PROCTER & GAMBLE COMPANY Management's Discussion and Analysis 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 13 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, except to the extent required by law. Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, -------------------------------------------------------------------------------- 12The Procter & Gamble Company 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 effect 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, acts of war or terrorism, or disease outbreaks; (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 and operational 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 theUnited Kingdom's exit from theEuropean 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, labor and employment, 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; (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; and (17) the ability to successfully manage the demand, supply, and operational challenges associated with a disease outbreak, including epidemics, pandemics, or similar widespread public health concerns (including the novel coronavirus, COVID-19, outbreak). 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 I, Item 1A) of this Form 10-K. The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding ofProcter & 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 2020 Results •Economic Conditions and Uncertainties •Results of Operations •Segment Results •Cash Flow, Financial Condition and Liquidity •Significant Accounting Policies and Estimates •Other Information 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 inthe United States of America (U.S. GAAP), consisting of organic sales growth, core earnings per share (Core EPS), adjusted free cash flow and adjusted free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Core EPS is diluted net earnings per share from continuing operations excluding certain items that are not judged to be part of the Company's sustainable results or trends. Adjusted free cash flow is operating cash flow less capital spending, transitional tax payments related to theU.S. Tax Act and tax payments related to the Merck OTC consumer healthcare acquisition. Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight to some of the metrics used to evaluate management. The explanation at the end of the MD&A provides more details on the use and the derivation of these measures, as well as reconciliations to the most directly comparableU.S. GAAP measures. Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and --------------------------------------------------------------------------------The Procter & Gamble Company 13 comparability of share and consumption information. References to market share and 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 of our products in dollar terms on a constant currency basis, 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 as compared to the end of the reporting period. Management also uses unit volume growth to evaluate and explain drivers of changes in net sales. Organic volume growth reflects year-over-year changes in unit volume excluding the impacts of acquisitions and divestitures and certain one-time items, if applicable, and is used to explain changes in organic sales. OVERVIEWProcter & Gamble 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 (including airport duty-free stores), high-frequency stores, pharmacies, electronics stores and professional channels. 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 believe we are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position. ORGANIZATIONAL STRUCTURE In fiscal 2020, our organizational structure was comprised of Sector Business Units (SBUs), Enterprise Markets (EMs), Corporate Functions (CF) and Global Business Services (GBS). Sector Business Units Our SBUs are organized into ten product categories. UnderU.S. GAAP, the SBUs underlying the ten product categories are aggregated into five reportable segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. The SBUs are responsible for developing overall brand strategy, new product upgrades and innovations and marketing plans. The following provides additional detail on our reportable segments and the ten product categories and brand composition within each segment. % of % of Net
Reportable Segments
Major Brands
Hair Care (Conditioner, Shampoo, Styling Head & Shoulders, Herbal
Aids, Treatments) Essences, Pantene,
Rejoice
Beauty 19% 21% Skin and Personal Care Olay, Old
(Antiperspirant and Deodorant, Spice,
Personal Cleansing, Skin Care) Safeguard,
Secret, SK-II
Grooming (2) (Shave Care - Female Blades &
Grooming 9% 10% Razors, Male Blades & Razors, Pre- and Braun, Gillette, Venus
Post-Shave Products, Other Shave Care;
Appliances)
Oral Care(Toothbrushes, Toothpaste, Other Crest, Oral-B
Oral Care)
Personal Health Care
Health Care 13% 12% (Gastrointestinal, Rapid Metamucil,
Diagnostics, Respiratory, Neurobion,
Vitamins/Minerals/Supplements, Pepto-Bismol,
Pain Relief, Other Personal Vicks
Health Care)
Fabric Care (Fabric Enhancers, Laundry Ariel, Downy, Gain, Tide
Additives, Laundry Detergents)
Fabric & Home Care 33% 31% Cascade, Dawn,
Home Care (Air Care, Dish Care, Fairy, Febreze,
P&G Professional, Surface Care) Mr. Clean,
Swiffer
Baby Care (Baby Wipes, Taped Diapers and Luvs, Pampers
Pants)
Baby, Feminine & Feminine Care (Adult Always, Always
Family Care 26% 26% Incontinence, Feminine Care) Discreet,
Tampax
Family Care (Paper Towels, Bounty,
Tissues, Toilet Paper) Charmin, Puffs
(1) Percent of Net sales and Net earnings from continuing operations for the
year ended June 30, 2020 (excluding results held in Corporate).
(2) The Grooming product category is comprised of the Shave Care and Appliances
operating segments.
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14 The Procter & Gamble Company
Recent Developments:
During fiscal 2019, the Company completed the 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). This business
primarily sells OTC consumer healthcare products, mainly in markets in Europe ,
Latin America and Asia . Total sales for the business during Merck OTC's fiscal
year ended December 31, 2017 were approximately $1 billion . Refer to Note 14 to
our Consolidated Financial Statements for more details on this transaction.
During fiscal 2019, the Company also dissolved our PGT Healthcare partnership, a
venture between the Company and Teva Pharmaceutical Industries, Ltd (Teva) in
the OTC consumer healthcare business. Pursuant to the agreement, PGT product
assets were returned to the original respective parent companies to reestablish
independent OTC businesses. This transaction was accounted for as a sale of the
Teva portion of the PGT business. The Company recorded an after-tax gain on the
sale of $353 million .
Organization Design Changes:
The Company implemented changes to our organization design effective July 1,
2019 . In the new design, the ten product categories were organized into six
SBUs. The SBUs are responsible for global brand strategy, innovation and supply
chain. They have direct profit responsibility for markets representing the large
majority of the Company's sales and earnings (referred to as Focus Markets) and
are responsible for innovation plans, supply plans and operating frameworks to
drive growth and value creation in the remaining markets (referred to as
Enterprise Markets). For segment reporting purposes, the product categories
continue to be aggregated into the same five external reporting segments.
Throughout the MD&A, we reference business results by region, which are
comprised of North America , Europe , Greater China , Latin America , Asia Pacific
and India , Middle East and Africa (IMEA).
Beauty: We are a global market leader in the beauty category. Most of the beauty
markets in which we compete are highly fragmented with a large number of global
and local competitors. We compete in skin and personal care and in hair care. In
skin and personal care, we offer a wide variety of products, ranging from
deodorants to personal cleansing to skin care, such as our Olay brand, which is
one of the top facial skin care brands in the world with approximately 6% global
market share. We are the global market leader in the retail hair care market
with over 20% global market share primarily behind our Pantene and Head &
Shoulders brands.
Grooming: We compete in shave care and appliances. In shave care, we are the
global market leader in the blades and razors market. Our global blades and
razors market share is over 60%, primarily behind our Gillette and Venus brands.
Our appliances, such as electric shavers and epilators, are sold under the Braun
brand in a number of markets around the world where we compete against both
global and regional competitors. We hold nearly 25% of the male
electric shavers market and over 50% of the female epilators market.
Health Care: We compete in oral care and personal health care. In oral care,
there are several global competitors in the market and we have the number two
market share position with nearly 20% global market share behind our Crest and
Oral-B brands. In personal health care, we are a top ten competitor in a large,
highly fragmented industry, primarily behind respiratory treatments (Vicks
brand) and digestive wellness products (Metamucil, Pepto Bismol and Align
brands). As discussed earlier, in fiscal 2019, we dissolved the PGT Healthcare
partnership with Teva, which previously managed nearly all of our personal
health care sales outside the U.S. , and reestablished an independent OTC
business. We also acquired Merck OTC as discussed above.
Fabric & Home Care: This segment is comprised of a variety of fabric care
products, including laundry detergents, additives and fabric enhancers; and home
care products, including dishwashing liquids and detergents, surface cleaners
and air fresheners. In fabric care, we generally have the number one or number
two market share position in the markets in which we compete and are the global
market leader with over 25% global market share, primarily behind our Tide,
Ariel and Downy brands. Our global home care market share is approximately 25%
across the categories in which we compete primarily behind our Cascade, Dawn,
Febreze and Swiffer brands.
Baby, Feminine & Family Care: In baby care, we are the global market leader and
compete mainly in taped diapers, pants and baby wipes with nearly 25% global
market share. We have the number one or number two market share position in most
of the key markets in which we compete, primarily behind Pampers, the Company's
largest brand, with annual net sales of over $7 billion . We are the global
market leader in the feminine care category with 25% global market share,
primarily behind our Always and Tampax brands. We also compete in the adult
incontinence category in certain markets behind Always Discreet, achieving
nearly 10% market share in most of the key markets in which we compete. Our
family care business is predominantly a North American business comprised
primarily of the Bounty paper towel and Charmin toilet paper brands. U.S. market
shares are over 40% for Bounty and over 25% for Charmin.
Enterprise Markets
As a result of the changes in our organization design effective July 1, 2019 ,
EMs are responsible for sales and profit delivery in specific countries,
supported by SBU agreed innovation and supply chain plans, along with scaled
services like planning, distribution and customer management.
Corporate Functions
CF provides company-level strategy and portfolio analysis, corporate accounting,
treasury, tax, external relations, governance, human resources and legal
services.
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The Procter & Gamble Company 15
Global Business Services
GBS provides technology, processes and standard data tools to enable the SBUs,
the EMs and CF to better understand the business and better serve consumers and
customers. The GBS organization is responsible for providing world-class
solutions at a low cost and with minimal capital investment.
STRATEGIC FOCUS
Procter & Gamble aspires to serve the world's consumers better than our best
competitors in every category and in every country in which we compete, and, as
a result, deliver total shareholder return in the top one-third of our peer
group. Delivering and sustaining leadership levels of shareholder value
creation requires balanced top- and bottom-line growth and strong cash
generation.
The Company has undertaken an effort to focus and strengthen its business
portfolio to compete in categories and with brands that are structurally
attractive and that play to P&G's strengths. The ongoing portfolio of businesses
consists of ten product categories where P&G has leading market positions,
strong brands and consumer-meaningful product technologies.
Within these categories, our strategic choices are focused on winning with
consumers. The consumers who purchase and use our products are at the center of
everything we do. We win with consumers by delivering superiority across the
five key elements of product, packaging, brand communication, retail execution
and value equation. Winning with consumers around the world and against our best
competitors requires innovation. Innovation has always been, and continues to
be, P&G's lifeblood. Innovation requires consumer insights and technology
advancements that lead to product improvements, improved marketing and
merchandising programs and game-changing inventions that create new brands and
categories.
