10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
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| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2016
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-434
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
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| | |
Ohio | | 31-0411980 |
(State of Incorporation) | | (I.R.S. Employer Identification Number) |
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| | |
One Procter & Gamble Plaza, Cincinnati, Ohio | | 45202 |
(Address of principal executive offices) | | (Zip Code) |
(513) 983-1100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 2,661,851,865 shares of Common Stock outstanding as of March 31, 2016.
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
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| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
Amounts in millions except per share amounts | 2016 | | 2015 | | 2016 | | 2015 |
NET SALES | $ | 15,755 |
| | $ | 16,930 |
| | $ | 49,197 |
| | $ | 54,196 |
|
Cost of products sold | 7,915 |
| | 8,927 |
| | 24,527 |
| | 28,219 |
|
Selling, general and administrative expense | 4,522 |
| | 4,978 |
| | 13,731 |
| | 15,740 |
|
OPERATING INCOME | 3,318 |
| | 3,025 |
| | 10,939 |
| | 10,237 |
|
Interest expense | 146 |
| | 148 |
| | 429 |
| | 478 |
|
Interest income | 33 |
| | 38 |
| | 135 |
| | 103 |
|
Other non-operating income, net | 21 |
| | 53 |
| | 38 |
| | 85 |
|
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 3,226 |
| | 2,968 |
| | 10,683 |
| | 9,947 |
|
Income taxes on continuing operations | 889 |
| | 567 |
| | 2,664 |
| | 2,156 |
|
NET EARNINGS FROM CONTINUING OPERATIONS | 2,337 |
| | 2,401 |
| | 8,019 |
| | 7,791 |
|
NET EARNINGS/(LOSS) FROM DISCONTINUED OPERATIONS | 446 |
| | (213 | ) | | 627 |
| | (1,185 | ) |
NET EARNINGS | 2,783 |
| | 2,188 |
| | 8,646 |
| | 6,606 |
|
Less: Net earnings attributable to noncontrolling interests | 33 |
| | 35 |
| | 89 |
| | 91 |
|
NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 2,750 |
| | $ | 2,153 |
| | $ | 8,557 |
| | $ | 6,515 |
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| | | | | | | |
BASIC NET EARNINGS PER COMMON SHARE: (1) | | | | | | | |
Earnings from continuing operations | $ | 0.83 |
| | $ | 0.85 |
| | $ | 2.86 |
| | $ | 2.77 |
|
Earnings/(loss) from discontinued operations | 0.17 |
| | (0.08 | ) | | 0.23 |
| | (0.44 | ) |
BASIC NET EARNINGS PER COMMON SHARE | 1.00 |
| | 0.77 |
| | 3.09 |
| | 2.33 |
|
DILUTED NET EARNINGS PER COMMON SHARE: (1) | | | | | | | |
Earnings from continuing operations | $ | 0.81 |
| | $ | 0.82 |
| | $ | 2.78 |
| | $ | 2.67 |
|
Earnings/(loss) from discontinued operations | 0.16 |
| | (0.07 | ) | | 0.22 |
| | (0.41 | ) |
DILUTED NET EARNINGS PER COMMON SHARE | 0.97 |
| | 0.75 |
| | 3.00 |
| | 2.26 |
|
DIVIDENDS PER COMMON SHARE | $ | 0.663 |
| | $ | 0.644 |
| | $ | 1.989 |
| | $ | 1.931 |
|
Diluted Weighted Average Common Shares Outstanding | 2,835.0 |
| | 2,882.5 |
| | 2,855.6 |
| | 2,885.3 |
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| |
(1) | Basic net earnings per share and diluted net earnings per share are calculated on net earnings attributable to Procter & Gamble. |
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
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| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
Amounts in millions | 2016 | | 2015 | | 2016 | | 2015 |
NET EARNINGS | $ | 2,783 |
| | $ | 2,188 |
| | $ | 8,646 |
| | $ | 6,606 |
|
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | | | | | | | |
Financial statement translation | 1,041 |
| | (3,696 | ) | | (937 | ) | | (8,623 | ) |
Unrealized gains/(losses) on hedges | (382 | ) | | 780 |
| | (172 | ) | | 1,553 |
|
Unrealized gains/(losses) on investment securities | 36 |
| | 28 |
| | 16 |
| | 26 |
|
Unrealized gains/(losses) on defined benefit retirement plans | (3 | ) | | 354 |
| | 231 |
| | 855 |
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TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | 692 |
| | (2,534 | ) | | (862 | ) | | (6,189 | ) |
TOTAL COMPREHENSIVE INCOME/(LOSS) | 3,475 |
| | (346 | ) | | 7,784 |
| | 417 |
|
Less: Total comprehensive income attributable to noncontrolling interests | 33 |
| | 35 |
| | 89 |
| | 91 |
|
TOTAL COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 3,442 |
| | $ | (381 | ) | | $ | 7,695 |
| | $ | 326 |
|
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| | | | | | | | | | | | |
Amounts in millions | | | | | March 31, 2016 | | June 30, 2015 |
ASSETS | | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | | | | $ | 7,895 |
| | $ | 6,836 |
|
Available-for-sale investment securities | | | | | 5,924 |
| | 4,767 |
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Accounts receivable | | | | | 4,591 |
| | 4,568 |
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INVENTORIES | | | | | | | |
Materials and supplies | | | | | 1,285 |
| | 1,266 |
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Work in process | | | | | 558 |
| | 525 |
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Finished goods | | | | | 3,114 |
| | 3,188 |
|
Total inventories | | | | | 4,957 |
| | 4,979 |
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Deferred income taxes | | | | | 1,189 |
| | 1,356 |
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Prepaid expenses and other current assets | | | | | 2,733 |
| | 2,708 |
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Assets held for sale | | | | | 7,028 |
| | 4,432 |
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TOTAL CURRENT ASSETS | | | | | 34,317 |
| | 29,646 |
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PROPERTY, PLANT AND EQUIPMENT, NET | | | | | 19,186 |
| | 19,655 |
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GOODWILL | | | | | 44,679 |
| | 44,622 |
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TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET | | | | 24,629 |
| | 25,010 |
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NONCURRENT ASSETS HELD FOR SALE | | | | | — |
| | 5,204 |
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OTHER NONCURRENT ASSETS | | | | | 4,697 |
| | 5,358 |
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TOTAL ASSETS | | | | | $ | 127,508 |
| | $ | 129,495 |
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| | | | | |
| | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Accounts payable | | | | | $ | 7,795 |
| | $ | 8,138 |
|
Accrued and other liabilities | | | | | 7,652 |
| | 8,091 |
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Liabilities held for sale | | | | | 2,229 |
| | 1,543 |
|
Debt due within one year | | | | | 13,681 |
| | 12,018 |
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TOTAL CURRENT LIABILITIES | | | | | 31,357 |
| | 29,790 |
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LONG-TERM DEBT | | | | | 19,134 |
| | 18,327 |
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DEFERRED INCOME TAXES | | | | | 9,161 |
| | 9,179 |
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NONCURRENT LIABILITIES HELD FOR SALE | | | | | — |
| | 717 |
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OTHER NONCURRENT LIABILITIES | | | | | 8,003 |
| | 8,432 |
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TOTAL LIABILITIES | | | | | 67,655 |
| | 66,445 |
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SHAREHOLDERS’ EQUITY | | | | | | | |
Preferred stock | | | | | 1,043 |
| | 1,077 |
|
Common stock – shares issued – | March 2016 | | 4,009.2 |
| | | | |
| June 2015 | | 4,009.2 |
| | 4,009 |
| | 4,009 |
|
Additional paid-in capital | | | | | 63,617 |
| | 63,852 |
|
Reserve for ESOP debt retirement | | | | | (1,289 | ) | | (1,320 | ) |
Accumulated other comprehensive income/(loss) | | | | | (13,642 | ) | | (12,780 | ) |
Treasury stock | | | | | (82,400 | ) | | (77,226 | ) |
Retained earnings | | | | | 87,849 |
| | 84,807 |
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Noncontrolling interest | | | | | 666 |
| | 631 |
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TOTAL SHAREHOLDERS’ EQUITY | | | | | 59,853 |
