | $ | $ | $ | |||||||||||||||||||
| Service cost | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Actuarial loss (gain) | ( | ( | ( | ( | |||||||||||||||||||
| Plan amendments | ( | ||||||||||||||||||||||
| Translation and other adjustments | ( | ||||||||||||||||||||||
| Plan settlement | ( | ||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
| Benefit obligation as of end of year | $ | $ | $ | $ | |||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of assets as of beginning of year | $ | $ | $ | $ | |||||||||||||||||||
| Actual return on plan assets | ( | ||||||||||||||||||||||
| Employer contributions | |||||||||||||||||||||||
| Plan Settlement | ( | ||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
| Translation and other adjustments | ( | ( | |||||||||||||||||||||
| Fair value of plan assets as of end of year | |||||||||||||||||||||||
| Accrued benefit cost, net funded status | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Amount recognized in the balance sheets consists of: | |||||||||||||||||||||||
| Pension benefit assets | $ | $ | $ | $ | |||||||||||||||||||
| Current accrued benefit liability | ( | ( | ( | ( | |||||||||||||||||||
| Non-current accrued benefit liability | ( | ( | ( | ( | |||||||||||||||||||
| Accrued benefit cost, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
For the retirement income plans, the benefit obligation is the projected benefit obligation (PBO). For the retirement health care plan, the benefit obligation is the accumulated benefit obligation (ABO).
The ABO for all retirement income plans was $474 , $512 and $618 as of June 30, 2023, 2022 and 2021, respectively.
| ABO Exceeds the Fair Value of Plan Assets | PBO Exceeds the Fair Value of Plan Assets | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Projected benefit obligation | $ | $ | $ | $ | |||||||||||||
| Accumulated benefit obligation | |||||||||||||||||
| Fair value of plan assets | |||||||||||||||||
63
NOTE 18. EMPLOYEE BENEFIT PLANS (Continued)
Net Periodic Benefit Cost
| Retirement Income | Retirement Health Care | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Settlement loss recognized | |||||||||||||||||||||||||||||||||||
| Amortization of unrecognized items | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||
Service cost component of the net periodic benefit cost is reflected in employee benefit costs, and all other components are reflected in Other (income) expense, net.
| Retirement Income | Retirement Health Care | ||||||||||
| Net actuarial loss (gain) | $ | $ | ( | ||||||||
| Prior service benefit | ( | ||||||||||
| Net deferred income tax (assets) liabilities | ( | ||||||||||
| Accumulated other comprehensive loss (income) | $ | $ | ( | ||||||||
| Retirement Income | Retirement Health Care | ||||||||||
| Net actuarial loss (gain) as of beginning of year | $ | $ | ( | ||||||||
| Amortization during the year | ( | ||||||||||
| Loss (gain) during the year | ( | ||||||||||
| Net actuarial loss (gain) as of end of year | $ | $ | ( | ||||||||
The Company uses the straight-line amortization method for unrecognized prior service costs and benefits.
Assumptions
| Retirement Income | Retirement Health Care | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Discount rate | % | % | % | % | |||||||||||||||||||
| Rate of compensation increase | % | % | n/a | n/a | |||||||||||||||||||
| Interest crediting rate | % | % | n/a | n/a | |||||||||||||||||||
64
NOTE 18. EMPLOYEE BENEFIT PLANS (Continued)
| Retirement Income | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Discount rate | % | % | % | ||||||||||||||
| Rate of compensation increase | % | % | % | ||||||||||||||
| Expected return on plan assets | % | % | % | ||||||||||||||
| Interest crediting rate | % | % | % | ||||||||||||||
| Retirement Health Care | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Discount rate | % | % | % | ||||||||||||||
The expected long-term rate of return assumption is based on prospective returns according to the fund’s current target asset allocation.
The actuarial benefit obligation gain incurred during fiscal year 2023 was primarily driven by increases in the discount rates for the retirement plans, partially offset by investment gains lower than expected return on assets. The actuarial benefit obligation gain during fiscal year 2022 was primarily driven by increases in the discount rates for the retirement plans, partially offset by the domestic qualified plan reflecting plan termination lump sum window and annuity buyout assumptions.
