PG 2010 AnnualReport

8/11/2019 PG 2010 AnnualReport

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Net Sales($ billions)

$78.9

$64.4

$76.7

$79.3

$72.4

10

09

08

06

07

Operating Cash Flow($ billions)

$11.4

$16.1

$13.4

$15.0

$14.9

10

09

08

06

07

Diluted Net Earnings(per common share)

$2.64

$4.11

$3.64

$4.26

10

09

08

06

07 $3.04

Financial Highlights(unaudited) Amounts in millions, except per share amounts 2010 2009 2008 2007 2006

Net Sales $78,938 $76,694 $79,257 $72,441 $64,416Operating Income 16,021 15,374 15,979 14,485 12,551Net Earnings 12,736 13,436 12,075 10,340 8,684Net Earnings Margin from Continuing Operations 13.9% 13.9% 14.2% 13.3% 12.7%Diluted Net Earnings per Common Share from Continuing Operations $ 3.53 $ 3.39 $ 3.40 $ 2.84 $ 2.49Diluted Net Earnings Per Common Share 4.11 4.26 3.64 3.04 2.64Dividends Per Common Share 1.80 1.64 1.45 1.28 1.15

ContentsLetter to Shareholders 1Leadership Brands 7Touching & Improving Lives 11 More Consumers 12 More Parts of the World 16

More Completely 20P&G Innovations 24Making a Difference 26Financial Contents 27Global Leadership Council 75Board of Directors 75Financial Summary 76Company and Shareholder Information 78

Beauty & GroomingHealth and Well-BeingHousehold Care

By business segment(% of total business segments)

These results exclude net sales in Corporate.

34%

48%

18%

North AmericaWestern EuropeCentral & Eastern Europe,Middle East & AfricaLatin AmericaAsia

By geographic region

42%

21%

9%

15%

13%

DevelopedDeveloping

By market maturity

66%

34%

2010 Net Sales


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P&Gs Purposeto touch andimprove lives, now and for generatito comeis inspiring and pervasive.Our Purpose is tightly and deliberatlinked to our business and nancialgoals: P&Gs Purpose inspires ourstrategic choices; it leads us to biggeand better innovation; it drives brilli

execution; and it compels us to maka difference in areas such assustainability and social responsibilnot merely to be a good citizen, butmore importantly, to create futureopportunities to touch and improvelivesand, in so doing, to keep our

Company growing.

Dear Shareholders,

Robert A. McDonald

Chairman of the Board, President and Chief Executive Ofcer


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We are touching and improving MORE CONSUMERS lives by innovating and expanding vertically, up and downvalue tiers.

We are touching and improving lives in MORE PARTS OFTHE WORLD by innovating and expanding geographically,into new white spaces where we havent been competing.

We are touching and improving consumers lives MORECOMPLETELY by innovating to improve existing products,by creating or entering adjacent categories and by drivingregimen use that broadens our product portfolios.

We have a strong multiyear pipeline that will continue todrive growth in the future. The impact of this innovationprogram is already evident. We have featured six examplesin the editorial section that follows this letter, but I want toshare perspective here as well to give you a sense of boththe strength and breadth of innovation coming from P&G.Ill highlight just three representative businesses to illustrate

Male GroomingFusion has now grown share for 18 consecutive quarters,and we recently launched Gillette Fusion ProGlide. Consumetesting shows that men prefer the Fusion ProGlide family ata ratio of up to 2-to-1 over Gillette Fusion. In the middletier, we recently launched a new Mach3 razor specicallydesigned to better meet the needs of emerging-marketconsumers. As a result, Mach3 shares are at record levels inArgentina, Brazil and India. In February, we launched a complete line of Gillettemale grooming solutions in Brazil, and are now expandingin several Latin American countries. In March, we introducea scientic face care regimen under the Gillette name inChina. In June, we introduced Gillette Fusion ProSeries inNorth America.

This is encouraging performance, inspired by thePurpose that motivates our people and partners and drivenprimarily by our strong, multiyear innovation program. Weare innovating to win in every P&G category, we are investingbehind these innovations to build protable market shareand we are continually increasing productivity that funds ourinvestments in future growth. This investment allows us tocontinually replenish our multiyear innovation pipeline.

