The Procter & Gamble Company
51
includes an estimate of forfeitures, which is based on historical data. Total expense and related tax benefit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30
|
2019
|
|
2018
|
|
2017
(1)
|
Stock options
|
$
|
246
|
|
|
$
|
220
|
|
|
$
|
216
|
|
RSUs and PSUs
|
269
|
|
|
175
|
|
|
150
|
|
Total stock-based expense
|
$
|
515
|
|
|
$
|
395
|
|
|
$
|
366
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
101
|
|
|
$
|
87
|
|
|
$
|
111
|
|
|
|
(1)
|
Includes amounts related to discontinued operations, which are not material.
|
We utilize an industry standard lattice-based valuation model to calculate the fair value for stock options granted. Assumptions utilized in the model, which are evaluated and revised to reflect market conditions and experience, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30
|
2019
|
|
2018
|
|
2017
|
Interest rate
|
2.5
|
-
|
2.7
|
%
|
|
1.9
|
-
|
2.9
|
%
|
|
0.8
|
-
|
2.6
|
%
|
Weighted average interest rate
|
2.6
|
%
|
|
2.8
|
%
|
|
2.6
|
%
|
Dividend yield
|
3.0
|
%
|
|
3.1
|
%
|
|
3.2
|
%
|
Expected volatility
|
17
|
%
|
|
18
|
%
|
|
15
|
%
|
Expected life in years
|
9.2
|
|
|
9.2
|
|
|
9.6
|
|
Lattice-based option valuation models incorporate ranges of assumptions for inputs and those ranges are disclosed in the preceding table. Expected volatilities are based on a combination of historical volatility of our stock and implied volatilities of call options on our stock. We use historical data to estimate option exercise and employee termination patterns within the valuation model. The expected life of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of options outstanding under the plans as of
June 30, 2019
and activity during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Options
|
Options (in thousands)
|
Weighted Average Exercise Price
|
Weighted Average Contract-ual Life in Years
|
Aggregate Intrinsic Value
|
Outstanding, beginning of year
|
205,654
|
|
$
|
74.21
|
|
|
|
Granted
|
13,451
|
|
95.78
|
|
|
|
Exercised
|
(53,670
|
)
|
62.99
|
|
|
|
Forfeited/expired
|
(694
|
)
|
81.58
|
|
|
|
OUTSTANDING, END OF YEAR
|
164,741
|
|
$
|
79.59
|
|
5.6
|
$
|
4,951
|
|
EXERCISABLE
|
110,504
|
|
$
|
75.07
|
|
4.2
|
$
|
3,822
|
|
The following table provides additional information on stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30
|
2019
|
|
2018
|
|
2017
|
Weighted average grant-date fair value of options granted
|
$
|
13.60
|
|
|
$
|
11.89
|
|
|
$
|
10.45
|
|
Intrinsic value of options exercised
|
1,770
|
|
|
500
|
|
|
1,334
|
|
Grant-date fair value of options that vested
|
180
|
|
|
209
|
|
|
246
|
|
Cash received from options exercised
|
3,381
|
|
|
1,245
|
|
|
2,630
|
|
Actual tax benefit from options exercised
|
221
|
|
|
127
|
|
|
421
|
|
At
June 30, 2019
, there was
$174
of compensation cost that has not yet been recognized related to stock option grants. That cost is expected to be recognized over a remaining weighted average period of
1.9
years.
A summary of non-vested RSUs and PSUs outstanding under the plans as of
June 30, 2019
and activity during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
RSU and PSU awards
|
Units (in thousands)
|
Weighted Average Grant Date Fair Value
|
|
Units (in thousands)
|
Weighted Average Grant Date Fair Value
|
Non-vested at July 1, 2018
|
5,376
|
|
$
|
77.17
|
|
|
1,385
|
|
$
|
84.08
|
|
Granted
|
1,970
|
|
96.74
|
|
|
555
|
|
112.83
|
|
Vested
|
(1,685
|
)
|
78.40
|
|
|
(642
|
)
|
91.40
|
|
Forfeited
|
(168
|
)
|
79.67
|
|
|
(3
|
)
|
92.72
|
|
Non-vested at June 30, 2019
|
5,493
|
|
$
|
84.00
|
|
|
1,295
|
|
$
|
92.98
|
|
At
June 30, 2019
, there was
$261
of compensation cost that has not yet been recognized related to RSUs and PSUs. That cost is expected to be recognized over a remaining weighted average period of
2.0
years. The total grant date fair value of shares vested was
$205
,
$175
and
$163
in
2019
,
2018
and
2017
, respectively.
The Company settles equity issuances with treasury shares. We have no specific policy to repurchase common shares to mitigate the dilutive impact of options, RSUs and PSUs. However, we have historically made adequate discretionary purchases, based on cash availability, market trends and other factors, to offset the impacts of such activity.
NOTE 8
POSTRETIREMENT BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN
We offer various postretirement benefits to our employees.
Defined Contribution Retirement Plans
We have defined contribution plans, which cover the majority of our U.S. employees, as well as employees in certain other countries. These plans are fully funded. We generally make contributions to participants' accounts based on individual base salaries and years of service. Total global defined contribution
Amounts in millions of dollars except per share amounts or as otherwise specified.
52
The Procter & Gamble Company
expense was
$272
,
$292
and
$270
in
2019
,
2018
and
2017
, respectively.
The primary U.S. defined contribution plan (the U.S. DC plan) comprises the majority of the expense for the Company's defined contribution plans. For the U.S. DC plan, the contribution rate is set annually. Total contributions for this plan approximated
14%
of total participants' annual wages and salaries in
2019
,
2018
and
2017
.
We maintain The Procter & Gamble Profit Sharing Trust (Trust) and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. DC plan and other retiree benefits (described below). Operating details of the ESOP are provided at the end of this Note. The fair value of the ESOP Series A shares allocated to participants reduces our cash contribution required to fund the U.S. DC plan.
Defined Benefit Retirement Plans and Other Retiree Benefits
We offer defined benefit retirement pension plans to certain employees. These benefits relate primarily to local plans outside the U.S. and, to a lesser extent, plans assumed in previous acquisitions covering U.S. employees.
We also provide certain other retiree benefits, primarily health care and life insurance, for the majority of our U.S. employees who become eligible for these benefits when they meet minimum age and service requirements. Generally, the health care plans require cost sharing with retirees and pay a stated percentage of expenses, reduced by deductibles and other coverages. These benefits are primarily funded by ESOP Series B shares and certain other assets contributed by the Company.
