PRINCIPAL PRODUCTS.
The products of the Household Group – North America segment include:
• U.S. bleach and cleaning products, including:
• laundry products, such as liquid bleaches, laundry stain removers and dry and liquid color-safe bleaches under the Clorox ® and Clorox 2 ® brands; and
• home-care cleaning products, such as disinfecting and sanitizing sprays and wipes, toilet-bowl cleaners, dilutable and spray glass and surface cleaners, carpet cleaners, reusable cleaning cloths, drain openers, steel-wool soap pads and scrubber sponges, mildew removers, soap-scum removers and bathroom cleaners, floor mopping systems, toilet and bath cleaning tools, daily shower cleaners and pre moistened towelettes, primarily under the Clorox ® , Formula 409 ® , Liquid-Plumr ® , Pine-Sol ® , Tilex ® and S.O.S ® brands.
• Water-filtration systems and filters under the Brita ® brand.
• Professional products for institutional, janitorial, healthcare and food-service markets, including:
• bleaches, toilet bowl cleaners, disinfectants, sanitizers, dish detergents, disinfecting sprays and wipes, dilutable cleaners, clog removers, cleaners, steel-wool soap pads, mildew removers, soap scum removers and bathroom cleaners primarily under the Clorox ® , Formula 409 ® , Liquid-Plumr ® , Pine-Sol ® , Tilex ® and S.O.S ® brands. Dressings, barbecue sauces, browning sauce, food-storage
bags, wraps, trash bags and charcoal briquets primarily under the Hidden Valley Ranch ® , K.C. Masterpiece ® , Kitchen Bouquet ® , Glad ® and Kingsford ® brands.
• Auto-care products, including:
• protectants, cleaners and wipes, tire- and wheel-care products, washes, waxes and automotive fuel and oil additives, primarily under the Armor All ® and STP ® brands.
• All products marketed in Canada.
The products of the Specialty Group segment include:
• Plastic bags, wraps and containers, under the Glad ® brand.
• Cat litter products, including:
• clay (clumping and non-clumping) and silica gel-based cat litters with odor-eliminating carbon, primarily under the Fresh Step ® and Scoop Away ® brands.
• Food products, including:
• salad dressings and dip mixes, seasoned mini-croutons, seasonings, sauces and marinades, primarily under the Hidden Valley ® and K C Masterpiece ® brands.
• Charcoal products, including:
• charcoal briquets, charcoal lighter, charwood and wood chips under the Kingsford ® and Match Light ® brands.
The products of the International segment include:
• In Asia-Pacific:
• bleaches, liquid household cleaners, sponges, scouring pads, disposable gloves, nonstick baking paper, aluminum foil, foil trays, cleaning cloths, wraps and bags, containers, auto-care products, dressings and cat litter primarily under the Glad ® , Chux ® , Mono ® , Astra ® , Armor All ® , STP ® , Handy Andy ® , OSO ® , Yuhanrox ® , Ever Clean ® and Clorox ® brands.
• In Latin America:
• bleaches, disinfecting wipes, waxes, auto-care products, charcoal, liquid household cleaners, toilet-bowl cleaners, bathroom cleaners, disinfecting sprays, cleaning utensils, brooms, candles, air fresheners and fabric refreshers, insecticides and water filtration products primarily under the Clorox ® , Pine-Sol ® , PinoLuz ® , Blanquita ® , Arela ® , Pal ® , Emperatriz ® , Lustrillo ® , Mortimer ® , Luminosa ® , Devocion ® Marlene ® , Ayudin ® , Limpido ® , Clorinda ® , Los Conejos ® , Poett ® , Mistolin ® , Trenet ® , Selton ® , Brita ® , STP ® , Armor All ® , Kingsford ® , Glad ® , Lestoil ® and Bon Bril ® brands.
The Company has two product lines that have accounted for 10% or more of net sales during any of the past three fiscal years. Sales of Clorox ® liquid bleach represented 13%, 11% and 12% of the Company’s total net sales in fiscal years 2006, 2005 and 2004, respectively. Sales of Glad ® trash bags represented approximately 14%, 12% and 10%, respectively, of total net sales in fiscal years 2006, 2005 and 2004.
PRINCIPAL MARKETS – METHODS OF DISTRIBUTION. Most of the Company’s nondurable household consumer products are nationally advertised and sold within the United States to mass merchandisers, warehouse clubs and dollar, military and other retail stores primarily through a direct sales force, and to grocery stores and grocery wholesalers primarily through a network of brokers. Within the United States, the Company also sells institutional versions of many of its products. Outside the United States, the Company sells consumer products to the retail trade through subsidiaries, licensees, distributors and joint-venture arrangements with local partners.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS.
The following table shows net sales and long-lived assets by geographic area for the last three fiscal years.
