48 The Procter & Gamble Company
Goodwill increased during fiscal 2021 driven by a minor brand acquisition in the Health Care reportable segment and currency translation across all reportable segments. Identifiable intangible assets were comprised of:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
As of June 30 | Gross Carrying Amount | Accumulated Amortization | | Gross Carrying Amount | Accumulated Amortization |
INTANGIBLE ASSETS WITH DETERMINABLE LIVES |
Brands | $ | 4,299 | | $ | (2,628) | | | $ | 3,908 | | $ | (2,546) | |
Patents and technology | 2,769 | | (2,609) | | | 2,781 | | (2,575) | |
Customer relationships | 1,797 | | (939) | | | 1,789 | | (882) | |
Other | 147 | | (97) | | | 150 | | (97) | |
TOTAL | $ | 9,012 | | $ | (6,273) | | | $ | 8,628 | | $ | (6,100) | |
INTANGIBLE ASSETS WITH INDEFINITE LIVES |
Brands | 20,940 | | — | | | 21,114 | | — | |
TOTAL | $ | 29,952 | | $ | (6,273) | | | $ | 29,742 | | $ | (6,100) | |
Amortization expense of intangible assets was as follows: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
Intangible asset amortization | $ | 312 | | | $ | 318 | | | $ | 360 | |
Estimated amortization expense over the next five fiscal years is as follows:
| | | | | | | | | | | | | | | | | |
Years ending June 30 | 2023 | 2024 | 2025 | 2026 | 2027 |
Estimated amortization expense | $ | 316 | | $ | 305 | | $ | 288 | | $ | 268 | | $ | 258 | |
NOTE 5
INCOME TAXES
Income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax assets and liabilities, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change.
We have elected to account for the tax effects of Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred.
Earnings before income taxes consisted of the following: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
United States | $ | 11,698 | | | $ | 10,858 | | | $ | 10,338 | |
International | 6,297 | | | 6,757 | | | 5,496 | |
TOTAL | $ | 17,995 | | | $ | 17,615 | | | $ | 15,834 | |
Income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
CURRENT TAX EXPENSE |
U.S. federal | $ | 1,916 | | | $ | 1,663 | | | $ | 1,266 | |
International | 1,333 | | | 1,534 | | | 1,769 | |
U.S. state and local | 355 | | | 324 | | | 292 | |
TOTAL | 3,604 | | | 3,521 | | | 3,327 | |
DEFERRED TAX EXPENSE/(BENEFIT) |
U.S. federal | (320) | | | (65) | | | 39 | |
International and other | (82) | | | (193) | | | (635) | |
TOTAL | (402) | | | (258) | | | (596) | |
TOTAL TAX EXPENSE | $ | 3,202 | | | $ | 3,263 | | | $ | 2,731 | |
A reconciliation of the U.S. federal statutory income tax rate to our actual effective income tax rate is provided below: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Country mix impacts of foreign operations | (0.3) | % | | (0.5) | % | | (0.1) | % |
State income taxes, net of federal benefit | 1.5 | % | | 1.3 | % | | 1.4 | % |
Excess tax benefits from the exercise of stock options | (2.0) | % | | (1.6) | % | | (1.6) | % |
Tax benefit from simplification of legal entity structure | — | % | | — | % | | (1.4) | % |
Foreign derived intangible income deduction (FDII) | (1.1) | % | | (1.0) | % | | (1.0) | % |
Changes in uncertain tax positions | (0.4) | % | | (0.1) | % | | 0.1 | % |
Other | (0.9) | % | | (0.6) | % | | (1.2) | % |
EFFECTIVE INCOME TAX RATE | 17.8 | % | | 18.5 | % | | 17.2 | % |
Country mix impacts of foreign operations includes the effects of foreign subsidiaries' earnings taxed at rates other than the U.S. statutory rate, the U.S. tax impacts of non-U.S. earnings repatriation and any net impacts of intercompany transactions. Changes in uncertain tax positions represent changes in our net liability related to prior year tax positions. Excess tax benefits from the exercise of stock options reflect the excess of actual tax benefits received on employee exercises of stock options and other share-based payments (which generally equals the income taxable to the employee) over the amount of tax benefits that were calculated and recognized based on the grant date fair values of such instruments.
Tax costs charged to shareholders' equity totaled $1,538 for the year ended June 30, 2022. This primarily relates to the tax effects of certain adjustments to pension obligations recorded in shareholders' equity and the tax effects of net investment hedges. Tax costs charged to shareholders' equity totaled $215 for the year ended June 30, 2021. This primarily relates to the tax effects of certain adjustments to
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 49
pension obligations recorded in shareholders' equity, partially offset by the tax effects of net investment hedges.
Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely invested and, accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to a one-time transition tax. This charge included taxes for all U.S. income taxes and for the related foreign withholding taxes for the portion of those earnings which are no longer considered indefinitely invested. We have not provided deferred taxes on approximately $22 billion of earnings that are considered indefinitely invested.
A reconciliation of the beginning and ending liability for uncertain tax positions is as follows:
| | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
BEGINNING OF YEAR | $ | 627 | | | $ | 485 | | | $ | 466 | |
Increases in tax positions for prior years | 102 | | | 157 | | | 60 | |
Decreases in tax positions for prior years | (118) | | | (34) | | | (21) | |
Increases in tax positions for current year | 53 | | | 60 | | | 82 | |
Settlements with taxing authorities | (42) | | | (26) | | | (83) | |
Lapse in statute of limitations | (17) | | | (24) | | | (12) | |
Currency translation | (22) | | | 9 | | | (7) | |
END OF YEAR | $ | 583 | | | $ | 627 | | | $ | 485 | |
Included in the total liability for uncertain tax positions at June 30, 2022, is $363 that, depending on the ultimate resolution, could impact the effective tax rate in future periods.
The Company is present in approximately 70 countries and over 150 taxable jurisdictions and, at any point in time, has 40-50 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2010 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12-month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued existing
liabilities of approximately $12, including interest and penalties.
We recognize the additional accrual of any possible related interest and penalties relating to the underlying uncertain tax position in income tax expense. As of June 30, 2022, 2021 and 2020, we had accrued interest of $179, $166 and $141 and accrued penalties of $12, $10 and $17, respectively, which are not included in the above table. During the fiscal years ended June 30, 2022, 2021 and 2020, we recognized $21, $38 and $39 in interest expense and $2, $6 and $1 in penalties expense, respectively.
