SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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THE CLOROX
COMPANY
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(Name of Registrant as Specified In Its Charter)
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The Clorox Company |
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Notice
of 2008 Annual Meeting, Proxy Statement | |
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Annual
Meeting of Stockholders |
THE CLOROX COMPANY
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD ON NOVEMBER 19, 2008
The Annual Meeting of Stockholders of The Clorox Company, a Delaware corporation (Clorox or the Company), will be held at 9:00 a.m. Pacific time on Wednesday, November 19, 2008, at the offices of the Company, 1221 Broadway; Oakland, CA 94612-1888, for the following purposes:
1. | To elect 11 directors to serve until the 2009 Annual Meeting of Stockholders; | ||
2. | To ratify the selection of Ernst & Young LLP as the Companys independent registered public accounting firm for the fiscal year ending June 30, 2009; and | ||
3. | To consider and act upon such other business as may properly come before the Annual Meeting or any adjournment thereof. |
The board of directors has fixed the close of business on September 22, 2008, as the record date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting and any adjournment thereof. A list of such stockholders will be available at the Annual Meeting and, during the 10 days prior to the Annual Meeting, at the office of the Secretary of the Company at 1221 Broadway; Oakland, CA 94612-1888.
Only stockholders and people holding proxies from stockholders may attend the Annual Meeting. If your shares are registered in your name, you should bring a form of identification to the Annual Meeting. If your shares are held in the name of a broker, trust, bank or other nominee, you will need to bring a proxy or letter from that broker, trust, bank or nominee that confirms you are the beneficial owner of those shares.
We are pleased to take advantage of the new Securities and Exchange Commission rule allowing companies to use a Notice and Access model to provide their stockholders with access to proxy materials over the Internet. On or about October 3, 2008, we will begin mailing a Notice of Internet Availability of Proxy Materials to our stockholders informing them that our notice of annual meeting and proxy statement, annual report to stockholders and voting instructions are available on the Internet at www.proxyvote.com. As more fully described in that Notice, all stockholders may choose to access our proxy materials at www.proxyvote.com or may request to receive paper copies of the proxy materials. This allows us to conserve natural resources and reduces the costs of printing and distributing the proxy materials, while providing our stockholders with access to the proxy materials in a fast and efficient manner via the Internet.
YOUR VOTE IS VERY IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING, WE HOPE THAT YOU WILL READ THE PROXY STATEMENT AND VOTE ON THE MATTERS TO BE CONSIDERED. YOU MAY VOTE YOUR PROXY BY TELEPHONE OR VIA THE INTERNET OR BY REQUESTING A PRINTED COPY OF THE PROXY MATERIALS AND RETURNING THE PROXY CARD ENCLOSED THEREIN.
By Order of the Board of Directors | |
Angela C. Hilt | |
Vice President Corporate Secretary | |
& Assistant General Counsel | |
October 3, 2008 |
THE CLOROX COMPANY
1221 Broadway
Oakland, CA 94612-1888
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation of proxies by the board of directors of The Clorox Company, a Delaware corporation (Clorox or the Company), for use at the Annual Meeting of Stockholders of the Company (the Annual Meeting), to be held at 9:00 a.m. Pacific time on Wednesday, November 19, 2008, at the offices of the Company, 1221 Broadway, Oakland, CA 94612-1888. The costs of this proxy solicitation, including the preparation, assembly, printing and mailing of proxy materials, are borne by the Company.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
The Securities and Exchange Commission, or SEC, recently adopted rules that allow us to change the way we make our proxy statement and other annual meeting materials available to you. On or about October 3, 2008, we will begin mailing a notice, called the Notice of Internet Availability of Proxy Materials, to our stockholders advising them that our proxy statement, annual report to stockholders and voting instructions can be accessed over the Internet at www.proxyvote.com. You may then access these materials and vote your shares over the Internet or you may request that a printed copy of the proxy materials be sent to you. You will not receive a printed copy of the proxy materials unless you request one in the manner set forth in the Notice. This allows us to conserve natural resources and reduces the costs of printing and distributing the proxy materials, while providing our stockholders with access to the proxy materials in a fast and efficient manner via the Internet.
INFORMATION ABOUT VOTING
Who Can Vote
The only voting securities of the Company are its shares of common stock (Common Stock), of which 138,654,394 shares were outstanding and entitled to vote at the close of business on September 22, 2008. Only stockholders of record at the close of business on September 22, 2008, are entitled to vote at the Annual Meeting. The holders of the Common Stock are entitled to one vote per share on each matter submitted to a vote of stockholders.
Voting Procedures
You can vote your shares in one of two ways: either by proxy or in person at the Annual Meeting by written ballot. If you choose to vote by proxy you may do so via the Internet or by telephone, or by requesting a printed copy of the proxy materials and using the proxy card enclosed therein. Each of these procedures is explained below. Even if you plan to attend the Annual Meeting, the board of directors recommends that you vote by proxy. In this way, your shares of Common Stock will be voted as directed by you if you are unable to attend the Annual Meeting.
Voting by Proxy
Because many stockholders cannot attend the Annual Meeting in person, it is necessary that a large number of stockholders be represented by proxy. By following the procedures for voting via the Internet or by telephone, or by requesting a printed copy of the proxy materials and signing and returning the proxy card enclosed therein, you will enable Donald R. Knauss, Daniel J. Heinrich or Laura Stein, each of whom is named on the proxy card as a proxy holder, to vote your shares at the Annual Meeting in the manner indicated. Since the Company has adopted a Bylaw that provides for majority voting for directors, when you vote your proxy, you can specify whether your shares should be voted for or against each of the nominees for director identified in Proposal 1, or you can abstain from voting on the director nominees. You can also specify whether you approve, disapprove or abstain from voting on Proposal 2, which is described in this proxy statement.
Management of the Company is not aware of any matters other than those described in this proxy statement that may be presented for action at the Annual Meeting. If any other matters are properly presented at the Annual Meeting for consideration, the proxy holders will have discretion to vote for you on those matters.
You can vote your shares via the Internet by following the instructions in the Notice or by accessing www.proxyvote.com and following the instructions contained on that website. The Internet voting procedures are designed to authenticate your identity and to allow you to vote your shares and confirm that your voting instructions have been properly recorded. If you vote via the Internet, you do not need to mail a proxy card.
You can vote your shares by telephone by calling the number provided on the voting website (www.proxyvote.com) and on the proxy card. The telephone voting procedures are designed to authenticate your identity and to allow you to vote your shares and confirm that your voting instructions have been properly recorded. If you vote by telephone, you do not need to mail a proxy card.
You can vote by mail by requesting that a printed copy of proxy materials be sent to your home address. Upon receipt of the materials, you may fill out the proxy card enclosed therein and return it per the instructions on the card.
Voting at the Annual Meeting
If you wish to attend the Annual Meeting and vote in person, you may vote by written ballot at the Annual Meeting. If your shares are held in the name of a bank or brokerage firm, you must bring a proxy executed in your favor from that bank or brokerage firm in order to vote at the Annual Meeting. If you vote by proxy and also attend the Annual Meeting, you do not need to vote again at the Annual Meeting unless you wish to change your vote.
Revocation of Proxies
You may revoke your proxy at any time before it is exercised at the Annual Meeting by taking any of the following actions:
Quorum
In order for the business of the Annual Meeting to be conducted, a minimum number of shares constituting a quorum must be present. The holders of a majority of the issued and outstanding shares of Common Stock entitled to vote at the Annual Meeting must be present in person or represented by proxy at the Annual Meeting in order to have a quorum. Abstentions and broker non-votes are counted as shares that are present and entitled to vote for purposes of determining whether there is a quorum.
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Broker Non-Votes
A broker non-vote occurs when a stockholder who holds his or her shares through a bank or brokerage firm does not instruct that bank or brokerage firm how to vote the shares, and, as a result, the broker is prevented from voting the shares held in the stockholders account on certain proposals. Broker non-votes are not counted as votes against the proposals in question or as abstentions, nor are they counted to determine the number of votes present for a particular proposal.
Under the current rules of the New York Stock Exchange, if you hold your shares through a bank or brokerage firm and your broker delivers this proxy statement to you, the broker is entitled to vote your shares on Proposals 1 and 2 even if you do not provide voting instructions to your broker.
Required Vote
Proposal 1: Election of Directors. The Companys Bylaws provide for majority voting for directors in uncontested elections. Accordingly, each of the 11 nominees for director will be elected if he or she receives the majority of the votes cast in person or represented by proxy, with respect to that director. Abstentions will not have any effect on the election of directors.
Proposal 2: Ratification of Selection of Independent Registered Accounting Firm. The affirmative vote of a majority of the votes cast in person or represented by proxy at the Annual Meeting and entitled to vote on Proposal 2 is required for its adoption. Abstentions on Proposal 2 will have the same effect as a vote against Proposal 2.
Recommendations of the Board of Directors
The board of directors recommends that you vote:
PROPOSAL NO. 1: |
ELECTION OF DIRECTORS |
At the Annual Meeting, 11 people will be elected as members of the board of directors to serve until the next Annual Meeting, or until their respective successors are duly elected and qualified. The board of directors, upon the recommendation of the Nominating and Governance Committee, has nominated the 11 people listed below for election at the Annual Meeting. Each nominee is currently serving as a director of the Company.
Majority voting for directors. In September 2006, the board of directors approved an amendment to the Companys Bylaws to require each director to be elected by a majority of the votes cast with respect to such director in uncontested elections (the number of shares voted for a director must exceed the number of votes voted against that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. Under the Companys Bylaws, any director who fails to be elected by a majority of the votes cast must tender his or her resignation to the board of directors. The Nominating and Governance Committee would then make a recommendation to the board of directors whether to accept or reject the resignation, or whether other action should be taken. The board of directors would act on the Nominating and Governance Committees recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in the board of directors decision.
The proxies will be voted or not voted as directed and, if no direction is given, will be voted FOR the 11 director nominees. The board of directors knows of no reason why any of these nominees should be unable or unwilling to serve. However, if for any reason any nominee should be unable or unwilling to serve, the proxies will be voted for the election of such other person to the office of director as the board of directors may nominate in the place of such nominee.
Certain information with respect to each nominee appears on the following pages, including age, period served as a director, position (if any) with the Company, business experience and directorships of other publicly-owned corporations (if any). Ages are as of July 31, 2008.
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Name, Principal Occupation | Director | |
And Other Information | Since | |
DANIEL BOGGAN, JR. Retired Senior Vice President, the National Collegiate Athletic Association. |
1990 | |
Mr. Boggan served as the chief of staff of the Oakland, California Mayors office from January 2007 through August 2007. He served as a consultant to Siebert Brandford Shank & Co., LLC (a municipal finance firm) from September 2003 to March 2006. He served as senior vice president of the National Collegiate Athletic Association from 1996 through his retirement in August 2003. Previously, he was vice chancellor for business and administrative services at the University of California at Berkeley. Mr. Boggan is also a director of Collective Brands, Inc. and Viad Corp. and a trustee of The California Endowment, and serves on various local boards. Age: 62. |
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RICHARD H. CARMONA, M.D., M.P.H., F.A.C.S. Vice Chairman, Canyon Ranch. |
2007 | |
Dr. Carmona has been vice chairman of Canyon Ranch (a life-enhancement company) since October 2006. He also serves as chief executive officer of the Canyon Ranch Health division and president of the non-profit Canyon Ranch Institute. He is also the first Distinguished Professor of Public Health at the Mel and Enid Zuckerman College of Public Health at the University of Arizona. Prior to joining Canyon Ranch, Dr. Carmona served as the 17th Surgeon General of the United States from 2002 through July 2006, achieving the rank of Vice Admiral. Previously, he was chairman of the State of Arizona Southern Regional Emergency Medical System; a professor of surgery, public health, and family and community medicine at the University of Arizona; and surgeon and deputy sheriff of the Pima County, Arizona, Sheriffs Department, and he served in the U.S. Army and the Armys Special Forces. Dr. Carmona is also a director of Taser International. Age: 58. |
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TULLY M. FRIEDMAN Chairman and Chief Executive Officer, Friedman Fleischer & Lowe LLC. |
1997 | |
Mr. Friedman is the chairman and chief executive officer of Friedman Fleischer & Lowe LLC (a private investment firm). Prior to forming Friedman Fleischer & Lowe in 1997, Mr. Friedman was a founding partner of Hellman & Friedman (a private investment firm) and a managing director of Salomon Brothers, Inc. (an investment bank). He is also a director of Mattel, Inc. He is also a member of the executive committee, a trustee and the treasurer of the American Enterprise Institute. Age: 66. |
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GEORGE J. HARAD Retired Executive Chairman of the Board of OfficeMax Incorporated (formerly known as Boise Cascade Corporation). |
2006 | |
Mr. Harad was executive chairman of the board of OfficeMax Incorporated (an office supply and services company), formerly known as Boise Cascade Corporation (Boise Cascade), from October 2004 until his retirement in June 2005. He served as chairman of the board and chief executive officer of Boise Cascade from April 1995 until October 2004. Previously, Mr. Harad held various positions at Boise Cascade including controller, senior vice president and chief financial officer, president and chief operating officer. Prior to joining Boise Cascade, Mr. Harad was a consultant for the Boston Consulting Group and a teaching fellow at Harvard University. Age: 64. |
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Name, Principal Occupation | Director | |
And Other Information | Since | |
DONALD R. KNAUSS Chairman and Chief Executive Officer of the Company. |
2006 | |
Mr. Knauss was elected chairman and chief executive officer of the Company in October 2006. He was executive vice president of The Coca-Cola Company (a marketer and distributor of nonalcoholic beverages) and president and chief operating officer for Coca-Cola North America from February 2004 until August 2006. Previously, he was president of the Retail Division of Coca-Cola North America from January 2003 through February 2004 and president and chief executive officer of The Minute Maid Company, a division of The Coca-Cola Company, from January 2000 until January 2003. Prior to that, he held various positions in marketing and sales with PepsiCo, Inc. and Procter & Gamble and served as an officer in the United States Marine Corps. He is also a director of Kellogg Company. Age: 57 |
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ROBERT W. MATSCHULLAT Retired Vice Chairman and Chief Financial Officer of The Seagram Company Ltd. |
1999 | |
Mr. Matschullat served as interim chairman and interim chief executive officer of the Company from March 2006 through October 2006. He served as presiding director of the board of directors of the Company from January 2005 through March 2006 and served as chairman of the board of the Company from January 2004 through January 2005. He was the vice chairman and chief financial officer of The Seagram Company Ltd. (a global company engaging in two business segments: entertainment and spirits and wine) from 1995 until relinquishing his position as chief financial officer in December 1999 and his retirement from his position as vice chairman in June 2000. Prior to joining The Seagram Company Ltd., Mr. Matschullat served as head of worldwide investment banking for Morgan Stanley & Co. Incorporated, and was on the Morgan Stanley Group board of directors. He is also a director of The Walt Disney Company and Visa Inc. Age: 60. |
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GARY G. MICHAEL Retired Chairman of the Board and Chief Executive Officer of Albertsons, Inc. |
2001 | |
Mr. Michael was the chairman of the board and chief executive officer of Albertsons, Inc. (a leading grocery retailer) from 1991 until his retirement in April 2001. He served as interim president of the University of Idaho from June 2003 until August 2004. He is also a director of Questar Corporation and Idacorp. Age: 67. |
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EDWARD A. MUELLER Chairman and Chief Executive Officer of Qwest Communications International Inc. |
2007 | |
Mr. Mueller was appointed chairman and chief executive officer of Qwest Communications International Inc. (Qwest) (a provider of voice, data and video services) in August 2007. He served as chief executive officer of Williams-Sonoma Inc. (a provider of specialty products for cooking) from January 2003 until July 2006. Mr. Mueller served on the board of directors of Williams-Sonoma Inc. from 1999 until May 2007. Prior to joining Williams-Sonoma, Inc., Mr. Mueller served as president and chief executive officer of Ameritech Corporation, a subsidiary of SBC Communications, Inc. (a provider of communication services and products). He joined SBC in 1968, and held numerous executive positions, including president and chief executive officer of Southwestern Bell Telephone Company, president and chief executive officer of Pacific Bell and president of SBC International Inc. He is also a director of Qwest and McKesson Corporation. Age 61. |
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Name, Principal Occupation | Director | |
And Other Information | Since | |
JAN L. MURLEY Consultant, Kohlberg Kravis Roberts & Co. |
2001 | |
Ms. Murley has served as a consultant to Kohlberg Kravis Roberts & Co. (KKR) (a private equity firm) since November 2006. From October 2003 to July 2006, Ms. Murley was chief executive officer and a director of The Boyds Collection, Ltd. (a publicly-traded designer and manufacturer of gifts and collectibles, which was majority-owned by KKR. Boyds filed for bankruptcy under chapter 11 of the US Bankruptcy Code in October 2005 and emerged from Chapter 11 in June 2006 as a private company). Prior to that, she was group vice president marketing of Hallmark Cards, Inc. (a publisher of greeting cards and related gifts) from 1999 to 2002. Previously, Ms. Murley was employed by Procter & Gamble for more than 20 years, with her last position being vice president for skin care and personal cleansing products. She is also a director of 1-800 Flowers.com and Qwest Communications International Inc. Age: 57. |
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PAMELA THOMAS-GRAHAM Managing Director, Angelo Gordon & Co. |
2005 | |
Ms. Thomas-Graham has served as a managing director in the private equity group at Angelo, Gordon & Co. (a private investment management firm) since March 2008. During the period of October 2005 to December 2007, Ms. Thomas-Graham held the position of Group President, at Liz Claiborne, Inc. (a designer and marketer of apparel, accessories and fragrances). Previously, she served as chairman of CNBC (a media and entertainment company) from February 2005 to October 2005 and served as president and chief executive officer of CNBC from July 2001 to February 2005. From September 1999 to July 2001, Ms. Thomas-Graham served as an executive vice president of NBC and as president and chief executive officer of CNBC.com. Prior to joining NBC, Ms. Thomas-Graham was a partner at McKinsey & Company. Ms. Thomas-Graham also serves as a director of Idenix Pharmaceuticals, Inc. Age: 45. |
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CAROLYN M. TICKNOR Retired President of Hewlett Packard Company, Imaging & Printing Systems Group. |
2005 | |
Ms. Ticknor currently consults for entrepreneurs and venture capitalists. Ms. Ticknor was president of the Imaging and Printing Systems group of the Hewlett Packard Company (a global IT company) from 1999 until her retirement in 2001. She served as president and general manager of Hewlett Packard Companys LaserJet Solutions from 1994 to 1999. Ms. Ticknor also serves as a director of Lucille Packard Childrens Hospital, a private non-profit organization at the Stanford University Medical Center. Age: 61. |
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DIRECTOR INDEPENDENCE AND ORGANIZATION OF THE BOARD OF DIRECTORS
The board of directors has established five standing committees: the Executive Committee, the Finance Committee, the Audit Committee, the Nominating and Governance Committee, and the Management Development and Compensation Committee. The Finance, Audit, Nominating and Governance, and Management Development and Compensation Committees consist only of non-management directors whom the board of directors has determined are independent under the New York Stock Exchange listing standards and the board of directors independence standards set forth in the Companys Governance Guidelines, which are discussed below. The charters for these committees are available in print to any stockholder who requests them and can be found in the Corporate Governance section of the Companys Web site at http://www.TheCloroxCompany.com/company/charters.html.
Executive Committee. The Executive Committee is composed of directors Boggan, Friedman, Harad, Knauss (chair), Michael and Mueller, and is delegated all of the powers of the board of directors except certain powers reserved by law to the full board of directors. In addition to being available to meet between regular board meetings on occasions when board action is required but the convening of the full board of directors is impracticable, the Executive Committee is authorized to handle special assignments as requested from time to time by the board of directors. The Executive Committee held no meetings during fiscal year 2008.
Finance Committee. The Finance Committee is composed of directors Boggan, Carmona, Friedman (chair), Harad and Matschullat, and oversees and makes recommendations to the board of directors with respect to the Companys major financial policies and actions, including policies and actions related to the Companys capital structure, equity and debt financings, capital expenditures, cash management and share repurchase activities. The Finance Committee held two meetings during fiscal year 2008.
Audit Committee. The Audit Committee is composed of directors Michael, Mueller (chair), Murley and Thomas-Graham, and is the principal link between the board of directors and the Companys independent registered public accounting firm. The Audit Committee operates in accordance with its charter and has the duties set out therein. The duties include assisting the board of directors in overseeing (a) the integrity of the Companys financial statements, (b) the independent registered public accounting firms qualifications, independence and performance, (c) the performance of the Companys internal audit function, (d) the Companys system of disclosure controls and procedures and system of internal control over financial reporting, and (e) the Companys compliance with legal and regulatory requirements relating to accounting and financial reporting matters. The Audit Committees duties also include risk management activities and preparing the report required by the SEC proxy rules to be included in the Companys annual proxy statement. The Audit Committee held 10 meetings during fiscal year 2008. Effective November 17, 2008, the Audit Committee will be composed of directors Michael, Mueller (chair), Murley, Thomas-Graham and Ticknor. The board of directors has determined that Mr. Michael is an audit committee financial expert, as defined by SEC rules.
Nominating and Governance Committee. The Nominating and Governance Committee is composed of directors Boggan (chair), Michael, Murley and Ticknor. The Nominating and Governance Committee has the functions set forth in its charter, including identifying and recruiting individuals qualified to become board members, recommending to the board of directors individuals to be selected as director nominees for the next annual meeting of stockholders and reviewing and recommending to the board of directors changes in the Companys Governance Guidelines, including changes relating to the board of directors. The Nominating and Governance Committee held four meetings during fiscal year 2008.
The Companys Governance Guidelines, which are explained below, describe the attributes that the board of directors seeks in nominees, but the board of directors has not established any specific minimum qualifications that a potential nominee must possess. The Nominating and Governance Committee considers recommendations from many sources, including stockholders, regarding possible candidates for director. Such recommendations, together with biographical and business experience information regarding the candidate, should be submitted to The Clorox Company, c/o Secretary; 1221 Broadway; Oakland, CA 94612-1888. The Nominating and Governance Committee evaluates candidates suggested by stockholders in the same manner as other candidates.
Management Development and Compensation Committee. The Management Development and Compensation Committee is composed of directors Friedman, Harad (Chair), Matschullat and Ticknor. The Management Development and Compensation Committee reviews and approves the policies under which compensation is paid or awarded to the Companys executive officers, determines executive compensation, grants stock options, restricted stock, performance units and other cash or stock awards under
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the Companys executive incentive compensation and stock incentive plans, and reviews pension and other retirement plans. In addition, the Management Development and Compensation Committee oversees the Companys management development and succession planning processes. The Management Development and Compensation Committee held six meetings during fiscal year 2008. Effective November 17, 2008, the Management Development and Compensation Committee will be composed of directors Carmona, Friedman, Harad (chair) and Matschullat.
Board Committee and Meeting Attendance
The board of directors held eight meetings during fiscal year 2008. All current directors attended at least 75% of the meetings of the board of directors and committees of which they were members during fiscal year 2008.
Annual Meeting Attendance
The policy of the Company is that all board members are expected to attend the annual meeting of stockholders. Each member of the board of directors as of November 14, 2007, attended the Companys 2007 annual meeting of stockholders on that date.
The Clorox Company Governance Guidelines and Director Independence
The board of directors has adopted Governance Guidelines, which can be found in the Corporate Governance section on the Companys Web site http://www.TheCloroxCompany.com/governance_guidelines.html, and are available in print to any stockholder who requests them.
The Guidelines present a framework for the governance of the Company. They describe responsibilities, qualifications and operational matters applicable to the board of directors and the board committees and set forth chief executive evaluation and succession requirements. The Guidelines are reviewed annually by the Nominating and Governance Committee, which recommends changes to the board as appropriate.
The Guidelines emphasize and describe the oversight role of the board and identify various criteria for board members intended to ensure that membership on the board is confined to those individuals who can, on the basis of their knowledge and experience, make valuable contributions to the overall conduct of the business. The Guidelines provide for a combined Chairman and Chief Executive Officer position with an independent director serving as a Presiding Director and describe various responsibilities for the Presiding Director. The Guidelines also include provisions relating to board meetings, including the number of and material for meetings and executive sessions, outside board service, ethics and conflicts of interest, stock ownership and retention requirements, orientation and continuing education, compensation, mandatory retirement, and access to management and other employees. The Guidelines require the board to evaluate the Chief Executive Officer of the Company annually and undertake ordinary-course and emergency succession planning for the Chief Executive Officer.
Finally, the Guidelines provide that a majority of the board must consist of independent directors. The board determines whether individual board members are independent, as defined by the New York Stock Exchange and SEC rules, using the following standards:
1. A director will not be deemed to be independent if the director is, or has been within the preceding three years, an employee of the Company, or an immediate family member is, or has been within the preceding three years, an executive officer of the Company, provided, however, that employment as an interim Chairman, interim CEO or other interim executive officer shall not disqualify a director from being considered independent following that employment.
2. A director will not be deemed to be independent if, during any 12-month period within the preceding three years, the director or an immediate family member received more than $100,000 in direct compensation from the Company, other than director and committee fees, pension or other forms of deferred compensation for prior service (provided that such compensation is not
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contingent in any way on continued service), compensation for former service as an interim chairman or interim chief executive officer or other interim executive officer, compensation received by an immediate family member for service as an employee (other than an executive officer) of the Company, or dividends on Company stock beneficially owned by the director.
