Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2019
OR
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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)
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| | | | |
Ohio | | 1-434 | | 31-0411980 |
(State of Incorporation) | | (Commission File Number) | | (I.R.S. Employer Identification Number) |
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| | |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act).
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| Large accelerated filer | þ | | | Accelerated filer | ¨ | |
| Non-accelerated filer | ¨ | | | Smaller reporting company | ¨ | |
| | | | | Emerging growth company | ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 2,508,329,764 shares of Common Stock outstanding as of March 31, 2019.
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
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| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
Amounts in millions except per share amounts | 2019 | | 2018 | | 2019 | | 2018 |
NET SALES | $ | 16,462 |
| | $ | 16,281 |
| | $ | 50,590 |
| | $ | 50,329 |
|
Cost of products sold | 8,427 |
| | 8,384 |
| | 25,830 |
| | 25,362 |
|
Selling, general and administrative expense | 4,806 |
| | 4,688 |
| | 14,081 |
| | 14,191 |
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OPERATING INCOME | 3,229 |
| | 3,209 |
| | 10,679 |
| | 10,776 |
|
Interest expense | 131 |
| | 133 |
| | 398 |
| | 370 |
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Interest income | 52 |
| | 69 |
| | 168 |
| | 184 |
|
Other non-operating income, net | 128 |
| | 108 |
| | 685 |
| | 447 |
|
EARNINGS BEFORE INCOME TAXES | 3,278 |
| | 3,253 |
| | 11,134 |
| | 11,037 |
|
Income taxes | 502 |
| | 713 |
| | 1,931 |
| | 3,066 |
|
NET EARNINGS | 2,776 |
| | 2,540 |
| | 9,203 |
| | 7,971 |
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Less: Net earnings attributable to noncontrolling interests | 31 |
| | 29 |
| | 65 |
| | 112 |
|
NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 2,745 |
| | $ | 2,511 |
| | $ | 9,138 |
| | $ | 7,859 |
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| | | | | | | |
NET EARNINGS PER SHARE (1) | | | | | | | |
Basic | $ | 1.07 |
| | $ | 0.97 |
| | $ | 3.58 |
| | $ | 3.02 |
|
Diluted | $ | 1.04 |
| | $ | 0.95 |
| | $ | 3.48 |
| | $ | 2.94 |
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| | | | | | | |
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 2,637.7 |
| | 2,645.6 |
| | 2,624.3 |
| | 2,668.6 |
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| |
(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)
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| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
Amounts in millions | 2019 | | 2018 | | 2019 | | 2018 |
NET EARNINGS | $ | 2,776 |
| | $ | 2,540 |
| | $ | 9,203 |
| | $ | 7,971 |
|
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | | | | | | | |
Financial statement foreign currency translation | (127 | ) | | 925 |
| | (713 | ) | | 1,953 |
|
Unrealized gains/(losses) on hedges | 200 |
| | (558 | ) | | 399 |
| | (1,188 | ) |
Unrealized gains/(losses) on investment securities | 54 |
| | (70 | ) | | 107 |
| | (135 | ) |
Unrealized gains/(losses) on defined benefit retirement plans | 64 |
| | (17 | ) | | 314 |
| | 111 |
|
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | 191 |
| | 280 |
| | 107 |
| | 741 |
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TOTAL COMPREHENSIVE INCOME | 2,967 |
| | 2,820 |
| | 9,310 |
| | 8,712 |
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Less: Total comprehensive income attributable to noncontrolling interests | 34 |
| | 29 |
| | 65 |
| | 112 |
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TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 2,933 |
| | $ | 2,791 |
| | $ | 9,245 |
| | $ | 8,600 |
|
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| | | | | | | | | | | | |
Amounts in millions | | | | | March 31, 2019 | | June 30, 2018 |
Assets | | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | | | | $ | 2,738 |
| | $ | 2,569 |
|
Available-for-sale investment securities | | | | | 7,085 |
| | 9,281 |
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Accounts receivable | | | | | 5,198 |
| | 4,686 |
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INVENTORIES | | | | | | | |
Materials and supplies | | | | | 1,415 |
| | 1,335 |
|
Work in process | | | | | 617 |
| | 588 |
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Finished goods | | | | | 3,326 |
| | 2,815 |
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Total inventories | | | | | 5,358 |
| | 4,738 |
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Prepaid expenses and other current assets | | | | | 1,933 |
| | 2,046 |
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TOTAL CURRENT ASSETS | | | | | 22,312 |
| | 23,320 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | | | | | 20,993 |
| | 20,600 |
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GOODWILL | | | | | 46,753 |
| | 45,175 |
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TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET | | | | 25,836 |
| | 23,902 |
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OTHER NONCURRENT ASSETS | | | | | 5,779 |
| | 5,313 |
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TOTAL ASSETS | | | | | $ | 121,673 |
| | $ | 118,310 |
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| | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Accounts payable | | | | | $ | 10,207 |
| | $ | 10,344 |
|
Accrued and other liabilities | | | | | 9,252 |
| | 7,470 |
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Debt due within one year | | | | | 8,911 |
| | 10,423 |
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TOTAL CURRENT LIABILITIES | | | | | 28,370 |
| | 28,237 |
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LONG-TERM DEBT | | | | | 21,359 |
| | 20,863 |
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DEFERRED INCOME TAXES | | | | | 6,951 |
| | 6,163 |
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OTHER NONCURRENT LIABILITIES | | | | | 9,441 |
| | 10,164 |
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TOTAL LIABILITIES | | | | | 66,121 |
| | 65,427 |
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SHAREHOLDERS’ EQUITY | | | | | | | |
Preferred stock | | | | | 933 |
| | 967 |
|
Common stock – shares issued – | March 2019 | | 4,009.2 |
| | | | |
| June 2018 | | 4,009.2 |
| | 4,009 |
| | 4,009 |
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Additional paid-in capital | | | | | 63,624 |
| | 63,846 |
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Reserve for ESOP debt retirement | | | | | (1,145 | ) | | (1,204 | ) |
Accumulated other comprehensive income/(loss) | | | | | (14,968 | ) | | (14,749 | ) |
Treasury stock | | | | | (99,484 | ) | | (99,217 | ) |
Retained earnings | | | | | 102,103 |
| | 98,641 |
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Noncontrolling interest | | | | | 480 |
| | 590 |
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TOTAL SHAREHOLDERS’ EQUITY | | | | | 55,552 |
| | 52,883 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | $ | 121,673 |
| | $ | 118,310 |
|
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumu-lated Other Comp-rehensive Income/(Loss) | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity |
Shares | Amount |
BALANCE DECEMBER 31, 2018 | 2,501,580 |
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| $4,009 |
|
| $946 |
|
| $63,679 |
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| ($1,178 | ) |
| ($15,156 | ) |
| ($99,480 | ) |
| $101,170 |
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| $453 |
|
| $54,443 |
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Net earnings | | | | | | | | 2,745 |
| 31 |
| 2,776 |
|
Other comprehensive income/(loss) | | | | | | 188 |
| | | 3 |
| 191 |
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Dividends and dividend equivalents ($0.7172 per share): | | | | | | | | | | |
Common | | | | | | | | (1,799 | ) | | (1,799 | ) |
Preferred, net of tax benefits | | | | | | | | (64 | ) | | (64 | ) |
Treasury stock purchases | (12,945 | ) | | | | | | (1,250 | ) | | | (1,250 | ) |
Employee stock plans | 18,197 |
| | | (57 | ) | | | 1,235 |
| | | 1,178 |
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Preferred stock conversions | 1,498 |
| | (13 | ) | 2 |
| | | 11 |
| | | — |
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ESOP debt impacts | | | | | 33 |
| | | 51 |
| | 84 |
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Noncontrolling interest, net | | | | — |
| | | | | (7 | ) | (7 | ) |
BALANCE MARCH 31, 2019 | 2,508,330 |
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| $4,009 |
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| $933 |
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| $63,624 |
