Quarterly Report (10-q)

Date : 10/22/2019 @ 8:19PM
Source : Edgar (US Regulatory)
Stock : Procter and Gamble Co (PG)
Quote : 119.16  -0.17 (-0.14%) @ 7:11PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark one)
x
True
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
OR
o
False
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
 
PGLOGOA18.JPG
PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
 
 
Ohio
OH
1-434
 
31-0411980
(State of Incorporation)
 
(Commission File Number)
 
(I.R.S. Employer Identification Number)
One Procter & Gamble Plaza
 
Cincinnati
OH
 
One Procter & Gamble Plaza, Cincinnati, Ohio
45202
(Address of principal executive offices)
(Zip Code)
(513) 983-1100
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, without Par Value
PG
NYSE
4.125% EUR notes due December 2020
PG20A
NYSE
0.275% Notes due 2020
PG20
NYSE
2.000% Notes due 2021
PG21
NYSE
2.000% Notes due 2022
PG22B
NYSE
1.125% Notes due 2023
PG23A
NYSE
0.500% Notes due 2024
PG24A
NYSE
0.625% Notes due 2024
PG24B
NYSE
1.375% Notes due 2025
PG25
NYSE
4.875% EUR notes due May 2027
PG27A
NYSE
1.200% Notes due 2028
PG28
NYSE
1.250% Notes due 2029
PG29B
NYSE
1.800% Notes due 2029
PG29A
NYSE
6.250% GBP notes due January 2030
PG30
NYSE
5.250% GBP notes due January 2033
PG33
NYSE
1.875% Notes due 2038
PG38
NYSE
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).
 
Large accelerated filer
 þ
 
 
Accelerated filer
 ¨
 
 
Non-accelerated filer
 ¨
 
 
Smaller reporting company
 ¨
False
 
 
 
 
 
Emerging growth company
 ¨
False
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 False
There were 2,493,812,048 shares of Common Stock outstanding as of September 30, 2019.



PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements


THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended September 30
Amounts in millions except per share amounts
2019
 
2018
NET SALES
$
17,798

 
$
16,690

Cost of products sold
8,723

 
8,484

Selling, general and administrative expense
4,785

 
4,652

OPERATING INCOME
4,290

 
3,554

Interest expense
(108
)
 
(129
)
Interest income
58

 
53

Other non-operating income, net
103

 
462

EARNINGS BEFORE INCOME TAXES
4,343

 
3,940

Income taxes
726

 
729

NET EARNINGS
3,617

 
3,211

Less: Net earnings attributable to noncontrolling interests
24

 
12

NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE
$
3,593

 
$
3,199

 
 
 
 
NET EARNINGS PER SHARE (1)
 
 
 
Basic
$
1.41

 
$
1.26

Diluted
$
1.36

 
$
1.22

 
 
 
 
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
2,647.5

 
2,612.1


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


See accompanying Notes to Consolidated Financial Statements.



THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
 
Three Months Ended September 30
Amounts in millions
2019
 
2018
NET EARNINGS
$
3,617

 
$
3,211

OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
 
 
 
Foreign currency translation
(540
)
 
(209
)
Unrealized gains/(losses) on investment securities
(5
)
 
(5
)
Unrealized gains/(losses) on defined benefit retirement plans
179

 
152

TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
(366
)
 
(62
)
TOTAL COMPREHENSIVE INCOME
3,251

 
3,149

Less: Total comprehensive income attributable to noncontrolling interests
20

 
8

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE
$
3,231

 
$
3,141



See accompanying Notes to Consolidated Financial Statements.



THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions
 
 
 
 
September 30, 2019
 
June 30, 2019
Assets
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
$
9,304

 
$
4,239

Available-for-sale investment securities
 
 
 
 

 
6,048

Accounts receivable
 
 
 
 
5,143

 
4,951

INVENTORIES
 
 
 
 
 
 
 
Materials and supplies
 
 
 
 
1,394

 
1,289

Work in process
 
 
 
 
656

 
612

Finished goods
 
 
 
 
3,415

 
3,116

Total inventories
 
 
 
 
5,465

 
5,017

Prepaid expenses and other current assets
 
 
 
 
2,013

 
2,218

TOTAL CURRENT ASSETS
 
 
 
 
21,925

 
22,473

PROPERTY, PLANT AND EQUIPMENT, NET
 
 
 
 
20,901

 
21,271

GOODWILL
 
 
 
 
39,605

 
40,273

TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET
 
 
 
24,002

 
24,215

OTHER NONCURRENT ASSETS
 
 
 
 
7,625

 
6,863

TOTAL ASSETS
 
 
 
 
$
114,058

 
$
115,095

 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
10,951

 
$
11,260

Accrued and other liabilities
 
 
 
 
9,950

 
9,054

Debt due within one year
 
 
 
 
9,352

 
9,697

TOTAL CURRENT LIABILITIES
 
 
 
 
30,253

 
30,011

LONG-TERM DEBT
 
 
 
 
20,161

 
20,395

DEFERRED INCOME TAXES
 
 
 
 
6,325

 
6,899

OTHER NONCURRENT LIABILITIES
 
 
 
 
10,335

 
10,211

TOTAL LIABILITIES
 
 
 
 
67,074

 
67,516

SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Preferred stock
 
 
 
 
915

 
928

Common stock – shares issued –
September 2019
 
4,009.2

 
 
 
 
 
June 2019
 
4,009.2

 
4,009

 
4,009

Additional paid-in capital
 
 
 
 
63,949

 
63,827

Reserve for ESOP debt retirement
 
 
 
 
(1,112
)
 
(1,146
)
Accumulated other comprehensive income/(loss)
 
 
 
 
(15,298
)
 
(14,936
)
Treasury stock
 
 
 
 
(102,510
)
 
(100,406
)
Retained earnings
 
 
 
 
96,625

 
94,918

Noncontrolling interest
 
 
 
 
406

 
385

TOTAL SHAREHOLDERS’ EQUITY
 
 
 
 
46,984

 
47,579

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
$
114,058

 
$
115,095


See accompanying Notes to Consolidated Financial Statements.



THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 
Three Months Ended September 30, 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, 2019
2,504,751


$4,009


$928


$63,827


($1,146
)

($14,936
)

($100,406
)

$94,918


$385


$47,579

Net earnings
 
 
 
 
 
 
 
3,593

24

3,617

Other comprehensive income/(loss)
 
 
 
 
 
(362
)
 
 
(4
)
(366
)
Dividends and dividend equivalents ($0.7459 per share):
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
(1,874
)
 
(1,874
)
Preferred, net of tax benefits
 
 
 
 
 
 
 
(65
)
 
(65
)
Treasury stock purchases
(25,405
)
 
 
 
 
 
(3,000
)
 
 
(3,000
)
Employee stock plans
13,050

 
 
120

 
 
885

 
 
1,005

Preferred stock conversions
1,416

 
(13
)
2

 
 
11

 
 

ESOP debt impacts
 
 
 
 
34

 
 
53

 
87

Noncontrolling interest, net
 
 
 


 
 
 
 
1

1

BALANCE
SEPTEMBER 30, 2019
2,493,812


$4,009


$915


$63,949


($1,112
)

($15,298
)

($102,510
)

$96,625


$406


$46,984


 
Three Months Ended September 30, 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, 2018
2,498,093


$4,009


$967


$63,846


($1,204
)

($14,749
)

($99,217
)

$98,641


$590


$52,883

Impact of adoption of new accounting standards
 
 
 
 
 
(326
)
 
(200
)
(27
)
(553
)
Net earnings
 
 
 
 
 
 
 
3,199

12

3,211

Other comprehensive income/(loss)
 
 
 
 
 
(58
)
 
 
(4
)
(62
)
Dividends and dividend equivalents
($0.7172 per share):
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
(1,791
)
 
(1,791
)
Preferred, net of tax benefits
 
 
 
 
 
 
 
(66
)
 
(66
)
Treasury stock purchases
(15,690
)
 
 
 
 
 
(1,252
)
 
 
(1,252
)
Employee stock plans
7,368

 
 
20

 
 
500

 
 
520

Preferred stock conversions
1,637

 
(16
)
3

 
 
13

 
 

ESOP debt impacts
 
 
 
 
27

 
 
48

 
75

Noncontrolling interest, net
 
 
 
(158
)
 
 
 
 
(303
)
(461
)
BALANCE
SEPTEMBER 30, 2018
2,491,408


$4,009


$951


$63,711


($1,177
)

($15,133
)

($99,956
)

$99,831


$268


$52,504




See accompanying Notes to Consolidated Financial Statements.




THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended September 30
Amounts in millions
2019
 
2018
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
$
4,239

 
$
2,569

OPERATING ACTIVITIES
 
 
 
Net earnings
3,617

 
3,211

Depreciation and amortization
723

 
643

Share-based compensation expense
110

 
102

Deferred income taxes
(586
)
 
34

Gain on sale of assets
(2
)
 
(361
)
Changes in:
 
 
 
Accounts receivable
(261
)
 
(475
)
Inventories
(549
)
 
(494
)
Accounts payable, accrued and other liabilities
1,151

 
933

Other operating assets and liabilities
(35
)
 
(84
)
Other
1

 
58

TOTAL OPERATING ACTIVITIES
4,169

 
3,567

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(1,079
)
 
(1,080
)
Proceeds from asset sales
6

 
9

Acquisitions, net of cash acquired

 
(237
)
Purchases of short-term investments

 
(158
)
Proceeds from sales and maturities of investment securities
6,151

 
649

Change in other investments
1

 
(48
)
TOTAL INVESTING ACTIVITIES
5,079

 
(865
)
FINANCING ACTIVITIES
 
 
 
Dividends to shareholders
(1,932
)
 
(1,853
)
Change in short-term debt
(61
)
 
24

Treasury stock purchases
(3,000
)
 
(1,252
)
Impact of stock options and other
875

 
425

TOTAL FINANCING ACTIVITIES
(4,118
)
 
(2,656
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(65
)
 
(70
)
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
5,065

 
(24
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
9,304

 
$
2,545




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, 2019. 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
On July 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)." The new accounting standard required the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. We elected the optional transition method and adopted the new guidance on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, we elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The adoption did not have a material impact on our financial statements, resulting in an increase of approximately 1% to each of our total assets and total liabilities on our balance sheet as of July 1, 2019. See Note 10 for further information.
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.
3. Segment Information
Under U.S. GAAP, our operating segments 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, Pain Relief, 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, Taped 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 operating segments are comprised of similar product categories. Operating segments that individually accounted for 5% or more of consolidated net sales are as follows:
 
% of Net sales by operating segment (1)
 
Three Months Ended September 30
 
2019
 
2018
Fabric Care
23%
 
23%
Baby Care
11%
 
12%
Home Care
10%
 
10%
Hair Care
10%
 
10%
Skin and Personal Care
10%
 
9%
Family Care
9%
 
9%
Oral Care
7%
 
8%
Shave Care
7%
 
8%
Feminine Care
6%
 
6%
Personal Health Care
5%
 
3%
Other
2%
 
2%
Total
100%
 
100%
(1) 
% of Net sales by operating segment excludes sales held in Corporate.
Following is a summary of reportable segment results:
 
 
Three Months Ended September 30
 
 
Net Sales
 
Earnings/(Loss) Before Income Taxes
 
Net Earnings
Beauty
2019
$
3,552

 
$
1,092

 
$
874

 
2018
3,289

 
947

 
759

Grooming
2019
1,531

 
426

 
353

 
2018
1,562

 
417

 
340

Health Care
2019
2,221

 
540

 
401

 
2018
1,845

 
440

 
332

Fabric & Home Care
2019
5,832

 
1,338

 
1,028

 
2018
5,488

 
1,144

 
877

Baby, Feminine & Family Care
2019
4,567

 
1,134

 
871

 
2018
4,390

 
902

 
692

Corporate
2019
95

 
(187
)
 
90

 
2018
116

 
90

 
211

Total Company
2019
$
17,798

 
$
4,343

 
$
3,617

 
2018
16,690

 
3,940

 
3,211



Amounts in millions of dollars unless otherwise specified.


4. Goodwill and Other Intangible Assets
Goodwill is allocated by reportable segment as follows:
 
Beauty
 
Grooming
 
Health Care
 
Fabric & Home Care
 
Baby, Feminine & Family Care
 
Total Company
Goodwill at June 30, 2019
$
12,985

 
$
12,881

 
$
7,972

 
$
1,855

 
$
4,580

 
$
40,273

Acquisitions and divestitures
(1
)
 

 
(53
)
 

 

 
(54
)
Translation and other
(222
)
 
(159
)
 
(153
)
 
(18
)
 
(62
)
 
(614
)
Goodwill at September 30, 2019
$
12,762

 
$
12,722

 
$
7,766

 
$
1,837

 
$
4,518

 
$
39,605


Goodwill from current year acquisitions and divestitures primarily reflects opening balance sheet adjustments from the prior year acquisition of the over-the-counter (OTC) healthcare business of Merck KGaA (Merck OTC) in the Health Care reportable segment (see Note 12), along with adjustments from a prior year Beauty acquisition.
Identifiable intangible assets at September 30, 2019 were comprised of:
 
Gross Carrying Amount
 
Accumulated Amortization
Intangible assets with determinable lives
$
8,452

 
$
(5,443
)
Intangible assets with indefinite lives
20,993

 

Total identifiable intangible assets
$
29,445

 
$
(5,443
)

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 determinable lived intangible assets for the three months ended September 30, 2019 and 2018 was $96 and $73, 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 (the step two testing) to determine the implied fair value of the reporting unit's goodwill. The step two testing 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 three months ended December 31.
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. The Appliances wholly-acquired reporting unit has a fair value that significantly exceeds the underlying carrying value. As previously disclosed, the carrying value of the Shave Care reporting unit and the related Gillette indefinite-lived intangible asset were impaired during the year ended June 30, 2019.  The underlying reductions in fair values were due in large part to significant currency devaluations in a number of countries relative to the U.S. dollar, a deceleration of category growth caused by changing grooming habits, primarily in the developed markets, and an increased competitive market environment in the U.S. and certain other markets. As a result of the impairment determined by the step two testing, the Shave Care fair value exceeded the carrying value by approximately 20% as of June 30, 2019. Because the impairment testing for intangible assets is a one step process, the Gillette indefinite-lived intangible asset fair value approximated its carrying value at that date.  As a result, the Gillette indefinite-lived intangible asset is more susceptible to future impairment risk.