3. A director will not be deemed to be independent if (i) the director, or an immediate family member, is a current partner of the firm that is the Companys independent registered public accounting firm; (ii) the director is a current employee of such firm; (iii) an immediate family member of the director is a current employee of such firm who participates in the firms audit, assurance or tax compliance (but not tax planning) practice; or (iv) the director or an immediate family member was within the preceding three years (but is no longer) a partner or employee of such firm and personally worked on the Companys audit within that time.
4. A director will not be deemed to be independent if, within the preceding three years: (i) the director or an immediate family member is or was employed as an executive officer of another company where any of the Companys present executive officers at the same time serves or served on that companys compensation committee; or (ii) the director is a current employee, or an immediate family member is a current executive officer, of another company that has made payments to or received payments from the Company for property or services that, in any of the preceding three fiscal years, exceeded two percent or $1 million, whichever is greater, of such other companys consolidated gross revenues.
5. A director may be considered independent notwithstanding that the director owns, or is a partner, stockholder, officer, director or employee of, an entity that owns, not more than 30% of the outstanding stock of the Company unless the director or the entity owning the Companys stock has a relationship with the Company that, under paragraphs 1 through 4 above or otherwise, precludes a finding of independence.
6. A director will not be deemed independent if the director serves, or an immediate family member serves, as an executive officer of a tax exempt organization that received contributions from the Company and its Foundation, in any single fiscal year within the preceding three years, more than the greater of $1 million or 2% of such organizations consolidated gross revenues.
For purposes of these criteria, immediate family member includes a persons spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone, other than domestic employees, who shares such persons home.
The board of directors has determined that each director is independent under the New York Stock Exchange listing standards and the independence standards set forth in the Governance Guidelines except Mr. Knauss as a result of his service as the Companys chief executive officer.
Code of Conduct
The Company has adopted a Code of Conduct, which can be found in the Governance section under Company Information on the Companys Web site, http://www.TheCloroxCompany.com/company/code_of_conduct.html, and is available in print to any stockholder who requests it. The Code of Conduct applies to all of the Companys employees, contractors and non-employee directors.
Presiding Director and Executive Sessions
The Companys presiding director is Mr. Michael. The duties of the Presiding Director are set forth in the Companys Governance Guidelines. They include coordinating the activities of the independent directors and serving as a liaison between the chairman and the independent directors. In addition, the presiding director: (1) assists the board of directors and the Companys officers in promoting compliance with and the implementation of the Governance Guidelines; (2) moderates the executive sessions of the independent directors and has the authority to call additional executive sessions as appropriate; (3) presides at meetings of the board of directors in the chairmans absence; (4) oversees information sent to the board of directors; (5) consults with the chairman on meeting agendas and schedules for the board of directors; (6) is available for consultation and communication with major stockholders as appropriate; and (7) evaluates, along with the members of the Management Development and Compensation
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Committee, the performance of the chief executive officer. The independent directors generally meet in executive session at each regularly scheduled board meeting without the presence of management directors or employees of the Company to discuss various matters related to the oversight of the Company, the management of board affairs and the chief executive officers performance.
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The following table shows, as of July 31, 2008, the holdings of Common Stock by (i) any entity or person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director and nominee for director and each of the five individuals named in the Summary Compensation Table (the named executive officers), and (iii) all current directors and executive officers of the Company as a group:
Amount and Nature of | |||
Beneficial Ownership | Percent of Class | ||
Name of Beneficial Owner(1) | (2) | (3) | |
Daniel Boggan, Jr. | 15,580 | * | |
Richard H. Carmona | 0 | * | |
Tully M. Friedman | 42,200 | * | |
George J. Harad | 9,000 | * | |
Daniel J. Heinrich | 210,820 | * | |
Donald R. Knauss | 201,156 | * | |
Robert W. Matschullat | 22,648 | * | |
Gary G. Michael | 12,651 | * | |
Edward A. Mueller | 0 | * | |
Jan L. Murley | 20,564 | * | |
Lawrence S. Peiros | 357,212 | * | |
Beth Springer | 138,004 | * | |
Frank A. Tataseo | 240,538 | * | |
Pamela Thomas-Graham | 8,302 | * | |
Carolyn M. Ticknor | 8,000 | * | |
All current directors and executive officers as a group (18 persons) (4) | 1,604,597 | 1.2 |
* |
Does not exceed 1% of the outstanding shares. | |
(1) | Correspondence to all executive officers and directors of the Company may be mailed to The Clorox Company, c/o Secretary; 1221 Broadway; Oakland, CA 94612-1888. | |
(2) | Unless otherwise indicated, each beneficial owner listed has sole voting and dispositive power (or shares such power) concerning the shares indicated. These totals include the following number of shares of Common Stock which such persons have the right to acquire through stock options exercisable within 60 days of July 31, 2008: Mr. Boggan 14,000; Mr. Friedman 14,000; Mr. Harad 8,000; Mr. Heinrich 192,679; Mr. Knauss 115,000; Mr. Matschullat 20,000; Mr. Michael 6,000; Ms. Murley 16,000; Mr. Peiros 306,951; Ms. Springer 129,778; Mr. Tataseo 224,677; Ms. Thomas-Graham 8,000; Ms. Ticknor 8,000; and all current directors and executive officers as a group 1,339,015. The numbers in the table above do not include the following numbers of shares of Common Stock which the executive officers have the right to acquire upon the termination of their service as employees pursuant to deferred stock units granted in December 1995 in exchange for the cancellation of certain restricted stock, and deferred stock unit dividends thereon: Mr. Peiros 13,181; Mr. Tataseo 14,159; and all current executive officers as a group 27,340. The numbers in the table above do not include the following numbers of shares of Common Stock which the non-management directors have the right to acquire upon the termination of their service as directors pursuant to deferred stock units granted under the Independent Directors Stock-Based Compensation Plan: Mr. Boggan 16,982; Mr. Carmona 1,164; Mr. Friedman 21,914; Mr. Harad 6,145; Mr. Matschullat 45,490; Mr. Michael 5,457; Mr. Mueller 2,087; Ms. Murley 7,940; Ms. Thomas-Graham 4,286; and Ms. Ticknor 8,786. The numbers in the table above do not include the following numbers of shares of Common Stock which the executive officers have the right to acquire upon the termination of their service as employees pursuant to vested performance units that were deferred at the executive officers election: Mr. Heinrich 16,942; Mr. Peiros 12,000; Ms. Springer 11,236; Mr. Tataseo 7,500; and all current executive officers as a group 58,340. |
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(3) | On July 31, 2008, there were 138,088,713 shares of Common Stock outstanding. | |
(4) | Pursuant to Rule 3b-7 of the Securities Exchange Act of 1934, executive officers include the Companys current chief executive officer and all current executive vice presidents and senior vice presidents. |
EQUITY COMPENSATION PLAN INFORMATION
The following table sets out the number of shares of Common Stock to be issued upon exercise of outstanding options, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities available for future issuance under equity compensation plans as of June 30, 2008:
[a] | [b] | [c] | |||||||
Number of securities | |||||||||
remaining for future | |||||||||
issuance under non- | |||||||||
Number of securities to | qualified stock-based | ||||||||
be issued upon exercise | Weighted-average | compensation programs | |||||||
of outstanding options, | exercise price of | (excluding securities | |||||||
warrants and rights | outstanding options, | reflected in column (a)) | |||||||
Plan category | (in thousands) | warrants and rights | (in thousands) | ||||||
Equity compensation plans approved by security holders | 11,094 | $50 | 4,233 | ||||||
Equity compensation plans not approved by security holders | | | | ||||||
Total | 11,094 | $50 | 4,233 |
Column [a] includes the following (in thousands):
Column [b] reflects the weighted-average exercise price of the outstanding options.
AUDIT COMMITTEE REPORT
The Audit Committee assists the board of directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. The Audit Committee operates in accordance with a written charter, which was adopted by the board of directors. A copy of that charter is available on the Internet at http://www.TheCloroxCompany.com/company/charters.html and is available in print to any stockholder who requests it. Each member of the Audit Committee is independent, as required by the applicable listing standards of the New York Stock Exchange and the rules of the SEC.
The Audit Committee members are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the Companys independent registered public accounting firm. The Audit Committee oversees the Companys financial reporting process on behalf of the board of directors. The Companys management has primary responsibility for the financial statements and reporting process, including the Companys internal control over financial reporting. The independent registered public accounting firm is responsible for performing an integrated audit of the Companys financial statements and internal control over financial reporting in accordance with the auditing standards of the Public Company Accounting Oversight Board.
In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2008. This review included a discussion of the quality and the acceptability of the Companys financial reporting and control, including the clarity of disclosures in the
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financial statements. The Audit Committee also reviewed and discussed the audited financial statements of the Company for the fiscal year ended June 30, 2008 with the Companys independent registered public accounting firm, their judgments as to the quality and acceptability of the Companys financial reporting, and such other matters as are required to be discussed by Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees.
The Audit Committee obtained from the independent registered public accounting firm a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors independence, consistent with Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and discussed with the auditors any relationship that may impact their objectivity and independence. The Audit Committee meets periodically with the independent registered public accounting firm, with and without management present, to discuss the results of the independent registered public accounting firms examinations and evaluations of the Companys internal control and the overall quality of the Companys financial reporting.
Based upon the review and discussions referred to above, the Audit Committee recommended to the board of directors that the Companys audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2008, for filing with the SEC.
Edward A. Mueller, Chair | Gary G. Michael | |
Pamela Thomas-Graham | Jan L. Murley |
(Members of the Audit Committee as of June 30, 2008)
The table below includes fees billed or expected to be billed by the Companys independent registered public accounting firm, Ernst & Young LLP, in fiscal years 2008 and 2007:
2008 | 2007 | |||||
Audit Fees (1) | $4,447,000 | $4,057,000 | ||||
Audit-Related Fees (2) | 279,000 | 257,000 | ||||
Tax Fees (3) | 194,000 | 19,000 | ||||
All Other Fees (4) | | | ||||
Total | $4,920,000 | $4,333,000 |
(1) | Consists of fees for professional services rendered for the audit of the Companys annual financial statements for each of the fiscal years ended June 30, 2008 and June 30, 2007, and for review of the financial statements included in the Companys Quarterly Reports on Form 10-Q during each of those fiscal years. For fiscal years 2008 and 2007, the amounts also include $1,074,000, and $1,175,000, respectively, of fees billed for the internal control audit required by Section 404 of the Sarbanes-Oxley Act of 2002. | |
(2) | Consists of fees for assurance and related services reasonably related to the performance of the audit or review of the Companys financial statements for each of the fiscal years ended June 30, 2008 and June 30, 2007, and not included in the Audit Fees listed above. These services included audits of the Companys employee benefit plans. | |
(3) | Consists of fees for tax compliance, tax advice and tax planning for each of the fiscal years ended June 30, 2008 and June 30, 2007. These services included tax return preparation and review services for foreign subsidiaries and affiliates and advisory services on tax matters. | |
(4) | Consists of fees for all other services not included in the three categories set forth above for each of the fiscal years ended June 30, 2008 and June 30, 2007. There were no such services in either of these fiscal years. |
The Audit Committee has established a policy to require that it approve all services provided by its independent registered public accounting firm before services are provided. The Audit Committee has pre-approved the engagement of the independent registered public accounting firm for audit services, and certain specified audit-related services and tax services within defined limits. The Audit Committee has not pre-approved engagement of the independent registered public accounting firm for any other non-audit services
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COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides information about the overall objectives of our executive compensation program and explains how and why we arrived at the levels and forms of compensation for our current chairman and chief executive officer (CEO) and our chief financial officer (CFO) as well as our executive vice president & chief operating officer North America, our executive vice president functional operations, and our executive vice president strategy and growth, our three other most highly compensated executive officers. For purposes of this proxy statement, we refer to these five officers as our named executive officers. The compensation programs discussed here are applicable to all of our executive officers (a total of eight individuals). This section should be read in conjunction with the Summary Compensation Table and the other compensation tables and narratives included in this proxy statement.
Our Executive Compensation Program Philosophy
We believe that people are critical to the success of our business strategy, and we seek to compensate them in a manner that will drive the success of our business, and in turn, increase stockholder value. Consistent with this philosophy, we design our executive compensation programs to accomplish the following:
1. | Attract, Retain and Motivate Talented Executives. We design our compensation to be competitive with the organizations with which we compete for talent in order to attract, retain and motivate high-performing executives. | |
2. | Pay for Performance. We design our executives compensation to reward performance and the achievement of the Companys short- and long-term goals. As executives assume positions of greater responsibility, a larger portion of their total compensation is at risk incentive compensation (both annual incentives and long-term incentives) to more strongly link pay to performance. | |
3. | Create Stockholder Alignment. We align the interests of our executive officers with the interests of our stockholders through the use of long-term incentives and stock ownership guidelines that facilitate a culture of ownership and reward executive officers for sustained and superior stockholder return. | |
4. | Ensure Financial Efficiency. We strive to ensure that our executive compensation program is financially efficient and results in a reasonable level of cost and potential share dilution relative to industry peers. We design our incentive plans to ensure that costs are appropriately supported by performance and that payouts qualify as performance-based compensation under Internal Revenue Code (IRC) Section 162(m) (Section 162(m)), to the extent possible, and thus are fully tax deductible to the Company. |
Overview of How Compensation Decisions are Made
The Management Development and Compensation Committee of our board of directors (the Committee), which is comprised entirely of independent directors, as required by the NYSE listing standards, reviews the design and implementation of our executive compensation programs and provides the full board of directors regular reports of its discussions and actions. Compensation decisions related to payouts intended to qualify as performance-based compensation under Section 162(m) are made by a subcommittee, as described under Establishment of Subcommittee for Certain Compensation Actions.
The Committee makes decisions on compensation for the named executive officers based on its review of the peer group data described below, individual performance, input from the independent compensation consultant described below and other factors, such as industry trends and Company performance. The Committee receives input and recommendations from our CEO and our senior vice president human resources and corporate affairs regarding the compensation package for each of the named executive officers, other than the CEO, based upon the level of achievement of the Companys target goals and individual performance. For CEO compensation decisions, the Committee receives input and recommendations from the independent compensation consultant described below. The named executive officers do not have a role in their own compensation determination except that the named executive officers other than the CEO discuss their individual performance objectives with the CEO.
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Role of the Independent Compensation Consultant
In making compensation decisions, the Committee receives input from its independent compensation consultant, Frederic W. Cook & Co., Inc. The Committee has instructed Frederic W. Cook & Co., Inc. to provide advice and guidance based on executive compensation at other comparable consumer products companies, as well as relevant information about market practices and trends. Frederic W. Cook & Co., Inc. is retained directly by the Committee and has no other economic relationships with the Company. Frederic W. Cook & Co., Inc. reviews Committee meeting materials on behalf of the Committee and provides guidance to the Committee on compensation proposals including changes to named executive officers compensation levels, the design of incentive plans, the setting of performance goals, and the design of other forms of compensation and benefits programs. During fiscal year 2008, Frederic W. Cook & Co., Inc. attended all regularly scheduled meetings of the Committee.
Use of Peer Company Data
The Committee also uses peer group data in setting competitive compensation levels. With the assistance of its independent compensation consultant, the Committee has established a compensation peer group (our compensation peer group) and annually benchmarks the compensation of our named executive officers against the executive compensation practices of this group. For fiscal year 2008, our compensation peer group, which is unchanged from last year, was comprised of the following branded consumer products companies:
Alberto-Culver Company | General Mills, Inc. | |
Avon Products, Inc. | The Hershey Company | |
Bausch & Lomb Incorporated | H.J. Heinz Company | |
The Black & Decker Corporation | Kellogg Company | |
Campbell Soup Company | Newell Rubbermaid Inc. | |
Church & Dwight Co., Inc. | Revlon, Inc. | |
Colgate-Palmolive Company | S.C. Johnson & Son, Inc. | |
Del Monte Foods Company | Wm. Wrigley Jr. Company |
In determining the compensation peer group, the Committee considers companies that hold leadership positions in branded consumer products, are of reasonably similar revenue size, compete with the Company for executive talent and have executive positions similar in breadth, complexity and scope of responsibility. The size of the group has been determined with the goal of providing sufficient benchmarking data across the range of named executive officer positions at the Company. Each year, the Committee reviews the peer companies to ensure that they continue to meet the relevant criteria and makes adjustments to the compensation peer group, as appropriate.
In general, the Committee targets both aggregate and individual components of executive compensation to the median of our compensation peer group. Target total compensation for individual named executive officers may vary above or below the median based on a variety of factors, such as the individuals skill set relative to industry peers, experience and time in the position, criticality of the role and difficulty of replacement, individual performance and expected future contributions, readiness for promotion to a higher level, role relative to that of other executive officers and, in the case of externally recruited named executive officers, compensation earned at a prior employer. Actual incentive plan payouts and, in turn, total realized compensation, may vary above or below the targeted level based on the Companys performance relative to its corporate financial and strategic goals as well as the Companys stock performance.
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Use of Tally Sheets
The Committee annually reviews executive compensation tally sheets for each of our named executive officers. These tally sheets outline current compensation, the potential wealth creation of long-term incentive awards under various scenarios, and the potential value of payouts pursuant to applicable executive compensation plans under various termination alternatives. The Committee uses these tally sheets to help ensure that our executive compensation design is aligned with our overall compensation philosophy and that total compensation levels are appropriate.
Elements of the Executive Compensation Program
Our executive compensation program includes base salary, annual incentives paid in the form of cash bonuses, and long-term incentives consisting of stock option grants and grants of stock-based performance shares. Time-based restricted stock or restricted stock units as well as stock options are periodically used on a selective basis for special circumstances, such as retention, recognition or recruitment. In addition, indirect elements of the compensation program include retirement plans, post-termination compensation and perquisites, all of which serve to support our executive compensation philosophy. Compensation for each of our named executive officers, by element and in total, varies by position due to differing levels of responsibility. The primary elements of our executive compensation program and the reasons we use them are outlined below:
Element | Purpose | Characteristics |
Base Salary | Compensate named executive officers for their role and level of responsibility as well as individual performance. | Fixed component. |
Annual Incentives (1) | Promote the achievement of the Companys annual corporate financial and strategic goals, as well as individual objectives. | Performance-based cash bonus opportunity. |
Long-Term Incentives (1) | Promote the achievement of the Companys long-term corporate financial goals and stock price appreciation. | Amounts earned under stock option and performance share grant awards will vary from the targeted grant-date fair value based on actual financial and stock price performance. |
Retirement Plans | Provide replacement income upon retirement. Serves as a long-term retention incentive. | Fixed component; however, retirement contributions will vary based on pay and years of service as well as Company performance. |
Post-Termination Compensation | Contingent payments designed to attract and retain named executive officers. | Only payable if the named executive officers employment is terminated under specific circumstances as described in employment agreements. |
Perquisites | Provide other benefits competitive with our compensation peer group. | Financial planning services, Company automobile or car allowance, paid parking, annual executive physical and health club reimbursement. |
(1) | Payouts under the annual and long-term incentive plans are determined based on the achievement of pre-established objectives that are determined by the Committee at the beginning of the performance period. The performance period is one year for the annual incentive plan and three years for the performance shares awarded under the long-term incentive plan. Specific financial goals cannot be changed during the performance period, except according to principles set forth by the Committee that allow for adjustments in rare circumstances including, among other things, acquisitions, restructuring charges or significant changes to generally accepted accounting principles and only if the adjustments result in a specified minimum financial impact to the Company. |
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Base Salary. Each year, management engages Hewitt Associates to provide data on salaries and overall compensation paid to comparable positions in our compensation peer group. The Committees independent compensation consultant, Frederic W. Cook & Co., Inc., reviews this data and also performs an independent compensation analysis, which it uses to advise the Committee on potential compensation actions, including the CEOs compensation. The Committee takes this input into account in determining salary levels for the CEO and other named executive officers. The Committee generally seeks to establish base salaries for the CEO and other named executive officers at the median of our compensation peer group. Changes in base salary are approved by the Committee in September and are effective in October of each year. For fiscal year 2008, the salary increases ranged between 3.6% to 5.3% with an average increase of 4.4%. The actual amount of salary earned by our named executive officers in fiscal year 2008 is listed in the Salary column of the Summary Compensation Table.
Annual Incentives. On an annual basis, the Committee sets performance goals under its Executive Incentive Compensation (EIC) Plan that are designed to promote the achievement of the Board-approved annual corporate financial and strategic performance goals, and of individual objectives. The EIC Plan provides annual incentive awards to the named executive officers based on the level of achievement of these annual performance goals and individual objectives.
To help ensure that the compensation paid to the named executive officers is within the tax deductibility limitations of Section 162(m) of the IRC, maximum annual incentive award levels are based on earnings before income taxes achieved by the Company (Company earnings). The EIC Plan has a maximum award limit of 1.0% of Company earnings for the CEO and 0.6% of Company earnings for each of the other named executive officers. The Committee has discretion to reduce, but not to increase, incentive payments under the EIC Plan. The Committees practice has been to pay substantially lower amounts than the maximum award levels. The Committee reduces the maximum awards to the amount actually paid based on three factors a target award for each named executive officer, the performance against predetermined Company financial and strategic performance goals and, to a lesser extent, the named executive officers individual performance, based primarily on the performance of the operations under the individuals responsibility. These factors are discussed below.
Each year, the Committee sets an annual incentive target level for each named executive officer as a percent of his or her salary based upon the median annual incentive award targets of comparable positions in our compensation peer group. At the beginning of each fiscal year, the Committee also sets financial and strategic goals for the EIC Plan based on the operating plan and strategic initiatives approved by the board of directors. At the end of the year, the Committee assesses the Companys performance based on a review of achievements versus the goals set at the beginning of the year. The Committee first assesses the Companys financial performance by considering the results versus targets approved at the beginning of the fiscal year, and, if necessary, applying its discretion to account for other factors, such as stockholder return or underlying business performance during the year. The Committee then reviews the achievement of results versus the strategic goals, as well as individual performance, and based on this discretionary evaluation, may choose to adjust the financial payout up or down, but not to an amount that would exceed the maximum permitted award level for each named executive officer.
For fiscal year 2008, the Committee established annual financial goals that focused on increasing net customer sales and economic profit, as defined below. The Committee also established strategic goals that align with our business strategy and support people objectives, including employee engagement and diversity targets; customer objectives including targets related to product innovation, share growth, category growth, and order execution; growth objectives; and cost savings initiatives. The Committee and management agreed that focusing on the financial goals of net customer sales and economic profit, as well as the key strategic metrics, would drive sustainable growth in stockholder return.
In fiscal year 2008, the financial goals for the EIC Plan, the potential percentage of target award payouts for achieving those goals, and the actual results as determined by the Committee were as follows:
Annual Incentive | ||||||||
Financial Goals (in millions) | ||||||||
0% | 100% | 200% | ||||||
Goal (1) | (minimum) | (target) | (maximum) | Actual | ||||
Net Customer Sales (weighted 50%) | $ | 4,921 | $ | 5,072 | $ | 5,223 | $ | 5,173 |
Economic Profit (weighted 50%) (2) | $ | 380 | $ | 406 | $ | 432 | $ | 401 |
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(1) | The above metrics exclude the impact of the Companys acquisition of Burts Bees, Inc. (Burts Bees) during fiscal year 2008. Thus, the actual net customer sales result differs from the $5,273 net customer sales as disclosed under generally accepted accounting principles in the Companys Form 10-K for the fiscal year ended June 30, 2008. | |
(2) | Economic profit is defined by the Company as earnings from continuing operations before income taxes, non-cash restructuring and asset impairment costs and interest expense, tax affected, and less a capital charge. The capital charge represents average capital employed by the Company, multiplied by the weighted-average cost of capital. Weighted-average cost of capital is the blended average of the cost of the Companys debt and equity capital. Average capital employed represents a two-point average of adjusted capital employed for the current fiscal year and total capital employed for the prior fiscal year, based on year-end balances. Adjusted capital employed represents total capital employed adjusted to add back the current fiscal years non-cash restructuring and asset impairment costs. Total capital employed represents total assets less non-interest bearing liabilities. Additional information is provided in the Companys Form 10-K for the fiscal year ended June 30, 2008. |
The fiscal year 2008 targets were established to drive both net customer sales and profit growth, in line with long-term financial goals. Assuming targets were achieved, net customer sales growth and economic profit growth would be approximately 4% and 7%, respectively. The Committee reviewed the actual business results, including the level of stockholder return during fiscal year 2008, and based on this, reduced the financial payout to 115% of target.
The Committee also assessed Company performance against the strategic goals and individual performance. For fiscal year 2008, the Committee determined that the majority of the annual strategic goals were successfully achieved and, as a result, determined that the overall financial and strategic payout would be 115% of target. The Committee also reviewed individual performance and adjusted the payout for the named executive officers as appropriate. As a result, the total annual incentive payouts for the named executive officers range from 115% of target to approximately 120% of target.
The table below outlines the targets (expressed as a percentage of base salary) for the annual incentive awards. These targets approximate the median of bonus targets of comparable positions in our compensation peer group:
Target Annual | ||||
Named Executive Officer | Incentive | |||
Knauss, D. | 120 | % | ||
Peiros, L. | 80 | % | ||
Tataseo, F. | 75 | % | ||
Heinrich, D. | 75 | % | ||
Springer, B. | 75 | % |
The actual amount of annual incentive compensation earned by our named executive officers in 2008 is outlined in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
Long-Term Incentives. We provide long-term incentive compensation in the form of stock options and performance shares to our named executive officers because we believe stock options and performance shares create strong alignment between our executives interests and the interests of our stockholders. We also believe these incentive awards support the achievement of our long-term corporate financial goals.