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| ($1,145 | ) |
| ($14,968 | ) |
| ($99,484 | ) |
| $102,103 |
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| $480 |
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| $55,552 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended March 31, 2019 |
Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumu-lated Other Comp-rehensive Income/(Loss) | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity |
Shares | Amount |
BALANCE JUNE 30, 2018 | 2,498,093 |
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| $4,009 |
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| $967 |
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| $63,846 |
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| ($1,204 | ) |
| ($14,749 | ) |
| ($99,217 | ) |
| $98,641 |
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| $590 |
|
| $52,883 |
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Impact of adoption of new accounting standards | | | | | | (326 | ) | | (200 | ) | (27 | ) | (553 | ) |
Net earnings | | | | | | | | 9,138 |
| 65 |
| 9,203 |
|
Other comprehensive income/(loss) | | | | | | 107 |
| | | — |
| 107 |
|
Dividends and dividend equivalents ($2.1516 per share): | | | | | | | | | | |
Common | | | | | | | | (5,380 | ) | | (5,380 | ) |
Preferred, net of tax benefits | | | | | | | | (195 | ) | | (195 | ) |
Treasury stock purchases | (37,282 | ) | | | | | | (3,253 | ) | | | (3,253 | ) |
Employee stock plans | 43,586 |
| | | (110 | ) | | | 2,957 |
| | | 2,847 |
|
Preferred stock conversions | 3,933 |
| | (34 | ) | 5 |
| | | 29 |
| | | — |
|
ESOP debt impacts | | | | | 59 |
| | | 99 |
| | 158 |
|
Noncontrolling interest, net | | | | (117 | ) | | | | | (148 | ) | (265 | ) |
BALANCE MARCH 31, 2019 | 2,508,330 |
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| $4,009 |
|
| $933 |
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| $63,624 |
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| ($1,145 | ) |
| ($14,968 | ) |
| ($99,484 | ) |
| $102,103 |
|
| $480 |
|
| $55,552 |
|
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (cont.)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumu-lated Other Comp-rehensive Income/(Loss) | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity |
Shares | Amount |
BALANCE DECEMBER 31, 2017 | 2,521,004 |
|
| $4,009 |
|
| $986 |
|
| $63,757 |
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| ($1,229 | ) |
| ($14,171 | ) |
| ($97,121 | ) |
| $97,881 |
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| $609 |
|
| $54,721 |
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Net earnings | | | | | | | | 2,511 |
| 29 |
| 2,540 |
|
Other comprehensive income/(loss) | | | | | | 280 |
| | | — |
| 280 |
|
Dividends and dividend equivalents ($0.6896 per share): | | | | | | | | | | |
Common | | | | | | | | (1,739 | ) | | (1,739 | ) |
Preferred, net of tax benefits | | | | | | | | (74 | ) | | (74 | ) |
Treasury stock purchases | (16,506 | ) | | | | | | (1,381 | ) | | | (1,381 | ) |
Employee stock plans | 8,509 |
| | | (42 | ) | | | 578 |
| | | 536 |
|
Preferred stock conversions | 1,592 |
| | (14 | ) | 2 |
| | | 12 |
| | | — |
|
ESOP debt impacts | | | | | 26 |
| | | 44 |
| | 70 |
|
Noncontrolling interest, net | | | | | | | | | (7 | ) | (7 | ) |
BALANCE MARCH 31, 2018 | 2,514,599 |
|
| $4,009 |
|
| $972 |
|
| $63,717 |
|
| ($1,203 | ) |
| ($13,891 | ) |
| ($97,912 | ) |
| $98,623 |
|
| $631 |
|
| $54,946 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended March 31, 2018 |
Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumu-lated Other Comp-rehensive Income/(Loss) | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity |
Shares | Amount |
BALANCE JUNE 30, 2017 | 2,553,297 |
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| $4,009 |
|
| $1,006 |
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| $63,641 |
|
| ($1,249 | ) |
| ($14,632 | ) |
| ($93,715 | ) |
| $96,124 |
|
| $594 |
|
| $55,778 |
|
Net earnings | | | | | | | | 7,859 |
| 112 |
| 7,971 |
|
Other comprehensive income/(loss) | | | | | | 741 |
| | | — |
| 741 |
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Dividends and dividend equivalents ($2.0688 per share): | | | | | | | | | | |
Common | | | | | | | | (5,251 | ) | | (5,251 | ) |
Preferred, net of tax benefits | | | | | | | | (198 | ) | | (198 | ) |
Treasury stock purchases | (63,242 | ) | | | | | | (5,634 | ) | | | (5,634 | ) |
Employee stock plans | 20,748 |
| | | 71 |
| | | 1,408 |
| | | 1,479 |
|
Preferred stock conversions | 3,796 |
| | (34 | ) | 5 |
| | | 29 |
| | | — |
|
ESOP debt impacts | | | | | 46 |
| | | 89 |
| | 135 |
|
Noncontrolling interest, net | | | | | | | | | (75 | ) | (75 | ) |
BALANCE MARCH 31, 2018 | 2,514,599 |
|
| $4,009 |
|
| $972 |
|
| $63,717 |
|
| ($1,203 | ) |
| ($13,891 | ) |
| ($97,912 | ) |
| $98,623 |
|
| $631 |
|
| $54,946 |
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See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Nine Months Ended March 31 |
Amounts in millions | 2019 | | 2018 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | $ | 2,569 |
| | $ | 5,569 |
|
OPERATING ACTIVITIES | | | |
Net earnings | 9,203 |
| | 7,971 |
|
Depreciation and amortization | 2,004 |
| | 2,084 |
|
Share-based compensation expense | 299 |
| | 249 |
|
Deferred income taxes | (24 | ) | | (1,826 | ) |
Gain on sale of assets | (370 | ) | | (187 | ) |
Changes in: | | | |
Accounts receivable | (549 | ) | | (450 | ) |
Inventories | (601 | ) | | (457 | ) |
Accounts payable, accrued and other liabilities | 1,441 |
| | 752 |
|
Other operating assets and liabilities | (537 | ) | | 2,331 |
|
Other | 225 |
| | 201 |
|
TOTAL OPERATING ACTIVITIES | 11,091 |
| | 10,668 |
|
INVESTING ACTIVITIES | | | |
Capital expenditures | (2,533 | ) | | (2,810 | ) |
Proceeds from asset sales | 22 |
| | 246 |
|
Acquisitions, net of cash acquired | (3,943 | ) | | (108 | ) |
Purchases of short-term investments | (159 | ) | | (3,770 | ) |
Proceeds from sales and maturities of short-term investments | 2,535 |
| | 2,790 |
|
Change in other investments | (59 | ) | | 44 |
|
TOTAL INVESTING ACTIVITIES | (4,137 | ) | | (3,608 | ) |
FINANCING ACTIVITIES | | | |
Dividends to shareholders | (5,561 | ) | | (5,449 | ) |
Change in short-term debt | (1,832 | ) | | (1,259 | ) |
Additions to long-term debt | 2,368 |
| | 5,072 |
|
Reductions of long-term debt | (1,002 | ) | | (1,402 | ) |
Treasury stock purchases | (3,253 | ) | | (5,634 | ) |
Impact of stock options and other | 2,590 |
| | 1,158 |
|
TOTAL FINANCING ACTIVITIES | (6,690 | ) | | (7,514 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (95 | ) | | 211 |
|
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 169 |
| | (243 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 2,738 |
| | $ | 5,326 |
|
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, 2018 and the Form 8-K filed October 22, 2018 to update the Form 10-K to revise disclosures to reflect the adoption of the Financial Accounting Standards Board (FASB) ASU 2017-07 and 2016-18. For additional details on the impacts of adoption, see Note 2. 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 and U.S. Tax Reform
On July 1, 2018, we adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." This guidance outlines a single, comprehensive model of accounting for revenue from contracts with customers. We adopted the standard using the modified retrospective transition method, under which prior periods were not revised to reflect the impacts 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. Accordingly, the timing of revenue recognition is not materially impacted by the new standard. Trade promotions, consisting primarily of customer pricing allowances, in-store merchandising funds, advertising and other promotional activities, and consumer coupons, are offered through various programs to customers and consumers. The adoption of the new standard impacts the accrual timing for certain portions of our customer and consumer promotional spending, which resulted in a cumulative reduction to Retained earnings of $534, net of tax, on the date of adoption. The provisions of the new standard also impact the classification of certain payments to customers, moving an immaterial amount of such payments from expense to a deduction from net sales. Had this standard been effective and adopted during fiscal 2018, the impact would have been to reclassify $232 from Selling, General and Administrative expense (SG&A) to a reduction of Net sales for the nine months ended March 31, 2018 and $309 for the year ended June 30, 2018, with no impact to operating profit. This guidance included practical expedients, none of which are material to our Consolidated Financial Statements. This new guidance does not have any other material impacts on our Consolidated Financial Statements, including financial disclosures.