Deferred income tax assets and liabilities were comprised of the following:
| | | | | | | | | | | |
As of June 30 | 2022 | | 2021 |
DEFERRED TAX ASSETS | | | |
Loss and other carryforwards | 914 | | | 1,030 | |
Pension and other retiree benefits | $ | 740 | | | $ | 1,476 | |
Capitalized research & development | 646 | | | 358 | |
Accrued marketing and promotion | 420 | | | 424 | |
Stock-based compensation | 386 | | | 386 | |
Fixed assets | 209 | | | 223 | |
Lease liabilities | 185 | | | 196 | |
Unrealized loss on financial and foreign exchange transactions | 138 | | | 109 | |
Advance payments | 82 | | | — | |
Inventory | 41 | | | 31 | |
Accrued interest and taxes | 22 | | | 22 | |
Other | 717 | | | 878 | |
Valuation allowances | (409) | | | (569) | |
TOTAL | $ | 4,091 | | | $ | 4,564 | |
| | | |
DEFERRED TAX LIABILITIES | | | |
Goodwill and intangible assets | $ | 5,783 | | | $ | 5,761 | |
Fixed assets | 1,542 | | | 1,512 | |
Other retiree benefits | 1,031 | | | 645 | |
Unrealized gain on financial and foreign exchange transactions | 439 | | | 111 | |
Lease right-of-use assets | 179 | | | 191 | |
Foreign withholding tax on earnings to be repatriated | 70 | | | 108 | |
Other | 244 | | | 175 | |
TOTAL | $ | 9,288 | | | $ | 8,503 | |
Net operating loss carryforwards were $2.5 billion at June 30, 2022, and $3.0 billion at June 30, 2021. If unused, approximately $300 will expire between 2022 and 2041. The remainder, totaling $2.2 billion at June 30, 2022, may be carried forward indefinitely.
Amounts in millions of dollars except per share amounts or as otherwise specified.
50 The Procter & Gamble Company
NOTE 6
EARNINGS PER SHARE
Basic net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble less preferred dividends by the weighted average number of common shares outstanding during the year. Diluted net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble by the diluted weighted average number of common shares outstanding during the year. The diluted shares include the dilutive effect of stock options and other stock-based awards based on the treasury stock method (see Note 7) and the assumed conversion of preferred stock (see Note 8).
Net earnings per share were calculated as follows: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
CONSOLIDATED AMOUNTS | | | | | |
Net earnings | $ | 14,793 | | | $ | 14,352 | | | $ | 13,103 | |
Less: Net earnings attributable to noncontrolling interests | 51 | | | 46 | | | 76 | |
Net earnings attributable to P&G | 14,742 | | | 14,306 | | | 13,027 | |
Less: Preferred dividends | 281 | | | 271 | | | 263 | |
Net earnings attributable to P&G available to common shareholders (Basic) | $ | 14,461 | | | $ | 14,035 | | | $ | 12,764 | |
| | | | | |
Net earnings attributable to P&G available to common shareholders (Diluted) | $ | 14,742 | | | $ | 14,306 | | | $ | 13,027 | |
| | | | | |
SHARES IN MILLIONS | | | | | |
Basic weighted average common shares outstanding | 2,410.3 | | 2,465.8 | | 2,487.1 |
Add effect of dilutive securities: | | | | | |
Stock options and other unvested equity awards (1) | 49.5 | | 52.5 | | 52.7 |
Convertible preferred shares (2) | 79.3 | | 82.7 | | 86.0 |
Diluted weighted average common shares outstanding | 2,539.1 | | 2,601.0 | | 2,625.8 |
| | | | | |
NET EARNINGS PER SHARE (3) | | | | | |
Basic | $ | 6.00 | | | $ | 5.69 | | | $ | 5.13 | |
Diluted | $ | 5.81 | | | $ | 5.50 | | | $ | 4.96 | |
(1)Excludes 11 million, 9 million and 6 million in 2022, 2021 and 2020, respectively, of weighted average stock options outstanding because the exercise price of these options was greater than the average market value of the Company's stock or their effect was antidilutive.
(2)An overview of preferred shares can be found in Note 8.
(3)Net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
NOTE 7
STOCK-BASED COMPENSATION
The Company has two primary stock-based compensation programs under which we annually grant stock option, restricted stock unit (RSU) and performance stock unit (PSU) awards to key managers and directors.
In our main long-term incentive program, key managers can elect to receive options or RSUs. All options vest after three years and have a 10-year life. Exercise prices on options are set equal to the market price of the underlying shares on the date of the grant. RSUs vest and settle in shares of common stock three years from the grant date.
Senior-level executives participate in an additional long-term incentive program that awards PSUs, which are paid in shares after the end of a three-year performance period subject to pre-established performance goals. The program includes a Relative Total Shareholder Return (R-TSR) modifier under which the number of shares ultimately granted is also impacted by the Company's actual
shareholder return relative to our consumer products competitive peer set.
In addition to these long-term incentive programs, we award RSUs to the Company's non-employee directors and make other minor stock option and RSU grants to employees for which the terms are not substantially different from our long-term incentive awards.
A total of 150 million shares of common stock were newly authorized for issuance under the stock-based compensation plan approved by shareholders in 2019. A total of 119 million shares remain available for grant under the 2019 plan.
The Company recognizes stock-based compensation expense based on the fair value of the awards at the date of grant. The fair value is amortized on a straight-line basis over the requisite service period. Awards to employees eligible for retirement prior to the award becoming fully vested are recognized as compensation expense from the grant date through the date the employee first becomes eligible to retire
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 51
and/or is no longer required to provide services to earn the award. Stock-based compensation expense is included as part of Cost of products sold and SG&A in the Consolidated Statement of Earnings and includes an estimate of forfeitures, which is based on historical data. Total expense and related tax benefit were as follows:
| | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
Stock options | $ | 271 | | | $ | 279 | | | $ | 249 | |
RSUs and PSUs | 257 | | | 261 | | | 309 | |
Total stock-based expense | $ | 528 | | | $ | 540 | | | $ | 558 | |
| | | | | |
Income tax benefit | $ | 88 | | | $ | 102 | | | $ | 97 | |
We utilize an industry standard lattice-based valuation model to calculate the fair value for stock options granted. Assumptions utilized in the model, which are evaluated and revised to reflect market conditions and experience, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
Interest rate | 0.1 | - | 1.6 | % | | 0.1 | - | 0.7 | % | | 1.1 | - | 1.4 | % |
Weighted average interest rate | 1.5 | % | | 0.6 | % | | 1.3 | % |
Dividend yield | 2.4 | % | | 2.4 | % | | 2.4 | % |
Expected volatility | 19 | % | | 20 | % | | 17 | % |
Expected life in years | 9.1 | | 9.2 | | 9.2 |
Lattice-based option valuation models incorporate ranges of assumptions for inputs and those ranges are disclosed in the preceding table. Expected volatilities are based on a combination of historical volatility of our stock and implied volatilities of call options on our stock. We use historical data to estimate option exercise and employee termination patterns within the valuation model. The expected life of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of options outstanding under the plans as of June 30, 2022, and activity during the year then ended is presented below:
| | | | | | | | | | | | | | |
Options | Options (in thousands) | Weighted Average Exercise Price | Weighted Average Contract-ual Life in Years | Aggregate Intrinsic Value |
Outstanding at July 1, 2021 | 138,272 | | $ | 91.24 | | | |
Granted | 14,369 | | 141.67 | | | |
Exercised | (25,040) | | 77.07 | | | |
Forfeited/expired | (886) | | 116.38 | | | |
Outstanding at June 30, 2022 | 126,715 | | $ | 99.59 | | 5.4 | $ | 5,618 | |
Exercisable | 86,992 | | $ | 84.89 | | 4.0 | $ | 5,124 | |
The following table provides additional information on stock options: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
Weighted average grant-date fair value of options granted | $ | 21.55 | | | $ | 20.94 | | | $ | 15.60 | |
Intrinsic value of options exercised | 1,886 | | | 1,401 | | | 1,455 | |
Grant-date fair value of options that vested | 177 | | | 236 | | | 217 | |
Cash received from options exercised | 1,930 | | | 1,705 | | | 2,019 | |
Actual tax benefit from options exercised | 399 | | | 292 | | | 298 | |
At June 30, 2022, $166 of compensation cost had not yet been recognized related to stock option grants. That cost is expected to be recognized over a remaining weighted average period of 1.5 years.
