ITEM 1.
BUSINESS
Overview of
Business
The Clorox Company is a
leading multinational manufacturer and marketer of consumer and professional
products with fiscal year 2016 net sales of $5.8 billion and approximately 8,000
employees worldwide as of June 30, 2016. Clorox sells its products primarily
through grocery and mass retail outlets, e-commerce channels, wholesale
distributors and medical supply distributors. Clorox markets some of the most
trusted and recognized consumer brand names, including its namesake bleach and
cleaning products, Pine-Sol
®
cleaners, Liquid-Plumr
®
clog
removers, Poett
®
home care products, Fresh Step
®
cat
litter, Glad
®
bags, wraps and container products,
Kingsford
®
charcoal, Renew Life
®
digestive health
products, Hidden Valley
®
dressings and sauces, Brita
®
water-filtration products, and Burts Bees
®
natural personal care products. The Company also
markets brands through professional services channels, including infection
control products for the healthcare industry under Clorox
Healthcare
®
and Clorox
Commercial Solutions
®
. More than 80% of the Companys 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 Companys 2020 strategy
focuses on delivering long-term, profitable growth and total shareholder return.
The Companys long-term financial goals include annual net sales growth of 3-5%,
annual EBIT margin growth of 25-50 basis points and annual free cash flow of
10-12% of net sales.
On May 2, 2016, the Company
acquired 100 percent of the digestive health company Renew Life for $290
million. The purchase of the Renew Life business aligns with the Companys
acquisition strategy to target leading brands with attractive margins in
high-growth categories, particularly in health and wellness. Results for Renew
Lifes domestic business are reflected in the Household reportable segment and
results for Renew Lifes international business are reflected in the
International reportable segment. Included in the Companys results for fiscal
year 2016 was $21 million of Renew Lifes global net sales.
In fiscal year 2016, the
Company delivered strong results including 2% net sales growth and an 8%
increase in diluted earnings per share (EPS) from continuing operations, despite
a highly competitive environment in the U.S. and a difficult macro-environment,
including unfavorable foreign exchange rates and challenging economies in
International markets.
1
Table of Contents
The Company focused on driving
sales growth in its U.S. business, leveraging incremental demand building
investments and innovation, to drive category growth and market share
improvements. In particular, the Company launched new products in many
categories in fiscal year 2016, including the Brita
®
Infinity
pitcher, Burt's Bees
®
lipsticks, Clorox Healthcare
®
nasal
antiseptic swabs, Clorox Healthcare
®
Optimum-UV Enlight, Fresh
Step
®
with Febreze
, Glad
®
DualDefense
trash bags, Hidden Valley
®
Greek yogurt
dressing.
In international markets, the
Company focused on a number of measures to address economic challenges
experienced in fiscal year 2016. Significant currency declines across the
majority of countries and high inflation in several markets were partially
offset by price increases and cost savings initiatives. Despite these
challenges, the Companys international business continued to play an important
strategic role, with No. 1 and No. 2 brands in multiple countries and strong
growth of the Burts Bees
®
brand internationally.
In fiscal year 2016, the
Company repurchased approximately 2 million shares of its common stock for $254
million, paid $398 million in dividends to stockholders and announced a 4%
increase in its quarterly dividend from prior year, payable in August
2016.
Finally, the Company continued
its commitment to corporate responsibility by maintaining strong and transparent
environmental, social and governance practices. The Company remained committed
to lowering water and energy use, solid waste to landfill and greenhouse gas
emissions as part of its 2020 operational footprint reduction goals. The Company
was recognized as one of the top corporate citizens by Corporate Responsibility
magazine and named as one of the greenest companies in the 2016 Newsweek Green
Rankings. In fiscal year 2016, together The Clorox Company Foundation and The
Burts Bees Greater Good Foundation awarded approximately $5 million in cash
grants, and the Company made product donations with a fair market value of
approximately $8 million and contributed more than $1 million to deserving
nonprofits through cause marketing programs for social and charitable
causes.
In fiscal year 2017, Clorox
anticipates ongoing challenges that may impact its sales and margins, including
unfavorable foreign currency exchange rates, particularly in Argentina, and a
continuation of challenging international economies. In addition, the Company is
monitoring anticipated slower U.S. category growth, driven primarily by expected
competitive activity and changes to commodity costs and manufacturing and
logistics costs.
For additional information on
recent business developments, see Managements Discussion and Analysis of
Financial Condition and Results of Operations, in Exhibit 99.1, incorporated
herein by reference.
Financial Information About
Operating Segments and Principal Products
The Company operates through
strategic business units that are aggregated into four reportable segments:
Cleaning, Household, Lifestyle and International. The four reportable segments
consist of the following:
●
|
Cleaning
consists of laundry, home care and
professional products marketed and sold in the United States. Products
within this segment include laundry additives, including bleach products
under the Clorox
®
brand and Clorox 2
®
stain fighter
and color booster; home care products, primarily under the
Clorox
®
, Formula 409
®
, Liquid-Plumr
®
,
Pine-Sol
®
, S.O.S
®
and Tilex
®
brands;
naturally derived products under the Green Works
®
brand; and
professional cleaning and disinfecting products under the
Clorox
®
, Dispatch
®
, Aplicare
®
,
HealthLink
®
and Clorox Healthcare
®
brands.
|
●
|
Household
consists of charcoal, cat litter,
digestive health products and bags, wraps and container products marketed
and sold in the United States. Products within this segment include
charcoal products under the Kingsford
®
and Match
Light
®
brands; cat litter products under the Fresh
Step
®
, Scoop Away
®
and Ever Clean
®
brands; digestive health products under the Renew Life
®
brand;
and bags, wraps and containers under the Glad
®
brand.
|
●
|
Lifestyle
consists of food products, water-filtration systems and filters and
natural personal care products marketed and sold in the United States.