On July 1, 2018, we adopted ASU 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)." This guidance requires an entity to disaggregate the current service cost component from the other components of net benefit costs in the face of the income statement. It requires the service cost component to be presented with other current compensation costs for the related employees in the operating section of the income statement, with other components of net benefit cost presented outside of income from operations. We adopted the standard retrospectively, using the practical expedient which allows entities to use information previously disclosed in their pension and other postretirement benefit plans footnote as the basis to apply the retrospective presentation requirements. As such, prior periods’ results have been revised to report the other components of net defined benefit costs, previously reported in Cost of products sold and SG&A, in Other non-operating income, net.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows: Restricted Cash (Topic 230)." This guidance requires the Statement of Cash Flows to present changes in the total of cash, cash equivalents and restricted cash. Prior to the adoption of this ASU, the relevant accounting guidance did not require the Statement of Cash Flows to include changes in restricted cash. We adopted the standard retrospectively on July 1, 2018. We currently have no significant restricted cash balances. Historically, we had restricted cash balances and changes related to divestiture activity. Such balances were presented as Current assets held for sale on the balance sheets, with changes presented as Investing activities on the Statements of Cash Flow. In accordance with ASU 2016-08, such balances are now included in the beginning and ending balances of Cash, cash equivalents and restricted cash for all periods presented.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)." This guidance permits companies to make an election to reclassify stranded tax effects from the recently enacted U.S. Tax Cuts and Jobs Act included in Accumulated other comprehensive income/(loss) (AOCI) to Retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this guidance in the quarter ended September 30, 2018. The reclassification from the adoption of this standard resulted in an increase of $326 to Retained earnings and a decrease of $326 to AOCI.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity transfers of Assets other than Inventory." The standard eliminates the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. We have adopted this standard effective July 1, 2018 on a modified
Amounts in millions of dollars unless otherwise specified.
retrospective basis. The adoption of ASU 2016-16 did not have a material impact on our Consolidated Financial Statements, including the cumulative effect adjustment required upon adoption.
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. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements”. The updated guidance provides an optional transition method, which allows for the application of the standard as of the adoption date with no restatement of prior period amounts. We plan to adopt the standard on July 1, 2019 under the optional transition method described above. We are currently in the process of implementing lease accounting software as well as 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 to show equal and offsetting lease assets and lease liabilities.
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model, whereby the impairment equals the difference between the carrying amount and the fair value of the specified reporting units in their entirety. This eliminates the second step of the current impairment model that requires companies to first estimate the fair value of all assets in a reporting unit and measure impairments based on those fair values and a residual measurement approach. It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We will adopt the standard no later than July 1, 2020. The impact of the new standard will be dependent on the specific facts and circumstances of future individual impairments, if any.
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.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "U.S. Tax Act"). The U.S. Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rates and implementing a hybrid territorial tax system. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ended June 30, 2018, and 21% for subsequent fiscal years. However, the U.S. Tax Act eliminated the domestic manufacturing deduction and moved to a hybrid territorial system, which also largely eliminated the ability to credit certain foreign taxes that existed prior to enactment of the U.S. Tax Act.
There are also certain transitional impacts of the U.S. Tax Act. As part of the transition to the new hybrid territorial tax system, the U.S. Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate caused us to adjust our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $602 million for the fiscal year ended June 30, 2018, and $650 million for the nine months ended March 31, 2018, comprised of a repatriation tax charge of $3.9 billion (comprised of U.S. repatriation taxes and foreign withholding taxes) and a net deferred tax benefit of $3.2 billion. We finalized our assessment of the transitional impacts of the U.S. Tax Act during the quarter ended December 31, 2018 and there was no significant impact on tax expense during the nine months ended March 31, 2019. Any legislative changes, as well as any other new or proposed Treasury regulations, which have yet to be issued, may result in additional income tax impacts which could be material in the period any such changes are enacted.
3. Segment Information
Under U.S. GAAP, our Global Business Units (GBUs) are aggregated into five reportable segments: 1) Beauty, 2) Grooming, 3) Health Care, 4) Fabric & Home Care and 5) Baby, Feminine & Family Care. Our five reportable segments are comprised of:
| |
• | Beauty: Hair Care (Conditioner, Shampoo, Styling Aids, Treatments); Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care); |
| |
• | Grooming: Shave Care (Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care); Appliances |
| |
• | Health Care: Oral Care (Toothbrushes, Toothpaste, Other Oral Care); Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care); |
| |
• | Fabric & Home Care: Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents); Home Care (Air Care, Dish Care, P&G Professional, Surface Care); and |
| |
• | Baby, Feminine & Family Care: Baby Care (Baby Wipes, Diapers and Pants); Feminine Care (Adult Incontinence, Feminine Care); Family Care (Paper Towels, Tissues, Toilet Paper). |
Amounts in millions of dollars unless otherwise specified.