| | 63,050 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | $ | 127,508 |
| | $ | 129,495 |
|
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| | | | | | | |
| Nine Months Ended March 31 |
Amounts in millions | 2016 | | 2015 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | $ | 6,836 |
| | $ | 8,558 |
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OPERATING ACTIVITIES | | | |
Net earnings | 8,646 |
| | 6,606 |
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Depreciation and amortization | 2,239 |
| | 2,326 |
|
Share-based compensation expense | 216 |
| | 231 |
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Deferred income taxes | (428 | ) | | (135 | ) |
Loss/(gain) on sale of businesses | 241 |
| | (319 | ) |
Goodwill and intangible asset impairment charges | 450 |
| | 2,021 |
|
Changes in: | | | |
Accounts receivable | (129 | ) | | 308 |
|
Inventories | (94 | ) | | (190 | ) |
Accounts payable, accrued and other liabilities | (199 | ) | | 146 |
|
Other operating assets and liabilities | 167 |
| | (823 | ) |
Other | 187 |
| | 449 |
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TOTAL OPERATING ACTIVITIES | 11,296 |
| | 10,620 |
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INVESTING ACTIVITIES | | | |
Capital expenditures | (2,023 | ) | | (2,462 | ) |
Proceeds from asset sales | 114 |
| | 3,715 |
|
Acquisitions, net of cash acquired | (186 | ) | | (119 | ) |
Purchases of short-term investments | (2,372 | ) | | (2,897 | ) |
Proceeds from sales of short-term investments | 1,222 |
| | 256 |
|
Cash transferred in Batteries divestiture | (143 | ) | | — |
|
Restricted cash related to Beauty Brands divestiture | (995 | ) | | — |
|
Change in other investments | — |
| | (203 | ) |
TOTAL INVESTING ACTIVITIES | (4,383 | ) | | (1,710 | ) |
FINANCING ACTIVITIES | | | |
Dividends to shareholders | (5,589 | ) | | (5,416 | ) |
Change in short-term debt | 1,535 |
| | (141 | ) |
Additions to long-term debt | 3,916 |
| | 1,188 |
|
Reductions of long-term debt | (2,210 | ) | | (2,684 | ) |
Treasury stock purchases | (3,504 | ) | | (4,254 | ) |
Shares exchanged in Batteries divestiture | (1,730 | ) | | — |
|
Impact of stock options and other | 2,024 |
| | 2,664 |
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TOTAL FINANCING ACTIVITIES | (5,558 | ) | | (8,643 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (296 | ) | | (451 | ) |
CHANGE IN CASH AND CASH EQUIVALENTS | 1,059 |
| | (184 | ) |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 7,895 |
| | $ | 8,374 |
|
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, 2015 and the Form 8-K filed October 26, 2015 to update the Form 10-K to revise disclosures to reflect discontinued operations related to the pending sale of certain Beauty Brands businesses, which was announced by the Company on July 9, 2015. For additional details on the transaction and discontinued operations, see Note 11. In the opinion of management, the accompanying unaudited Consolidated Financial Statements of The Procter & Gamble Company and subsidiaries (the "Company," "Procter & Gamble," "P&G," "we" or "our") contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.
2. New Accounting Pronouncements and Policies
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". This guidance outlines a single, comprehensive model for accounting for revenue from contracts with customers. We will adopt the standard no later than July 1, 2018. While we are currently assessing the impact of the new standard, we do not expect this new guidance to have a material impact on our Consolidated Financial Statements.
On July 1, 2015, the Company adopted ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". The guidance included new reporting and disclosure requirements for discontinued operations. For additional details on discontinued operations, see Note 11.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We will adopt the standard no later than July 1, 2019. We are currently assessing the impact that the new standard will have on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard amends several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We will adopt the standard no later than July 1, 2017. We are currently assessing the impact that the new standard will have on our Consolidated Financial Statements.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on the Consolidated Financial Statements.
Amounts in millions of dollars unless otherwise specified.
3. Segment Information
As discussed in Note 11, the Beauty Brands, Batteries and Pet Care businesses are presented as discontinued operations and are excluded from segment results for all periods presented.
Following is a summary of reportable segment results:
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31 | | Nine Months Ended March 31 |
| | | Net Sales | | Earnings/(Loss) from Continuing Operations Before Income Taxes | | Net Earnings/(Loss) from Continuing Operations | | Net Sales | | Earnings/(Loss) from Continuing Operations Before Income Taxes | | Net Earnings/(Loss) from Continuing Operations |
Beauty | 2016 | | $ | 2,719 |
| | $ | 604 |
| | $ | 458 |
| | $ | 8,723 |
| | $ | 2,200 |
| | $ | 1,667 |
|
| 2015 | | 2,961 |
| | 642 |
| | 481 |
| | 9,701 |
| | 2,284 |
| | 1,727 |
|
Grooming | 2016 | | 1,623 |
| | 469 |
| | 356 |
| | 5,103 |
| | 1,547 |
| | 1,187 |
|
| 2015 | | 1,801 |
| | 603 |
| | 456 |
| | 5,749 |
| | 1,937 |
| | 1,466 |
|
Health Care | 2016 | | 1,773 |
| | 414 |
| | 278 |
| | 5,547 |
| | 1,426 |
| | 990 |
|
| 2015 | | 1,909 |
| | 462 |
| | 303 |
| | 6,008 |
| | 1,435 |
| | 994 |
|
Fabric Care and Home Care | 2016 | | 5,028 |
| | 1,014 |
| | 652 |
| | 15,626 |
| | 3,311 |
| | 2,172 |
|
| 2015 | | 5,248 |
| | 937 |
| | 594 |
| | 16,953 |
| | 3,099 |
| | 2,018 |
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Baby, Feminine and Family Care | 2016 | | 4,506 |
| | 976 |
| | 631 |
| | 13,874 |
| | 3,124 |
| | 2,063 |
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| 2015 | | 4,890 |
| | 1,011 |
| | 691 |
| | 15,429 |
| | 3,330 |
| | 2,276 |
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Corporate | 2016 | | 106 |
| | (251 | ) | | (38 | ) | | 324 |
| | (925 | ) | | (60 | ) |
| 2015 | | 121 |
| | (687 | ) | | (124 | ) | | 356 |
| | (2,138 | ) | | (690 | ) |
Total Company | 2016 | | $ | 15,755 |
| | $ | 3,226 |
| | $ | 2,337 |
| | $ | 49,197 |
| | $ | 10,683 |
| | $ | 8,019 |
|
| 2015 | | 16,930 |
| | 2,968 |
| | 2,401 |
| | 54,196 |
| | 9,947 |
| | 7,791 |
|
4. Goodwill and Other Intangible Assets
Goodwill is allocated by reportable segment as follows:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Beauty | | Grooming | | Health Care | | Fabric Care and Home Care | | Baby, Feminine and Family Care | | Total Company |
Goodwill at June 30, 2015 | $ | 12,704 |
| | $ | 19,619 |
| | $ | 5,876 |
| | $ | 1,874 |
| | $ | 4,549 |
| | $ | 44,622 |
|
Acquisitions and divestitures | (2 | ) | | — |
| | (2 | ) | | — |
| | — |
| | (4 | ) |
Translation and other | 48 |
| | (1 | ) | | 6 |
| | (7 | ) | | 15 |
| | 61 |
|
Goodwill at March 31, 2016 | $ | 12,750 |
| | $ | 19,618 |
| | $ | 5,880 |
| | $ | 1,867 |
| | $ | 4,564 |
| | $ | 44,679 |
|
On July 9, 2015, the Company announced the signing of a definitive agreement to divest four product categories, initially comprised of 43 of its beauty brands ("Beauty Brands"), which will be merged with Coty, Inc. The transaction includes the global salon professional hair care and color, retail hair color and cosmetics businesses and a majority of the fine fragrances business, along with select hair styling brands (see Note 11). The Beauty Brands have historically been part of the Company's Beauty reportable segment (previously named Beauty, Hair and Personal Care). In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Beauty Brands are presented as discontinued operations. As a result, the goodwill attributable to the Beauty Brands as of June 30, 2015 and March 31, 2016 is excluded from the preceding table and is reported as Assets held for sale in the Consolidated Balance Sheets.