The Committee, with the assistance of its independent compensation consultant, annually reviews the costs of and potential dilution from our long-term incentive program versus that of our compensation peer group to ensure that the overall program is financially efficient. In determining the total value of the long-term incentive opportunity for each named executive officer, the Committee reviews the compensation peer group data presented by both management and its independent compensation consultant on a position-by-position basis and considers recommendations by the CEO for the other named executive officers.
The Committees goal is to establish long-term incentive award targets to be competitive with the median of the compensation peer group. Actual long-term incentive award target levels for individual named executive officers may vary above or below the median based on a variety of factors, such as the named executive officers experience, criticality of the role, individual performance and expected future contributions. Like the annual incentive awards, actual payouts under long-term incentive awards will vary
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around target based on whether the Company underperforms or outperforms its target goals. The value of actual payouts also will vary based on changes in stock price. For fiscal year 2008, long-term incentive awards granted to the named executive officers were generally targeted at the median of the compensation peer group.
For fiscal year 2008, the Committee determined that the named executive officers would receive 50% of the value of their total annual long-term incentive awards in stock options and 50% in performance shares, the same split as in the prior fiscal year. The Committee selected this mix of equity awards to support several important objectives, including compensating named executive officers for achievement of long-term goals tied to the business strategy through the use of performance shares, rewarding named executive officers for sustained increases in the Companys stock price, enhancing retention by mitigating the impact of stock price fluctuations, and calibrating the overall cost of the program so it is aligned with compensation realized by named executive officers and performance delivered to stockholders. Annual grants of long-term incentives are intended to be competitive with those of our compensation peer group. Therefore, the Committee does not consider the amount of outstanding stock options, performance shares and restricted stock currently held by a named executive officer when making annual awards of stock options and performance shares.
The following provides details on the types of long-term incentives awarded to our named executive officers:
Performance Shares. Performance shares are subject to a time-based performance period and are paid out only if the predetermined financial performance goals are met by the Company. The performance period for these grants is a three-year period. We believe that performance shares align the interests of our named executive officers with the interests of our stockholders because the shares potential value is tied to the achievement of the Companys long-term financial goals.
For grants made in fiscal years 2006 through 2008, an objective measure of cumulative operating profit was established at the beginning of the performance period to determine the performance level that would qualify for the maximum possible award payout of 150% of the target number of shares granted. The Committee also determined specific goals for the performance period of return on invested capital (ROIC), for the fiscal year 2006 and 2007 grants, and economic profit for the fiscal year 2008 grant.
At the end of the performance period, if the cumulative operating profit target is met, the Committee may exercise negative discretion and adjust the maximum awards down to reflect performance against the ROIC and economic profit targets, as applicable. Payouts range from zero, in the event the minimum required financial goals are not met, to a maximum of 150% of the target number of shares granted to each individual, with a minimum payout of 50% of the target number of shares when financial goals are met.
For the fiscal year 2008 grant, the Committee set the financial target as a specified percentage of cumulative economic profit growth for the period from July 2007 through June 2010. The Committee set the specific targets, including the minimum, target and maximum payout levels, to align with our long-term financial goals. A target payout of 100% would require cumulative economic profit growth of approximately 8%, before adjustment for the Burts Bees acquisition, or 4%, including the impact of the Burts Bees acquisition. The Committee believes this metric directly supports the Companys updated corporate strategy and long-term financial goals and highly correlates to stock price performance.
Prior to fiscal year 2006, our named executive officers received performance share grants linked to achievement of a three-year Total Stockholder Return (TSR) relative to a group of consumer products companies the Company benchmarked itself against for financial performance purposes. In October 2007, the Committee certified the results of the fiscal year 2005 grant. During the September 2004 through September 2007 performance period, the Companys TSR relative to the financial peer group was at the 42nd percentile, which equated to a 50% payout, based on targets the Committee had established at the beginning of the performance period. Information regarding the vesting of these performance shares is shown in the Option Exercises and Stock Vested table.
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In August 2008, the Committee certified the results of the fiscal year 2006 grant. The financial targets for this grant were based on cumulative operating profit and an average ROIC goal over the three-year performance period. The cumulative operating profit threshold was met. The Committee applied negative discretion to adjust the maximum payout level of 150% down to a 108% payout level based on ROIC results. Specific information regarding the vesting of these performance share awards will be provided in next years proxy statement.
Stock Options. We believe stock options align the interests of named executive officers with those of stockholders because options only have value if the price of the Companys stock increases after the options are granted. Stock options vest at the rate of one-fourth per year over four years (beginning one year from the date of grant) and expire 10 years from the date of grant. In fiscal year 2008, the Committee awarded options to our named executive officers as part of our annual long-term incentive plan. The option exercise price for these options was equal to the closing price of the Companys stock price on the date of grant. Information on all stock option grants is in the Grants of Plan-Based Awards table.
Retirement Plans. The named executive officers participate in the same defined-benefit pension and defined-contribution benefit programs as all other U.S.-based salaried and non-union hourly employees. The Companys retirement plans are designed to provide replacement income upon retirement and to be competitive with programs offered by our peers. We balance the effectiveness of these plans as a compensation and retention tool with the cost to the Company of providing them. The Company provides these retirement benefits under The Clorox Company Pension Plan and The Clorox Company 401(k) Plan, which includes a profit sharing provision known as Value Sharing.
In addition, because the IRC limits the amount of benefits that can be contributed to and paid from a tax-qualified retirement plan, the Company also provides our executive officers, including our named executive officers, with additional retirement benefits intended to restore amounts that would otherwise be payable under the Companys tax-qualified retirement plans if the IRC did not have limits on includable compensation and maximum benefits. We call these restoration plans because they restore executive benefits to the same percentage level provided to our salaried employees who are not limited by IRC restrictions. These plans use the same benefit formulas, the same types of compensation to determine benefits, and the same vesting requirements as our tax-qualified retirement plans. These restoration retirement benefits, which include the cash balance restoration and the Value Sharing restoration benefits, are an unfunded, unsecured obligation of the Company and are part of the Nonqualified Deferred Compensation Plan described below.
The Company also offers the Supplemental Executive Retirement Plan (SERP) to our executive officers, including our named executive officers. This plan was closed to new participants effective April 2007. Benefits are determined based on age and years of service and are offset by the annuity value of Company contributions to the tax-qualified retirement plans and by Social Security. The benefit formula under this plan is described in the narrative in Overview of Pension Benefits. We believe the SERP is a strong retention tool because participants are not eligible for a full benefit if they leave the Company prior to reaching age 65 with at least 15 years of service. Participants attaining age 55 with at least 10 years of service are eligible to receive a benefit that is actuarially reduced from that available upon retirement at age 65. Mr. Knauss, our CEO, participates in an additional SERP as part of his employment agreement with the Company to compensate for the loss of retirement benefits at his prior employer (the replacement SERP). Information regarding the SERP and the replacement SERP for our CEO is described in the Overview of Pension Benefits.
Nonqualified Deferred Compensation. We offer a Nonqualified Deferred Compensation Plan (NQDC) to help executive officers, including our named executive officers, save for retirement and to be competitive with general market practice. Under the NQDC, our named executive officers may voluntarily defer the receipt of salary and annual incentive awards in amounts of up to 50% of base salary and 100% of annual incentive awards. Deferred amounts can be invested into accounts that mirror the gains or losses of the S&P 500 index and/or the 30-year Treasury Bond yield, or the rate specified by the IRS for use where the 30-year bond rate would otherwise apply. In addition, as noted above, the NQDC permits the Company to contribute amounts that exceed the IRC compensation limits in the tax-qualified plans through the cash balance restoration and Value Sharing restoration provisions. The NQDC is an unfunded and unsecured obligation of the Company. Details about the plans and accumulated balances are described in the Pension Benefits Table and Nonqualified Deferred Compensation section.
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Post-Termination Compensation. We have entered into employment agreements with each of our executive officers. We believe employment agreements help encourage them to take reasonable amounts of risk by mitigating the economic hardship associated with unexpected termination. The employment agreements specify payments in the event the executives employment is terminated under certain specific circumstances. The type and amount of payments vary by executive level and the nature of the termination. These severance benefits, which are designed to be competitive with our compensation peer group and general industry practices, are payable if and only if the executives employment terminates as specified in the applicable plan document or employment agreement. See Potential Payments Upon Termination or Change in Control for additional information.
Perquisites. We provide named executive officers with other benefits we believe are competitive with our compensation peer group and consistent with the Companys overall executive compensation program. These benefits are reflected in the All Other Compensation column in the Summary Compensation Table. We believe these benefits allow our named executive officers to work more efficiently and, in the case of the financial counseling program, help them optimize the value received from our compensation and benefit programs. These perquisites consist of a company automobile or car allowance, paid parking at the Companys headquarters, an annual executive physical, reimbursement for health club membership and financial planning. The value of perquisites to our named executive officers is shown in a separate table in a footnote to the All Other Compensation column of the Summary Compensation Table.
Executive Compensation Policies
Stock Award Granting Practices. The Company makes its annual long-term incentive grants each September at a regularly scheduled meeting of the Committee, which typically occurs during the third week of the month, or about six weeks after the Company has publicly released a report of its annual earnings. The meeting date is the effective grant date for the awards, and the exercise/grant price is equal to the closing price of the Companys stock on that date.
The Committee also may make occasional grants of stock options and other equity-based awards at other times to recognize, retain or recruit executive officers. These grants are approved by the Committee on or before the grant date, which is determined based on the timing of the triggering event. The exercise/grant price is the closing price of the Companys stock on the effective date of the grant. The Committee must approve all equity grants to executive officers of the Company, including named executive officers.
All long-term incentive grants are made pursuant to the terms set forth in The Clorox Company 2005 Stock Incentive Plan.
Executive Stock Ownership Guidelines. To preserve the linkage between the interests of executive officers of the Company and stockholders, all executive officers, including the named executive officers, are expected to establish and maintain a significant level of direct stock ownership. This can be achieved in a variety of ways, such as by retaining stock received upon the exercise of options or the vesting of stock awards or purchasing stock in the open market. The current stock ownership guidelines are as follows:
Ownership levels The minimum required ownership levels are stock having a value equal to four times base annual salary for the CEO and three times base annual salary for the other named executive officers. As of the date of this filing, all of the named executive officers, except Mr. Knauss who joined the Company in October 2006, have met the required ownership levels.
Retention ratios Executive officers, including named executive officers, are required to retain a certain percentage of shares obtained upon the exercise of options or the release of restrictions on full-value equity awards, after satisfying any applicable tax withholding requirement. The CEO is expected to retain 75% of shares acquired until the minimum ownership level is met. After attaining the minimum ownership level, the CEO must retain 50% of any further shares acquired until retirement or termination. Other named executive officers must retain 75% of shares acquired until the minimum required ownership levels are met and thereafter must retain 25% of shares acquired for one year after receipt.
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Ownership levels are based on shares of Common Stock owned by the named executive officer or held pursuant to Company plans. No stock options are counted in determining ownership levels, and shares that have not vested due to time or performance restrictions also are excluded from the ownership guidelines. Named executive officers are required to achieve ownership levels over time through the ongoing retention ratios associated with the exercise of stock options and vesting of full-value shares.
Securities Trading Policy. Named executive officers and directors may not purchase or sell options to sell or buy the Companys stock (puts and calls) or engage in short sales with respect to the Companys stock.
Clawback Provisions. Our executive compensation incentive programs include clawback provisions that allow the Company to recoup proceeds received by named executive officers under certain conditions. Under our EIC Plan, in the event of a restatement of financial results to correct a material error, the Committee is authorized to reduce or recoup an executive officers award, as applicable, to the extent that the Committee determines the officers fraud or intentional misconduct was a significant contributing factor to the need for a restatement.
Under our long-term incentive plan, if an executive officer leaves the Company to work for a competitor prior to the expiration of an option award or at any time within one year after the date of exercise of an option award, any outstanding awards will be forfeited and the executive officer must immediately return to the Company the shares acquired upon exercise or the pre-tax income derived from any disposition of the shares acquired upon exercise within the past year.
Tax Deductibility Limits on Executive Compensation. Section 162(m) of the IRC limits the tax deductibility of compensation paid to certain executive officers that exceeds $1 million per year unless such amounts are determined to be performance-based compensation. Our policy with respect to Section 162(m) seeks to balance the interests of the Company in maintaining flexible incentive plans against the possible loss of a tax deduction when taxable compensation for any of the executive officers subject to Section 162(m) exceeds $1 million per year. The Companys EIC Plan and long-term incentive plan are designed to meet the requirements of Section 162(m) for performance-based compensation.
Establishment of Subcommittee for Certain Compensation Actions
In July 2008, the Committee delegated authority to a subcommittee (the Subcommittee) with respect to certain compensation actions for covered employees as defined in Section 162(m). The Subcommittee is comprised of Tully M. Friedman, George J. Harad and Carolyn M. Ticknor.
Although the Board has determined that all members of the Committee are independent, consistent with our Governance Guidelines and the NYSE listing standards, based on Robert W. Matschullats service as interim chief executive officer from May 2006 until October 2006 and recent IRS guidance, the Committee has determined that he may not qualify as an outside director for purposes of Section 162(m). Therefore, the Committee has delegated to the Subcommittee the authority to take the actions required under Section 162(m) in order for performance-based compensation to be fully deductible by the Company for income tax purposes. All other decisions related to executive compensation matters are made by the Committee acting as a group.
Compensation for Mr. Knauss Chairman and CEO
The compensation of the Chairman and CEO, Mr. Knauss, is consistent with the executive compensation program and philosophy described above for the other named executive officers. Mr. Knauss total compensation is designed to be generally aligned with the CEO compensation of others in the compensation peer group and his annual incentive and long-term incentive awards are linked to Company performance.
In September 2007, the Committee, with input from the independent compensation consultant, reviewed all elements of Mr. Knauss compensation including base salary, annual incentive and long-term incentive award opportunities, relative to that of the compensation peer group. In addition, the Committee reviewed his performance for his first year in the role since his hire date of October 2, 2006.
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Based on the review of Mr. Knauss individual performance, overall Company performance and his compensation versus the compensation peer group, the Committee increased Mr. Knauss salary to $1,000,000 effective October 1, 2007. The Committee also increased Mr. Knauss annual incentive target to 120% of base salary for fiscal year 2008. The Committee granted Mr. Knauss a long-term incentive award of 185,000 stock options and 37,750 performance shares with a total value of approximately $4,500,000. Each individual element of Mr. Knauss compensation was positioned below median versus the compensation peer group given that Mr. Knauss was relatively new to the role.
Information about Mr. Knauss base salary, annual incentive and long-term incentive is described in more detail in the notes to the Summary Compensation Table.
COMPENSATION COMMITTEE REPORT
As detailed in its charter, the Management Development and Compensation Committee of the Board oversees the Companys executive compensation policies and programs. As part of this function, the Committee discussed and reviewed with management the Compensation Discussion and Analysis. Based on this review, we have recommended to the board of directors that the Compensation Discussion and Analysis be included in the Proxy Statement.
THE MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE
George J. Harad, Chair
Tully M.
Friedman
Robert W. Matschullat
Carolyn M. Ticknor
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SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned, paid or awarded to our named executive officers for the fiscal year ended June 30, 2008.
Change in | ||||||||||
Pension Value | ||||||||||
Nonqualified | ||||||||||
Non-Equity | Deferred | |||||||||
Stock | Option | Incentive Plan | Compensation | All Other | ||||||
Name and Principal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||
Position | Year | ($) (1) | ($) (2) | ($) (3) | ($) (3) | ($) (4) | ($) (5) | ($) (6) | ($) | |
Donald R. Knauss | 2008 | $987,500 | $ | | $1,949,179 | $1,443,716 | $1,380,000 | $526,244 | $254,846 | $6,541,485 |
Chairman & Chief | 2007 | 712,500 | 1,592,500 | 989,632 | 770,859 | | 434,567 | 716,042 | 5,216,100 | |
Executive Officer | ||||||||||
Lawrence S. Peiros | 2008 | 593,750 | | 664,815 | 943,254 | 552,000 | 354,383 | 103,522 | 3,211,724 | |
Executive Vice | 2007 | 543,750 | | 942,447 | 959,195 | 562,300 | 119,003 | 102,475 | 3,229,170 | |
President & Chief | ||||||||||
Operating Officer | ||||||||||
North America | ||||||||||
Frank A. Tataseo | 2008 | 465,000 | | 561,027 | 458,488 | 405,400 | 366,637 | 91,830 | 2,348,382 | |
Executive Vice | 2007 | 443,750 | | 772,016 | 397,956 | 472,500 | 332,132 | 89,931 | 2,508,285 | |
President | ||||||||||
Functional | ||||||||||
Operations | ||||||||||
Daniel J. Heinrich | 2008 | 495,000 | | 658,507 | 491,134 | 431,300 | 177,954 | 92,337 | 2,346,232 | |
Senior Vice President | 2007 | 475,000 | | 749,239 | 424,600 | 504,000 | 195,044 | 99,449 | 2,447,332 | |
Chief Financial | ||||||||||
Officer | ||||||||||
Beth Springer | 2008 | 462,000 | | 514,551 | 469,499 | 422,000 | 111,372 | 92,674 | 2,072,096 | |
Executive Vice | 2007 | 440,000 | | 551,152 | 354,092 | 496,100 | 182,199 | 88,124 | 2,111,667 | |
President | ||||||||||
Strategy and | ||||||||||
Growth |
(1) | Reflects actual salary earned in fiscal years 2007 and 2008. | |
(2) | Mr. Knauss did not receive any bonus in this category in fiscal year 2008. In fiscal year 2007, he received a sign-on bonus of $500,000 and a guaranteed minimum cash bonus of $1,092,500, in conjunction with his hire. | |
(3) | The amounts reflected in these columns, except as discussed below with respect to stock awards for fiscal year 2007, are the dollar amounts of compensation expense recognized for financial statement reporting purposes for the fiscal years ended June 30, 2007 and 2008, in accordance with SFAS 123(R), but without regard to forfeitures, and may include awards granted in and prior to each fiscal year. The assumptions made in valuing stock awards and option awards reported in these columns are discussed in Note 1, Summary of Significant Accounting Policies under Share-Based Compensation, and in Note 17, Share-Based Compensation, to the Companys consolidated financial statements for each of the two fiscal years ended June 30, 2007 and 2008, included in the Companys Form 10-K for the fiscal year ended June 30, 2008. Additional information |
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regarding the stock awards and option awards granted to our named executive officers during fiscal year 2008 is set forth in the Grants of Plan-Based Awards table. The amounts in the Stock Awards column for 2007 are the dollar amounts that should have been recognized for financial statement purposes in accordance with SFAS 123(R) but are somewhat lower than the amounts reported in the proxy statement for the annual meeting in 2007 and recognized in the Companys financial statements for 2007 because of an adjustment made to the amortization period for the stock awards. Total compensation figures for 2007 also reflect this adjustment. | ||
(4) | Reflects annual incentive awards earned for fiscal years 2007 and 2008 and paid out in September 2007 and 2008, respectively, under the EIC Plan. Information about the EIC Plan is set forth in the Compensation Discussion and Analysis under Annual Incentives. For fiscal year 2007, Mr. Knauss did not receive an annual incentive award in excess of the guaranteed amount of $1,092,500 reflected in the Bonus column. | |
(5) | The amounts reflect the aggregate increase in the present value of accumulated benefits during fiscal years 2007 and 2008 under the SERP, including Mr. Knauss replacement SERP, The Clorox Company Pension Plan and the cash balance restoration benefit of the NQDC (refer to the Pension Benefits Table for further information). Each plan amount in fiscal year 2008 is set forth in the following table: |
Donald R. | Lawrence S. | Frank A. | Daniel J. | Beth | ||||||||||||||||||
Knauss | Peiros | Tataseo | Heinrich | Springer | ||||||||||||||||||
SERP (includes, for Mr. Knauss, the replacement SERP) | $ | 497,516 | $ | 346,294 | $ | 356,471 | $ | 161,871 | $ | 88,747 | ||||||||||||
The Clorox Company Pension Plan | 7,727 | 14,012 | 11,555 | 7,910 | $ | 11,126 | ||||||||||||||||
Cash Balance Restoration Benefit | 21,001 | (5,923 | ) | (1,389 | ) | 8,173 | $ | 11,499 | ||||||||||||||
Total | $ | 526,244 | $ | 354,383 | $ | 366,637 | $ | 177,954 | $ | 111,372 |
(6) | The amounts shown in the column represent actual Company contributions (a) under the Companys 401(k) Plan, including the Value Sharing provision, (b) non-qualified contributions under the NQDC, other than the cash balance restoration benefit which is reflected in the change in pension value column (refer to the Nonqualified Deferred Compensation section for further information), (c) relocation and related amounts paid to Mr. Knauss as outlined in his employment agreement and (d) perquisites available to named executive officers of the Company. Amounts are set forth in the following table: |
Donald R. | Lawrence S. | Frank A. | Daniel J. | Beth | ||||||||||||||||
Knauss | Peiros | Tataseo | Heinrich | Springer | ||||||||||||||||
The Clorox Company 401(k) Plan | $ | 1,000 | $ | 16,400 | $ | 16,400 | $ | 16,400 | $ | 16,400 | ||||||||||
NQDC | | 54,163 | 42,438 | 44,415 | 41,230 | |||||||||||||||
Relocation and Related Costs | 210,402 | | | | | |||||||||||||||
Company Paid Perquisites | 43,444 | 32,959 | 32,992 | 31,522 | 35,044 | |||||||||||||||
Total | $ | 254,846 | $ | 103,522 | $ | 91,830 | $ | 92,337 | $ | 92,674 |
The following tables set forth the perquisites we make available to our named executive officers and the cost to the Company for providing these perquisites during fiscal year 2008. Other Perquisites are miscellaneous perquisites which consist of paid parking at the Companys headquarters, health club reimbursement and an annual executive physical. | ||
Donald R. | Lawrence S. | Frank A. | Daniel J. | Beth | ||||||||||||||||
Knauss | Peiros | Tataseo | Heinrich | Springer | ||||||||||||||||
Executive Automobile Program | $ | 21,613 | $ | 10,800 | $ | 10,800 | $ | 11,824 | $ | 12,290 | ||||||||||
Basic Financial Planning | 15,750 | 15,750 | 15,750 | 15,750 | 15,750 | |||||||||||||||
Other Perquisites | 6,081 | 6,409 | 6,442 | 3,948 | 7,004 | |||||||||||||||
Total | $ | 43,444 | $ | 32,959 | $ | 32,992 | $ | 31,522 | $ | 35,044 |
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In addition to the perquisites we make available to our named executive officers, we provided the following benefits to Mr. Knauss during fiscal year 2008 in accordance with the terms of his employment agreement and the Companys relocation policy, including costs related to his commuting expenses: |
Mortgage Subsidy | $117,799 | |
Tax Gross-Up on Relocation Expenses and Mortgage Subsidy | 45,326 | |
Non-Business Use of Company Aircraft | 47,277 | |
Total | $210,402 |
The amount included under Non-Business Use of Company Aircraft represents the incremental cost to the Company of Mr. Knauss non-business use of the Company aircraft during fiscal year 2008. The incremental cost is determined on a per flight basis and consists of the variable costs incurred as a result of the flight activity, including the cost of fuel used, crew travel expenses during layovers, catering expenses, trip-related landing and hangar fees and a pro-rata share of repairs and maintenance. Since our aircraft is used primarily for business travel, the calculation excludes fixed costs that do not change based on usage, such as regularly scheduled inspections, pilots salaries, acquisition costs of the aircraft and related expenses.
GRANTS OF PLAN-BASED AWARDS
This table shows grants of plan-based awards to the named executive officers during fiscal year 2008.
