|
|
|
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 10 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. 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:
|
|
•
|
Summary of Results –
Six
Months Ended
December 31, 2016
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations – Three and
Six
Months Ended
December 31, 2016
|
|
|
•
|
Business Segment Discussion – Three and
Six
Months Ended
December 31, 2016
|
|
|
•
|
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-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.
OVERVIEW
P&G is a global leader in fast-moving consumer goods, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than
180
countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores and pharmacies. We have on-the-ground operations in approximately
70
countries.
Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.
The table below provides detail on our reportable segments, including the product categories and brand composition within each segment.
|
|
|
|
Reportable Segments
|
Product Categories (Sub-Categories)
|
Major Brands
|
Beauty
|
Hair Care (
Conditioner, Shampoo, Styling Aids, Treatments
)
|
Head & Shoulders, Pantene, Rejoice
|
Skin and Personal Care (
Antiperspirant and Deodorant, Personal Cleansing, Skin Care
)
|
Olay, Old Spice, Safeguard, SK-II
|
Grooming
|
Grooming
(1)
(Shave Care -
Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care;
Appliances)
|
Braun, Fusion, Gillette, Mach3, Prestobarba, Venus
|
Health Care
|
Oral Care (
Toothbrushes, Toothpaste, Other Oral Care
)
|
Crest, Oral-B
|
Personal Health Care (
Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care
)
|
Prilosec, Vicks
|
Fabric & Home Care
|
Fabric Care (
Fabric Enhancers, Laundry Additives, Laundry Detergents
)
|
Ariel, Downy, Gain, Tide
|
Home Care (
Air Care, Dish Care, P&G Professional, Surface Care
)
|
Cascade, Dawn, Febreze, Mr. Clean, Swiffer
|
Baby, Feminine & Family Care
|
Baby Care (
Baby Wipes, Diapers and Pants
)
|
Luvs, Pampers
|
Feminine Care (
Adult Incontinence, Feminine Care
)
|
Always, Tampax
|
Family Care (
Paper Towels, Tissues, Toilet Paper
)
|
Bounty, Charmin
|
|
|
(1)
|
The Grooming product category is comprised of the Shave Care and Appliances Global Business Units.
|
The following table provides the percentage of net sales and net earnings by reportable business segment for the three and
six
months ended
December 31, 2016
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31
|
|
Six Months Ended December 31
|
|
Net Sales
|
|
Net Earnings
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
18%
|
|
19%
|
|
18%
|
|
20%
|
Grooming
|
11%
|
|
16%
|
|
10%
|
|
16%
|
Health Care
|
12%
|
|
15%
|
|
12%
|
|
13%
|
Fabric & Home Care
|
31%
|
|
26%
|
|
32%
|
|
26%
|
Baby, Feminine & Family Care
|
28%
|
|
24%
|
|
28%
|
|
25%
|
Total Company
|
100%
|
|
100%
|
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
six
months ended
December 31, 2016
versus the
six
months ended
December 31, 2015
:
|
|
•
|
Net sales
were unchanged versus the previous period at
$33.4 billion
. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange,
increased 2%
. Organic sales increased
3%
in Beauty,
2%
in Grooming,
7%
in Health Care,
3%
in Fabric & Home Care and
2%
in Baby, Feminine & Family Care.
|
|
|
•
|
Unit volume
increased 1%
with organic volume
up 2%
. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care, Baby, Feminine & Family Care and Grooming. Volume decreased low single digits in Beauty. Excluding the impacts of minor brand divestitures, organic volume increased low single digits in Beauty.
|
|
|
•
|
Net earnings from continuing operations were
$5.4 billion
,
a decrease of $246 million, or 4%
versus the prior year period. This decrease was driven by an increase in other non-operating expense due to a charge related to early extinguishment of certain long-term debt, partially offset by a lower effective tax rate.
|
|
|
•
|
Diluted net earnings per share from continuing operations
decreased 2% to
$1.93
.
|
|
|
•
|
Net earnings attributable to Procter & Gamble were
$10.6 billion
,
an increase of $4.8 billion or 82%
versus the prior year period, driven by the
$5.3 billion
after-tax gain on the sale of the Beauty Brands in the current period.
|
|
|
•
|
Core net earnings, which excludes discontinued operations, the charge related to early extinguishment of certain long-term debt and incremental restructuring charges, increased 1% to $5.9 billion. Core net earnings per share
increased 4% to
$2.11
due to the increase in core net earnings and the reduction in shares outstanding from shares tendered in the divestiture of the Beauty Brands to Coty.
|
|
|
•
|
Operating cash flow was
$6.0 billion
. Adjusted free cash flow, which is operating cash flow less capital expenditures and excluding tax payments related to the sale of the Beauty Brands, was
$4.7 billion
. Adjusted free cash flow productivity, which is the ratio of free cash flow to net earnings excluding a loss on early debt extinguishment and the gain on sale of the Beauty business, was
83%
.
|
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions.
Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies, greater political unrest in the Middle East and Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets and economic slowdowns in Japan and China, could reduce our sales or erode our operating margin, in either case reducing our earnings.
Changes in Costs.
Our costs are subject to fluctuations, particularly due to changes in commodity prices and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins, and volatility in the market price of these commodity input materials has a direct impact on our costs. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross margin, operating margin and net earnings. Sales could also be adversely impacted following pricing actions if there is a negative impact on consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including outsourcing projects, supply chain optimization and general overhead and workforce optimization. As discussed later in this MD&A, we initiated certain non-manufacturing overhead reduction projects along with manufacturing and other supply chain cost improvements projects in 2012. If we are not successful in executing and sustaining these changes, there could be a negative impact on our operating margin and net earnings.
Foreign Exchange.
We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. Over the past four years, the U.S. dollar has strengthened versus a number of foreign currencies leading to lower sales and earnings from these foreign exchange impacts. Certain countries experiencing significant exchange rate fluctuations, like Argentina, Egypt, Japan, Nigeria, and the United Kingdom have had, and could continue to have, a significant impact on our sales, costs and earnings. Increased pricing in response to these fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on consumption of our products, which would affect our sales.
Government Policies.