Productivity improvement is critical to delivering our balanced top- and
bottom-line growth and value creation
objectives. Productivity improvement and sales growth reinforce and fuel each
other. Our objective is to drive productivity improvement across all elements of
cost, including cost of goods sold, marketing and promotional spending and
non-manufacturing overhead. We plan to reinvest productivity improvements and
cost savings in product and packaging improvements, brand awareness-building
advertising and trial-building sampling programs, increased sales coverage and
R&D programs as well as to offset cost increases (including commodity and
foreign exchange impacts) and improve operating margins.
We are constructively disrupting our industry and the way we do business,
including how we innovate, communicate and leverage new technologies, to create
more value.
We are improving operational effectiveness and organizational culture through
enhanced clarity of roles and responsibilities, accountability and incentive
compensation programs.
We believe these strategies are right for the long-term health of the Company
and our objective of delivering total shareholder return in the top one-third of
our peer group.
The Company expects the delivery of the following long-term annual financial
targets will result in total shareholder returns in the top third of the
competitive fast-moving consumer goods peer group:
•Organic sales growth above market growth rates in the categories and
geographies in which we compete;
•Core earnings per share (EPS) growth of mid-to-high single digits; and
•Adjusted free cash flow productivity of 90% or greater.
In periods with significant macroeconomic pressures, such as the current
COVID-19 pandemic, we intend to maintain a disciplined approach to investing so
as not to sacrifice the long-term health of our businesses to meet short-term
objectives in any given year.
SUMMARY OF 2020 RESULTS
Change vs.
Amounts in millions, except per share amounts 2020 2019 Prior Year
Net sales $ 70,950 $ 67,684 5 %
Operating income 15,706 5,487 186 %
Net earnings 13,103 3,966 230 %
Net earnings attributable to Procter & Gamble 13,027 3,897 234 %
Diluted net earnings per common share 4.96 1.43 247 %
Core earnings per share 5.12 4.52 13 %
Cash flow from operating activities 17,403 15,242 14 %
•Net sales increased 5% to $71.0 billion on a 4% increase in unit volume.
Foreign exchange had a negative 2% impact on net sales. Net sales growth was
driven by a double digit increase in Health Care, a high single digit increase
in Fabric & Home Care, a mid-single digit increase in Beauty and a low single
digit increase in Baby, Feminine & Family Care. Grooming net sales
decreased low single digits. Organic sales increased 6% on a 4% increase in
organic volume. Organic sales increased high single digits in Health Care and in
Fabric & Home Care, increased mid-single digits in Beauty and in Baby, Feminine
& Family Care and increased low single digits in Grooming.
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16 The Procter & Gamble Company
•Operating income increased $10.2 billion , or 186% versus year ago, due
primarily to the $8.3 billion base period non-cash impairment charges related to
Shave Care goodwill and Gillette indefinite-lived intangible assets (Shave Care
impairment). The remaining $1.9 billion increase was driven by the net sales
increase and an increase in operating margin.
•Net earnings increased $9.1 billion or 230% versus year ago, due to the
aforementioned items and a reduction in current year effective tax rates,
partially offset by the base period gain on the dissolution of the PGT
Healthcare partnership and other minor divestitures. Foreign exchange impacts
negatively affected net earnings by approximately $390 million .
•Net earnings attributable to Procter & Gamble were $13.0 billion , an increase
of $9.1 billion or 234% versus the prior year primarily due to the
aforementioned items.
•Diluted net earnings per share (EPS) increased 247% to $4.96 .
• Core EPS increased 13% to $5.12 .
•Cash flow from operating activities was $17.4 billion .
• Adjusted free cash flow was $14.9 billion .
• Adjusted free cash flow productivity was 114%.
ECONOMIC CONDITIONS AND UNCERTAINTIES
We discuss expectations regarding future performance, events and outcomes, such
as our business outlook and objectives, in annual and quarterly reports, press
releases and other written and oral communications. All such statements, except
for historical and present factual information, are "forward-looking statements"
and are based on financial data and our business plans available only as of the
time the statements are made, which may become out-of-date or incomplete. We
assume no obligation to update any forward-looking statements as a result of new
information, future events or other factors, except as required by law.
Forward-looking statements are inherently uncertain and investors must recognize
that events could be significantly different from our expectations. For more
information on risk factors that could impact our results, please refer to "Risk
Factors" in Part I, Item 1A of this Form 10-K.
Global Economic Conditions. Our products are sold in numerous countries across
North America , Europe , Latin America , Asia and Africa , with more than half our
sales generated outside the United States . As such, we are exposed to and
impacted by global macro-economic factors, U.S. and foreign government policies
and foreign exchange fluctuations. Current global economic conditions are highly
volatile due to the COVID-19 pandemic, resulting in both market size
contractions in certain countries due to economic slowdowns and government
restrictions on movement, as well as market size increases in certain countries
due to pantry loading and increased consumption of household cleaning and
personal health and hygiene products by consumers. Other macro-economic factors
also remain dynamic, and any causes of market size contraction, such as
reduced GDP in commodity-dependent economies, greater political unrest or
instability in the Middle East , Central & Eastern Europe , certain Latin American
markets, the Hong Kong market in Greater China and the Korean peninsula and
economic uncertainty related to the United Kingdom's exit from the European
Union , could reduce our sales or erode our operating margin, in either case
reducing our net earnings and cash flows.
Changes in Costs. Our costs are subject to fluctuations, particularly due to
changes in commodity prices, transportation costs and our own productivity
efforts. We have significant exposures to certain commodities, in particular
certain oil-derived materials like resins and paper-based materials like pulp,
and volatility in the market price of these commodity input materials has a
direct impact on our costs. Disruptions in our manufacturing, supply and
distribution operations due to the COVID-19 pandemic may also impact our costs.
If we are unable to manage these impacts 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, net
earnings and cash flows. 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 the MD&A, in 2012 we initiated
overhead and supply chain cost improvement projects. In fiscal 2017, we
communicated specific elements of an additional multi-year cost reduction
program which is resulting in targeted enrollment reductions and other savings.
If we are not successful in executing and sustaining these changes, there could
be a negative impact on our gross margin, operating margin, net earnings and
cash flows.
Foreign Exchange. We have both translation and transaction exposure to the
fluctuation of exchange rates. Translation exposures relate to exchange rate
impacts of measuring income statements of foreign subsidiaries that do not use
the U.S. dollar as their functional currency. Transaction exposures relate to 1)
the impact from input costs that are denominated in a currency other than the
local reporting currency and 2) the revaluation of transaction-related working
capital balances denominated in currencies other than the functional currency.
In four of the past five years, including fiscal 2020, the U.S. dollar has
strengthened versus a number of foreign currencies, leading to lower sales and
earnings from these foreign exchange impacts. Certain countries experiencing
significant exchange rate fluctuations, like Argentina , Brazil , Greater China ,
Turkey and the United Kingdom have had, and could continue to have, a
significant impact on our sales, costs and net earnings. Increased pricing in
response to certain fluctuations in foreign currency exchange rates may offset
portions of the currency impacts but could also have a negative impact on
consumption of our products, which would affect our sales, gross margin,
operating margin, net earnings and cash flows.
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The Procter & Gamble Company 17
Government Policies. Our net earnings could be affected by changes in U.S. or
foreign government tax policies, for example, the U.S. Tax Act, and the current
work being led by the OECD for the G20 focused on "Addressing the Challenges of
the Digitalization of the Economy." The breadth of this project extends beyond
pure digital businesses and is likely to impact all multinational businesses by
redefining jurisdictional taxation rights. Further, our sales, net earnings and
cash flows may be impacted by U.S. and foreign government policies to manage the
COVID-19 pandemic, such as movement restrictions or site closures. Additionally,
we attempt to carefully manage our debt, currency and other exposures in certain
countries with currency exchange, import authorization and pricing controls,
such as Nigeria , Algeria , Egypt , Argentina and Turkey . Further, our sales, net
earnings and cash flows could be affected by changes to international trade
agreements in North America and elsewhere, including increases of import
tariffs, both currently effective and future potential changes. Changes in
government policies in these areas might cause an increase or decrease in our
sales, gross margin, operating margin, net earnings and cash flows.
COVID-19 Pandemic disclosures
The Company's priorities during the COVID-19 pandemic are protecting the health
and safety of our employees; maximizing the availability of products that help
consumers with their health, hygiene and cleaning needs; and using our
employees' talents and our resources to help society meet and overcome the
current challenges. Because the Company sells products that are essential to the
daily lives of consumers, the COVID-19 pandemic has not had a material net
impact to our consolidated sales, net earnings and cash flows in the current
year. However, the pandemic has had offsetting impacts during the period. For
example, during the second half of fiscal 2020 we experienced a significant
increase in demand and consumption of certain of our product categories (health,
hygiene and home cleaning products) primarily in North America , caused in part
by changing consumer habits and pantry stocking, due to the COVID-19 pandemic,
contributing to increases in sales, net earnings and cash flows. At the same
time, we experienced a decrease in sales due to the economic slowdown and
restricted consumer movements in certain regions, including Europe , IMEA, Asia
Pacific and Latin America , in certain channels, including travel retail,
professional and electronics stores, and in certain of our beauty and grooming
products. While we experienced a decrease in sales in Greater China during the
third quarter of fiscal 2020, demand recovered in the fourth quarter as
restrictions on consumer movement were relaxed. In the future, the pandemic may
cause reduced demand for our products if it results in a recessionary global
economic environment. Demand in certain of our Enterprise Markets, including
certain countries in Latin America , Asia Pacific , and IMEA may be particularly
susceptible to recession. It could also lead to volatility in consumer access to
our products due to government actions impacting our ability to produce and ship
products or impacting
consumers' movements and access to our products. We believe that over the long
term, there will continue to be strong demand for categories in which we
operate, particularly our products that deliver essential health, hygiene and
cleaning benefits. However, the timing and extent of demand recovery in markets
such as Greater China and Japan , the resumption of international travel, the
timing and impact of potential consumer pantry destocking in markets including
North America and Europe , and product demand volatility caused by future
economic trends are unclear. Accordingly, there may be heightened volatility in
sales, net earnings and cash flows during and subsequent to the duration of the
pandemic. Our retail customers are also being impacted by the pandemic. Their
success in addressing the issues and maintaining their operations could impact
consumer access to, and as a result, sales of our products.