Amounts in millions of dollars unless otherwise specified.


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. Based on developments in the macroeconomic environment during the quarter ended September 30, 2019, the discount rate utilized in our annual impairment testing for goodwill and indefinite lived intangible assets during the three months ended December 31 will likely decline, resulting in an increase in the implied fair value estimates. Spot rates as of the fair value measurement date are utilized in our fair value estimates for cash flows outside the U.S.
While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the business or in the macroeconomic environment 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 September 30, 2019, the carrying values of the Shave Care goodwill and the Gillette indefinite-lived intangible asset were $12.4 billion and $14.1 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.
 
Approximate Percent Change in Estimated Fair Value
 
+25 bps Discount Rate
 
-25 bps Growth Rate
Shave Care goodwill reporting unit
(5
)%
 
(6
)%
Gillette indefinite-lived intangible asset
(5
)%
 
(5
)%



Amounts in millions of dollars unless otherwise specified.


5. Earnings Per Share
Basic net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble less preferred dividends 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 September 30
 
2019
 
2018
Net earnings
$
3,617

 
$
3,211

Less: Net earnings attributable to noncontrolling interests
24

 
12

Net earnings attributable to P&G (Diluted)
3,593

 
3,199

Preferred dividends
(65
)
 
(66
)
Net earnings attributable to P&G available to common shareholders (Basic)
$
3,528

 
$
3,133

 
 
 
 
SHARES IN MILLIONS
 
 
 
Basic weighted average common shares outstanding
2,504.0

 
2,495.8

Add: Effect of dilutive securities
 
 
 
Conversion of preferred shares (1)
87.4

 
91.9

Impact of stock options and other unvested equity awards (2)
56.1

 
24.4

Diluted weighted average common shares outstanding
2,647.5

 
2,612.1

 
 
 
 
NET EARNINGS PER SHARE (3)
 
 
 
Basic
$
1.41

 
$
1.26

Diluted
$
1.36

 
$
1.22

(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 1 million and 69 million for the three months ended September 30, 2019 and 2018 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.
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 September 30
 
2019
 
2018
Share-based compensation expense
$
110

  
$
102

Net periodic benefit cost for pension benefits (1)
40

 
28

Net periodic benefit cost/(credit) for other retiree benefits (1)
(52
)
 
(41
)
(1) 
The components of the total net periodic benefit cost for both pension benefits and other retiree benefits for these 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, 2019.


Amounts in millions of dollars unless otherwise specified.



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 three months ended September 30, 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 three months ended September 30, 2019.
Other investments had a fair value of $62 and $169 as of September 30, 2019 and June 30, 2019, respectively, and are presented in Other noncurrent assets. During the three months ended September 30, 2019, the Company sold all of its existing U.S. government securities and corporate bond securities. Such securities were presented in Available-for-sale investment securities at June 30, 2019, and had fair values of $3,648 and $2,400, respectively. The Company's investments measured at fair value are generally classified as Level 2 within the fair value hierarchy. Cash equivalents were $7,955 and $2,956 as of September 30, 2019 and June 30, 2019, respectively, and 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 $25,196 and $25,378 as of September 30, 2019 and June 30, 2019, respectively. This includes the current portion of debt instruments ($3,291 and $3,390 as of September 30, 2019 and June 30, 2019, 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 September 30, 2019 and June 30, 2019 are as follows:
 
Notional Amount
 
Fair Value Asset
 
Fair Value (Liability)
 
September 30, 2019
 
June 30, 2019
 
September 30, 2019
 
June 30, 2019
 
September 30, 2019
 
June 30, 2019
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
Interest rate contracts
$
7,524

 
$
7,721

 
$
266

 
$
177

 
$

 
$
(1
)
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
Foreign currency interest rate contracts
$
3,309

 
$
3,157

 
$
104

 
$
35

 
$
(16
)
 
$
(24
)
TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
$
10,833

 
$
10,878

 
$
370

 
$
212

 
$
(16
)
 
$
(25
)
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
Foreign currency contracts
$
6,196

 
$
6,431

 
$
19

 
$
27

 
$
(49
)
 
$
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL DERIVATIVES AT FAIR VALUE
$
17,029

 
$
17,309

 
$
389

 
$
239

 
$
(65
)
 
$
(45
)

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 $7,756 and $7,860 as of September 30, 2019 and June 30, 2019, 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 $16,995 and $17,154 as of September 30, 2019 and June 30, 2019, respectively. Changes in the fair value of net investment hedges are recognized in the Foreign Currency Translation component of Other comprehensive income (OCI). All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.

Amounts in millions of dollars unless otherwise specified.



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 September 30
 
2019
 
2018
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS (1) (2)
Foreign exchange contracts
$
113

 
$
(43
)

(1) 
For the derivatives in net investment hedging relationships, the amount of gain/(loss) excluded from effectiveness testing, which was recognized in earnings, was $19 and $14 for the three months ended September 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 Accumulated other comprehensive income/(loss) (AOCI) for such instruments was $609 and $207, for the three months ended September 30, 2019 and 2018, respectively.
 
Amount of Gain/(Loss) Recognized in Earnings
 
Three Months Ended September 30
 
2019
 
2018
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
Interest rate contracts
$
90

 
$
(24
)
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
Foreign currency contracts
$
(97
)
 
$
(2
)

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 Selling, general and administrative expense (SG&A).
8. Accumulated Other Comprehensive Income/(Loss)
The table below presents the changes in AOCI, including the reclassifications out of AOCI by component:
 
 
 
Investment Securities
 
Pension and Other Retiree Benefits
 
Foreign Currency Translation
 
Total AOCI
Balance at June 30, 2019
$
11

 
$
(4,198
)
 
$
(10,749
)
 
$
(14,936
)
OCI before reclassifications (1)
(3
)
 
104

 
(540
)
 
(439
)
Amounts reclassified from AOCI into the Consolidated Statements of Earnings (2)
(2
)
 
75

 

 
73

Net current period OCI
(5
)
 
179

 
(540
)
 
(366
)
Less: Other comprehensive income/(loss) attributable to non-controlling interests

 

 
(4
)
 
(4
)
Balance at September 30, 2019
$
6

 
$
(4,019
)
 
$
(11,285
)
 
$
(15,298
)

(1) 
Net of tax expense/(benefit) of $0, $51 and $170 for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively.
(2) 
Net of tax expense/(benefit) of $0, $20 and $0 for gains/losses on investment securities, pension and other retiree benefit items and foreign currency translation, respectively.
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.