Innovating to WinInnovation has beenand will continue to beat the heartof our success. In scal 2010, for the fourth consecutive year,we invested nearly $2 billion in Research & Development. Infact, we invest about 50% more than our closest competitorand more than most of our closest competitors combined.This leadership level of investment is multiplied by our globalnetwork of external innovation partners, which leads to aneffective investment in innovation that far exceeds thereported spending. One measure of the strength of our innovation programis the SymphonyIRI Group New Product Pacesetters reportthe annual list of the biggest innovations in our industry asmeasured by sales. Over the past 15 years, 125 P&Ginnovations have earned a spot on the Top 25 Pacesetterslistmore than our six largest competitors combined. Based on this track record, SymphonyIRI recognizedP&G as the most innovative manufacturer in the consumerpackaged goods industry for the last decadepresentingthe Company with its Outstanding Achievement inInnovation award. In 2009, P&G launched 5 of the top10 most successful non-food innovations as judged by

SymphonyIRI: Tide Total Care, Gillette Venus Embrace,Bounty Extra Soft, Always Innity and Secret Flawless.Our innovation program is guided by the Company's

Purpose-inspired growth strategy:

The Procter & Gamble Compa

SymphonyIRI Group recognized P&G as the most innovativemanufacturer in the consumer packaged goods industry for the lastdecade with its Outstanding Achievement in Innovation award.

# 1 most innovativeP&G launched 5 of the top 10 most successful new non-foodproducts in 2009, according to SymphonyIRI Group.


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Looking AheadMany of our most signicant innovations just launched inNorth America between March and June 2010. They willhave a much bigger impact on scal 2011 than they had thispast year as we continue to leverage them in North Americaand to expand them to additional markets. And, of course,we will bring new innovations to market. More specically:

Pampers with Dry Max will expand across Western Europethis year.

Gillette Fusion ProGlide will roll out to more than40 countries over the next two years.

The new Pantene formulations will expand globally overthe next two years.

We are aggressively working to merge the productinnovation and geographic expansion plans of Ambi Purwith the Febreze franchise, following the close of theAmbi Pur acquisition in early July. Our air care businessnow spans 84 countries.

Oral Care is introducing a new Crest Clinical line ofproducts to treat two of the most common oral careproblems: gingivitis and tooth sensitivity. The Crest ClinicalSensitivity toothpaste provides the maximum strengthavailable over the counter. Crest Clinical will start shippingin North America in August.

In total, P&G competes in 38 product categories globally, butwe are not present in all these categories in all of our prioritymarkets. For example, as a total Company, we compete inless than 50% of potential country/category combinations inour top 50 markets. This presents a tremendous growth

opportunity. Our objective is to ll out our product portfolioin every category and then expand to the most relevantgeographic markets. This objective is driving clear, strategicchoices about where to innovate and expand to ensure ourtotal-Company lineup is reaching more consumers in moreparts of the world, more completely.

There are examples in every P&G category. I cite thesefew just to provide perspective on the strength and breadthof our innovation program. We currently have the strongestmultiyear innovation program Ive seen in my 30-year careerat P&G. And as strong as the program has been during thispast scal year, we are equally pleased with the quality of ourpipeline going forward. Its full of innovations that are sure totouch and improve the lives of consumers for years to come.

Fabric CareWere expanding our portfolio horizontally with Tide StainRelease and Ariel Professional in laundry additives, andBounce Dryer Bar in the fabric enhancer category. We arealso expanding vertically and into geographic white space.In Western Europe, we are innovating in the premium tierwith Ariel Excel Gel, a new-to-the-world gel that is consumerpreferred by a margin of 2 to 1. In Japan, our newest laundrybrand, Sarasa, is priced at a 15% premium versus thecategory average and is designed for consumers who wanta laundry detergent that cleans well, but also providesnatural and gentle benets.

We introduced Ace in Colombia during the Septemberquarter and Tide Naturals in India during the Decemberquarter. Tide Naturals is priced 30% lower than regularTide, enabling us to reach a much broader spectrum ofIndian households. Ace is a mid-tier laundry brand thatcomplements Ariels stain removal equity and Bolds softnessequity. Ace has become P&Gs 23rd billion-dollar brand.