Products within this segment include dressings and sauces, primarily under
the Hidden Valley
®
, KC Masterpiece
®
and Soy
Vay
®
brands; water-filtration systems and filters under the
Brita
®
brand; and natural personal care products under the
Burts Bees
®
brand.
|
●
|
International
consists of products sold outside the United States. Products
within this segment include laundry, home care, water-filtration,
digestive health products, charcoal and cat litter products, dressings and
sauces, bags, wraps and containers and natural personal care products,
primarily under the Clorox
®
, Glad
®
,
PinoLuz
®
, Ayudin
®
, Limpido
®
,
Clorinda
®
, Poett
®
, Mistolin
®
,
Lestoil
®
, Bon Bril
®
, Brita
®
, Green
Works
®
, Pine-Sol
®
, Agua Jane
®
,
Chux
®
, Renew Life
®
, Kingsford
®
, Fresh
Step
®
, Scoop Away
®
, Ever Clean
®
, KC
Masterpiece
®
, Hidden Valley
®
and Burts
Bees
®
brands.
|
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Table of Contents
Three of the Companys product
lines have accounted for 10% or more of consolidated net sales during each of
the past three fiscal years. In fiscal years 2016, 2015 and 2014, sales of
liquid bleach represented approximately 13%, 14% and 13% of the Companys
consolidated net sales, respectively, approximately 25%, 26%, and 26% of net
sales in the Cleaning segment for each such years, respectively, and
approximately 27%, 27% and 28% of net sales in the International segment,
respectively. Sales of trash bags represented approximately 13%, 14% and 13% of
the Companys consolidated net sales in each of the fiscal years 2016, 2015 and
2014, respectively, and approximately 37%, 38% and 36% of net sales in the
Household segment, respectively, for each such years. Sales of charcoal
represented approximately 11% of the Companys consolidated net sales and
approximately 34% of net sales in the Household segment in fiscal years 2016,
2015 and 2014.
Information about the results
of each of the Companys reportable segments for the last three fiscal years and
total assets as of the end of the last three fiscal years, reconciled to the
consolidated amounts, is set forth below. Certain non-allocated administrative
costs, interest income, interest expense and various other non-operating income
and expenses are reflected in Corporate. For additional information, refer to
the information set forth under the caption Segment Results from Continuing
Operations in Managements Discussion and Analysis of Financial Condition and
Results of Operations, in Exhibit 99.1.
(Dollars in millions)
|
|
Fiscal
Year
|
|
Cleaning
|
|
Household
|
|
Lifestyle
|
|
International
|
|
Corporate
|
|
Total
Company
|
Net
Sales
|
|
2016
|
|
$
|
1,912
|
|
$
|
1,862
|
|
$
|
990
|
|
$
|
997
|
|
$
|
-
|
|
|
$
|
5,761
|
|
|
2015
|
|
|
1,824
|
|
|
1,794
|
|
|
950
|
|
|
1,087
|
|
|
-
|
|
|
|
5,655
|
|
|
2014
|
|
|
1,776
|
|
|
1,709
|
|
|
936
|
|
|
1,093
|
|
|
-
|
|
|
|
5,514
|
|
Earnings (losses) from
|
|
2016
|
|
|
511
|
|
|
428
|
|
|
251
|
|
|
66
|
|
|
(273
|
)
|
|
|
983
|
continuing operations before
|
|
2015
|
|
|
445
|
|
|
375
|
|
|
257
|
|
|
79
|
|
|
(235
|
)
|
|
|
921
|
Income taxes
|
|
2014
|
|
|
428
|
|
|
326
|
|
|
258
|
|
|
99
|
|
|
(227
|
)
|
|
|
884
|
|
Total assets
|
|
2016
|
|
|
883
|
|
|
1,092
|
|
|
880
|
|
|
1,057
|
|
|
606
|
|
|
|
4,518
|
|
|
2015
|
|
|
876
|
|
|
725
|
|
|
860
|
|
|
1,057
|
|
|
646
|
|
|
|
4,164
|
Principal Markets and
Methods of Distribution
In the United States, most of
the Companys products are nationally advertised and sold to mass
retail-outlets, warehouse clubs, and dollar, military and other types of retail
stores primarily through a direct sales force, and to grocery stores and grocery
wholesalers primarily through a combination of direct sales teams and a network
of brokers. The Company sells institutional, janitorial, and food-service
versions of many of its products through distributors using a network of
brokers, and sells healthcare products through a direct sales force and medical
supply distributors. Outside the United States, the Company sells products to
the retail trade through subsidiaries, licensees, distributors and joint-venture
arrangements with local partners. Additionally, the Company sells many of its
products through online retailers.
Financial Information About
Foreign and Domestic Operations
For detailed financial
information about the Companys foreign and domestic operations, including net
sales and property, plant and equipment, net, by geographic area, see the Notes
to Consolidated Financial Statements in Exhibit 99.1.
Sources and Availability of
Raw Materials
The Company purchases raw
materials from numerous unaffiliated domestic 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, diesel, sodium hypochlorite,
corrugated cardboard and agricultural commodities. Sufficient raw materials were
available during fiscal year 2016. Costs for resin and diesel decreased in
fiscal year 2016.
However, costs for many
materials continued to increase amid volatility and inflation in some key
geographic and commodity markets, which the Company expects to continue in
fiscal year 2017. The Company generally utilizes supply and forward-purchase
contracts to help ensure availability and help manage the volatility of the
pricing of raw materials needed in its operations. However, the Company is
nonetheless highly exposed to changes in the prices of commodities used as raw
materials in the manufacturing of its products. For further information
regarding the impact of changes in commodity prices, see Managements
Discussion and Analysis of Financial Condition and Results of Operations in
Exhibit 99.1 and Risk Factors Volatility and increases in the costs of raw
materials, energy, transportation, labor and other necessary supplies or
services have harmed, and in the future may harm, the Companys net earnings and
cash flow in Item 1.A.
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Table of Contents
Patents and
Trademarks
Most of the Companys brand
name consumer products are protected by registered trademarks. The Companys
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 Companys success. The Companys patent
rights are also material to its business and are asserted, where appropriate,
against apparent infringements.
Seasonality
Most sales of the Companys
charcoal products occur in the first six months of each calendar year. A
moderate seasonality trend also occurs in the net sales of the Companys Burts
Bees
®
natural personal care products, with slightly more than half of
the annual net sales occurring during the months of October through March.
Short-term borrowings may be used to fund inventories of those products in the
off season.
Customers
Net sales to the Companys
largest customer, Walmart Stores, Inc. and its affiliates, were 27%, 26% and 27%
of consolidated net sales for each of the fiscal years ended June 30, 2016, 2015
and 2014, respectively, and occurred in each of the Companys reportable
segments. No other customers accounted for more than 10% of consolidated net
sales in any of these fiscal years. During fiscal years 2016, 2015 and 2014, the
Companys five largest customers accounted for 46%, 45%, and 45% of its
consolidated net sales for each of the three fiscal years,
respectively.
Competition
The markets for consumer
products are highly competitive. The Companys 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. The Companys products
generally
compete on
the basis of
product performance, brand recognition, 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 improvements 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.