Amounts in millions of dollars unless otherwise specified.


9. Restructuring Program
The Company has historically incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Before-tax costs incurred under the ongoing program have generally ranged from $250 to $500 annually.
In fiscal 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 month period ended September 30, 2019, the Company incurred total restructuring charges of $93. Approximately $70 of these charges were recorded in Cost of products sold and approximately $22 of these charges were recorded in SG&A. The remainder of these charges were recorded in Other non-operating income, net. The following table presents restructuring activity for the three months ended September 30, 2019:
 
Reserve Balance
 
Three Months Ended September 30, 2019
 
Reserve Balance
 
June 30, 2019
 
Charges
 
Cash Spent
 
Charges Against Assets
 
September 30, 2019
Separations
$
280

 
$
34

 
$
(60
)
 
$

 
$
254

Asset-related costs

 
45

 

 
(45
)
 

Other costs
188

 
14

 
(25
)
 

 
177

Total
$
468

 
$
93

 
$
(85
)
 
$
(45
)
 
$
431


Separation Costs
Employee separation charges for the three month period ended September 30, 2019 relate to severance packages for approximately 180 employees. The packages were primarily 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 September 30, 2019
Beauty
$
8

Grooming
18

Health Care
12

Fabric & Home Care
4

Baby, Feminine & Family Care
20

Corporate (1)
31

Total Company
$
93

(1) 
Corporate includes costs related to allocated overheads, including charges related to our Market Operations, Global Business Services and Corporate Functions activities.

Amounts in millions of dollars unless otherwise specified.


10. Leases
The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. We lease certain real estate, machinery, equipment, vehicles and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included within the lease term when it has become reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate our lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. The Company does not have any material financing lease or sublease activities.
The Company incurred lease expense for operating leases of $85 for the three months ended September 30, 2019. Total cash paid related to leases during the three months ended September 30, 2019 was $71, including amounts expensed and amounts capitalized. Commitments related to finance leases are not material. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the Consolidated Balance Sheets. Lease expense for such short-term leases is not material. The most significant assets in our leasing portfolio relate to real estate and vehicles. For purposes of calculating lease liabilities for such leases, we have combined lease and non-lease components.
The right-of-use assets obtained in exchange for new lease liabilities was $9 for the three months ended September 30, 2019.
Supplemental balance sheet and other information related to leases is as follows:
 
September 30, 2019
Operating leases:
 
Other noncurrent assets
$
887

 
 
Accrued and other liabilities
263

Other noncurrent liabilities
630

Total operating lease liabilities
$
893

 
 
Weighted average remaining lease term:
 
Operating leases
7 years

 
 
Weighted average discount rate:
 
Operating leases
4.3
%

At September 30, 2019, future payments of operating lease liabilities were as follows:
 
Operating Leases
 
September 30, 2019
1 year
$
263

2 years
177

3 years
158

4 years
134

5 years
114

Over 5 years
218

Total lease payments
1,064

Less: Interest
(171
)
Present value of lease liabilities
$
893






Amounts in millions of dollars unless otherwise specified.


As of June 30, 2019, minimum lease payments under non-cancelable operating leases by fiscal year were expected to be:
 
Operating Leases
 
June 30, 2019
2020
$
263

2021
209

2022
165

2023
141

2024
121

After 2024
244

Total lease payments
$
1,143


11. Commitments and Contingencies
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.
Income Tax Uncertainties
The Company is present in approximately 70 countries and over 150 taxable jurisdictions and, at any point in time, has 4050 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2008 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12 month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued existing liabilities of approximately $140, including interest and penalties.
Additional information on the Commitments and Contingencies of the Company can be found in our Annual Report on Form 10-K for the year ended June 30, 2019.


Amounts in millions of dollars unless otherwise specified.


12. 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 finalized during the quarter ended December 31, 2019, 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
$
420

Property, plant and equipment
121

Intangible assets
2,134

Goodwill
2,085

Other non-current assets
209

Total assets acquired
$
4,969

 
 
Current liabilities
$
233

Deferred income taxes
764

Non-current liabilities
95

Total liabilities acquired
$
1,092

 
 
Noncontrolling interest (1)
$
169

 
 
Net assets acquired
$
3,708

(1) 
Represents a 48% minority ownership interest in the Merck India company.
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.
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
325

 
20
   Total
$
1,188

 
15
 
 
 
 
Intangible assets with indefinite lives
 
 
 
   Brands
946

 
 
Total intangible assets
$
2,134

 
 





Amounts in millions of dollars unless otherwise specified.


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.
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 11 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, contract manufacturers, 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, product and packaging composition, 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:
Overview
Summary of Results – Three Months Ended September 30, 2019
Economic Conditions and Uncertainties
Results of Operations – Three Months Ended September 30, 2019
Business Segment Discussion – Three Months Ended September 30, 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 also sell direct to consumers. 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, Herbal Essences, Pantene, Rejoice
Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care)
Olay, Old Spice, Safeguard, SK-II, Secret
Grooming
Grooming (1) (Shave Care - Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care; Appliances)
Braun, Gillette, Venus
Health Care
Oral Care (Toothbrushes, Toothpaste, Other Oral Care)
Crest, Oral-B
Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Pain Relief, Other Personal Health Care)
Metamucil, Neurobion, Pepto Bismol, 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, Fairy, Febreze, Mr. Clean, Swiffer
Baby, Feminine & Family Care
Baby Care (Baby Wipes, Taped Diapers and Pants)
Luvs, Pampers
Feminine Care (Adult Incontinence, Feminine Care)
Always, Always Discreet, Tampax
Family Care (Paper Towels, Tissues, Toilet Paper)
Bounty, Charmin, Puffs
(1) 
The Grooming product category is comprised of the Shave Care and Appliances operating segments.
The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended September 30, 2019 (excluding net sales and net earnings in Corporate):
 
