10-Q 1 q2-ond14quarterlyreport.htm 10-Q Q2-OND 14 Quarterly Report


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2014
OR
 
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)
 
 
 
Ohio
 
31-0411980
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
 
One Procter & Gamble Plaza, Cincinnati, Ohio
 
45202
(Address of principal executive offices)
 
(Zip Code)
(513) 983-1100
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 2,700,509,874 shares of Common Stock outstanding as of December 31, 2014.



PART I. FINANCIAL INFORMATION 

Item 1.     Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended December 31
 
Six Months Ended December 31
Amounts in millions except per share amounts
2014
 
2013
 
2014
 
2013
NET SALES
$
20,161

 
$
21,099

 
$
40,347

 
$
41,273

Cost of products sold
10,083

 
10,474

 
20,292

 
20,682

Selling, general and administrative expense
6,131

 
6,323

 
12,330

 
12,319

OPERATING INCOME
3,947

 
4,302

 
7,725

 
8,272

Interest expense
160

 
185

 
330

 
351

Interest income
34

 
22

 
65

 
44

Other non-operating income, net
19

 
43

 
40

 
48

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
3,840

 
4,182

 
7,500

 
8,013

Income taxes on continuing operations
865

 
885

 
1,685

 
1,782

NET EARNINGS FROM CONTINUING OPERATIONS
2,975

 
3,297

 
5,815

 
6,231

NET EARNINGS/(LOSS) FROM DISCONTINUED OPERATIONS
(577
)
 
175

 
(1,397
)
 
298

NET EARNINGS
2,398

 
3,472

 
4,418

 
6,529

Less: Net earnings attributable to noncontrolling interests
26

 
44

 
56

 
74

NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE
$
2,372

 
$
3,428

 
$
4,362

 
$
6,455

 
 
 
 
 
 
 
 
BASIC NET EARNINGS PER COMMON SHARE (1):
 
 
 
 
 
 
 
Earnings from continuing operations
$
1.06

 
$
1.18

 
$
2.08

 
$
2.21

Earnings/(loss) from discontinued operations
(0.21
)
 
0.06

 
(0.52
)
 
0.11

BASIC NET EARNINGS PER COMMON SHARE
0.85

 
1.24

 
1.56

 
2.32

DILUTED NET EARNINGS PER COMMON SHARE (1):
 
 
 
 
 
 
 
Earnings from continuing operations
$
1.02

 
$
1.12

 
$
2.00

 
$
2.11

Earnings/(loss) from discontinued operations
(0.20
)
 
0.06

 
(0.49
)
 
0.10

DILUTED NET EARNINGS PER COMMON SHARE
0.82

 
1.18

 
1.51

 
2.21

DIVIDENDS PER COMMON SHARE
$
0.644

 
$
0.602

 
$
1.287

 
$
1.203

Diluted Weighted Average Common Shares Outstanding
2,885.2

 
2,908.5

 
2,886.8

 
2,916.4

(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

 
Three Months Ended December 31
 
Six Months Ended December 31
Amounts in millions
2014
 
2013
 
2014
 
2013
NET EARNINGS
$
2,398

 
$
3,472

 
$
4,418

 
$
6,529

OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
 
 
 
 

 
 
Financial statement translation
(2,091
)
 
431

 
(4,927
)
 
1,480

Hedges
365

 
(71
)
 
773

 
(310
)
Investment securities
1

 
(15
)
 
(2
)
 
(1
)
Defined benefit retirement plans
219

 
20

 
501

 
(36
)
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
(1,506
)
 
365

 
(3,655
)
 
1,133

TOTAL COMPREHENSIVE INCOME
892

 
3,837

 
763

 
7,662

Less: Total comprehensive income/(loss) attributable to noncontrolling interests
(18
)
 
50

 
(6
)
 
85

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO P&G
$
910

 
$
3,787

 
$
769

 
$
7,577


See accompanying Notes to Consolidated Financial Statements.






THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
Amounts in millions
 
 
 
 
December 31, 2014
 
June 30, 2014
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
$
8,204

 
$
8,558

Available-for-sale investment securities
 
 
 
 
4,047

 
2,128

Accounts receivable
 
 
 
 
5,802

 
6,386

Inventories
 
 
 
 
 
 
 
Materials and supplies
 
 
 
 
1,775

 
1,742

Work in process
 
 
 
 
612

 
684

Finished goods
 
 
 
 
4,090

 
4,333

Total inventories
 
 
 
 
6,477

 
6,759

Deferred income taxes
 
 
 
 
816

 
1,092

Prepaid expenses and other current assets
 
 
 
 
3,679

 
3,845

Assets held for sale
 
 
 
 
4,153

 
2,849

TOTAL CURRENT ASSETS
 
 
 
 
33,178

 
31,617

PROPERTY, PLANT AND EQUIPMENT, NET
 
 
 
 
20,745

 
22,304

GOODWILL
 
 
 
 
48,875

 
53,704

TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET
 
 
 
 
27,567

 
30,843

OTHER NONCURRENT ASSETS
 
 
 
 
5,898

 
5,798

TOTAL ASSETS
 
 
 
 
$
136,263

 
$
144,266

 
 
 
 
 
 

 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
7,733

 
$
8,461

Accrued and other liabilities
 
 
 
 
8,853

 
8,999

Liabilities held for sale
 
 
 
 
1,237

 
660

Debt due within one year
 
 
 
 
16,329

 
15,606

TOTAL CURRENT LIABILITIES
 
 
 
 
34,152

 
33,726

LONG-TERM DEBT
 
 
 
 
18,124

 
19,811

DEFERRED INCOME TAXES
 
 
 
 
9,552

 
10,218

OTHER NONCURRENT LIABILITIES
 
 
 
 
9,623

 
10,535

TOTAL LIABILITIES
 
 
 
 
71,451

 
74,290

SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Preferred stock
 
 
 
 
1,094

 
1,111

Common stock – shares issued –
December 2014
 
4,009.2

 
 
 
 
 
June 2014
 
4,009.2

 
4,009

 
4,009

Additional paid-in capital
 
 
 
 
63,814

 
63,911

Reserve for ESOP debt retirement
 
 
 
 
(1,332
)
 
(1,340
)
Accumulated other comprehensive income/(loss)
 
 
 
 
(11,317
)
 
(7,662
)
Treasury stock
 
 
 
 
(77,905
)
 
(75,805
)
Retained earnings
 
 
 
 
85,770

 
84,990

Noncontrolling interest
 
 
 
 
679

 
762

TOTAL SHAREHOLDERS’ EQUITY
 
 
 
 
64,812

 
69,976

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
$
136,263

 
$
144,266

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended December 31
Amounts in millions
2014
 
2013
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
8,558

 
$
5,947

OPERATING ACTIVITIES
 
 
 
Net earnings
4,418

 
6,529

Depreciation and amortization
1,540

 
1,526

Share-based compensation expense
151

 
153

Deferred income taxes
31

 
(126
)
Gain on sale of businesses
(299
)
 