Research and
Development
The Company conducts research
and development primarily at its facility located in Pleasanton, CA, which the
Company has leased since 2011. The Pleasanton facility consists of approximately
357,000 square feet of leased space, utilizing state-of-the-art labs and open
work spaces to encourage creativity, collaboration and innovation. In addition
to the leased facility in Pleasanton, CA, the Company conducts research and
development activities in Meriden, CT; Willowbrook, IL; Durham, NC; Cincinnati,
OH; and Buenos Aires, Argentina.
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Table of Contents
The Company devotes
significant resources and attention to product development, process technology
and consumer insight research to develop commercially viable consumer-preferred
products with innovative and distinctive features. The Company incurred expenses
of $141 million, $136 million and $125 million in fiscal years 2016, 2015 and
2014, respectively, on direct research activities relating to the development of
new products and/or the improvement of existing products. In addition, the
Company obtains technologies from third parties for use in its products.
Royalties relating to such technologies are reflected in the Companys Cost of
products sold. For further information regarding the Companys research and
development costs, see Managements Discussion and Analysis of Financial
Condition and Results of Operations in Exhibit 99.1.
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 Companys results of operations or financial
condition in Item 1.A. No material capital expenditures relating to
environmental compliance are presently anticipated.
Number of Persons
Employed
As of June 30, 2016, the
Company employed approximately 8,000 people.
Available
Information
The Companys Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Sections 13(a) or
15(d) of the Exchange Act are available on the Companys 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 Reporting/SEC Filings.
Information relating to corporate governance at Clorox, including the Companys
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 and Governance Committee, is
available at TheCloroxCompany.com under Corporate Responsibility/Performance/Corporate Governance or http://www.thecloroxcompany.com/corporate-responsibility/performance/corporate-governance.
The Company will provide any of the foregoing information without charge upon
written request to Corporate Communications, The Clorox Company, 1221 Broadway,
Oakland, CA 94612-1888. The information contained on the Companys 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
Companys business, financial condition and results of operations. Additional
risks and uncertainties that are not currently known to the Company or that are
not currently believed by the Company to be material may also harm the Companys
business operations and financial results.
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 United States and in its
international markets. Most of the Companys products compete with other widely
advertised brands within each product category. The Company also faces
competition from retailers, including club stores, grocery, dollar stores, mass
merchandisers and internet-based retailers, which are increasingly offering
private label brands that are typically sold at lower prices and compete with
the Companys products in certain categories. During times of economic
uncertainty, consumers tend to purchase more private label or other economy
brands. Increased purchases of private label products could reduce net sales
of the Companys higher-margin products or there could be a shift in product mix
to lower-margin offerings.
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Table of Contents
The Companys products
generally compete on the basis of product performance, brand recognition, 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 improvements to maintain its relative market position. If
the Companys advertising, marketing and promotional programs, including its use
of digital media to reach consumers, are not effective or adequate, the
Companys net sales may be negatively impacted.
Some of the Companys
competitors are larger than the Company and have greater financial resources.
These competitors may be able to spend more aggressively on advertising and
promotional activities, introduce competing products more quickly and respond
more effectively to changing business and economic conditions than the Company
can. In addition, the Companys competitors may attempt to gain market share by
offering products at prices at or below those typically offered by the Company.
Competitive activity may require the Company to increase its spending on
advertising and promotions and/or reduce prices, which could lead to reduced net
earnings and adversely affect growth.
Uncertain worldwide,
regional and local economic conditions and financial market volatility may
negatively impact the Company and consumers of its products, which would
negatively affect the Companys financial performance and
liquidity.
Although the Company continues
to devote significant resources to support its brands, uncertain economic
conditions may continue to negatively affect consumer demand for the Companys
products. Consumers may also be sensitive to economic uncertainty or unfavorable
economic conditions and reduce discretionary spending, which may lead to reduced
net sales or cause a shift in the Companys product mix from higher-margin to
lower-margin products. Consumers may increase purchases of lower-priced or
private label products, and the Companys competitors may increase levels of
advertising and promotional activity for lower-priced products as they seek to
maintain sales volumes during uncertain economic times, which may negatively
impact the Companys net sales.
Global markets continued to
experience significant disruptions during fiscal year 2016, and continuing
volatility could continue to harm the Companys business. In addition, financial
market volatility could adversely affect the Companys liquidity and capital
resources. Uncertain economic conditions and financial market volatility may
also adversely affect the financial condition of the Companys customers,
suppliers and other business partners. If customers financial conditions are
severely affected, customers may reduce their purchases of the Companys
products or the Company may not be able to collect accounts receivable, each of
which could have a material adverse impact on the Companys business operations
or financial results.
Sales growth objectives may
be difficult to achieve, and price increases, market and category declines and
changes to the Companys product and geographic mix may adversely impact the
Companys financial results.
A large percentage of the
Companys revenues comes from mature markets that are subject to high levels of
competition. During fiscal year 2016, approximately 83% of the Companys net
sales were generated in U.S. markets. The Companys ability to achieve sales
growth depends on its ability to drive growth through innovation, expansion into
new product categories, channels and countries, investment in its established
brands and enhanced merchandising and its ability to capture market share from
competitors. If the Company is unable to increase market share in existing
product lines, develop product improvements, undertake sales, marketing and
advertising initiatives that grow its product categories and/or develop, acquire
or successfully launch new products or brands, it may not achieve its sales
growth objectives. Even when the Company is successful in increasing market
share within particular product categories, a decline in the markets for such
product categories has had and can continue to have a negative impact on the
Companys financial results.
In addition, changes to the
mix of products the Company sells, as well as the mix of countries in which its
products are sold, can adversely impact the Companys net sales, profitability
and cash flow. The Companys financial outlook assumes a certain volume and
product mix, and if actual results vary from this projected volume and product
mix, the Companys business operations and financial results could be negatively
affected.
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Table of Contents
Volatility and increases in
the costs of raw materials, energy, transportation, labor and other necessary
supplies or services have harmed, and in the future may harm, the Companys net
earnings and cash flow.
Volatility and increases in
the costs of raw materials, including resin, sodium hypochlorite, linerboard,
soybean oil, solvent, corrugated cardboard and other chemicals and agricultural
commodities, or increases in the cost of energy, transportation, labor and other
necessary supplies or services have harmed, and in the future may harm, the
Companys profits and operating results. We distribute our products and receive
raw materials primarily by rail and truck. Reduced availability of rail or
trucking could cause us to incur unanticipated expenses and impair our ability
to distribute our products or receive our raw materials in a timely
manner.
The Company believes commodity
and other cost increases are possible in the future. If such increases occur or
exceed the Companys estimates and the Company is not able to increase the
prices of its products or achieve cost savings to offset such cost increases,
its profits and operating results will be harmed. In addition, if the Company
increases the prices of its products in response to increases in the cost of
commodities, and commodity costs decline, the Company 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 not to pay the
higher prices, which could lead to sales declines and loss of market share.