Our ability to continue to operate without any significant negative impacts will
in part depend on our ability to protect our employees and our supply chain. The
Company has endeavored to follow actions recommended by governments and health
authorities to protect our employees world-wide, with particular measures in
place for those working in our plants and distribution facilities. We have also
worked closely with local and national officials to keep our manufacturing
facilities open due to the essential nature of the majority our products. We
were able to broadly maintain our operations in the current fiscal year, but we
have experienced some disruption in our supply chain in certain Enterprise
Markets due primarily to the restriction of employee movements as well as
increased transportation and manufacturing costs. We intend to continue to work
with government authorities and implement our employee safety measures to ensure
that we are able to continue manufacturing and distributing our products during
the pandemic. However, uncertainty resulting from the pandemic could result in
an unforeseen disruption to our supply chain (for example a closure of a key
manufacturing or distribution facility or the inability of a key material or
transportation supplier to source and transport materials) that could impact our
operations.
Because the pandemic has not had a material negative impact on our operations or
demand for our products and resulting sales and net earnings, it has also not
negatively impacted the Company's liquidity position. We continue to generate
operating cash flows to meet our short-term liquidity needs, and we expect to
maintain access to the capital markets enabled by our strong short- and
long-term credit ratings. We have also not observed any material impairments of
our assets or a significant change in the fair value of assets due to the
COVID-19 pandemic.
For additional information on risk factors that could impact our results, please
refer to "Risk Factors" in Part I, Item 1A of this Form 10-K.
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18 The Procter & Gamble Company
RESULTS OF OPERATIONS
The key metrics included in the discussion of our consolidated results of
operations include net sales, gross margin, selling, general and administrative
costs (SG&A), other non-operating items and income taxes. The primary factors
driving year-over-year changes in net sales include overall market growth in the
categories in which we compete, product initiatives, competitive activities (the
level of initiatives, pricing and other activities by competitors), marketing
spending, retail executions (both in-store and online), and acquisition and
divestiture activity, all of which drive changes in our underlying unit volume,
as well as our pricing actions (which can also impact volume), changes in
product and geographic mix and foreign currency impacts on sales outside the
U.S.
Most of our cost of products sold and SG&A are to some extent variable in
nature. Accordingly, our discussion of these operating costs focuses primarily
on relative margins rather than the absolute year-over-year changes in total
costs. The primary drivers of changes in gross margin are input costs (energy
and other commodities), pricing impacts, geographic mix (for example, gross
margins in North America are generally higher than the Company average for
similar products), product mix (for example, the Beauty segment has higher gross
margins than the Company average), foreign exchange rate fluctuations (in
situations where certain input costs may be tied to a different functional
currency than the underlying sales), the impacts of manufacturing savings
projects and reinvestments (for example, product or package improvements) and to
a lesser extent scale impacts (for costs that are fixed or less variable in
nature). The primary components of SG&A are marketing-related costs and
non-manufacturing overhead costs. Marketing-related costs are primarily variable
in nature, although we may achieve some level of scale benefit
over time due to overall growth and other marketing efficiencies. While overhead
costs are variable to some extent, we generally experience more scale-related
impacts
for these costs due to our ability to leverage our organization and systems'
infrastructures to support business growth.
For a detailed discussion of the fiscal 2019 year over year changes, please
refer to the MD&A in Part II, Item 7 of the Company's Form 10-K
for the fiscal year ended June 30, 2019 .
Net Sales
Net sales increased 5% to $71.0 billion in fiscal 2020 on a 4% increase in unit
volume versus the prior year. Volume increased double digits in Health Care,
increased mid-single digits in Fabric & Home Care and increased low single
digits in Beauty and Baby, Feminine & Family Care. Volume decreased low single
digits in Grooming. Excluding the impacts of acquisitions and divestitures,
including the Merck OTC acquisition, organic volume increased mid-single digits
in Health Care and increased high single digits in Fabric & Home Care.
On a regional basis, volume increased high single digits in North America and
increased low single digits in Greater China , Europe , Asia Pacific and Latin
America driven by innovation, market growth and increased demand, particularly
in household cleaning and personal health and hygiene products in the second
half of the fiscal year, driven in part by increased consumption and pantry
loading due to the COVID-19 pandemic. Volume decreased low single digits in IMEA
as growth in the first half of the year was more than offset by market
contraction in the second half of the fiscal year driven by economic slowdown
resulting from the COVID-19 pandemic. Unfavorable foreign exchange reduced net
sales by 2%. Increased pricing had a positive 1% impact on net sales. Mix had a
positive 1% impact on net sales driven by the disproportionate organic growth of
the Personal Health Care and Home Care categories and the North America region,
all of which have higher than company average selling prices. Organic sales grew
6% on a 4% increase in organic volume.
Operating Costs
Basis Point
Comparisons as a percentage of net sales; Years ended
2019 Change
Gross margin 50.3 % 48.6 % 170
Selling, general and administrative expense 28.2 % 28.2 % -
Operating margin 22.1 % 8.1 % 1,400
Earnings before income taxes 22.3 % 9.0 % 1,330
Net earnings 18.5 % 5.9 % 1,260
Net earnings attributable to Procter & Gamble 18.4 % 5.8 % 1,260
Gross margin increased 170 basis points to 50.3% of net sales in fiscal 2020.
Gross margin benefited from:
•150 basis points from total manufacturing cost savings (130 basis points net of
product and packaging reinvestments),
•90 basis points from lower commodity costs and
•60 basis points of positive pricing impacts.
These were offset by a 70 basis-point decline from unfavorable product mix (due
to the disproportionate organic
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The Procter & Gamble Company 19
growth of the Fabric & Home Care segment which has lower than company average
gross margin and mix within segments due to the growth of lower margin product
forms and larger sizes in certain categories), a 20 basis-point negative impact
from unfavorable foreign exchange and 20 basis points of other impacts.
Total SG&A increased 5% to $20.0 billion , primarily due to increases in
marketing spending and, to a lesser extent, increases in other net operating
expenses and overhead costs. SG&A as a percentage of net sales was unchanged at
28.2%. An increase in marketing spending and other net operating expenses as a
percentage of net sales was offset by a decrease in overhead costs as a
percentage of net sales.
•Marketing spending as a percentage of net sales increased 10 basis points due
to investments in media and other marketing spending, partially offset by the
positive scale impacts of the net sales increase and savings in agency
compensation, production costs and advertising spending.
•Overhead costs as a percentage of net sales decreased 40 basis points due to
the positive scale impacts of the net sales increase and productivity savings,
partially offset by inflation and other cost increases.
•Other net operating expenses as a percentage of net sales increased
approximately 30 basis points primarily due to the base period gain on sale of
real estate.
Operating margin increased 1,400 basis points to 22.1% for fiscal 2020. 1,230
basis points of this increase is due to the Shave Care impairment charge in the
base period. The remaining increase is due to the increase in gross margin as
discussed above.
Non-Operating Items
•Interest expense was $465 million in fiscal 2020, a decrease of $44 million
versus the prior year due primarily to a reduction in U.S. interest rates,
partially offset by an increase in debt.
•Interest income was $155 million in fiscal 2020, a reduction of $65 million
versus the prior year due to a reduction in average cash and investment
securities balances and a reduction in U.S. interest rates.
•Other non-operating income, which consists primarily of divestiture gains and
other non-operating items decreased $433 million to $438 million , primarily due
to the base period gains from brand divestitures including a $355 million
before-tax gain from the dissolution of the PGT Healthcare partnership.
Income Taxes
Income taxes increased $628 million to $2.7 billion due to increased earnings,
partially offset by a decline in the effective tax rate. The effective tax rate
decreased 1,750 basis points to 17.2% in 2020 due to:
•a 1,750 basis-point reduction due to the prior year impact of the Shave Care
impairment charge as there was no tax benefit related to the goodwill portion of
the charge and
•a 135 basis-point current year reduction from a tax benefit arising from
transactions to simplify our legal entity structure.
These reductions were partially offset by:
•a 60 basis-point increase from unfavorable impacts from geographic mix of
current year earnings, caused primarily by disproportionately higher sales and
earnings in the U.S. ,
•a 40 basis-point increase related to the prior year tax impact of the gain on
the dissolution of the PGT Healthcare partnership,
•a 30 basis-point increase from current year unfavorable discrete impacts
related to uncertain tax positions (15 basis-point increase in the current year
rate versus a 15 basis-point decrease in the prior year rate) and
•a 5 basis-point increase from lower excess tax benefits of share-based
compensation (155 basis-point reduction in the current year versus 160
basis-point reduction in the prior year).
Net Earnings
Operating income increased 186% or $10.2 billion to $15.7 billion . $8.3 billion
of the increase was due to the base period charge for the Shave Care impairment.
The remaining $1.9 billion increase was due to the net sales increase and the
increase in gross margin partially offset by the increase in SG&A, all of which
are discussed above.
Earnings before income taxes increased 161% or $9.8 billion to $15.8 billion , as
the increase in operating income discussed above was partially offset by the
base period gains from the dissolution of the PGT Healthcare partnership and
other minor brand divestitures. Net earnings increased 230% or $9.1 billion to
$13.1 billion due to the increase in operating income and the reduction in
effective income taxes rates discussed above. Foreign exchange impacts reduced
net earnings by approximately $390 million in fiscal 2020 due to weakening of
certain currencies against the U.S. dollar, including those in Argentina ,
Brazil , China , Turkey and the United Kingdom . This impact includes both
transactional charges and translational impacts from converting earnings from
foreign subsidiaries to U.S. dollars.
Net earnings attributable to Procter & Gamble increased $9.1 billion , or 234%,
to $13.0 billion .
Diluted net EPS increased $3.53 , or 247%, to $4.96 due primarily to the increase
in net earnings.
