Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)



x	True	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2019



o	False	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

PROCTER & GAMBLE COMPANY

(Exact name of registrant as specified in its charter)



Ohio	OH	1-434		31-0411980
(State of Incorporation)		(Commission File Number)		(I.R.S. Employer Identification Number)
One Procter & Gamble Plaza		Cincinnati	OH
One Procter & Gamble Plaza, Cincinnati, Ohio			45202
(Address of principal executive offices)			(Zip Code)

(513) 983-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, without Par Value	PG	NYSE
4.125% EUR notes due December 2020	PG20A	NYSE
0.275% Notes due 2020	PG20	NYSE
2.000% Notes due 2021	PG21	NYSE
2.000% Notes due 2022	PG22B	NYSE
1.125% Notes due 2023	PG23A	NYSE
0.500% Notes due 2024	PG24A	NYSE
0.625% Notes due 2024	PG24B	NYSE
1.375% Notes due 2025	PG25	NYSE
4.875% EUR notes due May 2027	PG27A	NYSE
1.200% Notes due 2028	PG28	NYSE
1.250% Notes due 2029	PG29B	NYSE
1.800% Notes due 2029	PG29A	NYSE
6.250% GBP notes due January 2030	PG30	NYSE
5.250% GBP notes due January 2033	PG33	NYSE
1.875% Notes due 2038	PG38	NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act).



Large accelerated filer	þ	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨	False
		Emerging growth company	¨	False

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ False

There were 2,493,812,048 shares of Common Stock outstanding as of September 30, 2019.

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS



	Three Months Ended September 30
Amounts in millions except per share amounts	2019			2018
NET SALES	$	17,798		$	16,690
Cost of products sold	8,723			8,484
Selling, general and administrative expense	4,785			4,652
OPERATING INCOME	4,290			3,554
Interest expense	(108		)	(129		)
Interest income	58			53
Other non-operating income, net	103			462
EARNINGS BEFORE INCOME TAXES	4,343			3,940
Income taxes	726			729
NET EARNINGS	3,617			3,211
Less: Net earnings attributable to noncontrolling interests	24			12
NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE	$	3,593		$	3,199

NET EARNINGS PER SHARE ⁽¹⁾
Basic	$	1.41		$	1.26
Diluted	$	1.36		$	1.22

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	2,647.5			2,612.1


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

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)



	Three Months Ended September 30
Amounts in millions	2019			2018
NET EARNINGS	$	3,617		$	3,211
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
Foreign currency translation	(540		)	(209		)
Unrealized gains/(losses) on investment securities	(5		)	(5		)
Unrealized gains/(losses) on defined benefit retirement plans	179			152
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX	(366		)	(62		)
TOTAL COMPREHENSIVE INCOME	3,251			3,149
Less: Total comprehensive income attributable to noncontrolling interests	20			8
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE	$	3,231		$	3,141

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



Amounts in millions			September 30, 2019			June 30, 2019
Assets
CURRENT ASSETS
Cash and cash equivalents			$	9,304		$	4,239
Available-for-sale investment securities			—			6,048
Accounts receivable			5,143			4,951
INVENTORIES
Materials and supplies			1,394			1,289
Work in process			656			612
Finished goods			3,415			3,116
Total inventories			5,465			5,017
Prepaid expenses and other current assets			2,013			2,218
TOTAL CURRENT ASSETS			21,925			22,473
PROPERTY, PLANT AND EQUIPMENT, NET			20,901			21,271
GOODWILL			39,605			40,273
TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET			24,002			24,215
OTHER NONCURRENT ASSETS			7,625			6,863
TOTAL ASSETS			$	114,058		$	115,095

Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable			$	10,951		$	11,260
Accrued and other liabilities			9,950			9,054
Debt due within one year			9,352			9,697
TOTAL CURRENT LIABILITIES			30,253			30,011
LONG-TERM DEBT			20,161			20,395
DEFERRED INCOME TAXES			6,325			6,899
OTHER NONCURRENT LIABILITIES			10,335			10,211
TOTAL LIABILITIES			67,074			67,516
SHAREHOLDERS’ EQUITY
Preferred stock			915			928
Common stock – shares issued –	September 2019	4,009.2
	June 2019	4,009.2	4,009			4,009
Additional paid-in capital			63,949			63,827
Reserve for ESOP debt retirement			(1,112		)	(1,146		)
Accumulated other comprehensive income/(loss)			(15,298		)	(14,936		)
Treasury stock			(102,510		)	(100,406		)
Retained earnings			96,625			94,918
Noncontrolling interest			406			385
TOTAL SHAREHOLDERS’ EQUITY			46,984			47,579
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$	114,058		$	115,095