While the Company seeks to project tradeoffs between price increases and volume,
its projections may not accurately predict the volume impact of price increases,
which could adversely affect its financial condition and results of
operations.
To reduce the cost volatility
associated with anticipated commodity purchases, the Company uses derivative
instruments, including commodity futures and swaps. The extent of the Companys
derivative position at any given time depends on the Companys 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 institutes a position and costs subsequently decrease, the
Companys costs may be greater than anticipated or higher than its competitors
costs and the Companys financial results could be adversely affected. For
further information regarding the Companys use of derivative instruments, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations in Exhibit 99.1.
Dependence on key customers
could adversely affect the Companys business, financial condition and results
of operations.
A limited number of customers
account for a large percentage of the Companys net sales. Net sales to the
Companys largest customer, Walmart Stores, Inc. and its affiliates, were 27%,
26% and 27% of consolidated net sales for each of the fiscal years ended June
30, 2016, 2015 and 2014, respectively, and occurred in each of the Companys
reportable segments. No other individual customer accounted for more than 10% of
consolidated net sales in any of these fiscal years. During fiscal years 2016,
2015 and 2014, the Companys five largest customers accounted for 46%, 45%, and
45% of its consolidated net sales for each of the three fiscal years,
respectively. The Company expects that a significant portion of its revenues
will continue to be derived from a small number of customers. As a result,
changes in the strategies of the Companys largest customers, including a
reduction in the number of brands they carry or a shift of shelf space to
private label or competitors products, may harm the Companys net sales and
reduce the ability of the Company to offer new innovative and improved products
to consumers. In addition, 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 Companys business, financial condition and results of
operations.
In addition, the Companys business is
based primarily upon individual sales orders, and the Company typically does not enter into long-term contracts with its
customers. Accordingly, customers could reduce their purchasing levels or cease buying products from the Company at any time
and for any reason. If the Company does not effectively respond to the demands of its customers, they could decrease their
purchases from the Company, causing the Companys net sales and net earnings to decline. Furthermore, unfavorable market
conditions or competitive pressures may cause the Companys customers to reevaluate the number and mix of brands they
sell, resulting in lower purchases of the Companys products by these customers.
7
Table of Contents
The Company continues to see
retailer consolidation both in the United States and internationally. 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 special packaging or impose other
burdensome requirements on product suppliers. These business demands may relate
to inventory practices, logistics, a shift in focus away from branded products
toward private label or other aspects of the customer-supplier relationship.
These large consolidated companies could also exert additional competitive
pressure on the Companys other customers, which could in turn lead to such
customers demanding lower pricing 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
Companys business, financial condition and results of operations may be
harmed.
Cyber-attacks, privacy
breaches, data breaches or a failure of key information technology systems could
adversely impact the Companys ability to conduct business.
The Company relies extensively
on information technology systems, many of which are managed by third-party
service providers, in order to conduct its business. These systems include, but
are not limited to, programs and processes relating to communicating within the
Company and with customers, consumers and other parties, ordering and managing
materials from suppliers, converting materials to finished products, shipping
products to customers, processing transactions, summarizing and reporting
results of operations, complying with regulatory, legal and tax requirements and
implementing other processes involved in managing the business. Although the
Company has made progress with its implementation of enterprise-wide upgrades to
its hardware, software and operating systems, legacy systems still remain. If
the Companys existing and/or future technology systems, third-party service
providers and processes do not adequately support the future growth of the
Companys business, the Companys business may be adversely impacted.
Although the Company has network security measures in place, the systems
may be vulnerable to computer viruses or other malicious codes, security breaches and other disruptions from unauthorized
users or system failures, including Internet outages. While the Company has business continuity plans in place, if the
systems are damaged or cease to function properly due to any number of causes, including catastrophic events, power
outages, security breaches or other similar events, and if the business continuity plans do not effectively resolve such
issues on a timely basis, the Company may suffer interruptions in its ability to manage or conduct business, which may
adversely impact the Companys business. Furthermore, the Company sells its Burts Bees
®
natural
personal care products, Renew Life
®
digestive health products and other products directly to consumers
online, provides websites, mobile apps and connected devices, and offers promotions, rebates, customer loyalty and other
programs through which it may receive personal information, and it or its vendors could experience cyber-attacks, privacy
breaches, data breaches or other incidents that result in unauthorized disclosure of consumer, customer, employee or Company
information. In August 2015, the federal government brought an
indictment against
brokers and hackers for stealing advanced, nonpublic press releases of various public companies from news wires and trading
on securities using the information from such press releases. If the Company suffers a loss as a result of a breach or
other breakdown in its technology, including such cyber-attack, privacy breaches, data breaches or other incident involving
one of the Companys vendors, that result in unauthorized disclosure or significant unavailability of business,
financial, personal or stakeholder information, the Company may suffer reputational, competitive and/or business harm and
may be exposed to legal liability, which may adversely affect the Companys results of operations and/or financial
condition. In addition, if the Companys service providers, suppliers or customers experience such 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 Companys supply chain or reduced customer orders, which would adversely affect the
Companys business operations.
Government regulations
could impose material costs.
Generally, the manufacture,
packaging, labeling, storage, distribution and advertising of the Companys
products and the conduct of its business operations must all comply with
extensive federal, state and foreign laws and regulations. For example, in the
United States, many of the Companys products are regulated by the Environmental
Protection Agency, the Food and Drug Administration and the Consumer Product
Safety Commission, and the Companys product claims and advertising are
regulated by the Federal Trade Commission, among other regulatory agencies. Most
states have agencies that regulate in parallel to these federal agencies. The
Companys international operations are also subject to regulation in each of the
foreign jurisdictions in which it manufactures or distributes its products.
There is also a risk of potentially higher incidence of fraud or corruption in
certain foreign jurisdictions and related difficulties in maintaining effective
internal controls. Additionally, the Company could be subject to inquiries or
investigations by governmental and other regulatory bodies. Any determination
that the Companys operations or activities are not in compliance with
applicable law could expose the Company to significant fines, penalties or other
sanctions that may harm the business and reputation of the Company.
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In particular, because of the
Companys extensive international operations, we could be adversely affected by
violations of the Foreign Corrupt Practices Act and similar worldwide
anti-bribery laws. The Foreign Corrupt Practices Act and similar worldwide
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. While our policies mandate
compliance with these anti-bribery laws, we cannot provide assurance that our
internal control policies and procedures will always protect us from reckless or
criminal acts committed by our employees, joint-venture partners or agents.