A summary of non-vested RSUs and PSUs outstanding under the plans as of June 30, 2022, and activity during the year then ended is presented below:
| | | | | | | | | | | | | | | | | |
| RSUs | | PSUs |
RSU and PSU awards | Units (in thousands) | Weighted Average Grant Date Fair Value | | Units (in thousands) | Weighted Average Grant Date Fair Value |
Non-vested at July 1, 2021 | 3,237 | | $ | 114.68 | | | 971 | | $ | 135.24 | |
Granted | 1,365 | | 141.13 | | | 539 | | 152.69 | |
Vested | (1,656) | | 109.08 | | | (550) | | 121.62 | |
Forfeited | (114) | | 123.06 | | | (32) | | 152.89 | |
Non-vested at June 30, 2022 | 2,832 | | $ | 130.37 | | | 928 | | $ | 152.94 | |
At June 30, 2022, $216 of compensation cost had not yet been recognized related to RSUs and PSUs. That cost is expected to be recognized over a remaining weighted average period of 1.6 years. The total grant date fair value of shares vested was $248, $266 and $264 in 2022, 2021 and 2020, respectively.
The Company settles equity issuances with treasury shares. We have no specific policy to repurchase common shares to mitigate the dilutive impact of options, RSUs and PSUs. However, we have historically made adequate discretionary purchases, based on cash availability, market trends and other factors, to offset the impacts of such activity.
NOTE 8
POSTRETIREMENT BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN
We offer various postretirement benefits to our employees.
Defined Contribution Retirement Plans
We have defined contribution plans, which cover the majority of our U.S. employees, as well as employees in certain other countries. These plans are fully funded. We generally make contributions to participants' accounts based on individual base salaries and years of service. Total global defined contribution expense was $366, $340 and $317 in 2022, 2021 and 2020, respectively.
Amounts in millions of dollars except per share amounts or as otherwise specified.
52 The Procter & Gamble Company
The primary U.S. defined contribution plan (the U.S. DC plan) comprises the majority of the expense for the Company's defined contribution plans. For the U.S. DC plan, the contribution rate is set annually. Total contributions for this plan approximated 14% of total participants' annual wages and salaries in 2022, 2021 and 2020.
We maintain The Procter & Gamble Profit Sharing Trust (Trust) and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. DC plan and other retiree benefits (described below). Operating details of the ESOP are provided at the end of this Note. The fair value of the ESOP Series A shares allocated to participants reduces our cash contribution required to fund the U.S. DC plan.
Defined Benefit Retirement Plans and Other Retiree Benefits
We offer defined benefit retirement pension plans to certain employees. These benefits relate primarily to plans outside the U.S. and, to a lesser extent, plans assumed in previous acquisitions covering U.S. employees.
We also provide certain other retiree benefits, primarily health care benefits for the majority of our U.S. employees who become eligible for these benefits when they meet minimum age and service requirements. The plans require cost sharing with retirees and pay a stated percentage of expenses, reduced by deductibles and other coverages. These benefits are funded by ESOP Series B shares and certain other assets contributed by the Company.
Obligation and Funded Status. The following provides a reconciliation of benefit obligations, plan assets and funded status of these defined benefit plans: | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits (1) | | Other Retiree Benefits (2) |
Years ended June 30 | 2022 | | 2021 | | 2022 | | 2021 |
CHANGE IN BENEFIT OBLIGATION | | | | | | | |
Benefit obligation at beginning of year (3) | $ | 18,469 | | | $ | 17,761 | | | $ | 4,206 | | | $ | 4,770 | |
Service cost | 253 | | | 275 | | | 86 | | | 94 | |
Interest cost | 253 | | | 240 | | | 99 | | | 114 | |
Participants' contributions | 14 | | | 13 | | | 67 | | | 76 | |
Amendments (5) | 5 | | | 34 | | | (586) | | | — | |
Net actuarial loss/(gain) | (4,067) | | | (466) | | | (586) | | | (678) | |
Special termination benefits | 4 | | | 17 | | | 1 | | | 2 | |
Currency translation and other | (1,720) | | | 1,220 | | | 51 | | | 64 | |
Benefit payments | (603) | | | (625) | | | (268) | | | (236) | |
BENEFIT OBLIGATION AT END OF YEAR (3) | $ | 12,608 | | | $ | 18,469 | | | $ | 3,070 | | | $ | 4,206 | |
| | | | | | | | | | | | | | | | | | | | | | | |
CHANGE IN PLAN ASSETS | | | | | | | |
Fair value of plan assets at beginning of year | $ | 13,041 | | | $ | 11,484 | | | $ | 6,444 | | | $ | 5,618 | |
Actual return on plan assets | (1,233) | | | 1,058 | | | 526 | | | 879 | |
Employer contributions | 222 | | | 202 | | | 37 | | | 34 | |
Participants' contributions | 14 | | | 13 | | | 67 | | | 76 | |
Currency translation and other | (1,268) | | | 909 | | | 1 | | | 2 | |
ESOP debt impacts (4) | — | | | — | | | 82 | | | 71 | |
Benefit payments | (603) | | | (625) | | | (268) | | | (236) | |
FAIR VALUE OF PLAN ASSETS AT END OF YEAR | $ | 10,173 | | | $ | 13,041 | | | $ | 6,889 | | | $ | 6,444 | |
FUNDED STATUS | $ | (2,435) | | | $ | (5,428) | | | $ | 3,819 | | | $ | 2,238 | |
(1)Primarily non-U.S.-based defined benefit retirement plans.
(2)Primarily U.S.-based other postretirement benefit plans.