In February 2016, the Company completed the divestiture of its Batteries business to Berkshire Hathaway (BH) via a split transaction, in which the Company exchanged Duracell, which the Company had infused with approximately $1.9 billion of additional cash, to repurchase all 52.5 million shares of P&G stock owned by BH (see Note 11). Prior to the transaction, the Company recorded a non-cash, before-tax impairment charge of $402 ($350 after-tax) during the nine months ended March 31, 2016, which reflected the value of BH's shares in P&G stock as of the date of the impairment charges.
Goodwill increased from June 30, 2015 primarily due to currency translation.
Amounts in millions of dollars unless otherwise specified.
The test to evaluate goodwill for impairment is a two-step process. In the first step, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, we perform a second step to determine the implied fair value of the reporting unit's goodwill. The second step of the impairment analysis requires a valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the resulting implied fair value of the reporting unit's goodwill is less than its carrying value, that difference represents an impairment.
The business unit valuations used to test goodwill and intangible assets for impairment are dependent on a number of significant estimates and assumptions including macroeconomic conditions, overall category growth rates, competitive activities, cost containment and margin expansion and Company business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values.
Most of our goodwill reporting units are comprised of a combination of legacy and acquired businesses and as a result have fair value cushions that, at a minimum, exceed two times their underlying carrying values. Certain of our continuing goodwill reporting units, in particular Shave Care and Electronic Hair Removal, are comprised entirely of acquired businesses and as a result have fair value cushions that are not as high. While both of these wholly-acquired reporting units have fair value cushions that currently exceed the underlying carrying values, the Shave Care cushion, as well as the related indefinite-lived intangible assets, have been reduced to below 20% due in large part to significant currency devaluations in a number of countries relative to the U.S. dollar that began in recent years and continued subsequent to June 30, 2015. As a result, this unit is more susceptible to impairment risk from adverse changes in business operating plans and macroeconomic environment conditions, including any further significant devaluation of major currencies relative to the U.S. dollar. Any such adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges of the business unit's goodwill and indefinite-lived intangibles.
Identifiable intangible assets at March 31, 2016 are comprised of:
|
| | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization |
Intangible assets with determinable lives | $ | 7,525 |
| | $ | (4,606 | ) |
Intangible assets with indefinite lives | 21,710 |
| | — |
|
Total identifiable intangible assets | $ | 29,235 |
| | $ | (4,606 | ) |
Due to the pending divestiture of the Beauty Brands, intangible assets specific to these businesses are reported as Assets held for sale (see Note 11).
Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives consist of brands. The amortization expense of intangible assets for the three months ended March 31, 2016 and 2015 was $98 and $113, respectively. The amortization expense of intangible assets for the nine months ended March 31, 2016 and 2015 was $301 and $348, respectively.
5. Share-Based Compensation and Postretirement Benefits
The Company offers various postretirement benefits to its employees. The following table provides a summary of our share-based compensation expense and postretirement benefit costs:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
Share-based compensation expense | $ | 79 |
| | $ | 72 |
| | $ | 220 |
| | $ | 222 |
|
Net periodic benefit cost for pension benefits (1) | 85 |
| | 105 |
| | 256 |
| | 333 |
|
Net periodic benefit cost/(benefit) for other retiree benefits (1) | (26 | ) | | 4 |
| | (75 | ) | | 14 |
|
| |
(1) | The components of the total net periodic benefit cost for both pension benefits and other retiree benefits for those interim periods, on an annualized basis, do not differ materially from the amounts disclosed in the Form 8-K filed October 26, 2015 to update the Annual Report on Form 10-K for the fiscal year ended June 30, 2015. |
The disclosures above for both share-based compensation and postretirement benefits include amounts related to discontinued operations which were not material in any period presented.
Amounts in millions of dollars unless otherwise specified.
6. 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.
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. Except for the impairment charges related to our Batteries business (see Note 4), there were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis for the nine months ended March 31, 2016.
The following table sets forth the Company’s financial assets as of March 31, 2016 and June 30, 2015 that are measured at fair value on a recurring basis during the period:
|
| | | | | | | |
| Fair Value Asset |
| March 31, 2016 | | June 30, 2015 |
Investments | | | |
U.S. government securities | $ | 4,622 |
| | $ | 3,495 |
|
Corporate bond securities | 1,302 |
| | 1,272 |
|
Other investments | 28 |
| | 30 |
|
Total | $ | 5,952 |
| | $ | 4,797 |
|
Investment securities are presented in Available-for-sale investment securities and Other noncurrent assets. The amortized cost of U.S. government securities with maturities less than one year was $201 as of March 31, 2016 and $700 as of June 30, 2015. The amortized cost of U.S. government securities with maturities between one and five years was $4,401 as of March 31, 2016 and $2,789 as of June 30, 2015. The amortized cost of Corporate bond securities with maturities of less than a year was $321 as of March 31, 2016 and $221 as of June 30, 2015. The amortized cost of Corporate bond securities with maturities between one and five years was $977 as of March 31, 2016 and $1,052 as of June 30, 2015. The Company's investments measured at fair value are generally classified as Level 2 within the fair value hierarchy. There are no material investment balances classified as either Level 1 or Level 3 within the fair value hierarchy. Fair values are generally estimated based upon quoted market prices for similar instruments.
The fair value of long-term debt was $24,266 and $23,127 as of March 31, 2016 and June 30, 2015, respectively. This includes the current portion ($2,641 and $2,776 as of March 31, 2016 and June 30, 2015, respectively) of debt instruments. Certain long-term debt is recorded at fair value. Certain long-term debt is not recorded at fair value on a recurring basis but is measured at fair value for disclosure purposes. Long-term debt with fair value of $2,328 and $2,180 as of March 31, 2016 and June 30, 2015, respectively, is classified as Level 2 within the fair value hierarchy. All remaining long-term debt is classified as Level 1 within the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
The following table sets forth the notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of March 31, 2016 and June 30, 2015:
|
| | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value Asset/(Liability) |
| March 31, 2016 | | June 30, 2015 | | March 31, 2016 | | June 30, 2015 |
Derivatives in Cash Flow Hedging Relationships | | | | | | | |
Foreign currency contracts | $ | 797 |
| | $ | 951 |
| | $ | 95 |
| | $ | 312 |
|
Derivatives in Fair Value Hedging Relationships | | | | | | | |
Interest rate contracts | $ | 5,031 |
| | $ | 7,208 |
| | $ | 330 |
| | $ | 159 |
|
Derivatives in Net Investment Hedging Relationships | | | | | | | |
Net investment hedges | $ | 2,024 |
| | $ | 537 |
| | $ | (83 | ) | | $ | 95 |
|
Derivatives Not Designated as Hedging Instruments | | | | | | | |
Foreign currency contracts | $ | 8,434 |
| | $ | 6,610 |
| | $ | 106 |
| | $ | (55 | ) |
All derivative assets are presented in Prepaid expenses and other current assets or Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities or Other noncurrent liabilities. The total notional amount of contracts outstanding at the end of the period is indicative of the Company's derivative activity during the period. 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.
|
| | | | | | | |
| Amount of Gain/(Loss) Recognized in AOCI on Derivatives (Effective Portion) |
| March 31, 2016 | | June 30, 2015 |
Derivatives in Cash Flow Hedging Relationships | | | |
Interest rate contracts | $ | (3 | ) | | $ | (1 | ) |
Foreign currency contracts | (1 | ) | | 5 |
|
Total | $ | (4 | ) | | $ | 4 |
|
Derivatives in Net Investment Hedging Relationships | | | |
Net investment hedges | $ | (52 | ) | | $ | 60 |
|
During the next 12 months, the amount of the March 31, 2016 Accumulated other comprehensive income (AOCI) balance that will be reclassified to earnings is expected to be immaterial.