Violations of these laws, or allegations of such violations, could disrupt our
business and adversely affect our reputation and our business, results of
operations, cash flows and financial condition.
It is expected that federal,
state and foreign governments will continue to introduce new and expanded
legislation affecting the Companys operations, which may require the Company to
increase its resources, capabilities and expertise in such 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 new and increased regulation in other
areas, such as with respect to conflict minerals. Such regulation could
negatively impact the Companys ability to obtain raw materials or could
increase its acquisition and compliance costs. In addition, pending legislative
initiatives and adopted legislation in the areas of healthcare reform and other
areas, such as the Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010, the Dodd-Frank Wall Street Reform
and Consumer Protection
Act, the Foreign Account Tax
Compliance Act and legislation in the area of taxation of domestic and foreign
profits, executive compensation and corporate governance, could also increase
the Companys costs. These risks may be increased by the Companys recent
acquisition of Renew Life, which manufactures products subject to additional
regulations.
If the Company is found to be
noncompliant with applicable laws and regulations in these or other areas, it
could be subject to civil remedies, 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 operating results. As the Company expands its natural personal
care and healthcare businesses such as through Burts Bees
®
,
HealthLink
®
, Aplicare
®
and Caltech Industries, an
increasing number of its products have and will become subject to regulations
and laws relating to drugs and medical devices. In addition, as the Company
enters the digestive health space through its acquisition of Renew Life
®
, its products are subject to regulations relating to dietary
supplements. In order to comply with these laws and regulations, 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.
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The Company is subject to
risks related to its international operations.
In fiscal year 2016,
approximately 17% of the Companys net sales were generated in international
markets, including approximately 3% of the Companys net sales in Argentina. The
Company faces and will continue to face substantial risks associated with its
foreign operations, including the following:
●
|
economic or political instability, particularly
in Argentina;
|
●
|
price controls and related government
actions;
|
●
|
foreign currency fluctuations, currency
controls and inflation, particularly in Argentina, which may adversely
affect the Companys 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;
|
●
|
difficulty in obtaining non-local currency
(e.g., U.S. dollars) to pay for the raw materials needed to manufacture
the Companys products and contract-manufactured products;
|
●
|
restrictions on or costs related to the
repatriation of foreign profits to the United States, including possible
taxes or withholding obligations on any repatriations;
|
●
|
the imposition of tariffs, trade restrictions,
import and export laws or other government actions generating a negative
impact on the Companys business;
|
●
|
difficulties in hiring and retaining qualified
employees;
|
●
|
civil unrest, work stoppages and labor
disputes;
|
●
|
employment litigation related to employees,
contractors and suppliers, particularly in Argentina;
|
●
|
difficulties in obtaining or unavailability of
raw materials;
|
●
|
potential loss of distribution channels as a
result of retailer consolidation;
|
●
|
increased credit risk of customers, suppliers
and distributors;
|
●
|
potential harm to third parties, the Companys
employees and/or surrounding communities, and related liabilities and
damages to the Companys 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 Companys business partners;
|
●
|
difficulties in enforcing intellectual property
and contractual rights;
|
●
|
lack of well-established or reliable, and
impartial legal systems in certain countries where the Company
operates;
|
●
|
challenges relating to enforcement of or
compliance with local laws and regulations and with U.S. laws affecting
operations outside of the United States, including without limitation, the
Foreign Corrupt Practices Act;
|
●
|
the possibility of nationalization,
expropriation of assets or other similar government actions; and
|
●
|
risks related to the Companys discontinued
operations in Venezuela.
|
The risks described above
could have a significant adverse impact on the Companys ability to
commercialize its products on a competitive basis in international markets and
may have a material adverse effect on its results of operations or financial
condition. The Companys small sales volume in some countries, relative to some
multinational and local competitors, could exacerbate such risks.
In addition, the Company is
exposed to foreign currency exchange rate risks with respect to its net sales,
net earnings and cash flow driven by movements of the U.S. dollar relative to
other currencies. A weakening of the currencies in which sales are generated
relative to the currencies in which costs are denominated would decrease net
earnings and cash flow. Although the Company uses instruments to hedge certain
foreign currency risks, these hedges only offset a small portion of the
Companys exposure to foreign currency
fluctuations and, therefore, the Companys reported net earnings may be
negatively affected by changes in foreign exchange rates.
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Inflation is another risk
associated with the Companys international operations. For example, Argentina
could in the future be designated as a highly inflationary economy. Gains and
losses resulting from the remeasurement of non-U.S. dollar monetary assets and
liabilities of subsidiaries operating in highly inflationary economies are
recorded in net earnings. Other countries in which the Company operates may also
become highly inflationary or such countries currencies may be devalued, or
both, which may negatively impact the Companys business operations and
financial results.
For further information
regarding Argentina, see Managements Discussion and Analysis of Financial
Condition and Results of Operations in Exhibit 99.1.
Acquisitions, new venture
investments and divestitures may not be successful, which could impact the
Companys business operations and financial results.
In connection with the
Companys strategy, the Company expects to continue to seek acquisition
opportunities, such as the recent acquisition of Renew Life, which competes in
the digestive health category. However, the Company may not be able to identify
and successfully negotiate suitable strategic acquisitions at attractive prices.
In addition, all acquisitions and investments entail numerous risks, including
risks relating to the Companys ability to:
●
|
successfully integrate acquired companies, products, systems or
personnel into the Companys existing business, especially with respect to
businesses or operations that are outside of the United States;
|
●
|
minimize any potential interruption to the
ongoing business of the Company or the acquired company;
|
●
|
successfully enter categories and markets in
which the Company may have limited or no prior experience, such as the
digestive health category;
|
●
|
achieve expected synergies and obtain the
desired financial or strategic benefits from acquisitions;
|
●
|
achieve distribution expansion related to
products, categories and markets from acquisitions;
|
●
|
retain key relationships with employees,
customers, partners and suppliers of acquired companies;
and
|
●
|
maintain uniform standards, controls,
procedures and policies throughout acquired companies.
|
Acquired companies or
operations or joint ventures may not be profitable or may not achieve sales
levels and profitability and cash flow expectations. Future acquisitions or
ventures could also result in potentially dilutive issuances of equity
securities, the incurrence of debt, the assumption of contingent liabilities,
including litigation, an increase in expenses related to certain assets and
increased operating expenses, all of which could adversely affect the Companys
results of operations and financial condition. 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, government price control,
repatriation of profits and liabilities relating to the Foreign Corrupt
Practices Act. In addition, to the extent that the economic benefits associated
with any of the Companys acquisitions diminish in the future, the Company may
be required to record impairment charges related to goodwill, intangible assets
or other assets associated with such acquisitions, which could adversely affect
its operating results and/or net earnings per share.