(3)For the pension benefit plans, the benefit obligation is the projected benefit obligation. For other retiree benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.
(4)Represents the net impact of ESOP debt service requirements, which is netted against plan assets for other retiree benefits.
(5)Primarily relates to adjustments in the self-insured U.S. retiree health care program to utilize fully-insured Medicare Advantage Programs beginning in January 2022.
The actuarial gain for pension plans in 2022 was primarily related to increases in discount rates. The actuarial gain for other retiree benefits in 2022 was primarily related to increases in discount rates, partially offset by unfavorable medical claim experience. The actuarial gain for pension plans in 2021 was primarily related to increases in discount rates, partially offset by unfavorable actuarial assumptions, including inflation assumptions. The actuarial gain for other retiree benefits in 2021 was primarily related to favorable medical cost trends.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 53
The underfunding of pension benefits is primarily a function of the different funding incentives that exist outside of the U.S. In certain countries, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations prior to their due date. In these instances, benefit payments are typically paid directly from the Company's cash as they become due.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Retiree Benefits |
As of June 30 | 2022 | | 2021 | | 2022 | | 2021 |
CLASSIFICATION OF NET AMOUNT RECOGNIZED | | | | | | | |
Noncurrent assets | $ | 765 | | | $ | 88 | | | $ | 4,525 | | | $ | 3,193 | |
Current liabilities | (61) | | | (64) | | | (34) | | | (33) | |
Noncurrent liabilities | (3,139) | | | (5,452) | | | (672) | | | (922) | |
NET AMOUNT RECOGNIZED | $ | (2,435) | | | $ | (5,428) | | | $ | 3,819 | | | $ | 2,238 | |
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE (INCOME)/LOSS (AOCI) | | |
Net actuarial loss/(gain) | $ | 1,906 | | | $ | 4,869 | | | $ | (1,093) | | | $ | (504) | |
Prior service cost/(credit) | 170 | | | 198 | | | (907) | | | (471) | |
NET AMOUNTS RECOGNIZED IN AOCI | $ | 2,076 | | | $ | 5,067 | | | $ | (2,000) | | | $ | (975) | |
The accumulated benefit obligation for all defined benefit pension plans, which differs from the projected obligation in that it excludes the assumption of future salary increases, was $11.9 billion and $17.3 billion as of June 30, 2022 and 2021, respectively. Information related to the funded status of selected pension and other retiree benefits at June 30 is as follows:
| | | | | | | | | | | |
As of June 30 | 2022 | | 2021 |
PENSION PLANS WITH A PROJECTED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS |
Projected benefit obligation | $ | 7,989 | | | $ | 11,747 | |
Fair value of plan assets | 4,789 | | | 6,231 | |
PENSION PLANS WITH AN ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS |
Accumulated benefit obligation | $ | 7,191 | | | $ | 11,005 | |
Fair value of plan assets | 4,433 | | | 6,226 | |
OTHER RETIREE BENEFIT PLANS WITH AN ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS |
Accumulated benefit obligation | $ | 808 | | | $ | 1,082 | |
Fair value of plan assets | 102 | | | 127 | |
Amounts in millions of dollars except per share amounts or as otherwise specified.
54 The Procter & Gamble Company
Net Periodic Benefit Cost. Components of the net periodic benefit cost were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Retiree Benefits |
Years ended June 30 | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
AMOUNTS RECOGNIZED IN NET PERIODIC BENEFIT COST/(CREDIT) |
Service cost | $ | 253 | | | $ | 275 | | | $ | 247 | | | $ | 86 | | | $ | 94 | | | $ | 100 | |
Interest cost | 253 | | | 240 | | | 276 | | | 99 | | | 114 | | | 160 | |
Expected return on plan assets | (684) | | | (783) | | | (740) | | | (564) | | | (508) | | | (473) | |
Amortization of net actuarial loss | 337 | | | 423 | | | 340 | | | 11 | | | 47 | | | 68 | |
Amortization of prior service cost/(credit) | 28 | | | 25 | | | 25 | | | (107) | | | (60) | | | (48) | |
Amortization of net actuarial (gain)/loss due to settlements | (5) | | | 5 | | | 7 | | | — | | | — | | | — | |
Special termination benefits | 4 | | | 17 | | | 11 | | | 1 | | | 2 | | | 2 | |
GROSS BENEFIT COST/(CREDIT) | 186 | | | 202 | | | 166 | | | (474) | | | (311) | | | (191) | |
Dividends on ESOP preferred stock | — | | | — | | | — | | | — | | | (8) | | | (19) | |
NET PERIODIC BENEFIT COST/(CREDIT) | $ | 186 | | | $ | 202 | | | $ | 166 | | | $ | (474) | | | $ | (319) | | | $ | (210) | |
CHANGE IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN AOCI |
Net actuarial loss/(gain) - current year | $ | (2,150) | | | $ | (741) | | | | | $ | (548) | | | $ | (1,049) | | | |
Prior service cost/(credit) - current year | 5 | | | 34 | | | | | (586) | | | — | | | |
Amortization of net actuarial loss | (337) | | | (423) | | | | | (11) | | | (47) | | | |
Amortization of prior service (cost)/credit | (28) | | | (25) | | | | | 107 | | | 60 | | | |
Amortization of net actuarial loss/(gain) due to settlements | 5 | | | (5) | | | | | — | | | — | | | |
Currency translation and other | (486) | | | 367 | | | | | 13 | | | — | | | |
TOTAL CHANGE IN AOCI | (2,991) | | | (793) | | | | | (1,025) | | | (1,036) | | | |
NET AMOUNTS RECOGNIZED IN PERIODIC BENEFIT COST/(CREDIT) AND AOCI | $ | (2,805) | | | $ | (591) | | | | | $ | (1,499) | | | $ | (1,355) | | | |
The service cost component of the net periodic benefit cost is included in the Consolidated Statements of Earnings in Cost of products sold and SG&A. All other components are included in the Consolidated Statements of Earnings in Other non-operating income/(expense), net, unless otherwise noted.
