Edgar Filing: PROCTER & GAMBLE Co

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2016



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

THE PROCTER & GAMBLE COMPANY

(Exact name of registrant as specified in its charter)



Ohio	1-434	31-0411980
(State of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification Number)



One Procter & Gamble Plaza, Cincinnati, Ohio		45202
(Address of principal executive offices)		(Zip Code)

(513) 983-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

There were 2,556,477,220 shares of Common Stock outstanding as of December 31, 2016.

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS



	Three Months Ended December 31					Six Months Ended December 31
Amounts in millions except per share amounts	2016			2015		2016			2015
NET SALES	$	16,856		$	16,915	$	33,374		$	33,442
Cost of products sold	8,298			8,460		16,400			16,612
Selling, general and administrative expense	4,683			4,602		9,328			9,209
OPERATING INCOME	3,875			3,853		7,646			7,621
Interest expense	122			143		253			283
Interest income	42			58		77			102
Other non-operating income/(loss), net	(539		)	35		(476		)	17
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,256			3,803		6,994			7,457
Income taxes on continuing operations	695			898		1,558			1,775
NET EARNINGS FROM CONTINUING OPERATIONS	2,561			2,905		5,436			5,682
NET EARNINGS FROM DISCONTINUED OPERATIONS	5,335			323		5,217			181
NET EARNINGS	7,896			3,228		10,653			5,863
Less: Net earnings attributable to noncontrolling interests	21			22		64			56
NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE	$	7,875		$	3,206	$	10,589		$	5,807

BASIC NET EARNINGS PER COMMON SHARE: ⁽¹⁾
Earnings from continuing operations	$	0.96		$	1.04	$	1.99		$	2.02
Earnings from discontinued operations	2.05			0.12		1.98			0.07
BASIC NET EARNINGS PER COMMON SHARE	3.01			1.16		3.97			2.09
DILUTED NET EARNINGS PER COMMON SHARE: ⁽¹⁾
Earnings from continuing operations	$	0.93		$	1.01	$	1.93		$	1.97
Earnings from discontinued operations	1.95			0.11		1.88			0.06
DILUTED NET EARNINGS PER COMMON SHARE	2.88			1.12		3.81			2.03
DIVIDENDS PER COMMON SHARE	$	0.6695		$	0.6629	$	1.3390		$	1.3258
Diluted weighted average common shares outstanding	2,737.6			2,864.6		2,780.2			2,865.8


⁽¹⁾	Basic net earnings per share and Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)



	Three Months Ended December 31						Six Months Ended December 31
Amounts in millions	2016			2015			2016			2015
NET EARNINGS	$	7,896		$	3,228		$	10,653		$	5,863
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
Financial statement translation	(1,988		)	(955		)	(1,989		)	(1,978		)
Unrealized gains/(losses) on hedges	864			252			749			210
Unrealized gains/(losses) on investment securities	(55		)	(28		)	(68		)	(20		)
Unrealized gains/(losses) on defined benefit retirement plans	600			143			693			234
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX	(579		)	(588		)	(615		)	(1,554		)
TOTAL COMPREHENSIVE INCOME/(LOSS)	7,317			2,640			10,038			4,309
Less: Total comprehensive income attributable to noncontrolling interests	21			22			64			56
TOTAL COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO PROCTER & GAMBLE	$	7,296		$	2,618		$	9,974		$	4,253

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



Amounts in millions			December 31, 2016			June 30, 2016
Assets
CURRENT ASSETS
Cash and cash equivalents			$	6,051		$	7,102
Available-for-sale investment securities			7,403			6,246
Accounts receivable			4,729			4,373
INVENTORIES
Materials and supplies			1,398			1,188
Work in process			522			563
Finished goods			2,867			2,965
Total inventories			4,787			4,716
Deferred income taxes			—			1,507
Prepaid expenses and other current assets			2,602			2,653
Current assets held for sale			—			7,185
TOTAL CURRENT ASSETS			25,572			33,782
PROPERTY, PLANT AND EQUIPMENT, NET			18,778			19,385
GOODWILL			43,458			44,350
TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET			24,185			24,527
OTHER NONCURRENT ASSETS			5,040			5,092
TOTAL ASSETS			$	117,033		$	127,136

Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable			$	8,300		$	9,325
Accrued and other liabilities			7,584			7,449
Current liabilities held for sale			—			2,343
Debt due within one year			13,007			11,653
TOTAL CURRENT LIABILITIES			28,891			30,770
LONG-TERM DEBT			16,460			18,945
DEFERRED INCOME TAXES			8,692			9,113
OTHER NONCURRENT LIABILITIES			9,246			10,325
TOTAL LIABILITIES			63,289			69,153
SHAREHOLDERS’ EQUITY
Preferred stock			1,024			1,038
Common stock – shares issued –	December 2016	4,009.2
	June 2016	4,009.2	4,009			4,009
Additional paid-in capital			63,596			63,714
Reserve for ESOP debt retirement			(1,272		)	(1,290		)
Accumulated other comprehensive income/(loss)			(16,522		)	(15,907		)
Treasury stock			(92,720		)	(82,176		)
Retained earnings			94,945			87,953
Noncontrolling interest			684			642
TOTAL SHAREHOLDERS’ EQUITY			53,744			57,983
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$	117,033		$	127,136

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended December 31
Amounts in millions	2016				2015
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	$	7,102			$	6,836
OPERATING ACTIVITIES
Net earnings	10,653				5,863
Depreciation and amortization	1,435				1,454
Loss on early extinguishment of debt	543				—
Share-based compensation expense	104				140
Deferred income taxes	(448		)		140
Gain on sale of businesses	(5,343		)		(37		)
Goodwill and intangible asset impairment charges	—				402
Changes in:
Accounts receivable	(595		)		(488		)
Inventories	(247		)		(386		)
Accounts payable, accrued and other liabilities	(296		)		322
Other operating assets and liabilities	152				374
Other	67				234
TOTAL OPERATING ACTIVITIES	6,025				8,018
INVESTING ACTIVITIES
Capital expenditures	(1,429		)		(1,223		)
Proceeds from asset sales	280				80
Acquisitions, net of cash acquired	(16		)		(186		)
Purchases of short-term investments	(1,739		)		(762		)
Proceeds from sales of short-term investments	354				683
Pre-divestiture addition of restricted cash related to the Beauty Brands divestiture	(874		)		—
Cash transferred at closing related to the Beauty Brands divestiture	(475		)		—
Release of restricted cash upon closing of the Beauty Brands divestiture	1,870				—
Change in other investments	8				(31		)
TOTAL INVESTING ACTIVITIES	(2,021		)		(1,439		)
FINANCING ACTIVITIES
Dividends to shareholders	(3,637		)		(3,733		)
Change in short-term debt	2,715				2,020
Additions to long-term debt	2,641				1,721
Reductions of long-term debt	(5,029		)	⁽¹⁾	(2,239		)
Treasury stock purchases	(2,503		)		(2,503		)
Impact of stock options and other	1,074				1,007
TOTAL FINANCING ACTIVITIES	(4,739		)		(3,727		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(316		)		(285		)
CHANGE IN CASH AND CASH EQUIVALENTS	(1,051		)		2,567
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	6,051			$	9,403


⁽¹⁾	Includes $543 of costs related to early extinguishment of debt.