Net Sales by Geographic Area:
| (Millions) | 2006 | 2005 | 2004 | |||||||||
Foreign |
$ | 766 | $ | 696 | $ | 615 | ||||||
United States |
$ | 3,878 | $ | 3,692 | $ | 3,547 | ||||||
Long-Lived Assets at June 30:
| (Millions) | 2006 | 2005 | 2004 | |||||||||
Foreign |
$ | 117 | $ | 116 | $ | 115 | ||||||
United States |
$ | 887 | $ | 883 | $ | 937 | ||||||
SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company purchases raw materials, packaging supplies and energy from numerous unaffiliated firms, some of which are sole suppliers. Interruptions in the delivery of these materials or services could adversely impact the Company. Significant raw materials were available from a sufficient number of sources during fiscal year 2006, although costs were significantly higher than prior-year levels. The Company utilizes supply and forward-purchase contracts to ensure availability of raw material supply at the quantity and quality standards needed in its operations. The Company is exposed to changes in the price of commodities used as raw materials in the manufacturing of its products. For further information regarding the impact of changes in commodity prices, see “Quantitative and Qualitative Disclosure about Market Risk” in “Management’s Discussion and Analysis” on pages 13 through 14 of Exhibit 99.1 hereto and “Risk Factors – Price increases in raw materials could harm the Company’s profits” in Item 1.A.
PATENTS AND TRADEMARKS. Most of the Company’s brand name consumer products are protected by registered trademarks. Its brand names and trademarks are highly important to its business, and the Company pursues a course of vigorous action against apparent infringements. Maintenance of brand equity value is critical to the 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 charcoal briquets and foods product lines occur in the first six months of each calendar year. Operating cash flow is used to build inventories of those products in the off-season.
CUSTOMERS AND ORDER BACKLOG. During fiscal years 2006, 2005 and 2004, net sales to the Company’s largest customer, Wal-Mart Stores, Inc. and its domestic and international affiliates, were 26%, 26% and 25%, respectively, of the Company’s consolidated net sales. Order backlog is not a significant factor in the Company’s business.
COMPETITION. The markets for consumer products are highly competitive. Most of the Company’s products compete with other nationally advertised brands within each category and with “private label” brands and “generic” nonbranded products of grocery chains and wholesale cooperatives in certain categories. Competition is encountered from similar and alternative products, some of which are produced and marketed by major multinational or national companies having financial resources greater than those of the Company. Depending on the product, the Company’s products compete on product performance, brand recognition, price, quality or other benefits to consumers. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising support. If a product gains consumer acceptance, it normally requires continued advertising and promotional support to maintain its relative market position.
RESEARCH AND DEVELOPMENT. The Company conducts research and development primarily at its Technical Center in Pleasanton, Calif. The Company devotes significant resources and attention to product development, process technology and researching consumer insights to develop consumer-preferred products with innovative and distinctive features. The Company incurred expenses of $99 million, $88 million and $84 million in fiscal years 2006, 2005 and 2004, respectively, on direct research activities relating to the development of new products or the maintenance and improvement of existing products. None of this research activity was customer-sponsored.
ENVIRONMENTAL MATTERS. In general, the Company anticipates spending increasing amounts annually for facility upgrades and for environmental programs as existing facilities age. The amount of capital expenditures for
environmental compliance was approximately $2 million in fiscal year 2006 and is not expected to be material in the next fiscal year. For non capital expenditures, see the discussions below under “Risk Factors – Environmental matters create potential liability risks” in Item 1.A. and “Legal Proceedings” in Item 3.
NUMBER OF PERSONS EMPLOYED. At the end of fiscal year 2006, the Company employed approximately 7,600 people.
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 Web site, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at http://www.thecloroxcompany.com/investors/financialinfo in the “Investors – Financial Information – SEC Filings” section. Information relating to corporate governance at Clorox, including the Company’s Code of Ethics, Board of Directors Governance Guidelines and Board Committees, including charters for the Management Development and Compensation Committee, the Audit Committee, the Finance Committee and the Nominating and Governance Committee, is available at http://www.thecloroxcompany.com in the “Company Information – Governance” section. The Company will provide any of the foregoing information without charge upon written request to Manager of Corporate External Communications, The Clorox Company, 1221 Broadway, Oakland, CA 94612-1888.
ITEM 1.A. RISK FACTORS
The following risks and uncertainties, as well as other factors described elsewhere in this Report or in other filings by the Company with the SEC, could adversely affect the Company’s business, financial condition and results of operations. Additional risks and uncertainties that are not presently known to the Company or that are not currently believed by the Company to be material may also harm the Company’s business operations and financial results.
Operating results and net earnings may not meet expectations.