Expected Benefit Payments
| Retirement Income | Retirement Health Care | ||||||||||
| 2024 | $ | $ | |||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| Fiscal years 2029 through 2033 | |||||||||||
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.
Plan Assets
| % Target Allocation | % of Plan Assets | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Fixed income | % | % | % | % | |||||||||||||||||||
| Cash equivalents | % | % | % | % | |||||||||||||||||||
| Total | % | % | % | % | |||||||||||||||||||
The target asset allocation is determined based on the optimal balance between risk and return and, at times, may be adjusted to achieve the plan’s overall investment objective to generate sufficient resources to pay current and projected plan obligations over the life of the domestic retirement income plan.
65
NOTE 18. EMPLOYEE BENEFIT PLANS (Continued)
| 2023 | 2022 | ||||||||||
| Cash equivalents — Level 1 | |||||||||||
| Total assets in the fair value hierarchy | |||||||||||
| Common collective trusts measured at net asset value | |||||||||||
| Bond funds | $ | $ | |||||||||
| International equity funds | |||||||||||
| Domestic equity funds | |||||||||||
| Short-term investment fund | |||||||||||
| Real estate fund | |||||||||||
| Total common collect trust measured at net asset value | $ | $ | |||||||||
| Total assets at fair value | $ | $ | |||||||||
Common collective trust funds are not publicly traded and were valued at a net asset value unit price determined by the portfolio’s sponsor based on the fair value of underlying assets held by the common collective trust fund on June 30, 2023 and 2022.
The common collective trusts are invested in various trusts that attempt to achieve their investment objectives by investing primarily in other collective investment funds that have characteristics consistent with each trust’s overall investment objective and strategy.
Defined Contribution Plans
The Company has various defined contribution plans for eligible domestic and international employees. The aggregate cost of the domestic defined contribution plans was $64 , $58 and $65 in fiscal years 2023, 2022 and 2021, respectively. The aggregate cost of the international defined contribution plans was $6 , $6 and $4 for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.
NOTE 19. SEGMENT REPORTING
During the fourth quarter of fiscal year 2023, the Company realigned its reportable segments following management’s decision to narrow the focus on core brands and streamline investment levels in the VMS business. As a result of this decision and the financial impact of the related impairment charges incurred in prior periods, the VMS operating segment, previously included in the Health and Wellness reportable segment, no longer meets the criteria to be presented as a reportable segment and is now combined with Corporate. In connection with this change, Corporate was renamed Corporate and Other. The Health and Wellness reportable segment is now comprised of the Cleaning and Professional Products operating segments.
Additionally, beginning in the fourth quarter of fiscal year 2023, management changed its principle measure of segment profitability to segment adjusted earnings (losses) before interest and income taxes. Segment adjusted earnings (losses) before interest and income taxes is defined as earnings (losses) before income taxes excluding interest income, interest expense and other significant items that are nonrecurring or unusual (such as asset impairments, charges related to the streamlined operating model, charges related to the digital capabilities and productivity enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability).
The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. Management believes that the presentation of segment adjusted earnings (losses) before interest and income taxes excluding these items is useful to investors to assess operating performance on a consistent basis by removing the impact of the items that management believes do not directly reflect the performance of each segment's underlying operations. All periods presented have been recast to reflect these changes.
66
NOTE 19. SEGMENT REPORTING (Continued)
The Company operates through strategic business units (SBUs) that are organized into the Company’s operating segments. Operating segments with shared economic and qualitative characteristics are aggregated into four reportable segments: Health and Wellness, Household, Lifestyle and International. Operating segments not aggregated into a reportable segment are reflected in Corporate and Other. The four reportable segments consist of the following:
•Health and Wellness consists of cleaning, disinfecting and professional products mainly marketed and sold in the United States.
•Household consists of bags and wraps, cat litter and grilling products marketed and sold in the United States.
•Lifestyle consists of food, natural personal care products and water-filtration products marketed and sold in the United States.
•International consists of products sold outside the United States. Products within this segment include laundry additives; home care products; water-filtration products; digestive health products; grilling products; cat litter; food; bags and wraps; natural personal care products; and professional cleaning and disinfecting products.