Our business units are comprised of similar product categories. Nine business units individually accounted for 5% or more of consolidated net sales as follows:
|
| | | | | | | |
| % of Net sales by Business Unit (1) |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Fabric Care | 22% | | 22% | | 23% | | 22% |
Baby Care | 12% | | 13% | | 12% | | 13% |
Home Care | 11% | | 11% | | 10% | | 10% |
Skin and Personal Care | 10% | | 9% | | 10% | | 9% |
Hair Care | 9% | | 10% | | 9% | | 10% |
Family Care | 8% | | 8% | | 9% | | 8% |
Oral Care | 8% | | 8% | | 8% | | 8% |
Shave Care | 8% | | 8% | | 8% | | 8% |
Feminine Care | 6% | | 6% | | 6% | | 6% |
All Other | 6% | | 5% | | 5% | | 6% |
Total | 100% | | 100% | | 100% | | 100% |
| |
(1) | % of Net sales by business unit excludes sales held in Corporate. |
Following is a summary of reportable segment results:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31 | | Nine Months Ended March 31 |
| | Net Sales | | Earnings/(Loss) Before Income Taxes | | Net Earnings | | Net Sales | | Earnings/(Loss) Before Income Taxes | | Net Earnings |
Beauty | 2019 | $ | 3,061 |
| | $ | 675 |
| | $ | 551 |
| | $ | 9,707 |
| | $ | 2,586 |
| | $ | 2,082 |
|
| 2018 | 2,934 |
| | 642 |
| | 488 |
| | 9,305 |
| | 2,331 |
| | 1,775 |
|
Grooming | 2019 | 1,424 |
| | 329 |
| | 344 |
| | 4,603 |
| | 1,194 |
| | 1,062 |
|
| 2018 | 1,550 |
| | 422 |
| | 334 |
| | 4,903 |
| | 1,367 |
| | 1,086 |
|
Health Care | 2019 | 2,115 |
| | 462 |
| | 358 |
| | 6,180 |
| | 1,571 |
| | 1,210 |
|
| 2018 | 1,934 |
| | 467 |
| | 305 |
| | 6,048 |
| | 1,590 |
| | 1,065 |
|
Fabric & Home Care | 2019 | 5,382 |
| | 1,114 |
| | 847 |
| | 16,427 |
| | 3,392 |
| | 2,584 |
|
| 2018 | 5,262 |
| | 1,001 |
| | 635 |
| | 16,079 |
| | 3,281 |
| | 2,118 |
|
Baby, Feminine & Family Care | 2019 | 4,357 |
| | 861 |
| | 653 |
| | 13,305 |
| | 2,693 |
| | 2,052 |
|
| 2018 | 4,458 |
| | 852 |
| | 539 |
| | 13,616 |
| | 2,749 |
| | 1,766 |
|
Corporate | 2019 | 123 |
| | (163 | ) | | 23 |
| | 368 |
| | (302 | ) | | 213 |
|
| 2018 | 143 |
| | (131 | ) | | 239 |
| | 378 |
| | (281 | ) | | 161 |
|
Total Company | 2019 | $ | 16,462 |
| | $ | 3,278 |
| | $ | 2,776 |
| | $ | 50,590 |
| | $ | 11,134 |
| | $ | 9,203 |
|
| 2018 | 16,281 |
| | 3,253 |
| | 2,540 |
| | 50,329 |
| | 11,037 |
| | 7,971 |
|
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, 2018 | $ | 12,992 |
| | $ | 19,820 |
| | $ | 5,929 |
| | $ | 1,865 |
| | $ | 4,569 |
| | $ | 45,175 |
|
Acquisitions and divestitures | 132 |
| | — |
| | 1,960 |
| | 6 |
| | 57 |
| | 2,155 |
|
Translation and other | (202 | ) | | (212 | ) | | (81 | ) | | (18 | ) | | (64 | ) | | (577 | ) |
Goodwill at March 31, 2019 | $ | 12,922 |
| | $ | 19,608 |
| | $ | 7,808 |
| | $ | 1,853 |
| | $ | 4,562 |
| | $ | 46,753 |
|
Amounts in millions of dollars unless otherwise specified.
Goodwill from current year acquisitions primarily reflects the acquisition of the over-the-counter (OTC) healthcare business of Merck KGaA (Merck OTC) in the Health Care reportable segment (see Note 11), along with other minor acquisitions in the Beauty, Baby, Feminine & Family Care and Fabric & Home Care reportable segments. Goodwill increases due to acquisitions was partially offset by the divestiture of the Teva portion of the PGT business in the Health Care reportable segment and currency translation.
Identifiable intangible assets at March 31, 2019 were comprised of:
|
| | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization |
Intangible assets with determinable lives | $ | 8,586 |
| | $ | (5,338 | ) |
Intangible assets with indefinite lives | 22,588 |
| | — |
|
Total identifiable intangible assets | $ | 31,174 |
| | $ | (5,338 | ) |
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 March 31, 2019 and 2018 was $98 and $75, respectively. For the nine months ended March 31, 2019 and 2018, the amortization expense of intangible assets was $252 and $227, respectively.
Goodwill and indefinite lived intangible assets are not amortized, but are tested annually for impairment. 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. Our annual impairment testing for goodwill and indefinite lived intangible assets occurs during the 3 months ended December 31. Because of the relative size of the cushions in the Shave Care reporting unit and related Gillette indefinite-lived intangible asset, as discussed in the following paragraph, and the business unit performance, we updated our step-one impairment test during the quarter ended March 31, 2019.
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 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. Both of these wholly acquired reporting units have fair value cushions that currently equal or exceed the underlying carrying values. However, the overall Shave Care goodwill cushion and related Gillette indefinite-lived intangible asset cushion have been reduced in recent years, with the fair values in the current year being reduced to amounts that approximate the reporting unit's carrying value and indefinite lived intangible. These reductions are due in large part to an increased competitive market environment in the U.S. and certain other markets, a deceleration of category growth caused by changing grooming habits and significant currency devaluations in a number of countries relative to the U.S. dollar, which collectively have resulted in reduced cash flow projections. The current year reduction in the fair value was primarily caused by further currency devaluations, along with competitive activities. As a result of these factors and the reduction in the fair values and related cushions, goodwill for the Shave Care reporting unit and the related indefinite-lived intangible asset are more susceptible to impairment risk.
The most significant assumptions utilized in the determination of the estimated fair values of Shave Care reporting unit and the Gillette indefinite-lived intangible asset are the net sales and earnings growth rates (including residual growth rates) and discount rate. The residual growth rate represents the expected rate at which the reporting unit and Gillette brand are expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimates is consistent with the reporting unit and brand operating plans, and approximates expected long term category market growth rates. The residual growth rate is dependent on overall market growth rates, the competitive environment, inflation, relative currency exchange rates and business activities that impact market share. As a result, the residual growth rate could be adversely impacted by a sustained deceleration in category growth, grooming habit changes, devaluation of currencies against the U.S. dollar or an increased competitive environment. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other country specific factors, such as further devaluation of currencies against the U.S. dollar. Spot rates as of the fair value measurement date are utilized in our fair value estimates for cash flows outside the U.S.
Amounts in millions of dollars unless otherwise specified.
While management can and has implemented strategies to address these events, changes in operating plans or 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 would trigger future impairment charges of the reporting unit's goodwill and indefinite-lived intangibles. As of March 31, 2019, the carrying values of Shave Care goodwill and the Gillette indefinite-lived intangible asset were $19.3 billion and $15.7 billion, respectively.
The table below provides a sensitivity analysis for the Shave Care reporting unit and the Gillette indefinite lived intangible asset, utilizing reasonably possible changes in the assumptions for the shorter term and residual growth rates and the discount rate, to demonstrate the potential impacts to the estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to a 25 basis point increase to discount rate or a 25 basis point decrease to our shorter-term and residual growth rates, both of which would result in impairment charges.
|
| | | | | |
| Approximate Percent Change in Estimated Fair Value |
| +25 bps Discount Rate | | -25 bps Growth Rate |
Shave Care goodwill reporting unit | (6 | )% | | (6 | )% |
Gillette indefinite-lived intangible asset | (6 | )% | | (6 | )% |
5. Earnings Per Share
Basic net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble less preferred dividends (net of related tax benefits) by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share are calculated using the treasury stock method, on the basis of the weighted average number of common shares outstanding plus the dilutive effect of stock options and other stock-based awards and the assumed conversion of preferred stock.