Obligation and Funded Status
.
The following provides a reconciliation of benefit obligations, plan assets and funded status of these defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
(1)
|
|
Other Retiree Benefits
(2)
|
Years ended June 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
CHANGE IN BENEFIT OBLIGATION
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
(3)
|
$
|
15,658
|
|
|
$
|
16,160
|
|
|
$
|
4,778
|
|
|
$
|
5,187
|
|
Service cost
|
259
|
|
|
280
|
|
|
101
|
|
|
112
|
|
Interest cost
|
339
|
|
|
348
|
|
|
187
|
|
|
177
|
|
Participants' contributions
|
12
|
|
|
13
|
|
|
76
|
|
|
73
|
|
Amendments
|
9
|
|
|
12
|
|
|
—
|
|
|
(231
|
)
|
Net actuarial loss/(gain)
|
1,587
|
|
|
(722
|
)
|
|
37
|
|
|
(308
|
)
|
Acquisitions/(divestitures)
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
13
|
|
|
8
|
|
|
8
|
|
|
7
|
|
Currency translation and other
|
(283
|
)
|
|
148
|
|
|
20
|
|
|
5
|
|
Benefit payments
|
(606
|
)
|
|
(589
|
)
|
|
(243
|
)
|
|
(244
|
)
|
BENEFIT OBLIGATION AT END OF YEAR
(3)
|
$
|
17,037
|
|
|
$
|
15,658
|
|
|
$
|
4,964
|
|
|
$
|
4,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PLAN ASSETS
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
11,267
|
|
|
$
|
10,829
|
|
|
$
|
3,259
|
|
|
$
|
3,831
|
|
Actual return on plan assets
|
739
|
|
|
553
|
|
|
1,918
|
|
|
(481
|
)
|
Acquisitions/(divestitures)
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
178
|
|
|
406
|
|
|
31
|
|
|
33
|
|
Participants' contributions
|
12
|
|
|
13
|
|
|
76
|
|
|
73
|
|
Currency translation and other
|
(212
|
)
|
|
55
|
|
|
(1
|
)
|
|
(3
|
)
|
ESOP debt impacts
(4)
|
—
|
|
|
—
|
|
|
56
|
|
|
50
|
|
Benefit payments
|
(606
|
)
|
|
(589
|
)
|
|
(243
|
)
|
|
(244
|
)
|
FAIR VALUE OF PLAN ASSETS AT END OF YEAR
|
$
|
11,382
|
|
|
$
|
11,267
|
|
|
$
|
5,096
|
|
|
$
|
3,259
|
|
FUNDED STATUS
|
$
|
(5,655
|
)
|
|
$
|
(4,391
|
)
|
|
$
|
132
|
|
|
$
|
(1,519
|
)
|
|
|
(1)
|
Primarily non-U.S.-based defined benefit retirement plans.
|
|
|
(2)
|
Primarily U.S.-based other postretirement benefit plans.
|
|
|
(3)
|
For the pension benefit plans, the benefit obligation is the projected benefit obligation. For other retiree benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.
|
|
|
(4)
|
Represents the net impact of ESOP debt service requirements, which is netted against plan assets for other retiree benefits.
|
The underfunding of pension benefits is primarily a function of the different funding incentives that exist outside of the U.S. In certain countries, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations prior to their due date. In these instances, benefit payments are typically paid directly from the Company's cash as they become due.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
As of June 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
CLASSIFICATION OF NET AMOUNT RECOGNIZED
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
19
|
|
|
$
|
420
|
|
|
$
|
1,257
|
|
|
$
|
—
|
|
Current liabilities
|
(52
|
)
|
|
(43
|
)
|
|
(27
|
)
|
|
(24
|
)
|
Noncurrent liabilities
|
(5,622
|
)
|
|
(4,768
|
)
|
|
(1,098
|
)
|
|
(1,495
|
)
|
NET AMOUNT RECOGNIZED
|
$
|
(5,655
|
)
|
|
$
|
(4,391
|
)
|
|
$
|
132
|
|
|
$
|
(1,519
|
)
|
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
|
|
|
Net actuarial loss
|
$
|
5,062
|
|
|
$
|
3,787
|
|
|
$
|
874
|
|
|
$
|
2,366
|
|
Prior service cost/(credit)
|
214
|
|
|
244
|
|
|
(424
|
)
|
|
(478
|
)
|
NET AMOUNTS RECOGNIZED IN AOCI
|
$
|
5,276
|
|
|
$
|
4,031
|
|
|
$
|
450
|
|
|
$
|
1,888
|
|
The accumulated benefit obligation for all defined benefit pension plans was
$15,790
and
$14,370
as of
June 30, 2019
and
2018
, respectively. Pension plans with accumulated benefit obligations in excess of plan assets and plans with projected benefit obligations in excess of plan assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
|
|
Projected Benefit Obligation Exceeds the Fair Value of Plan Assets
|
As of June 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Projected benefit obligation
|
$
|
11,604
|
|
|
$
|
8,467
|
|
|
$
|
16,304
|
|
|
$
|
8,962
|
|
Accumulated benefit obligation
|
10,711
|
|
|
7,573
|
|
|
15,096
|
|
|
7,974
|
|
Fair value of plan assets
|
6,026
|
|
|
3,740
|
|
|
10,630
|
|
|
4,150
|
|
Net Periodic Benefit Cost
. Components of the net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
|
Years ended June 30
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
AMOUNTS RECOGNIZED IN NET PERIODIC BENEFIT COST
|
|
Service cost
|
$
|
259
|
|
|
$
|
280
|
|
|
$
|
310
|
|
(1)
|
$
|
101
|
|
|
$
|
112
|
|
|
$
|
133
|
|
(1)
|
Interest cost
|
339
|
|
|
348
|
|
|
300
|
|
|
187
|
|
|
177
|
|
|
175
|
|
|
Expected return on plan assets
|
(732
|
)
|
|
(751
|
)
|
|
(675
|
)
|
|
(447
|
)
|
|
(451
|
)
|
|
(431
|
)
|
|
Amortization of net actuarial loss
|
225
|
|
|
295
|
|
|
375
|
|
|
66
|
|
|
69
|
|
|
122
|
|
|
Amortization of prior service cost/(credit)
|
26
|
|
|
28
|
|
|
28
|
|
|
(48
|
)
|
|
(41
|
)
|
|
(45
|
)
|
|
Amortization of net actuarial loss/prior service cost due to settlements and curtailments
|
9
|
|
|
—
|
|
|
186
|
|
(2)
|
—
|
|
|
—
|
|
|
16
|
|
(2)
|
Special termination benefits
|
13
|
|
|
8
|
|
|
4
|
|
|
8
|
|
|
7
|
|
|
21
|
|
(2)
|
GROSS BENEFIT COST/(CREDIT)
|
139
|
|
|
208
|
|
|
528
|
|
|
(133
|
)
|
|
(127
|
)
|
|
(9
|
)
|
|