Corporate and Other includes certain non-allocated administrative costs, various other non-operating income and expenses, as well as the results of the VMS business. Assets in Corporate and Other include cash and cash equivalents, prepaid expenses and other current assets, property and equipment, operating lease right-of-use assets, other long-term assets and deferred taxes, as well as the assets related to the VMS business.
| Net Sales | |||||||||||||||||
| Fiscal year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Health and Wellness | $ | $ | $ | ||||||||||||||
| Household | |||||||||||||||||
| Lifestyle | |||||||||||||||||
| International | |||||||||||||||||
| Corporate and Other | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
67
NOTE 19. SEGMENT REPORTING (Continued)
| Segment Adjusted Earnings (losses) before interest and income taxes | |||||||||||||||||
| Fiscal year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Health and Wellness | $ | $ | $ | ||||||||||||||
| Household | |||||||||||||||||
| Lifestyle | |||||||||||||||||
| International | |||||||||||||||||
| Corporate and Other | ( | ( | ( | ||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Interest income | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
VMS impairments (1) (2) | ( | ( | |||||||||||||||
Professional Products supplier charge (3) | ( | ||||||||||||||||
Saudi JV acquisition gain (4) | |||||||||||||||||
Streamlined operating model (5) | ( | ||||||||||||||||
Digital capabilities and productivity enhancements investment (6) | ( | ( | |||||||||||||||
| Earnings (losses) before income taxes | $ | $ | $ | ||||||||||||||
(1)Represents a noncash impairment charge of $445 related to the VMS business recorded in fiscal year 2023. As a result of the segment changes noted above, $433 and $12 was recast from the third quarter fiscal year 2023 interim reporting period for the Health and Wellness and International reportable segments, respectively.
(2)Represents a noncash impairment charge of $329 related to the VMS business recorded in fiscal year 2021. As a result of the segment reporting changes noted above, $329 was recast from the fiscal year 2021 reporting period from the Health and Wellness reportable segment.
(3)Represents noncash charges of $28 on investments and related arrangements made with a Professional Products business supplier. As a result of the segment changes noted above, this amount was recast from the fiscal year 2021 reporting period for the Health and Wellness reportable segment.
(4)Represents an $82 noncash net gain from the remeasurement of the Company’s previously held investment in its Saudi joint venture. As a result of the segment changes noted above, this amount was recast from the fiscal year 2021 reporting period for the International reportable segment.
(5)Represents restructuring and related implementation costs, net for the streamlined operating model of $60 . As a result of the segment changes noted above, this amount was recast from the fiscal year 2023 reporting period for Corporate and Other. For informational purposes the following table provides the approximate restructuring and related implementation costs, net corresponding to the Company's segments as a percent of the total costs for the fiscal year ended June 30:
| 2023 | ||||||||||||||
| Health and Wellness | % | |||||||||||||
| Household | ||||||||||||||
| Lifestyle | ||||||||||||||
| International | ||||||||||||||
| Corporate and Other | ||||||||||||||
| Total | % | |||||||||||||
(6)Represents expenses related to the Company's digital capabilities and productivity enhancements investment. As a result of the segment changes noted above, these amounts were recast from the fiscal year 2023 and fiscal year 2022 reporting periods for Corporate and Other.
68
NOTE 19. SEGMENT REPORTING (Continued)
| Fiscal Year | Health and Wellness | Household | Lifestyle | International | Corporate and Other | Total Company | |||||||||||||||||||||||||||||||||||
| (Income) Loss from equity investees included in Other (income) expense, net | 2023 | ( | ( | ||||||||||||||||||||||||||||||||||||||
| 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Total assets | 2023 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | 2023 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 2023 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||||||||||||||
| Significant noncash charges included in earnings (losses) before interest and income taxes: | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 2023 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||||||||||||||
All intersegment sales are eliminated and are not included in the Company’s reportable net sales.
Net sales to the Company’s largest customer, Walmart Stores, Inc. and its affiliates, were 26 %, 25 %, and 25 % of consolidated net sales for each of the fiscal years ended June 30, 2023, 2022 and 2021, respectively, and occurred across all of the Company’s reportable segments. No other customers accounted for 10% or more of the Company’s consolidated net sales in any of these fiscal years.