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



	Three Months Ended September 30, 2019
Dollars in millions; shares in thousands	Common Stock				Preferred Stock			Add-itional Paid-In Capital		Reserve for ESOP Debt Retirement			Accumu-lated Other Comp-rehensive Income/(Loss)			Treasury Stock			Retained Earnings			Non-controlling Interest			Total Share-holders' Equity
	Shares		Amount
BALANCE JUNE 30, 2019	2,504,751			$4,009		$928			$63,827		($1,146	)		($14,936	)		($100,406	)		$94,918			$385			$47,579
Net earnings																			3,593			24			3,617
Other comprehensive income/(loss)													(362		)							(4		)	(366		)
Dividends and dividend equivalents ($0.7459 per share):
Common																			(1,874		)				(1,874		)
Preferred, net of tax benefits																			(65		)				(65		)
Treasury stock purchases	(25,405	)														(3,000		)							(3,000		)
Employee stock plans	13,050							120								885									1,005
Preferred stock conversions	1,416				(13		)	2								11									—
ESOP debt impacts										34									53						87
Noncontrolling interest, net																						1			1
BALANCE SEPTEMBER 30, 2019	2,493,812			$4,009		$915			$63,949		($1,112	)		($15,298	)		($102,510	)		$96,625			$406			$46,984



	Three Months Ended September 30, 2018
Dollars in millions; shares in thousands	Common Stock				Preferred Stock			Add-itional Paid-In Capital			Reserve for ESOP Debt Retirement			Accumu-lated Other Comp-rehensive Income/(Loss)			Treasury Stock			Retained Earnings			Non-controlling Interest			Total Share-holders' Equity
	Shares		Amount
BALANCE JUNE 30, 2018	2,498,093			$4,009		$967			$63,846			($1,204	)		($14,749	)		($99,217	)		$98,641			$590			$52,883
Impact of adoption of new accounting standards														(326		)				(200		)	(27		)	(553		)
Net earnings																				3,199			12			3,211
Other comprehensive income/(loss)														(58		)							(4		)	(62		)
Dividends and dividend equivalents ($0.7172 per share):
Common																				(1,791		)				(1,791		)
Preferred, net of tax benefits																				(66		)				(66		)
Treasury stock purchases	(15,690	)															(1,252		)							(1,252		)
Employee stock plans	7,368							20									500									520
Preferred stock conversions	1,637				(16		)	3									13									—
ESOP debt impacts											27									48						75
Noncontrolling interest, net								(158		)													(303		)	(461		)
BALANCE SEPTEMBER 30, 2018	2,491,408			$4,009		$951			$63,711			($1,177	)		($15,133	)		($99,956	)		$99,831			$268			$52,504

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Three Months Ended September 30
Amounts in millions	2019			2018
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	$	4,239		$	2,569
OPERATING ACTIVITIES
Net earnings	3,617			3,211
Depreciation and amortization	723			643
Share-based compensation expense	110			102
Deferred income taxes	(586		)	34
Gain on sale of assets	(2		)	(361		)
Changes in:
Accounts receivable	(261		)	(475		)
Inventories	(549		)	(494		)
Accounts payable, accrued and other liabilities	1,151			933
Other operating assets and liabilities	(35		)	(84		)
Other	1			58
TOTAL OPERATING ACTIVITIES	4,169			3,567
INVESTING ACTIVITIES
Capital expenditures	(1,079		)	(1,080		)
Proceeds from asset sales	6			9
Acquisitions, net of cash acquired	—			(237		)
Purchases of short-term investments	—			(158		)
Proceeds from sales and maturities of investment securities	6,151			649
Change in other investments	1			(48		)
TOTAL INVESTING ACTIVITIES	5,079			(865		)
FINANCING ACTIVITIES
Dividends to shareholders	(1,932		)	(1,853		)
Change in short-term debt	(61		)	24
Treasury stock purchases	(3,000		)	(1,252		)
Impact of stock options and other	875			425
TOTAL FINANCING ACTIVITIES	(4,118		)	(2,656		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(65		)	(70		)
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	5,065			(24		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	9,304		$	2,545

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. In the opinion of management, the accompanying unaudited Consolidated Financial Statements of The Procter & Gamble Company and subsidiaries (the "Company," "Procter & Gamble," "P&G," "we" or "our") contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.

2. New Accounting Pronouncements and Policies

On July 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)." The new accounting standard required the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. We elected the optional transition method and adopted the new guidance on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, we elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The adoption did not have a material impact on our financial statements, resulting in an increase of approximately 1% to each of our total assets and total liabilities on our balance sheet as of July 1, 2019. See Note 10 for further information.