Dividends on ESOP preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
(37
|
)
|
|
(45
|
)
|
|
NET PERIODIC BENEFIT COST/(CREDIT)
|
$
|
139
|
|
|
$
|
208
|
|
|
$
|
528
|
|
|
$
|
(161
|
)
|
|
$
|
(164
|
)
|
|
$
|
(54
|
)
|
|
CHANGE IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN AOCI
|
|
Net actuarial loss/(gain) - current year
|
$
|
1,580
|
|
|
$
|
(524
|
)
|
|
|
|
$
|
(1,434
|
)
|
|
$
|
624
|
|
|
|
|
Prior service cost/(credit) - current year
|
9
|
|
|
12
|
|
|
|
|
—
|
|
|
(231
|
)
|
|
|
|
Amortization of net actuarial loss
|
(225
|
)
|
|
(295
|
)
|
|
|
|
(66
|
)
|
|
(69
|
)
|
|
|
|
Amortization of prior service (cost)/credit
|
(26
|
)
|
|
(28
|
)
|
|
|
|
48
|
|
|
41
|
|
|
|
|
Amortization of net actuarial loss/prior service costs due to settlements and curtailments
|
(9
|
)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
Currency translation and other
|
(84
|
)
|
|
73
|
|
|
|
|
14
|
|
|
(3
|
)
|
|
|
|
TOTAL CHANGE IN AOCI
|
1,245
|
|
|
(762
|
)
|
|
|
|
(1,438
|
)
|
|
362
|
|
|
|
|
NET AMOUNTS RECOGNIZED IN PERIODIC BENEFIT COST AND AOCI
|
$
|
1,384
|
|
|
$
|
(554
|
)
|
|
|
|
$
|
(1,599
|
)
|
|
$
|
198
|
|
|
|
|
|
|
(1)
|
Service cost includes amounts related to discontinued operations in fiscal year ended June 30, 2017, which are not material.
|
|
|
(2)
|
For fiscal year ended June 30, 2017, amortization of net actuarial loss/prior service cost due to settlement and curtailments and
$18
of the special termination benefits are included in Net earnings from discontinued operations.
|
Amounts in millions of dollars except per share amounts or as otherwise specified.
54
The Procter & Gamble Company
The service cost component of the net periodic benefit cost is included in the Consolidated Statements of Earnings in Cost of products sold and SG&A, unless otherwise noted. All other components are included in the Consolidated Statements of Earnings in Other non-operating income/(expense), net, unless otherwise noted.
Amounts expected to be amortized from AOCI into net periodic benefit cost during the year ending
June 30, 2020
, are as follows:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
Net actuarial loss
|
$
|
344
|
|
|
$
|
68
|
|
Prior service cost/(credit)
|
25
|
|
|
(48
|
)
|
Assumptions
.
We determine our actuarial assumptions on an annual basis. These assumptions are weighted to reflect each country that may have an impact on the cost of providing retirement benefits. The weighted average assumptions used to determine benefit obligations recorded on the Consolidated Balance Sheets as of June 30, were as follows:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
As of June 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Discount rate
|
1.9
|
%
|
|
2.5
|
%
|
|
3.7
|
%
|
|
4.2
|
%
|
Rate of compensation increase
|
2.6
|
%
|
|
2.6
|
%
|
|
N/A
|
|
|
N/A
|
|
Health care cost trend rates assumed for next year
|
N/A
|
|
|
N/A
|
|
|
6.6
|
%
|
|
6.6
|
%
|
Rate to which the health care cost trend rate is assumed to decline (ultimate trend rate)
|
N/A
|
|
|
N/A
|
|
|
4.9
|
%
|
|
4.9
|
%
|
Year that the rate reaches the ultimate trend rate
|
N/A
|
|
|
N/A
|
|
|
2026
|
|
|
2025
|
|
|
|
(1)
|
Determined as of end of fiscal year.
|
The weighted average assumptions used to determine net benefit cost recorded on the Consolidated Statement of Earnings for the years ended June 30, were as follows:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
Years ended June 30
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
2.5
|
%
|
|
2.4
|
%
|
|
2.1
|
%
|
|
4.2
|
%
|
|
3.9
|
%
|
|
3.6
|
%
|
Expected return on plan assets
|
6.6
|
%
|
|
6.8
|
%
|
|
6.9
|
%
|
|
8.3
|
%
|
|
8.3
|
%
|
|
8.3
|
%
|
Rate of compensation increase
|
2.6
|
%
|
|
3.0
|
%
|
|
2.9
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
(1)
|
Determined as of beginning of fiscal year.
|
For plans that make up the majority of our obligation, the Company calculates the benefit obligation and the related impacts on service and interest costs using specific spot rates along the corporate bond yield curve. For the remaining plans, the Company determines these amounts utilizing a single weighted-average discount rate derived from the corporate bond yield curve used to measure the plan obligations.
Several factors are considered in developing the estimate for the long-term expected rate of return on plan assets. For the defined benefit retirement plans, these factors include historical rates of return of broad equity and bond indices and projected long-term rates of return obtained from pension investment consultants. The expected long-term rates of return for plan assets are
8
-
9%
for equities and
5
-
6%
for bonds. For other retiree benefit plans, the expected long-term rate of return reflects that the assets are comprised primarily of Company stock. The expected rate of return on Company stock is based on the long-term projected return of
8.5%
and reflects the historical pattern of returns.
Assumed health care cost trend rates could have a significant effect on the amounts reported for the other retiree benefit plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
One-Percentage
Point Increase
|
|
One-Percentage
Point Decrease
|
Effect on the total service and interest cost components
|
$
|
60
|
|
|
$
|
(45
|
)
|
Effect on the accumulated postretirement benefit obligation
|
755
|
|
|
(619
|
)
|
Plan Assets
.