The Company may also divest
certain assets, businesses or brands that do not meet the Companys strategic
objectives or growth targets. With respect to any divestiture, the Company may
encounter difficulty finding potential acquirers or other divestiture options on
favorable terms. Any 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 resulting from such sale or the costs or liabilities
that are not assumed by the acquirer (i.e., stranded costs) that may negatively
impact profitability and cash flow subsequent to any divestiture. The Company
may also be required to recognize impairment charges as a result of a divesture.
In addition, any potential
future acquisitions, new ventures or divestitures may divert the attention of
management and resources from matters that are core or critical to the Companys
business.
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The Company may not
successfully develop and introduce new products and line extensions or
successfully expand into adjacent categories and countries, which could
adversely impact its financial results.
The Companys 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 improvements or enter into or expand into adjacent
product categories, sales channels or countries. The Company cannot be certain
that it will successfully achieve its innovation goals. The development and
introduction of new products require substantial and effective research and
development and marketing expenditures, which the Company may be unable to
recoup if the new products do not gain widespread market acceptance. In
addition, effective and integrated systems are required for the Company to
gather and use consumer data and information to successfully market its
products. New product development and marketing efforts, including efforts to
enter markets or product categories in which the Company has limited or no prior
experience, have inherent risks. These risks include product development or
launch delays, which could result in the Company not being first to market and
the failure of new products, brands and line extensions to achieve anticipated
levels of market acceptance. If product introductions or new or expanded
adjacencies are not successful, costs associated with these efforts may not be
fully recouped and the Companys net earnings could be adversely affected. In addition, if sales generated by
new products cause a decline in sales of the Companys existing products, the
Companys financial condition and results of operations could be materially
adversely affected
.
Reliance on a limited base of suppliers may result in
disruptions to the Companys business.
The Company relies on a
limited number of suppliers for certain commodities and raw material inputs,
including sole-source and single-source suppliers for certain of its raw
materials, packaging, product components, finished products and other necessary
supplies. New suppliers have to be qualified under Company standards and may
also have to be qualified under governmental and industry standards, which can
require additional investment and time. The Company could experience disruptions
in production and its financial results and relationships with customers could
be adversely affected if the Company is unable to qualify any needed new
suppliers or maintain supplier arrangements and relationships, if it is unable
to contract with suppliers at the quantity, quality and price levels needed for
its business or if any of the Companys key suppliers becomes insolvent,
experiences financial distress or environmental, economic or other outside
factors impact its operations.
Product liability,
commercial claims or other legal proceedings could adversely affect the
Companys net sales and operating results, including cash flow.
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 Companys 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 claims could result in negative publicity that could harm the
Companys reputation, sales and operating results. In addition, if any of the
Companys products is found to be defective, the Company may recall it, which
could result in adverse publicity and significant expenses. In July 2016, the
Company voluntarily recalled three of the Liquid-Plumr
®
products,
which recall affects products manufactured prior to March 22, 2016. Although the
Company maintains product liability insurance coverage, potential product
liability claims may be subject to a retention, 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 from time to
time, including 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
and litigation in foreign jurisdictions. In general, claims made by or against
the Company in litigation, investigations, disputes or other proceedings have
been and can 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 or financial results or condition. It is not
possible to predict the final resolution of the litigation, investigations,
disputes or proceedings with which the Company currently is or may in the future
become involved. The impact of these matters on the Companys business, results
of operations and financial condition could be material. See Managements
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.
12
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Profitability and cash flow
could suffer if the Company is unable to successfully implement its strategies,
generate anticipated cost savings and efficiencies or efficiently manage supply
chain and manufacturing processes.
The Company continues to implement plans to improve its competitive
position by setting aggressive annual cost savings targets, and it expects
ongoing cost savings from its continuous improvement activities. The Company
anticipates these continuing cost savings will result from reducing material
costs and manufacturing inefficiencies and realizing productivity gains,
distribution efficiencies and overhead reductions. If the Company cannot
successfully implement its cost savings plans or the cost of making these
changes increases, the Company may not realize all anticipated benefits, which
could adversely affect its financial results or its long-term strategies, such
as the 2020 Strategy, which includes financial goals such as annual net sales
growth of 3-5%, annual EBIT margin growth between 25-50 basis points and annual
free cash flow as a percentage of net sales of about 10-12%. The Company also
continues to seek to penetrate new markets and introduce new products and
product improvements. These goals and strategies may not be implemented or may
fail to achieve desired results, and the Company may fail to achieve one or more
of the financial goals for one or more of the relevant fiscal years. In
addition, the Company expects to continue to restructure its operations as
necessary to improve operational efficiency, including occasionally closing
facilities or plants. Gaining additional efficiencies may become increasingly
difficult over time, there may be one-time costs relating to facility closures
or other restructurings and anticipated cost savings and the Companys
strategies may not be implemented or may fail to achieve desired results. If the
Company is unable to implement its strategies or if its strategies do not
achieve the intended effects, if it does not realize cost savings and other
efficiencies or if it is unable to efficiently manage its supply chain and
manufacturing processes, the Companys financial results could suffer. These
plans and strategies could also have a negative impact on the Companys
relationships with employees or customers, which could also adversely affect the
Companys financial results.
Loss of, or inability
to attract, key personnel could adversely impact the Companys business.
The Companys success depends,
in part, on its ability to retain its key personnel, including its executive
officers and senior management team. The unexpected loss of one or more of the
Companys key employees could disrupt its business. The Companys success also
depends, in part, on its continuing ability to identify, hire, train and retain
other highly qualified personnel. Competition for these employees can be
intense, especially in the San Francisco Bay Area, where the Companys
headquarters and largest research facility are located. As the Company expands
into new categories or markets, including more regulated businesses, it will also require personnel with relevant
training and experience in such categories or markets. The Company may not be
able to attract, assimilate or retain qualified personnel in the future, and its
failure to do so could adversely affect its business.
Harm to the Companys reputation or the reputation of one
or more of its leading brands could have an adverse effect on the business.