In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model, whereby the impairment equals the difference between the carrying amount and the fair value of the specified reporting units in their entirety. This eliminates the second step of the current impairment model that requires companies to first estimate the fair value of all assets in a reporting unit and measure impairments based on those fair values and a residual measurement approach. It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We will adopt the standard no later than July 1, 2020. The impact of the new standard will be dependent on the specific facts and circumstances of future individual impairments, if any.

No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our Consolidated Financial Statements.

3. Segment Information

Under U.S. GAAP, our operating segments are aggregated into five reportable segments: 1) Beauty, 2) Grooming, 3) Health Care, 4) Fabric & Home Care and 5) Baby, Feminine & Family Care. Our five reportable segments are comprised of:


•	Beauty: Hair Care (Conditioner, Shampoo, Styling Aids, Treatments); Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care);


•	Grooming: Shave Care (Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care); Appliances


•	Health Care: Oral Care (Toothbrushes, Toothpaste, Other Oral Care); Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Pain Relief, Other Personal Health Care);


•	Fabric & Home Care: Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents); Home Care (Air Care, Dish Care, P&G Professional, Surface Care); and


•	Baby, Feminine & Family Care: Baby Care (Baby Wipes, Taped Diapers and Pants); Feminine Care (Adult Incontinence, Feminine Care); Family Care (Paper Towels, Tissues, Toilet Paper).

Amounts in millions of dollars unless otherwise specified.

Our operating segments are comprised of similar product categories. Operating segments that individually accounted for 5% or more of consolidated net sales are as follows:



	% of Net sales by operating segment ⁽¹⁾
	Three Months Ended September 30
	2019	2018
Fabric Care	23%	23%
Baby Care	11%	12%
Home Care	10%	10%
Hair Care	10%	10%
Skin and Personal Care	10%	9%
Family Care	9%	9%
Oral Care	7%	8%
Shave Care	7%	8%
Feminine Care	6%	6%
Personal Health Care	5%	3%
Other	2%	2%
Total	100%	100%


⁽¹⁾	% of Net sales by operating segment excludes sales held in Corporate.

Following is a summary of reportable segment results:



		Three Months Ended September 30
		Net Sales		Earnings/(Loss) Before Income Taxes			Net Earnings
Beauty	2019	$	3,552	$	1,092		$	874
	2018	3,289		947			759
Grooming	2019	1,531		426			353
	2018	1,562		417			340
Health Care	2019	2,221		540			401
	2018	1,845		440			332
Fabric & Home Care	2019	5,832		1,338			1,028
	2018	5,488		1,144			877
Baby, Feminine & Family Care	2019	4,567		1,134			871
	2018	4,390		902			692
Corporate	2019	95		(187		)	90
	2018	116		90			211
Total Company	2019	$	17,798	$	4,343		$	3,617
	2018	16,690		3,940			3,211

Amounts in millions of dollars unless otherwise specified.

4. Goodwill and Other Intangible Assets

Goodwill is allocated by reportable segment as follows:



	Beauty			Grooming			Health Care			Fabric & Home Care			Baby, Feminine & Family Care			Total Company
Goodwill at June 30, 2019	$	12,985		$	12,881		$	7,972		$	1,855		$	4,580		$	40,273
Acquisitions and divestitures	(1		)	—			(53		)	—			—			(54		)
Translation and other	(222		)	(159		)	(153		)	(18		)	(62		)	(614		)
Goodwill at September 30, 2019	$	12,762		$	12,722		$	7,766		$	1,837		$	4,518		$	39,605

Goodwill from current year acquisitions and divestitures primarily reflects opening balance sheet adjustments from the prior year acquisition of the over-the-counter (OTC) healthcare business of Merck KGaA (Merck OTC) in the Health Care reportable segment (see Note 12), along with adjustments from a prior year Beauty acquisition.

Identifiable intangible assets at September 30, 2019 were comprised of:



	Gross Carrying Amount		Accumulated Amortization
Intangible assets with determinable lives	$	8,452	$	(5,443	)
Intangible assets with indefinite lives	20,993		—
Total identifiable intangible assets	$	29,445	$	(5,443	)

Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives consist of brands. The amortization expense of determinable lived intangible assets for the three months ended September 30, 2019 and 2018 was $96 and $73, respectively.

Goodwill and indefinite lived intangible assets are not amortized, but are tested annually for impairment. The test to evaluate goodwill for impairment is a two-step process. In the first step, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, we perform a second step (the step two testing) to determine the implied fair value of the reporting unit's goodwill. The step two testing of the impairment analysis requires a valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the resulting implied fair value of the reporting unit's goodwill is less than its carrying value, that difference represents an impairment.