Our investment objective for defined benefit retirement plan assets is to meet the plans' benefit obligations and to improve plan self-sufficiency for future benefit obligations. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by assessing different investment risks and matching the actuarial projections of the plans' future liabilities and benefit payments with current as well as expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
55
invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and with continual monitoring of investment managers' performance relative to the investment guidelines established with each investment manager.Our target asset allocation for the year ended
June 30, 2019
, and actual asset allocation by asset category as of
June 30, 2019
and
2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Asset Allocation
|
|
Actual Asset Allocation at June 30
|
|
Pension Benefits
|
|
Other Retiree
Benefits
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
Asset Category
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash
|
—
|
%
|
|
2
|
%
|
|
1
|
%
|
|
2
|
%
|
|
3
|
%
|
|
1
|
%
|
Debt securities
|
67
|
%
|
|
3
|
%
|
|
63
|
%
|
|
59
|
%
|
|
2
|
%
|
|
4
|
%
|
Equity securities
|
33
|
%
|
|
95
|
%
|
|
36
|
%
|
|
39
|
%
|
|
95
|
%
|
|
95
|
%
|
TOTAL
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The following tables set forth the fair value of the Company's plan assets as of
June 30, 2019
and
2018
segregated by level within the fair value hierarchy (refer to Note 9 for further discussion on the fair value hierarchy and fair value principles). Company stock listed as Level 1 in the hierarchy represents Company common stock; Level 2 represents preferred shares which are valued based on the value of Company common stock. The majority of our Level 3 pension assets are insurance contracts. Their fair values are based on their cash equivalent or models that project future cash flows and discount the future amounts to a present value using market-based observable inputs, including credit risk and interest rate curves. There was no significant activity within the Level 3 pension and other retiree benefits plan assets during the years presented. Investments valued using net asset value as a practical expedient are primarily equity and fixed income collective funds. These assets are not valued using the fair value hierarchy, but rather valued using the net asset value reported by the managers of the funds and as supported by the unit prices of actual purchase and sale transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retiree Benefits
|
As of June 30
|
Fair Value Hierarchy Level
|
|
2019
|
|
2018
|
|
Fair Value Hierarchy Level
|
|
2019
|
|
2018
|
ASSETS AT FAIR VALUE
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
|
$
|
47
|
|
|
$
|
136
|
|
|
1
|
|
$
|
111
|
|
|
$
|
5
|
|
Company stock
(1)
|
|
|
—
|
|
|
—
|
|
|
1 & 2
|
|
4,836
|
|
|
3,092
|
|
Other
(2)
|
1, 2 & 3
|
|
378
|
|
|
400
|
|
|
1
|
|
1
|
|
|
4
|
|
TOTAL ASSETS IN THE FAIR VALUE HEIRARCHY
|
|
|
425
|
|
|
536
|
|
|
|
|
4,948
|
|
|
3,101
|
|
Investments valued at net asset value
|
|
|
10,957
|
|
|
10,731
|
|
|
|
|
148
|
|
|
158
|
|
TOTAL ASSETS AT FAIR VALUE
|
|
|
$
|
11,382
|
|
|
11,267
|
|
|
|
|
$
|
5,096
|
|
|
3,259
|
|
|
|
(1)
|
Company stock is net of ESOP debt discussed below.
|
|
|
(2)
|
The Company's other pension plan assets measured at fair value are generally classified as Level 3 within the fair value hierarchy. There are no material other pension plan asset balances classified as Level 1 or Level 2 within the fair value hierarchy.
|
Cash Flows
.
Management's best estimate of cash requirements and discretionary contributions for the defined benefit retirement plans and other retiree benefit plans for the year ending
June 30, 2020
, is
$156
and
$39
, respectively. For the defined benefit retirement plans, this is comprised of
$94
in expected benefit payments from the Company directly to participants of unfunded plans and
$62
of expected contributions to funded plans. For other retiree benefit plans, this is comprised of
$27
in expected benefit payments from the Company directly to participants of unfunded plans and
$12
of expected contributions to funded plans. Expected contributions are dependent on many variables, including the variability of the market value of the plan assets as compared to the benefit obligation and other market or regulatory conditions. In addition, we take into consideration our business investment opportunities and resulting cash requirements.
Accordingly, actual funding may differ significantly from current estimates.
Total benefit payments expected to be paid to participants, which include payments funded from the Company's assets and payments from the plans are as follows:
|
|
|
|
|
|
|
|
|
Years ending June 30
|
Pension
Benefits
|
|
Other Retiree
Benefits
|
EXPECTED BENEFIT PAYMENTS
|
|
|
2020
|
$
|
518
|
|
|
$
|
191
|
|
2021
|
536
|
|
|
203
|
|
2022
|
549
|
|
|
214
|
|
2023
|
574
|
|
|
224
|
|
2024
|
583
|
|
|
233
|
|
2025 - 2029
|
3,220
|
|
|
1,283
|
|
Amounts in millions of dollars except per share amounts or as otherwise specified.
56
The Procter & Gamble Company
Employee Stock Ownership Plan
We maintain the ESOP to provide funding for certain employee benefits discussed in the preceding paragraphs.
The ESOP borrowed
$1.0 billion
in 1989 and the proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock to fund a portion of the U.S. DC plan. Principal and interest requirements of the borrowing were paid by the Trust from dividends on the preferred shares and from advances provided by the Company. The original borrowing of
$1.0 billion
has been repaid in full, and advances from the Company of
$42
remain outstanding at
June 30, 2019
. Each share is convertible at the option of the holder into one share of the Company's common stock. The dividend for the current year was equal to the common stock dividend of
$2.90
per share. The liquidation value is
$6.82
per share.
In 1991, the ESOP borrowed an additional
$1.0 billion
. The proceeds were used to purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of retiree health care benefits. These shares, net of the ESOP's debt, are considered plan assets of the other retiree benefits plan discussed above. Debt service requirements are funded by preferred stock dividends, cash contributions and advances provided by the Company, of which
$876
are outstanding at
June 30, 2019
. Each share is convertible at the option of the holder into one share of the Company's common stock. The dividend for the current year was equal to the common stock dividend of
$2.90
per share. The liquidation value is
$12.96
per share.
Our ESOP accounting practices are consistent with current ESOP accounting guidance, including the permissible continuation of certain provisions from prior accounting guidance. ESOP debt, which is guaranteed by the Company, is recorded as debt (see Note 10) with an offset to the Reserve for ESOP debt retirement, which is presented within Shareholders' equity. Advances to the ESOP by the Company are recorded as an increase in the Reserve for ESOP debt retirement. Interest incurred on the ESOP debt is recorded as Interest expense. Dividends on all preferred shares, net of related tax benefits, are charged to Retained earnings.