Maintaining a strong
reputation with consumers, customers and trade partners is critical to the
success of the Companys business. The Company devotes significant time and
resources to programs designed to protect and preserve the Companys reputation
and the reputation of its brands. These programs include ethics and compliance,
sustainability and product safety and quality initiatives. Despite these
efforts, negative publicity about the Company, including product safety,
quality, efficacy or similar concerns, whether real or perceived, could occur,
and the Companys products could face withdrawal, recall or other quality
issues. The Company also licenses certain of its brands to third parties, which
creates additional exposure for those brands to product safety, quality and
other concerns. In addition, widespread use of social media and networking sites
by consumers has greatly increased the speed and accessibility of information
dissemination. Negative publicity, posts or comments on social media or network
sites about the Company or its brands, whether accurate or inaccurate, or
disclosure of non-public sensitive information about the Company, could be
widely disseminated through the use of social media. Such events, if they were
to occur, could harm the Companys image and adversely affect its business, as
well as require resources to rebuild the Companys reputation.
13
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Environmental matters
create potential liabilities that could adversely affect the Companys results
of operations or financial condition.
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 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. The Company could also become subject to
additional environmental liabilities in the future that could result in a
material adverse effect on its results of operations or financial condition.
The Company had a recorded
liability of $14 million and $12 million as of June 30, 2016 and 2015,
respectively, for its share of aggregate future remediation costs related to
certain environmental matters, including response actions at various locations.
One matter in Dickinson County, Michigan, for which the Company is jointly and
severally liable, accounts for a substantial majority of the recorded liability
as of both June 30, 2016 and 2015. See Managements 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.
The Company also handles
and/or transports hazardous substances, including but not limited to chlorine,
at some of its international plant sites. A release of such chemicals, whether
in transit or at the Companys facilities, due to accident or an intentional
act, could result in substantial liability and business disruptions.
The facilities of the
Company and its suppliers are subject to disruption by events beyond the
Companys control.
Operations at facilities of the Company, its suppliers, service providers
and retail customers are subject to disruption for a variety of reasons,
including work stoppages, demonstrations, disease outbreaks or pandemics, acts
of war, terrorism, fire, earthquakes, flooding or other natural disasters. The
Companys corporate headquarters and primary research and development facility
are located near major earthquake fault lines in California. If a major
disruption were to occur, it could result in harm to people or the natural
environment, temporary loss of access to critical data, delays in shipments of
products to customers or suspension of operations. Any such disruption could
have a material adverse impact on the Companys business.
Failure to maximize,
successfully assert or successfully defend the Companys intellectual property
rights could impact its competitiveness.
The Company relies on
intellectual property rights based on trademark, trade secret, patent and
copyright laws to protect its brands, products and packaging for its products.
The Company cannot be certain that these intellectual property rights will be
maximized or that they can be successfully asserted. There is a risk that the
Company will not be able to obtain and perfect its own intellectual property
rights or, where appropriate, license intellectual property rights necessary to
support new product introductions. The Company cannot be certain that these
rights, if obtained, will not later be invalidated, circumvented or challenged,
and the Company could incur significant costs in connection with legal actions
to assert its intellectual property rights or to defend those rights from assertions of invalidity. In addition,
even if such rights are obtained in the United States, the laws of some of the
other countries in which the Companys products are or may be sold may not
protect intellectual property rights to the same extent as the laws of the
United States. If other parties infringe the Companys intellectual property
rights, they may dilute or diminish the value of the Companys brands and
products in the marketplace, which could diminish the value that consumers
associate with the Companys 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, operating
results, and financial condition.
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If the Company is found to have infringed the intellectual
property rights of others or cannot obtain necessary intellectual property
rights from others, its competitiveness could be negatively
impacted.
If the Company is found to
have violated the trademark, trade secret, copyright, patent or other
intellectual property rights of others, 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 Companys business and 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 impact on the Companys business, operating results and
financial condition.
Even if the Company is not
found to infringe a third partys intellectual property rights, claims of
infringement could adversely affect the Companys business. For example, if the
Company seeks proposals from multiple vendors for a new product or innovation
and chooses to partner with a particular vendor, another vendor may claim the
Company infringed its intellectual property rights by using information gathered
from the vendor proposals. The Company could incur material legal costs and
related expenses to defend against such claims and the Company could incur
significant costs associated with discontinuing to use, provide or manufacture
certain products, services or trademarks even if it is ultimately found not to
have infringed such rights.
An increase in the value of
the Companys Glad
®
business
would result in an increase in the Companys purchase obligation for The Procter
& Gamble Companys, P&Gs, 20% interest in that business, which may
adversely affect the Companys net earnings and cash flow. Additionally, it is
uncertain whether the Companys net earnings and cash flow would be adversely
affected more by an extension or a termination of the agreement related to the
Glad
®
business.
In January 2003, the Company
entered into a venture agreement with P&G related to the Companys
Glad
®
bags, wraps and containers business. In connection with this
agreement, P&G provides research and development support to the
Glad
®
business. The agreement with P&G will expire in January
2023 unless the parties decide, on or prior to January 2018, to extend the term
of the agreement for another 10 years.
Unless extended, the agreement
will require the Company to purchase P&Gs 20% interest in January 2023 for
cash at fair value. As of June 30, 2016, the estimated fair value of P&Gs
interest was $448 million, of which $302 million has been recognized by the
Company and is reflected in Other liabilities in the Companys June 30, 2016
Consolidated Balance Sheet. The difference between the estimated fair value and
the amount recognized, and any future changes in the fair value of P&Gs
interest, is charged to Cost of products sold on a straight line basis over the
remaining life of the agreement. The estimated fair value of P&Gs interest
increased significantly in 2016 and may continue to change up until any such
purchase by the Company of P&Gs interest. Any additional significant
increases in the fair value of such interest may adversely affect the Companys
net earnings and cash flow.
If the Company and P&G
decide not to extend the term of the agreement, this decision may harm the terms
on which the Company has access to innovation from P&G. Alternatively, if
the Company and P&G decide to extend the term of the agreement, there can be
no assurance that any future innovation will result. In either case, net
earnings and cash flow may be negatively impacted. For additional information,
see Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 10 to the Consolidated Financial Statements in Exhibit
99.1.
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The Companys substantial
indebtedness could adversely affect its business operations and financial
results and prevent the Company from fulfilling its obligations, and the Company
may incur substantially more debt in the future, which could exacerbate these
risks.
As of June 30, 2016, the
Company had over $2 billion of debt. The Companys substantial 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 and other general corporate purposes;
|
●
|
limit the Companys
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 Companys debt documents, its ability to
borrow additional funds.
|
Additionally, failure by the Company to comply with the financial
and other restrictive covenants in its debt documents could result in an event
of default that, if not cured or waived, could have a significant adverse effect
on the Company. Further, certain terms of the agreements governing the Companys
over-the-counter derivative instruments contain provisions that require the
Companys credit ratings, as assigned by Standard & Poors and Moodys to
the Company and its counterparties, to remain at a level equal to or better than
the minimum of an investment grade credit rating. As of June 30, 2016, the
Company and each of its counterparties had been assigned investment-grade
ratings with both Standard & Poors and Moodys. However, if the Companys
credit rating were to fall below investment grade, the counterparties to the
derivative instruments in net liability positions could request full
collateralization.