Core EPS increased 13% to $5.12 . Core EPS represents diluted net EPS from
continuing operations, excluding the base year charge for the Shave Care
impairment, the base year gain on the dissolution of the PGT Healthcare
partnership and incremental restructuring charges in both years related to our
productivity and cost savings plans. The increase was primarily driven by the
increase in net sales and the increase in operating margin discussed previously.
--------------------------------------------------------------------------------
20
SEGMENT RESULTS
Segment results reflect information on the same basis we use for internal
management reporting and performance evaluation. The results of these reportable
segments do not include certain non-business unit specific costs. These costs,
including the Shave Care impairment in fiscal 2019, are reported in our
Corporate segment and are included as part of our Corporate segment discussion.
Additionally, we apply blended statutory tax rates in the segments. Eliminations
to adjust segment results to arrive at our consolidated effective tax rate are
included in Corporate. See Note 2 to the Consolidated Financial Statements for
additional information on items included in the Corporate segment.
Net Sales Change Drivers 2020 vs. 2019 (1)
Volume with Volume Excluding
Acquisitions & Acquisitions & Foreign Net Sales
Divestitures Divestitures Exchange Price Mix Other (2) Growth
Beauty 3 % 2 % (2) % 2 % 1 % - % 4 %
Grooming (1) % (1) % (3) % 2 % - % - % (2) %
Health Care 10 % 5 % (2) % 1 % 1 % - % 10 %
Fabric & Home Care 6 % 7 % (1) % 1 % 1 % - % 7 %
Baby, Feminine & Family
Care 3 % 3 % (2) % 1 % 1 % - % 3 %
TOTAL COMPANY 4 % 4 % (2) % 1 % 1 % 1 % 5 %
(1)Net sales percentage changes are approximations based on quantitative
formulas that are consistently applied.
(2)Other includes the sales mix impact from acquisitions and divestitures and
rounding impacts necessary to reconcile volume to net sales.
BEAUTY
($ millions) 2020 2019 Change vs. 2019
Volume N/A N/A 3%
Net sales $13,359 $12,897 4%
Net earnings $2,737 $2,637 4%
% of net sales 20.5% 20.4% 10 bps
Beauty net sales increased 4% to $13.4 billion in fiscal 2020 on a 3% increase
in unit volume. Unfavorable foreign exchange impacts reduced net sales by 2%.
Higher pricing increased net sales by 2%. Favorable product mix added 1% to net
sales due to the disproportionate growth of the Skin and Personal Care category,
including the Olay skin care brand, which has higher than segment average
selling prices. Organic sales increased 5% on a 2% increase in organic volume.
Global market share of the Beauty segment increased 0.2 points. Volume increased
mid-single digits in North America , Europe and Asia Pacific and increased low
single digits in Greater China and Latin America . Volume decreased high single
digits in IMEA.
•Volume in Hair Care increased low single digits. Volume increased mid-single
digits in Europe and Asia Pacific and increased low single digits in North
America and Latin America due to product innovation and market growth. Volume
decreased double digits in IMEA and decreased low single digits in Greater China
due to the economic slowdown caused by the COVID-19 pandemic in the second half
of the fiscal year and market declines in certain countries. Global market share
of the hair care category was unchanged.
•Volume in Skin and Personal Care increased mid-single digits. Volume increased
double digits in Greater China ,
increased mid-single digits in North America , and increased low single digits in
Europe and Asia Pacific due to premium innovation, increased marketing spending
and market growth, partially offset by a volume decrease in the SK-II brand and
a mid-single digits decline in IMEA due to the COVID-19 pandemic related travel
restrictions. Global market share of the skin and personal care category
increased nearly half a point.
Net earnings increased 4% to $2.7 billion in fiscal 2020 due to the increase in
net sales and a 10 basis-point increase in net earnings margin. Net earnings
margin increased due to a decrease in SG&A as a percentage of net sales,
partially offset by a decrease in gross margin and an increase in the effective
tax rate. The gross margin decrease was mainly driven by the negative impacts of
unfavorable mix (due to the decline of the super-premium SK-II brand, driven by
the impacts of the COVID-19 pandemic, and the disproportionate growth of large
sizes) and other hurts related to new manufacturing startup costs partially
offset by increased selling prices. SG&A as a percentage of net sales decreased
due to the positive scale impacts of the net sales increase and a reduction in
marketing spending due to productivity savings. The increase in the effective
tax rate was driven by the unfavorable geographic mix of earnings.
GROOMING
($ millions) 2020 2019 Change vs. 2019
Volume N/A N/A (1)%
Net sales $6,069 $6,199 (2)%
Net earnings $1,329 $1,529 (13)%
% of net sales 21.9% 24.7% (280) bps
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The Procter & Gamble Company 21
Grooming net sales decreased 2% to $6.1 billion in fiscal 2020 on a 1% decrease
in unit volume. Unfavorable foreign exchange impacts reduced net sales by 3%.
Increased pricing had a 2% positive impact to net sales. Organic sales increased
1%. Global market share of the Grooming segment decreased 0.2 points. Volume
increased mid-single digits in Asia Pacific and was unchanged in Europe and
Latin America . Volume decreased low single digits in North America and Greater
China and decreased mid-single digits in IMEA.
•Shave Care volume decreased low single digits. Volume decreased mid-single
digits in IMEA and decreased low single digits in North America and Europe due
to market decline and reduced shaving incidents resulting from the COVID-19
pandemic and competitive activity. This was partially offset by a mid-single
digit volume increase in Asia Pacific due to innovation. Global market share of
the shave care category was unchanged.
•Appliances volume increased low single digits. Volume increased mid-teens in
North America and mid-single digits in Europe due to innovation and increased
consumption of at-home styling products due to pandemic related movement
restrictions. Volume decreased double digits in Asia Pacific , decreased high
single digits in Greater China and decreased low single digits in IMEA due to
market contraction, competitive activity and the economic slowdown caused by the
COVID-19 pandemic. Global market share of the appliances category increased more
than a point.
Net earnings decreased 13% to $1.3 billion in fiscal 2020 due to the decrease in
net sales and a 280 basis-point decrease in net earnings margin. The net
earnings margin decreased due to an increase in SG&A as a percentage of net
sales, an increase in the effective tax rate and a decrease in gross margin.
Gross margin decreased due to the negative impact of unfavorable mix (due to the
disproportionate growth of disposable razors, styling appliances and the Asia
Pacific region all of which have lower than segment average margins) partially
offset by the positive impacts of manufacturing cost savings and increased
selling prices. SG&A as a percentage of net sales increased primarily due to a
base period gain on the sale of operating real estate partially offset by
current period reductions in overhead costs and marketing spending due to
productivity savings. The increase in the effective tax rate was primarily due
to a base period benefit from the favorable adjustments to reserves for
uncertain tax positions.
HEALTH CARE
($ millions) 2020 2019 Change vs. 2019
Volume N/A N/A 10%
Net sales $9,028 $8,218 10%
Net earnings $1,652 $1,519 9%
% of net sales 18.3% 18.5% (20) bps
Health Care net sales increased 10% to $9.0 billion in fiscal 2020 on a 10%
increase in unit volume. Unfavorable foreign exchange impacts reduced net sales
by 2%. Increased pricing had a 1% positive impact to net sales. Favorable mix
increased net sales by 1% due to the disproportionate organic growth of the
Personal Health Care category which has higher than segment average selling
prices. Excluding the net impacts of the Merck OTC consumer healthcare
acquisition and minor brand divestitures, organic sales increased 7% on a 5%
increase in organic volume. Global market share of the Health Care segment
increased 0.4 points. Volume increased more than 20% in IMEA, increased double
digits in Latin America and Europe , increased high single digits in Asia Pacific
and increased mid-single digits in North America . Excluding the net impacts of
the Merck OTC consumer healthcare acquisition and minor brand divestitures,
organic volume increased high single digits in IMEA, increased mid-single digits
in Latin America and increased low single digits in Europe and Asia Pacific .
•Oral Care volume increased low single digits. Volume increased double digits in
IMEA, increased mid-single digits in Latin America and increased low single
digits in North America and Asia Pacific due to product innovation and market
growth. This growth was partially offset by low single digits volume decreases
in Europe and Greater China due to competitive activities and the COVID-19
pandemic related economic slowdown and electronics stores closures. Excluding
the impact of minor brand divestitures, organic volume increased low single
digits in Europe . Global market share of the oral care category increased less
than half a point.
•Volume in Personal Health Care increased over 20%. Excluding the impacts of the
Merck OTC consumer healthcare acquisition, organic volume increased double
digits. Organic volume increased mid-teens in North America and Europe and
increased mid-single digits in IMEA due to product innovation, increased
marketing spending and increased consumption and retailer inventory increases in
certain markets driven by the COVID-19 pandemic. This was partially offset by a
low single digit volume decrease in Asia Pacific and Latin America due to
devaluation related price increases and the COVID-19 related economic slowdown.
Global market share of the personal health care category increased nearly a
point.
Net earnings increased 9% to $1.7 billion in fiscal 2020 due to the increase in
net sales partially offset by a 20 basis-point decrease in net earnings margin.
The net earnings margin decreased due to an increase in SG&A as a percentage of
net sales and a reduction in non-operating income, partially offset by an
increase in gross margin. Gross margin increased due to manufacturing cost
savings and increased selling prices partially offset by unfavorable mix impact
(from the disproportionate growth of certain products and certain markets in
IMEA both of which have lower than segment-average margins). SG&A as a
percentage of net
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22 The Procter & Gamble Company
sales increased due to an increase in overhead costs and other operating
expenses primarily caused by the Merck OTC consumer healthcare acquisition,
partially offset by the positive scale impacts of the net sales increase.
Non-operating income declined due to a base period gain from minor brand
divestitures.
FABRIC & HOME CARE
($ millions) 2020 2019 Change vs. 2019
Volume N/A N/A 6%
Net sales $23,735 $22,080 7%
Net earnings $4,154 $3,518 18%
% of net sales 17.5% 15.9% 160 bps
Fabric & Home Care net sales increased 7% to $23.7 billion in fiscal 2020 on a
6% increase in unit volume. Unfavorable foreign exchange impacts reduced net
sales by 1%. Higher pricing increased net sales by 1%. Positive mix impacts
increased net sales by 1% due to the disproportionate growth of the Home Care
category and the North America region, both of which have higher than segment
average selling prices. Organic sales increased 9% on a 7% increase in organic
volume. Global market share of the Fabric & Home Care segment increased 0.7
points. Volume increased double digits in North America , increased high single
digits in Latin America , increased mid-single digits in Greater China and Europe
and increased low single digits in Asia Pacific . Volume decreased low single
digits in IMEA.