Oral CareOral-B toothpaste and toothbrush shares in Brazil continueto exceed expectations. Based on our in-market success, wehave initiated the second wave of our toothpaste expansionplan which will take us beyond the pharmacy channel.The Oral-B toothpaste launch in Belgium and theNetherlands is also going wellwith Oral-B toothpasteapproaching double-digit shares and driving P&G to overallOral Care market share leadership in both countries sincebeing launched in February 2009. Crest Pro-Health is off to a strong start in China, helpingto drive Oral Care shipments in China up high single digits inthe nal quarter of the scal year. The Crest Pro-Healthformula is being expanded to other markets around theworld, as well.

In March, we launched Crest 3D White in North America.3D White is a new regimen comprised of toothpaste, brush,rinse and Professional Effects whitestrips that work incombination to clean, whiten and protect teeth whileproviding health benets expected from Crest and Oral-B.

The amount we returned to P&G shareholders in 2010in the form of d ividends and share repurchases.

$11.5 billionP&G has paid a dividend for 120 consecutive yearsand 2010marked the 54th consecutive year of dividend increases.

120 years

4 The Procter & Gamble Company


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P&Gs single, unifying growth strategy is rootedin our enduring Purpose: We will grow bytouching and improving more consumers livesin more parts of the worldmore completely.

This strategy is working. Were carrying it outacross all of our businesses, and around the worlFrom a rural village in Kenya, to a tight-quartereconcrete home in India, to the bustling urbancenters of the United States, P&Gs growthstrategy guides our decisions, our innovations,our investments and our everyday actions.

Its a story best told by the people who aretouched by this strategyconsumers around the

world, whose everyday lives have become a littlbetter through the innovation and ingenuity ofP&G brands and P&G people.

Here are just some of their stories.

The Procter & Gamble Compa


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The Procter & Gamble Company

Managements Responsibility for Financial Reporting 28Managements Report on Internal Control over Financial Reporting 29Reports of Independent Registered Public Accounting Firm 29

Managements Discussion and AnalysisOverview 31Summary of 2010 Results 34Forward-Looking Statements 34Results of Operations 35Segment Results 38Financial Condition 43Signicant Accounting Policies and Estimates 46Other Information 48

Audited Consolidated Financial StatementsConsolidated Statements of Earnings 51

Consolidated Balance Sheets 52Consolidated Statements of Shareholders Equity 53Consolidated Statements of Cash Flows 54Notes to Consolidated Financial Statements 55

Financial Contents


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Managements Responsibility for Financial Reporting

At The Procter & Gamble Company, we take great pride in our longhistory of doing whats right. If you analyze whats made our Companysuccessful over the years, you may focus on our brands, our marketing

strategies, our organization design and our ability to innovate. But ifyou really want to get at what drives our companys success, the placeto look is our people. Our people are deeply committed to our Purpose,Values and Principles. It is this commitment to doing whats right thatunites us.

This commitment to doing whats right is embodied in our nancialreporting. High-quality nancial reporting is our responsibility one weexecute with integrity, and within both the letter and spirit of the law.

High-quality nancial reporting is characterized by accuracy, objectivityand transparency. Management is responsible for maintaining aneffective system of internal controls over nancial reporting to deliverthose characteristics in all material respects. The Board of Directors,through its Audit Committee, provides oversight. We have engagedDeloitte & Touche LLP to audit our Consolidated Financial Statements,on which they have issued an unqualied opinion.

Our commitment to providing timely, accurate and understandableinformation to investors encompasses:

Communicating expectations to employees. Every employee from senior management on down is required to be trained on theCompanys Worldwide Business Conduct Manual , which sets forththe Companys commitment to conduct its business affairs with highethical standards. Every employee is held personally accountable forcompliance and is provided several means of reporting any concerns

about violations of the Worldwide Business Conduct Manual , whichis available on our website at www.pg.com.

Maintaining a strong internal control environment. Our system ofinternal controls includes written policies and procedures, segregationof duties and the careful selection and development of employees. Thesystem is designed to provide reasonable assurance that transactionsare executed as authorized and appropriately recorded, that assetsare safeguarded and that accounting records are sufciently reliableto permit the preparation of nancial statements conforming in allmaterial respects with accounting principles generally accepted in theUnited States of America. We monitor these internal controls throughcontrol self-assessments conducted by business unit management.In addition to performing nancial and compliance audits aroundthe world, including unannounced audits, our Global Internal Auditorganization provides training and continuously improves internalcontrol processes. Appropriate actions are taken by management tocorrect any identied control deciencies.