Our net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. Additionally, we attempt to carefully manage our debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Egypt, Nigeria and Ukraine. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings. For example, during fiscal 2015, the Company deconsolidated its Venezuelan subsidiaries due to evolving conditions that resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and restricted our ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars.
For information on risk factors that could impact our results, refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.
RESULTS OF OPERATIONS – Three Months Ended
December 31, 2016
The following discussion provides a review of results for the three months ended
December 31, 2016
versus the three months ended
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31
|
Amounts in millions, except per share amounts
|
2016
|
|
2015
|
|
% Chg
|
Net sales
|
$
|
16,856
|
|
|
$
|
16,915
|
|
|
—
|
%
|
Operating income
|
3,875
|
|
|
3,853
|
|
|
1
|
%
|
Net earnings from continuing operations
|
2,561
|
|
|
2,905
|
|
|
(12
|
)%
|
Net earnings from discontinued operations
|
5,335
|
|
|
323
|
|
|
1,552
|
%
|
Net earnings attributable to Procter & Gamble
|
7,875
|
|
|
3,206
|
|
|
146
|
%
|
Diluted net earnings per common share
|
2.88
|
|
|
1.12
|
|
|
157
|
%
|
Diluted net earnings per share from continuing operations
|
0.93
|
|
|
1.01
|
|
|
(8
|
)%
|
Core net earnings per common share
|
1.08
|
|
|
1.04
|
|
|
4
|
%
|
|
|
Three Months Ended December 31
|
COMPARISONS AS A % OF NET SALES
|
2016
|
|
2015
|
|
Basis Pt Chg
|
Gross profit
|
50.8%
|
|
50.0%
|
|
80
|
Selling, general & administrative expense
|
27.8%
|
|
27.2%
|
|
60
|
Operating income
|
23.0%
|
|
22.8%
|
|
20
|
Earnings from continuing operations before income taxes
|
19.3%
|
|
22.5%
|
|
(320)
|
Net earnings from continuing operations
|
15.2%
|
|
17.2%
|
|
(200)
|
Net earnings attributable to Procter & Gamble
|
46.7%
|
|
19.0%
|
|
2,770
|
Net Sales
Net sales for the quarter
were unchanged versus the previous period at
$16.9 billion
. Unit volume
increased 1%
. Unfavorable foreign exchange reduced net sales by 2%. Pricing and mix had no net impact on consolidated net sales. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care, Baby, Feminine & Family Care and Grooming. Volume decreased low single digits in Beauty driven by minor brand divestitures. Volume increased low single digits in developed regions and was unchanged in developing regions. Organic sales increased
2%
driven by a
2%
increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2016 vs. 2015 (Three Months Ended December 31)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
(1)%
|
|
2%
|
|
(2)%
|
|
(1)%
|
|
2%
|
|
1%
|
|
(1)%
|
Grooming
|
3%
|
|
4%
|
|
(2)%
|
|
1%
|
|
(4)%
|
|
1%
|
|
(1)%
|
Health Care
|
4%
|
|
4%
|
|
(2)%
|
|
1%
|
|
2%
|
|
—%
|
|
5%
|
Fabric & Home Care
|
1%
|
|
2%
|
|
(2)%
|
|
(1)%
|
|
—%
|
|
1%
|
|
(1)%
|
Baby, Feminine & Family Care
|
2%
|
|
3%
|
|
(2)%
|
|
(1)%
|
|
(1)%
|
|
1%
|
|
(1)%
|
Total Company
|
1%
|
|
2%
|
|
(2)%
|
|
—%
|
|
—%
|
|
1%
|
|
—%
|
* 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
increased 80 basis points to 50.8%
of net sales for the quarter. Gross margin increased primarily due to a 210 basis point positive impact from manufacturing cost savings, a 10 basis point benefit from lower incremental restructuring charges and a 10 basis point benefit from volume scale leverage. These impacts were partially offset by a 50 basis point negative impact from unfavorable foreign exchange, a 30 basis point decrease due to higher commodity costs, a 40 basis point decline from unfavorable product mix (among segments caused by the net sales decline in Beauty, which has higher than company-average gross margins, and within segments primarily due to Grooming, which had disproportionate growth of developing regions, which have lower than segment-average margins), and a 30 basis point impact from lower pricing.
Total SG&A spending
increased 2% to $4.7 billion
primarily due to increased marketing activities. SG&A as a percentage of net sales
increased 60 basis points to 27.8%
primarily due to marketing spending as a percentage of net sales, which increased 90 basis points due to an increase in advertising and other activities, partially offset by a gain on a sale of real estate.
Non-Operating Expenses and Income
Interest expense was
$122 million
for the quarter,
a decrease of $21 million
versus the prior year period, due to a decrease in weighted average interest rates and a decline in the average debt outstanding. Interest income was
$42 million
for the quarter,
a decrease of $16 million
versus the prior year period due to a decrease in interest-bearing cash and cash equivalents. Other non-operating income/(loss) was
$(539) million
,
a decrease of $574 million
, primarily due to a $543 million charge related to early extinguishment of certain long-term debt during the quarter.
Income Taxes on Continuing Operations
The effective tax rate on continuing operations decreased
230
basis points to
21.3%
. The decline was due primarily to 300 basis points of favorable discrete impacts related to uncertain income tax positions from the resolution of matters in various jurisdictions (which netted to 380 basis points in the current year versus 80 basis points in the prior year) and a 210 basis point impact from the early extinguishment of debt. These benefits were partially offset by unfavorable geographic mix, primarily due to a higher proportion of U.S. earnings.
Net Earnings from Continuing Operations
Net earnings from continuing operations
decreased $344 million or 12% to $2.6 billion for the quarter.
This decrease was primarily driven by a $345 million after-tax charge related to early extinguishment of long-term debt during the quarter partially offset by a lower effective tax rate. Operating income was up 1%. Foreign exchange impacts reduced net earnings by about $130 million for the quarter due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Egypt, Nigeria and the United Kingdom. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations
decreased 8% to $0.93
due to the decrease in net earnings. The difference between the decrease in net earnings from continuing operations and the decrease in the related earnings per share was due to a reduction in number of weighted average shares outstanding following the shares tendered in the sale of the Beauty Brands to Coty (see Note 11 to the Consolidated Financial Statements).