The Company cannot be certain that its operating results and net earnings will meet its expectations. If the Company’s assumptions and estimates are incorrect or do not come to fruition, or if the Company does not achieve all of its key goals, then its actual performance could vary materially from its expectations. The Company’s operating results and net earnings may be influenced by a number of factors, including the following:
• the introduction of new products and line extensions by the Company or its competitors;
• the mix of products with varying profitability sold in a given quarter;
• the mix of products sold within channels with varying profitability in a given quarter;
• the Company’s ability to control internal costs;
• significant increases in the costs of key raw materials including but not limited to energy, resin, chlor-alkali, linerboard, soy bean oil, diesel, solvent and other miscellaneous chemicals;
• the effectiveness of the Company’s advertising, marketing and promotional programs;
• changes in product pricing by the Company or its competitors;
• consumer and customer reaction to price increases;
• the ability of the Company to execute its strategies and to maintain and enhance profits in the face of a consolidating retail environment;
• the ability of the Company to successfully implement and achieve the expected benefits of its process improvement initiatives;
• the ability of the Company to achieve its business plans, including volume growth and pricing plans, as a result of high levels of competitive activity;
• the ability of the Company to penetrate and grow international markets;
• the ability of the Company to maintain key retail customer relationships;
• the potential inability to generate expected cost savings and efficiencies;
• the ability of the Company to maintain the value of its brands;
• the ability of major customers and other debtors to meet their obligations as they come due;
• the failure of parties contracting with the Company to perform their obligations, and the loss of or inability to renew contracts of importance to the Company’s performance;
• the ability of the Company to successfully manage regulatory, tax and legal matters, including resolution of pending matters within current estimates;
• changes to cash flow resulting from tax payments, tax settlements and share repurchases;
• the availability and cost of debt financing;
• the ability of the Company to manage inventory at appropriate levels, including decisions regarding obsolescence;
• the impact of any litigation or product liability claims;
• fluctuations in federal, state, local and foreign taxes;
• expenses for impairment and obsolescence of property, plant and equipment in excess of projections;
• expenses for impairment of goodwill, trademarks and other intangible assets and equity investments in excess of projections;
• charges resulting from any restructuring that management may, from time to time, choose to undertake;
• the ability of the Company to make up for lost revenues resulting from divestitures;
• the purchase by P&G on January 5, 2005, of an additional 10% interest in the profits, losses and cash flows of the Glad ® bags, wraps and containers business, with the resultant increase in the Company’s net terminal obligation liability by $133 million, reflecting the additional fair value of the Company’s contractual requirement to purchase P&G’s interest at the termination of the joint venture agreement;
• the impact of changing accounting principles and standards;
• significant increases in interest rates, insurance costs, or in pension, healthcare or other employee benefit costs;
• the ability to attract and retain qualified personnel;
• the impact of environmental remediation costs, including those for which the Company is jointly and severally liable;
• the impact of currency fluctuations;
• the impact of foreign import and export restrictions or other trade regulations; and
• the impact of general economic conditions in the United States and in other countries in which the Company currently does business.
In addition, sales volume growth, whether due to acquisitions or to internal growth, can place burdens on management resources and financial controls that, in turn, can have a negative impact on operating results and net earnings. To some extent, the Company sets its expense levels in anticipation of future revenues. If actual revenue falls short of these expectations, operating results and net earnings are likely to be adversely affected.
The Company faces intense competition in its markets.
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 brands within each product category and with “private label” brands and “generic” nonbranded products of grocery chains and wholesale cooperatives in certain categories, which typically are sold at lower prices. The Company also encounters competition from similar and alternative products, many of which are produced and marketed by major multinational or national companies.
The Company’s products generally compete on the basis of product performance, brand recognition, price, quality or other benefits to consumers. Advertising, promotion, merchandising and packaging also have a significant impact on consumer purchasing decisions.
A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it normally requires continued advertising and promotional support to maintain its relative market position. Some of the Company’s competitors are larger and have financial resources greater than those of the Company. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than the Company can. In addition, the Company’s competitors may attempt to gain market share by offering products at prices at or below those typically offered by the Company. Competitive pricing may require the Company to increase its spending on advertising and promotions or reduce prices and could lead to a reduction in its sales or its profits.
Volume growth may be difficult to achieve.
A large percentage of the Company’s revenues comes from mature markets that are subject to increased competition. During fiscal year 2006, approximately 84% of the Company’s net sales were generated in U.S. markets. U.S. markets for household products are considered mature and are generally characterized by high household penetration. The Company’s ability to achieve volume growth will depend on its ability to drive growth through innovation and investment in its established brands and its ability to capture market share from competitors. During fiscal year 2006, the Company increased prices on more than 50% of its product portfolio. Price increases may slow volume growth or create declines in volume in the short term as consumers adjust to price increases. If the Company is unable to increase market share in existing product lines, or bring innovation to grow its product categories, or develop, acquire or successfully launch new products, it may not achieve its volume growth objectives.