(5
)
Goodwill and indefinite-lived intangible asset impairment charges
1,713

 

Changes in:
 
 
 
Accounts receivable
(342
)
 
(376
)
Inventories
(506
)
 
(446
)
Accounts payable, accrued and other liabilities
243

 
(1,191
)
Other operating assets and liabilities
(164
)
 
(859
)
Other
283

 
138

TOTAL OPERATING ACTIVITIES
7,068

 
5,343

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(1,642
)
 
(1,663
)
Proceeds from asset sales
3,648

 
15

Acquisitions, net of cash acquired
(112
)
 
1

Purchases of available-for-sale investment securities
(2,106
)
 

Proceeds from sales of available-for-sale investment securities
179

 

Change in other investments
(836
)
 
(149
)
TOTAL INVESTING ACTIVITIES
(869
)
 
(1,796
)
FINANCING ACTIVITIES
 
 
 
Dividends to shareholders
(3,614
)
 
(3,409
)
Change in short-term debt
352

 
(429
)
Additions to long-term debt
1,112

 
4,271

Reductions of long-term debt
(1,911
)
 
(3
)
Treasury stock purchases
(4,253
)
 
(4,004
)
Impact of stock options and other
2,009

 
937

TOTAL FINANCING ACTIVITIES
(6,305
)
 
(2,637
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(248
)
 
72

CHANGE IN CASH AND CASH EQUIVALENTS
(354
)
 
982

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
8,204

 
$
6,929

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, 2014. 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 on July 1, 2017. We are still evaluating the impact, if any, that the standard will have on our 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.

3. Segment Information

As discussed in Note 11, the Pet Care and Batteries businesses are presented as discontinued operations and are excluded from segment results for all periods presented.

Following is a summary of segment results:
 
 
 
Three Months Ended December 31
 
Six Months Ended December 31
 
 
 
Net Sales
 
Earnings / (Loss) from Continuing Operations Before Income Taxes
 
Net Earnings / (Loss) from Continuing Operations
 
Net Sales
 
Earnings / (Loss) from Continuing Operations Before Income Taxes
 
Net Earnings / (Loss) from Continuing Operations
Beauty, Hair and Personal Care
2014
  
$
4,962

 
$
1,089

 
$
863

 
$
9,819

 
$
2,015

 
$
1,573

 
2013
  
5,284

 
1,160

 
927

 
10,187

 
2,069

 
1,617

Grooming
2014
  
2,007

 
713

 
544

 
3,948

 
1,334

 
1,010

 
2013
  
2,118

 
730

 
553

 
4,074

 
1,331

 
1,006

Health Care
2014
  
2,088

 
514

 
369

 
4,099

 
973

 
691

 
2013
  
2,153

 
525

 
374

 
4,047

 
909

 
639

Fabric Care and Home Care
2014
  
5,775

 
1,083

 
706

 
11,708

 
2,164

 
1,425

 
2013
  
6,022

 
1,149

 
751

 
12,032

 
2,331

 
1,534

Baby, Feminine and Family Care
2014
  
5,217

 
1,117

 
760

 
10,539

 
2,319

 
1,585

 
2013
  
5,323

 
1,099

 
765

 
10,570

 
2,181

 
1,490

Corporate
2014
  
112

 
(676
)
 
(267
)
 
234

 
(1,305
)
 
(469
)
 
2013
  
199

 
(481
)
 
(73
)
 
363

 
(808
)
 
(55
)
Total Company
2014
  
$
20,161

 
$
3,840

 
$
2,975

 
$
40,347

 
$
7,500

 
$
5,815

 
2013
  
21,099

 
4,182

 
3,297

 
41,273

 
8,013

 
6,231


 

Amounts in millions of dollars unless otherwise specified.


4. Goodwill and Other Intangible Assets

Goodwill is allocated by reportable segment as follows:
 
Beauty, Hair and Personal Care
 
Grooming
 
Health Care
 
Fabric Care and Home Care
 
Baby, Feminine and Family Care
 
Corporate
 
Total Company
GOODWILL at June 30, 2014
$
17,040

 
$
20,939

 
$
6,280

 
$
1,981

 
$
4,910

 
$
2,554

 
$
53,704

Acquisitions, divestitures and discontinued operations (1)

 

 

 
(2
)
 

 
(2,515
)
 
(2,517
)
Translation and other
(926
)
 
(820
)
 
(246
)
 
(64
)
 
(217
)
 
(39
)
 
(2,312
)
GOODWILL at December 31, 2014
$
16,114

 
$
20,119

 
$
6,034

 
$
1,915

 
$
4,693

 
$

 
$
48,875

(1) Includes $1.6 billion of impairment charges related to the Batteries business which is included in discontinued operations (see Note 11).

During the quarter ended September 30, 2014, we determined that the estimated fair value of our Batteries reporting unit was less than its carrying amount. The underlying fair value assessment was triggered by an agreement that was reached in the quarter to sell the China-based battery joint venture and a related decision to pursue options to exit the remainder of the Batteries business. As previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2014, the results of our annual goodwill impairment testing during fiscal 2014 indicated a decline in the fair value of the Batteries reporting unit due to lower long-term market growth assumptions in certain key geographies. At that time, the estimated fair value of Batteries continued to exceed its underlying carrying value, but the fair value cushion had been reduced to about 5%. The agreement during the quarter ended September 30, 2014 to sell the China-based battery joint venture was at a transaction value that was below the earnings multiple implied from the prior valuation of our Batteries business, which effectively eliminated our fair value cushion. As a result, the remaining business unit cash flows no longer supported the remaining carrying amount of the Batteries business. Due largely to these factors, we recorded a non-cash, before and after-tax impairment charge of $863 in the quarter ended September 30, 2014 to reduce the carrying amount of goodwill for the Batteries business unit to its estimated fair value. These same factors resulted in a decline in the fair value of our Duracell trade name intangible asset below its carrying value. This resulted in a non-cash, before-tax impairment charge of $110 ($69 after tax) to reduce the carrying amount of this asset to its estimated fair value. Both of these charges were reclassified to discontinued operations during the quarter ended December 31, 2014.

In November 2014, the Company reached an agreement to divest the Batteries business via a split transaction in an exchange of a recapitalized Duracell Company for Berkshire Hathaway's (BH) shares of P&G stock (see Note 11). Based on the terms of the agreement and the value of BH's shares of P&G stock, the Company recorded a non-cash, before and after-tax impairment charge of $740 as part of discontinued operations during the quarter ended December 31, 2014 to adjust Duracell goodwill based on the expected transaction value. The remaining Batteries goodwill at December 31, 2014 is reported in Assets held for sale in the Consolidated Balance Sheets.

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, we recorded goodwill impairment charges during fiscal 2012 and 2013 in our Appliances business, which is included in the Grooming reportable segment. The most recent impairment charge in fiscal 2013, which also included an impairment of the Braun trade name intangible asset, was driven by the devaluation of the currency in Japan, a key country that generates a significant portion of the earnings of the Appliances business. While the recent underlying business results of the Appliances business have equaled or exceeded the projections used in the fiscal 2013 and 2014 impairment valuations, the currency in Japan has continued to devalue relative to the currencies in which the related assets are recorded. The estimated fair value of the Appliances business still exceeds the underlying carrying value, but as a result of the continued Japan currency devaluation, the fair value cushion has been reduced to approximately 5%.