Net earnings per share were as follows:
|
| | | | | | | | | | | | | | | |
CONSOLIDATED AMOUNTS | Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Net earnings | $ | 2,776 |
| | $ | 2,540 |
| | $ | 9,203 |
| | $ | 7,971 |
|
Less: Net earnings attributable to noncontrolling interests | 31 |
| | 29 |
| | 65 |
| | 112 |
|
Net earnings attributable to P&G (Diluted) | 2,745 |
| | 2,511 |
| | 9,138 |
| | 7,859 |
|
Preferred dividends, net of tax | (64 | ) | | (74 | ) | | (195 | ) | | (198 | ) |
Net earnings attributable to P&G available to common shareholders (Basic) | $ | 2,681 |
| | $ | 2,437 |
| | $ | 8,943 |
| | $ | 7,661 |
|
| | | | | | | |
SHARES IN MILLIONS | | | | | | | |
Basic weighted average common shares outstanding | 2,509.1 |
| | 2,522.7 |
| | 2,501.5 |
| | 2,535.7 |
|
Add: Effect of dilutive securities | | | | | | | |
Conversion of preferred shares (1) | 89.6 |
| | 94.3 |
| | 90.8 |
| | 95.4 |
|
Impact of stock options and other unvested equity awards (2) | 39.0 |
| | 28.6 |
| | 32.0 |
| | 37.5 |
|
Diluted weighted average common shares outstanding | 2,637.7 |
| | 2,645.6 |
| | 2,624.3 |
| | 2,668.6 |
|
| | | | | | | |
NET EARNINGS PER SHARE (3) | | | | | | | |
Basic | $ | 1.07 |
| | $ | 0.97 |
| | $ | 3.58 |
| | $ | 3.02 |
|
Diluted | $ | 1.04 |
| | $ | 0.95 |
| | $ | 3.48 |
| | $ | 2.94 |
|
| |
(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) | Weighted average outstanding stock options of approximately 4 million and 54 million for the three months ended March 31, 2019 and 2018, and approximately 25 million and 24 million for the nine months ended March 31, 2019 and 2018 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) | Net earnings per share are calculated on Net earnings attributable to Procter & Gamble. |
Amounts in millions of dollars unless otherwise specified.
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 March 31 | | Nine Months Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Share-based compensation expense | $ | 118 |
| | $ | 92 |
| | $ | 299 |
| | $ | 249 |
|
Net periodic benefit cost for pension benefits (1) | 30 |
| | 53 |
| | 94 |
| | 156 |
|
Net periodic benefit cost/(credit) for other retiree benefits (1) | (41 | ) | | (44 | ) | | (124 | ) | | (120 | ) |
| |
(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, 2018, as revised by the Form 8-K filed October 22, 2018 to update the Form 10-K to revise disclosures to reflect the adoption of the Financial Accounting Standards Board (FASB) ASU 2017-07 and 2016-18. |
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 nine months ended March 31, 2019.
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 nine months ended March 31, 2019.
The following table sets forth the Company’s financial assets as of March 31, 2019 and June 30, 2018 that are measured at fair value on a recurring basis during the period:
|
| | | | | | | |
| Fair Value Asset |
| March 31, 2019 | | June 30, 2018 |
Investments: | | | |
U.S. government securities | $ | 4,307 |
| | $ | 5,544 |
|
Corporate bond securities | 2,778 |
| | 3,737 |
|
Other investments | 165 |
| | 141 |
|
Total | $ | 7,250 |
| | $ | 9,422 |
|
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 $700 as of March 31, 2019 and $2,003 as of June 30, 2018. The amortized cost of U.S. government securities with maturities between one and five years was $3,657 as of March 31, 2019 and $3,659 as of June 30, 2018. The amortized cost of Corporate bond securities with maturities of less than a year was $1,422 as of March 31, 2019 and $1,291 as of June 30, 2018. The amortized cost of Corporate bond securities with maturities between one and five years was $1,375 as of March 31, 2019 and $2,503 as of June 30, 2018. 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 classified as Level 1 or Level 3 within the fair value hierarchy, or that used net asset value as a practical expedient. Fair values are generally estimated based upon quoted market prices for similar instruments.
The fair value of long-term debt was $24,958 and $23,402 as of March 31, 2019 and June 30, 2018, respectively. This includes the current portion of debt instruments ($2,310 and $1,769 as of March 31, 2019 and June 30, 2018, respectively). Certain long-term debt (debt tied to derivatives designated as a fair value hedge) is recorded at fair value. All other long-term debt is recorded at amortized cost, but is measured at fair value for disclosure purposes. We consider our debt to be Level 2 in the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Amounts in millions of dollars unless otherwise specified.
Disclosures about Financial Instruments
The notional amounts and fair values of financial instruments used in hedging transactions as of March 31, 2019 and June 30, 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value Asset | | Fair Value (Liability) |
| March 31, 2019 | | June 30, 2018 | | March 31, 2019 | | June 30, 2018 | | March 31, 2019 | | June 30, 2018 |
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS |
Interest rate contracts | $ | 4,515 |
| | $ | 4,587 |
| | $ | 127 |
| | $ | 125 |
| | $ | (16 | ) | | $ | (53 | ) |
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS |
Foreign currency interest rate contracts | $ | 3,034 |
| | $ | 1,848 |
| | $ | 27 |
| | $ | 41 |
| | $ | (8 | ) | | $ | (75 | ) |
TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS | $ | 7,549 |
| | $ | 6,435 |
| | $ | 154 |
| | $ | 166 |
| | $ | (24 | ) | | $ | (128 | ) |
| | | | | | | | | | | |
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS |
Foreign currency contracts | $ | 6,362 |
| | $ | 7,358 |
| | $ | 42 |
| | $ | 30 |
| | $ | (14 | ) | | $ | (56 | ) |
| | | | | | | | | | | |
TOTAL DERIVATIVES AT FAIR VALUE | $ | 13,911 |
| | $ | 13,793 |
| | $ | 196 |
| | $ | 196 |
| | $ | (38 | ) | | $ | (184 | ) |
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 fair value of the interest rate derivative asset/liability directly offsets the cumulative amount of the fair value hedging adjustment included in the carrying amount of the underlying debt obligation. The carrying amount of the underlying debt obligation, which includes the unamortized discount or premium and the fair value adjustment, was $4,611 and $4,639 as of March 31, 2019 and June 30, 2018, respectively. In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The carrying value of those debt instruments designated as net investment hedges, which includes the adjustment for the foreign currency transaction gain or loss on those instruments, was $16,958 and $15,012 as of March 31, 2019 and June 30, 2018, respectively. All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.
Before tax gains/(losses) on our financial instruments in hedging relationships are categorized as follows:
|
| | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in OCI on Derivatives |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS (1) (2) |
Foreign exchange contracts | $ | 34 |
| | $ | (222 | ) | | $ | 53 |
| | $ | (483 | ) |
| |
(1) | For the derivatives in net investment hedging relationships, the amount of gain/(loss) excluded from effectiveness testing, which was recognized in earnings, was $17 and $34 for the three months ended March 31, 2019 and 2018, respectively. The amount of gain/(loss) excluded from effectiveness testing was $44 and $107 for the nine months ended March 31, 2019 and 2018, respectively. |
| |
(2) | In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The amount of gain/(loss) recognized in AOCI for such instruments was $226 and $(535), for the three months ended March 31, 2019 and 2018, respectively. The amount of gain/(loss) recognized in AOCI for such instruments was $467 and $(1,280), for the nine months ended March 31, 2019 and 2018, respectively. |
|
| | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in Earnings |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS | | | | |
Interest rate contracts | $ | 21 |
| | $ | (46 | ) | | $ | 39 |
| | $ | (87 | ) |
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS | | | | |
Foreign currency contracts | $ | 75 |
| | $ | 123 |
| | $ | 68 |
| | $ | 121 |
|
The gain/(loss) on the derivatives in fair value hedging relationships is fully offset by the mark-to-market impact of the related exposure. These are both recognized in the Consolidated Statements of Earnings in Interest Expense. The gain/(loss) on derivatives not designated as hedging instruments is substantially offset by the currency mark-to-market of the related exposure. These are both recognized in the Consolidated Statements of Earnings in SG&A.