The business unit valuations used to test goodwill and intangible assets for impairment are dependent on a number of significant estimates and assumptions, including macroeconomic conditions, overall category growth rates, competitive activities, cost containment, margin expansion and Company business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. Our annual impairment testing for goodwill and indefinite lived intangible assets occurs during the three months ended December 31.

Most of our goodwill reporting units are comprised of a combination of legacy and acquired businesses and as a result have fair value cushions that, at a minimum, exceed two times their underlying carrying values. Certain of our goodwill reporting units, in particular Shave Care and Appliances, are comprised entirely of acquired businesses and as a result, have fair value cushions that are not as high. The Appliances wholly-acquired reporting unit has a fair value that significantly exceeds the underlying carrying value. As previously disclosed, the carrying value of the Shave Care reporting unit and the related Gillette indefinite-lived intangible asset were impaired during the year ended June 30, 2019. The underlying reductions in fair values were due in large part to significant currency devaluations in a number of countries relative to the U.S. dollar, a deceleration of category growth caused by changing grooming habits, primarily in the developed markets, and an increased competitive market environment in the U.S. and certain other markets. As a result of the impairment determined by the step two testing, the Shave Care fair value exceeded the carrying value by approximately 20% as of June 30, 2019. Because the impairment testing for intangible assets is a one step process, the Gillette indefinite-lived intangible asset fair value approximated its carrying value at that date. As a result, the Gillette indefinite-lived intangible asset is more susceptible to future impairment risk.

Amounts in millions of dollars unless otherwise specified.

The most significant assumptions utilized in the determination of the estimated fair values of Shave Care reporting unit and the Gillette indefinite-lived intangible asset are the net sales and earnings growth rates (including residual growth rates) and discount rate. The residual growth rate represents the expected rate at which the reporting unit and Gillette brand are expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimates is consistent with the reporting unit and brand operating plans, and approximates expected long term category market growth rates. The residual growth rate is dependent on overall market growth rates, the competitive environment, inflation, relative currency exchange rates and business activities that impact market share. As a result, the residual growth rate could be adversely impacted by a sustained deceleration in category growth, grooming habit changes, devaluation of currencies against the U.S. dollar or an increased competitive environment. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other country specific factors, such as further devaluation of currencies against the U.S. dollar. Based on developments in the macroeconomic environment during the quarter ended September 30, 2019, the discount rate utilized in our annual impairment testing for goodwill and indefinite lived intangible assets during the three months ended December 31 will likely decline, resulting in an increase in the implied fair value estimates. Spot rates as of the fair value measurement date are utilized in our fair value estimates for cash flows outside the U.S.

While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit's goodwill and indefinite-lived intangibles. As of September 30, 2019, the carrying values of the Shave Care goodwill and the Gillette indefinite-lived intangible asset were $12.4 billion and $14.1 billion, respectively.

The table below provides a sensitivity analysis for the Shave Care reporting unit and the Gillette indefinite lived intangible asset, utilizing reasonably possible changes in the assumptions for the shorter term and residual growth rates and the discount rate, to demonstrate the potential impacts to the estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to a 25 basis point increase to discount rate or a 25 basis point decrease to our shorter-term and residual growth rates.



	Approximate Percent Change in Estimated Fair Value
	+25 bps Discount Rate		-25 bps Growth Rate
Shave Care goodwill reporting unit	(5	)%	(6	)%
Gillette indefinite-lived intangible asset	(5	)%	(5	)%

Amounts in millions of dollars unless otherwise specified.

5. Earnings Per Share

Basic net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble less preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share are calculated using the treasury stock method, on the basis of the weighted average number of common shares outstanding plus the dilutive effect of stock options and other stock-based awards and the assumed conversion of preferred stock.

Net earnings per share were as follows:



CONSOLIDATED AMOUNTS	Three Months Ended September 30
	2019			2018
Net earnings	$	3,617		$	3,211
Less: Net earnings attributable to noncontrolling interests	24			12
Net earnings attributable to P&G (Diluted)	3,593			3,199
Preferred dividends	(65		)	(66		)
Net earnings attributable to P&G available to common shareholders (Basic)	$	3,528		$	3,133

SHARES IN MILLIONS
Basic weighted average common shares outstanding	2,504.0			2,495.8
Add: Effect of dilutive securities
Conversion of preferred shares ⁽¹⁾	87.4			91.9
Impact of stock options and other unvested equity awards ⁽²⁾	56.1			24.4
Diluted weighted average common shares outstanding	2,647.5			2,612.1

NET EARNINGS PER SHARE ⁽³⁾
Basic	$	1.41		$	1.26
Diluted	$	1.36		$	1.22


⁽¹⁾	Despite being included currently in Diluted net earnings per common share, the actual conversion to common stock occurs when the preferred shares are sold. Shares may only be sold after being allocated to the ESOP participants pursuant to the repayment of the ESOP's obligations through 2035.