Three Months Ended September 30, 2019
 
Net Sales
 
Net Earnings
Beauty
20%
 
25%
Grooming
9%
 
10%
Health Care
12%
 
11%
Fabric & Home Care
33%
 
29%
Baby, Feminine & Family Care
26%
 
25%
Total Company
100%
 
100%
SUMMARY OF RESULTS
Following are highlights of results for the three months ended September 30, 2019 versus the three months ended September 30, 2018:
Net sales increased 7% to $17.8 billion, driven by a 20% increase in Health Care, a high single digits increase in Beauty and mid-single digits increases in Fabric & Home Care and Baby, Feminine & Family Care, partially offset by a low single digit decline in Grooming. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 7%, driven by a double digits increase in Beauty, high single digits increases in Health Care and Fabric & Home Care, a mid-single digit increase in Baby, Feminine & Family Care and a low single digit increase in Grooming.
Unit volume increased 5%, with organic volume up 4%. Volume increased high teens in Health Care, mid-single digits in Fabric & Home Care, and low single digits in Beauty and in Baby, Feminine & Family Care. Volume decreased low single digits in Grooming. Excluding the impacts of the Merck OTC acquisition, organic volume increased mid-single digits in Health Care.
Net earnings were $3.6 billion, an increase of $0.4 billion or 13% versus the prior year due to the increase in net sales, an increase in operating margin and a reduction in the current year income tax rate, partially offset by the base period gain on dissolution of the PGT Healthcare partnership.
Net earnings attributable to Procter & Gamble increased $0.4 billion or 12% versus the prior year to $3.6 billion.
Diluted net earnings per share increased 11% to $1.36 due primarily to the increase in net earnings.
Core net earnings attributable to Procter & Gamble, which represents net earnings excluding incremental restructuring charges in both periods and the base period gain on the dissolution of the PGT Healthcare partnership, increased 24% to $3.6 billion. Core net earnings per share increased 22% to $1.37 due primarily to the increase in Core net earnings.
Operating cash flow was $4.2 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was $3.3 billion. Adjusted free cash flow productivity was 91%.
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 macroeconomic 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, Greater China 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, 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, and the current work being led by the OECD for the G20 focused on "Addressing the Challenges of the Digitalization of the Economy." The breadth of this project extends beyond pure digital businesses and is likely to impact all multinational businesses by redefining jursidictional taxing rights. 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, Argentina 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, 2019.





RESULTS OF OPERATIONS – Three Months Ended September 30, 2019
The following discussion provides a review of results for the three months ended September 30, 2019 versus the three months ended September 30, 2018.
 
Three Months Ended September 30
Amounts in millions, except per share amounts
2019
 
2018
 
% Chg
Net sales
$17,798
 
$16,690
 
7%
Operating income
4,290
 
3,554
 
21%
Net earnings
3,617
 
3,211
 
13%
Net earnings attributable to Procter & Gamble
3,593
 
3,199
 
12%
Diluted net earnings per common share
1.36
 
1.22
 
11%
Core net earnings per common share
1.37
 
1.12
 
22%
 
 
Three Months Ended September 30
COMPARISONS AS A PERCENTAGE OF NET SALES
2019
 
2018
 
Basis Pt Chg
Gross profit
51.0%
 
49.2%
 
180
Selling, general & administrative expense
26.9%
 
27.9%
 
(100)
Operating income
24.1%
 
21.3%
 
280
Earnings before income taxes
24.4%
 
23.6%
 
80
Net earnings
20.3%
 
19.2%
 
110
Net earnings attributable to Procter & Gamble
20.2%
 
19.2%
 
100
Net Sales
Net sales for the quarter increased 7% to $17.8 billion including a 2% negative impact from foreign exchange. Unit volume increased 5%. Excluding the impacts of acquisitions and divestitures, organic volume increased 4%. Increased pricing had a 1% favorable impact to net sales. Mix was a 2% positive impact to net sales, driven by disproportionate organic growth of Japan, Skin & Personal Care and Personal Health Care categories, all of which have higher than company average selling prices. Volume increased high teens in Health Care, increased mid-single digits in Fabric & Home Care and increased low single digits in Beauty and in Baby, Feminine & Family Care. Volume decreased low-single digits in Grooming. Excluding the impacts of the Merck OTC acquisition, Health Care organic volume increased mid-single digits. On a regional basis, volume growth was driven by high single digits increases in Latin America and in Asia Pacific, primarily due to inventory build by retailers in Japan in advance of a VAT increase effective October 2019, and mid-single digits increases in North America, Europe, Greater China, and India, Middle East and Africa (IMEA). Excluding the impact of minor acquisitions and divestitures, organic volume increased mid-single digits in Latin America and increased low single digits in Greater China, Europe and IMEA. Organic sales increased 7% on a 4% increase in organic volume.
 
Net Sales Change Drivers 2019 vs. 2018 (Three Months Ended September 30) (1)
 
Volume with Acquisitions & Divestitures
 
Volume Excluding Acquisitions & Divestitures
 
Foreign Exchange
 
Price
 
Mix
 
Other (1)
 
Net Sales Growth (2)
Beauty
3%
 
3%
 
(2)%
 
3%
 
4%
 
—%
 
8%
Grooming
(1)%
 
(1)%
 
(2)%
 
1%
 
—%
 
—%
 
(2)%
Health Care
17%
 
6%
 
(2)%
 
1%
 
2%
 
2%
 
20%
Fabric & Home Care
6%
 
6%
 
(1)%
 
—%
 
1%
 
—%
 
6%
Baby, Feminine & Family Care
2%
 
2%
 
(1)%
 
2%
 
1%
 
—%
 
4%
Total Company
5%
 
4%
 
(2)%
 
1%
 
2%
 
1%
 
7%
(1)    Other includes the sales mix impact from acquisitions and divestitures and rounding impacts necessary to reconcile volume to net sales.
(2)    Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
Operating Costs
Gross margin increased 180 basis points to 51.0% of net sales for the quarter. Gross margin benefited from:
90 basis points of gross manufacturing cost savings projects (80 basis points net of product and packaging reinvestments),
70 basis points of positive pricing impacts,
40 basis points of lower commodity costs, and
50 basis points of other benefits
These benefits were partially offset by a 10 basis point decline from unfavorable foreign exchange and a 50 basis point net decline from unfavorable product mix (primarily mix within segments due to the growth of lower margin product forms and large sizes 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 marketing spending and overhead costs, partially offset by a reduction in other operating costs. SG&A as a percentage of net sales decreased 100 basis points to 26.9% due to a decrease in overhead, marketing spending and other operating costs as a percentage of net sales. Marketing spending as a percentage of net sales decreased 20 basis points due to the positive scale impacts of the net sales increase and savings in agency compensation, production costs and advertising spending, partially offset by reinvestments in media and other marketing spending. Overhead costs as a percentage of net sales decreased 30 basis points driven by the positive scale impacts of the net sales increase, productivity savings and lower restructuring charges versus the base period, partially offset by inflation, higher incentive compensation costs and other cost increases. Other net operating costs as a percentage of net sales decreased 50 basis points due to a reduction in foreign exchange transaction charges and gains from legal settlements. Productivity-driven cost savings delivered 70 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was $108 million for the quarter, a decrease of $21 million versus the prior year period due to a decrease in average debt balances. Interest income was $58 million for the quarter, a $5 million increase versus the prior year period due to an increase in higher yield investment securities balances. Other non-operating income was $103 million, a decrease of $359 million due to the base period gain from the dissolution of the PGT Healthcare partnership.
Income Taxes
For the three months ended September 30, 2019 the effective tax rate decreased 180 basis points versus the prior year period to 16.7% due to:
a 150 basis-point reduction from increased excess tax benefits of share-based compensation (200 basis points in the current year versus 50 basis points in the prior year),
a 120 basis-point reduction from a non-recurring tax benefit arising from a simplification of our legal entity structure,
a 90 basis-point reduction from favorable impacts from geographic mix of earnings,
partially offset by a 180 basis-point increase related to the prior year tax impact of the gain on the dissolution of the PGT Healthcare partnership.
Net Earnings
Operating income increased $736 million, or 21% to $4.3 billion due to the net sales increase, the increase in gross margins and the reduction in SG&A as a percentage of sales, all of which are described above. Net earnings increased $406 million or 13% to $3.6 billion due to the increase in operating income and the lower tax rates as described above, partially offset by the base period gain on the PGT Healthcare partnership dissolution. Foreign exchange had a negative impact of $50 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 $394 million or 12% to $3.6 billion for the quarter. Diluted net earnings per share increased 11% to $1.36. Core net earnings per share increased 22% to $1.37. Core net earnings per share represents diluted net earnings per share excluding the incremental restructuring charges in both periods related to our productivity and cost savings plans and the gain on dissolution of the PGT Healthcare partnership in the base period.