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016. In the opinion of management, the accompanying unaudited Consolidated Financial Statements of The Procter & Gamble Company and subsidiaries (the "Company," "Procter & Gamble," "P&G," "we" or "our") contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.

2. New Accounting Pronouncements and Policies

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". This guidance outlines a single, comprehensive model for accounting for revenue from contracts with customers. We will adopt the standard no later than July 1, 2018. While we are currently assessing the impact of the new standard, our revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer. These are largely un-impacted by the new standard. Therefore we do not expect this new guidance to have a material impact on our Consolidated Financial Statements.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". This guidance simplifies the presentation of deferred taxes on the balance sheet by requiring that all deferred tax assets and liabilities be classified as non-current. The new standard is effective for us beginning July 1, 2017, with early adoption permitted. We elected to early adopt the new guidance on a prospective basis in the first quarter of fiscal year 2017. The impact was not significant.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We will adopt the standard no later than July 1, 2019. We are currently assessing the impact that the new standard will have on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases.

In March 2016, the FASB issued ASU 2016-09, "Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits (which represent the excess of actual tax benefits received at vest or settlement over the benefits recognized at issuance of share-based payments) and tax deficiencies (which represent the amount by which actual tax benefits received at vest or settlement is lower than the benefits recognized at issuance of share-based payments) to be recorded in the income statement when the awards vest or are settled. The amended guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows, rather than a financing activity. The standard further provides an accounting policy election to account for forfeitures as they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The new standard is effective for us beginning July 1, 2017, with early adoption permitted. We elected to early adopt the new guidance on a prospective basis in the first quarter of fiscal year 2017. The primary impact of adoption was the recognition of excess tax benefits in our Income taxes on continuing operations rather than in Additional paid-in capital for fiscal year 2017. As a result, we recognized a discrete tax benefit of $129 in Income taxes on continuing operations during the six months ended December 31, 2016. We also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of fiscal 2017. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. None of the other provisions in this amended guidance had a significant impact on our Consolidated Financial Statements.

No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our Consolidated Financial Statements.

Amounts in millions of dollars unless otherwise specified.

3. Segment Information

As discussed in Note 11, the Beauty Brands and Batteries businesses are presented as discontinued operations and are excluded from segment results for all periods presented. Effective July 1, 2016, the Company began accounting for sales to its Venezuela subsidiaries in Corporate for management reporting purposes. As a result, we are also reflecting such sales in Corporate for segment reporting purposes. This change was made on a prospective basis for both management and external segment reporting purposes and did not have a significant impact on any of the segments.

Following is a summary of reportable segment results:



		Three Months Ended December 31								Six Months Ended December 31
		Net Sales		Earnings/(Loss) from Continuing Operations Before Income Taxes			Net Earnings/(Loss) from Continuing Operations			Net Sales		Earnings/(Loss) from Continuing Operations Before Income Taxes			Net Earnings/(Loss) from Continuing Operations
Beauty	2016	$	2,942	$	714		$	540		$	5,938	$	1,497		$	1,132
	2015	2,963		774			585			6,004		1,596			1,209
Grooming	2016	1,789		614			469			3,447		1,143			884
	2015	1,806		579			441			3,480		1,078			831
Health Care	2016	2,072		608			422			3,933		1,104			742
	2015	1,978		564			394			3,774		1,012			712
Fabric & Home Care	2016	5,270		1,125			725			10,572		2,254			1,453
	2015	5,347		1,177			773			10,598		2,297			1,520
Baby, Feminine & Family Care	2016	4,645		1,038			680			9,240		2,083			1,377
	2015	4,710		1,037			683			9,368		2,148			1,432
Corporate	2016	138		(843		)	(275		)	244		(1,087		)	(152		)
	2015	111		(328		)	29			218		(674		)	(22		)
Total Company	2016	$	16,856	$	3,256		$	2,561		$	33,374	$	6,994		$	5,436
	2015	16,915		3,803			2,905			33,442		7,457			5,682

Amounts in millions of dollars unless otherwise specified.

4. Goodwill and Other Intangible Assets

Goodwill is allocated by reportable segment as follows:



	Beauty			Grooming			Health Care			Fabric & Home Care			Baby, Feminine & Family Care			Total Company
Goodwill at June 30, 2016	$	12,645		$	19,477		$	5,840		$	1,856		$	4,532		$	44,350
Acquisitions and divestitures	—			—			(10		)	(3		)	—			(13		)
Translation and other	(308		)	(350		)	(100		)	(30		)	(91		)	(879		)
Goodwill at December 31, 2016	$	12,337		$	19,127		$	5,730		$	1,823		$	4,441		$	43,458

On October 1, 2016, the Company completed the divestiture of four product categories, comprised of 41 of its beauty brands ("Beauty Brands"), to Coty, Inc. The transaction included the global salon professional hair care and color, retail hair color and cosmetics businesses and a majority of the fine fragrances business, along with select hair styling brands (see Note 11). The Beauty Brands have historically been part of the Company's Beauty reportable segment. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Beauty Brands are presented as discontinued operations. As a result, the goodwill attributable to the Beauty Brands as of June 30, 2016 is excluded from the preceding table and is reported as Current assets held for sale in the Consolidated Balance Sheets.

Goodwill decreased from June 30, 2016 primarily due to currency translation.

The test to evaluate goodwill for impairment is a two-step process. In the first step, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, we perform a second step to determine the implied fair value of the reporting unit's goodwill. The second step of the impairment analysis requires a valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the resulting implied fair value of the reporting unit's goodwill is less than its carrying value, that difference represents an impairment.

The business unit valuations used to test goodwill and intangible assets for impairment are dependent on a number of significant estimates and assumptions including macroeconomic conditions, overall category growth rates, competitive activities, cost containment, margin expansion and Company business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values.

Most of our goodwill reporting units are comprised of a combination of legacy and acquired businesses and as a result have fair value cushions that, at a minimum, exceed two times their underlying carrying values. Certain of our continuing goodwill reporting units, in particular Shave Care and Appliances, are comprised entirely of acquired businesses and as a result have fair value cushions that are not as high. While both of these wholly-acquired reporting units have fair value cushions that currently exceed the underlying carrying values, the Shave Care cushion, as well as the related indefinite-lived intangible assets, have been reduced to approximately 20% or below due in large part to significant currency devaluations in a number of countries relative to the U.S. dollar in recent years. As a result, this unit is more susceptible to impairment risk from adverse changes in business operating plans and macroeconomic environment conditions, including any further significant devaluation of major currencies relative to the U.S. dollar. Any such adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges of the business unit's goodwill and indefinite-lived intangibles.

Identifiable intangible assets at December 31, 2016 are comprised of:



	Gross Carrying Amount		Accumulated Amortization
Intangible assets with determinable lives	$	7,322	$	(4,703	)
Intangible assets with indefinite lives	21,566		—
Total identifiable intangible assets	$	28,888	$	(4,703	)

Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives consist of brands. The amortization expense of intangible assets for the three months ended December 31, 2016 and 2015 was $80 and $99, respectively. For the six months ended December 31, 2016 and 2015, the amortization expense of intangible assets was $169 and $203, respectively.

Amounts in millions of dollars unless otherwise specified.