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 impairment charges for the Batteries business are included in discontinued operations, along with the underlying Batteries business results.

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. 

Amounts in millions of dollars unless otherwise specified.


The second step of the impairment analysis for the Batteries impairment in the quarter ended December 31, 2014 also considered the structure and value of the divestiture agreement with BH. The final transaction value will depend on the value of BH's shares of the Company as of the closing date, which is expected to occur in the second half of calendar 2015. Accordingly, if the value of such shares declines between the transaction signing and closing dates, we may need to record additional non-cash impairment charges as part of discontinued operations in the future.

In addition to the discontinued operations impacts, goodwill decreased from June 30, 2014 due to currency translation across all reportable segments.

Identifiable intangible assets at December 31, 2014 are comprised of:
 
Gross Carrying Amount
 
Accumulated Amortization
Intangible assets with determinable lives
$
8,581

  
$
(4,984
)
Intangible assets with indefinite lives
23,970

  

Total identifiable intangible assets
$
32,551

  
$
(4,984
)

Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives consist primarily of brands. The amortization of intangible assets for the three months ended December 31, 2014 and 2013 was $116 and $129, respectively. For the six months ended December 31, 2014 and 2013, the amortization of intangibles was $235 and $263, respectively.

5. Share-Based Compensation and Postretirement Benefits

Total share-based compensation expense for the three months ended December 31, 2014 and 2013 was $70 and $69, respectively. Total share-based compensation expense for the six months ended December 31, 2014 and 2013 was $151 and $153, respectively.

The Company offers various postretirement benefits to its employees. The total net periodic benefit cost for pension benefits for the three months ended December 31, 2014 and 2013 was $111 and $107, respectively. The total net periodic benefit cost for pension benefits for the six months ended December 31, 2014 and 2013 was $228 and $211, respectively. The total net periodic benefit cost for other retiree benefits for the three months ended December 31, 2014 and 2013 was $6 and $14, respectively. The total net periodic benefit cost for other retiree benefits for the six months ended December 31, 2014 and 2013 was $10 and $27, respectively. The components of the total net periodic benefit cost for both pension benefits and other retiree benefits for those interim periods, on an annualized basis, do not differ materially from the amounts disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

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 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 assets or liabilities that were remeasured at fair value on a non-recurring basis for the period ended December 31, 2014.

The following table sets forth the Company’s financial assets as of December 31, 2014 and June 30, 2014 that are measured at fair value on a recurring basis during the period:
 

Amounts in millions of dollars unless otherwise specified.


 
 
Fair Value Asset
 
 
December 31, 2014
 
June 30, 2014
Investments
 
 
 
 
U.S. government securities
  
$
3,077

 
$
1,631

Corporate bond securities
 
970

 
497

Other investments
 
29

 
30

Total
 
$
4,076

 
$
2,158


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 $300 as of December 31, 2014 and $0 as of June 30, 2014. The amortized cost of U.S. government securities with maturities between one and five years was $2,793 as of December 31, 2014 and $1,649 as of June 30, 2014. The amortized cost of Corporate bond securities with maturities of less than a year was $91 as of December 31, 2014 and $39 as of June 30, 2014. The amortized cost of Corporate bond securities with maturities between one and five years was $883 as of December 31, 2014 and $458 as of June 30, 2014. 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 $25,117 and $26,429 at December 31, 2014 and June 30, 2014, respectively. This includes the current portion ($4,312 and $4,400 as of December 31, 2014 and June 30, 2014, respectively) of debt instruments. 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 $2,240 and $1,682 at December 31, 2014 and June 30, 2014, respectively, is classified as Level 2 within the fair value hierarchy. All remaining long-term debt is classified as Level 1 within the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The following table sets forth the notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of December 31, 2014 and June 30, 2014:
 
Notional Amount
 
Fair Value Asset/(Liability)
 
December 31, 2014
 
June 30, 2014
 
December 31, 2014
 
June 30, 2014
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Foreign currency contracts
$
951

 
$
951

  
$
300

 
$
187

Derivatives in Fair Value Hedging Relationships
 
 
 
 
 
 
 
Interest rate contracts
$
8,128

 
$
9,738

 
$
251

 
$
168

Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
Net investment hedges
$
855

 
$
831

 
$
164

 
$
48

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Foreign currency contracts
$
8,714

 
$
12,111

 
$
(143
)
 
$
(42
)
  
All derivative assets are presented in Prepaid expenses and other current assets and Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities and Other noncurrent liabilities. The total notional amount of contracts outstanding at the end of the period is indicative of the Company's derivative activity during the period. The change in the notional balance of foreign currency contracts not designated as hedging instruments during the period reflects changes in the level of intercompany financing activity. All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.

Amounts in millions of dollars unless otherwise specified.


 
Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)
 
December 31, 2014
 
June 30, 2014
Derivatives in Cash Flow Hedging Relationships
 
 
 
Interest rate contracts
$
1

 
$
3

Foreign currency contracts
8

 
14

Total
$
9

 
$
17

Derivatives in Net Investment Hedging Relationships
 
 
 
Net investment hedges
$
103

 
$
30


The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (OCI) during the six months ended December 31, 2014 and 2013 was not material. During the next 12 months, the amount of the December 31, 2014 accumulated OCI (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 six months ended December 31, 2014 and 2013 are as follows:
 
 
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income
 
Three Months Ended December 31
 
Six Months Ended December 31
 
2014
 
2013
 
2014
 
2013
Derivatives in Cash Flow Hedging Relationships (1)
 
 
 
 
 
 
 
Interest rate contracts
$
1

 
$
1

 
$
3

 
$
3

Foreign currency contracts
66

 
58

 
128

 
56

Total
$
67

 
$
59

 
$
131

 
$
59

 
 
 
 
 
 
 
 
 
Amount of Gain/(Loss) Recognized in Income
 
Three Months Ended December 31
 
Six Months Ended December 31
 
2014
 
2013
 
2014
 
2013
Derivatives in Fair Value Hedging Relationships (2)
 
 
 
 
 
 
 
Interest rate contracts
$
60

 
$
(84
)
 
83

 
(113
)
Debt
(60
)
 
84

 
(83
)
 
113

Total
$

 
$

 
$

 
$

Derivatives in Net Investment Hedging Relationships (2)
 
 
 
 
 
 
 
Net investment hedges
$

 
$

 
$
(1
)
 
$

Derivatives Not Designated as Hedging Instruments (3)
 
 
 
 
 
 
 
Foreign currency contracts
$
(316
)
 
$
(26
)
 
$
(729
)
 
$
83


(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 tables below present 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, 2014
$
(3,876
)
 
$
(18
)
 
$
(5,165
)
 
$
1,397

 
$
(7,662
)
 
OCI before reclassifications (1)
902

 

 
355

 
(4,927
)
 
(3,670
)
 
Amounts reclassified out of AOCI
(129
)
 
(2
)
 
146

 

 
15

 
Net current period OCI
773

 
(2
)
 
501

 
(4,927
)
 
(3,655
)
 
Balance at December 31, 2014
$
(3,103
)
 
$
(20
)
 
$
(4,664
)
 
$
(3,530
)
 
$
(11,317
)

(1) Net of tax (benefit)/expense of $470, $1 and $138 for hedges, investment securities, and pension and other retiree benefits plans, respectively.