The series A and B preferred shares of the ESOP are allocated to employees based on debt service requirements. The number of preferred shares outstanding at June 30 was as follows:
|
|
|
|
|
|
|
|
|
|
Shares in thousands
|
2019
|
|
2018
|
|
2017
|
Allocated
|
31,600
|
|
|
34,233
|
|
|
36,488
|
|
Unallocated
|
3,259
|
|
|
4,117
|
|
|
5,060
|
|
TOTAL SERIES A
|
34,859
|
|
|
38,350
|
|
|
41,548
|
|
|
|
|
|
Allocated
|
26,790
|
|
|
25,895
|
|
|
25,378
|
|
Unallocated
|
26,471
|
|
|
28,512
|
|
|
30,412
|
|
TOTAL SERIES B
|
53,261
|
|
|
54,407
|
|
|
55,790
|
|
For purposes of calculating diluted net earnings per common share, the preferred shares held by the ESOP are considered converted from inception.
NOTE 9
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. We evaluate exposures on a centralized basis to take advantage of natural exposure correlation and netting. To the extent we choose to manage volatility associated with the net exposures, we enter into various financial transactions that we account for using the applicable accounting guidance for derivative instruments and hedging activities. These financial transactions are governed by our policies covering acceptable counterparty exposure, instrument types and other hedging practices.
If the Company elects to do so and if the instrument meets certain specified accounting criteria, management designates derivative instruments as cash flow hedges, fair value hedges or net investment hedges. We record derivative instruments at fair value and the accounting for changes in the fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge. We generally have a high degree of effectiveness between the exposure being hedged and the hedging instrument.
Credit Risk Management
We have counterparty credit guidelines and normally enter into transactions with investment grade financial institutions, to the extent commercially viable. Counterparty exposures are monitored daily and downgrades in counterparty credit ratings are reviewed on a timely basis. We have not incurred, and do not expect to incur, material credit losses on our risk management or other financial instruments.
Substantially all of the Company's financial instruments used in hedging transactions are governed by industry standard netting and collateral agreements with counterparties. If the Company's credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangements. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of
June 30, 2019
, was not material. The Company has not been required to post collateral as a result of these contractual features.
Interest Rate Risk Management
Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount.
We designate certain interest rate swaps that meet specific accounting criteria as fair value hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in earnings. Historically, we had certain interest
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
57
rate swaps designated as cash flow hedges. For the years ended
June 30, 2019
and
2018
, we did not have any such contracts outstanding.
Foreign Currency Risk Management
We manufacture and sell our products and finance our operations in a number of countries throughout the world. As a result, we are exposed to movements in foreign currency exchange rates. We leverage the Company’s diversified portfolio of exposures as a natural hedge. In certain cases, we enter into non-qualifying foreign currency contracts to hedge certain balance sheet items subject to revaluation. The change in fair value of these instruments and the underlying exposure are both immediately recognized in earnings.
To manage exchange rate risk related to our intercompany financing, we primarily use forward contracts and currency swaps. The change in fair value of these non-qualifying instruments is immediately recognized in earnings, substantially offsetting the foreign currency mark-to-market impact of the related exposure.
Historically, we had utilized foreign currency swaps to offset the effect of exchange rate fluctuations on intercompany loans denominated in foreign currencies; these swaps were accounted for as cash flow hedges. For the years ended
June 30, 2019
and
2018
, we did not have any such contracts outstanding.
Net Investment Hedging
We hedge certain net investment positions in foreign subsidiaries. To accomplish this, we either borrow directly in foreign currencies and designate all or a portion of the foreign currency debt as a hedge of the applicable net investment position or we enter into foreign currency swaps that are designated as hedges of net investments. Changes in the fair value of these instruments are recognized in the Foreign Currency Translation component of OCI and offset the change in the value of the net investment being hedged. The time value component of the net investment hedge currency swaps is excluded from the assessment of hedge effectiveness. Changes in the fair value of the swap, including changes in the fair value of the excluded time value component, are recognized in OCI and offset the value of the underlying net assets. The time value component is subsequently reported in income on a systematic basis.
Commodity Risk Management
Certain raw materials used in our products or production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility related to anticipated purchases of certain of these materials, we have historically, on a limited basis, used futures and options with maturities generally less than
one year
and swap contracts with maturities up to
five years
. As of and during the years ended
June 30, 2019
and
2018
, we did not have any commodity hedging activity.
Insurance
We self-insure for most insurable risks. However, we purchase insurance for Directors and Officers Liability and certain other coverage where it is required by law or by contract.
Fair Value Hierarchy
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
|
|
•
|
Level 1: Quoted market prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
|
|
|
•
|
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions or external inputs from inactive markets.
|
When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the year.
When active market quotes are not available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value. Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future cash flows based on external inputs.
The following table sets forth the Company's financial assets as of
June 30, 2019
and
2018
that were measured at fair value on a recurring basis during the period:
|
|
|
|
|
|
|
|
|
|
Fair Value Asset
|
As of June 30
|
2019
|
|
2018
|
Investments:
|
|
|
|
U.S. government securities
|
$
|
3,648
|
|
|
$
|
5,544
|
|
Corporate bond securities
|
2,400
|
|
|
3,737
|
|
Other investments
|
169
|
|
|
141
|
|
TOTAL
|
$
|
6,217
|
|
|
$
|
9,422
|
|
Investment securities are presented in Available-for-sale investment securities and Other noncurrent assets. The amortized cost of the U.S. government securities with maturities less than one year was
$100
and
$2,003
as of
June 30, 2019
and
2018
, respectively. The amortized cost of the U.S. government securities with maturities between one and five years was
$3,556
and
$3,659
as of
June 30, 2019
and
2018
, respectively. The amortized cost of corporate bond securities with maturities of less than a year was
$1,347
and
$1,291
as of
June 30, 2019
and
2018
, respectively. The amortized cost of corporate bond securities with maturities between one and five years was
$1,057
and
$2,503
as of
Amounts in millions of dollars except per share amounts or as otherwise specified.
58
The Procter & Gamble Company
June 30, 2019
and
2018
, respectively. The Company's investments measured at fair value are generally classified as Level 2 within the fair value hierarchy. Within cash and cash equivalents, we have money market funds of
$2,956
and
$1,516
as of
June 30, 2019
and
2018
, respectively. These funds are classified as Level 1 within the fair value hierarchy. There are no other material investment balances classified as Level 1 or Level 3 within the fair value hierarchy, or using 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
$25,378
and
$23,402
as of
June 30, 2019
and
2018
, respectively. This includes the current portion of debt instruments (
$3,390
and
$1,769
as of
June 30, 2019
and
2018
, respectively). Certain long-term debt (debt 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.