•Fabric Care volume increased mid-single digits. Volume grew double digits in
North America and Latin America , grew mid-single digits in Greater China and
grew low single digits in Europe . Volume growth was driven by product innovation
and to a lesser extent the consumption increase and pantry loading driven by the
COVID-19 pandemic. This growth was partially offset by a low single digit volume
decrease in IMEA due to the COVID-19 pandemic related economic slowdown. Volume
in Asia Pacific was unchanged. Global market share of the Fabric Care category
increased a point.
•Home Care volume increased double digits. Volume increased in all regions led
by double digit growth in North America and Europe , high single digits growth in
Asia Pacific , mid-single digits growth in Latin America and low single digits
growth in IMEA. The volume growth was driven by product innovation as well as
the consumption increase and pantry loading driven by the COVID-19 pandemic.
Global market share of the Home Care category increased more than half a point.
Net earnings increased 18% to $4.2 billion in fiscal 2020 due to the increase in
net sales and a 160 basis-point increase in net earnings margin. The net
earnings margin increased due to an increase in gross margin partially offset by
an increase in the effective tax rate. The gross margin increase was driven by
manufacturing cost savings and a reduction in commodity costs, partially offset
by unfavorable product mix (due to the disproportionate growth of premium
innovation that has not yet been cost optimized). SG&A as a
percentage of net sales was unchanged as an increase in marketing spending was
offset by the positive scale benefits of increased net sales on overhead costs.
The increase in the effective tax rate was driven by the unfavorable
geographical mix of earnings.
BABY, FEMININE & FAMILY CARE
($ millions) 2020 2019 Change vs. 2019
Volume N/A N/A 3%
Net sales $18,364 $17,806 3%
Net earnings $3,465 $2,734 27%
% of net sales 18.9% 15.4% 350 bps
Baby, Feminine & Family Care net sales increased 3% to $18.4 billion in fiscal
2020 on a 3% increase in unit volume. Unfavorable foreign exchange impacts
reduced net sales by 2%. Increased pricing was a positive 1% impact to net
sales. Positive mix impact increased net sales by 1% due to the disproportionate
growth of the North America region which has higher than segment average selling
prices. Organic sales increased 4%. Global market share of the Baby, Feminine &
Family Care segment decreased 0.3 points. Volume increased high single digits in
North America and was unchanged in Asia Pacific . Volume decreased high single
digits in Latin America , decreased mid-single digits in IMEA and decreased low
single digits in Greater China and Europe .
•Baby Care volume decreased mid-single digits. Volume decreased double digits in
Latin America , decreased high single digits in IMEA, decreased mid-single digits
in Europe and decreased low single digits in Greater China and Asia Pacific due
to competitive activity, devaluation related price increases, category
contraction in certain markets (partly due to declining birth rates in China )
and to a lesser extent the economic slowdown caused by the COVID-19 pandemic.
This was partially offset by a low single digit volume increase in North America
driven by market growth and product innovation. Global market share of the baby
care category decreased more than a point.
•Feminine Care volume increased low single digits. Volume growth was led by a
double digit increase in Asia Pacific due to a new launch in the adult
incontinence category in Japan , as well as high single digits growth in North
America , mid-single digits growth in Europe and low single digits growth in
Greater China and Latin America , all due to product innovation, increased
marketing spending, adult incontinence category growth and to a lesser extent
the increased consumption and pantry loading related to the COVID-19 pandemic in
certain markets. Excluding the impact of a minor brand acquisition, volume in
North America increased mid-single digits. This was partially offset by a low
single digit volume decrease in IMEA due to the economic slowdown caused by the
COVID-19 pandemic. Global market share of the feminine care category increased
nearly a point.
--------------------------------------------------------------------------------
The Procter & Gamble Company 23
•Volume in Family Care, which is predominantly a North American business,
increased high single digits driven by the COVID-19 pandemic related market
growth, consumption increase and pantry loading, product innovation, increased
marketing spending and market growth. In the U.S. , all-outlet share of the
family care category decreased more than half a point.
Net earnings in fiscal 2020 increased 27% to $3.5 billion due to the increase in
net sales and a 350 basis-point increase in net earnings margin. Net earnings
margin increased primarily due to an increase in gross margin, partially offset
by an increase in the effective tax rate and a marginal increase in SG&A as a
percentage of net sales. The gross margin increase was driven by manufacturing
cost savings, a reduction in commodity costs and higher selling prices partially
offset by unfavorable product mix (due to the disproportionate growth of large
sizes and product forms with lower than segment average margins). SG&A as a
percentage of net sales increased marginally due primarily to an increase in
marketing spending, partially offset by a reduction in overhead costs driven by
productivity savings and the positive scale benefits of the net sales increase.
The increase in the effective tax rate was driven by an unfavorable geographic
mix of earnings.
CORPORATE
($ millions) 2020 2019 Change vs. 2019
Net sales $395 $484 (18)%
Net earnings/(loss) $(234) $(7,971) N/A
Corporate includes certain operating and non-operating activities not allocated
to specific business segments. These include: the incidental businesses managed
at the corporate level; financing and investing activities; certain employee
benefit costs; other general corporate items; gains and losses related to
certain divested brands and categories; certain asset impairment charges; and
certain restructuring-type activities to maintain a competitive cost structure,
including manufacturing and workforce optimization. Corporate also includes
reconciling items to adjust the accounting policies used in the segments to U.S.
GAAP. The most significant ongoing reconciling item is income taxes, to adjust
from blended statutory rates that are reflected in the segments to the overall
Company effective tax rate.
Corporate net sales decreased 18% to $395 million in fiscal 2020 due to a
decrease in the net sales of the incidental businesses managed at the corporate
level. Corporate net loss decreased by $7.7 billion in fiscal 2020 primarily due
to the $8.0 billion after tax ($8.3 billion before tax) base period charge for
the Shave Care impairment, partially offset by higher base period divestiture
gains (primarily driven by gain on the dissolution of the PGT healthcare
partnership).
Restructuring Program to Deliver Productivity and Cost Savings
In fiscal 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 both fund the Company's growth strategy and increase the Company's operating
margin. In fiscal 2017, the Company communicated specific elements of an
additional multi-year productivity and cost savings program.
The current productivity and cost savings plan is further reducing costs in the
areas of supply chain, certain marketing activities and overhead expenses. As
part of this plan, the Company incurred approximately $1.5 billion in total
before- tax restructuring costs across 2019 and 2020. In fiscal 2021 and
onwards, the Company expects to incur restructuring costs within the range of
our historical ongoing level of $250 to $500 million annually. Savings generated
from the Company's restructuring program are difficult to estimate, given the
nature of the activities, the timing of the execution and the degree of
reinvestment. However, we estimate that through 2020, the underlying
restructuring costs incurred since 2012 (approximately $8.2 billion ), along with
other non-manufacturing enrollment reductions since 2012 have delivered
approximately $3.7 billion in annual before-tax gross savings.
Restructuring accruals of $472 million as of June 30, 2020 are classified as
current liabilities. Approximately 52% of the restructuring charges incurred in
fiscal 2020 either have been or will be settled with cash. Consistent with our
historical policies for ongoing restructuring-type activities, the resulting
charges are funded by and included within Corporate for segment reporting.
In addition to our restructuring programs, we have additional ongoing savings
efforts in our supply chain, marketing and overhead areas that yield additional
benefits to our operating margins.
Refer to Note 3 to the Consolidated Financial Statements for more details on the
restructuring program and to the Operating Costs section of the MD&A for more
information about the total benefit to operating margins from our total savings
efforts.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced
by our ability to generate substantial cash from operations and to readily
access capital markets at competitive rates.
Operating cash flow provides the primary source of cash to fund operating needs
and capital expenditures. Excess operating cash is used first to fund
shareholder dividends. Other discretionary uses include share repurchases and
acquisitions to complement our portfolio of businesses, brands and geographies.
As necessary, we may supplement operating cash flow with debt to fund these
activities. The overall cash position of the Company reflects our strong
business results and a global cash management strategy that takes into account
liquidity management, economic factors and tax considerations.
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24 The Procter & Gamble Company
Operating Cash Flow
Operating cash flow was $17.4 billion in 2020, a 14% increase from the prior
year. Net earnings, adjusted for non-cash items (depreciation and amortization,
share-based compensation and deferred income taxes) generated approximately
$16.1 billion of operating cash flow. Working capital and other impacts
generated $1.3 billion of operating cash flow as summarized below.
•A decrease in accounts receivable generated $634 million of cash primarily due
to the timing of the end of the fiscal year (which fell on a Tuesday versus
Sunday in the prior year end, resulting in additional collection days in the
current year) and lower relative sales at the end of the period in certain
markets driven by COVID-19. The number of days sales outstanding decreased
approximately 5 days versus prior year.
•Higher inventory used $637 million of cash mainly due to inventory increases to
support initiatives, business growth across all segments and to replenish stocks
in certain categories depleted by the COVID-19 pandemic related demand
increases. Inventory days on hand increased approximately 4 days primarily due
to initiative support and inventory replenishment.
•Accounts payable, accrued and other liabilities increased, generating $1.9
billion of cash. Approximately $700 million of this was driven by extended
payment terms with our suppliers (see Extended Payment Terms and Supply Chain
Financing below). The remaining amount was driven by higher payables from
increased manufacturing activity due to the pandemic related demand increases,
an increase in marketing spending in the fourth quarter versus the prior year
and increases in taxes payable related to the Merck integration. Days payable
outstanding increased approximately 4 days to 81 days as of June 30, 2020 due to
the above.
•Other net operating assets and liabilities declined, using $710 million of
cash, primarily driven by the payment of the current year portion of taxes due
related to the U.S. Tax Act repatriation charge ($215 million ) and pension
related accruals and contributions.