Assumptions. We determine our actuarial assumptions on an annual basis. These assumptions are weighted to reflect each country that may have an impact on the cost of providing retirement benefits. The weighted average assumptions used to determine benefit obligations recorded on the Consolidated Balance Sheets as of June 30, 2022 and 2021, were as follows: (1)
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Retiree Benefits |
As of June 30 | 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 3.7 | % | | 1.7 | % | | 5.0 | % | | 3.2 | % |
Rate of compensation increase | 2.8 | % | | 2.7 | % | | N/A | | N/A |
Interest crediting rate for cash balance plans | 4.3 | % | | 4.4 | % | | N/A | | N/A |
Health care cost trend rates assumed for next year | N/A | | N/A | | 6.4 | % | | 6.4 | % |
Rate to which the health care cost trend rate is assumed to decline (ultimate trend rate) | N/A | | N/A | | 4.5 | % | | 4.5 | % |
Year that the rate reaches the ultimate trend rate | N/A | | N/A | | 2028 | | 2028 |
(1)Determined as of end of fiscal year.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 55
The weighted average assumptions used to determine net benefit cost recorded on the Consolidated Statement of Earnings for the years ended June 30 were as follows: (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Retiree Benefits |
Years ended June 30 | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discount rate | 1.7 | % | | 1.5 | % | | 1.9 | % | | 3.2 | % | | 3.1 | % | | 3.7 | % |
Expected return on plan assets | 5.5 | % | | 6.5 | % | | 6.6 | % | | 8.4 | % | | 8.4 | % | | 8.4 | % |
Rate of compensation increase | 2.7 | % | | 2.5 | % | | 2.6 | % | | N/A | | N/A | | N/A |
Interest crediting rate for cash balance plans | 4.4 | % | | 4.4 | % | | 4.4 | % | | N/A | | N/A | | N/A |
(1) Determined as of beginning of fiscal year.
For plans that make up the majority of our obligation, the Company calculates the benefit obligation and the related impacts on service and interest costs using specific spot rates along the corporate bond yield curve. For the remaining plans, the Company determines these amounts utilizing a single weighted average discount rate derived from the corporate bond yield curve used to measure the plan obligations.
Several factors are considered in developing the estimate for the long-term expected rate of return on plan assets. For the defined benefit retirement plans, these factors include historical rates of return of broad equity and bond indices and projected long-term rates of return obtained from pension investment consultants. The expected long-term rates of return for plan assets are 8 - 9% for equities and 3 - 5% for bonds. For other retiree benefit plans, the expected long-term rate of return reflects that the assets are comprised primarily of Company stock. The expected rate of return on Company stock is based on the long-term projected return of 8.5% and reflects the historical pattern of returns.
Plan Assets. Our investment objective for defined benefit retirement plan assets is to meet the plans' benefit obligations and to improve plan self-sufficiency for future benefit obligations. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by assessing different investment risks and matching the actuarial projections of the plans' future liabilities and benefit payments with current as well as expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and with continual monitoring of investment managers' performance relative to the investment guidelines established with each investment manager.
Our target asset allocation for the year ended June 30, 2022, and actual asset allocation by asset category as of June 30, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Target Asset Allocation | | Actual Asset Allocation at June 30 |
| Pension Benefits | | Other Retiree Benefits | | Pension Benefits | | Other Retiree Benefits |
Asset Category | | | 2022 | | 2021 | | 2022 | | 2021 |
Cash | — | % | | 2 | % | | 1 | % | | 1 | % | | 2 | % | | 2 | % |
Debt securities | 61 | % | | 2 | % | | 58 | % | | 59 | % | | 1 | % | | 2 | % |
Equity securities | 39 | % | | 96 | % | | 41 | % | | 40 | % | | 97 | % | | 96 | % |
TOTAL | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Amounts in millions of dollars except per share amounts or as otherwise specified.
56 The Procter & Gamble Company
The following table sets forth the fair value of the Company's plan assets as of June 30, 2022 and 2021, segregated by level within the fair value hierarchy (refer to Note 9 for further discussion on the fair value hierarchy and fair value principles). Investments valued using net asset value as a practical expedient are not valued using the fair value hierarchy, but rather valued using the net asset value reported by the managers of the funds and as supported by the unit prices of actual purchase and sale transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Retiree Benefits |
As of June 30 | Fair Value Hierarchy Level | | 2022 | | 2021 | | Fair Value Hierarchy Level | | 2022 | | 2021 |
ASSETS AT FAIR VALUE | | | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 78 | | | $ | 82 | | | 1 | | $ | 130 | | | $ | 131 | |
Company common stock | | | — | | | — | | | 1 | | 319 | | | 275 | |
Company preferred stock (1) | | | — | | | — | | | 2 | | 6,340 | | | 5,911 | |
Fixed income securities (2) | 2 | | 1,545 | | | 1,931 | | | 2 | | — | | | 3 | |
Insurance contracts (3) | 3 | | 94 | | | 111 | | | | | — | | | — | |
TOTAL ASSETS IN THE FAIR VALUE HIERARCHY | | | 1,717 | | | 2,124 | | | | | 6,789 | | | 6,320 | |
Investments valued at net asset value (4) | | | 8,456 | | | 10,917 | | | | | 100 | | | 124 | |
TOTAL ASSETS AT FAIR VALUE | | | $ | 10,173 | | | 13,041 | | | | | $ | 6,889 | | | 6,444 | |
(1)Company preferred stock is valued based on the value of Company common stock and is presented net of ESOP debt discussed below.
(2)Fixed income securities, classified as Level 2, are estimated by using pricing models or quoted prices of securities with similar characteristics.
(3)Fair values of insurance contracts are valued based on either their cash equivalent value or models that project future cash flows and discount the future amounts to a present value using market-based observable inputs, including credit risk and interest rate curves. The activity for Level 3 assets is not significant for all years presented.
(4)Investments valued using net asset value as a practical expedient are primarily equity and fixed income collective funds.
Cash Flows. Management's best estimate of cash requirements and discretionary contributions for the defined benefit retirement plans and other retiree benefit plans for the year ending June 30, 2023, is $244 and $47, respectively. Expected contributions are dependent on many variables, including the variability of the market value of the plan assets as compared to the benefit obligation and other market or regulatory conditions. In addition, we take into consideration our business investment opportunities and resulting cash requirements. Accordingly, actual funding may differ significantly from current estimates.
Total benefit payments expected to be paid to participants, which include payments funded from the Company's assets and payments from the plans are as follows:
| | | | | | | | | | | |
Years ending June 30 | Pension Benefits | | Other Retiree Benefits |
EXPECTED BENEFIT PAYMENTS | | |
2023 | $ | 571 | | | $ | 177 | |
2024 | 564 | | | 186 | |
2025 | 590 | | | 190 | |
2026 | 585 | | | 193 | |
2027 | 601 | | | 198 | |
2028 - 2032 | 3,459 | | | 1,076 | |
Employee Stock Ownership Plan
We maintain the ESOP to provide funding for certain employee benefits discussed in the preceding paragraphs.
The ESOP borrowed $1.0 billion in 1989 and the proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock to fund a portion of the U.S. DC plan. Principal and interest requirements of the borrowing were paid by the Trust from dividends on the preferred shares and from advances provided by the Company. The original borrowing of $1.0 billion has been repaid in full, and advances from the Company of $15 remain outstanding at June 30, 2022. Each share is convertible at the option of the holder into one share of the Company's common stock. The dividend for the current year was equal to the common stock dividend of $3.52 per share. The liquidation value is $6.82 per share.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 57
In 1991, the ESOP borrowed an additional $1.0 billion. The proceeds were used to purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of retiree health care benefits. These shares, net of the ESOP's debt, are considered plan assets of the other retiree benefits plan discussed above. The original borrowings of $1.0 billion were repaid in 2021. Debt service requirements were funded by preferred stock dividends, cash contributions and advances provided by the Company, of which $901 are outstanding at June 30, 2022. Each share is convertible at the option of the holder into one share of the Company's common stock. The dividend for the current year was equal to the common stock dividend of $3.52 per share. The liquidation value is $12.96 per share.