Amounts in millions of dollars unless otherwise specified.
8. Accumulated Other Comprehensive Income/(Loss)
The table below presents the changes in Accumulated other comprehensive income/(loss) (AOCI), including the reclassifications out of Accumulated other comprehensive income/(loss) by component:
|
| | | | | | | | | | | | | | | | | | | |
| Changes in Accumulated Other Comprehensive Income/(Loss) by Component |
| Hedges | | Investment Securities | | Pension and Other Retiree Benefits | | Financial Statement Translation | | Total AOCI |
Balance at June 30, 2018 | $ | (3,246 | ) | | $ | (173 | ) | | $ | (4,058 | ) | | $ | (7,272 | ) | | $ | (14,749 | ) |
OCI before reclassifications (1) | 399 |
| | 109 |
| | 163 |
| | (713 | ) | | (42 | ) |
Amounts reclassified from AOCI (2) | — |
| | (2 | ) | | 151 |
| | — |
| | 149 |
|
Net current period OCI | 399 |
| | 107 |
| | 314 |
| | (713 | ) | | 107 |
|
Reclassification to retained earnings in accordance with ASU 2018-02 (3) | (18 | ) | | — |
| | (308 | ) | | — |
| | (326 | ) |
Less: Other comprehensive income/(loss) attributable to non-controlling interests |
|
| |
|
| | — |
| | — |
| | — |
|
Balance at March 31, 2019 | $ | (2,865 | ) | | $ | (66 | ) | | $ | (4,052 | ) | | $ | (7,985 | ) | | $ | (14,968 | ) |
| |
(1) | Net of tax expense/(benefit) of $122, $0 and $43 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 $48 for gains/losses on hedges, investment securities and pension and other retiree benefit items, respectively. |
| |
(3) | Adjustment made to early adopt ASU 2018-02: "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," as discussed in Note 2. |
The below provides additional details on amounts reclassified from AOCI into the Consolidated Statements of Earnings:
| |
• | Investment securities: amounts reclassified from AOCI into Other non-operating income, net. |
| |
• | Pension and other retiree benefits: amounts reclassified from AOCI into Other non-operating income, net and included in the computation of net periodic postretirement costs. |
| |
• | Financial statement translation: amounts reclassified from AOCI into SG&A. |
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 2017, the Company announced specific elements of a multi-year productivity and cost savings plan to further reduce costs in the areas of supply chain, certain marketing activities and overhead expenses. This program is expected to result in incremental enrollment reductions, along with further 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. For the three and nine month periods ended March 31, 2019, the Company incurred total restructuring charges of $116 and $430, respectively. Of these charges incurred, $29 and $126 were recorded in SG&A and $85 and $291 were recorded in Cost of products sold, respectively. The remainder of these charges were recorded in Other non-operating income, net. The following table presents restructuring activity for the nine months ended March 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Reserve Balance | | Charges Previously Reported (Six Months Ended December 31, 2018) | | Charges for the | | Nine Months Ended March 31, 2019 | | Reserve Balance |
| June 30, 2018 | | | Three Months Ended March 31, 2019 | | Cash Spent | | Charges Against Assets | | March 31, 2019 |
Separations | $ | 259 |
| | $ | 109 |
| | $ | 57 |
| | $ | (188 | ) | | $ | — |
| | $ | 237 |
|
Asset-related costs | — |
| | 50 |
| | 52 |
| | — |
| | (102 | ) | | — |
|
Other costs | 254 |
| | 155 |
| | 7 |
| | (206 | ) | | — |
| | 210 |
|
Total | $ | 513 |
| | $ | 314 |
| | $ | 116 |
| | $ | (394 | ) | | $ | (102 | ) | | $ | 447 |
|
Separation Costs
Employee separation charges for the three and nine month periods ended March 31, 2019, relate to severance packages for approximately 240 employees and 1,210 employees, respectively. The packages were predominantly voluntary and the amounts were 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.
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 asset removal and termination of contracts related to supply chain optimization.
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 March 31, 2019 | | Nine Months Ended March 31, 2019 |
Beauty | $ | 6 |
| | $ | 33 |
|
Grooming | 18 |
| | 49 |
|
Health Care | 3 |
| | 15 |
|
Fabric & Home Care | 15 |
| | 46 |
|
Baby, Feminine & Family Care | 26 |
| | 117 |
|
Corporate (1) | 48 |
| | 170 |
|
Total Company | $ | 116 |
| | $ | 430 |
|
| |
(1) | Corporate includes costs related to allocated overheads, including charges related to our Sales and Market Operations, Global Business Services and Corporate Functions activities. |
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 150 taxable jurisdictions and, at any point in time, has 40 – 50 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. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions could increase or decrease within the next 12 months. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective tax rate related to these items.
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, 2018.
Amounts in millions of dollars unless otherwise specified.
11. Merck Acquisition
On November 30, 2018, we completed our acquisition of the over the counter (OTC) healthcare business of Merck KGaA (Merck OTC) for $3.7 billion (based on exchange rates at the time of closing) in an all-cash transaction. This business primarily sells OTC consumer healthcare products, mainly in Europe, Latin America and Asia markets. The results of Merck OTC, which are not material to the Company, are reported in our consolidated financial statements beginning December 1, 2018. Total sales for Merck OTC’s most recently completed fiscal year ended December 31, 2017 were approximately $1 billion.
The following table presents the preliminary allocation of purchase price related to the Merck OTC business as of the date of acquisition. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on final determination of fair values of the assets and liabilities acquired, which will be completed as we complete our analysis of the underlying assets and acquired liabilities, such as pensions, litigation cases, environmental issues, and tax positions.
|
| | | |
Amounts in millions | November 30, 2018 |
Current assets | $ | 392 |
|
Property, plant and equipment | 122 |
|
Intangible assets | 2,111 |
|
Goodwill | 2,014 |
|
Other non-current assets | 144 |
|
Total Assets Acquired | $ | 4,783 |
|
| |
Current liabilities | $ | 237 |
|
Deferred income taxes | 661 |
|
Non-current liabilities | 60 |
|
Total Liabilities Acquired | $ | 958 |
|
| |
Noncontrolling Interest (1) | $ | 169 |
|
| |
Net Assets Acquired | $ | 3,656 |
|
| |
(1) | Represents a 48% minority ownership interest in the Merck India company. |
The acquisition resulted in $2.0 billion in goodwill, of which approximately $180 million is expected to be deductible for tax purposes. All of this goodwill was allocated to the Health Care Segment. The goodwill is primarily attributable to the assembled workforce and synergies we expect to generate by combining the Merck OTC business with the Company’s existing personal health care business.
We have preliminarily estimated the fair value of Merck OTC’s identifiable intangible assets as $2.1 billion. The preliminary allocation of identifiable intangible assets and their average useful lives is as follows:
|
| | | | | |
Amounts in millions | Estimated Fair Value | | Avg Remaining Useful Life |
Intangible Assets with Determinable Lives | | | |
Brands | $ | 701 |
| | 14 |
Patents and technology | 118 |
| | 7 |
Customer relationships | 346 |
| | 20 |
Total | $ | 1,165 |
| | 15 |
| | | |
Intangible Assets with Indefinite Lives | | | |
Brands | 946 |
| | |
Total Intangible Assets | $ | 2,111 |
| | |
The majority of the intangible valuation relates to brand intangibles. Our preliminary assessment as to brand intangibles that have an indefinite life and those that have a definite life was based on a number of factors, including competitive environment, market
Amounts in millions of dollars unless otherwise specified.
share, brand history, product life cycles, operating plan and the macroeconomic environment of the countries in which the brands are sold. The indefinite-lived brand intangibles include Neurobion and Dolo Neurobion. The definite-lived brand intangibles primarily include regional or local brands. The definite-lived brand intangibles have estimated lives ranging from 10 to 20 years. The technology intangibles are related to R&D and manufacturing know-how; these intangibles have a 7 year estimated life. The customer relationships intangibles have a 20 year estimated life and reflect the historical and projected attrition rates for Merck OTC’s relationships with health care professionals, retailers and distributors.
|
| |
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.
Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility; (2) the ability to successfully manage local, regional or global economic volatility, including reduced market growth rates, and to generate sufficient income and cash flow to allow the Company to affect the expected share repurchases and dividend payments; (3) the ability to manage disruptions in credit markets or changes to our credit rating; (4) the ability to maintain key manufacturing and supply arrangements (including execution of supply chain optimizations and sole supplier and sole manufacturing plant arrangements) and to manage disruption of business due to factors outside of our control, such as natural disasters and acts of war or terrorism; (5) the ability to successfully manage cost fluctuations and pressures, including prices of commodities and raw materials, and costs of labor, transportation, energy, pension and healthcare; (6) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to changing consumer habits and technological advances attained by, and patents granted to, competitors; (7) the ability to compete with our local and global competitors in new and existing sales channels, including by successfully responding to competitive factors such as prices, promotional incentives and trade terms for products; (8) the ability to manage and maintain key customer relationships; (9) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, ingredients, efficacy or similar matters that may arise; (10) the ability to successfully manage the financial, legal, reputational and operational risk associated with third-party relationships, such as our suppliers, distributors, contractors and external business partners; (11) the ability to rely on and maintain key company and third party information technology systems, networks and services, and maintain the security and functionality of such systems, networks and services and the data contained therein; (12) the ability to successfully manage uncertainties related to changing political conditions (including the United Kingdom’s decision to leave the European Union) and potential implications such as exchange rate fluctuations and market contraction; (13) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, intellectual property, antitrust, data protection, tax, environmental, and accounting and financial reporting) and to resolve pending matters within current estimates; (14) the ability to manage changes in applicable tax laws and regulations including maintaining our intended tax treatment of divestiture transactions; (15) the ability to successfully manage our ongoing acquisition, divestiture and joint venture activities, in each case to achieve the Company’s overall business strategy and financial objectives, without impacting the delivery of base business objectives; and (16) the ability to successfully achieve productivity improvements and cost savings and manage ongoing organizational changes, while successfully identifying, developing and retaining key employees, including in key growth markets where the availability of skilled or experienced employees may be limited. 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:
| |
• | Summary of Results – Nine Months Ended March 31, 2019 |
| |
• | Economic Conditions and Uncertainties |
| |
• | Results of Operations – Three and Nine Months Ended March 31, 2019 |
| |
• | Business Segment Discussion – Three and Nine Months Ended March 31, 2019 |
| |
• | 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 purchased traditional brick-and-mortar and online data in key markets 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. The Company measures fiscal-year-to-date market shares through the most recent period for which market share data is available, which typically reflects a lag time of one or two months.
OVERVIEW
P&G is a global leader in the fast-moving consumer goods industry, 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, e-commerce, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, baby stores, specialty beauty stores, 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 |
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 |
Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care) | Metamucil, Prilosec, Vicks |
Fabric & Home Care | Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents) | Ariel, Downy, Gain, Tide |
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, Puffs |
| |
(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 nine months ended March 31, 2019 (excluding net sales and net earnings in Corporate):
|
| | | | | | | |
| Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| Net Sales | | Net Earnings | | Net Sales | | Net Earnings |
Beauty | 19% | | 20% | | 19% | | 23% |
Grooming | 9% | | 12% | | 9% | | 12% |
Health Care | 13% | | 13% | | 12% | | 13% |
Fabric & Home Care | 33% | | 31% | | 33% | | 29% |
Baby, Feminine & Family Care | 26% | | 24% | | 27% | | 23% |
Total Company | 100% | | 100% | | 100% | | 100% |
SUMMARY OF RESULTS
Following are highlights of results for the nine months ended March 31, 2019 versus the nine months ended March 31, 2018:
| |
• | Net sales increased 1% to $50.6 billion, driven by a mid-single digits increase in Beauty and a low single digit increase in Health Care and Fabric & Home Care, partially offset by a low single digit decline in Baby, Feminine & Family Care and mid-single digit decline in Grooming. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 4%, driven by a high single digits increase in Beauty, a mid-single digits increase in Health Care and Fabric & Home Care and a low single digit increase in Baby, Feminine & Family Care. Organic sales were unchanged in Grooming. |
| |
• | Unit volume increased 2%, with organic volume also up 2%. Volume increased mid-single digits in Fabric & Home Care and Health Care, low single digits in Beauty and was unchanged in Baby, Feminine & Family Care. Volume decreased low single digits in Grooming. Excluding the impacts of the PGT Healthcare partnership dissolution and the Merck OTC acquisition, organic volume increased low single digits in Health Care. |
| |
• | Net earnings were $9.2 billion, an increase of $1.2 billion or 15% versus the prior year due to a reduction in current year income tax expense (due to the impacts of the U.S. Tax Act, comprised of the reduction in the ongoing tax rate on earnings and the base period charges related to the transitional impacts of the U.S. Tax Act) and a current year gain on the dissolution of the PGT Healthcare partnership, partially offset by a reduction in the operating earnings margin primarily driven by currency impacts. |
| |
• | Diluted net earnings per share increased 18% to $3.48 due primarily to the increase in net earnings and a reduction in shares outstanding due to share repurchases. |
| |
• | Net earnings attributable to Procter & Gamble increased $1.3 billion or 16% versus the prior year to $9.1 billion. |
| |
• | Core net earnings attributable to Procter & Gamble, which represents net earnings excluding the current period gain on the dissolution of the PGT Healthcare partnership, incremental restructuring charges in both periods and the base period charges related to the transitional impacts of the U.S. Tax Act, increased 3% to $9.0 billion. Core net earnings per share increased 4% to $3.42 due to the increase in Core net earnings and the reduction in shares outstanding. |
| |
• | Operating cash flow was $11.1 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was $8.8 billion. Adjusted free cash flow productivity was 99%. Adjusted free cash flow and adjusted free cash flow productivity are defined in the section entitled "Reconciliation of Measures not defined by U.S. GAAP." |
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions. Our products are sold in numerous countries across North America, Europe, Latin America, Asia and Africa with more than half our sales generated outside the United States. As such, we are exposed to and impacted by global macro-economic factors, U.S. and foreign government policies and foreign exchange fluctuations. 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, Central & Eastern Europe and the Korean peninsula, economic uncertainty related to the execution of the United Kingdom's exit from the European Union, political instability in certain Latin American markets and overall economic slowdowns, 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, transportation costs and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins and paper-based materials like pulp, 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, in 2012 we initiated overhead and supply chain cost improvement projects. In fiscal 2017, we communicated specific elements of an additional multi-year cost reduction program which is resulting in enrollment reductions and other savings. 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. In four of the past five fiscal years, as well as the current year, 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, Russia, Turkey, Brazil, China and the United Kingdom have previously had, and could in the future have, a significant impact on our sales, costs and earnings. Increased pricing in response to certain 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 and profits.
Government Policies. Our net earnings could be affected by changes in U.S. or foreign government tax policies, for example, the U.S. Tax Act enacted in December 2017, the implications and uncertainties of which are disclosed elsewhere in this report. Additionally, we attempt to carefully manage our debt, currency and other exposures in certain countries with currency exchange, import authorization and pricing controls, such as Nigeria, Algeria, Egypt and Turkey. Further, our earnings and sales could be affected by changes to international trade agreements in North America and elsewhere, including increases of import tariffs, both currently effective and future potential changes. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings.