Reclassifications Out of Accumulated Other Comprehensive Income / (Loss)
 
Three Months Ended December 31
 
Six Months Ended December 31
 
2014
 
2013
 
2014
 
2013
Hedges (1)
 
 
 
 
 
 
 
Interest rate contracts
$
1

 
$
1

 
$
3

 
$
3

Foreign currency contracts
66

 
58

 
128

 
56

Total before-tax
67

 
59

 
131

 
59

Tax (expense)/benefit
(1
)
 
(1
)
 
(2
)
 
(1
)
Net of tax
66

 
58

 
129

 
58

 
 
 
 
 
 
 
 
Gains and (losses) on Investment Securities (2)
3

 
16

 
3

 
16

Tax (expense)/benefit
(1
)
 
(6
)
 
(1
)
 
(6
)
Net of tax
2

 
10

 
2

 
10

 
 
 
 
 
 
 
 
Pension and Other Retiree Benefits (3)
 
 
 
 
 
 
 
Amortization of deferred amounts
(2
)
 
(2
)
 
(5
)
 
(3
)
Recognized net actuarial gains/(losses)
(97
)
 
(84
)
 
(197
)
 
(165
)
Total before-tax
(99
)
 
(86
)
 
(202
)
 
(168
)
Tax (expense)/benefit
28

 
22

 
56

 
46

Net of tax
(71
)
 
(64
)
 
(146
)
 
(122
)
Total reclassifications, net of tax
$
(3
)
 
$
4

 
$
(15
)
 
$
(54
)

(1) See Note 6 for classification of these items in the Consolidated Statement of Earnings.
(2) Reclassified from AOCI into Other non-operating income, net.
(3) Reclassified from AOCI into Cost of products sold and SG&A. These components are included in net periodic pension cost.


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 (see below). Net earnings attributable to Procter & Gamble and common shares used to calculate basic and diluted net earnings per share were as follows:
 
Three Months Ended December 31, 2014
 
Three Months Ended December 31, 2013
CONSOLIDATED AMOUNTS
Continuing Operations
Discontinued Operations
Total
 
Continuing Operations
Discontinued Operations
Total
Net earnings
$
2,975

$
(577
)
$
2,398

 
$
3,297

$
175

$
3,472

Net earnings attributable to noncontrolling interests
(24
)
(2
)
(26
)
 
(39
)
(5
)
(44
)
Net earnings attributable to P&G (Diluted)
$
2,951

$
(579
)
$
2,372

 
$
3,258

$
170

$
3,428

Preferred dividends, net of tax benefit
(70
)

(70
)
 
(67
)

(67
)
Net earnings attributable to P&G available to Common Shareholders (Basic)
$
2,881

$
(579
)
$
2,302

 
$
3,191

$
170

$
3,361

 
 
 
 
 
 
 
 
 
SHARES IN MILLIONS
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
2,705.7

2,705.7

2,705.7

 
2,719.2

2,719.2

2,719.2

Effect of dilutive securities
 
 
 
 
 
 
 
 
Conversion of preferred shares (1)
109.1

109.1

109.1

 
112.7

112.7

112.7

 
Exercise of stock options and other unvested equity awards (2)
70.4

70.4

70.4

 
76.6

76.6

76.6

Diluted weighted average common shares outstanding
2,885.2

2,885.2

2,885.2

 
2,908.5

2,908.5

2,908.5

 
 
 
 
 
 
 
 
 
PER SHARE AMOUNTS (3)
 
 
 
 
 
 
 
Basic net earnings per common share
$
1.06

$
(0.21
)
$
0.85

 
$
1.18

$
0.06

$
1.24

Diluted net earnings per common share
$
1.02

$
(0.20
)
$
0.82

 
$
1.12

$
0.06

$
1.18

 
 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2014
 
Six Months Ended December 31, 2013
CONSOLIDATED AMOUNTS
Continuing Operations
Discontinued Operations
Total
 
Continuing Operations
Discontinued Operations
Total
Net earnings
$
5,815

$
(1,397
)
$
4,418

 
$
6,231

$
298

$
6,529

Net earnings attributable to noncontrolling interests
(50
)
(6
)
(56
)
 
(64
)
(10
)
(74
)
Net earnings attributable to P&G (Diluted)
$
5,765

$
(1,403
)
$
4,362

 
$
6,167

$
288

$
6,455

Preferred dividends, net of tax benefit
(130
)

(130
)
 
(125
)

(125
)
Net earnings attributable to P&G available to Common Shareholders (Basic)
$
5,635

$
(1,403
)
$
4,232

 
$
6,042

$
288

$
6,330

 
 
 
 
 
 
 
 
 
SHARES IN MILLIONS
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
2,708.2

2,708.2

2,708.2

 
2,727.2

2,727.2

2,727.2

Effect of dilutive securities
 
 
 
 
 
 
 
 
Conversion of preferred shares (1)
109.7

109.7

109.7

 
113.1

113.1

113.1

 
Exercise of stock options and other unvested equity awards (2)
68.9

68.9

68.9

 
76.1

76.1

76.1

Diluted weighted average common shares outstanding
2,886.8

2,886.8

2,886.8

 
2,916.4

2,916.4

2,916.4

 
 
 
 
 
 
 
 
 
PER SHARE AMOUNTS (3)
 
 
 
 
 
 
 
Basic net earnings per common share
$
2.08

$
(0.52
)
$
1.56

 
$
2.21

$
0.11

$
2.32

Diluted net earnings per common share
$
2.00

$
(0.49
)
$
1.51

 
$
2.11

$
0.10

$
2.21


Amounts in millions of dollars unless otherwise specified.


(1) 
Despite being included currently in diluted net earnings per common share, the actual conversion to common stock occurs when the preferred shares are sold. Shares may only be sold after being allocated to the ESOP participants pursuant to the repayment of the ESOP's obligations through 2035.
(2) 
Less than 1 million in the three and six months ended December 31, 2014 and less than 1 million in the three and six months ended December 31, 2013 of the Company's outstanding stock options 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 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 $4.5 billion in before-tax restructuring costs over a five year period (from fiscal 2012 through fiscal 2016), including costs incurred as part of the ongoing and incremental restructuring program. The restructuring program plans include a targeted net reduction in non-manufacturing overhead enrollment of approximately 16% - 22% through fiscal 2016, which we expect to exceed. Through fiscal 2014, the Company reduced non-manufacturing enrollment by approximately 9,300, or approximately 15%. Through December 31, 2014, the Company reduced non-manufacturing enrollment by approximately 10,400, or approximately 18%. The reductions are enabled by the elimination of duplicate work, simplification through the use of technology, 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 as outlined below. Through fiscal 2014, the Company incurred charges of approximately $2.8 billion. Approximately $1.5 billion of these charges were related to separations, $666 were asset-related and $680 were related to other restructuring-type costs.