Disclosures about Financial Instruments
The notional amounts and fair values of financial instruments used in hedging transactions as of
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value Asset
|
|
Fair Value (Liability)
|
As of June 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
7,721
|
|
|
$
|
4,587
|
|
|
$
|
177
|
|
|
$
|
125
|
|
|
$
|
(1
|
)
|
|
$
|
(53
|
)
|
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
|
|
|
|
|
|
|
Foreign currency interest rate contracts
|
$
|
3,157
|
|
|
$
|
1,848
|
|
|
$
|
35
|
|
|
$
|
41
|
|
|
$
|
(24
|
)
|
|
$
|
(75
|
)
|
TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
|
$
|
10,878
|
|
|
$
|
6,435
|
|
|
$
|
212
|
|
|
$
|
166
|
|
|
$
|
(25
|
)
|
|
$
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
6,431
|
|
|
$
|
7,358
|
|
|
$
|
27
|
|
|
$
|
30
|
|
|
$
|
(20
|
)
|
|
$
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL DERIVATIVES AT FAIR VALUE
|
$
|
17,309
|
|
|
$
|
13,793
|
|
|
$
|
239
|
|
|
$
|
196
|
|
|
$
|
(45
|
)
|
|
$
|
(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
$7,860
and
$4,639
as of
June 30, 2019
and
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
$17,154
and
$15,012
as of
June 30, 2019
and
2018
, respectively. The increase in the notional balance of interest rate fair value hedges is due to additional swaps in the current period driven by the favorable Euro swap curve. The increase in the notional balance of the net investment hedges, including the debt instruments designated as net investment hedges, is primarily driven by the increase in foreign currency net assets as a result of the Merck acquisition.
All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. 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. In addition, there was no significant activity within the Level 3 assets and liabilities during the periods presented. Except for the impairment of the Gillette indefinite-lived intangible asset discussed in Note 4, there were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis during the years ended
June 30, 2019
and
2018
.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
59
Before tax gains/(losses) on our financial instruments in hedging relationships are categorized as follows:
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in OCI on Derivatives
|
Years ended June 30
|
2019
|
|
2018
|
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
(1) (2)
|
Foreign currency interest rate contracts
|
$
|
47
|
|
|
$
|
(187
|
)
|
(1)
For the derivatives in net investment hedging relationships, the amount of gain/(loss) excluded from effectiveness testing, which was recognized in earnings, was
$70
and
$138
for the fiscal year ended
June 30, 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
$299
and
$(391)
, as of
June 30, 2019
and
2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in Earnings
|
Years ended June 30
|
2019
|
|
2018
|
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
|
Interest rate contracts
|
$
|
104
|
|
|
$
|
(106
|
)
|
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
|
Foreign currency contracts
|
$
|
54
|
|
|
$
|
(1
|
)
|
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 Statement 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. To the extent we have any derivatives used for cash flow hedging relationships, the gain/(loss) reclassified from AOCI into earnings on such derivatives would be recognized in the same period during which the related item affects earnings, typically in SG&A.
NOTE 10
SHORT-TERM AND LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
As of June 30
|
2019
|
|
2018
|
DEBT DUE WITHIN ONE YEAR
|
Current portion of long-term debt
|
$
|
3,388
|
|
|
$
|
1,772
|
|
Commercial paper
|
6,183
|
|
|
7,761
|
|
Other
|
126
|
|
|
890
|
|
TOTAL
|
$
|
9,697
|
|
|
$
|
10,423
|
|
Short-term weighted average interest rates
(1)
|
0.5
|
%
|
|
0.7
|
%
|
|
|
(1)
|
Short-term weighted average interest rates include the effects of interest rate swaps discussed in Note 9.
|
|
|
|
|
|
|
|
|
|
As of June 30
|
2019
|
|
2018
|
LONG-TERM DEBT
|
|
|
|
1.75% USD note due October 2019
|
$
|
600
|
|
|
$
|
600
|
|
1.90% USD note due November 2019
|
550
|
|
|
550
|
|
0.28% JPY note due May 2020
|
929
|
|
|
903
|
|
1.90% USD note due October 2020
|
600
|
|
|
600
|
|
4.13% EUR note due December 2020
|
682
|
|
|
698
|
|
9.36% ESOP debentures due 2019-2021
(1)
|
228
|
|
|
327
|
|
1.85% USD note due February 2021
|
600
|
|
|
600
|
|
1.70% USD note due November 2021
|
875
|
|
|
875
|
|
2.00% EUR note due November 2021
|
852
|
|
|
873
|
|
2.30% USD note due February 2022
|
1,000
|
|
|
1,000
|
|
2.15% USD note due August 2022
|
1,250
|
|
|
1,250
|
|
2.00% EUR note due August 2022
|
1,137
|
|
|
1,164
|
|
3.10% USD note due August 2023
|
1,000
|
|
|
1,000
|
|
1.13% EUR note due November 2023
|
1,421
|
|
|
1,455
|
|
0.50% EUR note due October 2024
|
568
|
|
|
582
|
|
0.63% EUR note due October 2024
|
909
|
|
|
—
|
|
2.70% USD note due February 2026
|
600
|
|
|
600
|
|
2.45% USD note due November 2026
|
875
|
|
|
875
|
|
4.88% EUR note due May 2027
|
1,137
|
|
|
1,164
|
|
2.85% USD note due August 2027
|
750
|
|
|
750
|
|
1.20% EUR note due October 2028
|
909
|
|
|
—
|
|
1.25% EUR note due October 2029
|
568
|
|
|
582
|
|
5.55% USD note due March 2037
|
763
|
|
|
763
|
|
1.88% EUR note due October 2038
|
568
|
|
|
—
|
|
3.50% USD note due October 2047
|
600
|
|
|
600
|
|
Capital lease obligations
|
33
|
|
|
107
|
|
All other long-term debt
|
3,779
|
|
|
4,717
|
|
Current portion of long-term debt
|
(3,388
|
)
|
|
(1,772
|
)
|
TOTAL
|
$
|
20,395
|
|
|
$
|
20,863
|
|
Long-term weighted average interest rates
(2)
|
2.4
|
%
|
|
2.5
|
%
|
|
|
(1)
|
Debt issued by the ESOP is guaranteed by the Company and is recorded as debt of the Company, as discussed in Note 8.
|
|
|
(2)
|
Long-term weighted average interest rates include the effects of interest rate swaps discussed in Note 9.
|
Long-term debt maturities during the next five fiscal years are as follows:
|
|
|
|
|
|
|
Years ending June 30
|
2020
|
2021
|
2022
|
2023
|
2024
|
Debt maturities
|
$3,388
|
$2,009
|
$2,840
|
$2,465
|
$2,461
|
The Procter & Gamble Company fully and unconditionally guarantees the registered debt and securities issued by its 100% owned finance subsidiaries.