Discontinued Operations
Net earnings from discontinued operations increased
$5.0 billion
to
$5.3 billion
in the current period versus
$323 million
in the prior period. This change was driven by the $5.3 billion after-tax gain on the sale of the Beauty Brands in the current period, partially offset by reduced net earnings from the businesses in discontinued operations following divestitures (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble
increased $4.7 billion or 146% to $7.9 billion for the quarter.
The increase was driven by the gain on the sale of the Beauty Brands, partially offset by the charge related to the early extinguishment of debt, both discussed above. Diluted net earnings per share
increased 157% to $2.88
. The difference between the increase in net earnings from continuing operations and the increase in the related earnings per share was due to the reduction in weighted average shares outstanding discussed above. Core net earnings per share
increased 4% to $1.08
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding the charge related to early extinguishment of long-term debt and incremental restructuring charges related to our productivity and cost savings plans.
RESULTS OF OPERATIONS – Six Months Ended
December 31, 2016
The following discussion provides a review of results for the six months ended
December 31, 2016
versus the six months ended
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31
|
Amounts in millions, except per share amounts
|
2016
|
|
2015
|
|
% Chg
|
Net sales
|
$
|
33,374
|
|
|
$
|
33,442
|
|
|
—
|
%
|
Operating income
|
7,646
|
|
|
7,621
|
|
|
—
|
%
|
Net earnings from continuing operations
|
5,436
|
|
|
5,682
|
|
|
(4
|
)%
|
Net earnings from discontinued operations
|
5,217
|
|
|
181
|
|
|
2,782
|
%
|
Net earnings attributable to Procter & Gamble
|
10,589
|
|
|
5,807
|
|
|
82
|
%
|
Diluted net earnings per common share
|
3.81
|
|
|
2.03
|
|
|
88
|
%
|
Diluted net earnings per share from continuing operations
|
1.93
|
|
|
1.97
|
|
|
(2
|
)%
|
Core net earnings per common share
|
2.11
|
|
|
2.02
|
|
|
4
|
%
|
|
|
Six Months Ended December 31
|
COMPARISONS AS A % OF NET SALES
|
2016
|
|
2015
|
|
Basis Pt Chg
|
Gross profit
|
50.9%
|
|
50.3%
|
|
60
|
Selling, general & administrative expense
|
27.9%
|
|
27.5%
|
|
40
|
Operating income
|
22.9%
|
|
22.8%
|
|
10
|
Earnings from continuing operations before income taxes
|
21.0%
|
|
22.3%
|
|
(130)
|
Net earnings from continuing operations
|
16.3%
|
|
17.0%
|
|
(70)
|
Net earnings attributable to Procter & Gamble
|
31.7%
|
|
17.4%
|
|
1,430
|
Net Sales
Net sales fiscal year to date
were unchanged versus the previous period at
$33.4 billion
. Unit volume
increased 1%
. Unfavorable foreign exchange reduced net sales by 2%. Pricing and mix had no net impact on consolidated net sales. Volume increased mid-single digits in Health Care and low single digits in Grooming, Fabric & Home Care and in Baby, Feminine & Family Care. Volume decreased low single digits in Beauty driven by minor brand divestitures. Volume increased low single digits in developed regions and was unchanged in developing regions. Organic sales increased
2%
driven by a
2%
increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2016 vs. 2015 (Six Months Ended December 31)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
(2)%
|
|
2%
|
|
(2)%
|
|
—%
|
|
2%
|
|
1%
|
|
(1)%
|
Grooming
|
2%
|
|
3%
|
|
(2)%
|
|
1%
|
|
(2)%
|
|
—%
|
|
(1)%
|
Health Care
|
4%
|
|
5%
|
|
(2)%
|
|
1%
|
|
1%
|
|
—%
|
|
4%
|
Fabric & Home Care
|
1%
|
|
3%
|
|
(2)%
|
|
(1)%
|
|
1%
|
|
1%
|
|
—%
|
Baby, Feminine & Family Care
|
3%
|
|
3%
|
|
(2)%
|
|
(1)%
|
|
—%
|
|
(1)%
|
|
(1)%
|
Total Company
|
1%
|
|
2%
|
|
(2)%
|
|
—%
|
|
—%
|
|
1%
|
|
—%
|
* 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
increased 60 basis points to 50.9%
of net sales for the fiscal year to date period. Gross margin increased primarily due to a 200 basis point positive impact from manufacturing cost savings and a 10 basis point benefit from volume scale leverage. These impacts were partially offset by a 60 basis point negative impact from unfavorable foreign exchange, a 10 basis point decrease due to higher incremental restructuring charges, a 20 basis point decline from unfavorable product mix across segments (caused by the net sales decline in Beauty, which has higher than company-average gross margins), a 20 basis point decrease due to lower pricing and 40 basis points of combined negative impact from higher commodity costs and initiative investments.
Total SG&A spending
increased 1% to $9.3 billion
due to increased marketing activities. SG&A as a percentage of net sales
increased 40 basis points to 27.9%
. Marketing spending as a percentage of net sales increased 80 basis points due to an increase in advertising and other activities. Overhead costs as a percentage of net sales increased 10 basis points while other operating expense decreased 50 basis points due to reduced net foreign exchange transactional costs and a sale of real estate.
Non-Operating Expenses and Income
Interest expense was
$253 million
for the fiscal year to date period,
a decrease of $30 million
versus the prior year period, due to a decrease in weighted average interest rates and a decline in the average debt outstanding. Interest income was
$77 million
for the fiscal year to date period,
a decrease of $25 million
versus the prior year period due to a decrease in interest-bearing cash and cash equivalents. Other non-operating income/(loss) was
$(476) million
, a decrease of $493 million, primarily due to a $543 million charge related to early extinguishment of long-term debt discussed above.
Income Taxes on Continuing Operations
The effective tax rate on continuing operations decreased
150
basis points to
22.3%
. The rate declined due primarily to 120 basis points of favorable discrete impacts related to uncertain income tax positions from the resolution of matters in various jurisdictions (which netted to 190 basis points favorable impact in the current year versus 70 basis points in the prior year), a 180 basis point impact from excess tax benefits associated with share-based payments due to the adoption of FASB Accounting Standards Update (ASU) 2016-09 Improvements to Employee Share-Based Payment Accounting (see Note 2 to the Consolidated Financial Statements) and a 100 basis point impact from the early extinguishment of debt. These benefits were partially offset by unfavorable geographic mix, primarily due to a higher proportion of U.S. earnings.