Executing nancial stewardship. We maintain specic programs andactivities to ensure that employees understand their duciary respon-sibilities to shareholders. This ongoing effort encompasses nancialdiscipline in strategic and daily business decisions and brings particularfocus to maintaining accurate nancial reporting and effective controlsthrough process improvement, skill development and oversight.

Exerting rigorous oversight of the business. We continuously reviewbusiness results and strategic choices. Our Global Leadership Councilis actively involved from understanding strategies to reviewing key

initiatives, nancial performance and control assessments. The intentis to ensure we remain objective, identify potential issues, continuouslychallenge each other and ensure recognition and rewards are appro-priately aligned with results.

Engaging our Disclosure Committee. We maintain disclosure con-trols and procedures designed to ensure that information required tobe disclosed is recorded, processed, summarized and reported timelyand accurately. Our Disclosure Committee is a group of senior-levelexecutives responsible for evaluating disclosure implications of signi-cant business activities and events. The Committee reports its ndingsto the CEO and CFO, providing an effective process to evaluate ourexternal disclosure obligations.

Encouraging strong and effective corporate governance from ourBoard of Directors. We have an active, capable and diligent Boardthat meets the required standards for independence, and we welcomethe Boards oversight. Our Audit Committee comprises independentdirectors with signicant nancial knowledge and experience. Wereview signicant accounting policies, nancial reporting and internalcontrol matters with them and encourage their independent discussionswith external auditors. Our corporate governance guidelines, as wellas the charter of the Audit Committee and certain other committeesof our Board, are available on our website at www.pg.com.

P&G has a strong history of doing whats right. Our employeesembrace our Purpose, Values and Principles. We take responsibility forthe quality and accuracy of our nancial reporting. We present thisinformation proudly, with the expectation that those who use it willunderstand our Company, recognize our commitment to performancewith integrity and share our condence in P&Gs future.

R.A. McDonaldChairman of the Board, President and Chief Executive Ofcer

J.R. Moeller

Chief Financial Ofcer


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In our opinion, such Consolidated Financial Statements present fairin all material respects, the nancial position of the Company atJune 30, 2010 and 2009, and the results of its operations and cashows for each of the three years in the period ended June 30, 201in conformity with accounting principles generally accepted in theUnited States of America.

We have also audited, in accordance with the standards of the PublCompany Accounting Oversight Board (United States), the Compainternal control over nancial reporting as of June 30, 2010, basedthe criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwCommission and our report dated August 13, 2010 expressed anunqualied opinion on the Companys internal control over nancireporting.

Cincinnati, OhioAugust 13, 2010

Managements Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Management is responsible for establishing and maintaining adequateinternal control over nancial reporting of The Procter & GambleCompany (as dened in Rule 13a-15(f) under the Securities Exchange

Act of 1934, as amended). Our internal control over nancial reportingis designed to provide reasonable assurance regarding the reliabilityof nancial reporting and the preparation of nancial statements forexternal purposes in accordance with generally accepted accountingprinciples in the United States of America.

Strong internal controls is an objective that is reinforced through ourWorldwide Business Conduct Manual , which sets forth our commit-ment to conduct business with integrity, and within both the letterand the spirit of the law. The Companys internal control over nancialreporting includes a Control Self-Assessment Program that is conductedannually by substantially all areas of the Company and is audited bythe internal audit function. Management takes the appropriate action

to correct any identied control deciencies. Because of its inherentlimitations, any system of internal control over nancial reporting, nomatter how well designed, may not prevent or detect misstatementsdue to the possibility that a control can be circumvented or overriddenor that misstatements due to error or fraud may occur that are notdetected. Also, because of changes in conditions, internal controleffectiveness may vary over time.

Management assessed the effectiveness of the Companys internalcontrol over nancial reporting as of June 30, 2010, using criteriaestablished in Internal Control Integrated Framework issued by

Committee of Sponsoring Organizations of the Treadway Commiss(COSO) and concluded that the Company maintained effective intecontrol over nancial reporting as of June 30, 2010, based on thesecriteria.