⁽²⁾

Weighted average outstanding stock options of approximately 1 million and 69 million for the three months ended September 30, 2019 and 2018 were not included in the Diluted net earnings per share calculation because the options were out of the money or to do so would have been antidilutive (i.e., the total proceeds upon exercise would have exceeded the market value of the underlying common shares).


⁽³⁾	Net earnings per share are calculated on Net earnings attributable to Procter & Gamble.

6. Share-Based Compensation and Postretirement Benefits

The following table provides a summary of our share-based compensation expense and postretirement benefit costs:



	Three Months Ended September 30
	2019			2018
Share-based compensation expense	$	110		$	102
Net periodic benefit cost for pension benefits ⁽¹⁾	40			28
Net periodic benefit cost/(credit) for other retiree benefits ⁽¹⁾	(52		)	(41		)


⁽¹⁾	The components of the total net periodic benefit cost for both pension benefits and other retiree benefits for these interim periods, on an annualized basis, do not differ materially from the amounts disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Amounts in millions of dollars unless otherwise specified.

7. Risk Management Activities and Fair Value Measurements

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. There have been no significant changes in our risk management policies or activities during the three months ended September 30, 2019.

The Company has not changed its valuation techniques used in measuring the fair value of any financial assets and liabilities during the period. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented. There were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis for the three months ended September 30, 2019.

Other investments had a fair value of $62 and $169 as of September 30, 2019 and June 30, 2019, respectively, and are presented in Other noncurrent assets. During the three months ended September 30, 2019, the Company sold all of its existing U.S. government securities and corporate bond securities. Such securities were presented in Available-for-sale investment securities at June 30, 2019, and had fair values of $3,648 and $2,400, respectively. The Company's investments measured at fair value are generally classified as Level 2 within the fair value hierarchy. Cash equivalents were $7,955 and $2,956 as of September 30, 2019 and June 30, 2019, respectively, and are classified as Level 1 within the fair value hierarchy. There are no other material investment balances classified as Level 1 or Level 3 within the fair value hierarchy, or using net asset value as a practical expedient. Fair values are generally estimated based upon quoted market prices for similar instruments.

The fair value of long-term debt was $25,196 and $25,378 as of September 30, 2019 and June 30, 2019, respectively. This includes the current portion of debt instruments ($3,291 and $3,390 as of September 30, 2019 and June 30, 2019, respectively). Certain long-term debt (debt designated as a fair value hedge) is recorded at fair value. All other long-term debt is recorded at amortized cost, but is measured at fair value for disclosure purposes. We consider our debt to be Level 2 in the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

Disclosures about Financial Instruments

The notional amounts and fair values of financial instruments used in hedging transactions as of September 30, 2019 and June 30, 2019 are as follows:



	Notional Amount				Fair Value Asset				Fair Value (Liability)
	September 30, 2019		June 30, 2019		September 30, 2019		June 30, 2019		September 30, 2019			June 30, 2019
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
Interest rate contracts	$	7,524	$	7,721	$	266	$	177	$	—		$	(1	)
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
Foreign currency interest rate contracts	$	3,309	$	3,157	$	104	$	35	$	(16	)	$	(24	)
TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS	$	10,833	$	10,878	$	370	$	212	$	(16	)	$	(25	)

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
Foreign currency contracts	$	6,196	$	6,431	$	19	$	27	$	(49	)	$	(20	)

TOTAL DERIVATIVES AT FAIR VALUE	$	17,029	$	17,309	$	389	$	239	$	(65	)	$	(45	)

All derivative assets are presented in Prepaid expenses and other current assets or Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities or Other noncurrent liabilities.

The fair value of the interest rate derivative asset/liability directly offsets the cumulative amount of the fair value hedging adjustment included in the carrying amount of the underlying debt obligation. The carrying amount of the underlying debt obligation, which includes the unamortized discount or premium and the fair value adjustment, was $7,756 and $7,860 as of September 30, 2019 and June 30, 2019, respectively. In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The carrying value of those debt instruments designated as net investment hedges, which includes the adjustment for the foreign currency transaction gain or loss on those instruments, was $16,995 and $17,154 as of September 30, 2019 and June 30, 2019, respectively. Changes in the fair value of net investment hedges are recognized in the Foreign Currency Translation component of Other comprehensive income (OCI). All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.