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Cleaning | % | % | % | |||||||||||||||||
| Professional Products | % | % | % | |||||||||||||||||
| Health and Wellness | % | % | % | |||||||||||||||||
| Bags and Wraps | % | % | % | |||||||||||||||||
| Cat Litter | % | % | % | |||||||||||||||||
| Grilling | % | % | % | |||||||||||||||||
| Household | % | % | % | |||||||||||||||||
| Food | % | % | % | |||||||||||||||||
| Natural Personal Care | % | % | % | |||||||||||||||||
| Water Filtration | % | % | % | |||||||||||||||||
| Lifestyle | % | % | % | |||||||||||||||||
| International | % | % | % | |||||||||||||||||
| Corporate and Other | % | % | % | |||||||||||||||||
| Total | % | % | % | |||||||||||||||||
69
NOTE 19. SEGMENT REPORTING (Continued)
| 2023 | 2022 | 2021 | |||||||||||||||
| Cleaning products | % | % | % | ||||||||||||||
| Bags and wraps | % | % | % | ||||||||||||||
| Food products | % | % | % | ||||||||||||||
| Cat litter products | % | % | % | ||||||||||||||
| Fiscal Year | United States | Foreign | Total Company | ||||||||||||||||||||
| Net sales | 2023 | $ | $ | $ | |||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| Property, plant and equipment, net | 2023 | ||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
NOTE 20. RELATED PARTY TRANSACTIONS
The Company holds various equity investments with ownership percentages of up to 50 % in a number of consumer products businesses, which operate both within and outside the United States. The equity investments, presented in Other assets and accounted for under the equity method, were $43 and $52 as of the fiscal years ended June 30, 2023 and 2022, respectively. The Company has no ongoing capital commitments, loan requirements, guarantees or any other types of arrangements under the terms of its agreements that would require any future cash contributions or disbursements arising out of an equity investment.
Transactions with the Company’s equity investees typically represent payments for contract manufacturing and purchases of raw materials. Payments to related parties, including equity investees, for such transactions during the fiscal years ended June 30, 2023, 2022 and 2021 were $87 , $117 and $44 , respectively. Receipts from and ending accounts receivable and payable balances related to the Company’s related parties were not significant during or as of the end of each of the fiscal years presented.
70
Exhibit 99.2
THE CLOROX COMPANY
RECONCILIATION OF ECONOMIC PROFIT (UNAUDITED) (1)
| Dollars in millions | FY23 | FY22 | FY21 | |||||||||||||||||
| Earnings before income taxes | $ | 238 | $ | 607 | $ | 900 | ||||||||||||||
| Add back: | ||||||||||||||||||||
Certain U.S. GAAP charges (2) | 605 | 61 | 357 | |||||||||||||||||
| Interest expense | 90 | 106 | 99 | |||||||||||||||||
| Less: | ||||||||||||||||||||
Saudi JV acquisition gain (2) | — | — | (82) | |||||||||||||||||
| Earnings before income taxes, certain U.S. GAAP items and interest expense | 933 | 774 | 1,274 | |||||||||||||||||
| Less: | ||||||||||||||||||||
Income taxes on earnings before income taxes, certain U.S. GAAP items and interest expense (3) | 220 | 174 | 264 | |||||||||||||||||
| Adjusted after tax profit | 713 | 600 | 1,010 | |||||||||||||||||
| Less: After tax profit attributable to noncontrolling interests | 12 | 9 | 9 | |||||||||||||||||
| Adjusted after tax profit attributable to Clorox | 701 | 591 | 1,001 | |||||||||||||||||
Average capital employed (4) | 3,383 | 3,428 | 3,655 | |||||||||||||||||
Less: Capital charge (5) | 304 | 309 | 329 | |||||||||||||||||
Economic profit (1) (Adjusted after tax profit attributable to Clorox less capital charge) | $ | 397 | $ | 282 | $ | 672 | ||||||||||||||
(1) Economic profit (EP) is defined by the Company as earnings before income taxes, excluding certain U.S. GAAP items (such as asset impairments, charges related to implementation of the streamlined operating model, charges related to digital capabilities and productivity enhancements investment, significant losses/(gains) related to acquisitions and other nonrecurring or unusual items impacting comparability) and interest expense; less income taxes (calculated based on the Company’s effective tax rate excluding the identified U.S. GAAP items), and less after tax profit attributable to noncontrolling interests, and less a capital charge (calculated as average capital employed multiplied by a cost of capital rate). EP is a key financial metric that the Company’s management uses to evaluate business performance and allocate resources, and is a component in determining employee incentive compensation. The Company’s management believes EP provides additional perspective to investors about financial returns generated by the business and represents profit generated over and above the cost of capital used by the business to generate that profit.