Amounts in millions of dollars unless otherwise specified.


BUSINESS SEGMENT DISCUSSION – Three Months Ended September 30, 2019
The following discussion provides a review of results by reportable business segment. Analysis of the results for the three months period ended September 30, 2019 is provided based on a comparison to the same three months period ended September 30, 2018. The primary financial measures used to evaluate segment performance are net sales and net earnings. The table below provides supplemental information on net sales and net earnings by reportable business segment for the three months ended September 30, 2019 versus the comparable prior year period (dollar amounts in millions):
 
Three Months Ended September 30, 2019
 
Net Sales
 
% Change Versus Year Ago
 
Earnings/(Loss) Before Income Taxes
 
% Change Versus Year Ago
 
Net Earnings
 
% Change Versus Year Ago
Beauty
$
3,552

 
8
 %
 
$
1,092

 
15
%
 
$
874

 
15
%
Grooming
1,531

 
(2
)%
 
426

 
2
%
 
353

 
4
%
Health Care
2,221

 
20
 %
 
540

 
23
%
 
401

 
21
%
Fabric & Home Care
5,832

 
6
 %
 
1,338

 
17
%
 
1,028

 
17
%
Baby, Feminine & Family Care
4,567

 
4
 %
 
1,134

 
26
%
 
871

 
26
%
Corporate
95

 
N/A

 
(187
)
 
N/A

 
90

 
N/A

Total Company
$
17,798

 
7
 %
 
$
4,343

 
10
%
 
$
3,617

 
13
%
Beauty
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Beauty net sales increased 8% to $3.6 billion during the first fiscal quarter on a 3% increase in unit volume. Favorable product mix added 4% to net sales due to the disproportionate growth of the Skin and Personal Care category, including the super-premium SK-II brand, which has higher than segment average selling prices. Higher pricing increased net sales by 3%. Unfavorable foreign exchange impacts reduced net sales by 2%. Organic sales increased 10%. Global market share of the Beauty segment increased 0.3 points. Volume growth was driven by a mid-single digit increase in North America, Asia Pacific, Latin America and IMEA and a low single digits increase in Europe. The volume increase in Asia Pacific was primarily driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
Volume in Hair Care increased low single digits. Increased volume was driven by mid-single digits growth in North America, Asia Pacific, Europe, Latin America and IMEA (due to product innovation, market growth and Japan retailer inventory increase), partially offset by a low single digits decline in Greater China due to competitive activities. Excluding the impact of minor brand acquisitions, volume increased low single digits in North America. Global market share of the Hair Care category was unchanged.
Volume in Skin and Personal Care increased mid-single digits. Volume increased in all regions, led by a high single digits increase in Greater China and mid-single digits increases in North America and Latin America driven by premium innovation. Global market share of the Skin and Personal Care category increased more than half a point.
Net earnings increased 15% to $874 million due to the increase in net sales and a 150 basis-point increase in net earnings margin. The net earnings margin increased primarily due to a reduction in SG&A as a percentage of sales, along with an increase in gross margin. The gross margin increase was primarily driven by increased pricing, partially offset by negative foreign exchange impacts and other hurts related to new manufacturing startup costs. The reduction in SG&A as a percentage of sales was primarily due to the positive scale impacts of the net sales increase.
Grooming
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Grooming net sales decreased 2% to $1.5 billion during the first fiscal quarter on a 1% decrease in unit volume. Unfavorable foreign exchange had a negative 2% impact on net sales. Pricing had a positive 1% impact on net sales. Organic sales increased 1%. Global market share of the Grooming segment decreased 0.4 points. The volume decrease was driven by a high single digits decline in North America, partially offset by a mid-single digits increase in Greater China and a low single digits increase in Latin America.
Shave Care volume decreased low single digits. The volume decrease was driven by a high single digits decline in North America due to competitive activity, partially offset by a mid-single digits increase in Greater China and low single digit increases in Latin America and Asia Pacific due to product innovation. Global market share of the Shave Care category was unchanged.