The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the three and nine months ended March 31, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Reclassified from AOCI into Earnings |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
Derivatives in Cash Flow Hedging Relationships (1) | | | | | | | |
Interest rate contracts | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | 5 |
|
Foreign currency contracts | (43 | ) | | 8 |
| | (44 | ) | | 136 |
|
Total | $ | (43 | ) | | $ | 10 |
| | $ | (41 | ) | | $ | 141 |
|
| | | | | | | |
| Amount of Gain/(Loss) Recognized in Earnings |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
Derivatives in Fair Value Hedging Relationships (2) | | | | | | | |
Interest rate contracts | $ | 132 |
| | $ | 25 |
| | $ | 171 |
| | $ | 108 |
|
Debt | (132 | ) | | (25 | ) | | (171 | ) | | (108 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Derivatives in Net Investment Hedging Relationships (2) | | | | | | | |
Net investment hedges | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Derivatives Not Designated as Hedging Instruments (3) | | | | | | | |
Foreign currency contracts | $ | 191 |
| | $ | (343 | ) | | $ | (29 | ) | | $ | (1,072 | ) |
| |
(1) | The gain or loss on the effective portion of cash flow hedging relationships is reclassified from AOCI into net income in the same period during which the related item affects earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in Interest expense and foreign currency contracts in Selling, general and administrative expense (SG&A) and Interest expense. |
| |
(2) | The gain or loss on the ineffective portion of interest rate contracts and net investment hedges, if any, is included in the Consolidated Statements of Earnings in Interest expense. |
| |
(3) | The gain or loss on foreign currency contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings in SG&A. This gain or loss substantially offsets the foreign currency mark-to-market impact of the related exposure. |
Amounts in millions of dollars unless otherwise specified.
7. Accumulated Other Comprehensive Income/(Loss)
The table below presents the changes in Accumulated other comprehensive income/(loss) by component and the reclassifications out of Accumulated other comprehensive income/(loss):
|
| | | | | | | | | | | | | | | | | | | |
| Changes in Accumulated Other Comprehensive Income/(Loss) by Component |
| Hedges | | Investment Securities | | Pension and Other Retiree Benefits | | Financial Statement Translation | | Total |
Balance at June 30, 2015 | $ | (2,642 | ) | | $ | 6 |
| | $ | (4,321 | ) | | $ | (5,823 | ) | | $ | (12,780 | ) |
OCI before reclassifications (1) | (214 | ) | | 17 |
| | 57 |
| | (937 | ) | | (1,077 | ) |
Amounts reclassified from AOCI (2) (3) | 42 |
| | (1 | ) | | 174 |
| | — |
| | 215 |
|
Net current period OCI | (172 | ) | | 16 |
| | 231 |
| | (937 | ) | | (862 | ) |
Balance at March 31, 2016 | $ | (2,814 | ) | | $ | 22 |
| | $ | (4,090 | ) | | $ | (6,760 | ) | | $ | (13,642 | ) |
| |
(1) | Net of tax expense/(benefit) of $(98), $0 and $6 for gains/losses on hedges, investment securities and pension and other retiree benefit items, respectively. |
| |
(2) | Net of tax expense/(benefit) of $(1), $0 and $65 for gains/losses on hedges, investment securities and pension and other retiree benefit items, respectively. |
| |
(3) | See Note 6 for classification of gains and losses from hedges in the Consolidated Statements of Earnings. Gains and losses on investment securities are reclassified from AOCI into Other non-operating income/(loss), net. Gains and losses on pension and other retiree benefits are reclassified from AOCI into Cost of products sold and SG&A and are included in the computation of net periodic pension costs. |
Amounts in millions of dollars unless otherwise specified.
8. Earnings Per Share
Net earnings attributable to Procter & Gamble less preferred dividends (net of related tax benefits) are divided by the weighted average number of common shares outstanding during the period to calculate basic net earnings per common share. Diluted net earnings per common share are calculated to give effect to stock options and other stock-based awards and assume conversion of preferred stock. Net earnings attributable to Procter & Gamble and common shares used to calculate basic and diluted net earnings per share were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | Three Months Ended March 31, 2015 |
CONSOLIDATED AMOUNTS | Continuing Operations | Discontinued Operations | Total | | Continuing Operations | Discontinued Operations | Total |
Net earnings/(loss) | $ | 2,337 |
| $ | 446 |
| $ | 2,783 |
| | $ | 2,401 |
| $ | (213 | ) | $ | 2,188 |
|
Net earnings attributable to noncontrolling interests | (32 | ) | (1 | ) | (33 | ) | | (34 | ) | (1 | ) | (35 | ) |
Net earnings/(loss) attributable to P&G (Diluted) | 2,305 |
| 445 |
| 2,750 |
| | 2,367 |
| (214 | ) | 2,153 |
|
Preferred dividends, net of tax benefit | (63 | ) | — |
| (63 | ) | | (59 | ) | — |
| (59 | ) |
Net earnings/(loss) attributable to P&G available to Common Shareholders (Basic) | $ | 2,242 |
| $ | 445 |
| $ | 2,687 |
| | $ | 2,308 |
| $ | (214 | ) | $ | 2,094 |
|
| | | | | | | |
SHARES IN MILLIONS | | | | | | | |
Basic weighted average common shares outstanding | 2,688.7 |
| 2,688.7 |
| 2,688.7 |
| | 2,711.7 |
| 2,711.7 |
| 2,711.7 |
|
Effect of dilutive securities | | | | | | | |
Conversion of preferred shares (1) | 103.4 |
| 103.4 |
| 103.4 |
| | 108.1 |
| 108.1 |
| 108.1 |
|
Exercise of stock options and other unvested equity awards (2) | 42.9 |
| 42.9 |
| 42.9 |
| | 62.7 |
| 62.7 |
| 62.7 |
|
Diluted weighted average common shares outstanding | 2,835.0 |
| 2,835.0 |
| 2,835.0 |
| | 2,882.5 |
| 2,882.5 |
| 2,882.5 |
|
| | | | | | | |
PER SHARE AMOUNTS (3) | | | | | | | |
Basic net earnings/(loss) per common share | $ | 0.83 |
| $ | 0.17 |
| $ | 1.00 |
| | $ | 0.85 |
| $ | (0.08 | ) | $ | 0.77 |
|
Diluted net earnings/(loss) per common share | $ | 0.81 |
| $ | 0.16 |
| $ | 0.97 |
| | $ | 0.82 |
| $ | (0.07 | ) | $ | 0.75 |
|
| | | | | | | |
| Nine Months Ended March 31, 2016 | | Nine Months Ended March 31, 2015 |
CONSOLIDATED AMOUNTS | Continuing Operations | Discontinued Operations | Total | | Continuing Operations | Discontinued Operations | Total |
Net earnings/(loss) | $ | 8,019 |
| $ | 627 |
| $ | 8,646 |
| | $ | 7,791 |
| $ | (1,185 | ) | $ | 6,606 |
|
Net earnings attributable to noncontrolling interests | (88 | ) | (1 | ) | (89 | ) | | (83 | ) | (8 | ) | (91 | ) |
Net earnings/(loss) attributable to P&G (Diluted) | 7,931 |
| 626 |
| 8,557 |
| | 7,708 |
| (1,193 | ) | 6,515 |
|
Preferred dividends, net of tax benefit | (192 | ) | — |
| (192 | ) | | (189 | ) | — |
| (189 | ) |
Net earnings/(loss) attributable to P&G available to Common Shareholders (Basic) | $ | 7,739 |
| $ | 626 |
| $ | 8,365 |
| | $ | 7,519 |
| $ | (1,193 | ) | $ | 6,326 |
|
| | | | | | | |
SHARES IN MILLIONS | | | | | | | |
Basic weighted average common shares outstanding | 2,709.2 |
| 2,709.2 |
| 2,709.2 |
| | 2,709.4 |
| 2,709.4 |
| 2,709.4 |
|
Effect of dilutive securities | | | | | | | |
Conversion of preferred shares (1) | 104.6 |
| 104.6 |
| 104.6 |
| | 109.1 |
| 109.1 |
| 109.1 |
|
Exercise of stock options and other unvested equity awards (2) | 41.8 |
| 41.8 |
| 41.8 |
| | 66.8 |
| 66.8 |
| 66.8 |
|
Diluted weighted average common shares outstanding | 2,855.6 |
| 2,855.6 |
| 2,855.6 |
| | 2,885.3 |
| 2,885.3 |
| 2,885.3 |
|
| | | | | | | |
PER SHARE AMOUNTS (3) | | | | | | | |
Basic net earnings/(loss) per common share | $ | 2.86 |
| $ | 0.23 |
| $ | 3.09 |
| | $ | 2.77 |
| $ | (0.44 | ) | $ | 2.33 |
|
Diluted net earnings/(loss) per common share | $ | 2.78 |
| $ | 0.22 |
| $ | 3.00 |
| | $ | 2.67 |
| $ | (0.41 | ) | $ | 2.26 |
|
Amounts in millions of dollars unless otherwise specified.