5. Earnings Per Share

Net earnings attributable to Procter & Gamble less preferred dividends (net of related tax benefits) are divided by the weighted average number of common shares outstanding during the period to calculate Basic net earnings per common share. Diluted net earnings per common share are calculated to give effect to stock options and other stock-based awards and assume conversion of preferred stock. Net earnings attributable to Procter & Gamble and common shares used to calculate Basic and Diluted net earnings per share were as follows:



	Three Months Ended December 31, 2016								Three Months Ended December 31, 2015
CONSOLIDATED AMOUNTS	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations		Total
Net earnings	$	2,561		$	5,335	$	7,896		$	2,905		$	323	$	3,228
Net earnings attributable to noncontrolling interests	(21		)	—		(21		)	(22		)	—		(22		)
Net earnings attributable to P&G (Diluted)	2,540			5,335		7,875			2,883			323		3,206
Preferred dividends, net of tax benefit	(61		)	—		(61		)	(64		)	—		(64		)
Net earnings attributable to P&G available to common shareholders (Basic)	$	2,479		$	5,335	$	7,814		$	2,819		$	323	$	3,142

SHARES IN MILLIONS
Basic weighted average common shares outstanding	2,596.6			2,596.6		2,596.6			2,718.9			2,718.9		2,718.9
Effect of dilutive securities
Conversion of preferred shares ⁽¹⁾	100.1			100.1		100.1			104.7			104.7		104.7
Exercise of stock options and other unvested equity awards ⁽²⁾	40.9			40.9		40.9			41.0			41.0		41.0
Diluted weighted average common shares outstanding	2,737.6			2,737.6		2,737.6			2,864.6			2,864.6		2,864.6

PER SHARE AMOUNTS ⁽³⁾
Basic net earnings per common share	$	0.96		$	2.05	$	3.01		$	1.04		$	0.12	$	1.16
Diluted net earnings per common share	$	0.93		$	1.95	$	2.88		$	1.01		$	0.11	$	1.12

	Six Months Ended December 31, 2016								Six Months Ended December 31, 2015
CONSOLIDATED AMOUNTS	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations		Total
Net earnings	$	5,436		$	5,217	$	10,653		$	5,682		$	181	$	5,863
Net earnings attributable to noncontrolling interests	(64		)	—		(64		)	(56		)	—		(56		)
Net earnings attributable to P&G (Diluted)	5,372			5,217		10,589			5,626			181		5,807
Preferred dividends, net of tax benefit	(124		)	—		(124		)	(129		)	—		(129		)
Net earnings attributable to P&G available to common shareholders (Basic)	$	5,248		$	5,217	$	10,465		$	5,497		$	181	$	5,678

SHARES IN MILLIONS
Basic weighted average common shares outstanding	2,635.6			2,635.6		2,635.6			2,719.5			2,719.5		2,719.5
Effect of dilutive securities
Conversion of preferred shares ⁽¹⁾	100.5			100.5		100.5			105.2			105.2		105.2
Exercise of stock options and other unvested equity awards ⁽²⁾	44.1			44.1		44.1			41.1			41.1		41.1
Diluted weighted average common shares outstanding	2,780.2			2,780.2		2,780.2			2,865.8			2,865.8		2,865.8

PER SHARE AMOUNTS ⁽³⁾
Basic net earnings per common share	$	1.99		$	1.98	$	3.97		$	2.02		$	0.07	$	2.09
Diluted net earnings per common share	$	1.93		$	1.88	$	3.81		$	1.97		$	0.06	$	2.03

Amounts in millions of dollars unless otherwise specified.


⁽¹⁾	Despite being included currently in Diluted net earnings per common share, the actual conversion to common stock occurs when the preferred shares are sold. Shares may only be sold after being allocated to the ESOP participants pursuant to the repayment of the ESOP's obligations through 2035.

⁽²⁾

Outstanding stock options of approximately 27 million and 48 million for the three months ended December 31, 2016 and 2015, respectively, and approximately 27 million and 69 million for the six months ended December 31, 2016 and 2015, respectively, were not included in the Diluted net earnings per share calculation because the options were out of the money or to do so would have been antidilutive (i.e., the total proceeds upon exercise would have exceeded the market value of the underlying common shares).


⁽³⁾	Basic net earnings per common share and Diluted net earnings per common share are calculated on Net earnings attributable to Procter & Gamble.

6. Share-Based Compensation and Postretirement Benefits

The following table provides a summary of our share-based compensation expense and postretirement benefit costs:



	Three Months Ended December 31					Six Months Ended December 31
	2016		2015			2016		2015
Share-based compensation expense	$	74	$	74		$	118	$	140
Net periodic benefit cost for pension benefits ⁽¹⁾	257		85			353		171
Net periodic benefit cost/(credit) for other retiree benefits ⁽¹⁾	58		(25		)	39		(49		)


⁽¹⁾	The components of the total net periodic benefit cost for both pension benefits and other retiree benefits for those interim periods, on an annualized basis, do not differ materially from the amounts disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

The disclosures above for both share-based compensation and postretirement benefits include amounts related to discontinued operations which were not material in any period presented.

7. Risk Management Activities and Fair Value Measurements

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. There have been no significant changes in our risk management policies or activities during the six months ended December 31, 2016.

The Company has not changed its valuation techniques used in measuring the fair value of any financial assets and liabilities during the period. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented. There were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis for the six months ended December 31, 2016.

The following table sets forth the Company’s financial assets as of December 31, 2016 and June 30, 2016 that are measured at fair value on a recurring basis during the period:



	Fair Value Asset
	December 31, 2016		June 30, 2016
Investments
U.S. government securities	$	5,599	$	4,839
Corporate bond securities	1,804		1,407
Other investments	30		28
Total	$	7,433	$	6,274

Investment securities are presented in Available-for-sale investment securities and Other noncurrent assets. The amortized cost of U.S. government securities with maturities less than one year was $1,642 as of December 31, 2016 and $292 as of June 30, 2016. The amortized cost of U.S. government securities with maturities between one and five years was $3,983 as of December 31, 2016 and $4,513 as of June 30, 2016. The amortized cost of Corporate bond securities with maturities of less than a year was $443 as of December 31, 2016 and $382 as of June 30, 2016. The amortized cost of Corporate bond securities with maturities between one and five years was $1,369 as of December 31, 2016 and $1,018 as of June 30, 2016. The Company's investments measured at fair value are generally classified as Level 2 within the fair value hierarchy. There are no material investment balances

Amounts in millions of dollars unless otherwise specified.

classified as either Level 1 or Level 3 within the fair value hierarchy. Fair values are generally estimated based upon quoted market prices for similar instruments.