For the three and six month periods ended December 31, 2014, the Company incurred total restructuring charges of approximately $183 and $341, respectively. For the three and six month periods ended December 31, 2014 approximately $80 and $126 of these charges were recorded in SG&A, respectively. For the three and six month periods ended December 31, 2014 approximately $97 and $208 of these charges were recorded in cost of products sold, respectively. The remainder is included in discontinued operations. The following table presents restructuring activity for the six months ended December 31, 2014:
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2014
 
 
 
Accrual Balance June 30, 2014
 
Charges Previously Reported (Three Months Ended September 30, 2014)
 
Charges for the Three Months Ended December 31, 2014
 
Cash Spent
 
Charges Against Assets
 
Accrual Balance December 31, 2014
Separations
$
353

 
$
81

 
$
98

 
$
(200
)
 


 
$
332

Asset-Related Costs

 
50

 
40

 

 
(90
)
 

Other Costs
28

 
27

 
45

 
(80
)
 


 
20

Total
$
381

 
$
158

 
$
183

 
$
(280
)
 
$
(90
)
 
$
352


Separation Costs
Employee separation charges for the three and six month periods ended December 31, 2014 relate to severance packages for approximately 840 and 1,490 employees, respectively. Separations related to non-manufacturing employees were approximately 500 and 690 employees for the three and six month periods ended December 31, 2014, respectively. These separations are primarily in North America and Western Europe. The packages are predominately 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 10,970 employees, of which approximately 6,970 are non-manufacturing overhead personnel.

Amounts in millions of dollars unless otherwise specified.


 
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 standardization. The asset-related charges will not have a significant impact on future depreciation charges.

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

Consistent with our historical policies for ongoing restructuring-type activities, the restructuring program charges are funded by and included within Corporate for both management and segment reporting. Accordingly, all of the charges under the program are included within the Corporate reportable segment. However, for informative purposes, the following table summarizes the total restructuring costs related to our reportable segments:
 
Three Months Ended December 31
 
Six Months Ended December 31
 
2014
 
2014
Beauty, Hair and Personal Care
$
32

 
$
68

Grooming
8

 
21

Health Care
4

 
6

Fabric Care and Home Care
32

 
54

Baby, Feminine and Family Care
26

 
66

Corporate (1)
81

 
126

Total Company
$
183

 
$
341


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

Litigation

The Company is subject to various legal proceedings and claims arising out of our business which cover a wide range of matters such as antitrust, trade and other governmental regulations, product liability, patent and trademark, advertising, contracts, environmental, labor and employment, and income taxes.

As previously disclosed, the Company has had a number of antitrust matters in Europe. These matters involve a number of other consumer products companies and/or retail customers. Several regulatory authorities in Europe have issued separate decisions pursuant to their investigations alleging that the Company, along with several other companies, engaged in violations of competition laws in those countries. Many of these matters have concluded and the fines have been paid. For ongoing matters, the Company has accrued liabilities for competition law violations from these European cases totaling $237 as of December 31, 2014. While the ultimate resolution of these matters for which we have accrued liabilities may result in fines or costs in excess of the amounts reserved, it is difficult to estimate such amounts at this time. Currently, however, we do not expect any such incremental losses to materially impact our financial statements in the period in which they are accrued and paid, respectively.

With respect to 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

Amounts in millions of dollars unless otherwise specified.


information, we do not believe the ultimate resolution of environmental remediation will have a material effect on 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 5060 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 or timing until the close of the audit. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions will significantly increase or decrease within the next 12 months related to audits described above. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective tax rate related to these items.

Additional information on the Commitments and Contingencies of the Company can be found in our Annual Report on Form 10-K for the year ended June 30, 2014.

11. Discontinued Operations
During the quarter ended September 30, 2014, the Company reached an agreement to sell its interest in a China-based battery joint venture. This transaction closed during the quarter ended December 31, 2014, resulting in proceeds of approximately $560. In November 2014, the Company reached an agreement to divest the remainder of its Batteries business to Berkshire Hathaway (BH) via a split transaction, in which the Company will exchange a recapitalized Duracell Company for BH's shares of P&G stock. As of the date the transaction was signed, BH's shares were valued at approximately $4.7 billion. The Company expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization, subject to final working capital adjustments. The Company recorded goodwill and indefinite-lived asset impairment charges during the six months ended December 31, 2014 which reflected the total estimated proceeds from the divestiture transactions (see Note 4). Since the number of shares of P&G stock the Company will receive in the Duracell transaction is fixed, the total value to be received in the transaction will be based on the Company's share price as of the closing date, which is expected to occur by the end of calendar 2015. Accordingly, any increase or decrease in the Company's share price between the transaction signing and closing dates will ultimately be reflected in earnings from discontinued operations as a gain or loss on divestiture.
The Batteries business had 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 positions as of December 31, 2014 are 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, our manufacturing facilities in the United States and the majority of the employees working in the Pet Care business. The agreement includes the acquisition of the Pet Care business in several additional countries, pending the receipt of necessary regulatory approvals. 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, our manufacturing facility in the Netherlands, and the majority of the employees working in the Western Europe Pet Care business. The one-time impact of these transactions is not material.
The Pet Care business had historically been 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. Additionally, the Pet Care balance sheet positions as of December 31, 2014 and June 30, 2014 are presented as Assets and Liabilities held for sale in the Consolidated Balance Sheets.

Amounts in millions of dollars unless otherwise specified.


Following is selected financial information included in net earnings from discontinued operations for the Pet Care and Batteries businesses:
 
Three Months Ended December 31
 
2014
 
2013
 
Pet Care
 
Batteries
 
Total
 
Pet Care
 
Batteries
 
Total
Net sales
$
72

 
$
782

 
$
854

 
$
383

 
$
798

 
$
1,181

Earnings before impairment charges and income taxes
(5
)
 
257

 
252

 
29

 
220

 
249

Impairment charges

 
(740
)
 
(740
)
 

 

 

Income tax expense

 
(103
)
 
(103
)
 
(11
)
 
(63
)
 
(74
)
Gain on sale before income taxes
13

 

 
13

 

 

 

Income tax expense on sale
1

 

 
1

 

 

 

Net earnings from discontinued operations
$
9

 
$
(586
)
 
$
(577
)
 
$
18

 
$
157

 
$
175

 
Six Months Ended December 31
 
2014
 
2013
 
Pet Care
 
Batteries
 
Total
 
Pet Care
 
Batteries
 
Total
Net sales
$
235

 
$
1,388

 
$
1,623

 
$
758

 
$
1,454

 
$
2,212

Earnings before impairment charges and income taxes
14

 
393

 
407

 
60

 
370

 
430

Impairment charges

 
(1,713
)
 