Amounts in millions of dollars unless otherwise specified.

Before tax gains/(losses) on our financial instruments in hedging relationships are categorized as follows:



	Amount of Gain/(Loss) Recognized in OCI on Derivatives
	Three Months Ended September 30
	2019		2018
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS ^{(1) (2)}
Foreign exchange contracts	$	113	$	(43	)


⁽¹⁾	For the derivatives in net investment hedging relationships, the amount of gain/(loss) excluded from effectiveness testing, which was recognized in earnings, was $19 and $14 for the three months ended September 30, 2019 and 2018, respectively.


⁽²⁾	In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The amount of gain/(loss) recognized in Accumulated other comprehensive income/(loss) (AOCI) for such instruments was $609 and $207, for the three months ended September 30, 2019 and 2018, respectively.



	Amount of Gain/(Loss) Recognized in Earnings
	Three Months Ended September 30
	2019			2018
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
Interest rate contracts	$	90		$	(24	)
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
Foreign currency contracts	$	(97	)	$	(2	)

The gain/(loss) on the derivatives in fair value hedging relationships is fully offset by the mark-to-market impact of the related exposure. These are both recognized in the Consolidated Statements of Earnings in Interest expense. The gain/(loss) on derivatives not designated as hedging instruments is substantially offset by the currency mark-to-market of the related exposure. These are both recognized in the Consolidated Statements of Earnings in Selling, general and administrative expense (SG&A).

8. Accumulated Other Comprehensive Income/(Loss)

The table below presents the changes in AOCI, including the reclassifications out of AOCI by component:




	Investment Securities			Pension and Other Retiree Benefits			Foreign Currency Translation			Total AOCI
Balance at June 30, 2019	$	11		$	(4,198	)	$	(10,749	)	$	(14,936	)
OCI before reclassifications ⁽¹⁾	(3		)	104			(540		)	(439		)
Amounts reclassified from AOCI into the Consolidated Statements of Earnings ⁽²⁾	(2		)	75			—			73
Net current period OCI	(5		)	179			(540		)	(366		)
Less: Other comprehensive income/(loss) attributable to non-controlling interests	—			—			(4		)	(4		)
Balance at September 30, 2019	$	6		$	(4,019	)	$	(11,285	)	$	(15,298	)


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


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

The below provides additional details on amounts reclassified from AOCI into the Consolidated Statements of Earnings:


•	Investment securities: amounts reclassified from AOCI into Other non-operating income, net.


•	Pension and other retiree benefits: amounts reclassified from AOCI into Other non-operating income, net and included in the computation of net periodic postretirement costs.

Amounts in millions of dollars unless otherwise specified.

9. Restructuring Program

The Company has historically incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Before-tax costs incurred under the ongoing program have generally ranged from $250 to $500 annually.

In fiscal 2017 the Company announced specific elements of a multi-year productivity and cost savings plan to further reduce costs in the areas of supply chain, certain marketing activities and overhead expenses. This program is expected to result in incremental enrollment reductions, along with further optimization of the supply chain and other manufacturing processes.

Restructuring costs incurred consist primarily of costs to separate employees, asset-related costs to exit facilities and other costs. For the three month period ended September 30, 2019, the Company incurred total restructuring charges of $93. Approximately $70 of these charges were recorded in Cost of products sold and approximately $22 of these charges were recorded in SG&A. The remainder of these charges were recorded in Other non-operating income, net. The following table presents restructuring activity for the three months ended September 30, 2019:



	Reserve Balance		Three Months Ended September 30, 2019								Reserve Balance
	June 30, 2019		Charges		Cash Spent			Charges Against Assets			September 30, 2019
Separations	$	280	$	34	$	(60	)	$	—		$	254
Asset-related costs	—		45		—			(45		)	—
Other costs	188		14		(25		)	—			177
Total	$	468	$	93	$	(85	)	$	(45	)	$	431

Separation Costs

Employee separation charges for the three month period ended September 30, 2019 relate to severance packages for approximately 180 employees. The packages were primarily voluntary and the amounts were calculated based on salary levels and past service periods. Severance costs related to voluntary separations are generally charged to earnings when the employee accepts the offer.

Asset-Related Costs

Asset-related costs consist of both asset write-downs and accelerated depreciation. Asset write-downs relate to the establishment of a new fair value basis for assets held-for-sale or disposal. These assets were written down to the lower of their current carrying basis or amounts expected to be realized upon disposal, less minor disposal costs. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period. These assets relate primarily to manufacturing consolidations and technology standardizations. The asset-related charges will not have a significant impact on future depreciation charges.