The fair value of long-term debt was $19,870 and $24,362 as of December 31, 2016 and June 30, 2016, respectively. This includes the current portion ($1,790 and $2,761 as of December 31, 2016 and June 30, 2016, respectively) of debt instruments. Certain long-term debt is recorded at fair value. Certain long-term debt is not recorded at fair value on a recurring basis but is measured at fair value for disclosure purposes. Long-term debt with fair value of $1,700 and $2,331 as of December 31, 2016 and June 30, 2016, respectively, is classified as Level 2 within the fair value hierarchy. All remaining long-term debt is classified as Level 1 within the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The following table sets forth the notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of December 31, 2016 and June 30, 2016:



	Notional Amount				Fair Value Asset/(Liability)
	December 31, 2016		June 30, 2016		December 31, 2016			June 30, 2016
Derivatives in Cash Flow Hedging Relationships
Foreign currency contracts	$	798	$	798	$	116		$	31
Derivatives in Fair Value Hedging Relationships
Interest rate contracts	$	4,393	$	4,993	$	191		$	371
Derivatives in Net Investment Hedging Relationships
Net investment hedges	$	3,044	$	3,013	$	147		$	(87	)
Derivatives Not Designated as Hedging Instruments
Foreign currency contracts	$	3,745	$	6,482	$	(20	)	$	(10	)

All derivative assets are presented in Prepaid expenses and other current assets or Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities or Other noncurrent liabilities. The total notional amount of contracts outstanding at the end of the period is indicative of the Company's derivative activity during the period. The change in the notional balance of foreign currency contracts not designated as hedging instruments during the period reflects changes in the level of intercompany financing activity. All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.



	Amount of Gain/(Loss) Recognized in AOCI on Derivatives (Effective Portion)
	December 31, 2016			June 30, 2016
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	(2	)	$	(2	)
Foreign currency contracts	(7		)	—
Total	$	(9	)	$	(2	)
Derivatives in Net Investment Hedging Relationships
Net investment hedges	$	94		$	(53	)

During the next 12 months, the amount of the December 31, 2016 Accumulated other comprehensive income (AOCI) balance that will be reclassified to earnings is expected to be immaterial.

Amounts in millions of dollars unless otherwise specified.

The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the three and six months ended December 31, 2016 and 2015 are as follows:



	Amount of Gain/(Loss) Reclassified from AOCI into Earnings
	Three Months Ended December 31						Six Months Ended December 31
	2016			2015			2016			2015
Derivatives in Cash Flow Hedging Relationships ⁽¹⁾
Interest rate contracts	$	—		$	1		$	—		$	3
Foreign currency contracts	107			8			99			(1		)
Total	$	107		$	9		$	99		$	2

	Amount of Gain/(Loss) Recognized in Earnings
	Three Months Ended December 31						Six Months Ended December 31
	2016			2015			2016			2015
Derivatives in Fair Value Hedging Relationships ⁽²⁾
Interest rate contracts	$	(152	)	$	(50	)	$	(180	)	$	39
Debt	152			50			180			(39		)
Total	$	—		$	—		$	—		$	—
Derivatives in Net Investment Hedging Relationships⁽²⁾
Net investment hedges	$	—		$	—		$	—		$	—
Derivatives Not Designated as Hedging Instruments⁽³⁾
Foreign currency contracts	$	(176	)	$	(158	)	$	(184	)	$	(220	)

⁽¹⁾

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from AOCI into net income in the same period during which the related item affects earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in Interest expense and foreign currency contracts in Selling, general and administrative expense (SG&A) and Interest expense.


⁽²⁾	The gain or loss on the ineffective portion of interest rate contracts and net investment hedges, if any, is included in the Consolidated Statements of Earnings in Interest expense.


⁽³⁾	The gain or loss on foreign currency contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings in SG&A. This gain or loss substantially offsets the foreign currency mark-to-market impact of the related exposure.

8. Accumulated Other Comprehensive Income/(Loss)

The table below presents the changes in Accumulated other comprehensive income/(loss) by component and the reclassifications out of Accumulated other comprehensive income/(loss):



	Changes in Accumulated Other Comprehensive Income/(Loss) by Component
	Hedges			Investment Securities			Pension and Other Retiree Benefits			Financial Statement Translation			Total
Balance at June 30, 2016	$	(2,641	)	$	34		$	(5,798	)	$	(7,502	)	$	(15,907	)
OCI before reclassifications ⁽¹⁾	848			(63		)	385			(1,989		)	(819		)
Amounts reclassified from AOCI ^{(2) (3)}	(99		)	(5		)	308			—			204
Net current period OCI	749			(68		)	693			(1,989		)	(615		)
Balance at December 31, 2016	$	(1,892	)	$	(34	)	$	(5,105	)	$	(9,491	)	$	(16,522	)


⁽¹⁾	Net of tax expense/(benefit) of $453, $(6) and $113 for gains/losses on hedges, investment securities and pension and other retiree benefit items, respectively.


⁽²⁾	Net of tax expense/(benefit) of $0, $0 and $114 for gains/losses on hedges, investment securities and pension and other retiree benefit items, respectively.

⁽³⁾

See Note 7 for classification of gains and losses from hedges in the Consolidated Statements of Earnings. Gains and losses on investment securities are reclassified from AOCI into Other non-operating income/(loss), net. Gains and losses on pension and other retiree benefits are reclassified from AOCI into Cost of products sold and SG&A and are included in the computation of net periodic pension costs.

Amounts in millions of dollars unless otherwise specified.

9. Restructuring Program

The Company has historically incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Before-tax costs incurred under the ongoing program have generally ranged from $250 to $500 annually. In fiscal 2012, the Company initiated an incremental restructuring program as part of a productivity and cost savings plan to reduce costs in the areas of supply chain, research and development, marketing and overheads. The productivity and cost savings plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes in order to help fund the Company's growth strategy.

The Company expects to incur approximately $5.5 billion in before-tax restructuring costs over a six year period (from fiscal 2012 through fiscal 2017), including costs incurred as part of the ongoing and incremental restructuring program. The program includes a non-manufacturing overhead enrollment reduction target of approximately 25% - 30% by the end of fiscal 2017.

Through December 31, 2016, the Company reduced non-manufacturing enrollment by approximately 26%. The reductions are enabled by the elimination of duplicate work, simplification through the use of technology and optimization of various functional and business organizations and the Company's global footprint. In addition, the plan includes integration of newly acquired companies and the optimization of the supply chain and other manufacturing processes.

Restructuring costs incurred consist primarily of costs to separate employees, asset-related costs to exit facilities and other costs. Through fiscal 2016, the Company incurred charges of approximately $4.9 billion. Approximately $2.3 billion of these charges were related to separations, $1.4 billion were asset-related costs and $1.2 billion were related to other restructuring-type costs.

For the three and six month periods ended December 31, 2016, the Company incurred total restructuring charges of approximately $180 and $348, respectively. For the three and six month periods ended December 31, 2016, $27 and $48 of these charges were recorded in SG&A, respectively. For the three and six month periods ended December 31, 2016, $148 and $277 of these charges were recorded in Cost of products sold, respectively. The remainder of the charges were included in discontinued operations. The following table presents restructuring activity for the six months ended December 31, 2016:



							Six Months Ended December 31, 2016
	Accrual Balance June 30, 2016		Charges Previously Reported (Three Months Ended September 30, 2016)		Charges for the Three Months Ended December 31, 2016		Cash Spent ⁽¹⁾			Charges Against Assets			Accrual Balance December 31, 2016
Separations	$	243	$	47	$	49	$	(107	)	$	—		$	232
Asset-related costs	—		105		101		—			(206		)	—
Other costs	72		16		30		(62		)	—			56
Total	$	315	$	168	$	180	$	(169	)	$	(206	)	$	288


⁽¹⁾	Includes liabilities transferred to Coty related to our Beauty Brands divestiture.