(1,713
)
 

 

 

Income tax expense
(6
)
 
(103
)
 
(109
)
 
(24
)
 
(108
)
 
(132
)
Gain on sale before income taxes
205

 

 
205

 

 

 

Income tax expense on sale
(187
)
 

 
(187
)
 

 

 

Net earnings from discontinued operations
$
26

 
$
(1,423
)
 
$
(1,397
)
 
$
36

 
$
262

 
$
298


The major components of assets and liabilities of the Pet Care and Batteries businesses held for sale were as follows:
 
December 31, 2014
 
June 30, 2014
 
Pet Care
 
Batteries
 
Pet Care
Cash
$

 
$
32

 
$

Accounts receivable

 
328

 

Inventories
16

 
317

 
122

Prepaid expenses and other current assets

 
27

 
14

Property, plant and equipment, net

 
472

 
441

Goodwill and intangible assets, net

 
2,941

 
2,258

Other noncurrent assets

 
20

 
14

Total assets held for sale
$
16

 
$
4,137

 
$
2,849

 
 
 
 
 
 
Accounts payable
$

 
$
169

 
$
63

Accrued and other liabilities

 
225

 
13

Long-term debt

 
32

 

Noncurrent deferred tax liabilities

 
811

 
584

Total liabilities held for sale
$

 
$
1,237

 
$
660



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 Note 4 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 that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled "Economic Conditions, Challenges and Risks" and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise.

The purpose of the 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:

Overview
Summary of Results - Six Months Ended December 31, 2014
Economic Conditions, Challenges and Risks
Results of Operations – Three and Six Months Ended December 31, 2014
Business Segment Discussion – Three and Six Months Ended December 31, 2014
Financial Condition
Reconciliation of Non-GAAP Measures
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 (EPS), free cash flow and adjusted free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of foreign exchange, acquisitions and divestitures. Core EPS is a measure of the Company's 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 is free cash flow excluding tax payments for the Pet Care divestiture. Adjusted free cash flow productivity is the ratio of free cash flow to net earnings excluding impairment charges on the Batteries business. We believe these measures provide investors with important information that is useful in understanding our business results and trends. 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
We are a global leader in retail 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, salons, high-frequency stores and distributors. We continue to expand our presence in other channels, such as perfumeries and e-commerce. 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.
On November 13, 2014, the Company announced that it plans to divest the Duracell business via a split transaction with Berkshire Hathaway, in which it will exchange a recapitalized Duracell Company for Berkshire Hathaway’s shares of Procter & Gamble stock. The Company had previously announced an agreement to divest its controlling interest in a Chinese batteries venture, which represents the balance of the Company’s Batteries business. That transaction was completed during the quarter ended December, 31 2014. The Company expects to complete the Duracell transaction in the second half of calendar year 2015, pending necessary regulatory approvals. The Batteries business had 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 is now presented as discontinued operations and, as such, is excluded from both continuing operations and segment results. Additionally, the Batteries balance sheet positions as of December 31, 2014 are presented as held for sale in the Consolidated Balance Sheet.
The table below provides more information about the components of our reportable business segment structure.
Reportable Business Segment
GBUs (Categories)
Billion Dollar Brands
Beauty, Hair and Personal Care
Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care); Cosmetics; Hair Care and Color; Prestige; Salon Professional
Head & Shoulders, Olay, Pantene, SK-II, Wella
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 months ended December 31, 2014 (excluding net sales and net earnings in Corporate):
 
Three Months Ended December 31, 2014
 
Net Sales
 
Net Earnings
Beauty, Hair and Personal Care
25%
 
27%
Grooming
10%
 
17%
Health Care
10%
 
11%
Fabric Care and Home Care
29%
 
22%
Baby, Feminine and Family Care
26%
 
23%
Total
100%
 
100%

The following table provides the percentage of net sales and net earnings by reportable business segment for the six months ended December 31, 2014 (excluding net sales and net earnings in Corporate):

 
Six Months Ended December 31, 2014
 
Net Sales
 
Net Earnings
Beauty, Hair and Personal Care
25%
 
25%
Grooming
10%
 
16%
Health Care
10%
 
11%
Fabric Care and Home Care
29%
 
23%
Baby, Feminine and Family Care
26%
 
25%
Total
100%
 
100%






SUMMARY OF RESULTS
Following are highlights of results for the six months ended December 31, 2014 versus the six months ended December 31, 2013:
Net sales decreased 2% versus the previous year to $40.3 billion. Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, were up 2%. Organic sales decreased 1% in Beauty, Hair, and Personal Care and increased 1% in Grooming, 3% in Health Care, 2% in Fabric Care and Home Care and 4% in Baby, Feminine and Family Care.
Unit volume was unchanged. Volume grew low single digits in Fabric and Home Care and Health Care. Volume decreased low single digits in Beauty, Hair and Personal Care and Grooming and was unchanged in Baby, Feminine and Family Care.
Net earnings from continuing operations were $5.8 billion, a decrease of $416 million or 7% versus the prior year period. This decrease was driven primarily by reduced net sales and foreign currency charges, including a $104 million after-tax charge related to balance sheet remeasurements in Venezuela.
Diluted net earnings per share from continuing operations decreased 5% to $2.00.
Net earnings attributable to Procter & Gamble were $4.4 billion, a decrease of $2.1 billion, or 32% versus the prior year period. This was primarily driven by a non-cash, after-tax impairment charge of $1.7 billion related to the goodwill and indefinite-lived intangible assets in our Batteries business (reflected in Earnings from Discontinued Operations) and the reduction in net earnings from continuing operations.
Core net earnings per share, which excludes discontinued operations, incremental restructuring charges, a balance sheet remeasurement charge from Venezuela and charges for European legal matters decreased 3% to $2.10.
Operating cash flow was $7.1 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and excluding tax payments for the Pet divestiture, was $5.8 billion. Adjusted free cash flow productivity, which is the ratio of adjusted free cash flow to net earnings excluding impairment charges on the Batteries business and tax payments for the Pet Care divestiture, was 95%.
ECONOMIC CONDITIONS, CHALLENGES AND RISKS
Ability to Achieve Business Plans. We are a consumer products company and rely on continued demand for our brands and products. To achieve business goals, we must develop and sell products that appeal to consumers and retail trade customers. Our continued success is dependent on leading-edge innovation with respect to both products and operations, the continued positive reputations of our brands and our ability to successfully maintain patent and trademark protection. This means we must be able to obtain patents and trademarks, and respond to technological advances and patents granted to competition. Our success is also dependent on effective sales, advertising and marketing programs. Our ability to innovate and execute in these areas will determine the extent to which we are able to grow existing sales and volume profitably, especially with respect to the product categories and geographic markets (including developing markets) in which we have chosen to focus. There are high levels of competitive activity in the environments in which we operate. To address these challenges, we must respond to competitive factors, including pricing, promotional incentives, trade terms and product initiatives. We must manage each of these factors, as well as maintain mutually beneficial relationships with our key customers, in order to effectively compete and achieve our business plans. As a company that manages a portfolio of consumer brands, our ongoing business model involves a certain level of ongoing acquisition, divestiture and joint venture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against base business objectives. Daily conduct of our business also depends on our ability to maintain key information technology systems, including systems operated by third-party suppliers, and to maintain security over our data.
Cost Pressures. Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, labor costs, foreign exchange and interest rates. Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions, as well as through consistent productivity improvements. We also must manage our debt and currency exposure, especially in certain countries with currency exchange, import authorization and pricing controls, such as Venezuela, Argentina, China, India and Egypt. We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements, and successfully manage any disruptions at Company manufacturing sites. We must implement, achieve and sustain cost improvement plans, including our outsourcing projects, supply chain optimization and those related to general overhead and workforce optimization. Successfully managing these changes, including identifying, developing and retaining key employees, is critical to our success.
Global Economic Conditions. Demand for our products has a correlation to global macroeconomic factors. The current macroeconomic factors remain dynamic. Economic changes, terrorist activity, political unrest and natural disasters may result in business interruption, inflation, deflation, lack of market growth or decreased demand for our products. Our success will depend, in part, on our ability to manage continued global political and/or economic uncertainty, especially in our significant geographic