Our ESOP accounting practices are consistent with current ESOP accounting guidance, including the permissible continuation of certain provisions from prior accounting guidance. ESOP debt, which was guaranteed by the Company, was recorded as debt with an offset to the Reserve for ESOP debt retirement, which is presented within Shareholders' equity. Advances to the ESOP by the Company are recorded as an increase in the Reserve for ESOP debt retirement. Interest incurred on the ESOP debt was recorded as Interest expense. Dividends on all preferred shares are charged to Retained earnings.
The series A and B preferred shares of the ESOP are allocated to employees based on debt service requirements. The number of preferred shares outstanding at June 30 was as follows:
| | | | | | | | | | | | | | | | | |
Shares in thousands | 2022 | | 2021 | | 2020 |
Allocated | 25,901 | | | 27,759 | | | 29,591 | |
Unallocated | 1,123 | | | 1,769 | | | 2,479 | |
TOTAL SERIES A | 27,024 | | | 29,528 | | | 32,070 | |
| | | |
Allocated | 30,719 | | | 29,203 | | | 27,894 | |
Unallocated | 20,120 | | | 22,349 | | | 24,418 | |
TOTAL SERIES B | 50,839 | | | 51,552 | | | 52,312 | |
For purposes of calculating diluted net earnings per common share, the preferred shares held by the ESOP are considered converted from inception.
NOTE 9
RISK MANAGEMENT ACTIVITIES AND FAIR VALUE MEASUREMENTS
As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. We evaluate exposures on a centralized basis to take advantage of natural exposure correlation and netting. To the extent we choose to manage volatility associated with the net exposures, we enter into various financial transactions that 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.
If the Company elects to do so and if the instrument meets certain specified accounting criteria, management designates derivative instruments as cash flow hedges, fair value hedges or net investment hedges. We record derivative instruments at fair value and the accounting for changes in the fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge. We generally have a high degree of effectiveness between the exposure being hedged and the hedging instrument.
Credit Risk Management
We have counterparty credit guidelines and normally enter into transactions with investment grade financial institutions, to the extent commercially viable. Counterparty exposures are monitored daily and downgrades in counterparty credit ratings are reviewed on a timely basis. We have not incurred, and do not expect to incur, material credit losses on our risk management or other financial instruments.
Substantially all of the Company's financial instruments used in hedging transactions are governed by industry standard netting and collateral agreements with counterparties. If the Company's credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangements. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of June 30, 2022, was not material. The Company has not been required to post collateral as a result of these contractual features.
Interest Rate Risk Management
Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount.
We designate certain interest rate swaps on fixed rate debt that meet specific accounting criteria as fair value hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in earnings.
Foreign Currency Risk Management
We manufacture and sell our products and finance our operations in a number of countries throughout the world. As a result, we are exposed to movements in foreign currency exchange rates. We leverage the Company’s diversified portfolio of exposures as a natural hedge. In certain cases, we enter into non-qualifying foreign currency contracts to hedge certain balance sheet items subject to revaluation. The change in fair value of these instruments and the underlying exposure are both immediately recognized in earnings.
Amounts in millions of dollars except per share amounts or as otherwise specified.
58 The Procter & Gamble Company
To manage exchange rate risk related to our intercompany financing, we primarily use forward contracts and currency swaps. The change in fair value of these non-qualifying instruments is immediately recognized in earnings, substantially offsetting the foreign currency mark-to-market impact of the related exposure.
Net Investment Hedging
We hedge certain net investment positions in foreign subsidiaries. To accomplish this, we either borrow directly in foreign currencies and designate all or a portion of the foreign currency debt as a hedge of the applicable net investment position or we enter into foreign currency swaps that are designated as hedges of net investments. Changes in the fair value of these instruments are recognized in the Foreign Currency Translation component of OCI and offset the change in the value of the net investment being hedged. The time value component of the net investment hedge currency swaps is excluded from the assessment of hedge effectiveness. Changes in the fair value of the swap, including changes in the fair value of the excluded time value component, are recognized in OCI and offset the value of the underlying net assets. The time value component is subsequently reported in income on a systematic basis.
Commodity Risk Management
Certain raw materials used in our products or production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. As of and during the years ended June 30, 2022 and 2021, we did not have any material financial commodity hedging activity.
Insurance
We self-insure for most insurable risks. However, we purchase insurance for Directors and Officers Liability and
certain other coverage where it is required by law or by contract.
Fair Value Hierarchy
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs reflecting the reporting entity's own assumptions or external inputs from inactive markets.
When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the year.
When active market quotes are not available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value.
Assets and Liabilities Measured at Fair Value
Cash equivalents were $6.0 billion and $9.1 billion as of June 30, 2022 and 2021, respectively, and are classified as Level 1 within the fair value hierarchy. Other investments had a fair value of $140 and $192 as of June 30, 2022 and 2021, respectively, including equity securities of $113 and $163 as of June 30, 2022 and 2021, respectively, and are presented in Other noncurrent assets. Investments are measured at fair value and primarily classified as Level 1 and Level 2 within the fair value hierarchy. Level 1 are based on quoted market prices in active markets for identical assets, and Level 2 are based on quoted market prices for similar investments. There are no material investment balances classified as Level 3 within the fair value hierarchy or using net asset value as a practical expedient. Unrealized gains/(losses) on equity securities were $(45) and $69 for the fiscal years ended June 30, 2022 and 2021, respectively, and are recognized in the Consolidated Statements of Earnings in Other non-operating income, net.