Separation Costs

Employee separation charges for the three and six month periods ended December 31, 2016 relate to severance packages for approximately 520 and 1,040 employees, respectively. Separations related to non-manufacturing employees were approximately 110 and 190 employees for the three and six month periods ended December 31, 2016, respectively. The packages are predominantly voluntary and the amounts are calculated based on salary levels and past service periods. Severance costs related to voluntary separations are generally charged to earnings when the employee accepts the offer. Since its inception, the restructuring program has incurred separation charges related to approximately 18,110 employees, of which approximately 9,730 are non-manufacturing overhead personnel.

Asset-Related Costs

Asset-related costs consist of both asset write-downs and accelerated depreciation. Asset write-downs relate to the establishment of a new fair value basis for assets held-for-sale or disposal. These assets were written down to the lower of their current carrying basis or amounts expected to be realized upon disposal, less minor disposal costs. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period. These assets relate primarily to manufacturing consolidations and technology standardizations. The asset-related charges will not have a significant impact on future depreciation charges.

Other Costs

Other restructuring-type charges are incurred as a direct result of the restructuring program. Such charges primarily include employee relocation related to separations and office consolidations, termination of contracts related to supply chain redesign and the cost to change internal systems and processes to support the underlying organizational changes.

Consistent with our historical policies for ongoing restructuring-type activities, the restructuring program charges are funded by and included within Corporate for both management and segment reporting. Accordingly, all of the charges under the program are included within the Corporate reportable segment. However, for informative purposes, the following table summarizes the total restructuring costs related to our reportable segments:



	Three Months Ended December 31, 2016		Six Months Ended December 31, 2016
Beauty	$	21	$	40
Grooming	12		17
Health Care	4		8
Fabric & Home Care	50		77
Baby, Feminine & Family Care	46		100
Corporate ⁽¹⁾	47		106
Total Company	$	180	$	348


⁽¹⁾	Corporate includes costs related to allocated overheads, including charges related to our Sales and Market Operations, Global Business Services and Corporate Functions activities and costs related to discontinued operations from our Beauty Brands businesses.

10. Commitments and Contingencies

Litigation

The Company is subject to various legal proceedings and claims arising out of our business which cover a wide range of matters such as antitrust, trade and other governmental regulations, product liability, patent and trademark, advertising, contracts, environmental, labor and employment and tax. With respect to these and other litigation and claims, while considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.

We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will materially affect our financial position, results of operations or cash flows.

Income Tax Uncertainties

The Company is present in approximately 140 taxable jurisdictions and, at any point in time, has 50 – 60 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2008 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12 month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued liabilities of approximately $180, including interest and penalties.

Additional information on the Commitments and Contingencies of the Company can be found in our Annual Report on Form 10-K for the year ended June 30, 2016.

11. Discontinued Operations

On October 1, 2016, the Company completed the divestiture of four product categories to Coty, Inc. (“Coty”). The divestiture included 41 of the Company's beauty brands (“Beauty Brands”), including the global salon professional hair care and color, retail hair color, cosmetics and a majority of the fine fragrance businesses, along with select hair styling brands. The form of the divestiture transaction was a Reverse Morris Trust split-off, in which P&G shareholders were given the election to exchange their P&G shares for shares of a new corporation that held the Beauty Brands (Galleria Co.), and then immediately exchange those shares for Coty shares. The value P&G received in the transaction was $11.4 billion. The value is comprised of 105 million shares of common stock of the Company, which were tendered by shareholders of the Company and exchanged for the Galleria Co. shares, valued at approximately $9.4 billion, and the assumption of $1.9 billion of debt by Galleria Co.. The shares tendered in the transaction were reflected as an addition to treasury stock and the cash received related to the debt assumed by Coty was

Amounts in millions of dollars unless otherwise specified.

reflected as an investing activity in the Consolidated Statement of Cash Flows. The Company recorded an after-tax gain on the final transaction of $5.3 billion, net of transaction and related costs.

Two of the fine fragrance brands, Dolce & Gabbana and Christina Aguilera, were excluded from the divestiture. These brands were divested at amounts that approximated their adjusted carrying values.

In February 2016, the Company completed the divestiture of its Batteries business to Berkshire Hathaway (BH) via a split transaction, in which the Company exchanged Duracell, which the Company had infused with approximately $1.9 billion of additional cash, to repurchase all 52.5 million shares of P&G stock owned by BH. During fiscal 2016, the Company recorded a non-cash, before-tax goodwill and indefinite-lived asset impairment charge of $402 ($350 after-tax), to reduce the value to the total estimated proceeds based on the value of BH’s shares in P&G stock at the time of the impairment charges. The Company recorded an after-tax gain on the final transaction of $422 to reflect the final value of the BH’s shares in P&G stock. The total value of the transaction was $4.2 billion representing the value of the Duracell business and the cash infusion. The cash infusion was reflected as a purchase of treasury stock.

In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Beauty Brands and Batteries business are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Additionally, the Beauty Brands' balance sheet positions are presented as assets and liabilities held for sale in the Consolidated Balance Sheets as of June 30, 2016. The Beauty Brands were historically part of the Company's Beauty reportable segment. The Batteries business was historically part of the Company's Fabric & Home Care reportable segment.

On July 1, 2015, the Company adopted ASU 2014-08, which included new reporting and disclosure requirements for discontinued operations. The new requirements are effective for discontinued operations occurring on or after the adoption date, which includes the Beauty Brands divestiture. All other discontinued operations prior to July 1, 2015 are reported based on the previous disclosure requirements for discontinued operations, including the Batteries divestiture.

The following table summarizes Net earnings/(loss) from discontinued operations and reconciles to the Consolidated Statements of Earnings:



	Three Months Ended December 31				Six Months Ended December 31
	2016		2015		2016		2015
Beauty Brands	$	5,335	$	238	$	5,217	$	388
Batteries	—		85		—		(207		)
Net earnings/(loss) from discontinued operations	$	5,335	$	323	$	5,217	$	181

The following is selected financial information included in Net earnings/(loss) from discontinued operations for the Beauty Brands:



	Beauty Brands
	Three Months Ended December 31							Six Months Ended December 31
	2016				2015			2016				2015
Net sales	$	—			$	1,404		$	1,159			$	2,623
Cost of products sold	—				443			450				828
Selling, general and administrative expense	—				664			783				1,311
Interest expense	—				—			14				—
Other non-operating income/(loss), net	—				(3		)	16				(2		)
Earnings/(loss) from discontinued operations before income taxes	$	—			$	294		$	(72	)		$	482
Income taxes on discontinued operations	—				56			46				94
Gain on sale of business before income taxes	$	5,197			$	—		$	5,197			$	—
Income tax expense/(benefit) on sale of business	(138		)	⁽¹⁾	—			(138		)	⁽¹⁾	—
Net earnings/(loss) from discontinued operations	$	5,335			$	238		$	5,217			$	388


⁽¹⁾	The income tax benefit of the Beauty Brands divestiture represents the reversal of underlying deferred tax balances offset by current tax expense related to the transaction.

The Beauty Brands incurred transition costs of $167, after-tax, for the three months ended September 30, 2016, included in the above table. Residual transaction costs for the three months ended December 31, 2016 are included in the gain on the sale of business in the table above.