markets. We could also be negatively impacted by a global, regional or national economic crisis, including sovereign risk in the event of a deterioration in the credit worthiness of or a default by local governments, resulting in a disruption of credit markets. Such events could negatively impact our ability to collect receipts due from governments, including refunds of value added taxes, create significant credit risks relative to our local customers and depository institutions, and/or negatively impact our overall liquidity.
Regulatory Environment. Changes in laws, regulations and the related interpretations may alter the environment in which we do business. This includes changes in environmental, competitive and product-related laws, as well as changes in accounting standards and taxation requirements. Our ability to manage regulatory, tax and legal matters (including, but not limited to, product liability, patent, intellectual property, competition law matters and tax policy) and to resolve pending legal matters within current estimates may impact our results.

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





RESULTS OF OPERATIONS – Three Months Ended December 31, 2014
The following discussion provides a review of results for the three months ended December 31, 2014 versus the three months ended December 31, 2013.
 
 
Three Months Ended December 31
Amounts in millions, except per share amounts
2014
 
2013
 
% CHG
Net sales
$
20,161

 
$
21,099

 
(4
)%
Operating income
3,947

 
4,302

 
(8
)%
Net earnings from continuing operations
2,975

 
3,297

 
(10
)%
Net earnings from discontinued operations
(577
)
 
175

 
(430
)%
Net earnings attributable to Procter & Gamble
2,372

 
3,428

 
(31
)%
Diluted net earnings per common share
0.82

 
1.18

 
(31
)%
Diluted net earnings per share from continuing operations
1.02

 
1.12

 
(9
)%
Core earnings per common share
1.06

 
1.15

 
(8
)%
 
 
 
 
 
 
 
COMPARISONS AS A % OF NET SALES
2014
 
2013
 
Basis Pt Chg
Gross margin
50.0
%
 
50.4
%
 
(40
)
Selling, general & administrative expense
30.4
%
 
30.0
%
 
40

Operating margin
19.6
%
 
20.4
%
 
(80
)
Earnings before income taxes
19.0
%
 
19.8
%
 
(80
)
Net earnings attributable to Procter & Gamble
11.8
%
 
16.2
%
 
(440
)
 
Net Sales

Net sales decreased 4% to $20.2 billion for the second quarter on unit volume that was unchanged versus the prior year period. Volume grew low single digits in Fabric Care and Home Care. Volume decreased low single digits in Beauty, Hair and Personal Care, Health Care, and Grooming. Volume was unchanged in Baby, Feminine and Family Care. Volume increased low single digits in developed regions and decreased low single digits in developing regions. Higher pricing, primarily to offset inflation and devaluation, increased net sales by 1%. The impact of favorable geographic and product mix also increased net sales by 1%, due to disproportionate growth in developed regions and in higher priced product categories such as Baby Care and Oral Care. Unfavorable foreign exchange reduced net sales by 5% and the mix impact of minor brand divestitures reduced net sales by 1%. Organic sales grew 2% driven by pricing and mix.

 
Net Sales Change Drivers 2014 vs. 2013 (Three Months Ended December 31)
 
Volume with
Acquisitions
& Divestitures
 
Volume
Excluding
Acquisitions
& Divestitures
 
Foreign
Exchange
 
Price
 
Mix
 
Other*
 
Net Sales
Growth
Beauty, Hair and Personal Care
-2%
 
-2%
 
-4%
 
1%
 
0%
 
-1%
 
-6%
Grooming
-2%
 
-2%
 
-7%
 
4%
 
0%
 
0%
 
-5%
Health Care
-2%
 
-2%
 
-4%
 
0%
 
3%
 
0%
 
-3%
Fabric Care and Home Care
2%
 
2%
 
-6%
 
1%
 
0%
 
-1%
 
-4%
Baby, Feminine and Family Care
0%
 
0%
 
-6%
 
1%
 
3%
 
0%
 
-2%
TOTAL COMPANY
0%
 
0%
 
-5%
 
1%
 
1%
 
-1%
 
-4%
Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
* Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.






Operating Costs

Gross margin decreased 40 basis points to 50.0% of net sales for the quarter. Gross margin was negatively impacted by a 50 basis point impact from higher commodity costs, a 60 basis point impact from unfavorable foreign exchange, a 110 basis point impact from unfavorable geographic and product mix, primarily from a decline in the Prestige business and within the Fabric Care and Home Care segment, and to a lesser extent from capacity investments and higher restructuring costs. These impacts were partially offset by a 190 basis point positive impact from manufacturing cost savings and a 60 basis point benefit from higher pricing.

Total selling, general and administrative expenses (SG&A) decreased 3% to $6.1 billion, with reduced overhead and marketing spending being partially offset by increased foreign exchange costs. SG&A as a percentage of net sales increased 40 basis points to 30.4%, due largely to the negative scale impacts from reduced sales. Marketing spending as a percentage of net sales decreased 50 basis points behind efficiency efforts, primarily in non-media spending areas. Overhead costs as a percentage of net sales increased 20 basis points, as productivity savings in overhead spending were more than offset by wage inflation and investments in research and development. Foreign exchange transactional charges added approximately 70 basis points to SG&A as a percentage of net sales. These transactional charges primarily include the impacts of revaluing receivables and payables from transactions denominated in a currency other than a local entity’s functional currency.

Non-Operating Expenses and Income

Interest expense was $160 million for the quarter, a decrease of $25 million versus the prior year period due to lower total debt and a decrease in weighted average interest rates. Interest income was $34 million for the quarter, an increase of $12 million versus the prior year due to an increase in cash, cash equivalents and investment securities. Other non-operating income decreased $24 million to $19 million.