Net Earnings from Continuing Operations
Net earnings from continuing operations
decreased $246 million or 4% to $5.4 billion for the fiscal year to date period.
This decrease was driven by a $345 million after-tax charge related to the early extinguishment of long-term debt, partially offset by the lower effective tax rate. Operating income was up less than 1%. Foreign exchange impacts reduced net earnings by about $330 million fiscal year to date due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Egypt, Nigeria and the United Kingdom. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations
decreased 2% to $1.93
due to the decrease in net earnings, partially offset by the decline in the number of weighted average shares outstanding discussed above.
Discontinued Operations
Net earnings from discontinued operations increased $5.0 billion to
$5.2 billion
in the current period versus
$181 million
in the prior period. This change was driven by the $5.3 billion gain on the sale of the Beauty Brands in the current period, partially offset by reduced net earnings from the businesses in discontinued operations following divestitures (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble
increased $4.8 billion or 82% to $10.6 billion for the fiscal year to date period.
The increase was driven by the gain on the sale of the Beauty Brands partially offset by the charge related to the early extinguishment of debt, both discussed above. Diluted net earnings per share
increased 88% to $3.81
. The difference between the increase in net earnings attributable to Procter & Gamble and the increase in the related earnings per share was due to the reduction in weighted average shares outstanding discussed above. Core net earnings per share
increased 4% to $2.11
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding the charge related to early extinguishment of long-term debt and incremental restructuring charges related to our productivity and cost savings plans.
BUSINESS SEGMENT DISCUSSION – Three and
Six
Months Ended
December 31, 2016
The following discussion provides a review of results by reportable business segment. Analyses of the results for the three and
six
month periods ended
December 31, 2016
are provided based on a comparison to the same three and
six
month periods ended
December 31, 2015
. The primary financial measures used to evaluate segment performance are net sales and net earnings from continuing operations. The table below provides supplemental information on net sales and net earnings from continuing operations by reportable business segment for the three and
six
months ended
December 31, 2016
versus the comparable prior year periods (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
2,942
|
|
|
(1
|
)%
|
|
$
|
714
|
|
|
(8
|
)%
|
|
$
|
540
|
|
|
(8
|
)%
|
Grooming
|
1,789
|
|
|
(1
|
)%
|
|
614
|
|
|
6
|
%
|
|
469
|
|
|
6
|
%
|
Health Care
|
2,072
|
|
|
5
|
%
|
|
608
|
|
|
8
|
%
|
|
422
|
|
|
7
|
%
|
Fabric & Home Care
|
5,270
|
|
|
(1
|
)%
|
|
1,125
|
|
|
(4
|
)%
|
|
725
|
|
|
(6
|
)%
|
Baby, Feminine & Family Care
|
4,645
|
|
|
(1
|
)%
|
|
1,038
|
|
|
—
|
%
|
|
680
|
|
|
—
|
%
|
Corporate
|
138
|
|
|
24
|
%
|
|
(843
|
)
|
|
N/A
|
|
|
(275
|
)
|
|
N/A
|
|
Total Company
|
$
|
16,856
|
|
|
—
|
%
|
|
$
|
3,256
|
|
|
(14
|
)%
|
|
$
|
2,561
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2016
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
5,938
|
|
|
(1
|
)%
|
|
$
|
1,497
|
|
|
(6
|
)%
|
|
$
|
1,132
|
|
|
(6
|
)%
|
Grooming
|
3,447
|
|
|
(1
|
)%
|
|
1,143
|
|
|
6
|
%
|
|
884
|
|
|
6
|
%
|
Health Care
|
3,933
|
|
|
4
|
%
|
|
1,104
|
|
|
9
|
%
|
|
742
|
|
|
4
|
%
|
Fabric & Home Care
|
10,572
|
|
|
—
|
%
|
|
2,254
|
|
|
(2
|
)%
|
|
1,453
|
|
|
(4
|
)%
|
Baby, Feminine & Family Care
|
9,240
|
|
|
(1
|
)%
|
|
2,083
|
|
|
(3
|
)%
|
|
1,377
|
|
|
(4
|
)%
|
Corporate
|
244
|
|
|
12
|
%
|
|
(1,087
|
)
|
|
N/A
|
|
|
(152
|
)
|
|
N/A
|
|
Total Company
|
$
|
33,374
|
|
|
—
|
%
|
|
$
|
6,994
|
|
|
(6
|
)%
|
|
$
|
5,436
|
|
|
(4
|
)%
|
Beauty
Three months ended
December 31, 2016
compared with three
months ended
December 31, 2015
Beauty net sales
decreased 1% to
$2.9 billion
during the
second fiscal quarter
on
a 1% decrease in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Price reduction in the form of promotional investments reduced net sales by 1%. Favorable product mix added 2% to net sales primarily due to growth of the super-premium SK-II brand, which has higher than average selling prices. Organic sales
increased 3%
on organic volume that
increased 2%
.
Global market share of the Beauty segment
decreased 0.8 points
.
Volume
decreased low single digits
in developed markets and also
decreased low single digits
in developing markets. Excluding the impact of minor brand divestitures, organic volume increased mid-single digits in developing markets.
|
|
•
|
Volume in Hair Care
decreased low single digits
due to minor brand divestitures. Organic volume increased low single digits. Developed market volume was unchanged and developing markets declined low single digits due to minor brand divestitures. Organic volume increased mid-single digits in developing markets behind product innovation, increased marketing spending and market growth. Global market share of the Hair Care category
decreased more than a point
.
|
|
|
•
|
Volume in Skin and Personal Care
decreased low single digits
. Volume decreased low single digits in developed regions due to reductions in customer trade inventory and competitive activity. Volume increased low single digits in developing regions due to product innovation and increased marketing. Global market share of the Skin and Personal Care category
decreased more than half a point
.
|
Net earnings
decreased 8% to
$540 million
due to the reduction in net sales and a 140 basis point decrease in net earnings margin. The net earnings margin declined primarily due to an increase in SG&A as a percentage of net sales. SG&A as a percentage of net sales increased due to increases in both marketing and overhead spending. Gross margin decreased as unfavorable commodity and foreign exchange impacts were only partially offset by productivity savings.