Amounts in millions of dollars unless otherwise specified.

The following is selected financial information related to cash flows from discontinued operations for the Beauty Brands:



	Beauty Brands
	Six Months Ended December 31
	2016			2015
NON-CASH OPERATING ITEMS
Depreciation and amortization	$	24		$	52
Deferred income tax benefit	(649		)	—
Before tax gain on sale of business	5,210			—
Net increase in accrued taxes	382			—
CASH FLOWS FROM OPERATING ACTIVITIES
Cash taxes paid	$	129		$	—
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	$	38		$	35

The major components of assets and liabilities of the Beauty Brands held for sale are provided below.



	Beauty Brands
	June 30, 2016
Cash	$	40
Restricted cash	996
Accounts receivable	384
Inventories	494
Prepaid expenses and other current assets	126
Property, plant and equipment, net	629
Goodwill and intangible assets, net	4,411
Other noncurrent assets	105
Current assets held for sale	$	7,185

Accounts payable	$	148
Accrued and other liabilities	384
Noncurrent deferred tax liabilities	370
Long-term debt	996
Other noncurrent liabilities	445
Current liabilities held for sale	$	2,343

Prior to the transaction, Beauty Brands drew $1.9 billion of debt ($1.0 billion as of June 30, 2016), which as noted above, was used to fund a portion of the transaction. The proceeds were held by the Beauty Brands as of June 30, 2016. In connection with the closing, this cash reverted to the Company and was used to retire P&G debt as part of a broader $2.5 billion debt retirement program that was completed in November 2016.

The following is selected financial information included in Net earnings/(loss) from discontinued operations for the Batteries business:



	Batteries
	Three Months Ended December 31, 2015			Six Months Ended December 31, 2015
Net sales	$	691		$	1,197
Earnings before impairment charges and income taxes	138			231
Impairment charges	—			(402		)
Income tax (expense)/benefit	(53		)	(36		)
Net earnings/(loss) from discontinued operations	$	85		$	(207	)

Amounts in millions of dollars unless otherwise specified.



Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors,” and Notes 4 and 10 to the Consolidated Financial Statements. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from those projected herein is included in the section titled "Economic Conditions and Uncertainties" and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q).

The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. The MD&A is organized in the following sections:


•	Overview


•	Summary of Results – Six Months Ended December 31, 2016


•	Economic Conditions and Uncertainties


•	Results of Operations – Three and Six Months Ended December 31, 2016


•	Business Segment Discussion – Three and Six Months Ended December 31, 2016


•	Liquidity and Capital Resources


•	Reconciliation of Measures Not Defined by U.S. GAAP

Throughout the MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (Core EPS), adjusted free cash flow and adjusted free cash flow productivity. The explanation at the end of the MD&A provides the definition of these non-GAAP measures as well as details on the use and the derivation of these measures.

Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in the MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.

OVERVIEW

P&G is a global leader in fast-moving consumer goods, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than 180 countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores and pharmacies. We have on-the-ground operations in approximately 70 countries.

Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.

The table below provides detail on our reportable segments, including the product categories and brand composition within each segment.



Reportable Segments	Product Categories (Sub-Categories)	Major Brands
Beauty	Hair Care (Conditioner, Shampoo, Styling Aids, Treatments)	Head & Shoulders, Pantene, Rejoice
Beauty	Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care)	Olay, Old Spice, Safeguard, SK-II
Grooming	Grooming ⁽¹⁾ (Shave Care - Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care; Appliances)	Braun, Fusion, Gillette, Mach3, Prestobarba, Venus
Health Care	Oral Care (Toothbrushes, Toothpaste, Other Oral Care)	Crest, Oral-B
Health Care	Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care)	Prilosec, Vicks
Fabric & Home Care	Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents)	Ariel, Downy, Gain, Tide
Fabric & Home Care	Home Care (Air Care, Dish Care, P&G Professional, Surface Care)	Cascade, Dawn, Febreze, Mr. Clean, Swiffer
Baby, Feminine & Family Care	Baby Care (Baby Wipes, Diapers and Pants)	Luvs, Pampers
	Feminine Care (Adult Incontinence, Feminine Care)	Always, Tampax
	Family Care (Paper Towels, Tissues, Toilet Paper)	Bounty, Charmin


⁽¹⁾	The Grooming product category is comprised of the Shave Care and Appliances Global Business Units.

The following table provides the percentage of net sales and net earnings by reportable business segment for the three and six months ended December 31, 2016 (excluding net sales and net earnings in Corporate):



	Three Months Ended December 31		Six Months Ended December 31
	Net Sales	Net Earnings	Net Sales	Net Earnings
Beauty	18%	19%	18%	20%
Grooming	11%	16%	10%	16%
Health Care	12%	15%	12%	13%
Fabric & Home Care	31%	26%	32%	26%
Baby, Feminine & Family Care	28%	24%	28%	25%
Total Company	100%	100%	100%	100%

SUMMARY OF RESULTS

Following are highlights of results for the six months ended December 31, 2016 versus the six months ended December 31, 2015:


•	Net sales were unchanged versus the previous period at $33.4 billion. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 2%. Organic sales increased 3% in Beauty, 2% in Grooming, 7% in Health Care, 3% in Fabric & Home Care and 2% in Baby, Feminine & Family Care.


•	Unit volume increased 1% with organic volume up 2%. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care, Baby, Feminine & Family Care and Grooming. Volume decreased low single digits in Beauty. Excluding the impacts of minor brand divestitures, organic volume increased low single digits in Beauty.


•	Net earnings from continuing operations were $5.4 billion, a decrease of $246 million, or 4% versus the prior year period. This decrease was driven by an increase in other non-operating expense due to a charge related to early extinguishment of certain long-term debt, partially offset by a lower effective tax rate.


•	Diluted net earnings per share from continuing operations decreased 2% to $1.93.


•	Net earnings attributable to Procter & Gamble were $10.6 billion, an increase of $4.8 billion or 82% versus the prior year period, driven by the $5.3 billion after-tax gain on the sale of the Beauty Brands in the current period.


•	Core net earnings, which excludes discontinued operations, the charge related to early extinguishment of certain long-term debt and incremental restructuring charges, increased 1% to $5.9 billion. Core net earnings per share increased 4% to $2.11 due to the increase in core net earnings and the reduction in shares outstanding from shares tendered in the divestiture of the Beauty Brands to Coty.


•	Operating cash flow was $6.0 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and excluding tax payments related to the sale of the Beauty Brands, was $4.7 billion. Adjusted free cash flow productivity, which is the ratio of free cash flow to net earnings excluding a loss on early debt extinguishment and the gain on sale of the Beauty business, was 83%.

ECONOMIC CONDITIONS AND UNCERTAINTIES

Global Economic Conditions. Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies, greater political unrest in the Middle East and Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets and economic slowdowns in Japan and China, could reduce our sales or erode our operating margin, in either case reducing our earnings.

Changes in Costs. Our costs are subject to fluctuations, particularly due to changes in commodity prices and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins, and volatility in the market price of these commodity input materials has a direct impact on our costs. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross margin, operating margin and net earnings. Sales could also be adversely impacted following pricing actions if there is a negative impact on consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including outsourcing projects, supply chain optimization and general overhead and workforce optimization. As discussed later in this MD&A, we initiated certain non-manufacturing overhead reduction projects along with manufacturing and other supply chain cost improvements projects in 2012. If we are not successful in executing and sustaining these changes, there could be a negative impact on our operating margin and net earnings.