| |
(1) | Despite being included currently in diluted net earnings per common share, the actual conversion of preferred shares to common stock occurs when the preferred shares are sold. Shares may only be sold after being allocated to the ESOP participants pursuant to the repayment of the ESOP's obligations through 2035. |
| |
(2) | Outstanding stock options of approximately 33 million and 10 million for the three months ended March 31, 2016 and 2015, respectively, and approximately 51 million and 4 million for the nine months ended March 31, 2016 and 2015, respectively, were not included in the diluted net earnings per share calculation because the options were out of the money or to do so would have been antidilutive (i.e., the total proceeds upon exercise would have exceeded the market value of the underlying common shares). |
| |
(3) | Basic net earnings per common share and diluted net earnings per common share are calculated on net earnings attributable to Procter & Gamble. |
9. Restructuring Program
The Company has historically incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Before-tax costs incurred under the ongoing program have generally ranged from $250 to $500 annually. In fiscal 2012, the Company initiated an incremental restructuring program as part of a productivity and cost savings plan to reduce costs in the areas of supply chain, research and development, marketing and overheads. The productivity and cost savings plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes in order to help fund the Company's growth strategy.
The Company expects to incur in excess of $5 billion in before-tax restructuring costs over a six year period (from fiscal 2012 through fiscal 2017), including costs incurred as part of the ongoing and incremental restructuring program. The program includes a non-manufacturing overhead enrollment reduction target of 25% - 30% by the end of fiscal 2017.
Through fiscal 2015, the Company reduced non-manufacturing enrollment by approximately 12,600, or approximately 21%. Through March 31, 2016, the Company reduced non-manufacturing enrollment by approximately 14,100, or approximately 24%. The reductions are enabled by the elimination of duplicate work, simplification through the use of technology and optimization of various functional and business organizations and the Company's global footprint. In addition, the plan includes integration of newly acquired companies and the optimization of the supply chain and other manufacturing processes.
Restructuring costs incurred consist primarily of costs to separate employees, asset-related costs to exit facilities and other costs. Through fiscal 2015, the Company incurred charges of approximately $3.9 billion. Approximately $2.0 billion of these charges were related to separations, $954 were asset-related costs and $944 were related to other restructuring-type costs.
For the three and nine month periods ended March 31, 2016, the Company incurred total restructuring charges of $229 and $591, respectively. For the three and nine month periods ended March 31, 2016 $32 and $121 of these charges were recorded in SG&A, respectively. For the three and nine month periods ended March 31, 2016 $192 and $445 of these charges were recorded in Cost of products sold, respectively. The remainder of the charges was included in discontinued operations. The following table presents restructuring activity for the nine months ended March 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Nine Months Ended March 31, 2016 | | |
| Accrual Balance June 30, 2015 | | Charges Previously Reported (Six Months Ended December 31, 2015) | | Charges for the Three Months Ended March 31, 2016 | | Cash Spent | | Charges Against Assets | | Accrual Balance March 31, 2016 |
Separations | $ | 362 |
| | $ | 125 |
| | $ | 46 |
| | $ | (283 | ) | | $ | — |
| | $ | 250 |
|
Asset-related costs | — |
| | 119 |
| | 119 |
| | — |
| | (238 | ) | | — |
|
Other costs | 27 |
| | 118 |
| | 64 |
| | (167 | ) | | — |
| | 42 |
|
Total | $ | 389 |
| | $ | 362 |
| | $ | 229 |
| | $ | (450 | ) | | $ | (238 | ) | | $ | 292 |
|
Separation Costs
Employee separation charges for the three and nine month periods ended March 31, 2016 relate to severance packages for approximately 570 and 2,040 employees, respectively. Separations related to non-manufacturing employees were approximately 260 and 750 employees for the three and nine month periods ended March 31, 2016. The packages are predominantly voluntary and the amounts are calculated based on salary levels and past service periods. Severance costs related to voluntary separations are generally charged to earnings when the employee accepts the offer. Since its inception, the restructuring program has incurred separation charges related to approximately 16,340 employees, of which approximately 9,370 are non-manufacturing overhead personnel.
Asset-Related Costs
Asset-related costs consist of both asset write-downs and accelerated depreciation. Asset write-downs relate to the establishment of a new fair value basis for assets held-for-sale or disposal. These assets were written down to the lower of their current carrying basis or amounts expected to be realized upon disposal, less minor disposal costs. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period. These assets relate primarily to manufacturing consolidations and technology standardizations. The asset-related charges will not have a significant impact on future depreciation charges.
Other Costs
Other restructuring-type charges are incurred as a direct result of the restructuring program. Such charges primarily include employee relocation related to separations and office consolidations, termination of contracts related to supply chain redesign and the cost to change internal systems and processes to support the underlying organizational changes.
Consistent with our historical policies for ongoing restructuring-type activities, the restructuring program charges are funded by and included within Corporate for both management and segment reporting. Accordingly, all of the charges under the program are included within the Corporate reportable segment. However, for informative purposes, the following table summarizes the total restructuring costs related to our reportable segments:
|
| | | | | | | |
| Three Months Ended March 31, 2016 | | Nine Months Ended March 31, 2016 |
Beauty | $ | 19 |
| | $ | 47 |
|
Grooming | 10 |
| | 26 |
|
Health Care | 6 |
| | 16 |
|
Fabric Care and Home Care | 60 |
| | 166 |
|
Baby, Feminine and Family Care | 66 |
| | 122 |
|
Corporate (1) | 68 |
| | 214 |
|
Total Company | $ | 229 |
| | $ | 591 |
|
| |
(1) | Corporate includes costs related to allocated overheads, including charges related to our Sales and Market Operations, Global Business Services and Corporate Functions activities and costs related to discontinued operations from our Batteries and Beauty Brands businesses. |
10. Commitments and Contingencies
Litigation
The Company is subject to various legal proceedings and claims arising out of our business which cover a wide range of matters such as antitrust, trade and other governmental regulations, product liability, patent and trademark, advertising, contracts, environmental, labor and employment and tax. With respect to these and other litigation and claims, while considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.
We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will materially affect our financial position, results of operations or cash flows.
Income Tax Uncertainties
The Company is present in approximately 140 taxable jurisdictions and, at any point in time, has 60 – 70 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 2002 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12 month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued liabilities of approximately $300, including interest and penalties.
Additional information on the Commitments and Contingencies of the Company can be found in the Form 8-K filed October 26, 2015 to update the Annual Report on Form 10-K for the year ended June 30, 2015.
11. Discontinued Operations
On July 9, 2015, the Company announced the signing of a definitive agreement to divest four product categories which will be merged with Coty, Inc. (“Coty”). The divestiture was initially comprised of 43 of the Company's beauty brands (“Beauty Brands”), including the global salon professional hair care and color, retail hair color, cosmetics and fine fragrance businesses, along with select hair styling brands. Subsequent to signing, two of the fine fragrance brands, Dolce & Gabbana and Christina Aguilera, were excluded from the divestiture. In connection with the decision to exclude these brands, the Company recorded a non-cash, before-tax impairment charge in discontinued operations of approximately $48 ($42 after-tax) in the three month period ended March 31, 2016 in order to record the Dolce & Gabbana license intangible asset at its estimated net realizable value. While the ultimate form of the transaction has not yet been decided, the Company’s current preference is for a Reverse Morris Trust split-off transaction in which P&G shareholders could elect to participate in an exchange offer to exchange their P&G shares for shares of a new corporation that would hold the Beauty Brands and then immediately exchange those shares for Coty shares. The Company expects to close the transaction in the second half of calendar year 2016, pending regulatory approvals.
Coty’s offer for the Beauty Brands, which was accepted by the Company, was $12.5 billion. The final value of the transaction will be determined at closing. Based on Coty’s stock price and outstanding shares and equity grants as of March 31, 2016, the value of the transaction was approximately $13.5 billion. The value is comprised of approximately 412 million shares, or 54% of the diluted equity of the newly combined company, valued at approximately $11.5 billion and the assumption of debt of $2.0 billion by the entity holding the Beauty Brands immediately prior to close of the transaction. The assumed debt is expected to vary between $3.9 billion and $1.9 billion, depending on a $22.06 to $27.06 per share collar of Coty’s stock based on the trading price prior to the close of the transaction, but will be subject to other contractual valuation adjustments including an adjustment for the exclusion of Dolce & Gabbana and Christina Aguilera fine fragrance brands.