Volume in Appliances decreased mid-single digits. A decline of more than 20% in Asia Pacific (due to market contraction, competitive activities and a reduction in trade inventories), was partially offset by mid-single digit volume increase in Greater China due to innovation. Global market share of the Appliances category was unchanged.
Net earnings increased 4% to $353 million due to a 130 basis-point increase in net earnings margin, partially offset by the reduction in net sales. Net earnings margin increased primarily due to a reduction in SG&A as a percentage of net sales and a reduction in effective tax rates, partially offset by a reduction in gross margin. Gross margin declined due to the negative impact of unfavorable mix (due to the growth of lower margin products), partially offset by the positive impacts of manufacturing cost savings and increased pricing. SG&A as a percentage of net sales decreased primarily due to a favorable legal settlement in the current period and reduction in overhead costs due to productivity savings, partially offset by the negative scale impacts of the net sales decrease.
Health Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Health Care net sales increased 20% to $2.2 billion during the first fiscal quarter on a 17% increase in unit volume. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic sales increased 9% and organic volume increased 6%. Unfavorable foreign exchange impacts decreased net sales by 2%. Higher pricing increased net sales by 1%. Favorable mix increased net sales by 2% due to the disproportionate organic growth of premium products and the North America region which have higher than segment average margins. Global market share of the Health Care segment increased 0.3 points. Volume increased in all regions, led by over 20% growth in Europe, Latin America, IMEA and Asia Pacific and high single digits growth in North America. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic volume increased high single digits in IMEA and in Latin America and increased low single digits in Europe and in Asia Pacific.
Oral Care volume increased mid-single digits. Increased volume was driven by high teens growth in IMEA and high single digits growth in North America, Asia Pacific and Latin America due to innovation and market growth. Global market share of the Oral Care category increased nearly half a point.
Volume in Personal Health Care increased more than 50% versus the prior year period. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic volume increased high single digits. The organic volume increase was driven by over 20% growth in Europe and double digits growth in North America (due to innovation and higher retailer inventory build for the cough/cold season versus the year ago period), partially offset by double digit volume declines in Asia Pacific due to devaluation-related price increases. Global market share of the Personal Health Care category increased slightly.
Net earnings increased 21% to $401 million, primarily due to the increase in net sales. Net earnings margin increased 10 basis points as an increase in gross margin was largely offset by an increase in SG&A as a percentage of sales and an increase in income tax rates. The increase in gross margin was driven by the positive impacts of increased pricing and favorable mix due to the disproportionate growth of the North America region which has higher than segment-average margins, partially offset by the mix impact of the Merck OTC consumer healthcare acquisition. SG&A as a percentage of net sales increased primarily due to an increase in overheads and other operating expenses caused by the impact of the Merck OTC consumer healthcare acquisition, partially offset by the positive scale benefits of the net sales increase.
Fabric & Home Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Fabric & Home Care net sales increased 6% to $5.8 billion during the first fiscal quarter on a 6% increase in unit volume. Unfavorable foreign exchange impacts reduced net sales by 1%. Positive mix impacts increased net sales by 1% due to the disproportionate growth of premium products. Organic sales increased 8%. Global market share of the Fabric & Home Care segment increased 0.7 points. Volume growth was driven by double digit increases in Asia Pacific, Greater China and Latin America and mid-single digit increases in North America and Europe. The volume increase in Asia Pacific was partially driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
Fabric Care volume increased high single digits. Volume increased in all regions led by double digits growth in Asia Pacific, Greater China and Latin America, high single digits growth in North America and mid-single digits growth in Europe. Growth was driven by product innovation, market growth and the increase in Japan retailer inventories prior to a VAT increase. Global market share of the Fabric Care category increased half a point.
Home Care volume increased low single digits. Excluding the impact of minor brand divestitures, organic volume increased mid-single digits. Increased volume was driven by high single digits growth in Asia Pacific, mid-single digits growth in Europe and low single digits growth in North America. Volume grew behind product innovation and the increase in Japan retailer inventories prior to a VAT increase. Global market share of the Home Care category increased more than a point.





Net earnings increased 17% to $1.0 billion due to the increase in net sales and a 160 basis point increase in net earnings margin. The net earnings margin increase was primarily due to an increase in gross margin, along with a reduction in SG&A as a percentage of sales. The gross margin increase was driven by manufacturing cost savings and reduction in commodity costs. SG&A expense as a percentage of net sales was down due to the positive scale benefits of the net sales increase.
Baby, Feminine & Family Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Baby, Feminine & Family Care net sales increased 4% to $4.6 billion during the first fiscal quarter on a 2% increase in unit volume. Unfavorable foreign exchange impacts decreased net sales by 1%. Higher pricing increased net sales by 2%. Positive mix increased net sales by 1% due to the disproportionate growth of premium products, which have higher than segment average margins. Organic sales increased 5%. Global market share of the Baby, Feminine & Family Care segment decreased 0.5 points. Volume growth was driven by a mid-teens increase in Asia Pacific and a mid-single digit increase in North America, partially offset by a low single digit decline in Europe and Latin America. Excluding the impact of minor brand acquisitions, organic volume increased low single digits in North America. The volume increase in Asia Pacific was primarily driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
Volume in Baby Care decreased low single digits. Volume decreased high single digits in Latin America and mid-single digits in Europe due to competitive activity, devaluation related price increases and category contraction in certain markets. This was partially offset by high teens volume increase in Asia Pacific due to the increase in Japan retailer inventories prior to the VAT increase, mid-single digit increase in Greater China, and low single digit increase in North America due to product innovation. Global market share of the Baby Care category decreased more than a point.
Volume in Feminine Care increased mid-single digits. Volume increased high single digits in IMEA and Latin America and increased mid-single digits in Europe due to product innovation and adult incontinence category growth. Global market share of the Feminine Care category was unchanged.
Volume in Family Care, which is predominantly a North American business, increased mid-single digits driven by product innovation, partially offset by volume declines due to price increases. North America share of the Family Care category decreased nearly half a point.
Net earnings increased 26% to $871 million due to the increase in net sales and a 330 basis point increase in net earnings margin. Net earnings margin increased primarily due to an increase in gross margin,along with a reduction in SG&A as a percentage of net sales. Gross margin increased due to manufacturing cost savings projects, increased pricing and a reduction in commodity costs, partially offset by negative foreign exchange impacts. SG&A as a percentage of net sales decreased due to reduced overhead costs, driven by productivity savings, partially offset by an increase in marketing spending as a percentage of net sales.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include: the incidental businesses managed at the corporate level; financing and investing activities; certain employee benefit costs; other general corporate items; the gains and losses related to certain divested brands and categories; certain restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Corporate also includes reconciling items to adjust the accounting policies used in the segments to U.S. GAAP. The most significant reconciling item includes income taxes to adjust from blended statutory rates that are reflected in the segments to the overall Company effective tax rate.
Corporate net sales decreased $21 million to $95 million for the quarter ended September 30, 2019. Corporate net earnings decreased $121 million in the quarter primarily due to the base period gain on the dissolution of the PGT Healthcare partnership, partially offset by lower restructuring charges versus the base period, lower foreign exchange transactional charges, lower interest expense and a decrease in effective tax rates, all of which have been described above.
Restructuring Program to deliver Productivity and Cost Savings
In 2012, the Company initiated a productivity and cost savings plan to reduce costs and better leverage scale in the areas of supply chain, research and development, marketing and overheads.  The plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to fund the Company's growth strategy. In 2017, the Company communicated specific elements of an additional multi-year productivity and cost savings program.
The current productivity and cost savings plan will further reduce costs in the areas of supply chain, certain marketing activities and overhead expenses.  As part of this plan, the Company incurred $1.8 billion in total before-tax restructuring costs across fiscal 2018 and fiscal 2019, with an additional amount of approximately $0.6 billion expected in fiscal 2020. This program is expected to result in additional enrollment reductions, along with further optimization of the supply chain and other manufacturing processes. Consistent with our historical policies for ongoing restructuring-type activities, the resulting charges are funded by and included within Corporate for segment reporting.