Other Costs

Other restructuring-type charges are incurred as a direct result of the restructuring program. Such charges primarily include asset removal and termination of contracts related to supply chain optimization.

Consistent with our historical policies for ongoing restructuring-type activities, the restructuring program charges are funded by and included within Corporate for both management and segment reporting. Accordingly, all of the charges under the program are included within the Corporate reportable segment. However, for informative purposes, the following table summarizes the total restructuring costs related to our reportable segments:



	Three Months Ended September 30, 2019
Beauty	$	8
Grooming	18
Health Care	12
Fabric & Home Care	4
Baby, Feminine & Family Care	20
Corporate ⁽¹⁾	31
Total Company	$	93


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

Amounts in millions of dollars unless otherwise specified.

10. Leases

The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. We lease certain real estate, machinery, equipment, vehicles and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included within the lease term when it has become reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate our lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. The Company does not have any material financing lease or sublease activities.

The Company incurred lease expense for operating leases of $85 for the three months ended September 30, 2019. Total cash paid related to leases during the three months ended September 30, 2019 was $71, including amounts expensed and amounts capitalized. Commitments related to finance leases are not material. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the Consolidated Balance Sheets. Lease expense for such short-term leases is not material. The most significant assets in our leasing portfolio relate to real estate and vehicles. For purposes of calculating lease liabilities for such leases, we have combined lease and non-lease components.

The right-of-use assets obtained in exchange for new lease liabilities was $9 for the three months ended September 30, 2019.

Supplemental balance sheet and other information related to leases is as follows:



	September 30, 2019
Operating leases:
Other noncurrent assets	$	887

Accrued and other liabilities	263
Other noncurrent liabilities	630
Total operating lease liabilities	$	893

Weighted average remaining lease term:
Operating leases	7 years

Weighted average discount rate:
Operating leases	4.3		%

At September 30, 2019, future payments of operating lease liabilities were as follows:



	Operating Leases
	September 30, 2019
1 year	$	263
2 years	177
3 years	158
4 years	134
5 years	114
Over 5 years	218
Total lease payments	1,064
Less: Interest	(171		)
Present value of lease liabilities	$	893

Amounts in millions of dollars unless otherwise specified.

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



	Operating Leases
	June 30, 2019
2020	$	263
2021	209
2022	165
2023	141
2024	121
After 2024	244
Total lease payments	$	1,143

11. Commitments and Contingencies

Litigation

We are subject, from time to time, to certain legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising, contracts, environmental, patent and trademark matters, labor and employment matters and tax. While considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.

We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will materially affect our financial position, results of operations or cash flows.

Income Tax Uncertainties

The Company is present in approximately 70 countries and over 150 taxable jurisdictions and, at any point in time, has 40–50 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2008 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12 month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued existing liabilities of approximately $140, including interest and penalties.

Additional information on the Commitments and Contingencies of the Company can be found in our Annual Report on Form 10-K for the year ended June 30, 2019.

Amounts in millions of dollars unless otherwise specified.

12. Merck Acquisition

On November 30, 2018, we completed our acquisition of the over the counter (OTC) healthcare business of Merck KGaA (Merck OTC) for $3.7 billion (based on exchange rates at the time of closing) in an all-cash transaction. This business primarily sells OTC consumer healthcare products, mainly in Europe, Latin America and Asia markets. The results of Merck OTC, which are not material to the Company, are reported in our consolidated financial statements beginning December 1, 2018.

The following table presents the preliminary allocation of purchase price related to the Merck OTC business as of the date of acquisition. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on final determination of fair values of the assets and liabilities acquired, which will be finalized during the quarter ended December 31, 2019, as we complete our analysis of the underlying assets and acquired liabilities, such as pensions, litigation cases, environmental issues and tax positions.



Amounts in millions	November 30, 2018
Current assets	$	420
Property, plant and equipment	121
Intangible assets	2,134
Goodwill	2,085
Other non-current assets	209
Total assets acquired	$	4,969

Current liabilities	$	233
Deferred income taxes	764
Non-current liabilities	95
Total liabilities acquired	$	1,092

Noncontrolling interest ⁽¹⁾	$	169

Net assets acquired	$	3,708


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

The acquisition resulted in $2.1 billion in goodwill, of which approximately $180 million is expected to be deductible for tax purposes. All of this goodwill was allocated to the Health Care Segment.

We have preliminarily estimated the fair value of Merck OTC’s identifiable intangible assets as $2.1 billion. The preliminary allocation of identifiable intangible assets and their average useful lives is as follows:



Amounts in millions	Estimated Fair Value		Avg Remaining Useful Life
Intangible assets with determinable lives
Brands	$	701	14
Patents and technology	162		10
Customer relationships	325		20
Total	$	1,188	15

Intangible assets with indefinite lives
Brands	946
Total intangible assets	$	2,134

Amounts in millions of dollars unless otherwise specified.