All Other | All Other | ||||||||||
Stock | Option | ||||||||||
Estimated Future Share Payouts | Awards: | Awards: | Grant Date | ||||||||
Estimated Possible Payouts Under | Under Equity Incentive Plan | Number of | Number of | Exercise or | Fair Value | ||||||
Non-Equity Incentive Plan Awards | Awards | Shares of | Securities | Base Price | of Stock | ||||||
Stock or | Underlying | of Option | and Option | ||||||||
Grant | Threshold | Target | Maximum | Threshold | Target | Maximum | Units | Options | Awards | Awards | |
Name | Date | ($) | ($) | ($) | (#) | (#) | (#) | (#) | (#) | ($/Sh) | ($) |
Donald R. Knauss | |||||||||||
Annual Incentive (1) | $ | $1,200,000 | $6,930,000 | ||||||||
Performance Shares (2) | 9/18/2007 | 18,875 | 37,750 | 56,625 | $2,308,790 | ||||||
Stock Options (3) | 9/18/2007 | 185,000 | $61.16 | 2,218,150 | |||||||
Lawrence S. Peiros | |||||||||||
Annual Incentive (1) | | 480,000 | 4,158,000 | ||||||||
Performance Shares (2) | 9/18/2007 | 5,450 | 10,900 | 16,350 | 666,644 | ||||||
Stock Option (3) | 9/18/2007 | 53,400 | 61.16 | 640,266 | |||||||
Frank A. Tataseo | |||||||||||
Annual Incentive (1) | | 352,500 | 4,158,000 | ||||||||
Performance Shares (2) | 9/18/2007 | 4,200 | 8,400 | 12,600 | 513,744 | ||||||
Stock Options (3) | 9/18/2007 | 41,100 | 61.16 | 492,789 | |||||||
Daniel J. Heinrich | |||||||||||
Annual Incentive (1) | | 375,000 | 4,158,000 | ||||||||
Performance Shares (2) | 9/18/2007 | 4,200 | 8,400 | 12,600 | 513,744 | ||||||
Stock Options (3) | 9/18/2007 | 41,100 | 61.16 | 492,789 | |||||||
Beth Springer | |||||||||||
Annual Incentive (1) | | 349,500 | 4,158,000 | ||||||||
Performance Shares (2) | 9/18/2007 | 4,200 | 8,400 | 12,600 | 513,744 | ||||||
Stock Options (3) | 9/18/2007 | 41,100 | 61.16 | 492,789 |
(1) | Represents estimated possible payouts for annual incentive awards for fiscal year 2008 under the Executive Incentive Compensation (EIC) Plan for each of our named executive officers. The EIC is an annual cash incentive opportunity and therefore awards are earned in the year of grant. The target amounts represent the potential payout if both Company and individual performance are at target levels. The maximum amount represents the stockholder-approved maximum payout in the EIC Plan of 1.0% of Company earnings for the CEO and .6% of Company earnings for all other named executive officers. The EIC Plan is designed to meet the requirements of Section 162(m), and the maximum column reflects maximum awards |
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under the Plan. The Committee historically has paid annual incentive awards that are substantially lower than the maximum EIC payouts. Mr. Knauss employment agreement provides that his annual incentive award shall not exceed 200% of his bonus target for the applicable year, which is consistent with our historical practice of paying annual incentive awards to our named executive officers in amounts significantly lower than 200% of the named executive officers fiscal year annual incentive target. See the Summary Compensation Table for the actual payout amounts in fiscal year 2008 under the EIC Plan. See Compensation Discussion and Analysis Annual Incentives for additional information about the EIC Plan. | ||
(2) | Represents possible future payouts of Common Stock underlying performance shares awarded in fiscal year 2008 to each of our named executive officers as part of their participation in the 2005 Stock Incentive Plan. These awards will vest upon the achievement of performance measures based on cumulative operating profit and economic profit growth over a three-year period, with the threshold, target and maximum awards equal to 50%, 100% and 150%, respectively, of the number of performance shares granted. If the minimum financial goals are not met at the end of the three-year period, no awards will be paid out under the Plan. See Compensation Discussion and Analysis Long-Term Incentives for additional information. | |
(3) | Represents stock options issued to each of our named executive officers under the 2005 Stock Incentive Plan. All options vest in equal installments on the first, second, third and fourth anniversaries of the grant date. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following equity awards granted to our named executive officers were outstanding as of the end of fiscal year 2008.
Option Awards | Stock Awards | |||||||||
Equity | ||||||||||
Equity | Equity | Incentive | ||||||||
Incentive | Incentive | Plan Awards: | ||||||||
Plan | Plan Awards: | Market or | ||||||||
Awards: | Market | Number of | Payout Value | |||||||
Number of | Number of | Number of | Number | Value of | Unearned | of Unearned | ||||
Securities | Securities | Securities | of Shares | Shares or | Shares, Units | Shares, Units | ||||
Underlying | Underlying | Underlying | or Units of | Units of | or Other | or Other | ||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | Rights That | Rights That | |||
Options - | Options - | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | ||
Exercisable | Unexercisable | Options | Price | Expiration | Vested | Vested | Vested | Vested | ||
Name | (#) | (#) | (#) | ($) | Date | (#) | ($) (1) | (#) | ($) (2) | |
Donald R. Knauss | ||||||||||
Stock Options (3) | 68,750 | 206,250 | (4) | $63.21 | 10/2/2016 | |||||
185,000 | (5) | 61.16 | 9/18/2017 | |||||||
Restricted Stock Units (3) | 65,221 (4) | $3,404,536 | ||||||||
Performance Shares (3) | 37,750 (6) | $1,970,550 | ||||||||
Lawrence S. Peiros | ||||||||||
Stock Options (3) | 23,400 | 53.91 | 5/6/2009 | |||||||
6,000 | 36.94 | 8/7/2010 | ||||||||
50,001 | 36.13 | 9/20/2010 | ||||||||
37,000 | 35.13 | 10/16/2011 | ||||||||
40,000 | 41.98 | 9/18/2012 | ||||||||
46,000 | 45.25 | 9/17/2013 | ||||||||
33,750 | 11,250 | (7) | 53.88 | 9/15/2014 | ||||||
16,100 | 16,100 | (8) | 57.00 | 9/21/2015 | ||||||
8,525 | 25,575 | (9) | 61.51 | 9/19/2016 | ||||||
5,000 | 15,000 | (10) | 63.89 | 1/5/2017 | ||||||
53,400 | (5) | 61.16 | 9/18/2017 |
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Option Awards | Stock Awards | |||||||||||
Equity | ||||||||||||
Equity | Equity | Incentive | ||||||||||
Incentive | Incentive | Plan Awards: | ||||||||||
Plan | Plan Awards: | Market or | ||||||||||
Awards: | Market | Number of | Payout Value | |||||||||
Number of | Number of | Number of | Number | Value of | Unearned | of Unearned | ||||||
Securities | Securities | Securities | of Shares | Shares or | Shares, Units | Shares, Units | ||||||
Underlying | Underlying | Underlying | or Units of | Units of | or Other | or Other | ||||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | Rights That | Rights That | |||||
Options - | Options - | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | ||||
Exercisable | Unexercisable | Options | Price | Expiration | Vested | Vested | Vested | Vested | ||||
Name | (#) | (#) | (#) | ($) | Date | (#) | ($) (1) | (#) | ($) (2) | |||
Lawrence S. Peiros | ||||||||||||
(contd) | ||||||||||||
Performance Shares (3) | 8,800 | (11) | 459,360 | |||||||||
8,500 | (12) | 443,700 | ||||||||||
10,900 | (6) | 568,980 | ||||||||||
Frank A. Tataseo | ||||||||||||
Stock Options (3) | 10,200 | 53.91 | 5/6/2009 | |||||||||
1,400 | 43.25 | 9/15/2009 | ||||||||||
40,002 | 36.13 | 9/20/2010 | ||||||||||
45,000 | 35.13 | 10/16/2011 | ||||||||||
22,000 | 41.98 | 9/18/2012 | ||||||||||
23,000 | 45.25 | 9/17/2013 | ||||||||||
26,400 | 8,800 | (7) | 53.88 | 9/15/2014 | ||||||||
14,500 | 14,500 | (8) | 57.00 | 9/21/2015 | ||||||||
7,925 | 23,775 | (9) | 61.51 | 9/19/2016 | ||||||||
41,100 | (5) | 61.16 | 9/18/2017 | |||||||||
Performance Shares (3) | 7,900 | (11) | 412,380 | |||||||||
7,900 | (12) | 412,380 | ||||||||||
8,400 | (6) | 438,480 | ||||||||||
Daniel J. Heinrich | ||||||||||||
Stock Options (3) | 25,002 | 35.46 | 3/1/2011 | |||||||||
40,002 | 35.13 | 10/16/2011 | ||||||||||
13,000 | 41.98 | 9/18/2012 | ||||||||||
32,000 | 45.25 | 9/17/2013 | ||||||||||
26,400 | 8,800 | (7) | 53.88 | 9/15/2014 | ||||||||
14,500 | 14,500 | (8) | 57.00 | 9/21/2015 | ||||||||
7,725 | 23,175 | (9) | 61.51 | 9/19/2016 | ||||||||
41,100 | (5) | 61.16 | 9/18/2017 | |||||||||
Restricted Stock Units (3) | 5,000 | (13) | 261,000 | |||||||||
Performance Shares (3) | 7,900 | (11) | 412,380 | |||||||||
7,700 | (12) | 401,940 | ||||||||||
8,400 | (6) | 438,480 |
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Option Awards | Stock Awards | ||||||||||
Equity | |||||||||||
Equity | Equity | Incentive | |||||||||
Incentive | Incentive | Plan Awards: | |||||||||
Plan | Plan Awards: | Market or | |||||||||
Awards: | Market | Number of | Payout Value | ||||||||
Number of | Number of | Number of | Number | Value of | Unearned | of Unearned | |||||
Securities | Securities | Securities | of Shares | Shares or | Shares, Units | Shares, Units | |||||
Underlying | Underlying | Underlying | or Units of | Units of | or Other | or Other | |||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | Rights That | Rights That | ||||
Options - | Options - | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | |||
Exercisable | Unexercisable | Options | Price | Expiration | Vested | Vested | Vested | Vested | |||
Name | (#) | (#) | (#) | ($) | Date | (#) | ($) (1) | (#) | ($) (2) | ||
Beth Springer | |||||||||||
Stock Options (3) | 3,264 | 40.36 | 9/21/2008 | ||||||||
4,485 | 38.84 | 9/29/2009 | |||||||||
723 | 44.44 | 11/22/2009 | |||||||||
7,000 | 35.78 | 4/26/2010 | |||||||||
8,355 | 36.13 | 9/20/2010 | |||||||||
7,740 | 35.22 | 9/24/2011 | |||||||||
13,000 | 41.98 | 9/18/2012 | |||||||||
14,000 | 45.25 | 9/17/2013 | |||||||||
13,200 | 4,400 | (7) | 53.88 | 9/15/2014 | |||||||
9,000 | 3,000 | (14) | 58.55 | 1/18/2015 | |||||||
14,500 | 14,500 | (8) | 57.00 | 9/21/2015 | |||||||
7,925 | 23,775 | (9) | 61.51 | 9/19/2016 | |||||||
41,100 | (5) | 61.16 | 9/18/2017 | ||||||||
Performance Shares (3) | 7,900 | (11) | 412,380 | ||||||||
7,900 | (12) | 412,380 | |||||||||
8,400 | (6) | 438,480 |
(1) | Represents unvested restricted stock units or shares under our 2005 Stock Incentive Plan multiplied by the closing price of our Common Stock on June 30, 2008. The ultimate value will depend on the value of our Common Stock on the actual vesting date. | |
(2) | Represents unvested target number of performance shares under our 2005 Stock Incentive Plan multiplied by the closing price of our Common Stock on June 30, 2008. The ultimate value will depend on whether performance criteria are met and the value of our Common Stock on the actual vesting date. | |
(3) | Grants were made under the 2005 Stock Incentive Plan. | |
(4) | Represents unvested stock options and restricted stock units granted on October 2, 2006 that vest in four equal installments beginning one year from the date of grant. Restricted stock also includes 2,596 restricted stock units as a result of reinvested dividends. However, any portion of 23,500 designated restricted stock units and any portion of 61,000 designated stock options that remain unvested at the time of termination will vest immediately if Mr. Knauss terminates due to involuntary termination without cause or voluntary termination for good reason. | |
(5) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of September 18, 2007. | |
(6) | Represents the target number of performance shares that could be earned under our 2005 Stock Incentive Plan. The grants from the plan have a three-year performance period (fiscal years 2008 2010). Performance is based on achievement of cumulative operating profit growth and economic profit growth. The Committee will determine whether the performance measures have been achieved after the completion of the 2010 fiscal year. | |
(7) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of September 15, 2004. |
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(8) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of September 21, 2005. | |
(9) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of September 19, 2006. | |
(10) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of January 5, 2007. | |
(11) | Represents the target number of performance shares that could be earned under our 2005 Stock Incentive Plan. The grants from the plan have a three-year performance period (fiscal years 2006-2008). Performance is based on achievement of cumulative operating profit growth and average ROIC. The Committee determines whether the performance measures have been achieved after the completion of the 2008 fiscal year. On August 11, 2008, the Committee approved the payout of this award at 108% of target, and the award was settled on August 26, 2008. | |
(12) | Represents the target number of performance shares that could be earned under our 2005 Stock Incentive Plan. The grants from the plan have a three-year performance period (fiscal years 2007-2009). Performance is based on achievement of cumulative operating profit growth and average ROIC. The Committee will determine whether the performance measures have been achieved after the completion of the 2009 fiscal year. | |
(13) | Represents restricted stock units that vest in full on May 13, 2009. | |
(14) | Represents unvested portion of stock options that vest in four equal installments beginning one year from the grant date of January 18, 2005. |
OPTION EXERCISES AND STOCK VESTED
This table shows options exercised and stock vested for the named executive officers during fiscal year 2008.
Option Awards | Stock Awards | |||||||||
Number of Shares | Value Realized on | |||||||||
Acquired on Exercise | Exercise | Number of Shares | Value Realized on | |||||||
Name | (#) | ($) (1) | Acquired on Vesting | Vesting (2) | ||||||
Donald R. Knauss | | $ | | 21,312 | (3) | $ | 1,296,835 | |||
Lawrence S. Peiros | 23,000 (4) | 664,010 | 10,000 | (5) | 605,500 | |||||
5,000 | (6) | 313,500 | ||||||||
Frank A. Tataseo | | | 7,500 | (5) | 454,125 | |||||
4,000 | (6) | 250,800 | ||||||||
Daniel J. Heinrich | | | 4,000 | (6) | 208,800 | (6) | ||||
Beth Springer | | | 3,350 | (6) | 174,870 | (6) |
(1) | The dollar value realized reflects the difference between the closing price of the Companys Common Stock on the date of exercise and the option exercise price. | |
(2) | The dollar value realized reflects the market value of the vested shares based on the closing price of the Companys Common Stock on the vesting date, unless otherwise noted. | |
(3) | Represents vesting of 20,875 restricted stock units and 437 additional restricted stock units as a result of reinvested dividends. These restricted stock units were granted to Mr. Knauss in conjunction with his hire. | |
(4) | Represents exercise of nonqualified stock options granted in previous years under the Companys long-term incentive program. | |
(5) | Represents vesting of restricted stock granted in previous years under the Companys long-term incentive program. | |
(6) | Stock awards listed represent the 50% vesting of performance shares granted through participation in our 2005 Stock Incentive Plan on October 10, 2007, the date of determination of vesting. Performance was based on the Companys total stockholder return as compared to peer companies. Mr. Heinrich and Ms. Springer have deferred the receipt of their shares until termination from service with the Company. Their actual realized value will depend upon the value of the Companys Common Stock on the date the shares are received. The dollar value set forth above is based on the Companys Common Stock price as of the end of the fiscal year of $52.20. |
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Overview of Pension Benefits
Pension benefits are paid to named executive officers under the following plans: The Clorox Company Pension Plan (the Pension Plan), the cash balance restoration provision in the NQDC and the SERP, or in the case of the CEO, the replacement SERP. The following is an overview of the current terms of the pension plans and provision.
Cash Balance Restoration | |||
Pension Plan | Provision in Nonqualified | ||
(cash balance plan) | Deferred Compensation Plan | SERP | |
Reason for Plan | Provide eligible employees, along | Provide eligible employees | Provide named executive officers with |
with our non-qualified plans, a | with a competitive level of | a retirement replacement income that | |
competitive level of retirement | retirement benefits based on | is competitive with peers and also | |
benefits based on pay | pay, by restoring benefits | supports long-term retention of key | |
limited by the IRC Code | talent | ||
Eligibility | Salaried and hourly employees | Named executive officers | Named executive officers and select |
of the Company, including the | and select group of senior | group of senior executives. Plan was | |
named executive officers | employees | closed to new participants in April 2007. | |
Retirement | Fully vested after 3 years of | Fully vested after 3 years of | Maximum benefit is payable at age 65 |
Eligibility | service | service | and 15 years of service. Participants |
are eligible for a reduced early | |||
retirement benefit at age 55 with | |||
10 years of service. SERP-eligible | |||
employees terminating before reaching | |||
age 55 with 10 years of service receive | |||
no benefits from the SERP. | |||
Pension Formula | Annual credits of 3% of eligible | Annual credits of 3% of | In combination with other Company |
compensation (base salary and | the eligible compensation | retirement plans (including cash balance | |
annual incentive) and quarterly | (base salary and annual | plan, Company contributions to the | |
credits of an interest factor | incentive) that exceeds the IRC | 401(k) Plan, including the Value Sharing | |
compensation limits | provision, cash balance restoration of | ||
NQDC and Value Sharing restoration of | |||
NQDC) and Social Security, employee | |||
can receive maximum total benefits | |||
approximately equal in value to 55% of | |||
average compensation (defined as the | |||
average of the highest consecutive three | |||
years of base salary plus the average of | |||
the highest three years of EIC award). | |||
The maximum benefit is proportionately | |||
reduced for service between 10 and | |||
15 years at a rate of 3% per year. | |||
Payment Form | A participant whose benefit has | A participant whose benefit has | Paid as a monthly annuity for the life |
vested at retirement or other | vested at retirement or other | of the participant. Plan also provides a | |
termination of employment may | termination of employment may | disability and survivors benefit. Lump | |
elect a cash distribution or an | elect a lump sum or annuity | sum option is not available. | |
alternate annuity form. The normal | distribution that will be paid out | ||
retirement benefit is an annuity | based on previously determined | ||
payable upon attainment of age 65. | criteria. | ||
A reduced retirement benefit | |||
annuity is payable at age 55 with | |||
at least 10 years of vesting service. | |||
Participants may also elect an | |||
optional annuity form of benefit. |
All items in the above overview are included in the Change in Pension Value column of the Summary Compensation Table and the Pension Benefits Table.
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The Replacement Supplemental Executive Retirement Plan. Pursuant to his employment agreement, Mr. Knauss participates in a replacement SERP that provides retirement benefits that are equal to the greater of the amount calculated under the Company SERP, described above, or the benefits to which he would have been entitled if he had stayed at his previous employer, The Coca-Cola Company. In the event that Mr. Knauss employment with the Company terminates prior to the completion of three years of service from his hire date of October 2, 2006, Mr. Knauss will be credited with a minimum of three years of benefit accruals under the replacement SERP. Mr. Knauss is fully vested in the replacement SERP, and he is the sole participant in the plan.
Eligible compensation for the replacement SERP is defined as the average of five years of base salary plus the average of five years of EIC awards. To the extent needed to obtain five years of consecutive annual compensation, actual annual salary and bonuses paid by The Coca-Cola Company prior to Mr. Knauss retirement will be used.
PENSION BENEFITS TABLE
The following table sets forth each named executive officers pension benefits under the Companys pension plans for fiscal year 2008.
Number of Years of | Present Value of | Payments During | ||||||
Credited Service | Accumulated Benefit | Last Fiscal Year | ||||||
Name | Plan Name | (#) (1) | ($) (2) | ($) | ||||
Donald R. Knauss | The Clorox Company Pension Plan | 2 | $ | 7,727 | $ | | ||
Replacement SERP/SERP | 3 | (3) | 906,318 | | ||||
Cash Balance Restoration | 2 | 21,001 | | |||||
Lawrence S. Peiros | The Clorox Company Pension Plan | 28 | 162,220 | | ||||
SERP | 28 | 1,197,033 | | |||||
Cash Balance Restoration | 28 | 213,950 | | |||||
Frank A. Tataseo | The Clorox Company Pension Plan | 14 | 107,678 | | ||||
SERP | 14 | 1,340,683 | | |||||
Cash Balance Restoration | 14 | 166,051 | | |||||
Daniel J. Heinrich | The Clorox Company Pension Plan | 7 | 47,302 | | ||||
SERP | 7 | 494,070 | | |||||
Cash Balance Restoration | 7 | 99,394 | | |||||
Beth Springer | The Clorox Company Pension Plan | 18 | 98,294 | | ||||
SERP | 18 | 474,828 | | |||||
Cash Balance Restoration | 18 | 89,393 | |
(1) | Numbers of years of credited service is rounded to the nearest whole number. | |
(2) | Present value of the accumulated benefit was calculated using the following assumptions: Mortality Table: RP2000, Discount Rate: 6.75%; age and pay at June 30, 2008. | |
(3) | Pursuant to his employment agreement with the Company, as of his service date of October 2, 2006, Mr. Knauss is guaranteed a minimum three years of credited service under the replacement SERP. Please refer to a description of the replacement SERP above. |
Nonqualified Deferred Compensation. In addition to the cash balance restoration benefits previously described and set forth in the Pension Benefits Table, the NQDC provides benefits that supplement the Value Sharing provision of the 401(k) Plan and permits the deferral of compensation. The Value Sharing provision of the 401(k) Plan is a Company profit sharing plan under which, depending on financial performance measurements, the Company contributes 3% 12% of the participants eligible compensation, including annual base salary and annual incentive, to either the participants 401(k) or NQDC account. Company contributions in amounts up to 7% of a named executive officers eligible compensation within the IRC compensation limits are tax-qualified and are credited to the participants 401(k) account. The portion of eligible compensation up to 7% that exceeds the IRC compensation limits is credited to the Nonqualified Deferred Compensation Value Sharing restoration benefit. In addition, any amount exceeding 7% of eligible compensation is payable in cash or deferred under the Value Sharing restoration provision of the NQDC, dependent upon the participants election. Company contributions under the Value Sharing provision of the 401(k) Plan are determined using the Companys achievement of financial performance based on net customer sales and economic profit, the same metrics used to determine the payout for the annual incentive awards.
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In addition to the Value Sharing benefits, the NQDC permits selected employees to defer annual incentive awards and base salary. A participant may defer up to 50% of his or her annual salary and up to 100% of his or her annual incentive paid under the EIC Plan.
Participants have the option of selecting two investment crediting rates under the NQDC the 30-year Treasury Bond yield, and/or an S&P 500 index. Participants may elect to receive distributions from the NQDC in either a lump sum or up to 10 annual installments which will be paid upon separation from service. The responsibility to pay benefits under the NQDC is an unfunded obligation of the Company.
The following table provides information regarding the accounts of the named executive officers under the NQDC in fiscal year 2008.
Executive | Registrant | ||||
Contributions | Contributions | Aggregate Earnings | Aggregate Balance | ||
in Last FY | in Last FY | in Last FY | at Last FYE | ||
Name | ($) (1) | ($) (2) | ($) (3) | ($) (4) | |
Donald R. Knauss | $558,875 | $ | | $ (98,949) | $ 599,413 |
Lawrence S. Peiros | 852,925 | 54,163 | (341,012) | 2,289,366 | |
Frank A. Tataseo | 472,500 | 42,438 | (314,608) | 2,026,186 | |
Daniel J. Heinrich | | 44,415 | (27,475) | 187,423 | |
Beth Springer | 496,100 | 41,230 | (221,286) | 1,405,001 |
(1) | For Messrs. Knauss and Peiros, the amount represents salary and annual incentive awards deferred during fiscal year 2008. Deferred salary is reported in the Summary Compensation Table - Salary. For Mr. Tataseo and Ms. Springer, the amounts represent annual incentive awards deferred during fiscal year 2008. Deferred annual incentive awards are also reported in the Summary Compensation Table - Non-Equity Incentive Plan Compensation. Information regarding the deferral of salary and annual incentive awards is described above. | |
(2) | Represents that portion of the Company contribution up to 7% of salary that is in excess of IRC Compensation limits pursuant to the Value Sharing restoration provision of the NQDC plan. These contributions are also reported in the Summary Compensation Table - All Other Compensation. | |
(3) | Earnings are based on the investment option of a 30-year Treasury Bond yield or the rate specified by the IRS for use where the 30-year bond rate would otherwise apply, the S&P 500 Index or a combination of both, as elected by the participant. For fiscal year 2008, the 30-year Treasury Bond return was 4.8% and the S&P 500 index return was (13.1%). | |
(4) | Reflects aggregate balances under the Value Sharing restoration provision of the NQDC plan and deferred salary and deferred annual incentive amounts as of the end of fiscal year 2008. |
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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Employment Agreements
The Company has entered into employment agreements with each of the named executive officers. Excluding Mr. Knauss, the named executive officers employment agreements are evergreen in that they renew daily to maintain a two-year term, unless the Company provides the named executive officer with written notice of non-renewal. Mr. Knauss employment agreement has a three-year term that is subject to automatic one-year extensions unless either the Company or Mr. Knauss gives notice to the other party at least 180 days before such extension becomes effective, reflecting emerging best practice for employment agreements.
Employment Agreements with Named Executive Officers Other than Mr. Knauss. Each employment agreement sets forth that the named executive officers annual base salary will be subject to periodic review in accordance with the Companys regular administrative practices for executive officers. The employment agreement also states that each named executive officer is eligible to participate in the EIC Plan, the Companys long-term incentive program, the SERP and other employee benefit plans made available to the Companys named executive officers. Information regarding these plans and the periodic review of our named executive officer salaries is discussed in the Compensation Discussion and Analysis section of this proxy.
Under the terms in the employment agreements, our named executive officers are eligible to receive benefits in the event their employment is terminated (1) by the Company without cause, (2) due to retirement, (3) due to disability, or (4) due to death. The amounts of benefits will vary based on the reason for termination. No benefits are payable under the terms of the employment agreements if the Company terminates the named executive officer for cause or the named executive officer terminates at will.
Regardless of the manner in which a named executive officers employment terminates, each named executive officer would retain the amounts that he or she has earned over the course of his or her employment prior to the termination event, such as the named executive officers balances under our deferred compensation plan, accrued retirement benefits and previously vested stock options, except as outlined below under Termination for Cause. For further information about previously earned amounts, see Summary Compensation Table, Outstanding Equity Awards at Fiscal Year-End, Option Exercises and Stock Vested, Pension Benefits Table and Nonqualified Deferred Compensation.
Under the employment agreements, each named executive officer agrees to keep confidential, during the term of employment and thereafter, all information regarding the Company that he or she receives during the term of employment and also agrees that he or she will not solicit for employment any customer or employee of the Company for two years after termination.