Adjusted Free Cash Flow. We view adjusted free cash flow as an important
non-GAAP measure because it is a factor impacting the amount of cash available
for dividends, share repurchases, acquisitions and other discretionary
investments. It is defined as operating cash flow less capital expenditures and
excluding payments for the transitional tax resulting from the U.S. Tax Act and
tax payments related to the Merck acquisition. Adjusted free cash flow is one of
the measures used to evaluate senior management and determine their at-risk
compensation.
Adjusted free cash flow was $14.9 billion in 2020, an increase of 23% versus the
prior year. The increase was primarily driven by the increase in operating cash
flows as discussed above. Adjusted free cash flow productivity, defined as the
ratio of adjusted free cash flow to net earnings, was 114% in 2020.
Extended Payment Terms and Supply Chain Financing. Beginning in fiscal 2014, in
response to evolving market practices, the Company began a program to negotiate
extended payment terms with its suppliers. At about the same time, the Company
initiated a Supply Chain Finance program (SCF) with several global financial
institutions (SCF Banks). Under the SCF, qualifying suppliers may elect to sell
their receivables from the Company to an SCF Bank . These participating suppliers
negotiate their receivables sales arrangements directly with the respective SCF
Bank . While the Company is not party to those agreements, the SCF Banks allow
the participating suppliers to utilize the Company's creditworthiness in
establishing credit spreads and associated costs. This generally provides the
suppliers with more favorable terms than they would be able to secure on their
own. The Company has no economic interest in a supplier's decision to sell a
receivable. Once a qualifying supplier elects to participate in the SCF and
reaches an agreement with an SCF Bank , the supplier elects which individual
Company invoices they sell to the SCF bank. However, all the Company's payments
to participating suppliers are paid to the SCF Bank on the invoice due date,
regardless of whether the individual invoice is sold by the supplier to the SCF
Bank . The SCF Bank pays the supplier on the invoice due date for any invoices
that were not previously sold by the supplier to the SCF Bank .
The terms of the Company's payment obligation are not impacted by a supplier's
participation in the SCF. Our payment terms with our suppliers for similar
materials within individual markets are consistent between suppliers that elect
to participate in the SCF and those that do not participate. Accordingly, our
average days outstanding are not significantly impacted by the portion of
suppliers or related input costs that are included in the SCF. In addition, the
SCF is available to both material suppliers, where the underlying costs are
largely included in Cost of goods sold, and to service suppliers, where the
underlying costs are largely included in SG&A. As of June 30, 2020 ,
approximately 3% of our global suppliers have elected to participate in the SCF.
Payments to those suppliers during 2020 total approximately $13 billion , which
equals approximately 24% of our total Cost of goods sold and SG&A for the
period. For participating suppliers, we believe substantially all of their
receivables with the Company are sold to the SCF Banks. Accordingly, we would
expect that at each balance sheet date, a similar proportion of amounts
originally due to suppliers would instead be payable to SCF Banks. All
outstanding amounts related to suppliers participating in the SCF are recorded
within Accounts payable in our Consolidated Balance Sheets, and the associated
payments are included in operating activities within our Consolidated Statements
of Cash Flows. As of both June 30, 2020 and 2019, the amount due to suppliers
participating in the SCF and included in Accounts payable were approximately $4
billion .
Although difficult to project due to market and other dynamics, we anticipate
incremental cash flow benefits from the extended payment terms with suppliers
could increase at
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The Procter & Gamble Company 25
a slower rate in fiscal 2021. Future changes in our suppliers' financing
policies or economic developments, such as changes in interest rates, general
market liquidity or the Company's creditworthiness relative to participating
suppliers could impact suppliers' participation in the SCF and/or our ability to
negotiate extended payment terms with our suppliers. However, any such impacts
are difficult to predict.
Investing Cash Flow
Net investing activities generated $3.0 billion in cash in 2020, mainly due to
proceeds from sales and maturities of investment securities, partially offset by
capital spending. Net investing activities consumed $3.5 billion in cash in
2019, mainly due to capital spending and business acquisitions, partially offset
by proceeds from sales and maturities of short-term investments.
Capital Spending. Capital expenditures, primarily to support capacity expansion,
innovation and cost efficiencies, were $3.1 billion in 2020 and $3.3 billion in
2019. Capital spending as a percentage of net sales decreased 60 basis points to
4.3% in 2020.
Acquisitions. Acquisition activity used cash of $58 million in 2020, primarily
related to final contractual payments from the prior year acquisition of Merck
OTC along with a minor Baby Care acquisition. Acquisition activity used $3.9
billion in 2019, primarily related to the Merck OTC acquisition.
Proceeds from Divestitures and Other Asset Sales. Proceeds from asset sales were
$30 million and $394 million in 2020 and 2019, respectively, primarily from
minor brand divestitures in both years and the sale of real estate in 2019.
Investment Securities . Investments generated net cash of $6.2 billion in 2020
and $3.5 billion in 2019 primarily from sales and maturities of investment
securities.
Financing Cash Flow
Net financing activities consumed $8.4 billion of cash in 2020, mainly due to
dividends to shareholders and treasury stock purchases, partially offset by a
net increase in debt and the impact of stock options. Net financing activities
consumed $10.0 billion in cash in 2019, mainly due to dividends to shareholders
and treasury stock purchases, partially offset by the impact of stock options.
Dividend Payments. Our first discretionary use of cash is dividend payments.
Dividends per common share increased 5% to $3.0284 per share in 2020. Total
dividend payments to common and preferred shareholders were $7.8 billion in 2020
and $7.5 billion in 2019. In April 2020 , the Board of Directors declared an
increase in our quarterly dividend from $0.7459 to $0.7907 per share on Common
Stock and Series A and B ESOP Convertible Class A Preferred Stock. This
represents a 6% increase compared to the prior quarterly dividend and is the
64th consecutive year that our dividend has increased. We have paid a dividend
for 130 consecutive years, every year since our incorporation in 1890.
Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate
after evaluating a number of factors, including cash flow expectations, cash
requirements for
ongoing operations, investment and financing plans (including acquisitions and
share repurchase activities) and the overall cost of capital. Total debt was
$34.7 billion as of June 30, 2020 and $30.1 billion as of June 30, 2019 . The
increase is primarily due to the issuance of bonds generating $5.0 billion of
cash.
Treasury Purchases. Total share repurchases were $7.4 billion in 2020 and $5.0
billion in 2019.
Liquidity
At June 30, 2020 , our current liabilities exceeded current assets by $5.0
billion largely due to short-term borrowings under our commercial paper program.
We anticipate being able to support our short-term liquidity and operating needs
largely through cash generated from operations. The Company regularly assesses
its cash needs and the available sources to fund these needs. As of June 30,
2020 , the Company did not have material net cash and cash equivalents related to
foreign subsidiaries nor related to any country subject to exchange controls
that significantly restrict our ability to access or repatriate the funds. Under
current law, we do not expect restrictions or taxes on repatriation of cash held
outside of the U.S. to have a material effect on our overall liquidity,
financial condition or the results of operations for the foreseeable future.
We utilize short- and long-term debt to fund discretionary items, such as
acquisitions and share repurchases. We have strong short- and long-term debt
ratings, which 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 funding to meet short-term financing
requirements.
On June 30, 2020 , our short-term credit ratings were P-1 (Moody's) and A-1+
(Standard & Poor's ), while our long-term credit ratings were Aa3 (Moody's) and
AA- (Standard & Poor's ), all with a stable outlook.
We maintain bank credit facilities to support our ongoing commercial paper
program. The current facility is an $8.0 billion facility split between a $3.2
billion five-year facility and a $4.8 billion 364-day facility, which expire in
November 2024 and November 2020 , respectively. Both facilities can be extended
for certain periods of time as specified in the terms of the credit agreement.
These facilities are currently undrawn and we anticipate that they will remain
undrawn. These credit facilities do not have cross-default or ratings triggers,
nor do they have material adverse events clauses, except at the time of signing.
In addition to these credit facilities, we have an automatically effective
registration statement on Form S-3 filed with the SEC that is available for
registered offerings of short- or long-term debt securities. For additional
details on debt see Note 10 to the Consolidated Financial Statements.
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26 The Procter & Gamble Company
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements,
including variable interest entities,
which we believe could have a material impact on our financial condition or
liquidity.
Contractual Commitments
The following table provides information on the amount and payable date of our
contractual commitments as of June 30, 2020 .