The growth of the Company’s business depends on continuous and successful new product introductions.
In most categories in which the Company competes, there are frequent introductions of new products and line extensions. Important factors in the Company’s future performance will be its ability to identify emerging consumer and technological trends and maintain and improve the competitiveness of its product offerings. The Company cannot be certain that it will successfully achieve those goals. The development and introduction of new products requires substantial and effective research, development and marketing expenditures, which the Company may be unable to recoup if the new products do not gain widespread market acceptance. New product development and marketing efforts have inherent risks, including product development or launch delays, which could result in the Company not being first to market, the failure of new products and line extensions to achieve anticipated levels of market acceptance, and the cost of failed product introductions.
The Company depends on a limited number of customers for a large portion of its net sales.
A limited number of customers account for a large percentage of the Company’s net sales. The Company’s largest customer, Wal-Mart Stores, Inc. and its domestic and international affiliated companies, accounted for approximately 26% of the Company’s net sales during fiscal years 2006 and 2005 and 25% of net sales in fiscal year 2004. During fiscal years 2006, 2005 and 2004, the Company’s five largest customers accounted for 41%, 40% and 40% of its net sales, respectively. The Company expects that a significant portion of its revenues will continue to be derived from a small number of customers and that these percentages may increase if the growth of mass merchandisers continues. As a result, changes in the strategies of the Company’s 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 Company’s sales. In addition, 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, these customers could reduce their purchasing levels or cease buying products from the Company at any time and for any reason. If the Company loses a significant customer or if sales of its products to a significant customer materially decrease, it may have a material adverse effect on the Company’s business, financial condition and results of operations.
Large sophisticated customers may take actions that adversely affect the Company’s margins and results of operations.
In recent years, the Company has experienced a consumer purchasing trend away from traditional grocers and toward mass merchandisers, which include super centers and dollar and club stores. This trend has resulted in the increased size and influence of these mass merchandisers, who may demand lower pricing or special packaging, or impose other requirements on product suppliers. These business demands may relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. If the Company does not effectively respond to the demands of these mass merchandisers, they could decrease their purchases from the Company, causing the Company’s sales and profitability to decline.
Price increases in raw materials, energy, transportation and other necessary supplies or services could harm the Company’s profits.
Increases in the cost of raw materials including resin, chlor-alkali, linerboard, soy bean oil, solvent and other miscellaneous chemicals, or increases in the cost of energy, transportation and other necessary services, may harm the Company’s profits and operating results. In particular, during fiscal years 2005 and 2006, the Company experienced unprecedented levels of price increases for certain of its raw materials and diesel fuel and energy costs, primarily as a result of supply interruptions caused by hurricanes Katrina and Rita and strong demand from abroad. If price increases in any of the primary raw materials or other necessary supplies or services occur and the Company is not able to increase the prices of its products or achieve cost savings to offset the increase in prices, its profits and operating results may be harmed. In addition, in some cases, the Company relies on a limited number of suppliers or sole suppliers for its raw materials or other necessary supplies. If the Company is unable to maintain supplier arrangements and relations or if it is unable to contract with suppliers at the quantity and quality levels need for its business, it could experience disruptions in production and its financial results could be adversely affected. For further information regarding the impact of changes in commodity prices, see “Quantitative and Qualitative Disclosure about Market Risk” in “Management’s Discussion and Analysis” on pages 13 through 14 of Exhibit 99.1 hereto, incorporated herein by reference.
Operations outside the United States expose the Company to uncertain conditions and other risks in international markets.
The Company’s sales outside the United States were approximately 16% of net sales in fiscal year 2006, and the Company owns and operates 21 manufacturing facilities outside the United States. The Company has and will continue to face substantial risks associated with having foreign operations, including:
• economic or political instability in its international markets, particularly Colombia and Venezuela.
• restrictions on repatriating foreign profits back to the United States; and
• the imposition of tariffs or trade restrictions.
These risks could have a significant impact on the Company’s ability to sell its products on a competitive basis in international markets and may have a material adverse effect on its results of operations or financial position. The Company’s small volume in some countries, relative to some multinational and local competitors, could exacerbate such risks.
Also, the Company’s operations outside the United States are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, potentially higher incidence of fraud or corruption, credit risk of local customers and distributors, and potentially adverse tax consequences.
The Company is also exposed to foreign currency exchange rate risk with respect to its sales, profits and assets and liabilities denominated in currencies other than the U.S. dollar. Although the Company uses instruments to hedge certain foreign currency risks, it is not fully protected against foreign currency fluctuations and its reported earnings will be affected by changes in foreign exchange rates.
The share exchange with Henkel could result in significant tax liability.
On November 22, 2004, the Company completed the exchange of its ownership interest in a subsidiary for Henkel’s approximately 61.4 million shares of the Company’s common stock, which represent