The Beauty Brands were historically part of the Company's Beauty reportable segment. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Beauty Brands are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Additionally, the Beauty Brands' balance sheet positions as of March 31, 2016 and June 30, 2015 are presented as assets and liabilities held for sale in the Consolidated Balance Sheets.
In February 2016, the Company completed the divestiture of its Batteries business to Berkshire Hathaway (BH) via a split transaction, in which the Company exchanged Duracell, which the Company had infused with approximately $1.9 billion of additional cash, to repurchase all 52.5 million shares of P&G stock owned by BH. During the nine months ended March 31, 2016, the Company recorded non-cash, before-tax goodwill and indefinite-lived asset impairment charges of $402 ($350 after-tax), to reduce the value to the total estimated proceeds based on the value of BH’s shares in P&G stock at the time of the impairment charges (see Note 4). The Company recorded an after-tax gain on the final transaction of $422 to reflect the final value of the BH’s shares in P&G stock. The total value of the transaction was $4.2 billion representing the value of the Duracell business and the cash capitalization. This amount was reflected as an increase in treasury stock.
The Batteries business has historically been part of the Company's Fabric Care and Home Care reportable segment. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Batteries business are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Additionally, the Batteries balance sheet position as of June 30, 2015 is presented as assets and liabilities held for sale in the Consolidated Balance Sheets.
On July 31, 2014, the Company completed the divestiture of its Pet Care operations in North America, Latin America and other selected countries to Mars, Incorporated (Mars) for $2.9 billion in an all-cash transaction. Under the terms of the agreement, Mars acquired our branded pet care products and our manufacturing sites in the United States and assumed the majority of the employees working in the Pet Care business. The European Union countries were not included in the agreement with Mars. In December 2014, the Company completed the divestiture of its Pet Care operations in Western Europe to Spectrum Brands in an all-cash transaction. Under the terms of the agreement, Spectrum Brands acquired our branded pet care products and our manufacturing site in the Netherlands and assumed the majority of the employees working in the Western Europe Pet Care business. The one-time after-tax impact of these transactions was not material.
The Pet Care business was historically part of the Company’s Health Care reportable segment. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Pet Care business are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.
Amounts in millions of dollars unless otherwise specified.
On July 1, 2015, the Company adopted ASU 2014-08, which included new reporting and disclosure requirements for discontinued operations. The new requirements are effective for discontinued operations occurring on or after the adoption date, which includes the Beauty Brands divestiture. All other discontinued operations prior to July 1, 2015 are reported based on the previous disclosure requirements for discontinued operations, including the Batteries and Pet Care divestitures.
The following table summarizes Net earnings/(loss) from discontinued operations and reconciles to the Consolidated Statements of Earnings:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
Beauty Brands | $ | (2 | ) | | $ | 74 |
| | $ | 386 |
| | $ | 499 |
|
Batteries | 448 |
| | (276 | ) | | 241 |
| | (1,699 | ) |
Pet Care | — |
| | (11 | ) | | — |
| | 15 |
|
Net earnings/(loss) from discontinued operations | $ | 446 |
| | $ | (213 | ) | | $ | 627 |
| | $ | (1,185 | ) |
The Beauty Brands incurred transition costs of $55 for the nine months ended March 31, 2016. On January 26, 2016, Beauty Brands drew on its Term B loan of $1.0 billion. The proceeds will be held in restricted cash in escrow until the anticipated legal integration activities prior to close. Beauty Brands has received additional debt funding commitments with a consortium of lenders of $3.5 billion.
The following table summarizes total assets and liabilities held for sale and reconciles to the Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | |
| March 31, 2016 | | June 30, 2015 |
| Beauty Brands | | Beauty Brands | | Batteries | | Total |
Current assets held for sale | $ | 7,028 |
| | $ | 922 |
| | $ | 3,510 |
| | $ | 4,432 |
|
Noncurrent assets held for sale | — |
| | 5,204 |
| | — |
| | 5,204 |
|
Total assets held for sale | $ | 7,028 |
| | $ | 6,126 |
| | $ | 3,510 |
| | $ | 9,636 |
|
| | | | | | | |
Current liabilities held for sale | $ | 2,229 |
| | $ | 356 |
| | $ | 1,187 |
| | $ | 1,543 |
|
Noncurrent liabilities held for sale | — |
| | 717 |
| | — |
| | 717 |
|
Total liabilities held for sale | $ | 2,229 |
| | $ | 1,073 |
| | $ | 1,187 |
| | $ | 2,260 |
|
The following is selected financial information included in Net earnings/(loss) from discontinued operations for the Beauty Brands:
|
| | | | | | | | | | | | | | | |
| Beauty Brands |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales | $ | 1,092 |
| | $ | 1,212 |
| | $ | 3,715 |
| | $ | 4,293 |
|
Cost of products sold | 365 |
| | 400 |
| | 1,193 |
| | 1,400 |
|
Selling, general and administrative expense | 672 |
| | 702 |
| | 1,983 |
| | 2,270 |
|
Intangible asset impairment charges | 48 |
| | — |
| | 48 |
| | — |
|
Other non-operating income/(loss), net | (6 | ) | | (1 | ) | | (8 | ) | | 7 |
|
Earnings from discontinued operations before income taxes | $ | 1 |
| | $ | 109 |
| | $ | 483 |
| | $ | 630 |
|
Income taxes on discontinued operations | 3 |
| | 35 |
| | 97 |
| | 131 |
|
Net earnings/(loss) from discontinued operations | $ | (2 | ) | | $ | 74 |
| | $ | 386 |
| | $ | 499 |
|
Amounts in millions of dollars unless otherwise specified.
The following is selected financial information included in cash flows from discontinued operations for the Beauty Brands: |
| | | | | | | |
| Beauty Brands |
| Nine Months Ended March 31 |
| 2016 | | 2015 |
NON-CASH OPERATING ITEMS | | | |
Depreciation and amortization | $ | 78 |
| | $ | 95 |
|
Goodwill and intangible asset impairment charges | 48 |
| | — |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Capital expenditures | $ | (65 | ) | | $ | (73 | ) |
The major components of assets and liabilities of the Beauty Brands held for sale are provided below. The assets and liabilities held for sale will evolve up to the closing date for normal operational changes as well as contractual adjustments including the assumption of debt, pension plan funding and other provisions.
|
| | | | | | | | |
| Beauty Brands |
| March 31, 2016 (1) | | June 30, 2015 |
Cash | $ | 44 |
| | $ | 9 |
| |
Restricted cash | 995 |
| | — |
| |
Accounts receivable | 307 |
| | 293 |
| |
Inventories | 480 |
| | 476 |
| |
Prepaid expenses and other current assets | 46 |
| | 144 |
| |
Property, plant and equipment, net | 613 |
| | 613 |
| (2) |
Goodwill and intangible assets, net | 4,457 |
| | 4,513 |
| (2) |
Other noncurrent assets | 86 |
| | 78 |
| (2) |
Total current assets held for sale | $ | 7,028 |
| | $ | 922 |
| |
Total noncurrent assets held for sale | — |
| | 5,204 |
| |
Total assets held for sale | $ | 7,028 |
| | $ | 6,126 |
| |
| | | | |
Accounts payable | $ | 143 |
| | $ | 118 |
| |
Accrued and other liabilities | 316 |
| | 238 |
| |
Noncurrent deferred tax liabilities | 372 |
| | 352 |
| (2) |
Long-term debt | 995 |
| | — |
| |
Other noncurrent liabilities | 403 |
| | 365 |
| (2) |
Total current liabilities held for sale | $ | 2,229 |
| | $ | 356 |
| |
Total noncurrent liabilities held for sale | — |
| | 717 |
| |
Total liabilities held for sale | $ | 2,229 |
| | $ | 1,073 |
| |
| |
(1) | The Company expects the Beauty Brands transaction to close in the second half of calendar year 2016. Therefore, for the period ended March 31, 2016, all assets and liabilities held for sale are reported as current assets and liabilities held for sale on the Consolidated Balance Sheets. |
| |
(2) | Amounts as of June 30, 2015 are reflected as part of the noncurrent assets and liabilities held for sale. |
Amounts in millions of dollars unless otherwise specified.