Less Than 1
($ millions) Total Year 1-3 Years 3-5 Years After 5 Years
RECORDED LIABILITIES
Total debt $ 34,589 $ 11,189 $ 5,154 $ 5,148 $ 13,098
Leases 1,023 239 352 220 212
U.S. Tax Act transitional charge (1) 2,346 224 450 984 688
Uncertain tax positions (2) 59 59 - - -
OTHER
Interest payments relating to long-term debt 6,676 673 1,173 955 3,875 Minimum pension funding (3) 603 196 407 - - Purchase obligations (4) 1,577 782 412 145 238
TOTAL CONTRACTUAL COMMITMENTS
(1)Represents theU.S. federal tax liability associated with the repatriation provisions of theU.S. Tax Act. Does not include any provisions made for foreign withholding taxes on expected repatriations as the timing of those payments is uncertain. (2)As ofJune 30, 2020 , the Company's Consolidated Balance Sheet reflects a liability for uncertain tax positions of$643 million , including$158 million of interest and penalties. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for uncertain tax positions beyond one year, a reasonable estimate of the period of cash settlement beyond twelve months from the balance sheet date ofJune 30, 2020 cannot be made. (3)Represents future pension payments to comply with local funding requirements. These future pension payments assume the Company continues to meet its future statutory funding requirements. Considering the current economic environment in which the Company operates, the Company believes its cash flows are adequate to meet the future statutory funding requirements. The projected payments beyond fiscal year 2023 are not currently determinable. (4)Primarily reflects future contractual payments under various take-or-pay arrangements entered into as part of the normal course of business. Commitments made under take-or-pay obligations represent minimum commitments under take-or-pay agreements with suppliers and are in line with expected usage. This includes service contracts for information technology, human resources management and facilities management activities that have been outsourced. While the amounts listed represent contractual obligations, we do not believe it is likely that the full contractual amount would be paid if the underlying contracts were canceled prior to maturity. In such cases, we generally are able to negotiate new contracts or cancellation penalties, resulting in a reduced payment. The amounts do not include other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES In preparing our financial statements in accordance withU.S. GAAP, there are certain accounting policies that may require a choice between acceptable accounting methods or may require substantial judgment or estimation in their application. These include revenue recognition, income taxes, certain employee benefits and goodwill and intangible assets. We believe these accounting policies, and others set forth in Note 1 to the Consolidated Financial Statements, should be reviewed as they are integral to understanding the results of operations and financial condition of the Company. The Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Company's Board of Directors. Revenue Recognition Our revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer, which can be on the date of shipment or the date of receipt by the customer. Trade promotions, consisting primarily of customer pricing allowances, in-store merchandising funds, advertising and other promotional activities, and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is recognized as incurred at the time of the sale. Amounts accrued for trade promotions at the end of a period require estimation, based on contractual terms, sales volumes and historical utilization and redemption rates. The actual amounts paid may be different from such estimates. These differences, which have historically not been significant, are recognized as a change in management estimate in a subsequent period. The Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" onJuly 1, 2018 . Adoption of this standard resulted in a change --------------------------------------------------------------------------------The Procter & Gamble Company 27 in the timing of recognition of certain trade promotional spending. Income Taxes Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual tax rate are judgments and assumptions regarding the recoverability of certain deferred tax balances, primarily net operating loss and other carryforwards, and our ability to uphold certain tax positions. Realization of net operating losses and other carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods, which involves business plans, planning opportunities and expectations about future outcomes. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized. We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. These interpretational differences with the respective governmental taxing authorities can be impacted by the local economic and fiscal environment. A core operating principle is that our tax structure is based on our business operating model, such that profits are earned in line with the business substance and functions of the various legal entities. However, because of the complexity of transfer pricing concepts, we may have income tax uncertainty related to the determination of intercompany transfer prices for our various cross-border transactions. We have obtained and continue to prioritize the strategy of seeking advance rulings with tax authorities to reduce this uncertainty. We estimate that our current portfolio of advance rulings reduces this uncertainty with respect to over 70% of our global earnings. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows. Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective tax rate. See Note 5 to the Consolidated Financial Statements for additional details on the Company's income taxes. Employee Benefits We sponsor various post-employment benefits throughout the world. These include pension plans, both defined contribution plans and defined benefit plans, and other post-employment benefit (OPEB) plans, consisting primarily of health care and life insurance for retirees. For accounting purposes, the defined benefit pension and OPEB plans require assumptions to estimate the net projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets; and health care cost trend rates. These and other assumptions affect the annual expense and net obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations. As permitted byU.S. GAAP, the net amount by which actual results differ from our assumptions is deferred. If this net deferred amount exceeds 10% of the greater of plan assets or liabilities, a portion of the deferred amount is included in expense for the following year. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the employees expected to receive benefits. The expected return on plan assets assumption impacts our defined benefit expense since many of our defined benefit pension plans and our primary OPEB plan are partially funded. The process for setting the expected rates of return is described in Note 8 to the Consolidated Financial Statements. For 2020, the average return on assets assumptions for pension plan assets and OPEB assets was 6.6% and 8.4%, respectively. A change in the rate of return of 100 basis points for both pension and OPEB assets would impact annual after-tax benefit/expense by approximately$130 million . Since pension and OPEB liabilities are measured on a discounted basis, the discount rate impacts our plan obligations and expenses. Discount rates used for ourU.S. defined benefit pension and OPEB plans are based on a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. For our international plans, the discount rates are set by benchmarking against investment grade corporate bonds rated AA or better. The average discount rate on the defined benefit pension plans of 1.5% represents a weighted average of local rates in countries where such plans exist. A 100 basis point change in the discount rate would impact annual after-tax benefit expense by approximately$220 million . The average discount rate on the OPEB plan of 3.1% reflects the higher interest rates generally applicable in theU.S. , which is where a majority of the plan participants receive benefits. A 100 basis point change in the discount rate would impact annual after-tax OPEB expense by approximately$50 million . See Note 8 to the Consolidated Financial Statements for -------------------------------------------------------------------------------- 28The Procter & Gamble Company additional details on our defined benefit pension and OPEB plans.Goodwill and Intangible Assets Significant judgment is required to estimate the fair value of our goodwill reporting units and intangible assets. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant goodwill reporting units and intangible assets. The fair value estimates are based on available historical information and on future expectations. We typically estimate the fair value of these assets using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets. The valuations used to establish and to test goodwill and intangible assets for impairment are dependent on a number of significant estimates and assumptions, including macroeconomic conditions, overall category growth rates, competitive activities, cost containment and margin progression, Company business plans and the discount rate applied to cash flows. Indefinite-lived intangible assets and goodwill are not amortized, but are tested at least annually for impairment. Our ongoing annual impairment testing for goodwill and indefinite-lived intangible assets occurs during the 3 months endedDecember 31 . Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe these estimates and assumptions are reasonable and comparable to those that would be used by other marketplace participants. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. For example, 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. In addition, changes to, or a failure to achieve business plans or deterioration of macroeconomic conditions could result in reduced cash flows or higher discount rates, leading to a lower valuation that would trigger an impairment of the goodwill and intangible assets of these businesses. We test individual indefinite-lived intangible assets by comparing the book value of each asset to the estimated fair value. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangible assets. The test to evaluate goodwill for impairment is a two-step process. In the first step (step one), 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 (step two) to determine the implied fair value of the reporting unit's goodwill. The second step of the impairment analysis requires a valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. The difference between the step one fair value and the amounts allocated to the assets and liabilities in step two is the implied fair value of the reporting unit's goodwill. If this implied fair value of the reporting unit's goodwill is less than its carrying value, that difference represents an impairment. Determining the useful life of an intangible asset also requires judgment. Certain brand intangible assets are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands. Other acquired intangible assets (e.g., certain brands, all customer relationships, patents and technologies) are expected to have determinable useful lives. Our assessment as to brands that have an indefinite life and those that have a determinable life is based on a number of factors including competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the brands are sold. Determinable-lived intangible assets are amortized to expense over their estimated lives. An impairment assessment for determinable-lived intangibles is only required when an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. 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. During fiscal 2019, a non-cash before- and after-tax impairment charge of$6.8 billion was recognized to reduce the carrying amount of goodwill for the Shave Care reporting unit, and a non-cash, before-tax impairment charge of$1.6 billion ($1.2 billion after-tax) was recognized to reduce the carrying amount of the Gillette indefinite-lived intangible asset to its fair value. The underlying reductions in fair values were due in large part to significant currency devaluations in a number of countries relative to theU.S. dollar, a deceleration of category growth caused by changing grooming habits, primarily in the developed markets, and an increased competitive market environment in theU.S. and certain other markets. As a result of the fiscal 2019 impairment determined by the step two testing, the Shave Care fair value exceeded the carrying value by approximately 20% as ofJune 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. During our annual impairment testing during the quarter endedDecember 31, 2019 , we reduced the discount rate used in the valuation based on developments in the macroeconomic environment. As a result of this change and updates to other underlying cash flow projections, the Shave Care fair value exceeded the carrying value by more than 20% and the --------------------------------------------------------------------------------The Procter & Gamble Company 29 Gillette indefinite-lived intangible asset fair value exceeded the carrying value by approximately 5%. The most significant assumptions utilized in the determination of the estimated fair values of the 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 theU.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 theU.S. dollar. Spot rates as of the fair value measurement date are utilized in our fair value estimates for cash flows outside theU.S. While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the Shave Care reporting unit's goodwill and indefinite-lived intangibles. As ofJune 30, 2020 , the carrying values of the Shave Care goodwill and the Gillette indefinite-lived intangible asset were$12.5 billion and$14.1 billion , respectively. The COVID-19 pandemic that occurred during the second half of fiscal 2020 resulted in a reduction in shave incidents by consumers and a weakening of certain currencies relative to theU.S. dollar, which led to a reduction in net sales for Gillette-branded products. This resulted in a triggering event for the Gillette indefinite-lived intangible asset, which caused us to perform an additional impairment assessment for that asset as ofJune 30, 2020 . That assessment indicated that the fair value of the Gillette trade name approximated its carrying value. Accordingly, no impairment charge was recorded during the year endedJune 30, 2020 . The duration and severity of the pandemic could result in additional future impairment charges for the Shave Care reporting unit goodwill and the Gillette indefinite-lived intangible asset. OurJune 30, 2020 impairment assessment of the Gillette intangible asset assumes the pandemic's impact on net sales will begin to abate during the first half of fiscal 2021 and be largely eliminated by the second half of the fiscal year. There is an extreme level of uncertainty relating to how the pandemic will evolve and how governments and consumers will react. Accordingly, there is a significant amount of uncertainty related to this key assumption. A more prolonged pandemic could impact the results of operations due to changes to assumptions utilized in the determination of the estimated fair values of Shave Care reporting unit and the Gillette indefinite-lived intangible asset that are significant enough to trigger an impairment. Net sales and earnings growth rates could be negatively impacted by more prolonged reductions or changes in demand for our shave care products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other travel restrictions, financial hardship, changes in the use and frequency of grooming products or by shifts in demand away from one or more of our higher priced products to lower priced products. In addition, relative global and country/regional macroeconomic factors could result in additional and prolonged devaluation of other countries' currencies relative to theU.S. dollar. Finally, the discount rate utilized in our valuation model could be impacted by changes in the underlying interest rates and risk premiums included in the determination of the cost of capital. 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, either of which, in isolation, would result in an additional impairment of the Gillette indefinite-lived intangible asset.
Approximate Percent Change in Estimated Fair Value
-25 bps
+25 bps Discount Rate Growth Rate
Shave Care goodwill reporting unit (6)% (6)%
Gillette indefinite-lived intangible asset (6)% (6)%
See Note 4 to the Consolidated Financial Statements for additional discussion on
goodwill and intangible asset impairment testing results.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted
accounting pronouncements and recently issued accounting pronouncements not yet
adopted as of June 30, 2020 .