Income Taxes
The effective tax rate on continuing operations increased 130 basis points to 22.5% primarily due to the unfavorable geographic mix of earnings. The current year rate also increased 30 basis points due to the net impact of favorable discrete adjustments related to uncertain income tax positions (which netted to 220 basis points in the current year versus 250 basis points in the prior year). These impacts were partially offset by the impact of U.S. corporate tax law changes effective in the current period.

Net Earnings from Continuing Operations

Net earnings from continuing operations decreased $322 million or 10% for the quarter. This decline was caused primarily by the reduction in net sales and an 80 basis point reduction in operating income margin, driven by the gross margin decline and the increase in SG&A as a percentage of net sales (both discussed above). Foreign exchange impacts reduced net earnings by about $450 million for the quarter due to weakening of certain key currencies against the U.S. dollar, primarily in Russia, the Ukraine, Venezuela and Argentina. This impact includes both transactional charges as discussed above in Operating Costs and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations decreased 9% to $1.02 due to reduced net sales and operating income margin.

Discontinued Operations

The company incurred a net loss from discontinued operations of $577 million in the current period, versus net earnings of $175 million in the prior year. The decline was driven primarily by current year after-tax impairment charges of $740 million (see Note 4 to the Consolidated Financial Statements).

Net Earnings

Net earnings attributable to Procter & Gamble decreased $1.1 billion or 31% to $2.4 billion for the quarter. The decline was due to the $740 million impairment charge in discontinued operations discussed above and the reduction in net earnings from continuing operations. Diluted net earnings per share declined 31% to $0.82. Core net earnings per share decreased 8% to $1.06. Core net earnings per share for the quarter represents diluted net earnings per share from continuing operations excluding incremental restructuring charges related to our productivity and cost savings plan and charges related to European legal matters in both periods.







Foreign Currency Translation – Venezuela Impacts
Venezuela is a highly inflationary economy under U.S. GAAP. As a result, the U.S. dollar is the functional currency for our subsidiaries in Venezuela. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by these subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.

The Venezuelan government currently has three exchange rate mechanisms.  The preferential CENCOEX (National Center for External Commerce) exchange rate is 6.3 Venezuelan bolivares fuerte (VEF) per dollar and can be used for the importation of certain qualifying products.  SICAD I (Complementary System for Foreign Exchange Administration) is an auction-based exchange program that the Company expects to be able to access for dividends and certain other qualifying imports of finished goods and materials.  The rate available through SICAD I was 10.6 VEF per dollar at June 30, 2014 and 12.0 VEF per dollar at December 31, 2014.  The government introduced a third exchange mechanism, referred to as SICAD II, which is also an auction-based program currently trading at 52.1 VEF per dollar.  The Company does not expect to access SICAD II.  Accordingly, the underlying SICAD II exchange rates have not been utilized for purposes of remeasuring or translating our Venezuela results.

Through December 31, 2013, the Venezuelan government had only one officially established exchange rate for qualifying dividends and imported goods and services, the preferential CENCOEX rate, previously CADIVI (Foreign Exchange Administrative Commission). Accordingly, through December 31, 2013, our results in Venezuela and all of our net monetary assets were measured at the preferential exchange rate, which we expected to be applicable to dividend repatriations.

On January 24, 2014, the government made a number of announcements affecting currency exchange rate and other controls, including the introduction of the SICAD I and II exchange rate mechanisms. While there is considerable uncertainty as to the nature of transactions that will flow through CENCOEX and how CENCOEX will operate in the future, a significant portion of our imports have, and the Company believes will continue to qualify for the preferential rate. However, the Company expects the importation of certain finished goods and raw materials for some product categories, along with the payment of dividends and royalties, will be executed under the SICAD I rate. The Company incurred an after-tax charge of $275 million during the quarter ended March 31, 2014 to remeasure certain portions of our local Venezuela balance sheets not qualifying for the preferential CENCOEX rate to the initial SICAD I exchange rate. The Company incurred an additional after-tax charge of $104 million ($0.04 per share) in the quarter ended September 30, 2014 to remeasure additional historic portions of our local Venezuela balance sheets that will not qualify for the preferential CENCOEX rate. Because the SICAD I rate fluctuates based on auctions that occur periodically during each quarter, the potential exists for additional impacts if the auction rate changes significantly. There could also be additional financial impacts if the SICAD I rate becomes applicable to additional categories of imports or other types of currency transactions.

As of December 31, 2014, the Company had net monetary assets denominated in local currency of approximately $1,060 million. Approximately $600 million of that amount is expected to be utilized to satisfy liabilities for past imports that were approved under CENCOEX and are measured at the preferential 6.3 rate. The remaining balance has been measured at the SICAD I rate. Local currency net monetary balances increased approximately $30 million versus June 30, 2014, as the remeasurement of balances from the preferential CENCOEX rate to the SICAD I rate and a devaluation of the SICAD I rate during the fiscal year to date period was more than offset by earnings in Venezuela and delayed timing of CENCOEX payments.

Other controls imposed by the Venezuelan government include import authorization controls, currency exchange and payment controls, price controls and recently enacted profit margin controls. While government restrictions and exchange rate mechanisms place some limits on our business decisions, the consolidated financial statements reflect our Venezuela operations as a controlled subsidiary. We will continue to monitor developments in Venezuela to assess if government restrictions and exchange rate controls evolve such that we no longer have effective control of business operations.

The ongoing impact of the recent announcements and our ability to restore net sales and profit to levels achieved prior to the recent devaluations will be impacted by several factors.  These include our ability to mitigate the effect of the price and profit margin controls, any potential future devaluation of the preferential CENCOEX exchange rate, any significant change in the auction exchange rates or liquidity in the SICAD I program, any further Venezuelan government price or exchange controls, economic conditions and the availability of raw materials and utilities.  In addition, depending on the future availability of U.S. dollars at the preferential rate, our local U.S. dollar needs, our overall repatriation plans, including our ability to obtain government approval for the payment of dividends, which has been limited in recent years, the creditworthiness of the local depository institutions and other creditors and our ability to collect amounts due from customers and the government, including VAT receivables, we may have exposure for our local monetary assets.





RESULTS OF OPERATIONS – Six Months Ended December 31, 2014
The following discussion provides a review of results for the six months ended December 31, 2014 versus the six months ended December 31, 2013.
 
 
Six Months Ended December 31
Amounts in millions, except per share amounts
2014
 
2013
 
% CHG
Net sales
$
40,347

 
$
41,273

 
(2
)%
Operating income
7,725

 
8,272

 
(7
)%
Net earnings from continuing operations
5,815

 
6,231

 
(7
)%
Net earnings from discontinued operations
(1,397
)
 
298

 
(569
)%
Net earnings attributable to Procter & Gamble
4,362

 
6,455

 
(32
)%
Diluted net earnings per common share
1.51

 
2.21

 
(32
)%
Diluted net earnings per share from continuing operations
2.00

 
2.11

 
(5
)%
Core earnings per common share
2.10

 
2.16

 
(3
)%
 
 
 
 
 
 
 
COMPARISONS AS A % OF NET SALES
2014
 
2013