The fair value of long-term debt was $25.7 billion and $28.8 billion as of June 30, 2022 and 2021, respectively. This includes the current portion of long-term debt instruments ($3.6 billion as of June 30, 2022 and 2021). Certain long-term debt (debt designated as a fair value hedge) is recorded at fair value. All other long-term debt is recorded at amortized cost, but is measured at fair value for disclosure purposes. We consider our debt to be Level 2 in the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 59
Disclosures about Financial Instruments
The notional amounts and fair values of financial instruments used in hedging transactions as of June 30, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value Asset | | Fair Value (Liability) |
As of June 30 | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS | | | | | | |
Interest rate contracts | $ | 4,972 | | | $ | 7,415 | | | $ | 3 | | | $ | 146 | | | $ | (307) | | | $ | — | |
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS | | | | | | |
Foreign currency interest rate contracts | $ | 7,943 | | | $ | 8,484 | | | $ | 561 | | | $ | 89 | | | $ | (1) | | | $ | (94) | |
TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS | $ | 12,915 | | | $ | 15,899 | | | $ | 564 | | | $ | 235 | | | $ | (308) | | | $ | (94) | |
| | | | | | | | | | | |
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS | | | | | | |
Foreign currency contracts | $ | 5,625 | | | $ | 5,060 | | | $ | 6 | | | $ | 20 | | | $ | (61) | | | $ | (22) | |
| | | | | | | | | | | |
TOTAL DERIVATIVES AT FAIR VALUE | $ | 18,540 | | | $ | 20,959 | | | $ | 570 | | | $ | 255 | | | $ | (369) | | | $ | (116) | |
All derivative assets are presented in Prepaid expenses and other current assets or Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities or Other noncurrent liabilities.
The fair value of the interest rate derivative asset/liability directly offsets the cumulative amount of the fair value hedging adjustment included in the carrying amount of the underlying debt obligation. The carrying amount of the underlying debt obligation, which includes the unamortized discount or premium and the fair value adjustment, was $4.7 billion and $7.5 billion as of June 30, 2022 and 2021, respectively. In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The carrying value of those debt instruments designated as net investment hedges, which includes the adjustment for the foreign currency transaction gain or loss on those instruments, was $11.2 billion and $12.0 billion as of June 30, 2022 and 2021, respectively. The decrease in the notional balance of interest rate contracts was primarily due to the maturity of interest rate swaps that were associated with multiple bonds maturing in the period.
All of the Company's derivative assets and liabilities are measured at fair value that is derived from observable market data, including interest rate yield curves and foreign exchange rates, and are classified as Level 2 within the fair value hierarchy. There was no significant activity within the Level 3 assets and liabilities during the periods presented. There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis during the years ended June 30, 2022 and 2021.
Amounts in millions of dollars except per share amounts or as otherwise specified.
60 The Procter & Gamble Company
Before tax gains/(losses) on our financial instruments in hedging relationships are categorized as follows:
| | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in OCI on Derivatives |
Years ended June 30 | 2022 | | 2021 |
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS (1) (2) |
Foreign currency interest rate contracts | $ | 1,033 | | | $ | (232) | |
(1) For the derivatives in net investment hedging relationships, the amount of gain excluded from effectiveness testing, which was recognized in earnings, was $73 and $60 for the fiscal years ended June 30, 2022 and 2021, respectively.
(2) In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The amount of gain/(loss) recognized in AOCI for such instruments was $1,639 and $(918), for the fiscal years ended June 30, 2022 and 2021, respectively.
| | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in Earnings |
Years ended June 30 | 2022 | | 2021 |
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS |
Interest rate contracts | $ | (450) | | | $ | (123) | |
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS |
Foreign currency contracts | $ | (149) | | | $ | 296 | |
The gain/(loss) on the derivatives in fair value hedging relationships is fully offset by the mark-to-market impact of the related exposure. These are both recognized in the Consolidated Statement of Earnings in Interest Expense. The gain/(loss) on derivatives not designated as hedging instruments is substantially offset by the currency mark-to-market of the related exposure. These are both recognized in the Consolidated Statements of Earnings in SG&A.
NOTE 10
SHORT-TERM AND LONG-TERM DEBT | | | | | | | | | | | |
As of June 30 | 2022 | | 2021 |
DEBT DUE WITHIN ONE YEAR |
Current portion of long-term debt | $ | 3,647 | | $ | 3,620 |
Commercial paper | 4,805 | | 5,171 |
Other | 193 | | 98 |
TOTAL | $ | 8,645 | | $ | 8,889 |
Short-term weighted average interest rates (1) | 0.8 | % | | 0.2 | % |
(1)Short-term weighted average interest rates include the effects of interest rate swaps discussed in Note 9.
| | | | | | | | | | | |
As of June 30 | 2022 | | 2021 |
LONG-TERM DEBT | | | |
2.15% USD note due August 2022 | $ | 1,250 | | $ | 1,250 |
2.00% EUR note due August 2022 | 1,045 | | 1,190 |
3.10% USD note due August 2023 | 1,000 | | 1,000 |
1.13% EUR note due November 2023 | 1,306 | | 1,488 |
0.50% EUR note due October 2024 | 523 | | 595 |
0.63% EUR note due October 2024 | 836 | | 952 |
0.55% USD note due October 2025 | 1,000 | | 1,000 |
2.70% USD note due February 2026 | 600 | | 600 |
1.00% USD note due April 2026 | 1,000 | | 1,000 |
2.45% USD note due November 2026 | 875 | | 875 |
1.90% USD note due February 2027 | 1,000 | | — |
2.80% USD note due March 2027 | 500 | | 500 |
4.88% EUR note due May 2027 | 1,045 | | 1,190 |
2.85% USD note due August 2027 | 750 | | 750 |
1.20% EUR note due October 2028 | 836 | | 952 |
1.25% EUR note due October 2029 | 523 | | 595 |
3.00% USD note due March 2030 | 1,500 | | 1,500 |
0.35% EUR note due May 2030 | 523 | | — |
1.20% USD note due October 2030 | 1,250 | | 1,250 |
1.95% USD note due April 2031 | 1,000 | | 1,000 |
2.30% USD note due February 2032 | 850 | | — |
5.55% USD note due March 2037 | 716 | | 716 |
1.88% EUR note due October 2038 | 523 | | 595 |
3.55% USD note due March 2040 | 516 | | 516 |
0.90% EUR note due November 2041 | 627 | | — |
All other long-term debt | 4,901 | | 7,205 |
Current portion of long-term debt | (3,647) | | (3,620) |
TOTAL | $ | 22,848 | | $ | 23,099 |
Long-term weighted average interest rates (1) | 2.2% | | 2.0% |
(1)Long-term weighted average interest rates include the effects of interest rate swaps discussed in Note 9.