Termination benefits under the employment agreements for our named executive officers are as follows, except to the extent discussed separately with respect to Mr. Knauss:
Involuntary Termination Without Cause. If the Company terminates a named executive officers employment without cause, the employment agreements entitle the named executive officer to receive a severance payment after the termination in the form of a lump sum payment. The severance amount is equal to two times the named executive officers current base salary, plus two times 75% of his or her average annual EIC awards for the preceding three years. In addition, an amount equal to 75% of his or her average annual EIC awards for the preceding three years, pro-rated to the date of termination, is provided in lieu of EIC participation in the year of termination.
The employment agreements provide that the named executive officer is entitled to continue to participate in the Companys medical and dental insurance programs for the two-year period following termination on the same terms as active employees. In addition, if at the end of, and including, this two-year period the named executive officer will be age 55 or older and have at least 10 years of employment with the Company, he or she will be eligible to participate in the medical and/or dental plans offered to former employees who retire at age 55 or older, provided they have at least 10 years of service, on the same terms as such other former employees. This coverage will continue until the named executive officer is age 65 and, thereafter, the named executive officer may participate in the Companys retiree health plan as it may exist in the future, provided the named executive officer is
33
otherwise eligible to participate in the retiree health plan. If the named executive officer will be age 55 or older and have at least 10 years of service at the end of, and including, the two-year period following termination, the named executive officer will receive two additional years of service credit under the SERP.
Upon termination, each named executive officer will also be entitled to purchase the Company-leased automobile, if any, that he or she has used at the buyout amount specified by the lessor.
The above severance-related benefits are provided only if the named executive officer executes a general release prepared by the Company. If notice of non-renewal has been given under an employment agreement prior to termination, the actual severance payment multiple and length of continuation of benefits after termination would be a lower amount based on the number of months remaining in the term of the employment agreement at the time of termination without cause.
Termination Due to Retirement. If the named executive officer is eligible to receive benefits under the SERP, then upon three months written notice, the named executive officer may terminate employment due to retirement. Under the employment agreements, upon retirement the named executive officer is entitled to his or her salary through the last day of employment and a pro-rata portion of the EIC award for the fiscal year in which retirement occurs. He or she will also be eligible to receive SERP and other retirement benefits. In addition to the amounts that the named executive officer has earned or accrued over the course of his or her employment under the Companys qualified and nonqualified plans, named executive officers who are at least age 55 with 10 years of service or who have 20 years of service regardless of age, are eligible to receive retirement-related benefits under the long-term incentive program, as determined in accordance with the terms of the respective award agreements and plan document.
Termination Due to Death or Disability. Under each employment agreement, if the named executive officers employment is terminated due to his or her death, the named executive officers beneficiary or estate is entitled to the named executive officers salary through the end of the month in which the death occurred and is entitled to a pro-rata portion of the named executive officers target EIC award for the fiscal year of death. Benefits are also paid pursuant to the Companys life insurance plan on the executive in the event of death.
If the named executive officer begins to receive benefits under the Companys long-term disability plan, the Company may terminate the named executive officers employment at any time, in which case the named executive officer will receive his or her salary through the date of termination and will also be entitled to a pro-rata portion of the target EIC award for the fiscal year of the termination.
Termination For Cause. The Company may terminate a named executive officers employment for cause at any time without notice. Upon the named executive officers termination for cause, the named executive officer is entitled to his or her salary through the date of termination, but would not be entitled to any EIC award for the fiscal year in which the termination for cause occurs. Cause is defined in the employment agreements as: (1) the willful and continued neglect of significant duties or willful and continued violation of a material Company policy after being warned in writing; (2) committing a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude; (3) exhibiting gross negligence in the course of employment; (4) the failure to obey a lawful direction of the board of directors; and (5) acting in any manner inconsistent with the Companys best interests and values. All stock option grants awarded since September 2005 will be forfeited upon a termination for cause. In addition, for performance shares awarded since September 2005, any retirement-related benefits a named executive officer would normally receive, if applicable, will be forfeited upon a termination for cause.
Termination At Will. The named executive officer may terminate his or her employment at any time upon 10 business days written notice. Upon the named executive officers at will termination (other than due to retirement), the named executive officer is entitled to his or her salary through the date of termination, but is not entitled to any EIC award for the fiscal year of termination.
The Company has also entered into change in control agreements with each of the named executive officers, which are described below under Potential Payments Upon Change in Control.
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Mr. Knauss Employment Agreement. On August 25, 2006, the Company entered into an employment agreement with Mr. Knauss, which became effective on October 2, 2006, when Mr. Knauss began his employment as chairman and CEO of the Company. As noted above, Mr. Knauss employment agreement has a three-year term subject to automatic one-year extensions unless either the Company or Mr. Knauss gives notice to the other party at least 180 days before such extension becomes effective.
Mr. Knauss agreement sets forth that his annual salary will be subject to periodic review in accordance with the Companys regular administrative practices for named executive officers, as described in the Compensation Discussion and Analysis. The employment agreement also states that Mr. Knauss is eligible to participate in the Companys EIC Plan, the Companys long-term incentive program, the Company SERP, and the replacement SERP, which are described in the Compensation Discussion and Analysis, and other employee benefit plans made available to the Companys named executive officers.
Under the terms of his agreement, Mr. Knauss is entitled to certain relocation benefits including those available under the Companys relocation policy and additional benefits set forth in the agreement. Relocation benefits paid in fiscal year 2008 are specified in the Summary Compensation Table.
Upon completion of seven years of service, Mr. Knauss will be deemed retirement eligible under all Company welfare benefit, equity and other incentive plans and programs applicable to the Companys executive officers, provided, however, that such treatment will not apply to the extent Mr. Knauss is eligible for retiree benefits from his prior employer. Mr. Knauss is eligible to participate in the Company SERP and will be eligible for an early retirement benefit upon completion of seven years of service. Mr. Knauss is also eligible for an additional retirement benefit through a replacement SERP, which is intended to duplicate the rights and benefits to which he would have been entitled under the SERP of his previous employer. However, the supplemental retirement benefit that Mr. Knauss will be eligible to receive upon retirement will be the greater of the amount attributable to the Company SERP or the replacement SERP. For information regarding the Company SERP and the replacement SERP, see Overview of Pension Benefits The Replacement Supplemental Executive Retirement Plan.
The terms of Mr. Knauss employment agreement relating to termination by the Company without cause, due to retirement, due to death or disability, and for cause are similar to the terms of the agreements of our other named executive officers, which are described above. Mr. Knauss termination benefits differ from those for other named executive officers in the following ways:
Upon termination by the Company without cause, or by Mr. Knauss for good reason, and provided that Mr. Knauss executes a general release, Mr. Knauss will receive severance-related benefits as follows:
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Good reason is defined in Mr. Knauss employment agreement as the (1) assignment of duties inconsistent with Mr. Knauss position or material diminution of his position, (2) Companys failure to provide compensation and benefits as provided in Mr. Knauss employment agreement, (3) relocation of Mr. Knauss office that increases his commute by more than 40 miles, (4) termination of his employment by the Company other than as expressly permitted by Mr. Knauss employment agreement, or (5) Companys failure to obtain a successor companys agreement to assume Mr. Knauss employment agreement. In addition, a failure by the board of directors to appoint Mr. Knauss to the board of directors will also constitute good reason. A failure by the stockholders to elect Mr. Knauss to the board of directors shall not constitute good reason.
Cause is defined in Mr. Knauss employment agreement as (1) the willful and continued neglect of significant duties or willful and continued violation of a material Company policy after being warned in writing, (2) committing a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude, (3) exhibiting gross negligence in the course of employment, or (4) the failure to obey a lawful direction of the board of directors.
Also on August 25, 2006, the Company entered into a change in control agreement with Mr. Knauss, which is described below under Potential Payments Upon Change in Control.
Potential Payments upon Change in Control
We have agreements with Mr. Knauss and each of our other named executive officers that take effect only if a change in control occurs. Excluding Mr. Knauss, until November 2007, each named executive officer had a change in control agreement that renewed daily to maintain a three-year term unless the Company provided the named executive officer written notice of non-renewal. On November 16, 2007, the Company provided the executive officers other than Mr. Knauss notice of non-renewal and, thus, the agreements will expire on January 17, 2011. Mr. Knauss change in control agreement has a three-year term that is subject to automatic one-year extensions unless either the Company or Mr. Knauss gives notice to the other party at least 180 days before such extension becomes effective, reflecting emerging best practice for change in control agreements.
The benefits and protections provided under the change in control agreements apply for a two-year period commencing immediately upon the occurrence of a change in control of the Company. A change in control is defined in the agreements as (1) a change in the composition of a majority of the board of directors within any twelve-month period, unless approved by a majority of incumbent directors, (2) a consummation of a reorganization, merger, consolidation or sale, unless the Companys shareholders own more than 50% of the Common Stock or voting stock of the successor corporation, no person owns more than 20% of the Common Stock or voting stock of the successor corporation or the majority of the directors are incumbent directors, (3) shareholder approval of the sale of all or substantially all of the Companys assets, or (4) an acquisition by a party of at least 50% of Common Stock or voting stock or at least 30% of voting stock over a twelve-month period.
The severance and other benefits payable to our named executive officers under their agreements are due only in the event of a double trigger in which there is first a change in control and subsequently a qualifying termination of employment. Qualifying terminations of employment include involuntary termination by the Company without cause or voluntary termination by the named executive officer with good reason, each within a two-year protection period that commences upon a change in control. Good reason is defined in the change in control agreements as a material diminution of position or an assignment of inconsistent duties, a decrease in or failure to provide compensation and benefits, a material change in work location, a termination of the named executive officers employment by the Company other than as expressly permitted by the agreement or any material failure by the Company to have a successor assume the agreement. In addition, under Mr. Knauss change in control agreement, a failure
36
of the board of directors to nominate Mr. Knauss to the board of directors at any time will constitute good reason. Failure by the stockholders to elect Mr. Knauss to the board of directors shall not constitute good reason. Cause is defined in the change in control agreements as the (1) willful and continued failure to perform duties after receiving a written warning and (2) willful engagement in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company.
Severance-related benefits under the change in control agreements for our named executive officers, including Mr. Knauss, for qualifying terminations are as follows:
In the event that any payments made in connection with a change in control would be subject to the excise tax imposed by Section 4999 of the IRC, the agreements provide for a gross-up payment to cover any federal excise taxes owed by the named executive officer on any change in control-related severance payments and benefits. The gross-up is an additional payment that would cover (1) the amount of federal excise taxes and (2) the additional income taxes resulting from payment of the gross-up. The Company can reduce the severance payments up to 5% to avoid the excise tax. If a larger reduction is required, the Company pays the full excise tax gross-up. This gross-up and the change in control severance-related benefit amounts are reflected in Estimated Potential Payments Upon Termination or Change in Control.
In addition to the above benefits, under Mr. Knauss change in control agreement, if Mr. Knauss dies during the two-year protection period following a change in control or if Mr. Knauss employment is terminated due to disability during the two-year protection period following a change in control, all restricted stock units and stock options granted to him under his employment agreement become fully vested and, in the case of the options, will remain exercisable for one year following the date of death or termination due to disability or, if earlier, until the expiration of the term of the option. Furthermore, upon a change in control, should the continuing entity not assume or replace the restricted stock units and stock options awarded to Mr. Knauss under his employment agreement, such awards will become immediately vested upon the change in control.
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Under the change in control agreements, each named executive officer agrees to keep confidential during the term of employment and thereafter, all information regarding the Company that he or she receives during the term of employment and agrees that he or she will not solicit for employment any customer or employee of the Company for two years after termination.
Estimated Potential Payments upon Termination or Change in Control
The following table reflects the estimated amount of compensation payable to each of the Companys named executive officers upon termination of the named executive officers employment under different scenarios, excluding earned amounts, such as vested amounts or accrued benefits. The amounts shown assume that the termination was effective as of the last business day of fiscal year 2008 (i.e., June 30, 2008) and that the closing price of Clorox Common Stock, upon which certain of the calculations are based, was $52.20 on that date. Although the calculations are intended to provide reasonable estimates of the potential compensation payable, they are based on assumptions outlined in the footnotes below and may not represent the actual amount the named executive officer would receive if an eligible termination event were to occur. For further details about the post-termination amounts shown in the table below, see Employment Agreements and Potential Payments Upon a Change in Control above.
The table does not include compensation or benefits provided under plans or arrangements that are generally available to all salaried employees with the exception of disability and life insurance. Amounts reflected for change in control assume that each named executive officer is involuntarily terminated by the Company without cause or voluntarily terminates for good reason within two years after a change in control.
Involuntary | |||||||||||||||||||||||||
Termination | |||||||||||||||||||||||||
Without Cause | Termination | ||||||||||||||||||||||||
(or Good Reason | After Change In | ||||||||||||||||||||||||
Name and Benefits | for CEO Only) | Control | Retirement | Disability | Death | ||||||||||||||||||||
Donald R. Knauss | |||||||||||||||||||||||||
Cash Severance | $ | 6,658,125 | (1) | $ | 7,370,000 | (2) | $ | | $ | | (3) | $ | | (3) | |||||||||||
Stock Options | | (4) | | (5) | | (4) | | (6) | | (6) | |||||||||||||||
Restricted Stock | 958,183 | (7) | 3,404,536 | (8) | 958,183 | (7) | 3,404,536 | (9) | 3,404,536 | (9) | |||||||||||||||
Performance Shares | | 656,850 | (10) | | 1,970,550 | (11) | 1,970,550 | (11) | |||||||||||||||||
Retirement Benefits | | (12) | 2,970,656 | (13) | | (12) | 2,787,242 | (14) | 744,593 | (15) | |||||||||||||||
Health and Welfare Benefits | | (16) | 21,903 | (17) | | | | ||||||||||||||||||
Disability/Life Insurance (18) | | | | 1,255,500 | 1,000,000 | ||||||||||||||||||||
Financial Planning (19) | | 15,750 | | | | ||||||||||||||||||||
Excise Tax Gross-Up (20) | | 6,672,719 | | | | ||||||||||||||||||||
Total Estimated | |||||||||||||||||||||||||
Incremental Value | $ | 7,616,308 | $ | 21,112,414 | $ | 958,183 | $ | 9,417,828 | $ | 7,119,679 | |||||||||||||||
Lawrence S. Peiros | |||||||||||||||||||||||||
Cash Severance | $ | 2,267,850 | (21) | $ | 3,698,400 | (2) | $ | | (22) | $ | | (3) | $ | | (3) | ||||||||||
Stock Options | | (23) | | (5) | | (23) | | (6) | | (6) | |||||||||||||||
Restricted Stock | | | | | | ||||||||||||||||||||
Performance Shares | 755,160 | (24) | 944,820 | (10) | 755,160 | (24) | 1,472,040 | (11) | 1,472,040 | (11) | |||||||||||||||
Retirement Benefits | 3,822,870 | (25) | 3,907,860 | (13) | | 1,469,627 | (14) | 1,855,481 | (15) | ||||||||||||||||
Health and Welfare Benefits | 14,434 | (16) | 36,822 | (17) | | | | ||||||||||||||||||
Disability/Life Insurance (18) | | | | 644,760 | 600,000 | ||||||||||||||||||||
Financial Planning (19) | | 15,750 | | | | ||||||||||||||||||||
Excise Tax Gross-Up (20) | | 3,659,377 | | | | ||||||||||||||||||||
Total Estimated | |||||||||||||||||||||||||
Incremental Value | $ | 6,860,314 | $ | 12,263,029 | $ | 755,160 | $ | 3,586,427 | $ | 3,927,521 |
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Involuntary | ||||||||||||||||||||||||
Termination | ||||||||||||||||||||||||
Without Cause | Termination | |||||||||||||||||||||||
(or Good Reason | After Change In | |||||||||||||||||||||||
Name and Benefits | for CEO Only) | Control | Retirement | Disability | Death | |||||||||||||||||||
Frank A. Tataseo | ||||||||||||||||||||||||
Cash Severance | $ | 1,822,600 | (21) | $ | 2,664,511 | (2) | $ | | $ | | (3) | $ | | (3) | ||||||||||
Stock Options | | | (5) | | | (6) | | (6) | ||||||||||||||||
Restricted Stock | | | | | | |||||||||||||||||||
Performance Shares | | 833,460 | (10) | | 1,263,240 | (11) | 1,263,240 | (11) | ||||||||||||||||
Retirement Benefits | 3,574,300 | (25) | 3,745,698 | (13) | | 1,970,403 | (14) | 1,757,317 | (15) | |||||||||||||||
Health and Welfare Benefits | 16,812 | (16) | 36,824 | (17) | | | | |||||||||||||||||
Disability/Life Insurance (18) | | | | 431,133 | 470,000 | |||||||||||||||||||
Financial Planning (19) | | 15,750 | | | | |||||||||||||||||||
Excise Tax Gross-Up (20) | | | | | | |||||||||||||||||||
Total Estimated | ||||||||||||||||||||||||
Incremental Value | $ | 5,413,712 | $ | 7,296,243 | $ | | $ | 3,664,776 | $ | 3,490,557 | ||||||||||||||
Daniel J. Heinrich | ||||||||||||||||||||||||
Cash Severance | $ | 1,977,550 | (21) | $ | 3,237,867 | (2) | $ | | $ | | (3) | $ | | (3) | ||||||||||
Stock Options | | | (5) | | | (6) | | (6) | ||||||||||||||||
Restricted Stock | | 261,000 | (8) | | 261,000 | (9) | 261,000 | (9) | ||||||||||||||||
Performance Shares | | 826,500 | (10) | | 1,252,800 | (11) | 1,252,800 | (11) | ||||||||||||||||
Retirement Benefits | | 2,603,975 | (13) | | | (14) | | (15) | ||||||||||||||||
Health and Welfare Benefits | 16,812 | (16) | 37,254 | (17) | | | | |||||||||||||||||
Disability/Life Insurance (18) | | | | 467,233 | 500,000 | |||||||||||||||||||
Financial Planning (19) | | 15,750 | | | | |||||||||||||||||||
Excise Tax Gross-Up (20) | | 3,451,500 | | | | |||||||||||||||||||
Total Estimated | ||||||||||||||||||||||||
Incremental Value | $ | 1,994,362 | $ | 10,433,846 | $ | | $ | 1,981,033 | $ | 2,013,800 | ||||||||||||||
Beth Springer | ||||||||||||||||||||||||
Cash Severance | $ | 1,806,725 | (21) | $ | 2,953,067 | (2) | $ | | $ | | (3) | $ | | (3) | ||||||||||
Stock Options | | | (5) | | | (6) | | (6) | ||||||||||||||||
Restricted Stock | | | | | | |||||||||||||||||||
Performance Shares | | 833,460 | (10) | | 1,263,240 | (11) | 1,263,240 | (11) | ||||||||||||||||
Retirement Benefits | | 258,427 | (13) | | 289,741 | (14) | 853,060 | (15) | ||||||||||||||||
Health and Welfare Benefits | 9,402 | (16) | 25,670 | (17) | | | | |||||||||||||||||
Disability/Life Insurance (18) | | | | 427,383 | 466,000 | |||||||||||||||||||
Financial Planning (19) | | 15,750 | | | | |||||||||||||||||||
Excise Tax Gross-Up (20) | | 2,076,355 | | | | |||||||||||||||||||
Total Estimated | ||||||||||||||||||||||||
Incremental Value | $ | 1,816,127 | $ | 6,162,729 | $ | | $ | 1,980,364 | $ | 2,582,300 |
(1) | This amount represents three times Mr. Knauss current base salary of $1,000,000 plus three times 75% of his annual EIC award for the preceding year plus 100% of his current year EIC award target of $1,200,000, pro-rated to the date of termination. In accordance with Mr. Knauss employment agreement, his actual EIC award for fiscal year 2007 has been substituted for his average annual EIC awards for the preceding three years for purposes of calculating his severance payment since Mr. Knauss had only received one EIC award as of June 30, 2008. | |
(2) | This amount represents three times the named executive officers current base salary, plus three times the average EIC awards for the preceding three years, plus the average EIC awards for the preceding three years, prorated to the date of termination, except as discussed in footnote (1) above with respect to Mr. Knauss. For Mr. Tataseo, this amount has been reduced by the allowable amount by which his gross-up payment can be cut back to avoid the IRC Section 4999 excise tax. |
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(3) | Named executive officers whose termination is the result of disability or death are eligible to receive a pro-rata EIC award through the date of termination. However, all bonus-eligible employees active as of June 30, 2008 are eligible to receive an EIC award so a pro-rata EIC award would not be applicable as of this date. | |
(4) | This amount represents the value of the accelerated vesting of 45,750 of Mr. Knauss stock options in accordance with his employment agreement, calculated as the difference between the June 30, 2008 closing stock price of $52.20 and the exercise price for each option. The exercise price for these options was greater than the stocks closing price at the end of the fiscal year making the total value $0. | |
(5) | This amount represents the value of the accelerated vesting of all outstanding stock options, calculated as the difference between the June 30, 2008 closing stock price of $52.20 and the exercise price for each option. The exercise price for all of the named executive officers outstanding option grants was greater than the stocks closing price at the end of fiscal year 2008 making the total value for all named executive officers $0. | |
(6) | This amount represents the value of the accelerated vesting of outstanding stock options upon the named executive officers termination of employment due to disability or death, calculated as the difference between the June 30, 2008 closing stock price of $52.20 and the exercise price for each option. The exercise price for all of the named executive officers outstanding option grants was greater than the stocks closing price at the end of fiscal year 2008 making the total value for all named executive officers $0. | |
(7) | This amount represents the value of the accelerated vesting of 18,356 of Mr. Knauss restricted stock units in accordance with his employment agreement. This amount represents the unvested portion of his initial grant of 23,500 restricted stock units that will vest upon termination plus 731 restricted stock units as a result of reinvested dividends related to the 23,500 units. This dollar amount was determined by multiplying 18,356 units times the closing price of our Common Stock on June 30, 2008 of $52.20. | |
(8) | This amount represents the value of the accelerated vesting of all outstanding restricted stock units. This dollar amount was determined by multiplying 65,221 units for Mr. Knauss and 5,000 units for Mr. Heinrich times the closing price of our Common Stock on June 30, 2008 of $52.20. Mr. Knauss restricted stock units represent the unvested portion of his initial grant of 83,500 restricted stock units per his employment agreement plus 2,596 restricted stock units due to reinvested dividends. | |
(9) | This amount represents the value of the accelerated vesting of all outstanding restricted stock units upon the named executive officers termination due to disability or death determined by multiplying 65,221 units for Mr. Knauss and 5,000 units for Mr. Heinrich times the closing price of our Common Stock on June 30, 2008 of $52.20. | |
(10) | Performance shares will vest on a pro-rata basis upon a qualifying termination after a change in control. This amount assumes a targeted payout and is valued at the closing price of our Common Stock on June 30, 2008 of $52.20. | |
(11) | This amount represents the value of the vesting of performance shares upon a death or disability, assuming a target payout and valued at the closing price of our Common Stock on June 30, 2008 of $52.20. Upon a death or disability, performance shares will all vest. The actual payout will not be determined until the end of the performance period. | |
(12) | Mr. Knauss received 3 years of benefit accruals for the replacement SERP under the terms of his employment agreement; he is not eligible for any additional retirement benefits in the event of an involuntary termination or retirement above what he has already accrued. | |
(13) | This amount represents the difference between the actuarial equivalent of the benefit the named executive officer would have been eligible to receive if his or her employment had continued until the third anniversary of the date of termination or, other than for Mr. Knauss, the first day of the month following the named executive officers 65th birthday if earlier, under the qualified and nonqualified retirement plans and the actuarial equivalent of the named executive officers actual aggregate benefits paid or payable, if any, as of the date of termination under the qualified and nonqualified retirement plans. | |
(14) | This amount represents the present value of the SERP benefit payable to the named executive officer at the time of termination due to disability. For Mr. Knauss, this amount includes the present value accrued to date of the replacement SERP benefit. Mr. Heinrich is not yet eligible for this SERP benefit. |
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(15) | This amount represents the present value of the SERP benefit payable to the named executive officers beneficiary at the time of death. For Mr. Knauss, this amount represents the present value accrued to date of the replacement SERP benefit payable to his beneficiary. Mr. Heinrich is not yet eligible for this SERP benefit. | |
(16) | This amount represents the estimated Company cost of providing continuing medical and dental benefits to Mr. Knauss for the three-year period follow his termination of employment and to the other named executive officers for the two-year period following termination. Mr. Knauss currently has not elected to receive medical and dental coverage under the Companys plans so there is no Company cost related to this benefit. | |
(17) | This amount represents the estimated Company cost of providing welfare benefits, including medical, dental, disability and life insurance, for the three-year period following a qualifying termination after a change in control. Mr. Knauss currently has not elected to receive medical and dental coverage under the Companys plans, so there is no Company cost related to this portion of the benefit. | |
(18) | These amounts represent benefits payable pursuant to the Companys disability and life insurance plans. The disability benefit represents the same level of benefit offered to other salaried employees. The death benefit represents the life insurance payment elected by the named executive officer, and is also the same as that offered to other salaried employees. | |
(19) | This amount represents the cost of providing financial planning services for the year of termination. | |
(20) | This amount represents the gross-up payment to cover any IRC Section 4999 excise tax owed by the named executive officer on any change in control-related severance payments and benefits. | |
(21) | This amount reflects three times the named executive officers current base salary, plus three times 75% of his or her average annual EIC awards for the preceding three years, plus 75% of his or her average annual EIC awards for the preceding three years, pro-rated to the date of termination. | |
(22) | Mr. Peiros is the only named executive officer who is retirement eligible and thus is eligible for a pro-rata EIC award upon retirement. However, all bonus-eligible employees active as of June 30, 2008 are eligible to receive an EIC award so a pro-rata EIC award would not be applicable as of this date. | |
(23) | Mr. Peiros is retirement eligible and, thus, all his unvested options held greater than one year will automatically vest upon his termination. This amount represents the value of the accelerated vesting of the stock options, calculated as the difference between the June 30, 2008 closing stock price of $52.20 and the exercise price for each option. The exercise price for all these options was greater than the stocks closing price at the end of fiscal year 2008 making the total value $0. | |
(24) | Mr. Peiros is retirement eligible and, thus, is entitled to receive a pro-rata portion of all performance shares held at least one year upon his termination. This value represents the pro-rata vesting of the eligible shares from the September 2005 and the September 2006 grants, assuming a target payout and valued at the closing price of our Common Stock on June 30, 2008 of $52.20. The actual payout of the shares will not be determined until the end of the performance period. Named executive officers who are not retirement eligible forfeit shares upon termination in this circumstance. | |
(25) | For Messrs. Peiros and Tataseo, this amount represents the value of the continuation of benefits and service accruals under the Company SERP per the provisions of the employment agreement, assuming each will be age 55 with 10 or more years of service at the end of the two-year period following termination. |
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DIRECTOR COMPENSATION
Only our non-employee directors receive compensation for their services as directors. The Companys non-employee director compensation program is comprised of cash compensation and an annual grant of deferred stock units.