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30 The Procter & Gamble Company
OTHER INFORMATION
Hedging and Derivative Financial Instruments
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. We evaluate exposures on a centralized basis to take advantage
of natural exposure correlation and netting. We leverage the Company's
diversified portfolio of exposures as a natural hedge and prioritize operational
hedging activities over financial market instruments. To the extent we choose to
further manage volatility within our financing operations, as discussed below,
we enter into various financial transactions which we account for using the
applicable accounting guidance for derivative instruments and hedging
activities. These financial transactions are governed by our policies covering
acceptable counterparty exposure, instrument types and other hedging practices.
See Note 9 to the Consolidated Financial Statements for a discussion of our
accounting policies for derivative instruments.
Derivative positions are monitored using techniques including market valuation,
sensitivity analysis and value-at-risk modeling. The tests for interest rate,
currency rate and commodity derivative positions discussed below are based on
the RiskManager™ value-at-risk model using a one-year horizon and a 95%
confidence level. The model incorporates the impact of correlation (the degree
to which exposures move together over time) and diversification (from holding
multiple currency, commodity and interest rate instruments) and assumes that
financial returns are normally distributed. Estimates of volatility and
correlations of market factors are drawn from the RiskMetrics™ dataset as of
June 30, 2020 . In cases where data is unavailable in RiskMetrics™, a reasonable
proxy is included.
Our market risk exposures relative to interest rates, currency rates and
commodity prices, as discussed below, have not changed materially versus the
previous reporting period. In addition, we are not aware of any facts or
circumstances that would significantly impact such exposures in the near term.
Interest Rate Exposure on Financial Instruments. Interest rate swaps are used to
hedge exposures to interest rate movement on underlying debt obligations.
Certain interest rate swaps denominated in foreign currencies are designated to
hedge exposures to currency exchange rate movements on our investments in
foreign operations. These currency interest rate swaps are designated as hedges
of the Company's foreign net investments.
Based on our interest rate exposure as of and during the year ended June 30,
2020 , including derivative and other instruments sensitive to interest rates, we
believe a near-term change in interest rates, at a 95% confidence level based on
historical interest rate movements, would not materially affect our financial
statements.
Currency Rate Exposure on Financial Instruments. Because we manufacture and sell
products and finance operations in a number of countries throughout the world,
we are exposed to the impact on revenue and expenses of movements in currency
exchange rates. Corporate policy
prescribes the range of allowable hedging activity. To manage the exchange rate
risk associated with the financing of our operations, we primarily use forward
contracts and currency swaps with maturities of less than 18 months.
Based on our currency rate exposure on derivative and other instruments as of
and during the year ended June 30, 2020 , we believe, at a 95% confidence level
based on historical currency rate movements, the impact on such instruments of a
near-term change in currency rates would not materially affect our financial
statements.
Commodity Price Exposure on Financial Instruments. We use raw materials that are
subject to price volatility caused by weather, supply conditions, political and
economic variables and other unpredictable factors. We may use futures, options
and swap contracts to manage the volatility related to the above exposures.
As of and during the years ended June 30, 2020 and June 30, 2019 , we did not
have any commodity hedging activity.
Measures Not Defined By U.S. GAAP
In accordance with the SEC's Regulation S-K Item 10(e), the following provides
definitions of the non-GAAP measures and the reconciliation to the most closely
related GAAP measures. We believe that these measures provide useful perspective
of 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. These measures include:
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. We believe this measure provides investors with a
supplemental understanding of underlying sales trends by providing sales growth
on a consistent basis. This measure is used in assessing achievement of
management goals for at-risk compensation.
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The Procter & Gamble Company 31
The following tables provide a numerical reconciliation of organic sales growth
to reported net sales growth:
Foreign Exchange Acquisition & Divestiture
Year ended June 30, 2020 Net Sales Growth Impact Impact/Other (1) Organic Sales Growth
Beauty 4 % 2 % (1) % 5 %
Grooming (2) % 3 % - % 1 %
Health Care 10 % 2 % (5) % 7 %
Fabric & Home Care 7 % 1 % 1 % 9 %
Baby, Feminine & Family Care 3 % 2 % (1) % 4 %
TOTAL COMPANY 5 % 2 % (1) % 6 %
(1) Acquisition & Divestiture Impact/Other includes the volume and mix impact of
acquisitions and divestitures and rounding impacts necessary to reconcile net
sales to organic sales.
Adjusted Free Cash Flow. Adjusted free cash flow is defined as operating cash
flow less capital spending, tax payments related to the Merck OTC Consumer
Healthcare acquisition in 2020 and the transitional tax resulting from the U.S.
Tax Act in 2020 and 2019 (the Company incurred a transitional tax liability of
approximately $3.8 billion from the U.S. Tax Act, which is payable over a period
of 8 years). Adjusted free cash flow represents the cash that the Company is
able to generate after taking into account planned maintenance and asset
expansion. We view adjusted free cash flow as an important measure because it is
one factor used in determining the amount of cash available for
dividends, share repurchases, acquisitions and other discretionary investments.
The following table provides a numerical reconciliation of adjusted free cash
flow ($ millions):
Operating Capital Adjusted Free
Cash Flow Spending Adjustments to Operating Cash Flow (1)
Cash Flow
2020$ 17,403 $ (3,073) $ 543 $
14,873
2019$ 15,242 $ (3,347) $ 235 $
12,130
(1) Adjustments to Operating Cash Flow include tax payments for the transitional tax resulting from theU.S. Tax Act of$215 and$235 in 2020 and 2019, respectively, and tax payments related to the Merck acquisition of$328 in 2020. Adjusted Free Cash Flow Productivity. Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings. We view adjusted free cash flow productivity as a useful measure to help investors understandP&G's ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, in allocating financial resources and for budget planning purposes. This measure is used in assessing the achievement of management goals for at-risk compensation. The Company's long-term target is to generate annual adjusted free cash flow productivity at or above 90 percent. The following table provides a numerical reconciliation of adjusted free cash flow productivity ($ millions): Adjusted Free Net Cash Flow Adjusted Free Cash Flow Earnings Productivity 2020 $ 14,873$ 13,103 114 % Core EPS. 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. Core EPS is also used in assessing the achievement of management goals for at-risk compensation. The table below provides a reconciliation of diluted net earnings per share to Core EPS, including the following reconciling items: •Incremental Restructuring: The Company has had and continues to have an ongoing level of restructuring activities. Such activities have resulted in ongoing annual restructuring related charges of approximately$250 -$500 million before tax. In 2012, the Company began a$10 billion strategic productivity and cost savings initiative that included incremental restructuring activities. In 2017, we communicated details of an additional multi-year productivity and cost savings plan. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs. •Gain on Dissolution of thePGT Healthcare Partnership : The Company dissolved ourPGT Healthcare partnership, a venture between the Company andTeva Pharmaceuticals Industries, Ltd (Teva) in the OTC consumer healthcare business, during the year endedJune 30, 2019 . The transaction was accounted for as a sale of the Teva portion of the PGT business and the Company recognized an after-tax gain on the dissolution of$353 million . •Shave Care Impairment: As discussed in Note 4 to the Consolidated Financial Statements and in the Significant Accounting Policies and Estimates section of the MD&A, in the fourth quarter of fiscal 2019, the Company recognized a non-cash after-tax charge of$8.0 billion ($8.3 billion before tax) to adjust the carrying values of the Shave Care reporting unit and the Gillette indefinite-lived intangible asset. This was comprised of a before and after-tax impairment charge of$6.8 billion related to goodwill and an after-tax impairment charge of$1.2 billion ($1.6 billion before tax) to reduce the carrying value of the Gillette indefinite-lived intangible asset. •Anti-Dilutive Impacts: As discussed in Note 6 to the Consolidated Financial Statements, the Shave Care impairment charges caused preferred shares that are normally dilutive (and hence, normally assumed converted for purposes of determining diluted earnings per share) to be anti-dilutive. Accordingly, forU.S. GAAP the preferred shares were not assumed to be converted into common shares for diluted earnings per share and the related dividends paid to the preferred -------------------------------------------------------------------------------- 32The Procter & Gamble Company shareholders were deducted from net income to calculate net earnings available to common shareholders. As a result of the non-GAAP Shave Care impairment adjustment, these instruments are dilutive for non-GAAP core EPS. We do not view the above items to be indicative of underlying business results and their exclusion from Core earnings measures provides a more comparable measure of year-on-year results. These items are also excluded when evaluating senior management in determining their at-risk compensation. THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES (Amounts in Millions Except Per Share Amounts) Reconciliation of Non-GAAP Measures Twelve Months Ended June 30, 2020 INCREMENTAL AS REPORTED (GAAP) RESTRUCTURING NON-GAAP (CORE) NET EARNINGS ATTRIBUTABLE TO P&G 13,027 415 13,442 Core EPS DILUTED NET EARNINGS PER COMMON SHARE (1) $ 4.96 $ 0.16 $ 5.12 (1) Diluted net earnings per share are calculated on Net earnings attributable toProcter & Gamble . CHANGE VERSUS YEAR AGO CORE EPS 13 % THE
PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
Twelve Months Ended
AS REPORTED INCREMENTAL SHAVE CARE GAIN ON DISSOLUTION NON-GAAP
(GAAP) ANTI-DILUTIVE IMPACTS RESTRUCTURING IMPAIRMENT OF PGT PARTNERSHIP ROUNDING (CORE)
NET EARNINGS ATTRIBUTABLE TO
P&G 3,897 - 354 7,978 (353) 1 11,877
Core EPS
Diluted Net Earnings
attributable to common
shareholders (1) 3,634 263 354 7,978 (353) 1 11,877
Diluted Weighted Average
Common Shares Outstanding (1) 2,539.5 90.2 2,629.7
DILUTED NET EARNINGS PER
COMMON SHARE $ 1.43 $ 0.06 $ 0.13 $ 3.03 $ (0.13) $ - $ 4.52
(1) The reduction in net earnings from the 2019 charge for the Shave Care
impairment caused the preferred shares outstanding to be anti-dilutive.
Accordingly, for U.S. GAAP, the preferred shares were not assumed to be
converted into common shares for diluted earnings per share and the related
dividends paid to the preferred shareholders were deducted from net income to
calculate earnings available to common shareholders. Excluding the impairment
charge results in higher non-GAAP earnings which causes the preferred shares to
be dilutive. The adjustments in this row are made to reflect the dilutive
preferred share impact resulting from the Shave Care impairment adjustment.
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