Foreign Exchange. We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. Over the past four years, the U.S. dollar has strengthened versus a number of foreign currencies leading to lower sales and earnings from these foreign exchange impacts. Certain countries experiencing significant exchange rate fluctuations, like Argentina, Egypt, Japan, Nigeria, and the United Kingdom have had, and could continue to have, a significant impact on our sales, costs and earnings. Increased pricing in response to these fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on consumption of our products, which would affect our sales.

Government Policies. Our net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. Additionally, we attempt to carefully manage our debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Egypt, Nigeria and Ukraine. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings. For example, during fiscal 2015, the Company deconsolidated its Venezuelan subsidiaries due to evolving conditions that resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and restricted our ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars.

For information on risk factors that could impact our results, refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.

RESULTS OF OPERATIONS – Three Months Ended December 31, 2016

The following discussion provides a review of results for the three months ended December 31, 2016 versus the three months ended December 31, 2015.



	Three Months Ended December 31
Amounts in millions, except per share amounts	2016		2015		% Chg
Net sales	$	16,856	$	16,915	—	%
Operating income	3,875		3,853		1	%
Net earnings from continuing operations	2,561		2,905		(12	)%
Net earnings from discontinued operations	5,335		323		1,552	%
Net earnings attributable to Procter & Gamble	7,875		3,206		146	%
Diluted net earnings per common share	2.88		1.12		157	%
Diluted net earnings per share from continuing operations	0.93		1.01		(8	)%
Core net earnings per common share	1.08		1.04		4	%

	Three Months Ended December 31
COMPARISONS AS A % OF NET SALES	2016		2015		Basis Pt Chg
Gross profit	50.8%		50.0%		80
Selling, general & administrative expense	27.8%		27.2%		60
Operating income	23.0%		22.8%		20
Earnings from continuing operations before income taxes	19.3%		22.5%		(320)
Net earnings from continuing operations	15.2%		17.2%		(200)
Net earnings attributable to Procter & Gamble	46.7%		19.0%		2,770

Net Sales

Net sales for the quarter were unchanged versus the previous period at $16.9 billion. Unit volume increased 1%. Unfavorable foreign exchange reduced net sales by 2%. Pricing and mix had no net impact on consolidated net sales. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care, Baby, Feminine & Family Care and Grooming. Volume decreased low single digits in Beauty driven by minor brand divestitures. Volume increased low single digits in developed regions and was unchanged in developing regions. Organic sales increased 2% driven by a 2% increase in organic volume.



	Net Sales Change Drivers 2016 vs. 2015 (Three Months Ended December 31)*
	Volume with Acquisitions & Divestitures	Volume Excluding Acquisitions & Divestitures	Foreign Exchange	Price	Mix	Other**	Net Sales Growth
Beauty	(1)%	2%	(2)%	(1)%	2%	1%	(1)%
Grooming	3%	4%	(2)%	1%	(4)%	1%	(1)%
Health Care	4%	4%	(2)%	1%	2%	—%	5%
Fabric & Home Care	1%	2%	(2)%	(1)%	—%	1%	(1)%
Baby, Feminine & Family Care	2%	3%	(2)%	(1)%	(1)%	1%	(1)%
Total Company	1%	2%	(2)%	—%	—%	1%	—%

* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.

** Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.

Operating Costs

Gross margin increased 80 basis points to 50.8% of net sales for the quarter. Gross margin increased primarily due to a 210 basis point positive impact from manufacturing cost savings, a 10 basis point benefit from lower incremental restructuring charges and a 10 basis point benefit from volume scale leverage. These impacts were partially offset by a 50 basis point negative impact from unfavorable foreign exchange, a 30 basis point decrease due to higher commodity costs, a 40 basis point decline from unfavorable product mix (among segments caused by the net sales decline in Beauty, which has higher than company-average gross margins, and within segments primarily due to Grooming, which had disproportionate growth of developing regions, which have lower than segment-average margins), and a 30 basis point impact from lower pricing.

Total SG&A spending increased 2% to $4.7 billion primarily due to increased marketing activities. SG&A as a percentage of net sales increased 60 basis points to 27.8% primarily due to marketing spending as a percentage of net sales, which increased 90 basis points due to an increase in advertising and other activities, partially offset by a gain on a sale of real estate.

Non-Operating Expenses and Income

Interest expense was $122 million for the quarter, a decrease of $21 million versus the prior year period, due to a decrease in weighted average interest rates and a decline in the average debt outstanding. Interest income was $42 million for the quarter, a decrease of $16 million versus the prior year period due to a decrease in interest-bearing cash and cash equivalents. Other non-operating income/(loss) was $(539) million, a decrease of $574 million, primarily due to a $543 million charge related to early extinguishment of certain long-term debt during the quarter.

Income Taxes on Continuing Operations

The effective tax rate on continuing operations decreased 230 basis points to 21.3%. The decline was due primarily to 300 basis points of favorable discrete impacts related to uncertain income tax positions from the resolution of matters in various jurisdictions (which netted to 380 basis points in the current year versus 80 basis points in the prior year) and a 210 basis point impact from the early extinguishment of debt. These benefits were partially offset by unfavorable geographic mix, primarily due to a higher proportion of U.S. earnings.

Net Earnings from Continuing Operations

Net earnings from continuing operations decreased $344 million or 12% to $2.6 billion for the quarter. This decrease was primarily driven by a $345 million after-tax charge related to early extinguishment of long-term debt during the quarter partially offset by a lower effective tax rate. Operating income was up 1%. Foreign exchange impacts reduced net earnings by about $130 million for the quarter due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Egypt, Nigeria and the United Kingdom. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations decreased 8% to $0.93 due to the decrease in net earnings. The difference between the decrease in net earnings from continuing operations and the decrease in the related earnings per share was due to a reduction in number of weighted average shares outstanding following the shares tendered in the sale of the Beauty Brands to Coty (see Note 11 to the Consolidated Financial Statements).

Discontinued Operations

Net earnings from discontinued operations increased $5.0 billion to $5.3 billion in the current period versus $323 million in the prior period. This change was driven by the $5.3 billion after-tax gain on the sale of the Beauty Brands in the current period, partially offset by reduced net earnings from the businesses in discontinued operations following divestitures (see Note 11 to the Consolidated Financial Statements).

Net Earnings

Net earnings attributable to Procter & Gamble increased $4.7 billion or 146% to $7.9 billion for the quarter. The increase was driven by the gain on the sale of the Beauty Brands, partially offset by the charge related to the early extinguishment of debt, both discussed above. Diluted net earnings per share increased 157% to $2.88. The difference between the increase in net earnings from continuing operations and the increase in the related earnings per share was due to the reduction in weighted average shares outstanding discussed above. Core net earnings per share increased 4% to $1.08. Core net earnings per share represents diluted net earnings per share from continuing operations excluding the charge related to early extinguishment of long-term debt and incremental restructuring charges related to our productivity and cost savings plans.

RESULTS OF OPERATIONS – Six Months Ended December 31, 2016

The following discussion provides a review of results for the six months ended December 31, 2016 versus the six months ended December 31, 2015.