The Company may incur
substantial additional indebtedness in the future to fund acquisitions,
repurchase shares or fund other activities for general business purposes,
subject to compliance with the Companys existing restrictive debt covenants. As
of June 30, 2016, the Company could add approximately $2 billion in incremental
debt and remain in compliance with restrictive debt covenants, although the
actual amount that the Company may be able to borrow in the future may not equal
this amount. If new debt is added to the current debt levels, the related risks
that the Company now faces could intensify. In addition, the cost of incurring
additional debt could increase due to possible downgrades in the Companys
credit rating, economic conditions or otherwise. In this regard, failure to
maintain the Company's credit ratings could adversely affect the interest rate
in future financings, liquidity, competitive position and access to capital
markets.
The Company is subject to
risks related to its discontinued operations in Venezuela.
On September 22, 2014, the
Companys Venezuela subsidiary announced that it was discontinuing its
operations, effective immediately, and seeking to sell its assets. On September
26, 2014, the Company reported that Venezuelan Vice President Jorge Arreaza
announced, with endorsement by President Nicolás Maduro, that the Venezuelan
government had occupied the production facilities of the Companys Venezuela
subsidiary. On November 6, 2014, the Company reported that the Venezuelan
government had published a resolution granting a government-sponsored Special
Administrative Board full authority to restart and operate the business formerly
operated by the Companys Venezuela subsidiary, thereby reaffirming the
governments expropriation of its assets. Further, President Nicolás Maduro
announced the governments intention to facilitate the resumed production of
bleach and other cleaning products at the Venezuela plants. The Venezuelan
governments actions raise grave concerns, as the production of cleaning
products, in particular bleach, is a highly specialized and technical process.
Any restarting of operations in Venezuela is or would be without the consent or
involvement of the Company and its affiliates, and any resumed production
processes would be outside the Companys control. The Company has advised
repeatedly that it and its affiliates cannot be responsible for the safety of
any workers and the surrounding communities or for the safety, quality or
effectiveness of any product that may be produced under the Venezuelan
governments takeover or any use of the names and trademarks of the Company and
its affiliates. Nevertheless, the Company may face liabilities or costs
associated with any such unauthorized resumption of operations by the Venezuelan
government or others.
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The Company may not
continue to pay dividends or repurchase its stock.
Although the Company has
historically declared and paid quarterly cash dividends on its common stock and
has been authorized to repurchase its shares subject to certain limitations
under its share repurchase programs, any determinations by the board of
directors to continue to declare and pay cash dividends on the Companys common
stock or to repurchase the Companys common stock will be based primarily upon
the Companys financial condition, results of operations and business
requirements, the price of its common stock in the case of the repurchase
program and the board of directors continuing determination that the repurchase
programs and the declaration and payment of dividends are in the best interests
of the Companys stockholders and are in compliance with all laws and agreements
applicable to the repurchase and dividend programs. The Companys ability to
continue to declare and pay cash dividends will depend upon, among other things,
its cash balances and future cash requirements, results of operations, financial
condition and net earnings, all of which are subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond the
Companys control. In the event the Company does not declare and pay a quarterly
dividend or discontinues its share repurchases, the Companys stock price could
be adversely affected.
The Companys
continued growth and expansion and reliance on third-party service providers
could adversely affect its internal control over financial reporting, which
could harm its business and financial results.
Clorox management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with accounting principles
generally accepted in the United States. Because of its inherent limitations,
internal control over financial reporting cannot provide absolute assurance that
a misstatement of the Companys financial statements would be prevented or
detected. The Companys continuing growth and expansion in domestic and globally
dispersed markets, such as its recent acquisition of Renew Life, may place
significant additional pressure on the Companys system of internal control over
financial reporting. Moreover, the Company engages the services of third parties
to assist with business operations and financial reporting processes, which
injects additional monitoring obligations and risk into the system of internal
control. Any failure to maintain an effective system of internal control over
financial reporting could limit the Companys ability to report its financial results accurately and on a
timely basis, or to detect and prevent fraud and could expose it to regulatory
enforcement action and shareholder claims.
The Companys judgments regarding the accounting for tax
positions and the resolution of tax disputes may impact the Companys net
earnings and cash flow.
Significant judgment is
required to determine the Companys effective tax rate and evaluate its tax
positions. The Company provides for uncertain tax positions when such tax
positions do not meet the recognition thresholds or measurement criteria
prescribed by applicable accounting standards. Fluctuations in federal, state,
local and foreign taxes or a change to uncertain tax positions, including
related interest and penalties, may impact the Companys effective tax rate and
the Companys financial results. When particular tax matters arise, a number of
years may elapse before such matters are audited and finally resolved.
Unfavorable resolution of any tax matter could increase the effective tax rate,
which would have an adverse effect on the Companys operating results. Any
resolution of a tax issue may require the use of cash in the year of resolution.
For additional information, see the information set forth in the Notes to
Consolidated Financial Statements in Exhibit 99.1.
The estimates and
assumptions on which the Companys 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 Companys future profitability, cash
flows and stock price.
The Companys financial
projections are dependent on certain estimates and assumptions related to, among
other things, category growth, market share projections, product pricing,
foreign exchange rates, commodity prices, cost savings, accruals for estimated
liabilities, including litigation reserves, goodwill, measurement of benefit
obligations for pension and other postretirement benefit plans and the Companys
ability to generate sufficient cash flow to reinvest in its existing business,
fund internal growth, repurchase its shares, make acquisitions, pay dividends
and meet debt obligations. While the Companys financial projections are based
on historical experience and on various other assumptions that the Company
believes to be reasonable under the circumstances and at the time they are made,
the Companys actual results may differ materially from its financial
projections. Any material variation between the Companys financial projections
and its actual results may adversely affect the Companys future profitability,
cash flows and stock price.
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The Companys 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, including the Company. 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 incur significant
costs, which would have an adverse effect on the Companys financial results.
Stockholder activists may also seek to involve themselves in the governance,
strategic direction and operations of the Company. Such proposals may disrupt
the Companys business and divert the attention of the Companys management and
employees, and any perceived uncertainties as to the Companys 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 may make it more difficult for the Company
to attract and retain qualified personnel and business partners, which could
adversely affect the Companys 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.