The following is selected financial information included in Net earnings/(loss) from discontinued operations for the Batteries and Pet Care businesses:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | Nine Months Ended March 31 |
| 2016 | | 2015 | | 2016 | | 2015 |
| Batteries | | Batteries | Pet Care | Total | | Batteries | | Batteries | Pet Care | Total |
Net sales | $ | 320 |
| | $ | 398 |
| $ | 12 |
| $ | 410 |
| | $ | 1,517 |
| | $ | 1,786 |
| $ | 247 |
| $ | 2,033 |
|
Earnings before impairment charges and income taxes | 35 |
| | 43 |
| (7 | ) | 36 |
| | 266 |
| | 436 |
| 7 |
| 443 |
|
Impairment charges | — |
| | (308 | ) | — |
| (308 | ) | | (402 | ) | | (2,021 | ) | — |
| (2,021 | ) |
Income tax (expense)/benefit | (9 | ) | | (11 | ) | 1 |
| (10 | ) | | (45 | ) | | (114 | ) | (5 | ) | (119 | ) |
Gain/(loss) on sale before income taxes | (288 | ) | | — |
| (3 | ) | (3 | ) | | (288 | ) | | — |
| 202 |
| 202 |
|
Income tax (expense)/benefit on sale | 710 |
| (1) | — |
| (2 | ) | (2 | ) | | 710 |
| (1) | — |
| (189 | ) | (189 | ) |
Net earnings/(loss) from discontinued operations | $ | 448 |
| | $ | (276 | ) | $ | (11 | ) | $ | (287 | ) | | $ | 241 |
| | $ | (1,699 | ) | $ | 15 |
| $ | (1,684 | ) |
| |
(1) | The income tax benefit of the Batteries divestiture primarily represents the reversal of underlying deferred tax balances. |
The major components of current assets and current liabilities of the Batteries business held for sale were as follows:
|
| | | |
| Batteries |
| June 30, 2015 |
Cash | $ | 25 |
|
Accounts Receivable | 245 |
|
Inventories | 304 |
|
Prepaid expenses and other current assets | 28 |
|
Property, plant and equipment, net | 496 |
|
Goodwill and intangible assets, net | 2,389 |
|
Other noncurrent assets | 23 |
|
Total current assets held for sale | $ | 3,510 |
|
| |
Accounts payable | $ | 195 |
|
Accrued and other liabilities | 194 |
|
Long-term debt | 18 |
|
Noncurrent deferred tax liabilities | 780 |
|
Total current liabilities held for sale | $ | 1,187 |
|
Amounts in millions of dollars unless otherwise specified.
|
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors,” and Notes 4, 10 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 disruptions in credit markets, reduced market growth rates or changes affecting our credit rating, and generate sufficient income and cash flow to allow the Company to effect the expected share repurchases and dividend payments; (3) the ability to maintain key manufacturing and supply arrangements (including sole supplier and sole manufacturing plant arrangements) and manage disruption of business due to factors outside of our control, such as natural disasters and acts of war or terrorism; (4) the ability to successfully manage cost fluctuations and pressures, including commodity prices, raw materials, labor costs, energy costs and pension and health care costs, and achieve cost savings described in our announced productivity plan; (5) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to technological advances attained by, and patents granted to, competitors; (6) the ability to compete with our local and global competitors in new and existing sales channels by successfully responding to competitive factors, including prices, promotional incentives and trade terms for products; (7) the ability to manage and maintain key customer relationships; (8) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, efficacy or similar matters that may arise; (9) the ability to successfully manage the financial, legal, reputational and operational risk associated with third party relationships, such as our suppliers, contractors and external business partners; (10) the ability to rely on and maintain key information technology systems and networks (including Company and third-party systems and networks) and maintain the security and functionality of such systems and networks and the data contained therein; (11) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, intellectual property, antitrust, privacy, accounting standards and environmental) and to resolve pending matters within current estimates; (12) the ability to manage changes in applicable tax laws and regulations; (13) the ability to successfully manage our portfolio optimization strategy, as well as ongoing acquisition, divestiture and joint venture activities, to achieve the Company’s overall business strategy, without impacting the delivery of base business objectives; and (14) the ability to successfully achieve productivity improvements and manage ongoing organizational changes, while successfully identifying, developing and retaining particularly key employees, especially 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. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. MD&A is organized in the following sections:
| |
• | Summary of Results – Nine Months Ended March 31, 2016 |
| |
• | Economic Conditions and Uncertainties |
| |
• | Results of Operations – Three and Nine Months Ended March 31, 2016 |
| |
• | Business Segment Discussion – Three and Nine Months Ended March 31, 2016 |
| |
• | Liquidity and Capital Resources |
| |
• | Reconciliation of Measures Not Defined by U.S. GAAP |
Throughout 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), free cash flow and adjusted free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of the Venezuela deconsolidation, acquisitions, divestitures and foreign exchange from year-over-year comparisons. Core EPS is diluted net earnings per share from continuing operations excluding certain items that are not judged to be part of the Company's sustainable results or trends. Free cash flow is operating cash flow less capital spending. Adjusted free cash flow productivity is the ratio of free cash flow to net earnings excluding impairment charges and the gain on the sale of the Batteries business. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight to some of the metrics used to evaluate management. The explanation at the end of MD&A provides more 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 MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.
OVERVIEW
P&G is a global leader in fast-moving consumer goods, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than 180 countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, e-commerce, high-frequency stores and pharmacies. We have on-the-ground operations in approximately 70 countries.
Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.
The table below provides more information about the components of our reportable segment structure.
|
| | |
Reportable Segment | Global Business Units (Categories) | Billion Dollar Brands |
Beauty | Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care); Hair Care | Head & Shoulders, Olay, Pantene, SK-II |
Grooming | Shave Care (Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care); Electronic Hair Removal | Fusion, Gillette, Mach3, Prestobarba |
Health Care | Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care); Oral Care (Toothbrush, Toothpaste, Other Oral Care) | Crest, Oral-B, Vicks |
Fabric Care and Home Care | Fabric Care (Laundry Additives, Fabric Enhancers, Laundry Detergents); Home Care (Air Care, Dish Care, P&G Professional, Surface Care) | Ariel, Dawn, Downy, Febreze, Gain, Tide |
Baby, Feminine and Family Care | Baby Care (Baby Wipes, Diapers and Pants); Feminine Care (Adult Incontinence, Feminine Care); Family Care (Paper Towels, Tissues, Toilet Paper) | Always, Bounty, Charmin, Pampers |
The following table provides the percentage of net sales and net earnings by reportable business segment for the three and nine months ended March 31, 2016 (excluding net sales and net earnings in Corporate):
|
| | | | | | | |
| Three Months Ended March 31, 2016 | | Nine Months Ended March 31, 2016 |
| Net Sales | | Net Earnings | | Net Sales | | Net Earnings |
Beauty | 17% | | 19% | | 18% | | 21% |
Grooming | 11% | | 15% | | 11% | | 15% |
Health Care | 11% | | 12% | | 11% | | 12% |
Fabric Care and Home Care | 32% | | 27% | | 32% | | 27% |
Baby, Feminine and Family Care | 29% | | 27% | | 28% | | 25% |
Total Company | 100% | | 100% | | 100% | | 100% |
SUMMARY OF RESULTS
Following are highlights of results for the nine months ended March 31, 2016 versus the nine months ended March 31, 2015:
| |
• | Net sales decreased 9% versus the previous year to $49.2 billion. Organic sales, which exclude the impacts of acquisitions and divestitures, foreign exchange and Venezuela deconsolidation, were unchanged. Organic sales increased 2% in Fabric Care and Home Care, 1% in Grooming and in Health Care, decreased 1% in Baby, Feminine and Family Care, and were unchanged in Beauty. |
| |
• | Unit volume decreased 4% on an all-in and 2% on an organic basis. Volume decreased low single digits in Fabric Care and Home Care and decreased mid-single digits in Beauty, Grooming, Health Care and Baby, Feminine and Family Care. |
| |
• | Net earnings from continuing operations were $8.0 billion, an increase of $228 million, or 3% versus the prior year period. This increase was driven primarily by operating margin expansion, which more than offset the reduction in net sales. |
| |
• | Diluted net earnings per share from continuing operations increased 4% to $2.78. |
| |
• | Net earnings attributable to Procter & Gamble were $8.6 billion, an increase of $2.0 billion, or 31% versus the prior year period. This was primarily driven by a $1.8 billion increase in earnings from discontinued operations from incremental base period impairment charges of $1.6 billion related to our Batteries business and a $422 million gain on the sale of the Batteries business in the current period. |
| |
• | Core net earnings per share, which excludes discontinued operations, incremental restructuring charges, prior year charges for balance sheet remeasurement related to the Venezuelan currency and charges for certain European legal matters, increased 2% to $2.88. |
| |
• | Operating cash flow was $11.3 billion. Free cash flow, which is operating cash flow less capital expenditures, was $9.3 billion. Adjusted free cash flow productivity, which is the ratio of free cash flow to net earnings excluding impairment charges and the gain on sale of the Batteries business, was 108%. |
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions. Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies as commodity prices decline, greater political unrest in the Middle East and Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets and economic slowdowns in Japan and China, could reduce our sales or erode our operating margin, in either case reducing our earnings.