The majority of the intangible valuation relates to brand intangibles. Our preliminary assessment as to brand intangibles that have an indefinite life and those that have a definite life was based on a number of factors, including competitive environment, market share, brand history, product life cycles, operating plan and the macroeconomic environment of the countries in which the brands are sold. The indefinite-lived brand intangibles include Neurobion and Dolo Neurobion. The definite-lived brand intangibles primarily include regional or local brands. The definite-lived brand intangibles have estimated lives ranging from 10 to 20 years. The technology intangibles are related to R&D and manufacturing know-how; these intangibles have a 10 year estimated life. The customer relationships intangibles have a 20 year estimated life and reflect the historical and projected attrition rates for Merck OTC’s relationships with health care professionals, retailers and distributors.



Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors,” and "Notes 4 and 11 to the Consolidated Financial Statements." These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise.

Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility; (2) the ability to successfully manage local, regional or global economic volatility, including reduced market growth rates, and to generate sufficient income and cash flow to allow the Company to affect the expected share repurchases and dividend payments; (3) the ability to manage disruptions in credit markets or changes to our credit rating; (4) the ability to maintain key manufacturing and supply arrangements (including execution of supply chain optimizations and sole supplier and sole manufacturing plant arrangements) and to manage disruption of business due to factors outside of our control, such as natural disasters and acts of war or terrorism; (5) the ability to successfully manage cost fluctuations and pressures, including prices of commodities and raw materials, and costs of labor, transportation, energy, pension and healthcare; (6) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to changing consumer habits and technological advances attained by, and patents granted to, competitors; (7) the ability to compete with our local and global competitors in new and existing sales channels, including by successfully responding to competitive factors such as prices, promotional incentives and trade terms for products; (8) the ability to manage and maintain key customer relationships; (9) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, ingredients, efficacy or similar matters that may arise; (10) the ability to successfully manage the financial, legal, reputational and operational risk associated with third-party relationships, such as our suppliers, contract manufacturers, distributors, contractors and external business partners; (11) the ability to rely on and maintain key company and third party information technology systems, networks and services, and maintain the security and functionality of such systems, networks and services and the data contained therein; (12) the ability to successfully manage uncertainties related to changing political conditions (including the United Kingdom’s decision to leave the European Union) and potential implications such as exchange rate fluctuations and market contraction; (13) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, product and packaging composition, intellectual property, antitrust, data protection, tax, environmental, and accounting and financial reporting) and to resolve pending matters within current estimates; (14) the ability to manage changes in applicable tax laws and regulations including maintaining our intended tax treatment of divestiture transactions; (15) the ability to successfully manage our ongoing acquisition, divestiture and joint venture activities, in each case to achieve the Company’s overall business strategy and financial objectives, without impacting the delivery of base business objectives; and (16) the ability to successfully achieve productivity improvements and cost savings and manage ongoing organizational changes, while successfully identifying, developing and retaining key employees, including in key growth markets where the availability of skilled or experienced employees may be limited. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from those projected herein, is included in the section titled “Economic Conditions and Uncertainties” and the section titled “Risk Factors” (Part II, Item 1A) of this Form 10-Q.

The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes.

The MD&A is organized in the following sections:


•	Overview


•	Summary of Results – Three Months Ended September 30, 2019


•	Economic Conditions and Uncertainties


•	Results of Operations – Three Months Ended September 30, 2019


•	Business Segment Discussion – Three Months Ended September 30, 2019


•	Liquidity and Capital Resources


•	Reconciliation of Measures Not Defined by U.S. GAAP

Throughout the MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (Core EPS), adjusted free cash flow and adjusted free cash flow productivity. The explanation at the end of the MD&A provides the definition of these non-GAAP measures as well as details on the use and the derivation of these measures.

Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in the MD&A are based on a combination of vendor purchased traditional brick-and-mortar and online data in key markets as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category. The Company measures fiscal-year-to-date market shares through the most recent period for which market share data is available, which typically reflects a lag time of one or two months.

OVERVIEW

P&G is a global leader in the fast-moving consumer goods industry, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than 180 countries and territories, primarily through mass merchandisers, e-commerce, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, baby stores, specialty beauty stores, high-frequency stores and pharmacies. We also sell direct to consumers. We have on-the-ground operations in approximately 70 countries.

Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.

The table below provides detail on our reportable segments, including the product categories and brand composition within each segment.



Reportable Segments