Six
months ended
December 31, 2016
compared with
six
months ended
December 31, 2015
Beauty fiscal year to date net sales
decreased 1% to
$5.9 billion
on
a 2% decrease in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Pricing was unchanged and favorable product mix added 2% to net sales primarily due to growth of the super-premium SK-II brand, which has higher than average selling prices. Organic sales
increased 3%
on organic volume that
increased 2%
.
Global market share of the Beauty segment
decreased 0.7 points
.
Volume
decreased low single digits
in developed markets. Volume also
decreased low single digits
in developing markets, mainly due to minor brand divestitures, and increased mid-single digits on an organic basis.
|
|
•
|
Volume in Hair Care
decreased low single digits
due to minor brand divestitures. Organic volume increased low single digits. Developed markets declined low single digits due to competitive activity and developing markets declined low single digits due to minor brand divestitures. Organic volume increased low single digits in developing markets behind product innovation, increased marketing and market growth. Global market share of the Hair Care category
decreased a point
.
|
|
|
•
|
Volume in Skin and Personal Care
was unchanged
in both developed and developing markets including the impact of minor brand divestitures.
Organic volume was up low single digits in developing markets and globally behind innovation, increased marketing and market growth. Global market share of the Skin and Personal Care category
decreased half a point
.
|
Net earnings
decreased 6% to
$1.1 billion
due to the reduction in net sales and a 110 basis point decrease in net earnings margin, behind an increase in SG&A as a percentage of net sales. SG&A as a percentage of net sales increased primarily due to increased marketing spending. Gross margin was unchanged as productivity savings were offset by unfavorable commodity and foreign exchange impacts.
Grooming
Three months ended
December 31, 2016
compared with three
months ended
December 31, 2015
Grooming net sales
decreased 1% to
$1.8 billion
during the
second fiscal quarter
on
a 3% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Price increases in Shave Care contributed 1% to net sales. Unfavorable geographic mix reduced net sales by 4% driven by growth in developing markets, where average selling prices are lower than in developed markets. Organic sales
increased 1%
on organic volume that
increased 4%
. Global market share of the Grooming segment
decreased 0.9 points
. Volume
decreased low single digits
in developed regions and
increased mid-single digits
in developing regions.
|
|
•
|
Shave Care volume
increased low single digits
.
Shave Care volume decreased low single digits in developed regions due to competitive activity and increased mid-single digits in developing regions behind product innovation and increased marketing support. Organic volume increased high single digits in developing regions. Global market share of the Shave Care category
decreased more than half a point
.
|
|
|
•
|
Volume in Appliances
increased mid-single digits
.
Volume was up mid-single digits in developed regions and high single digits in developing regions due to product innovation and market growth. Global market share of the Appliances category
increased more than half a point
.
|
Net earnings
increased 6% to
$469 million
as a 170 basis-point increase in net earnings margin was only partially offset by the reduction in net sales. Net earnings margin increased due to a decrease in SG&A as a percent of net sales partially offset by a decrease in gross margin. SG&A as a percent of net sales decreased due a gain on the sale of real estate partially offset by increased marketing spending. Gross margin declined due to unfavorable foreign exchange and product mix driven by the disproportionate growth of disposable razors which have below segment-average margins, partially offset by the impact of savings projects.
Six
months ended
December 31, 2016
compared with
six
months ended
December 31, 2015
Grooming fiscal year to date net sales
decreased 1% to
$3.4 billion
on
a 2% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Price increases in Shave Care contributed 1% to net sales. Unfavorable geographic mix reduced net sales by 2% driven by growth in emerging markets, where average selling prices are lower than in developed markets. Organic sales
increased 2%
on organic volume that
increased 3%
. Global market share of the Grooming segment
decreased 0.5 points
. Volume
decreased low single digits
in developed regions and
increased low single digits
in developing regions.
|
|
•
|
Shave Care volume
increased low single digits
. Shave Care volume decreased low single digits in developed regions due to competitive activity and increased low single digits in developing regions behind product innovation and increased marketing support. Organic volume increased high single digits in developing regions. Global market share of the Shave Care category
decreased slightly
.
|
|
|
•
|
Volume in Appliances
increased mid-single digits
. Volume was up mid-single digits in both developed and developing regions due to product innovation. Global market share of the Appliances category
was unchanged
.
|
Net earnings
increased 6% to
$884 million
due to a 180 basis-point increase in net earnings margin which more than offset the reduction in net sales. SG&A as a percent of net sales decreased due to a gain on the sale of real estate partially offset by increased marketing spending. Gross margin increased as the benefits of increased pricing and productivity efforts were only partially offset by unfavorable foreign exchange impacts and product mix driven by the disproportionate growth of disposable razors which have below segment-average margins.
Health Care
Three months ended
December 31, 2016
compared with three
months ended
December 31, 2015
Health Care net sales
increased 5% to
$2.1 billion
during the
second fiscal quarter
on
a 4% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Price increases contributed 1% to net sales and favorable product mix added 2% to net sales, primarily due to an increase in Oral Care power toothbrushes, which have higher than average selling prices. Organic sales
increased 7%
on organic volume that
increased 4%
. Global market share of the Health Care segment
decreased 0.2 points
. Volume
increased low single digits
in developed regions and
increased mid-single digits
in developing regions.
|
|
•
|
Oral Care volume
increased mid-single digits
.
Volume increased low single digits in developed regions and high single digits in developing regions driven by market growth and product innovation. Global market share of the Oral Care category
decreased less than half a point
.
|
|
|
•
|
Volume in Personal Health Care
was unchanged
with mid-single-digit growth in developed regions behind market growth offset by a mid-single digit decline in developing regions due to reduced distributor inventory and minor brand divestitures. Global market share of the Personal Health Care category
was unchanged
.
|
Net earnings
increased 7% to
$422 million
due to the increase in net sales and a 50 basis point increase in net earnings margin, primarily behind improved gross margin. Gross margin increased due to manufacturing cost savings, increased pricing and favorable product mix from Oral care power toothbrushes, which have higher than average margins, which more than offset negative foreign exchange impacts. SG&A as a percentage of net sales decreased slightly due to the scale benefit of the increase in net sales.