Long-term debt maturities during the next five fiscal years are as follows:
| | | | | | | | | | | | | | | | | |
Years ending June 30 | 2023 | 2024 | 2025 | 2026 | 2027 |
Debt maturities | $3,647 | $2,298 | $1,879 | $2,713 | $3,686 |
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 61
NOTE 11
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The table below presents the changes in Accumulated other comprehensive income/(loss) attributable to Procter & Gamble (AOCI), including the reclassifications out of AOCI by component:
| | | | | | | | | | | | | | | | | | | | | | | |
Changes in Accumulated Other Comprehensive Income/(Loss) by Component |
| Investment Securities | | Post-retirement Benefit Plans | | Foreign Currency Translation | | Total AOCI |
BALANCE at JUNE 30, 2020 | $ | (1) | | | $ | (4,350) | | | $ | (11,814) | | | $ | (16,165) | |
OCI before reclassifications (1) | 20 | | | 1,046 | | | 1,023 | | | 2,089 | |
Amounts reclassified to the Consolidated Statement of Earnings (2) | (4) | | | 340 | | | — | | | 336 | |
Net current period OCI | 16 | | | 1,386 | | | 1,023 | | | 2,425 | |
Less: OCI attributable to non-controlling interests | — | | | (1) | | | 5 | | | 4 | |
BALANCE at JUNE 30, 2021 | 15 | | | (2,963) | | | (10,796) | | | (13,744) | |
OCI before reclassifications (3) | 4 | | | 2,797 | | | (1,451) | | | 1,350 | |
Amounts reclassified to the Consolidated Statement of Earnings (4) | 1 | | | 195 | | | 1 | | | 197 | |
Net current period OCI | 5 | | | 2,992 | | | (1,450) | | | 1,547 | |
Less: OCI attributable to non-controlling interests | — | | | 2 | | | (10) | | | (8) | |
BALANCE at JUNE 30, 2022 | $ | 20 | | | $ | 27 | | | $ | (12,236) | | | $ | (12,189) | |
(1)Net of tax (benefit)/expense of $5, $345 and $(266) for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively, for the period ended June 30, 2021. Income tax effects within foreign currency translation include impacts from items such as net investment hedge transactions. Foreign cumulative translation is not adjusted for income taxes related to permanent investments in international subsidiaries.
(2)Net of tax (benefit)/expense of $0, $100 and $0 for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively, for the period ended June 30, 2021.
(3)Net of tax (benefit)/expense of $1, $953 and $515 for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively, for the period ended June 30, 2022. Income tax effects within foreign currency translation include impacts from items such as net investment hedge transactions. Foreign cumulative translation is not adjusted for income taxes related to permanent investments in international subsidiaries.
(4)Net of tax (benefit)/expense of $0, $69 and $0 for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively, for the period ended June 30, 2022.
The below provides additional details on amounts reclassified from AOCI into the Consolidated Statement of Earnings:
•Investment securities: amounts reclassified from AOCI into Other non-operating income, net.
•Postretirement benefit plans: amounts reclassified from AOCI into Other non-operating income, net and included in the computation of net periodic postretirement costs (see Note 8).
Amounts in millions of dollars except per share amounts or as otherwise specified.
62 The Procter & Gamble Company
NOTE 12
LEASES
The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. We lease certain real estate, machinery, equipment, vehicles and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included within the lease term when it has become reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate our lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. Our operating lease agreements do not contain any material guarantees or restrictive covenants. The Company does not have any material finance leases or sublease activities. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the Consolidated Balance Sheets. Lease expense for such short-term leases is not material. The most significant assets in our leasing portfolio relate to real estate and vehicles. For purposes of calculating lease liabilities for such leases, we have combined lease and non-lease components.
The components of the Company’s total operating lease cost for the years ended June 30, 2022, 2021 and 2020, were as follows: | | | | | | | | | | | | | | | | | |
Years ended June 30 | 2022 | | 2021 | | 2020 |
Operating lease cost | 220 | | 245 | | 271 |
Variable lease cost (1) | 89 | | 75 | | 76 |
Total lease cost | $ | 309 | | | $ | 320 | | | $ | 347 | |
(1) Includes primarily costs for utilities, common area maintenance, property taxes and other operating costs associated with operating leases that are not included in the lease liability and are recognized in the period in which they are incurred.
Supplemental balance sheet and other information related to leases is as follows:
| | | | | | | | | | | |
As of June 30 | 2022 | | 2021 |
Operating leases: | | | |
Right-of-use assets (Other noncurrent assets) | $ | 760 | | $ | 808 |
| | | |
Current lease liabilities (Accrued and other liabilities) | 205 | | 219 |
Noncurrent lease liabilities (Other noncurrent liabilities) | 595 | | 631 |
Total operating lease liabilities | $ | 800 | | $ | 850 |
| | | |
Weighted average remaining lease term: |
Operating leases | 6.4 years | | 6.4 years |
| | | |
Weighted average discount rate: |
Operating leases | 3.2 | % | | 3.8 | % |
At June 30, 2022, future payments of operating lease liabilities were as follows:
| | | | | |
| Operating Leases |
| June 30, 2022 |
1 year | $ | 206 | |
2 years | 179 | |
3 years | 135 | |
4 years | 92 | |
5 years | 64 | |
Over 5 years | 209 | |
Total lease payments | 885 | |
Less: Interest | (85) | |
Present value of lease liabilities | $ | 800 | |
Total cash paid for amounts included in the measurement of lease liabilities was $228 and $253 for the years ended June 30, 2022, and June 30, 2021, respectively.
The right-of-use assets obtained in exchange for lease liabilities were $217 and $163 for the years ended June 30, 2022, and June 30, 2021, respectively.
Amounts in millions of dollars except per share amounts or as otherwise specified.
The Procter & Gamble Company 63
NOTE 13
COMMITMENTS AND CONTINGENCIES
Guarantees
In conjunction with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., indemnification for representations and warranties and retention of previously existing environmental, tax and employee liabilities) for which terms range in duration and, in some circumstances, are not explicitly defined. The maximum obligation under some indemnifications is also not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.
In certain situations, we guarantee loans for suppliers and customers. The total amount of guarantees issued under such arrangements is not material.
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing arrangements, including variable interest entities, that have a material impact on our financial statements.
Purchase Commitments
We have purchase commitments for materials, supplies, services and property, plant and equipment as part of the normal course of business. Commitments made under take-or-pay obligations are as follows:
| | | | | | | | | | | | | | | | | | | | |
Years ending June 30 | 2023 | 2024 | 2025 | 2026 | 2027 | There-after |
Purchase obligations | $ | 1,082 | | $ | 494 | | $ | 332 | | $ | 259 | | $ | 193 | | $ | 425 | |
Such amounts represent minimum commitments under take-or-pay agreements with suppliers and are in line with expected usage. These amounts include purchase commitments related to service contracts for information technology, human resources management and facilities management activities that have been outsourced to third-party suppliers. Due to the proprietary nature of many of our materials and processes, certain supply contracts contain penalty provisions for early termination. We do not expect to incur penalty payments under these provisions that would materially affect our financial position, results of operations or cash flows.
Litigation
We are subject, from time to time, to certain legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising, contracts, environmental, patent and trademark matters, labor and employment matters and tax.
While considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.
We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will materially affect our financial position, results of operations or cash flows.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
The Company's Chairman of the Board, President and Chief Executive Officer, Jon R. Moeller, and the Company's Chief Financial Officer, Andre Schulten, performed an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K.
Messrs. Moeller and Schulten have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including Messrs. Moeller and Schulten, to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Amounts in millions of dollars except per share amounts or as otherwise specified.
64 The Procter & Gamble Company