Changes in Costs. Our costs are subject to fluctuations, particularly due to changes in commodity prices and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins, and volatility in the market price of these commodity input materials has a direct impact on our costs. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross margin, operating margin and net earnings. Sales could also be adversely impacted following pricing actions if there is a negative impact on consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including outsourcing projects, supply chain optimization and general overhead and workforce optimization. As discussed later in this MD&A, we initiated certain non-manufacturing overhead reduction projects along with manufacturing and other supply chain cost improvements projects in 2012. If we are not successful in executing 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 2016, 2015 and 2014, 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, Canada, Japan, Mexico, Russia and Turkey have had, and could have, an additional significant impact on our sales, costs and earnings. Increased pricing in response to these fluctuations in foreign currency exchange rates may offset portions of the currency impacts, but could also have a negative impact on consumption of our products, which would affect our sales.
Government Policies. Our net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. Additionally, we attempt to carefully manage our debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Argentina, Egypt, Nigeria and Ukraine. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings. During fiscal 2015, the Company deconsolidated its Venezuelan subsidiaries due to evolving conditions that resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and restricted our ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars.
For information on risk factors that could impact our results, refer to Part I, Item 1A "Risk Factors" in the Company's Form 10-K for the fiscal year ended June 30, 2015.
RESULTS OF OPERATIONS – Three Months Ended March 31, 2016
The following discussion provides a review of results for the three months ended March 31, 2016 versus the three months ended March 31, 2015.
|
| | | | | | | | | | |
| Three Months Ended March 31 |
Amounts in millions, except per share amounts | 2016 | | 2015 | | % Chg |
Net sales | $ | 15,755 |
| | $ | 16,930 |
| | (7 | )% |
Operating income | 3,318 |
| | 3,025 |
| | 10 | % |
Net earnings from continuing operations | 2,337 |
| | 2,401 |
| | (3 | )% |
Net earnings/(loss) from discontinued operations | 446 |
| | (213 | ) | | N/A |
|
Net earnings attributable to Procter & Gamble | 2,750 |
| | 2,153 |
| | 28 | % |
Diluted net earnings per common share | 0.97 |
| | 0.75 |
| | 29 | % |
Diluted net earnings per share from continuing operations | 0.81 |
| | 0.82 |
| | (1 | )% |
Core net earnings per common share | 0.86 |
| | 0.89 |
| | (3 | )% |
|
COMPARISONS AS A % OF NET SALES | 2016 | | 2015 | | Basis Pt Chg |
Gross margin | 49.8% | | 47.3% | | 250 |
Selling, general & administrative expense | 28.7% | | 29.4% | | (70) |
Operating margin | 21.1% | | 17.9% | | 320 |
Earnings from continuing operations before income taxes | 20.5% | | 17.5% | | 300 |
Net earnings from continuing operations | 14.8% | | 14.2% | | 60 |
Net earnings attributable to Procter & Gamble | 17.5% | | 12.7% | | 480 |
Net Sales
Net sales decreased 7% to $15.8 billion for the third quarter. Unit volume decreased 2%. Unfavorable foreign exchange reduced net sales by 5%. Sales growth in most business segments continued to benefit, to varying degrees, from price increases taken with new product innovations and/or to offset the impact of currency devaluation in markets such as Argentina, Canada, Mexico and Turkey. Higher pricing increased net sales by 1%. The impact of minor brand divestitures and the Venezuela deconsolidation reduced net sales by 3%. Volume was unchanged in Fabric Care and Home Care and decreased low single digits in Baby, Feminine and Family Care and in Health Care. Volume decreased mid-single digits in Beauty and in Grooming. Volume increased low single digits in developed regions and decreased high single digits in developing regions. Organic sales increased 1% driven by improved pricing on organic volume that was unchanged.
|
| | | | | | | | | | | | | |
| Net Sales Change Drivers 2016 vs. 2015 (Three Months Ended March 31)* |
| Volume with Acquisitions & Divestitures | | Volume Excluding Acquisitions & Divestitures | | Foreign Exchange | | Price | | Mix | | Other** | | Net Sales Growth |
Beauty | (5)% | | (1)% | | (5)% | | 2% | | —% | | —% | | (8)% |
Grooming | (6)% | | (5)% | | (7)% | | 5% | | (1)% | | (1)% | | (10)% |
Health Care | (3)% | | (2)% | | (5)% | | 1% | | —% | | —% | | (7)% |
Fabric Care and Home Care | —% | | 2% | | (5)% | | 1% | | —% | | —% | | (4)% |
Baby, Feminine and Family Care | (2)% | | (1)% | | (5)% | | —% | | —% | | (1)% | | (8)% |
Total Company | (2)% | | —% | | (5)% | | 1% | | —% | | (1)% | | (7)% |
* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
** Other includes the sales mix impact from acquisitions/divestitures, Venezuela deconsolidation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin increased 250 basis points to 49.8% of net sales for the quarter. Gross margin increased primarily due to a 230 basis point positive impact from manufacturing cost savings, a 130 basis point benefit from lower commodity costs and a 60 basis point benefit of higher pricing. These impacts were partially offset by an 70 basis point negative impact from unfavorable foreign exchange, a 20 basis point decrease due to incremental restructuring charges, an 80 basis point decline from unfavorable mix, including product mix across segments (caused by a disproportionate decline in Grooming which has higher than average gross margin), product forms within certain businesses and other impacts.
Total SG&A decreased 9% to $4.5 billion due to foreign exchange impacts and productivity efforts. SG&A as a percentage of net sales decreased 70 basis points to 28.7% due to lower foreign exchange transactional charges and the decreased overhead spending behind productivity efforts, partially offset by increased marketing spending and the negative scale impacts from reduced sales. Marketing spending as a percentage of net sales increased 130 basis points due to the negative scale impacts from reduced sales and increased advertising spending. Overhead costs as a percentage of net sales decreased 60 basis points, as 60 basis points of productivity savings in overhead spending and a 50 basis point benefit from reduced restructuring activity were partially offset by wage inflation, investments in research and development and the negative scale impacts from reduced sales. Lower foreign exchange transactional charges, from revaluing receivables and payables from transactions denominated in a currency other than a local entity’s functional currency, reduced SG&A as a percentage of net sales by 100 basis points.
Non-Operating Expenses and Income
Interest expense was $146 million for the quarter, a decrease of $2 million versus the prior year period, due to a decrease in weighted average interest rates. Interest income was $33 million for the quarter, a decrease of $5 million versus the prior period. Other non-operating income was $21 million, a decrease of $32 million, due to a gain from a minor brand divestiture in the base period.
Income Taxes
The effective tax rate on continuing operations increased 850 basis points to 27.6%. The current year rate increased due to unfavorable geographic mix of earnings versus the base period, which had an unusually high benefit from favorable geographic mix, and the current year establishment of a valuation allowance on deferred tax assets related to net operating loss carryforwards. These increases were partially offset by the net impact of unfavorable discrete adjustments related to uncertain income tax positions in the base period.