Six
months ended
December 31, 2016
compared with
six
months ended
December 31, 2015
Health Care fiscal year to date net sales
increased 4% to
$3.9 billion
on
a 4% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Price increases contributed 1% to net sales. Favorable product mix increased net sales 1%, primarily driven by an increase in Oral Care power toothbrushes which have higher than average selling prices. Organic sales
increased 7%
on organic volume that
increased 5%
.
Global market share of the Health Care segment
decreased 0.2 points
.
Volume
increased mid-single digits
in developed regions and
increased mid-single digits
in developing regions.
|
|
•
|
Oral Care volume
increased mid-single digits
in both developed and developing regions driven by market growth and product innovation. Global market share of the Oral Care category
decreased less than half a point
.
|
|
|
•
|
Volume in Personal Health Care
increased low single digits
with low single-digit growth in developed regions and mid-single-digit growth in developing regions behind market growth, product innovation and expanded distribution. Global market share of the Personal Health Care category
decreased slightly
.
|
Net earnings
increased 4% to
$742 million
due to the increase in net sales. Net earnings margin was unchanged as gross margin improvement was offset by increased SG&A as a percentage of net sales. Gross margin increased due to productivity cost savings and pricing benefits, partially offset by unfavorable foreign exchange impacts. SG&A increased as a percentage of net sales due to a base period benefit related to our PGT Healthcare partnership, partially offset by reduced marketing spending.
Fabric & Home Care
Three months ended
December 31, 2016
compared with three months ended
December 31, 2015
Fabric & Home Care net sales
decreased 1% to
$5.3 billion
for the
second fiscal quarter
on
a 1% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Lower pricing driven by promotional spending had a negative 1% impact on net sales. Organic sales
increased 1%
on organic volume that
increased 2%
.
Global market share of the Fabric & Home Care segment
was unchanged
. Volume
increased low single digits
in developed regions and
decreased low single digits
in developing regions.
|
|
•
|
Fabric Care volume
increased low single digits
as a mid-single-digit increase in developed markets due to innovation and increased marketing spending was partially offset by a mid-single-digit decrease in developing regions driven primarily by reduced distribution of less profitable brands. Global market share of the Fabric Care category
was unchanged
.
|
|
|
•
|
Home Care volume
was unchanged
.
Developed market volume was unchanged while developing regions decreased low single digits due to minor brand divestitures. Organic volume in developing regions was unchanged. Global market share of the Home Care category
increased slightly
.
|
Net earnings
decreased 6% to
$725 million
due to a 70 basis-point decrease in net earnings margin along with the reduction in net sales. Net earnings margin decreased due to an increase in SG&A as a percent of net sales, partially offset by higher gross margin. SG&A as a percentage of net sales increased primarily due to increased marketing spending. Gross margin expansion was driven by manufacturing cost savings partially offset by unfavorable foreign exchange impacts, increased commodity costs and lower pricing.
Six
months ended
December 31, 2016
compared with
six
months ended
December 31, 2015
Fabric & Home Care fiscal year to date net sales
was unchanged at
$10.6 billion
on
a 1% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Lower pricing driven by promotional spending had a negative 1% impact on net sales.
Favorable geographic mix increased net sales 1%, primarily driven by increased volume in developed regions, which have higher than segment-average selling prices. Organic sales
increased 3%
on organic volume that
increased 3%
. Global market share of the Fabric & Home Care segment
was unchanged
. Volume
increased mid-single digits
in developed regions and
decreased low single digits
in developing regions.
|
|
•
|
Fabric Care volume
increased low single digits
as a mid-single-digit increase in developed markets due to innovation and increased marketing spending was partially offset by a low single-digit decrease in developing regions driven by competitive activity and reduced distribution of less profitable brands. Global market share of the Fabric Care category
was unchanged
.
|
|
|
•
|
Home Care volume
increased low single digits
driven by a low single-digit increase in developed markets due to product innovation, partially offset by a low single-digit decrease in developing regions due to minor brand divestitures. Organic volume in developing regions increased low single digits due to product innovation. Global market share of the Home Care category
increased slightly
.
|
Net earnings
decreased 4% to
$1.5 billion
behind a 60 basis-point decrease in net earnings margin. Net earnings margin decreased due to an increase in SG&A as a percent of net sales, partially offset by higher gross margin. SG&A as a percentage of net sales increased primarily due to increased marketing spending. Gross margin expansion was driven by manufacturing cost savings partially offset by unfavorable foreign exchange impacts, increased commodity costs and lower pricing.
Baby, Feminine & Family Care
Three months ended
December 31, 2016
compared with three
months ended
December 31, 2015
Baby, Feminine & Family Care net sales
decreased 1% to
$4.6 billion
during the
second fiscal quarter
on
a 2% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Unfavorable product mix reduced net sales by 1% due to the disproportionate growth of Family Care which has lower than segment-average selling prices. Lower pricing driven by promotional spending had a negative 1% impact on net sales. Organic sales
increased 1%
on organic volume that
increased 3%
. Global market share of the Baby, Feminine & Family Care segment
was unchanged
.
Volume increased low single digits in both developed and developing regions.
|
|
•
|
Volume in Baby Care
increased low single digits
caused by a mid-single-digit increase in developing regions due to market growth and product innovation. Volume decreased low single digits in developed regions due to competitive activity. Global market share of the Baby Care category
decreased half a point
.
|
|
|
•
|
Volume in Feminine Care
decreased low single digits
. Volume decreased low-single-digits in developing regions due to reduced exports to our Venezuelan subsidiaries. Volume in developed regions increased low single digits due to product innovation and market growth. Global market share of the Feminine Care category
decreased slightly
.
|
|
|
•
|
Volume in Family Care, which is predominantly a North American business,
increased mid-single digits
driven by product innovation, increased distribution and increased merchandising. In the U.S., all-outlet share of the Family Care category
increased more than a point
.
|
Net earnings
were unchanged at
$680 million
as the decline in net sales was offset by a 10 basis point increase in net earnings margin. Net earnings margin increased due to an increase in gross margin partially offset by an increase in SG&A as a percent of sales. Gross margin increased due to manufacturing cost savings, partially offset by unfavorable foreign exchange impacts and lower pricing. SG&A as a percentage of net sales increased driven primarily by higher marketing spending.