For information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended June 30, 2018.
RESULTS OF OPERATIONS – Three Months Ended March 31, 2019
The following discussion provides a review of results for the three months ended March 31, 2019 versus the three months ended March 31, 2018.
|
| | | | | |
| Three Months Ended March 31 |
Amounts in millions, except per share amounts | 2019 | | 2018 | | % Chg |
Net sales | $16,462 | | $16,281 | | 1% |
Operating income | 3,229 | | 3,209 | | 1% |
Net earnings | 2,776 | | 2,540 | | 9% |
Net earnings attributable to Procter & Gamble | 2,745 | | 2,511 | | 9% |
Diluted net earnings per common share | 1.04 | | 0.95 | | 9% |
Core net earnings per common share | 1.06 | | 1.00 | | 6% |
|
| Three Months Ended March 31 |
COMPARISONS AS A PERCENTAGE OF NET SALES | 2019 | | 2018 | | Basis Pt Chg |
Gross profit | 48.8% | | 48.5% | | 30 |
Selling, general & administrative expense | 29.2% | | 28.8% | | 40 |
Operating income | 19.6% | | 19.7% | | (10) |
Earnings before income taxes | 19.9% | | 20.0% | | (10) |
Net earnings | 16.9% | | 15.6% | | 130 |
Net earnings attributable to Procter & Gamble | 16.7% | | 15.4% | | 130 |
Net Sales
Net sales for the quarter increased 1% to $16.5 billion including a 5% negative impact from foreign exchange. Unit volume increased 3%. Excluding the impacts of acquisitions and divestitures, organic volume increased 2%. Increased pricing had a 2% favorable impact to net sales. Mix was a 1% positive impact to net sales, driven by disproportionate growth of the Skin & Personal Care category (behind the super-premium SK-II brand) and developed regions, each of which have higher than company average selling prices. Volume increased high-single digits in Health Care, increased mid-single digits in Fabric & Home Care, increased low single digits in Beauty and was unchanged in Baby, Feminine & Family Care. Volume decreased low-single digits in Grooming. Excluding the impacts of the PGT Healthcare partnership dissolution and Merck OTC acquisition, Health Care organic volume increased low single digits. Volume increased low single digits in both developed and developing regions. Organic sales increased 5% on a 2% increase in organic volume.
|
| | | | | | | | | | | | | |
| Net Sales Change Drivers 2019 vs. 2018 (Three Months Ended March 31) (1) |
| Volume with Acquisitions & Divestitures | | Volume Excluding Acquisitions & Divestitures | | Foreign Exchange | | Price | | Mix | | Other (2) | | Net Sales Growth |
Beauty | 3% | | 3% | | (5)% | | 2% | | 4% | | —% | | 4% |
Grooming | (3)% | | (3)% | | (7)% | | 2% | | —% | | —% | | (8)% |
Health Care | 7% | | 2% | | (4)% | | 2% | | 1% | | 3% | | 9% |
Fabric & Home Care | 5% | | 5% | | (4)% | | 1% | | 1% | | (1)% | | 2% |
Baby, Feminine & Family Care | —% | | —% | | (4)% | | 3% | | (1)% | | —% | | (2)% |
Total Company | 3% | | 2% | | (5)% | | 2% | | 1% | | —% | | 1% |
| |
(1) | Net sales percentage changes are approximations based on quantitative formulas that are consistently applied. |
| |
(2) | Other includes the sales mix impact from acquisitions and divestitures, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile volume to net sales. |
Operating Costs
Gross margin increased 30 basis points to 48.8% of net sales for the quarter. Gross margin benefited from 160 basis points of gross manufacturing cost savings projects (130 basis points net of product and packaging reinvestments), 80 basis points of positive pricing impacts and 30 basis points from lower restructuring costs. These impacts were offset by:
| |
• | a 70 basis point decline due to higher commodity costs, |
| |
• | a 60 basis point decline from unfavorable foreign exchange and |
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• | an 80 basis point net decline from unfavorable product mix and other impacts (primarily mix within segments due to the growth of lower margin products forms and club channel in certain categories and due to the disproportionate growth of the Fabric Care category which is one of our largest categories and has lower than company-average margins). |
Total SG&A spending increased 3% to $4.8 billion due to increases in overhead costs and other operating costs, partially offset by a reduction in marketing spending. SG&A as a percentage of net sales increased 40 basis points to 29.2% due to the increase in overhead and other operating costs, partially offset by the impacts of the reductions in marketing spending as a percentage of net sales. Marketing spending as a percentage of net sales decreased 50 basis points due to the positive scale impacts of the organic net sales increase, savings in agency compensation, production costs and advertising spending, and the impact of adopting the new standard on "Revenue from Contracts with Customers" which prospectively reclassified certain customer spending from marketing (SG&A) expense to a reduction of net sales. These reductions were partially offset by reinvestments in media and other marketing spending. Overhead costs as a percentage of net sales increased 40 basis points as the positive scale impacts of the organic net sales increase and productivity savings were more than offset by inflation, Merck OTC related overhead spending and other costs. Other net operating costs as a percentage of net sales increased approximately 50 basis points due to an increase in foreign exchange transaction charges and the net impact of changes in indirect tax reserves. Productivity-driven cost savings delivered 100 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was $131 million for the quarter, a marginal decrease versus the prior year period. Interest income was $52 million for the quarter, a $17 million decrease versus the prior year period due to a reduction in investment securities. Other non-operating income was $128 million, an increase of $20 million versus the prior year period due to lower pension related costs versus the base period.
Income Taxes
For the three months ended March 31, 2019 the effective tax rate decreased 660 basis points versus the prior year period to 15.3% due to:
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• | a 540 basis-point reduction from the impact of the lower blended U.S. federal tax rate on current year earnings versus the prior year rate due to the phased in rate impact of the U.S. Tax Act in the prior year caused by our June 30 fiscal year-end, |
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• | a 180 basis-point reduction from higher excess tax benefits from share-based compensation (240 basis points in the current year versus 60 basis points in the prior year), |
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• | a 70 basis-point reduction due to prior year transitional impacts from the U.S. Tax Act, |
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• | a 70 basis-point increase from discrete impacts related to uncertain tax positions (40 basis points of unfavorable impact in the current year versus 30 basis points of favorable impact in the prior year), |
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• | a 60 basis-point increase from unfavorable impacts from geographic mix of earnings. |
Net Earnings
Net earnings increased $236 million or 9% to $2.8 billion for the quarter. The tax rate reduction discussed above drove a $211 million increase in net earnings. This tax benefit, along with the increase in net sales and the increased gross margin were partially offset by the increase in SG&A spending, all of which are discussed above. Foreign exchange had a negative impact of $245 million on net earnings for the quarter, including both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Net earnings attributable to Procter & Gamble increased $234 million or 9% to $2.7 billion for the quarter. Diluted net earnings per share increased 9% to $1.04. Core net earnings per share increased 6% to $1.06. Core net earnings per share represents diluted net earnings per share excluding the transitional impacts from the U.S. Tax Act in the base period and incremental restructuring charges in both periods related to our productivity and cost savings plans.
RESULTS OF OPERATIONS – Nine Months Ended March 31, 2019
The following discussion provides a review of results for the nine months ended March 31, 2019 versus the nine months ended March 31, 2018.
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| Nine Months Ended March 31 |
Amounts in millions, except per share amounts | 2019 | | 2018 | | % Chg |
Net sales | $50,590 | | $50,329 | | 1% |
Operating income | 10,679 | | 10,776 | | |