The following table sets forth information regarding compensation for each of the Companys non-employee directors during fiscal year 2008:
Fees Earned | Stock | Option | All Other | Total | ||||||||||
Or Paid in Cash | Awards | Awards | Compensation | |||||||||||
Name | ($)(1) | ($)(2) | ($)(3) | ($) | ($) | |||||||||
Daniel Boggan, Jr. | $ | 85,000 | $ | 100,000 | $ | | $ | | $ | 185,000 | ||||
Richard Carmona (4) | 75,000 | 75,000 | | | 150,000 | |||||||||
Tully M. Friedman | 85,000 | 100,000 | | | 185,000 | |||||||||
George Harad | 87,582 | 100,000 | 25,066 | | 212,648 | |||||||||
Robert W. Matschullat | 82,506 | 100,000 | | | 182,506 | |||||||||
Gary G. Michael | 100,000 | 100,000 | | | 200,000 | |||||||||
Edward A. Mueller (5) | 87,582 | 75,000 | | | 162,582 | |||||||||
Jan L. Murley | 75,000 | 100,000 | | | 175,000 | |||||||||
Michael E. Shannon (6) | 35,178 | 75,000 | | | 110,178 | |||||||||
Pamela Thomas-Graham | 75,000 | 100,000 | 12,872 | | 187,872 | |||||||||
Carolyn M. Ticknor | 75,000 | 100,000 | 17,021 | | 192,021 |
(1) | The amount reported in the Fees Earned or Paid in Cash column reflects the total annual cash retainer amount and other cash compensation earned by each director in fiscal year 2008 and includes amounts deferred into cash or deferred stock units and/or issued in Common Stock in lieu of cash at the directors election. The annual cash retainer is paid to each director in quarterly installments. | |
(2) | The amount reported reflects the dollar amount accrued for financial statement reporting purposes for fiscal year 2008 under Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), with respect to the annual grant of deferred stock units earned during fiscal year 2008. Awards are granted on an annual basis at the end of each calendar year, and accordingly, the expense accrued for fiscal year 2008 relates to two calendar quarters relating to the award that was granted on December 31, 2007, and two calendar quarters relating to the award that was earned, but will not be granted until December 31, 2008. Refer to Note 17 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended June 30, 2008, for a discussion of the relevant assumptions used in calculating the compensation expense and grant-date fair value pursuant to SFAS 123(R). As of June 30, 2008, the following directors had the following aggregate number of deferred stock units accumulated in their deferred accounts for all years of service as a director, from deferrals of cash compensation and annual awards of deferred stock units, including additional deferred stock units credited as a result of dividend equivalents earned with respect to the deferred stock units: Mr. Boggan 16,982 units; Dr. Carmona 1,164 units; Mr. Friedman 21,914 units; Mr. Harad 6,145 units; Mr. Matschullat 45,490 units; Mr. Michael 5,457 units; Mr. Mueller 2,087 units; Ms. Murley 7,940, Mr. Shannon 787 units; Ms. Thomas-Graham 4,286 units; and Ms. Ticknor 8,786 units. | |
(3) | The amount reported reflects the dollar amount recognized for financial statement reporting purposes for fiscal year 2008 under SFAS 123(R), rather than an amount paid to or realized by the director, for outstanding stock options held by the director that were granted in prior years. No stock options were awarded to directors in fiscal year 2008, and the award of stock options as an element of director compensation was discontinued in October 2006. Prior to October 2006, each new non-employee director received a one-time grant of 8,000 options upon joining the board of directors, which award vested in two equal installments over a two-year period. The Companys prior policy of making annual grants to non-employee directors of stock options that vested over a two-year period was discontinued in 2004. Assumptions used in the calculation of the compensation costs are included in Note 17 of the Companys audited financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2008. As of June 30, 2008, the following directors had |
42
options for the following aggregate number of shares: Mr. Boggan 14,000 shares; Dr. Carmona 0 shares; Mr. Friedman 14,000 shares; Mr. Harad 8,000 shares; Mr. Matschullat 20,000 shares; Mr. Michael 6,000 shares; Mr. Mueller 0 shares; Ms. Murley 16,000 shares; Mr. Shannon 16,000 shares; Ms. Thomas-Graham 8,000 shares; and Ms. Ticknor 8,000 shares. | ||
(4) | Mr. Carmona joined the board on February 5, 2007. In accordance with the terms of the Companys director compensation plan, the annual deferred stock unit award is pro-rated based on the number of full fiscal quarters served during the calendar year. | |
(5) | Mr. Mueller joined the board on February 5, 2007. In accordance with the terms of the Companys director compensation plan, the annual deferred stock unit award is pro-rated based on the number of full fiscal quarters served during the calendar year. | |
(6) | Mr. Shannon retired from the board on November 17, 2007. In accordance with the terms of the Companys director compensation plan, the annual deferred stock unit award is pro-rated based on the number of full fiscal quarters served during the calendar year. |
Fees Earned or Paid in Cash
Cash compensation consists of annual cash retainer amounts and any special assignment fees. The following table lists the various retainers earned for board service and service as presiding director or a committee chair for each fiscal year:
Annual director retainer | $ | 75,000 | |
Presiding director retainer | 25,000 | ||
Committee chair retainers: | |||
Nominating and Governance Committee | 10,000 | ||
Finance Committee | 10,000 | ||
Audit Committee | 20,000 | ||
Management Development and Compensation Committee | 20,000 |
Directors who serve as a board member, presiding director or committee chair for less than the full fiscal year receive pro-rated retainer amounts based on the number of days they served in such position during the fiscal year.
In addition to the retainer amounts, each non-employee director is entitled to receive a fee of $2,500 per day for any special assignment requested by the board of directors.
Under the Companys Independent Directors Deferred Compensation Plan, a director may annually elect to receive all or a portion of his or her cash compensation in the form of cash, Common Stock, deferred cash or deferred stock units.
Payment in stock. Directors who elect to receive cash compensation amounts in the form of Common Stock are issued shares of Common Stock based on the fair market value of the Common Stock on the date on which the fees are scheduled to be paid.
Elective deferral program. For directors who elect deferred cash, the amount deferred is credited to an unfunded cash account that is credited with interest at an annual interest rate equal to Wells Fargo Bank, N.A.s prime lending rate in effect on January 1 of each year. Upon termination of service as a director, the amounts credited to the directors deferred cash account are paid out in five annual cash installments or in one lump sum cash payment, at the directors election. For directors who elect deferred stock units, the amount deferred is credited to an unfunded account in the form of units equivalent to the fair market value of the Common Stock on the date on which the fees are scheduled to be paid. When dividends are declared, additional deferred stock units are allocated to the directors deferred stock unit account in amounts equivalent to the dollar amount of Common Stock dividends paid by the Company divided by the fair market value of the Common Stock on the date the dividends are paid. Upon termination of service as a director, the amounts credited to the deferred stock unit account, which include any elective deferrals and the annual deferred stock unit grants described below, are paid out in shares of Common Stock in five annual installments or in one lump sum, at the directors election.
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Stock Awards
In addition to the cash compensation amounts described above, each non-employee director also receives an annual grant of deferred stock units valued at $100,000. Awards are made as of the last business day in the calendar year and represent payment for services provided during such calendar year. Directors who serve as non-employee board members for less than the full calendar year receive pro-rated awards based on the number of full fiscal quarters they served as a non-employee board member during the calendar year. As noted above, deferred stock units accrue dividend equivalents and a directors deferred stock unit account is paid out in Common Stock following the directors termination of service in the manner described above.
Stock Ownership Guidelines for Directors
The board of directors believes that the alignment of directors interests with those of stockholders is strengthened when board members are also stockholders. The board of directors therefore requires that each non-employee director, within three years of being first elected, own Common Stock or deferred stock units having a market value of at least two times their annual cash retainer. This program is designed to ensure that directors acquire a meaningful and significant ownership interest in the Company during their tenure on the board of directors. As of June 30, 2008, each non-employee director was in compliance with the guidelines.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return of the Common Stock for the last five fiscal years with the cumulative total return of the Standard & Poors 500 Stock Index and a composite index composed of the Standard & Poors Household Products Index and the Standard & Poors Housewares & Specialties Index (referred to below as the Peer Group) for a five-year period ending June 30, 2008. The composite index is weighted based on market capitalization as of the end of each quarter during each of the last five years. The graph lines merely connect the prices on the dates indicated and do not reflect fluctuations between those dates.
COMPARISON OF 5 YEAR
CUMULATIVE TOTAL RETURN* |
*$100 invested on 6/30/03 in stock and index and assuming reinvestment of dividends. |
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and SEC regulations require the Companys directors, certain officers and holders of more than 10% of the Companys Common Stock to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. The reporting directors, officers and 10% stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of copies of such reports received or written representations from its directors and officers, the Company believes that all Section 16(a) filing requirements applicable to its directors and officers were complied with during fiscal year 2008.
PROPOSAL NO. 2: |
RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
The Audit Committee of the board of directors has selected Ernst & Young LLP as the Companys independent registered public accounting firm for the fiscal year ending June 30, 2009. Ernst & Young LLP has been so engaged since February 15, 2003.
Vote Required and Board of Directors Recommendation
Ratification of the selection of Ernst & Young LLP by stockholders is not required by law. However, as a matter of policy, such selection is being submitted to the stockholders for ratification at the Annual Meeting (and it is the present intention of the board of directors to continue this policy). The Audit Committee and the board of directors recommend the ratification of the Audit Committees selection of Ernst & Young LLP as the Companys independent registered accounting firm for the fiscal year ending June 30, 2009.
The people designated in the enclosed proxy will vote your shares FOR ratification unless you include instructions to the contrary. If the stockholders fail to ratify the selection of this firm, the Audit Committee will reconsider the matter. The affirmative vote of a majority of the shares of Common Stock represented and entitled to vote at the Annual Meeting is required to ratify the selection of Ernst & Young LLP.
Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting to respond to appropriate questions and to make a statement should they desire to do so.
OTHER INFORMATION
Financial Statements and Form 10-K
The following portions of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2008, are attached as Appendix A to this proxy statement: Managements Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, Managements Report on Internal Control over Financial Reporting, Reports of Independent Registered Public Accounting Firm; Valuation and Qualifying Accounts and Reserves schedule; and Reconciliation of Economic Profit. The Companys Form 10-K has been filed with the SEC and a copy may be obtained, without charge, by calling Clorox Shareholder Direct at 888-CLX-NYSE (259-6973) toll-free, 24 hours a day, seven days a week, or by writing to the Secretary at the address shown on the top of the notice accompanying this proxy statement.
Director Communications
Stockholders and interested parties may direct communications to individual directors, including the Presiding Director, to a board committee, the independent directors as a group or to the board of directors as a whole, by addressing the communication to the named individual, to the committee, to the independent directors as a group or to the board of directors as a whole c/o The Clorox Company, Attention: Secretary, 1221 Broadway, Oakland, CA 94612-1888. The Secretary will review all communications so addressed and will forward to the addressee(s) all communications determined to bear substantively on the business, management or governance of the Company.
45
SOLICITATION OF PROXIES
The Company will bear the entire cost of this solicitation of proxies, including the preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional solicitation materials furnished to stockholders by the Company. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries, and custodians holding shares in their names that are beneficially owned by others so that they may forward the solicitation materials to such beneficial owners and the corresponding forwarding expenses will be reimbursed by the Company. The original solicitation of proxies by mail may be supplemented by solicitation by telephone and other means by directors, officers, and/or employees of the Company. No additional compensation will be paid to these individuals for any such services. Except as described above, the Company does not presently intend to solicit proxies other than by mail, by telephone and via the Internet.
STOCKHOLDER PROPOSALS FOR 2009 ANNUAL MEETING
In the event that a stockholder wishes to have a proposal considered for presentation at the 2009 Annual Meeting and included in the Companys proxy statement and form of proxy used in connection with such meeting, the proposal must be forwarded to the Companys Secretary so that it is received no later than June 6, 2009. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended.
Under the Companys Bylaws, if a stockholder, rather than including a proposal in the proxy statement as discussed above, seeks to propose business for consideration at that meeting, notice must be received by the Secretary at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the first anniversary of the preceding years Annual Meeting. To be timely for the 2009 Annual Meeting, the notice must be received by the Secretary between July 22, 2009 and August 21, 2009. However, in the event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made.
By Order of the Board of Directors | |
Angela C. Hilt | |
Vice President Corporate Secretary | |
& Assistant General Counsel | |
October 3, 2008 |
46
Appendix A
Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Consolidated Financial
Statements, Managements Report on Internal Control over Financial
Reporting
and Reports of Independent Registered Public Accounting
Firm
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Clorox
Company
(Dollars in millions, except
per share amounts)
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of the Companys financial statements with a narrative from the perspective of management on the Companys financial condition, results of operations, liquidity and certain other factors that may affect future results. The MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. This MD&A includes the following sections:
EXECUTIVE OVERVIEW
The Clorox Company (the Company or Clorox) is a leading manufacturer and marketer of consumer products with fiscal year 2008 net sales of $5,273. The Company sells it products primarily through mass merchandisers, grocery stores and other retail outlets. Clorox markets some of consumers most trusted and recognized brand names, including its namesake bleach and cleaning products, Green Works natural cleaners, Poett® and Mistolín® cleaning products, Armor All® and STP® auto-care products, Fresh Step® and Scoop Away® cat litter, Kingsford® charcoal, Hidden Valley® and KC Masterpiece® dressings and sauces, Brita® water-filtration systems, Glad® bags, wraps and containers, and Burts Bees® natural personal care products. With approximately 8,300 employees worldwide, the Company manufactures products in more than 15 countries and markets them in more than 100 countries.
The Company operates through two operating segments: North America and International. The North America operating segment includes all products marketed in the United States and Canada. The International operating segment includes all products marketed outside the United States and Canada. Historical segment financial information presented herein has been revised to reflect these two operating segments, which were adopted in the first quarter of fiscal year 2008. The Companys Corporate segment includes certain nonallocated administrative costs, amortization of trademarks and other intangible assets, interest income, interest expense, foreign exchange gains and losses, and other nonoperating income and expense.
The Company primarily markets its leading brands in midsized categories with attractive economic and competitive sets. Most of the Companys products compete with other nationally-advertised brands within each category and with private label brands.
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Strategic Initiatives
The Company has developed a strategy to guide it through its 100-year anniversary in 2013. As part of its Centennial Strategy, the Company has established two main objectives: 1) to maximize economic profit across its categories, customers and countries; and 2) be the best at building big-share brands in economically-attractive midsized categories.
The Company has established financial goals to measure its progress against the Centennial Strategy. These goals include 3%-5% annual sales growth, before acquisitions, and 50-75 basis points of improvement in earnings before interest and taxes (EBIT) margin. Additionally, the Company has plans to carefully manage the growth of its asset base. If these financial goals are achieved, the Company believes it can realize double-digit percentage economic profit growth (See Economic profit section below) and free cash flow (See Free cash flow section below) of 10% of net sales or more.
The Company plans to achieve these financial goals through its leading product portfolio and by leveraging its capabilities in the areas of the consumer, the customer and cost management. From a portfolio perspective, the Company plans to achieve accelerated growth both in and beyond its core categories. The Company is focused on creating value by investing in new and existing categories with profitable growth potential, particularly those categories aligned with global consumer trends in the areas of health and wellness, sustainability, convenience and a more multicultural marketplace. To accomplish this, the Company is focusing on growing existing brands, expanding into adjacent product categories, entering new sales channels, increasing distribution within existing countries and pursuing new businesses in growing markets where the Company can establish and sustain a competitive advantage.
The Company will continue to leverage and grow its capabilities in demand creation and strengthen consumer loyalty to its brands through its three strategic capabilities: Desire, Decide and Delight.
Desire is about integrated pre-purchase communications that increase consumers awareness about how the Companys brands meet their needs;
Decide is about winning at the store shelf, through superior packaging and execution of product assortment, merchandising, pricing and shelving; and
Delight is about continuing to offer high-quality, consumer-preferred products that exceed their expectations, so the consumers will continue to purchase the Companys products.
The Company will also continue to aggressively focus on pricing and cost management to offset the impact of rising commodity costs and enhance its margins.
Fiscal Year 2008 Summary
Financial Highlights
The Company reported net earnings for the year ended June 30, 2008, of $461 and diluted net earnings per share of $3.24 based on weighted average diluted shares outstanding of approximately 142 million. This compares to net earnings for the year ended June 30, 2007, of $501 and diluted net earnings per share of $3.26 based on weighted average diluted shares outstanding of approximately 154 million. Restructuring-related charges were $0.26 per diluted share for the year ended June 30, 2008, (See Restructuring and asset impairment costs section below) as compared with $0.10 per diluted share for the year ended June 30, 2007. Also included in the Companys results for the year ended June 30, 2008, were costs of $0.09 per diluted share related to the Companys acquisition of Burts Bee, Inc (See Investing Activities section below).
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The Company continues to face a challenging cost environment, largely driven by cost pressures across a large spectrum, including commodity costs, primarily resin and agricultural commodities, and increased energy-related manufacturing and logistics costs. The Company is addressing these challenges through price increases, on-going cost savings programs, focus on product mix and assortment, innovative product improvements and new products, and advertising and trade promotional spending to support and grow its brands.
Certain key fiscal year 2008 developments are summarized as follows:
RESULTS OF OPERATIONS
Managements discussion and analysis of the Companys results of operations, unless otherwise noted, compares fiscal year 2008 to fiscal year 2007, and fiscal year 2007 to fiscal year 2006, using percent changes calculated on a rounded basis, except as noted. In certain instances, parenthetical references are made to relevant sections of the Notes to Consolidated Financial Statements to direct the reader to a further detailed discussion. In addition, the discussion of results of worldwide operations includes certain measures not defined by accounting principles generally accepted in the United States of America (non-GAAP measures), including gross profit as a percentage of net sales excluding certain changes, economic profit and free cash flow as a percentage of net sales. Management believes these measures provide investors with additional information about the underlying results and trends of the Company. Information about these non-GAAP measures is set forth in the paragraphs where they are discussed.
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CONSOLIDATED RESULTS
FINANCIAL PERFORMANCE MEASURES
Net Sales |
Net sales in fiscal year 2008 increased 9% compared to the prior period. Volume grew 6%, primarily due to the acquisition of BBI, higher shipments of bleach and dilutable cleaners in Latin America, record shipments of Fresh Step® scoopable cat litter, the launch of Green Works natural cleaners, strong results in Brita®, and higher shipments of Clorox® disinfecting wipes and Hidden Valley® salad dressings. Partially offsetting these increases were reduced shipments in the North America segment, of Glad® and Clorox® liquid bleach. Sales growth outpaced volume growth primarily due to the benefit of favorable foreign exchange rates and price increases.
Net sales in fiscal year 2007 increased 4% compared to the prior period. Volume grew 2%, primarily due to increased shipments of home-care products, cat litter and the acquisition of bleach businesses in Canada and Latin America in December 2006 and February 2007, respectively. Contributing to the volume growth in fiscal year 2007 were increased shipments of Fresh Step® scoopable cat litter with odor eliminating carbon, Clorox® disinfecting wipes, the launch of Clorox® disinfecting cleaner and increased shipments of Clorox® toilet-bowl cleaner, due to a product improvement. These were partially offset by lower shipments of Clorox 2® color-safe bleach primarily due to the impact of aggressive competitive activity, and Glad® products, which were impacted by higher pricing, and aggressive competitive activity in the trash bags category. Sales growth outpaced volume growth, primarily due to the impact of price increases, partially offset by increased trade-promotion spending.
Gross Profit (% of net
sales) |
Gross profit increased 4% in fiscal year 2008, and decreased as a percentage of net sales to 41.2% in fiscal year 2008 from 43.1% in fiscal year 2007. Gross profit as a percentage of net sales was 42.1%, excluding the impact of $19 resulting from the step-up in inventory values associated with the purchase accounting for BBI and incremental charges of $23 related to the Companys Supply Chain and Other restructuring initiatives. The decline as a percentage of net sales was largely due to increased commodity costs, primarily resin and agricultural commodities, and higher energy-related manufacturing and logistics costs, including the cost of diesel fuel. Also contributing to the decrease was increased trade promotion spending to address competitive activities. These increases were partially offset by cost savings and price increases.
Gross profit increased 7% in fiscal year 2007, and increased as a percentage of net sales to 43.1% in fiscal year 2007 from 42.2% in fiscal year 2006. The increase was primarily due to the benefit of cost savings and price increases. These factors were partially offset by increased commodity, higher manufacturing and logistics costs and increased trade-promotion spending.
A-4
Diluted net earnings per share
from continuing operations |
Diluted net earnings per share from continuing operations increased by $0.01 in fiscal year 2008. This slight increase was primarily driven by a decrease in shares outstanding during fiscal year 2008 due to the Companys repurchase of 14 million of its shares (See Share Repurchases and Dividend Payments section below), partially offset by lower net earnings. The decrease in net earnings was primarily attributable to increased commodity costs, manufacturing and logistics costs, increased interest expense due to an increase in borrowings used to finance the BBI acquisition and ASR, and increased restructuring and asset impairment charges (See Restructuring and asset impairment costs section below). These increases were partially offset by volume growth, cost savings, and the benefit of favorable foreign exchange rates.
Diluted net earnings per share from
continuing operations increased by $0.34 or 12% in fiscal year 2007. The
increase was due to higher earnings from continuing operations driven by higher
sales and cost savings.
Economic Profit |
Economic Profit (EP) is a non-GAAP measure used by the Companys management to evaluate business performance and is considered in determining managements incentive compensation and the Companys contribution to employee profit sharing plans (for a detailed reconciliation of EP to earnings from continuing operations before income taxes of $693, the most comparable GAAP financial measure, refer to Exhibit 99.3). EP is defined by the Company as earnings from continuing operations before income taxes, non-cash restructuring and asset impairment costs and interest expense; tax effected, and less a capital charge. The capital charge represents average capital employed by the Company, as defined, multiplied by the weighted-average cost of capital. Weighted-average cost of capital is the blended average of the cost of the Companys debt and equity capital. Average capital employed represents a two-point average of adjusted capital employed for the current year and total capital employed for the prior year, based on year-end balances. Adjusted capital employed represents total capital employed adjusted to add back the current fiscal years non-cash restructuring and asset impairment costs. Total capital employed represents total assets less non-interest bearing liabilities. EP decreased by 4.2% during fiscal year 2008 primarily due to the dilutive near-term effect of the acquisition of BBI. EP increased by 8.9% during fiscal year 2007 primarily due to higher earnings from continuing operations before income taxes, largely due to volume growth and cost savings; and relatively flat average capital employed.
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Free cash flow is a non-GAAP measure used by the Companys management to help assess funds available for investing activities, such as acquisitions, investing in the business to drive growth, and financing activities, including debt payments, dividend payments and share repurchases. Free cash flow is calculated as cash provided by operations less capital expenditures. Free cash flow does not represent cash available only for discretionary expenditures, since the Company has mandatory debt service requirements and other contractual and non-discretionary expenditures.
2008 | 2007 | 2006 | |||||||||
Cash provided by operations | $ | 730 | $ | 709 | $ | 522 | |||||
Less: capital expenditures | (170 | ) | (147 | ) | (180 | ) | |||||
Free cash flow | $ | 560 | $ | 562 | $ | 342 | |||||
Free cash flow as a percentage of net sales | 10.6 | % | 11.6 | % | 7.4 | % |
Free cash flow as a percentage of net sales decreased to 10.6% in fiscal year 2008 from 11.6% in fiscal year 2007, primarily due to the timing of tax payments and higher capital expenditures partially offset by improvements in working capital. Free cash flow as a percentage of net sales increased to 11.6% in fiscal year 2007 from 7.4% in fiscal year 2006, primarily due to a $151 income tax settlement payment in fiscal year 2006, and lower capital expenditures in 2007.