Six
months ended
December 31, 2016
compared with
six
months ended
December 31, 2015
Baby, Feminine & Family Care net sales
decreased 1% to
$9.2 billion
during the fiscal year to date on
a 3% increase in unit volume
.
Unfavorable foreign exchange reduced net sales by 2%. Lower pricing driven by promotional spending had a negative 1% impact on net sales. Organic sales
increased 2%
on organic volume that
increased 3%
.
Global market share of the Baby, Feminine & Family Care segment
decreased 0.2 points
.
Volume increased low single digits in both developed and developing regions.
|
|
•
|
Volume in Baby Care
increased low single digits
caused by a mid-single-digit increase in developing regions due to market growth, product innovation and decreased pricing. Volume decreased low single digits in developed regions due to competitive activity. Global market share of the Baby Care category
decreased nearly half a point
.
|
|
|
•
|
Volume in Feminine Care
increased low single digits
due to a low single-digit increase in developed regions driven by product innovation and market growth. Developing region volume was unchanged. Global market share of the Feminine Care category
decreased less than half a point
.
|
|
|
•
|
Volume in Family Care, which is predominantly a North America business,
increased mid-single digits
driven by market growth, product innovation and increased merchandising. In the U.S., all-outlet share of the family care category
was unchanged
.
|
Net earnings
decreased 4% to
$1.4 billion
due to the reduction in net sales and a 40 basis point decrease in the net earnings margin as increased SG&A as a percent of net sales was only partially offset by increased gross margin. SG&A as a percentage of net sales increased primarily due to increased marketing spending. Gross margin increased driven by manufacturing cost savings partially offset by unfavorable foreign exchange impacts, lower pricing and unfavorable product mix across business units.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include: the incidental businesses managed at the corporate level; financing and investing activities; other general corporate items; the gains and losses related to certain divested brands and categories; certain restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization; certain significant asset impairment charges; and certain balance sheet impacts from significant foreign exchange devaluations. Corporate also includes reconciling items to adjust the accounting policies used in the segments to U.S. GAAP. The most significant reconciling item includes income taxes to adjust from blended statutory rates that are reflected in the segments to the overall Company effective tax rate.
Corporate net sales
increased 24% to
$
138 million
during the
second fiscal quarter
and increased 12% to
$244 million
fiscal year to date primarily due to an increase in the incidental businesses managed at the corporate level. Corporate net earnings from continuing operations
decreased by $304 million
in the
second fiscal quarter
and decreased by $130 million
fiscal year to date. Corporate net earnings declined due to the $345 million after-tax charge on the early extinguishment of long-term debt during the second quarter, discussed above. This was partially offset by tax benefits resulting from the adoption of a new accounting standard on the tax impacts of share-based payments to employees, which primarily impacted the first fiscal quarter (see Note 2 to the Consolidated Financial Statements) and an increase in the proportion of corporate overhead spending which is allocated to the segments, consisting in part of stranded overheads from divestitures.
Productivity and Cost Savings Plan
In 2012, the Company initiated a productivity and cost savings plan to reduce costs and better leverage scale in the areas of supply chain, research and development, marketing and overheads. The plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to fund the Company's growth strategy.
As part of this plan, which has been expanded since its inception, the Company expects to incur approximately
$5.5 billion
in before-tax restructuring costs over a six-year period (from fiscal 2012 through fiscal 2017). Approximately
95%
of the estimated costs have been incurred through
December 2016
. Savings generated from the restructuring costs are difficult to estimate, given the nature of the activities, the corollary benefits achieved (e.g., enrollment reduction achieved via normal attrition), the timing of the execution and the degree of reinvestment. Overall, the costs and other non-manufacturing enrollment reductions are expected to deliver approximately
$3 billion
in annual gross savings (before-tax). The cumulative before-tax savings as of the current year are estimated at approximately
$2.5
to
$3
billion. Consistent with our historical policies for ongoing restructuring-type activities, the resulting charges are funded by and included within Corporate for segment reporting.
Refer to Note 9 in the Notes to the Consolidated Financial Statements for more details on the restructuring program.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
We generated
$6.0 billion
of cash from operating activities fiscal year to date, a decrease of
$2.0 billion
versus the prior year. Net earnings, adjusted for non-cash items (depreciation and amortization, loss on early extinguishment of debt, share-based compensation expense, deferred income taxes, and gain on sale of businesses), generated $6.9 billion of operating cash flow. Working capital and other impacts used $919 million of cash in the period. Accounts receivable used $595 million of cash due to seasonality in certain businesses and sales mix. Inventory consumed $247 million of cash to support product initiatives. Accounts payable, accrued and other liabilities used $296 million of cash primarily due to an decrease in taxes payable due to the timing of estimated payments, including payments related to the Beauty Brands divestiture. All other operating assets and liabilities generated $219 million of cash.
Investing Activities
Cash used by investing activities was
$2.0 billion
fiscal year to date. Capital expenditures were $1.4 billion, or 4.3% of net sales.
We generated $280 million of cash from proceeds from asset sales primarily from building sales and minor brand divestitures. We initially invested $874 million of cash received from the pre-divestiture issuance of transaction-related debt in restricted cash. We transferred $475 million of cash at closing to the discontinued Beauty Brands. At transaction closing, cumulative restricted cash of $1.9 billion was released and returned to cash and cash equivalents. We used $1.7 billion for purchases of short-term investments, partially offset by $354 million of cash generated from proceeds from sales or maturities of short-term investments.
Financing Activities
Our financing activities consumed net cash of
$4.7 billion
fiscal year to date. We used $2.5 billion for treasury stock purchases and $3.6 billion for dividends. Cash generated from net debt issuances was $327 million. Cash from the exercise of stock options and other impacts generated $1.1 billion of cash.
As of
December 31, 2016
, our current liabilities exceeded current assets by $3.3 billion. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measure.