	Six Months Ended December 31
Amounts in millions, except per share amounts	2016		2015		% Chg
Net sales	$	33,374	$	33,442	—	%
Operating income	7,646		7,621		—	%
Net earnings from continuing operations	5,436		5,682		(4	)%
Net earnings from discontinued operations	5,217		181		2,782	%
Net earnings attributable to Procter & Gamble	10,589		5,807		82	%
Diluted net earnings per common share	3.81		2.03		88	%
Diluted net earnings per share from continuing operations	1.93		1.97		(2	)%
Core net earnings per common share	2.11		2.02		4	%

	Six Months Ended December 31
COMPARISONS AS A % OF NET SALES	2016		2015		Basis Pt Chg
Gross profit	50.9%		50.3%		60
Selling, general & administrative expense	27.9%		27.5%		40
Operating income	22.9%		22.8%		10
Earnings from continuing operations before income taxes	21.0%		22.3%		(130)
Net earnings from continuing operations	16.3%		17.0%		(70)
Net earnings attributable to Procter & Gamble	31.7%		17.4%		1,430

Net Sales

Net sales fiscal year to date were unchanged versus the previous period at $33.4 billion. Unit volume increased 1%. Unfavorable foreign exchange reduced net sales by 2%. Pricing and mix had no net impact on consolidated net sales. Volume increased mid-single digits in Health Care and low single digits in Grooming, Fabric & Home Care and in Baby, Feminine & Family Care. Volume decreased low single digits in Beauty driven by minor brand divestitures. Volume increased low single digits in developed regions and was unchanged in developing regions. Organic sales increased 2% driven by a 2% increase in organic volume.



	Net Sales Change Drivers 2016 vs. 2015 (Six Months Ended December 31)*
	Volume with Acquisitions & Divestitures	Volume Excluding Acquisitions & Divestitures	Foreign Exchange	Price	Mix	Other**	Net Sales Growth
Beauty	(2)%	2%	(2)%	—%	2%	1%	(1)%
Grooming	2%	3%	(2)%	1%	(2)%	—%	(1)%
Health Care	4%	5%	(2)%	1%	1%	—%	4%
Fabric & Home Care	1%	3%	(2)%	(1)%	1%	1%	—%
Baby, Feminine & Family Care	3%	3%	(2)%	(1)%	—%	(1)%	(1)%
Total Company	1%	2%	(2)%	—%	—%	1%	—%

* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.

** Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.

Operating Costs

Gross margin increased 60 basis points to 50.9% of net sales for the fiscal year to date period. Gross margin increased primarily due to a 200 basis point positive impact from manufacturing cost savings and a 10 basis point benefit from volume scale leverage. These impacts were partially offset by a 60 basis point negative impact from unfavorable foreign exchange, a 10 basis point decrease due to higher incremental restructuring charges, a 20 basis point decline from unfavorable product mix across segments (caused by the net sales decline in Beauty, which has higher than company-average gross margins), a 20 basis point decrease due to lower pricing and 40 basis points of combined negative impact from higher commodity costs and initiative investments.

Total SG&A spending increased 1% to $9.3 billion due to increased marketing activities. SG&A as a percentage of net sales increased 40 basis points to 27.9%. Marketing spending as a percentage of net sales increased 80 basis points due to an increase in advertising and other activities. Overhead costs as a percentage of net sales increased 10 basis points while other operating expense decreased 50 basis points due to reduced net foreign exchange transactional costs and a sale of real estate.

Non-Operating Expenses and Income

Interest expense was $253 million for the fiscal year to date period, a decrease of $30 million versus the prior year period, due to a decrease in weighted average interest rates and a decline in the average debt outstanding. Interest income was $77 million for the fiscal year to date period, a decrease of $25 million versus the prior year period due to a decrease in interest-bearing cash and cash equivalents. Other non-operating income/(loss) was $(476) million, a decrease of $493 million, primarily due to a $543 million charge related to early extinguishment of long-term debt discussed above.

Income Taxes on Continuing Operations

The effective tax rate on continuing operations decreased 150 basis points to 22.3%. The rate declined due primarily to 120 basis points of favorable discrete impacts related to uncertain income tax positions from the resolution of matters in various jurisdictions (which netted to 190 basis points favorable impact in the current year versus 70 basis points in the prior year), a 180 basis point impact from excess tax benefits associated with share-based payments due to the adoption of FASB Accounting Standards Update (ASU) 2016-09 Improvements to Employee Share-Based Payment Accounting (see Note 2 to the Consolidated Financial Statements) and a 100 basis point impact from the early extinguishment of debt. These benefits were partially offset by unfavorable geographic mix, primarily due to a higher proportion of U.S. earnings.

Net Earnings from Continuing Operations

Net earnings from continuing operations decreased $246 million or 4% to $5.4 billion for the fiscal year to date period. This decrease was driven by a $345 million after-tax charge related to the early extinguishment of long-term debt, partially offset by the lower effective tax rate. Operating income was up less than 1%. Foreign exchange impacts reduced net earnings by about $330 million fiscal year to date due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Egypt, Nigeria and the United Kingdom. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations decreased 2% to $1.93 due to the decrease in net earnings, partially offset by the decline in the number of weighted average shares outstanding discussed above.

Discontinued Operations

Net earnings from discontinued operations increased $5.0 billion to $5.2 billion in the current period versus $181 million in the prior period. This change was driven by the $5.3 billion gain on the sale of the Beauty Brands in the current period, partially offset by reduced net earnings from the businesses in discontinued operations following divestitures (see Note 11 to the Consolidated Financial Statements).

Net Earnings

Net earnings attributable to Procter & Gamble increased $4.8 billion or 82% to $10.6 billion for the fiscal year to date period. The increase was driven by the gain on the sale of the Beauty Brands partially offset by the charge related to the early extinguishment of debt, both discussed above. Diluted net earnings per share increased 88% to $3.81. The difference between the increase in net earnings attributable to Procter & Gamble and the increase in the related earnings per share was due to the reduction in weighted average shares outstanding discussed above. Core net earnings per share increased 4% to $2.11. Core net earnings per share represents diluted net earnings per share from continuing operations excluding the charge related to early extinguishment of long-term debt and incremental restructuring charges related to our productivity and cost savings plans.

BUSINESS SEGMENT DISCUSSION – Three and Six Months Ended December 31, 2016

The following discussion provides a review of results by reportable business segment. Analyses of the results for the three and six month periods ended December 31, 2016 are provided based on a comparison to the same three and six month periods ended December 31, 2015. The primary financial measures used to evaluate segment performance are net sales and net earnings from continuing operations. The table below provides supplemental information on net sales and net earnings from continuing operations by reportable business segment for the three and six months ended December 31, 2016 versus the comparable prior year periods (dollar amounts in millions):



	Three Months Ended December 31, 2016
	Net Sales		% Change Versus Year Ago		Earnings/(Loss) from Continuing Operations Before Income Taxes		% Change Versus Year Ago		Net Earnings/(Loss) from Continuing Operations		% Change Versus Year Ago
Beauty	$	2,942	(1	)%	$	714	(8	)%	$	540	(8	)%
Grooming	1,789		(1	)%	614		6	%	469		6	%
Health Care	2,072		5	%	608		8	%