Expenses
Change | % of Net Sales | ||||||||||||||||||||||
2008 | 2007 | ||||||||||||||||||||||
to | to | ||||||||||||||||||||||
2008 | 2007 | 2006 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||
Selling and administrative expenses | $ | 690 | $ | 642 | $ | 631 | 7 | % | 2 | % | 13.1 | % | 13.2 | % | 13.6 |
% | |||||||
Advertising costs | 486 | 474 | 450 | 3 | 5 | 9.2 | 9.8 | 9.7 | |||||||||||||||
Research and development costs | 111 | 108 | 99 | 3 | 9 | 2.1 | 2.2 | 2.1 |
Selling and administrative expenses increased 7% in fiscal year 2008 primarily driven by the BBI and bleach business acquisitions, increased selling costs to drive growth in the grocery channel, the impact of inflationary pressure in Latin America, and increased sales commissions.
Selling and administrative expenses increased 2% in fiscal year 2007 primarily due to transition fees related to the Companys Information Technology Services (ITS) Agreement (See Restructuring and asset impairment costs section below), higher sales commissions, the second year impact of adopting Statement of Financial Accounting Standards No. 123-R, Share Based Payment, and incremental costs to support the Companys new Centennial strategy. These increases were partially offset by the fiscal year 2006 pretax charges of $25 associated with non-cash historical stock option compensation expense related to prior periods and $11 related to the retirement of the former chairman and CEO from his positions.
Advertising costs increased 3% in fiscal year 2008 as the Company continued to support its established brands and new products, including Green Works natural cleaners and BBI.
Advertising costs increased 5% in fiscal year 2007 as a result of higher spending due to advertising for Fresh Step® scoopable cat litter with odor eliminating carbon, which was launched in the third quarter of fiscal year 2006, new home-care product launches and growth initiatives in Canada and Latin America.
Research and development costs increased 3% in fiscal year 2008 as the Company continued to support product innovations.
Research and development costs increased 9% in fiscal year 2007 as a result of increased headcount and investment in innovation.
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Restructuring and asset impairment costs, interest expense, other income, net and effective tax rate on continuing operations
2008 | 2007 | 2006 | |||||||||
Restructuring and asset impairment costs | $ | 36 | $ | 13 | $ | 1 | |||||
Interest expense | 168 | 113 | 127 | ||||||||
Other income, net | (9 | ) | (2 | ) | (2 | ) | |||||
Income taxes on continuing operations | 232 | 247 | 210 |
Restructuring and asset impairment costs of $36 in fiscal year 2008 related to the Companys Supply Chain and Other restructuring initiatives. Total restructuring and asset impairment charges, including cost of products sold, were $59 in fiscal year 2008, of which approximately $48 was non-cash. The Supply Chain restructuring involves closing certain domestic and international manufacturing facilities. The Company anticipates redistributing production from these facilities between the remaining facilities and third-party producers to optimize available capacity and reduce operating costs. As a result of this initiative, a number of positions are being eliminated. The Company anticipates the Supply Chain restructuring will be completed in fiscal year 2012. The projected annual cost savings at the completion of this restructuring is expected to be approximately $22 to $24. The Other restructuring charges relate primarily to the write-down of certain new venture investments, intangible assets and equipment and the cost of exiting the Companys private label food bags business.
The following table summarizes, by segment, the costs associated with the Companys Supply Chain and Other restructuring initiatives for fiscal year 2008:
North | |||||||||||
America | International | Corporate | Total | ||||||||
Cost of products sold | $ | 19 | $ | 3 | $ | 1 | $ | 23 | |||
Restructuring and asset impairment: | |||||||||||
Severance | 3 | 2 | 2 | 7 | |||||||
Asset impairment | 25 | 4 | | 29 | |||||||
Total restructuring and asset impairment costs | 28 | 6 | 2 | 36 | |||||||
Total costs | $ | 47 | $ | 9 | $ | 3 | $ | 59 |
The Company anticipates approximately $20 to $25 of Supply Chain and Other restructuring-related charges, of which approximately $7 are non-cash, to be incurred in fiscal year 2009. The Company anticipates approximately $19 to $22 of the fiscal year 2009 charges to be in the North America segment, of which approximately $16 to $18 are estimated to be recognized as cost of products sold charges (primarily accelerated depreciation for manufacturing equipment and other costs associated with the Supply Chain initiative) and the remainder to be severance charges. The remaining estimated charges will be spread across the International segment and the Corporate segment, and are expected to be classified as cost of products sold and severance. The total anticipated charges for the Supply Chain and Other restructuring initiatives, for the fiscal years 2010 through 2012 are estimated to be approximately $10. The Company may, from time to time, decide to pursue additional restructuring related initiatives and therefore may incur restructuring, asset impairment, severance and related charges in the future. Total restructuring payments through June 30, 2008, were $2 and the total accrued restructuring liability as of June 30, 2008, was $5 (See Note 4).
Restructuring and asset impairment costs of $13 in fiscal year 2007 included $9 of restructuring costs associated with the ITS agreement, described below, which are included as part of the Companys Corporate segment, and $4 of asset impairment costs, which are included as part of the North America segment.
During fiscal year 2007, the Company entered into the ITS agreement and restructured certain Information Services (IS) activities. The Company incurred administrative expenses and restructuring costs of approximately $23 during its fiscal year ending June 30, 2007, primarily associated with transition and severance costs, which are included as part of the Companys Corporate segment. In
A-7
fiscal year 2007, transition costs of $14 were recorded in administrative expense and severance and other related costs of $9 were recorded as restructuring costs. Total restructuring payments through June 30, 2007, were $9 and the total accrued restructuring liability as of June 30, 2007, was zero.
Interest expense increased $55 in fiscal year 2008, primarily due to an increase in borrowings used to finance the BBI acquisition and ASR (See Financing Activities section below), partially offset by lower interest rates. Interest expense decreased $14 in fiscal year 2007, driven primarily by lower debt levels as a result of a decrease in average borrowings and a $150 debt repayment in the third quarter of fiscal year 2007. These were partially offset by higher interest rates.
Other income, net of $9 in fiscal year 2008 included interest income of $12 and equity earnings in unconsolidated affiliates of $8. Partially offsetting this income were operating expenses from the Companys investment in low-income housing partnerships and other investment losses of $7, amortization of intangible assets of $7 and net foreign exchange transaction losses of $2.
Other income, net of $2 in fiscal year 2007 included interest income of $8 and equity earnings of $8. Partially offsetting this income were amortization of intangible assets of $5, foreign exchange losses of $4 and operating expenses from the Companys investment in low-income housing partnerships of $4.
Other income, net of $2 in fiscal year 2006 included interest income of $10 and equity earnings of $7. Partially offsetting this income were operating expenses of $15 from the Companys investment in low-income housing partnerships.
The effective tax rate on continuing operations was 33.6%, 33.2% and 32.1% in fiscal years 2008, 2007 and 2006, respectively. The fiscal year 2008 tax rate was slightly higher than in fiscal year 2007 due to higher uncertain tax position accruals in fiscal year 2008, partially offset by a decrease in net valuation allowances and the statutory phase-in of increased rates for the domestic manufacturing deduction.
The fiscal year 2007 tax rate was higher than in fiscal year 2006 primarily due to tax benefits recognized on foreign earnings repatriated in fiscal year 2006, offset partially by lower net tax contingency accruals in fiscal year 2007, primarily as a result of the settlement of federal tax issues for the fiscal years 1997 to 2000.
Earnings from discontinued operations
2007 | 2006 | ||||
Earnings from discontinued operations | $ | 5 | $ | 1 | |
Diluted earnings per share from discontinued operations | $ | 0.03 | $ | 0.01 |
Diluted earnings per share from discontinued operations in fiscal year 2007 represents an income tax benefit of $5 related to the sale of certain assets remaining from the Companys discontinued operations in Brazil (See Note 3). Diluted earnings per share from discontinued operations in fiscal year 2006 represents the final receipt of revenues from the interim production of insecticides and Soft Scrub® following the Henkel share exchange (See Note 3).
Segment Results
NORTH AMERICA
Change | ||||||||||||||
2008 | 2007 | |||||||||||||
to | to | |||||||||||||
2008 | 2007 | 2006 | 2007 | 2006 | ||||||||||
Net sales | $ | 4,440 | $ | 4,130 | $ | 4,005 | 8 | % | 3 | % | ||||
Earnings from continuing operations before income taxes | 1,211 | 1,205 | 1,131 | | 7 |
A-8
Fiscal year 2008 versus fiscal year 2007: Volume, net sales and earnings from continuing operations before income taxes increased during fiscal year 2008. Volume growth of 5% was primarily driven by the acquisition of BBI, increased shipments of home-care products primarily due to the launch of the Green Works line of natural cleaners and increased shipments of Clorox® disinfecting wipes. Also contributing to the increase was continued growth in cat litter, primarily related to Fresh Step® scoopable cat litter, and higher category consumption of Brita® driven by the overall sustainability trend in the marketplace. These were partially offset by lower shipments of Glad® products primarily driven by category decline, the Companys exit from a private-label food bag business and lower shipments of laundry products, primarily Clorox® liquid bleach. Net sales growth outpaced volume growth primarily due to the favorable impact of Canadian exchange rates and price increases. Growth in earnings from continuing operations before income taxes was primarily driven by higher sales and cost savings offset by restructuring and asset impairment costs of $47, a $19 step-up in inventory values associated with purchase accounting for BBI, and substantial unfavorable commodity costs.
Fiscal year 2007 versus fiscal year 2006: Volume, net sales and earnings from continuing operations before income taxes increased during fiscal year 2007. Volume growth of 1% was driven primarily by increased shipments of Fresh Step® scoopable cat litter, due to a significant product improvement, the bleach business acquisition in Canada in the second quarter of fiscal year 2007 and increased shipments of home-care products primarily due to strong shipments of Clorox® disinfecting wipes, the launch of Clorox® disinfecting cleaner and increased shipments of Clorox® toilet-bowl cleaner. These increases were partially offset by lower shipments of Clorox 2® color-safe bleach primarily due to the impact of competitive activity. Net sales growth outpaced volume growth primarily due to the impact of price increases, partially offset by increased trade-promotion spending in response to competitive activity. Growth in earnings from continuing operations before income taxes was primarily driven by increased net sales and the benefits of cost savings, partially offset by increased commodity, logistics and advertising costs.
INTERNATIONAL
Change | ||||||||||||||
2008 | 2007 | |||||||||||||
to | to | |||||||||||||
2008 | 2007 | 2006 | 2007 | 2006 | ||||||||||
Net sales | $ | 833 | $ | 717 | $ | 639 | 16 | % | 12 |
% | ||||
Earnings from continuing operations before income taxes | 146 | 141 | 129 | 4 | 9 |
Fiscal year 2008 versus fiscal year 2007: Volume, net sales and earnings from operations before income taxes increased during fiscal year 2008. Volume growth of 7% was driven by increased shipments of bleach and dilutable cleaners in Latin America, primarily due to category growth and the bleach acquisition in the third quarter of fiscal year 2007. The variance between net sales and volume growth was primarily driven by pricing and favorable foreign exchange rates. Growth in earnings from continuing operations before income taxes reflects the benefit of price increases, the impact of foreign exchange rates and increases in net sales, partially offset by increased commodity costs, manufacturing and logistic costs, and charges related to restructuring and asset impairment, primarily in Latin America.
Fiscal year 2007 versus fiscal year 2006: Volume, net sales and earnings from continuing operations before income taxes increased during fiscal year 2007. Volume growth of 9% was driven by increased shipments of home-care products in Latin America, primarily due to category growth and the acquired bleach businesses in certain Latin American countries in the third quarter of fiscal year 2007. The variance between net sales and volume growth was primarily driven by pricing and favorable foreign exchange rates. Growth in earnings from continuing operations before income taxes reflects the benefit of higher net sales and costs savings, partially offset by the impact of increased selling and administrative costs and higher raw material costs.
A-9
CORPORATE
Change | |||||||||||||||||
2008 | 2007 | ||||||||||||||||
to | to | ||||||||||||||||
2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||
Losses from continuing operations before income taxes | $ | (664 | ) | $ | (603 | ) | $ | (607 | ) | 10 | % | (1 | )% |
Fiscal year 2008 versus fiscal year 2007: The losses from continuing operations before income taxes attributable to Corporate increased by $61, or 10%, in fiscal year 2008, primarily due to increased interest expense as a result of higher average borrowings to finance the Companys ASR agreement and the BBI acquisition.
Fiscal year 2007 versus fiscal year 2006: The losses from continuing operations before income taxes attributable to Corporate decreased by $4, or 1%, primarily due to pretax charges in the prior year of $25 associated with non-cash historical stock option compensation expense related to prior periods and $11 related to the retirement of the former chairman and CEO from his positions. Also contributing to the decrease were lower interest costs, due to a $150 debt repayment in the third quarter of fiscal year 2007, lower commercial paper borrowings due to strong operating cash flows, and lower operating expenses from low-income housing investments. These decreases were partially offset by costs related to the Companys ITS Agreement, incremental costs to support the Companys Centennial strategy, increased foreign exchange losses and other smaller items.
FINANCIAL POSITION AND LIQUIDITY
Managements discussion and analysis of the financial position and liquidity describes the Companys consolidated operating, investing and financing activities, contractual obligations and off balance sheet arrangements. In certain instances, parenthetical references are made to relevant sections of the Notes to Consolidated Financial Statements to direct the reader to a further detailed discussion.
The Companys financial position and liquidity remained strong during fiscal year 2008, due to the continued strength of operating cash flows. During fiscal year 2008, the Company remained disciplined in its capital spending and used its strong cash flows and access to the credit markets to purchase BBI, increase dividend payments and repurchase shares.
The following table summarizes cash activities:
2008 | 2007 | 2006 | |||||||||
Cash provided by continuing operations | $ | 730 | $ | 709 | $ | 514 | |||||
Cash used for investing activities | (1,082 | ) | (268 | ) | (161 | ) | |||||
Cash provided by (used for) financing activities | 380 | (456 | ) | (462 | ) |
The Companys cash position includes amounts held by foreign subsidiaries, and the repatriation of those cash balances from some of the Companys subsidiaries could result in additional tax costs. However, these cash balances are generally available without legal restriction to fund local business operations. The Companys cash holdings for fiscal years 2008 and 2007 were as follows:
2008 | 2007 | ||||
Cash held in foreign accounts in foreign currencies | $ | 100 | $ | 73 | |
Cash held in foreign accounts in U.S. Dollars | 69 | 96 | |||
Cash held in domestic accounts in U.S. Dollars | 45 | 13 | |||
Total | $ | 214 | $ | 182 |
During fiscal years 2008, 2007 and 2006, the Company repatriated approximately $164, $30 and $265, respectively, of cash previously held in foreign entities. Of the fiscal year 2006 repatriated cash, $111 represented dividends paid under the terms of the American Jobs Creation Act that the Company used for reinvestment in certain qualified activities.
A-10
Operating Activities
Net cash provided by continuing operations increased to $730 in fiscal year 2008 from $709 in fiscal year 2007. The year over year increase was primarily due to the cash impact of changes in working capital, partially offset by the timing of tax payments in the fourth quarter of fiscal year 2008.
In June 2008, the Company reached agreement with the IRS resolving tax issues originally arising in the periods 2001 and 2002. As a result of the settlement agreement, the Company paid $72 in federal taxes and interest for the years 2001 and 2002 in the fourth quarter of fiscal year 2008. The Company had previously provided for these uncertain tax positions. The Company paid $11 in federal taxes and interest for the years 1997 through 2000 in the fourth quarter of fiscal year 2007.
Net cash provided by continuing operations increased to $709 in fiscal year 2007 from $514 in fiscal year 2006. The year-over-year increase was primarily due to a $151 income tax settlement payment, as described below, in the first quarter of fiscal year 2006.
In April 2005, the Company reached a settlement agreement with the IRS which resulted in federal and state tax and interest payments of $151 in the first quarter of fiscal year 2006. The Company had previously accrued for these contingencies.
Investing Activities
Capital expenditures were $170, $147 and $180, respectively, in fiscal years 2008, 2007 and 2006. Capital spending as a percentage of net sales was 3.2%, 3.0% and 3.9% for fiscal years 2008, 2007 and 2006, respectively. Capital expenditures are in line with the Companys long-term target of 4% or less of net sales. Higher capital spending during fiscal year 2008 was driven primarily by the Companys manufacturing network consolidation efforts. Lower capital spending during fiscal year 2007 was driven primarily by lower spending on information technology projects compared to fiscal year 2006.
During fiscal year 2008, the Company acquired BBI, a leading manufacturer and marketer of natural personal care products, for an aggregate price of $913, excluding $25 that the Company paid for tax benefits associated with the acquisition. The Company also incurred $8 of costs in connection with the acquisition of BBI. Assets, acquired at fair value, included cash of $33, inventory of $45, other current assets of $24, property, plant and equipment of $16, goodwill of $613, trademarks of $322, other intangibles of $52 and other assets of $1. Liabilities assumed, at fair value, included accounts payable and accrued liabilities of $52, deferred taxes of $138 and other liabilities of $3. The other intangibles will be amortized over a weighted-average estimated useful life of 16 years. Changes to the fair values of the assets acquired and liabilities assumed may be recorded in future periods as the Company finalizes its estimates of fair value.
The Company purchased bleach businesses in Canada, effective December 29, 2006, and in certain Latin American countries, effective February 28, 2007, for an aggregate price of $123, with the objective of expanding its global bleach business. The transactions were structured as all cash acquisitions and operating results of the acquired businesses are included in the consolidated net earnings of the North America and International operating segments from their respective dates of acquisition.
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Financing Activities
Capital Resources and Liquidity
In March 2008, the Company issued $500 of debt in fixed rate notes at 5.00% due in March 2013 with an effective rate of 5.18%. Interest is payable semi-annually in March and September. Proceeds from the notes were used to partially retire commercial paper used to finance the acquisition of BBI.
In December 2007, the Company repaid $500 of debt which became due. The payment was financed through commercial paper issuances.
In October 2007, the Company issued $750 of debt in fixed rate notes, including $350 of notes at 5.45%, which are due in October 2012 with an effective rate of 5.66%, and $400 of notes at 5.95%, that are due in October 2017 with an effective rate of 6.09%. Interest is payable semi-annually in April and October. Proceeds from the notes were used to partially retire commercial paper used to finance the ASR.
In March 2007, the Company paid off $150 of term debt that became due. The payment was financed through operating cash flows.
The Company was in compliance with all restrictive covenants and limitations as of June 30, 2008 and 2007, and had the following credit ratings at June 30:
2008 | 2007 | ||||||
Short-Term | Long-Term | Short-Term | Long-Term | ||||
Standard and Poors | A-2 | BBB+ | A-2 | A- | |||
Moodys | P-2 | Baa2 | P-2 | A3 |
In August 2007 Standard & Poors revised the Companys long-term credit rating to BBB+ after the Company announced its intent to repurchase shares in an aggregate amount of up to $750. Moodys revised the Companys long-term credit rating to Baa1 in September 2007 as a result of the share repurchase announcement. In January 2008, after the Companys acquisition of BBI (See Investing Activities section above), Moodys revised the Companys long-term credit rating to Baa2. The short-term credit rating remained unchanged.
The Companys credit facilities as of June 30 were as follows:
2008 | 2007 | ||||
Revolving credit line | $ | 1,200 | $ | 1,300 | |
Foreign and other credit lines | 48 | 95 | |||
Total | $ | 1,248 | $ | 1,395 |
During fiscal year 2008, the $1,300 in revolving credit agreements were cancelled and replaced by a $1,200 revolving credit agreement, which expires in April 2013, and is available for general corporate purposes and to support commercial paper issuances. As of June 30, 2008, there were no borrowings under the $1,200 revolving credit agreement. The $1,200 revolving credit agreement includes certain restrictive covenants. The Company was in compliance with all restrictive covenants and limitations at June 30, 2008. In addition, at June 30, 2008, the Company had $48 in foreign working capital credit lines and other facilities, of which $25 was available for borrowing.
Based on the Companys working capital requirements, the current borrowing availability under its credit agreements, its credit ratings, and its anticipated ability to generate positive cash flows from operations in the future, the Company believes it will have the funds necessary to meet all of its financing requirements and other fixed obligations as they become due. Should the Company
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undertake transactions requiring funds in excess of its current cash levels and available credit lines, it might consider the issuance of debt or other securities to finance acquisitions, to repurchase shares, to refinance debt or to fund other activities for general business purposes.
Share Repurchases and Dividend Payments
The Company has two share repurchase programs: an open-market purchase program, which had, as of June 30, 2008, a total authorization of $750, and a program to offset the impact of share dilution related to share-based awards (evergreen program), which has no authorization limit as to amount or timing of repurchases.
The open-market purchase program was approved by the Companys Board of Directors in May 2008 after the share repurchase open-market program approved in May 2007 was fully utilized by the ASR described below. The open-market purchase program approved in May 2007 replaced the July 2002 and July 2003 share repurchase open-market programs.
On August 10, 2007, the Company entered into an ASR agreement with two investment banks. Under the ASR agreement, the Company repurchased $750 of its shares of common stock from the investment banks for an initial per share amount of $59.59, subject to adjustment. The banks delivered an initial amount of 10.9 million shares to the Company on August 15, 2007. Under the terms of the ASR agreement, the final number of shares the Company repurchased and the timing of the final settlement depended on prevailing market conditions, the final discounted volume weighted average share price over the term of the ASR agreement and other customary adjustments. The final purchase price adjustment was settled on January 17 and 23, 2008, resulting in the receipt of an additional 1.1 million shares by the Company. The final settlement under the ASR agreement did not require the Company to make any additional cash or share payments. Upon final settlement, the average per share amount paid for all shares purchased under the ASR agreement was $62.08. The total number of shares received under the ASR agreement reduced the weighted number of common shares outstanding during the fiscal year 2008 by 10 million shares.
No shares were repurchased under the open-market programs in fiscal year 2007. Share repurchases under the evergreen program were $118 (2 million shares) in fiscal year 2008 and $155 (2.4 million shares) in fiscal year 2007. As of June 30, 2008, the Company is not planning to repurchase any shares in fiscal year 2009 to offset the impact of share dilution related to share-based awards.
On May 13, 2008, the Company announced an increase in the quarterly dividend rate from $0.40 per share to $0.46 per share. Dividends paid in fiscal year 2008 were $228 or $1.60 per share.
Contractual Obligations
The Company had contractual obligations payable or maturing in the following fiscal years:
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | ||||||||||||||
At June 30, 2008 | ||||||||||||||||||||
Notes and loans payable (3) | $ | 755 | $ | | $ | | $ | | $ | | $ | | $ | 755 | ||||||
Purchase obligations (See Note 18) | 222 | 73 | 40 | 22 | 15 | 16 | 388 | |||||||||||||
Long-term debt maturities including interest payments | 140 | 705 | 413 | 104 | 925 | 1,121 | 3,408 | |||||||||||||
ITS Agreement (service agreement only) (1) | 40 | 37 | 33 | 31 | 29 | 8 | 178 | |||||||||||||
Operating leases | 31 | 30 | 25 | 21 | 18 | 30 | 155 | |||||||||||||
Contributions to non-qualified supplemental post retirement | ||||||||||||||||||||
plans (2) | 13 | 13 | 13 | 14 | 16 | 75 | 144 | |||||||||||||
Terminal obligation pursuant to Venture Agreement (See | ||||||||||||||||||||
Note 13) | | | | | | 301 | 301 | |||||||||||||
Other | 1 | | | | | | 1 | |||||||||||||
Total contractual obligations | $ | 1,202 | $ | 858 | $ | 524 | $ | 192 | $ | 1,003 | $ | 1,551 | $ | 5,330 |
(1) |
In October 2006, the Company entered into an ITS Agreement with HP, a third-party service provider. Upon the terms and subject to the conditions set forth in the ITS Agreement, HP is providing certain information technology and related services. The services began in March 2007 and will continue through October 2013. The total minimum contractual obligations at |
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June 30, 2008, are $192, of which $14 are included in operating leases. The minimum contractual obligations are based on an annual service fee that will be adjusted periodically based upon updates to services and equipment provided. Included in the ITS Agreement are certain acceleration payment clauses if the Company terminates the contract without cause. | ||
(2) |
Represents expected payments through 2018. Based on the accounting rules for retirement and postretirement benefit plans, the liabilities reflected in the Companys Consolidated Balance Sheets differ from these expected future payments (See Note 21). | |
(3) |
The weighted-average interest rate on notes and loans payable was 2.95% at June 30, 2008. |
At June 30, 2008, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $103 pursuant to FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxesan Interpretation of Financial Accounting Standards Board Statement No. 109. In the twelve months succeeding June 30, 2008, audit resolutions could potentially reduce total unrecognized tax benefits by up to $28, primarily as a result of cash payments. Since the ultimate amount and timing of further cash settlements cannot be predicted with reasonable certainty, liabilities for uncertain tax positions are excluded from the contractual obligation table (See Note 20).
Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. These obligations are related primarily to advertising and inventory purchases. For purchase obligations subject to variable price and/or quantity provisions, an estimate of the price and/ or quantity has been made. Examples of the Companys purchase obligations include commitments for information technology and related services, advertising, raw materials, and contract packing materials, utility agreements, capital expenditure agreements, software acquisition and license commitments and service contracts.