(2) Certain U.S. GAAP charges include incremental operating expenses related to the implementation of the Company’s digital capabilities and productivity enhancements investment, restructuring and related implementation costs related to implementation of the streamlined operating model, noncash impairments related to the Vitamins, Minerals and Supplements (VMS) business, noncash charges on investments and related arrangements made with a Professional Products business supplier and a noncash nonrecurring net gain related to the Company’s increased investment in each of the two entities comprising its joint venture in the Kingdom of Saudi Arabia (Saudi JV). Refer to "Management's Discussion and Analysis: Summary of Non-GAAP Financial Measures" in Exhibit 99.1 for detail on the U.S. GAAP charges.
(3) The tax rate applied is the effective tax rate before the identified U.S. GAAP items was 23.6%, 22.5% and 20.7% in fiscal years 2023, 2022, and 2021, respectively. The difference between the fiscal year 2023 effective tax rate on earnings of 32.4% is due to the tax rate impact of the FY23 VMS impairment and incremental operating expenses recorded related to the implementation of the Company's digital capabilities and productivity enhancements investment of (8.9)% and 0.1%, respectively. The difference between the fiscal year 2022 effective tax rate on earnings of 22.4% is due to the tax rate impact of the incremental operating expenses recorded related to the implementation of the Company’s digital capabilities and productivity enhancements investment of 0.1%. The difference between the fiscal year 2021 effective tax rate on earnings of 20.1% is due to the tax rate impact of the Professional Products supplier charge, FY21 VMS impairment, and Saudi JV acquisition gain of 0.1%, (0.4)%, and 0.9%, respectively.
(4) Total capital employed represents total assets less non-interest bearing liabilities. Adjusted capital employed represents total capital employed adjusted to add back current year after tax U.S. GAAP items, as applicable, and deduct the current year after tax noncash, nonrecurring gain. Average capital employed is the average of adjusted capital employed for the current year and total capital employed for the prior year, based on year-end balances. See below for details of the average capital employed calculation.
(5) Capital charge represents average capital employed multiplied by a cost of capital, which was 9% for all fiscal years presented. The calculation of capital charge includes the impact of rounding numbers.
Exhibit 99.2
| Dollars in millions | FY23 | FY22 | FY21 | |||||||||||||||||
| Total assets | $ | 5,945 | $ | 6,158 | $ | 6,334 | ||||||||||||||
| Less: | ||||||||||||||||||||
Accounts payable and accrued liabilities (6) | 1,650 | 1,463 | 1,670 | |||||||||||||||||
| Current operating lease liabilities | 87 | 78 | 81 | |||||||||||||||||
| Income taxes payable | 121 | — | — | |||||||||||||||||
| Long-term operating lease liabilities | 310 | 314 | 301 | |||||||||||||||||
Other liabilities (6) | 804 | 778 | 819 | |||||||||||||||||
| Deferred income taxes | 28 | 66 | 67 | |||||||||||||||||
| Non-interest bearing liabilities | 3,000 | 2,699 | 2,938 | |||||||||||||||||
Total capital employed (4) | 2,945 | 3,459 | 3,396 | |||||||||||||||||
After tax certain U.S. GAAP items (2) | 362 | — | 212 | |||||||||||||||||
Adjusted capital employed (4) | $ | 3,307 | $ | 3,459 | $ | 3,608 | ||||||||||||||
| Average capital employed | $ | 3,383 | $ | 3,428 | $ | 3,655 | ||||||||||||||
(6) Accounts payable and accrued liabilities and Other liabilities are adjusted to exclude interest-bearing liabilities.