Amounts in millions of dollars except per share amounts or as otherwise specified.
60
The Procter & Gamble Company
NOTE 11
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The table below presents the changes in Accumulated other comprehensive income/(loss) attributable to Procter & Gamble (AOCI), including the reclassifications out of AOCI by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive Income/(Loss) by Component
|
|
Investment Securities
|
|
Pension and Other Retiree Benefits
|
|
Foreign Currency Translation
|
|
Total AOCI
|
BALANCE at JUNE 30, 2017
|
$
|
(25
|
)
|
|
$
|
(4,397
|
)
|
|
$
|
(10,210
|
)
|
|
$
|
(14,632
|
)
|
OCI before reclassifications
(1)
|
(141
|
)
|
|
74
|
|
|
(305
|
)
|
|
(372
|
)
|
Amounts reclassified from AOCI into the Consolidated Statement of Earnings
(2)
|
(7
|
)
|
|
260
|
|
|
—
|
|
|
253
|
|
Net current period OCI
|
(148
|
)
|
|
334
|
|
|
(305
|
)
|
|
(119
|
)
|
Less: Other comprehensive income/(loss) attributable to non-controlling interests
|
—
|
|
|
(5
|
)
|
|
3
|
|
|
(2
|
)
|
BALANCE at JUNE 30, 2018
|
(173
|
)
|
|
(4,058
|
)
|
|
(10,518
|
)
|
|
(14,749
|
)
|
OCI before reclassifications
(3)
|
167
|
|
|
(43
|
)
|
|
(213
|
)
|
|
(89
|
)
|
Amounts reclassified from AOCI into the Consolidated Statement of Earnings
(4)
|
17
|
|
|
212
|
|
|
—
|
|
|
229
|
|
Net current period OCI
|
184
|
|
|
169
|
|
|
(213
|
)
|
|
140
|
|
Reclassification to retained earnings in accordance with ASU 2018-02
(5)
|
—
|
|
|
(308
|
)
|
|
(18
|
)
|
|
(326
|
)
|
Less: Other comprehensive income/(loss) attributable to non-controlling interests
|
|
|
1
|
|
|
—
|
|
|
1
|
|
BALANCE at JUNE 30, 2019
|
$
|
11
|
|
|
$
|
(4,198
|
)
|
|
$
|
(10,749
|
)
|
|
$
|
(14,936
|
)
|
|
|
(1)
|
Net of tax (benefit) / expense of
$0
,
$(23)
and
$(279)
for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively, for the period ended
June 30, 2018
.
|
|
|
(2)
|
Net of tax (benefit) / expense of
$0
,
$91
and
$0
for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively, for the period ended
June 30, 2018
.
|
|
|
(3)
|
Net of tax (benefit) / expense of
$0
,
$(44)
and
$78
for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively, for the period ended
June 30, 2019
.
|
|
|
(4)
|
Net of tax (benefit) / expense of
$0
,
$66
,
$0
for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively, for the period ended
June 30, 2019
.
|
|
|
(5)
|
Adjustment made to early adopt ASU 2018-02: "Reclassification of Certain Effects from Accumulated Other Comprehensive Income," as discussed in Note 1.
|
The below provides additional details on amounts reclassified from AOCI into the Consolidated Statement 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 (see Note 8 for additional details).
|
|
|
•
|
Foreign currency translation: this number includes financial statement translation and net investment hedges. See Note 9 for classification of gains and losses from hedges in the Consolidated Statements of Earnings.
|
NOTE 12
COMMITMENTS AND CONTINGENCIES
Guarantees
In conjunction with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., indemnification for representations and warranties and retention of previously existing environmental, tax and employee liabilities) for which terms range in duration and, in some circumstances, are not explicitly defined. The maximum obligation under some indemnifications is also not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not
made significant payments for these indemnifications. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.
In certain situations, we guarantee loans for suppliers and customers. The total amount of guarantees issued under such arrangements is not material.
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing arrangements, including variable interest entities, that have a material impact on our financial statements.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
61
Purchase Commitments and Operating Leases
We have purchase commitments for materials, supplies, services and property, plant and equipment as part of the normal course of business. Commitments made under take-or-pay obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending June 30
|
2020
|
2021
|
2022
|
2023
|
2024
|
There-after
|
Purchase obligations
|
$
|
633
|
|
$
|
221
|
|
$
|
176
|
|
$
|
87
|
|
$
|
106
|
|
$
|
268
|
|
Such amounts represent minimum commitments under take-or-pay agreements with suppliers and are in line with expected usage. These amounts include purchase commitments related to service contracts for information technology, human resources management and facilities management activities that have been outsourced to third-party suppliers. Due to the proprietary nature of many of our materials and processes, certain supply contracts contain penalty provisions for early termination. We do not expect to incur penalty payments under these provisions that would materially affect our financial position, results of operations or cash flows.
We also lease certain property and equipment for varying periods. Future minimum rental commitments under non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending June 30
|
2020
|
2021
|
2022
|
2023
|
2024
|
There-after
|
Operating leases
|
$
|
255
|
|
$
|
213
|
|
$
|
162
|
|
$
|
166
|
|
$
|
134
|
|
$
|
288
|
|
Litigation
We are subject, from time to time, to certain legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising, contracts, environmental, patent and trademark matters, labor and employment matters and tax.
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.
NOTE 13
DISCONTINUED OPERATIONS
During the year ended June 30, 2017, the Company completed the divestiture of
four
product categories to Coty, Inc. (“Coty”). The divestiture included
41
of the Company's beauty brands (“Beauty Brands”), including the global salon professional hair care and color, retail hair color, cosmetics and a majority of the fine fragrance businesses, along with select hair styling brands. The form of the divestiture transaction was a Reverse Morris Trust split-off, in which P&G shareholders were given the election to exchange their P&G shares for shares of a new
corporation that held the Beauty Brands (Galleria Co.), and then immediately exchange those shares for Coty shares. The value P&G received in the transaction was
$11.4 billion
. The value was comprised of
105 million
shares of common stock of the Company, which were tendered by shareholders of the Company and exchanged for the Galleria Co. shares, valued at approximately
$9.4 billion
, and the assumption of
$1.9 billion
of debt by Galleria Co. The shares tendered in the transaction were reflected as an addition to treasury stock and the cash received related to the debt assumed by Coty was reflected as an investing activity in the Consolidated Statement of Cash Flows. The Company recorded an after-tax gain on the final transaction of
$5.3 billion
, net of transaction and related costs.