Off Balance Sheet Arrangements
In conjunction with divestitures and other transactions, the Company may provide indemnifications relating to the enforceability of trademarks; pre-existing legal, tax, environmental and employee liabilities; as well as provisions for product returns and other items. The Company has indemnification agreements in effect that specify a maximum possible indemnification exposure. As of June 30, 2008, the Companys aggregate maximum exposure from these agreements is $291, which consists primarily of an indemnity of up to $250 made to Henkel in connection with the Share Exchange Agreement, subject to a minimum threshold of $12 before any payments would be made. As of June 30, 2008, the Company had not made, nor does it anticipate making, any payments relating to the indemnities contained in the Share Exchange Agreement. The general representations and warranties made by the Company in connection with the Henkel Share Exchange Agreement were made to guarantee statements of fact at the time of the transaction closing and pertain to environmental, legal and other matters.
In addition to the indemnifications related to the general representations and warranties, the Company entered into an agreement with Henkel regarding certain tax matters. The Company and Henkel agreed to be responsible for each others taxes on the transaction if their respective actions result in a breach of certain tax representations and warranties in a manner that causes the share-exchange to fail to qualify for tax-free treatment. The Company is unable to estimate the amount of maximum potential liability relating to the tax indemnification but notes that the tax exposure, if any, could be very significant. Any exposure under the agreement would be limited to taxes assessed prior to the expiration of the statute of limitations period for assessing taxes on the share exchange transaction.
During the first quarter of fiscal year 2008, the Company entered into an agreement with the IRS, agreeing to the tax-free treatment of the share exchange transaction. Henkel has advised the Company that the IRS has completed its audit of Henkels U.S. groups federal income tax return for the year in which the share exchange transaction took place and did not propose any adjustments to Henkels tax-free treatment of the share exchange transaction. Thus, while the statutes of limitations permitting IRS assessment of tax against the Company and Henkel with respect to the share exchange transaction remain open, it appears likely that the tax-free treatment of the exchange transaction will be sustained.
The Company is a party to letters of credit of $21, primarily related to one of its insurance carriers.
The Company has not recorded any liabilities on any of the aforementioned guarantees at June 30, 2008.
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CONTINGENCIES
The Company is involved in certain environmental matters, including Superfund and other response actions at various locations. The Company has a recorded liability of $20 and $23 at June 30, 2008 and 2007, respectively, for its share of the related aggregate future remediation cost. One matter in Dickinson County, Michigan, for which the Company is jointly and severally liable, accounts for a substantial majority of the recorded liability at both June 30, 2008 and 2007. The Company is subject to a cost-sharing arrangement with another party for this matter, under which the Company has agreed to be liable for 24.3% of the aggregate remediation and associated costs, other than legal fees, as the Company and the other party are each responsible for their own such fees. The other party in this matter reported substantial net losses for the full calendar year 2007 and the first half of calendar year 2008 and indicated that it expects substantial net losses for the remainder of calendar year 2008. If the other party with whom the Company shares joint and several liability is unable to pay its share of the response and remediation obligations, the Company would likely be responsible for such obligations. In October 2004, the Company and the other party agreed to a consent judgment with the Michigan Department of Environmental Quality, which sets forth certain remediation goals and monitoring activities. Based on the current status of this matter, and with the assistance of environmental consultants, the Company maintains an undiscounted liability representing its best estimate of its share of costs associated with the capital expenditures, maintenance and other costs to be incurred over an estimated 30-year remediation period. The most significant components of the liability relate to the estimated costs associated with the remediation of groundwater contamination and excess levels of subterranean methane deposits. The Company made payments of less than $1 in fiscal years 2008 and 2007, respectively, towards remediation efforts. Currently, the Company cannot accurately predict the timing of the payments that will likely be made under this estimated obligation. In addition, the Companys estimated loss exposure is sensitive to a variety of uncertain factors, including the efficacy of remediation efforts, changes in remediation requirements and the timing, varying costs and alternative clean-up technologies that may become available in the future. Although it is possible that the Companys exposure may exceed the amount recorded, any amount of such additional exposures, or range of exposures, is not estimable at this time.
The Company is subject to various other lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Companys consolidated financial statements taken as a whole.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a multinational company, the Company is exposed to the impact of foreign currency fluctuations, changes in commodity prices, interest-rate risk and other types of market risk. In the normal course of business, the Company manages its exposure to market risk using contractual agreements and a variety of derivative instruments. The Companys objective in managing its exposure to market risk is to limit the impact of fluctuations on earnings and cash flow through the use of swaps, forward purchases, options and futures contracts. Derivative contracts are entered into for nontrading purposes with major credit-worthy institutions, thereby decreasing the risk of credit loss.
Sensitivity Analysis
For fiscal year 2008, the Companys exposure to market risk was estimated using sensitivity analyses, which illustrate the change in the fair value of a derivative financial instrument assuming hypothetical changes in foreign exchange rates, market rates or prices. The results of the sensitivity analyses for foreign-currency derivative contracts, commodity derivative contracts and interest rates are summarized below. Actual changes in foreign-exchange rates or market prices may differ from the hypothetical changes, and any changes in the fair value of the contracts, real or hypothetical, would be partly to fully offset by an inverse change in the value of the underlying hedged items.
The Company periodically assesses and takes action to mitigate its exposure to interest-rate risk. As of June 30, 2008, the Company had no outstanding interest-rate derivative contracts.
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Foreign Currency Derivative Contracts
The Company seeks to minimize the impact of certain foreign-currency fluctuations by hedging transactional exposures with foreign-currency forward and option contracts. The Companys foreign-currency transactional exposures pertaining to derivative contracts exist primarily with the Canadian Dollar and certain other currencies. Based on a hypothetical decrease (or increase) of 10% in the value of the U.S. Dollar against the currency for which the Company has derivative instruments at June 30, 2008, the estimated fair value of the Companys foreign currency derivative contracts would decrease by $4 or increase by $3, resulting in a decrease of $4 or an increase of $3 to accumulated other comprehensive income or pre-tax earnings or losses for fiscal year 2008.
Commodity Derivative Contracts
The Company is exposed to changes in the price of commodities used as raw materials in the manufacturing of its products. These commodities include, among others, resin, diesel, solvent, jet fuel, soybean oil, corrugate and chlor-alkalai. The Company uses various strategies to manage cost exposures on certain raw material purchases with the objective of obtaining more predictable costs for these commodities, including long-term commodity purchase contracts and commodity derivative contracts. Based on a hypothetical decrease (or increase) of 10% in commodity prices at June 30, 2008, the estimated fair value of the Companys existing derivative contracts would decrease or increase by $16, resulting in decreases or increases to accumulated other comprehensive income or pre-tax earnings or losses based on its hedge accounting designation.
The Company uses different methodologies, when necessary, to estimate the fair value of its derivative contracts. The estimated fair values of the majority of the Companys contracts are based on quoted market prices, traded exchange market prices, or broker price quotations, and represent the estimated amounts that the Company would pay or receive to terminate the contracts.
Interest Rate
The Company is exposed to interest rate volatility with regard to existing and future issuances of variable rate debt. Primary exposures include movements in London Interbank Offered Rates (LIBOR) and commercial paper rates. The Company periodically uses interest rate swaps and forward interest rate contracts to reduce interest rate volatility. As of June 30, 2008, the Company did not have any interest rate swaps or forward interest rate contracts outstanding. Assuming average variable rate debt levels during the year, a 100 basis point change in interest rates would have increased or decreased interest expense by approximately $11 in fiscal year 2008.
NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2007, the Company adopted FIN 48. This Interpretation prescribes a consistent recognition threshold and measurement standard, as well as criteria for subsequently recognizing, derecognizing, classifying and measuring tax positions for financial statement purposes.
The cumulative effect of adopting FIN 48 was recorded as a $10 reduction to beginning retained earnings. FIN 48 requires uncertain tax positions to be classified as non-current income tax liabilities unless expected to be paid within one year. Upon adoption of FIN 48, income tax liabilities of $53 were reclassified from current to non-current on the Companys balance sheet (See Note 20).
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, delaying the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis. The delayed portions of SFAS No. 157 will be adopted by the Company beginning in its fiscal year ending June 30, 2010, while all other portions of the standard will be adopted by the Company beginning in its fiscal year ending June 30, 2009, as required. The Company does not expect that SFAS No. 157 will have a material impact on its consolidated financial statements when it becomes effective.
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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115. SFAS No. 159 provides the option to measure, at fair value, eligible financial instrument items using fair value, which are not otherwise required to be measured at fair value. The irrevocable decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis. Changes in that instruments fair value must be recognized in current earnings in subsequent reporting periods. If elected, the first measurement to fair value is reported as a cumulative-effect adjustment to the opening balance of retained earning in the year of adoption. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its consolidated financial statements if it elects to measure eligible financial instruments at fair value. The standard is effective for the Company beginning in its fiscal year ending June 30, 2009.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No. 141-R). SFAS No.141-R will significantly change the accounting for future business combinations after adoption. SFAS No. 141-R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, including contingent liabilities, and any non controlling interest in the acquired business. SFAS No. 141-R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141-R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. This Statement will be adopted by the Company beginning in its fiscal year ending June 30, 2010, as required. The Company is currently evaluating the impact SFAS No. 141-R will have on its consolidated financial statements when it becomes effective.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No. 51. This statement establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary (commonly referred to as minority interest) and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require the noncontrolling interest to be reported as a component of equity. Changes in a parents ownership interest while the parent retains its controlling interest will be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary will be initially measured at fair value. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. This Statement will be adopted by the Company beginning in its fiscal year ending June 30, 2010, as required. The Company is currently evaluating the impact SFAS No. 160 will have on its consolidated financial statements when it becomes effective.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of SFAS No. 133. This Statement requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement will be adopted by the Company no later than the beginning of the third quarter of its fiscal year ending June 30, 2009, as required. The Company is currently evaluating the impact SFAS No. 161 will have on its consolidated financial statements, when it becomes effective.
In June 2008 the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions in this FSP. Earlier adoption is prohibited. This FSP will be adopted by the Company beginning in its fiscal year ending June 30, 2010, as required. The Company is currently evaluating the impact FSP EITF 03-6-1 will have on its consolidated financial statements when it becomes effective.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates, and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements. Specific areas, among others, requiring the application of managements estimates and judgment include assumptions pertaining to accruals for consumer and trade-promotion programs, share-based compensation costs, pension and post-employment benefit costs, future cash flows associated with impairment testing of goodwill and other long-lived assets, credit worthiness of customers, uncertain tax positions, tax valuation allowances and legal, environmental and insurance matters. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. The most critical accounting policies are those that are most important to the portrayal of the Companys financial condition and results, and require the Company to make its most difficult and subjective judgments, often estimating the outcome of future events that are inherently uncertain. The Companys most critical accounting policies are: revenue recognition; valuation of intangible assets and property, plant and equipment; employee benefits, including estimates related to share-based compensation; and income taxes. The Companys critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. A summary of the Companys significant accounting policies is contained in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
Sales are recognized as revenue when the risk of loss and title pass to the customer and when all of the following have occurred: a firm sales arrangement exists, pricing is fixed or determinable, and collection is reasonably assured. Sales are recorded net of allowances for trade-promotions and other discounts.
The Company routinely commits to one-time or on-going trade-promotion programs with customers. Programs include cooperative marketing programs, shelf-price reductions, advantageous end-of-aisle or in-store displays of the Companys products, graphics and other trade-promotion activities conducted by the customer. Costs related to these programs are recorded as a reduction of sales. The Companys estimated costs of trade-promotions incorporate historical sales and spending trends by customer and category. The determination of these estimated costs requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs and for programs related to the introduction of new products. Final determination of the total cost of promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event. This process of analyzing and settling trade-promotion programs with customers could impact the Companys results of operations and trade spending accruals depending on how actual results of the programs compare to original estimates. If the Companys June 30, 2008, trade spending accrual estimates were to differ by 10%, the impact on net sales would be approximately $4.
Valuation of Intangible Assets and Property, Plant and Equipment
The carrying values of goodwill, trademarks with indefinite lives and other indefinite-lived intangible assets are reviewed for possible impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. With respect to goodwill, impairment occurs when the carrying amount of a reporting units goodwill exceeds its implied fair value. An impairment charge is recorded for the difference between the carrying amount and the implied fair value of the reporting units goodwill. For trademarks and other intangible assets with indefinite lives, impairment occurs when the carrying amount of an asset is greater than its fair value. A charge is recorded for the difference between the carrying amount and the fair value. The Companys estimates of fair value are primarily based on a discounted cash flow approach that requires significant management judgment with respect to future volumes, revenue and expense growth rates, changes in working capital use, foreign-exchange rates, devaluation, inflation and the selection of an appropriate discount rate. The Company tests its goodwill, trademarks with indefinite lives and other indefinite-lived intangible assets annually in the third fiscal quarter unless there are indications during an interim period that these assets may have become impaired.
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The Company performed its annual review of goodwill and indefinite-lived intangible assets in the third quarter of fiscal year 2008 and recorded $2 of asset impairment costs related to indefinite-lived intangible assets which were included as part of the International segment. No instances of goodwill impairment were identified. A 10% decline in the fair values of the indefinite-lived intangible assets would have increased the asset impairment costs related to indefinite-lived intangible assets by $2. A 10% decline in the fair values of the reporting units would not have changed the results of the goodwill impairment review.
Property, plant and equipment and finite-lived intangible assets are reviewed for possible impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Companys impairment review requires significant management judgment including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. The Company conducts quarterly reviews for idle and underutilized equipment, and reviews business plans for possible impairment indicators. Impairment occurs when the carrying amount of the asset exceeds its estimated future undiscounted cash flows and the impairment is viewed as other than temporary. When an impairment is indicated, an impairment charge is recorded for the difference between the assets book value and its estimated fair market value. Depending on the asset, estimated fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement.
Employee Benefits
The Company has various individual and group compensation and retirement income programs, including an incentive compensation program, a profit sharing element of The Clorox Company 401(k) plan and share-based compensation programs.
Incentive Compensation and Profit Sharing Programs
Company contributions to the 401(k) plan and payments to managerial staff for the annual incentive compensation program are subject to the Company achieving certain fiscal year performance targets. The 401(k) plan has two components: a 401(k) component and a profit sharing component. Employee contributions made to the 401(k) component are partially matched with Company contributions. The Companys contributions to the profit sharing component above 3% of eligible employee earnings are discretionary and are based on achieving certain financial targets. The Companys payouts under the annual incentive compensation program are also based on achieving certain financial targets. The Company accrues for the profit sharing cash contribution and annual incentive compensation program costs quarterly based on estimated annual results. At June 30, 2008, the Company accrued $26 for such costs and anticipates making a profit sharing cash contribution to the 401(k) plan in the first quarter of fiscal year 2009. At June 30, 2008, the Company accrued $40 related to the annual incentive compensation program.
Share-Based Compensation
The Company grants various nonqualified stock-based compensation awards, including stock options, performance units and restricted stock. The share-based compensation expense and related income tax benefit recognized in the income statement in fiscal year 2008 was $47 and $18, respectively. As of June 30, 2008, there was $59 of total unrecognized compensation cost related to nonvested stock options, restricted stock, and performance unit awards, which is expected to be recognized over a weighted average remaining vesting period of 2 years.
The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The Company estimates stock option forfeitures based on historical data for each employee grouping, and adjusts the rate to expected forfeitures periodically. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed. During fiscal year 2008, adjustments totaled $1.
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The use of different assumptions in the Black-Scholes valuation model could lead to a different estimate of the fair value of each stock option. The expected volatility is based on implied volatility from publicly traded options on the Companys stock at the date of grant, historical implied volatility of the Companys publicly traded options and other factors. If the Companys assumption for the volatility rate increased by one percentage point, the fair value of options granted in fiscal year 2008 would have increased by less than $1. The expected life of the stock options is based on observed historical exercise patterns. If the Companys assumption for the expected life increased by one year, the fair value of options granted in fiscal year 2008 would have increased by $1.
The Companys performance unit grants provide for the issuance of common stock to certain managerial staff and executive management if the Company achieves specified performance targets. The performance unit grants generally vest after three years. The fair value of each grant issued is estimated on the date of grant based on the current market price of the stock. The total amount of compensation expense recognized reflects estimated forfeiture rates, and the initial assumption that performance goals will be achieved. Compensation expense is adjusted quarterly based on managements assessment of the probability that performance goals will be achieved. If such goals are not met or it is determined that achievement of performance goals is not probable, any previously recognized compensation expense is reversed. If it is determined that the performance goals will be exceeded, additional compensation expense is recognized.
Retirement Income Plans
The determination of net periodic pension cost is based on actuarial assumptions including a discount rate to reflect the time value of money, employee compensation rates, demographic assumptions to determine the probability and timing of benefit payments, and the long-term rate of return on plan assets. The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation. Actual results could differ from expected results because actuarial assumptions and estimates are used. In the calculation of pension expense related to domestic plans for 2008, the Company used a long-term rate of return on plan assets assumption of 8.25% and a beginning of year discount rate assumption of 6.25%. The use of a different discount rate or long-term rate of return on domestic plan assets can significantly impact pension expense. For example, at June 30, 2008, a decrease of 100 basis points in the discount rate would increase pension liability by approximately $48, and potentially increase fiscal year 2009 pension expense by $4. A 100 basis point decrease in the long-term rate of return on plan assets would increase future pension expense in fiscal year 2009 by $3. The Company also has defined benefit pension plans for eligible international employees, including Canadian and Australian employees, and different assumptions are used in the determination of pension expense for those plans, as appropriate. Refer to Note 21 of the Notes to Consolidated Financial Statements for further discussion of pension and other retirement plan obligations.
Income Taxes
The Companys effective tax rate is based on income by tax jurisdiction, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which the Company operates. Significant judgment is required in determining the Companys effective tax rate and in evaluating its tax positions.
The Company maintains valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Companys income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Valuation allowances maintained by the Company relate mostly to deferred tax assets arising from the Companys inability to use net operating losses in certain foreign countries.
In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by FIN 48. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled.
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United States income taxes and foreign withholding taxes are not provided when foreign earnings are indefinitely reinvested in accordance with Accounting Principles Board Opinion No. 23, Accounting for Income Taxes, Special Areas. The Company determines whether its foreign subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination on a periodic basis. Change to the Companys determination may be warranted based on the Companys experience as well as plans regarding future international operations and expected remittances.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this Report), including the exhibits hereto and the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and such forward-looking statements involve risks and uncertainties. Except for historical information, matters discussed above, including statements about future volume, sales, costs, cost savings, earnings, cash outflows, plans, objectives, expectations, growth, or profitability, are forward-looking statements based on managements estimates, assumptions and projections. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, seeks, estimates, and variations on such words, and similar expressions, are intended to identify such forward looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed above. Important factors that could affect performance and cause results to differ materially from managements expectations are described in the sections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in this Report, as updated from time to time in the Companys SEC filings. These factors include, but are not limited to, the Companys cost levels, including volatility and increases in commodity costs such as resin, diesel, chlor-alkali, and agricultural commodities; increases in energy and transportation costs, including the cost of diesel; general economic and marketplace conditions and events, including consumer spending levels, the rate of economic growth, and the rate of inflation; consumer and customer reaction to price increases; risks related to acquisitions, mergers and divestitures, including the Companys ability to achieve the projected strategic and financial benefits from the Burts Bees acquisition; the ability of the Company to implement and generate expected savings from its programs to reduce costs, including its supply chain restructuring; the success of the Companys previously announced Centennial Strategy; the need for any additional restructuring or asset-impairment charges; customer-specific ordering patterns and trends; changes in the Companys tax rates; any difficulty of the Company or its suppliers in obtaining key raw materials or product components used in the production of the Companys products; risks inherent in sole-supplier relationships; risks related to customer concentration; risks arising out of natural disasters; risks related to the handling and/or transportation of hazardous substances, including but not limited to chlorine; risks inherent in litigation; risks related to international operations, including the risk associated with foreign currencies; the impact of the volatility of the debt markets on the Companys access to funds and cost of borrowing; risks inherent in maintaining an effective system of internal controls, including the potential impact of acquisitions or the use of third-party service providers; the ability to manage and realize the benefit of joint ventures and other cooperative relationships, including the Companys joint venture regarding the Companys Glad® plastic bags, wraps and containers business, and the agreement relating to the provision of information technology and related services by a third party; the success of new products; risks related to changes in the Companys capital structure; risks related to the Companys November 2004 share exchange transaction with Henkel KGaA and the Companys accompanying tax indemnification obligations; risks arising from any declines in cash flow, whether resulting from tax payments, debt payments, share repurchases, interest cost increases greater than expected, increases in debt, changes in credit ratings or otherwise; and the ability of the Company to successfully manage tax, regulatory, product liability, intellectual property, environmental and other legal matters, including the risk resulting from joint and several liability for environmental contingencies.
The Companys forward looking statements in this Report are based on managements current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws.
In this Report, unless the context requires otherwise, the terms the Company and Clorox refer to The Clorox Company and its subsidiaries.
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CONSOLIDATED STATEMENTS OF
EARNINGS
The Clorox Company
Years ended June 30 | ||||||||||||
Dollars in millions, except per share amounts | 2008 | 2007 | 2006 | |||||||||
Net sales | $ | 5,273 | $ | 4,847 | $ | 4,644 | ||||||
Cost of products sold | 3,098 | 2,756 | 2,685 | |||||||||
Gross profit | 2,175 | 2,091 | 1,959 | |||||||||
Selling and administrative expenses | 690 | 642 | 631 | |||||||||
Advertising costs | 486 | 474 | 450 | |||||||||
Research and development costs | 111 | 108 | 99 | |||||||||
Restructuring and asset impairment costs | 36 | 13 | 1 | |||||||||
Interest expense | 168 | 113 | 127 | |||||||||
Other income, net | (9 | ) | (2 | ) | (2 | ) | ||||||
Earnings from continuing operations before income taxes | 693 | 743 | 653 | |||||||||
Income taxes on continuing operations | 232 | 247 | 210 | |||||||||
Earnings from continuing operations | 461 | 496 | 443 | |||||||||
Earnings from discontinued operations | | 5 | 1 | |||||||||
Net earnings | $ | 461 | $ | 501 | $ | 444 | ||||||
Earnings per share | ||||||||||||
Basic | ||||||||||||
Continuing operations | $ | 3.30 | $ | 3.28 | $ | 2.94 | ||||||
Discontinued operations | | 0.03 | 0.01 | |||||||||
Basic net earnings per share | $ | 3.30 | $ | 3.31 | $ | 2.95 | ||||||
Diluted | ||||||||||||
Continuing operations | $ | 3.24 | $ | 3.23 | $ | 2.89 | ||||||
Discontinued operations | | 0.03 | 0.01 | |||||||||
Diluted net earnings per share | $ | 3.24 | $ | 3.26 | $ | 2.90 | ||||||
Weighted average shares outstanding (in thousands) | ||||||||||||
Basic | 139,633 | 151,445 | 150,545 | |||||||||
Diluted | 142,004 | 153,935 | 153,001 |
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE
SHEETS
The Clorox
Company
As of June 30 | ||||||||
Dollars in millions, except share amounts | 2008 | 2007 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 214 | $ | 182 | ||||
Receivables, net | 505 | 460 | ||||||
Inventories, net | 384 | 309 | ||||||
Other current assets | 146 | 81 | ||||||
Total current assets | 1,249 | 1,032 | ||||||
Property, plant and equipment, net | 960 | 976 | ||||||
Goodwill | 1,658 | 1,025 | ||||||
Trademarks, net | 560 | 254 | ||||||
Other intangible assets, net | 123 | 94 | ||||||
Other assets | 158 | 200 | ||||||
Total assets | $ | 4,708 | $ | 3,581 | ||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY | ||||||||
Current liabilities | ||||||||
Notes and loans payable | $ | 755 | $ | 74 | ||||
Current maturities of long-term debt | | 500 | ||||||
Accounts payable | 418 | 329 | ||||||
Accrued liabilities | 440 | 507 | ||||||
Income taxes payable | 48 | 17 | ||||||
Total current liabilities | 1,661 | 1,427 | ||||||
Long-term debt | 2,720 | 1,462 | ||||||
Other liabilities | 600 | 516 | ||||||
Deferred income taxes | 97 | 5 | ||||||
Total liabilities | 5,078 | 3,410 | ||||||
Commitments and contingencies | ||||||||
Stockholders (deficit) equity | ||||||||
Common stock: $1.00 par value; 750,000,000 shares authorized; 158,741,461 shares issued at | ||||||||
June 30, 2008 and 2007; and 138,038,052 and 151,256,460 shares outstanding at June 30, 2008 | ||||||||
and 2007, respectively | 159 | 159 | ||||||
Additional paid-in capital | 534 | 481 | ||||||
Retained earnings | 386 | 185 | ||||||
Treasury shares, at cost: 20,703,409 and 7,485,001 shares at June 30, 2008 and 2007, respectively | (1,270 | ) | (445 | ) | ||||
Accumulated other comprehensive net losses | (179 | ) | (209 | ) | ||||
Stockholders (deficit) equity | (370 | ) | 171 | |||||
Total liabilities and stockholders (deficit) equity | $ | 4,708 | $ | 3,581 |
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF
STOCKHOLDERS (DEFICIT) EQUITY
The
Clorox Company
Accumulated | ||||||||||||||||||||||||||||||||||||||
Treasury | Other | |||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Shares | Comprehensive | Total | ||||||||||||||||||||||||||||||||||
Dollars in millions, except share | Shares | Paid-in | Retained | Shares | Net (Losses) |