In addition to our restructuring programs, we have additional ongoing savings efforts in our supply chain, marketing and overhead areas that yield additional benefits to our operating margins.
Refer to Note 9 in the Notes to the Consolidated Financial Statements for more details on the restructuring program.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
We generated $4.2 billion of cash from operating activities fiscal year to date, an increase of $602 million versus the prior year. Net earnings, adjusted for non-cash items (depreciation and amortization, share-based compensation expense, deferred income taxes and gain on sale of assets), generated $3.9 billion of operating cash flow. Working capital and other impacts generated $307 million of cash in the period. Accounts receivable increased, using $261 million of cash, primarily due to sales growth and to a lesser extent, the extension of customer payment terms for seasonal products. These increases were partially offset by the timing of the quarter-end (which fell on a Monday versus Sunday in the prior year end, resulting in greater collections). Inventory consumed $549 million of cash primarily to support business growth, holiday seasonality builds in certain categories and product initiatives. Accounts payable, accrued and other liabilities increased, generating $1.2 billion of cash. An increase in taxes payable drove approximately $900 million of the increase, including an approximate $500 million increase in taxes payable related to the integration of Merck, which had no impact on operating cash flows, as there was an equal and offsetting release of a deferred tax liability created on the acquisition of Merck. The remaining balance of the increase was primarily driven by an increase in payables to support the increase in inventory and to a lesser extent extended payment terms with our suppliers, partially offset by the payment of prior fiscal year incentive compensation. All other operating assets and liabilities used $35 million of cash.
Investing Activities
Investing activities generated $5.1 billion of cash fiscal year to date. Capital expenditures were $1.1 billion, or 6.1% of net sales. We received $6.2 billion of cash from sales and maturities of investment securities.
Financing Activities
Our financing activities used $4.1 billion of net cash fiscal year to date. We used $3.0 billion for treasury stock purchases, $1.9 billion for dividends and $61 million for debt repayments. Cash from the exercise of stock options and other impacts generated $875 million of cash.
As of September 30, 2019, our current liabilities exceeded current assets by $8.3 billion. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation S-K Item 10(e), the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measures. We believe that these measures provide useful perspective on underlying business results and trends (i.e., trends excluding non-recurring or unusual items) and provide a supplemental measure of year-on-year results. The non-GAAP measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
Organic sales growth: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions and divestitures and foreign exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. This measure is used in assessing achievement of management goals for at-risk compensation.
Adjusted free cash flow: Adjusted free cash flow is defined as operating cash flow less capital spending and excluding payments for the transitional tax resulting from the comprehensive U.S. legislation commonly referred to as the Tax Cuts and Jobs Act enacted in December 2017 (the U.S. Tax Act). Adjusted free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends, share repurchases, acquisitions and other discretionary investments.
Adjusted free cash flow productivity: Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. This measure is also used in assessing the achievement of management goals for at-risk compensation. The Company's long-term target is to generate annual adjusted free cash flow productivity at or above 90 percent.
Core EPS: Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share adjusted as indicated. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time. This measure is also used when evaluating senior management in determining their at-risk compensation.
The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following items:
Incremental Restructuring: The Company has had and continues to have an ongoing level of restructuring activities. Such activities have resulted in ongoing annual restructuring related charges of approximately $250 - $500 million before tax. In 2012, the Company began a $10 billion strategic productivity and cost savings initiative that included incremental restructuring activities. In 2017, we communicated details of an additional multi-year productivity and cost savings plan. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs.
Gain on Dissolution of PGT Healthcare Partnership: The Company finalized the dissolution of our PGT Healthcare partnership, a venture between the Company and Teva Pharmaceuticals Industries, Ltd. (Teva) in the OTC consumer healthcare business, in the quarter ended September 30, 2018. The transaction was accounted for as a sale of the Teva portion of the PGT business and resulted in the Company recognizing an after-tax gain on the dissolution of $353 million.
We do not view the above items to be part of our sustainable results and their exclusion from Core earnings measures provides a more comparable measure of year-on-year results. These items are also excluded when evaluating senior management in determining their at-risk compensation.
Organic sales growth:
Three Months Ended September 30, 2019
Net Sales Growth
 
Foreign Exchange Impact
 
Acquisition & Divestiture Impact/Other (1)
 
Organic Sales Growth
Beauty
8%
 
2%
 
—%
 
10%
Grooming
(2)%
 
2%
 
1%
 
1%
Health Care
20%
 
2%
 
(13)%
 
9%
Fabric & Home Care
6%
 
1%
 
1%
 
8%
Baby, Feminine & Family Care
4%
 
1%
 
—%
 
5%
Total Company
7%
 
2%
 
(2)%
 
7%
(1)    Includes rounding impacts necessary to reconcile net sales to organic sales.
Adjusted free cash flow (dollar amounts in millions):
Three Months Ended September 30, 2019
Operating Cash Flow
 
Capital Spending
U.S. Tax Act Payments
 
Adjusted Free Cash Flow
$4,169
 
$(1,079)
$215
 
$3,305
Adjusted free cash flow productivity (dollar amounts in millions):
Three Months Ended September 30, 2019
Adjusted Free Cash Flow
 
Net Earnings
 
Adjusted Free Cash Flow Productivity
$3,305
 
$3,617
 
91%



THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
Three Months Ended September 30, 2019
 
AS REPORTED (GAAP)
 
INCREMENTAL RESTRUCTURING
 
ROUNDING
 
NON-GAAP (CORE)
COST OF PRODUCTS SOLD
$
8,723

 
$
(52
)
 
$

 
$
8,671

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
4,785

 
22

 

 
4,807

OPERATING INCOME
4,290

 
30

 

 
4,320

INCOME TAX
726

 
1

 

 
727

NET EARNINGS ATTRIBUTABLE TO P&G
3,593

 
31

 
(1
)
 
3,623

 
 
 
 
 
 
 
 Core EPS
DILUTED NET EARNINGS PER COMMON SHARE (1)
$
1.36

 
$
0.01

 
$

 
$
1.37

(1)    Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
 
 
CHANGE VERSUS YEAR AGO
 
 
 
 
 
 
CORE NET EARNINGS ATTRIBUTABLE TO P&G
24
%
 
 
 
 
 
CORE EPS
22
%
 
 
 

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
Three Months Ended September 30, 2018
 
AS REPORTED (GAAP)
 
INCREMENTAL RESTRUCTURING
 
GAIN ON DISSOLUTION OF PGT PARTNERSHIP
 
ROUNDING
 
NON-GAAP (CORE)
COST OF PRODUCTS SOLD
$
8,484

 
$
(46
)
 
$

 
$

 
$
8,438

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
4,652

 
(28
)
 

 
1

 
4,625

OPERATING INCOME
3,554

 
74

 

 
(1
)
 
3,627

INCOME TAX
729

 
6

 
(2
)
 
1

 
734

NET EARNINGS ATTRIBUTABLE TO P&G
3,199

 
69

 
(353
)
 

 
2,915