Two
of the fine fragrance brands, Dolce & Gabbana and Christina Aguilera, were excluded from the divestiture. These brands were subsequently divested at amounts that approximated their adjusted carrying values.
In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Beauty Brands are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the year ended June 30, 2017. The Beauty Brands were historically part of the Company's Beauty reportable segment.
The following is selected financial information included in Net earnings from discontinued operations for the Beauty Brands:
|
|
|
|
|
|
Beauty Brands
|
Years ended June 30
|
2017
|
Net sales
|
$
|
1,159
|
|
Cost of products sold
|
450
|
|
Selling, general and administrative expense
|
783
|
|
Interest expense
|
14
|
|
Other non-operating income/(expense), net
|
16
|
|
Loss from discontinued operations before income taxes
|
(72
|
)
|
Income taxes on discontinued operations
|
46
|
|
Gain on sale of business before income taxes
|
5,197
|
|
Income tax expense/(benefit) on sale of business
(1)
|
(138
|
)
|
Net earnings from discontinued operations
|
$
|
5,217
|
|
|
|
(1)
|
The income tax benefit of the Beauty Brands divestiture represents the reversal of underlying deferred tax balances partially offset by current tax expense related to the transaction.
|
Amounts in millions of dollars except per share amounts or as otherwise specified.
62
The Procter & Gamble Company
The following is selected financial information included in cash flows from discontinued operations for the Beauty Brands:
|
|
|
|
|
|
Beauty Brands
|
Years ended June 30
|
2017
|
NON-CASH OPERATING ITEMS
|
|
Depreciation and amortization
|
$
|
24
|
|
Deferred income tax benefit
|
(649
|
)
|
Gain on sale of businesses
|
5,210
|
|
Net increase in accrued taxes
|
93
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
Cash taxes paid
|
$
|
418
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
Capital expenditures
|
$
|
38
|
|
NOTE 14
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.
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
|
$
|
419
|
|
Property, plant and equipment
|
121
|
|
Intangible assets
|
2,143
|
|
Goodwill
|
2,138
|
|
Other non-current assets
|
143
|
|
Total Assets Acquired
|
$
|
4,964
|
|
|
|
Current liabilities
|
$
|
233
|
|
Deferred income taxes
|
767
|
|
Non-current liabilities
|
87
|
|
Total Liabilities Acquired
|
$
|
1,087
|
|
|
|
Noncontrolling Interest
(1)
|
$
|
169
|
|
|
|
Net Assets Acquired
|
$
|
3,708
|
|
|
|
(1)
|
Represents a
48%
minority ownership interest in the Merck India company.
|
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
|
162
|
|
|
10
|
Customer relationships
|
334
|
|
|
20
|
Total
|
$
|
1,197
|
|
|
15
|
|
|
|
|
Intangible Assets with Indefinite Lives
|
Brands
|
946
|
|
|
|
Total Intangible Assets
|
$
|
2,143
|
|
|
|
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 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
10
-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.
The acquisition resulted in
$2.1 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.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company
63
NOTE 15
QUARTERLY RESULTS (UNAUDITED)
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Quarters Ended
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|
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Sep 30
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Dec 31
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Mar 31
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Jun 30
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Total Year
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NET SALES
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2018-2019
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|
$
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16,690
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|
|
$
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17,438
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|
|
$
|
16,462
|
|
|
$
|
17,094
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|
|
$
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67,684
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|
|
2017-2018
|
|
16,653
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|
|
17,395
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|
|
16,281
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|
|
16,503
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|
|
66,832
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|
OPERATING INCOME
|
2018-2019
|
|
3,554
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|
|
3,896
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|
|
3,229
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|
|
(5,192
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)
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|
5,487
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|
|
2017-2018
|
|
3,648
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|
|
3,919
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|
|
3,209
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|
|
2,587
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|
|
13,363
|
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GROSS MARGIN
|
2018-2019
|
|
49.2
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%
|
|
48.9
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%
|
|
48.8
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%
|
|
47.7
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%
|
|
48.6
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%
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2017-2018
|
|
50.3
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%
|
|
49.9
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%
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|
48.5
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%
|
|
45.0
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%
|
|
48.5
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%
|
NET EARNINGS/(LOSS):
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Net earnings/(loss)
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2018-2019
|
|
3,211
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|
|
3,216
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|
|
2,776
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|
|
(5,237
|
)
|
|
3,966
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|
|
2017-2018
|
|
2,870
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|
|
2,561
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|
|
2,540
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|
|
1,890
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|
|
9,861
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|
Net earnings/(loss) attributable to Procter and Gamble
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2018-2019
|
|
3,199
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|
|
3,194
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|
|
2,745
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|
|
(5,241
|
)
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|
3,897
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|
|
2017-2018
|
|
2,853
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|
|
2,495
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|
|
2,511
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|
|
1,891
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|
|
9,750
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DILUTED NET EARNINGS/(LOSS) PER COMMON SHARE
(1) (2)
|
2018-2019
|
|
$
|
1.22
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$
|
1.22
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|
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$
|
1.04
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|
|
$
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(2.12
|
)
|
|
$
|
1.43
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|
|
2017-2018
|
|
1.06
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|
|
0.93
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|
|
0.95
|
|
|
0.72
|
|
|
3.67
|
|
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(1)
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Diluted net earnings per share is calculated on Net earnings attributable to Procter & Gamble.
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(2)
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Diluted net earnings/(loss) per share in each quarter is computed using the weighted average number of shares outstanding during that quarter while Diluted net earnings/(loss) per share for the full year is computed using the weighted average number of shares outstanding during the year. In the quarter ended June 30, 2019, the Company reported a Net loss attributable to P&G, driven by the Shave Care impairment charges discussed in Note 4. This caused certain of our equity instruments to be antidilutive for the full year (preferred shares) and for the quarter ended June 30, 2019 (preferred shares and equity awards). Because these securities were dilutive during the first three quarters of this fiscal year, the sum of the four quarters' Diluted net earnings/(loss) per share will not equal the full-year Diluted net earnings per common share.
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