We believe that these measures provide useful perspective on underlying business trends (i.e. trends excluding non-recurring or unusual items) and results and provide a supplemental measure of year-on-year results. The non-GAAP measures described below are used by Management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following items:
Incremental restructuring
: The Company has had and continues to have an ongoing level of restructuring activities. Such activities have resulted in ongoing annual restructuring related charges of approximately $250 - $500 million before tax. Beginning in 2012 Procter & Gamble began a $10 billion strategic productivity and cost savings initiative that includes incremental restructuring activities. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs.
Early debt extinguishment charges
: During the three months ended December 31, 2016, the Company recorded a charge of $345 million after tax due to the early extinguishment of certain long-term debt. This charge represents the difference between the reacquisition price and the par value of the debt extinguished. Management does not view this charge as indicative of the Company’s operating performance or underlying business results.
We do not view the above items to be part of our sustainable results and their exclusion from Core earnings measures provides a more comparable measure of year-on-year results. Both of these items are also excluded when evaluating senior management in determining their at-risk compensation.
Organic sales growth
: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis.
Adjusted free cash flow
: Adjusted free cash flow is defined as operating cash flow less capital spending and excluding tax payments related to the Beauty Brands divestiture, which are non-recurring and not considered indicative of underlying cash flow performance. Adjusted free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.
Adjusted free cash flow productivity
: Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings excluding the loss on early debt extinguishment and gain on the sale of the Beauty Brands, which are non-recurring and not considered indicative of underlying earnings performance. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. The Company's long-term target is to generate annual adjusted free cash flow productivity at or above 90 percent.
Core EPS
: Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share from continuing operations adjusted as indicated. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time.
Organic sales growth
:
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
(1)%
|
|
2%
|
|
2%
|
|
3%
|
Grooming
|
(1)%
|
|
2%
|
|
—%
|
|
1%
|
Health Care
|
5%
|
|
2%
|
|
—%
|
|
7%
|
Fabric & Home Care
|
(1)%
|
|
2%
|
|
—%
|
|
1%
|
Baby, Feminine & Family Care
|
(1)%
|
|
2%
|
|
—%
|
|
1%
|
Total Company
|
—%
|
|
2%
|
|
—%
|
|
2%
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2016
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
(1)%
|
|
2%
|
|
2%
|
|
3%
|
Grooming
|
(1)%
|
|
2%
|
|
1%
|
|
2%
|
Health Care
|
4%
|
|
2%
|
|
1%
|
|
7%
|
Fabric & Home Care
|
—%
|
|
2%
|
|
1%
|
|
3%
|
Baby, Feminine & Family Care
|
(1)%
|
|
2%
|
|
1%
|
|
2%
|
Total Company
|
—%
|
|
2%
|
|
—%
|
|
2%
|
* Acquisition/Divestiture Impact includes the mix impacts of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.
Adjusted free cash flow (dollar amounts in millions)
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, December 31, 2016
|
Operating Cash Flow
|
|
Capital Spending
|
|
Free Cash Flow
|
|
Cash Tax Payment - Beauty Sale
|
|
Adjusted Free Cash Flow
|
$6,025
|
|
$(1,429)
|
|
$4,596
|
|
$129
|
|
$4,725
|
Adjusted free cash flow productivity (dollar amounts in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, December 31, 2016
|
Adjusted Free Cash Flow
|
|
Net Earnings
|
|
Loss on Early Debt Extinguishment
|
|
Gain on Sale of Beauty Brands
|
|
Adjusted Net Earnings
|
|
Adjusted Free Cash Flow Productivity
|
$4,725
|
|
$10,653
|
|
$345
|
|
$(5,335)
|
|
$5,663
|
|
83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended December 31, 2016
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
EARLY DEBT EXTINGUISHMENT
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,298
|
|
|
—
|
|
|
(128
|
)
|
|
—
|
|
|
—
|
|
|
8,170
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,683
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
1
|
|
|
4,720
|
|
OPERATING INCOME
|
3,875
|
|
|
—
|
|
|
92
|
|
|
—
|
|
|
(1
|
)
|
|
3,966
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
695
|
|
|
—
|
|
|
21
|
|
|
198
|
|
|
(1
|
)
|
|
913
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
7,875
|
|
|
(5,335
|
)
|
|
71
|
|
|
345
|
|
|
—
|
|
|
2,956
|
|
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
2.88
|
|
|
(1.95
|
)
|
|
0.03
|
|
|
0.13
|
|
|
(0.01
|
)
|
|
1.08
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
CORE EPS
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended December 31, 2015
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,460
|
|
|
—
|
|
|
(143
|
)
|
|
—
|
|
|
8,317
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,602
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
4,616
|
|
OPERATING INCOME
|
3,853
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
3,982
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
898
|
|
|
—
|
|
|
30
|
|
|
(1
|
)
|
|
927
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
3,206
|
|
|
(323
|
)
|
|
99
|
|
|
1
|
|
|
2,983
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
1.12
|
|
|
(0.11
|
)
|
|
0.03
|
|
|
—
|
|
|
1.04
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Six Months Ended December 31, 2016
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
EARLY DEBT EXTINGUISHMENT
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
16,400
|
|
|
—
|
|
|
(239
|
)
|
|
—
|
|
|
—
|
|
|
16,161
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
9,328
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
—
|
|
|
9,387
|
|
OPERATING INCOME
|
7,646
|
|
|
—
|
|
|
180
|
|
|
—
|
|
|
—
|
|
|
7,826
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
1,558
|
|
|
—
|
|
|
36
|
|
|
198
|
|
|
—
|
|
|
1,792
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
10,589
|
|
|
(5,217
|
)
|
|
144
|
|
|
345
|
|
|
—
|
|
|
5,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
3.81
|
|
|
(1.88
|
)
|
|
0.05
|
|
|
0.12
|
|
|
0.01
|
|
|
2.11
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
CORE EPS
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Six Months Ended December 31, 2015
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
16,612
|
|
|
—
|
|
|
(215
|
)
|
|
—
|
|
|
16,397
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
9,209
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
9,223
|
|
OPERATING INCOME
|
7,621
|
|
|
—
|
|
|
201
|
|
|
—
|
|
|
7,822
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
1,775
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
1,819
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
5,807
|
|
|
(181
|
)
|
|
157
|
|
|
—
|
|
|
5,783
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
2.03
|
|
|
(0.06
|
)
|
|
0.05
|
|
|
—
|
|
|
2.02
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.