Deloitte & Touche LLP, an independent registered public accountinrm, has audited the effectiveness of the Companys internal controver nancial reporting as of June 30, 2010, as stated in their reporwhich is included herein.

R.A. McDonaldChairman of the Board, President and Chief Executive Ofcer

J.R. MoellerChief Financial Ofcer

August 13, 2010

To the Board of Directors and Stockholders ofThe Procter & Gamble Company

We have audited the accompanying Consolidated Balance Sheets ofThe Procter & Gamble Company and subsidiaries (the Company) asof June 30, 2010 and 2009, and the related Consolidated Statementsof Earnings, Shareholders Equity, and Cash Flows for each of the threeyears in the period ended June 30, 2010. These nancial statements arethe responsibility of the Companys management. Our responsibility is toexpress an opinion on these nancial statements based on our audits.

We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the nancial statements are freeof material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the nan-cial statements. An audit also includes assessing the accountingprinciples used and signicant estimates made by management, aswell as evaluating the overall nancial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders ofThe Procter & Gamble Company

We have audited the internal control over nancial reporting of TheProcter & Gamble Company and subsidiaries (the Company) as ofJune 30, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Companys manage-ment is responsible for maintaining effective internal control overnancial reporting and for its assessment of the effectiveness of internalcontrol over nancial reporting, included in Managements Reporton Internal Control Over Financial Reporting. Our responsibility is toexpress an opinion on the Companys internal control over nancialreporting based on our audit.

We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reason-able assurance about whether effective internal control over nancialreporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over nancial reporting,assessing the risk that a material weakness exists, testing and evaluat-ing the design and operating effectiveness of internal control basedon the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion.

A companys internal control over nancial reporting is a processdesigned by, or under the supervision of, the companys principalexecutive and principal nancial ofcers, or persons performing similarfunctions, and effected by the companys board of directors, manage-ment, and other personnel to provide reasonable assurance regardingthe reliability of nancial reporting and the preparation of nancialstatements for external purposes in accordance with generally acceptedaccounting principles. A companys internal control over nancialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of nancial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordancewith authorizations of management and directors of the company;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of thecompanys assets that could have a material effect on the nancialstatements.

Because of the inherent limitations of internal control over nancialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud maynot be prevented or detected on a timely basis. Also, projections ofany evaluation of the effectiveness of the internal control over nancialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects,effective internal control over nancial reporting as of June 30, 2010,based on the criteria established in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission.

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the ConsolidatedFinancial Statements of the Company as of and for the year endedJune 30, 2010 and our report dated August 13, 2010 expressed anunqualied opinion on those nancial statements.

Cincinnati, OhioAugust 13, 2010


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The purpose of this discussion is to provide an understanding ofP&Gs nancial results and condition by focusing on changes incertain key measures from year to year. Managements Discussion

and Analysis (MD&A) is organized in the following sections:

Overview Summary of 2010 Results Forward-Looking Statements Results of Operations Segment Results Financial Condition Signicant Accounting Policies and Estimates Other Information

Throughout MD&A, we refer to measures used by management toevaluate performance, including unit volume growth, net sales andnet earnings. We also refer to a number of nancial measures thatare not dened under accounting principles generally accepted in theUnited States of America (U.S. GAAP), including organic sales growth,core earnings per share (Core EPS), free cash ow and free cash owproductivity. Organic sales growth is sales growth excluding theimpacts of foreign exchange, acquisitions and divestitures. Core EPS isdiluted net earnings per share from continuing operations excludingcertain specied charges. Free cash ow is operating cash ow lesscapital spending. Free cash ow productivity is the ratio of free cashow to net earnings. We believe these measures provide investorswith important information that is useful in understanding our busi-ness results and trends. The explanation at the end of MD&A providesmore details on the use and the derivation of these measures.

Management also uses certain market share and market consumptionestimates to evaluate performance relative to competition despitesome limitations on the availability and comparability of share andconsumption information. References to market share and marketconsumption in MD&A are based on a combination of vendor-reportedconsumption and market size data, as well as internal estimates. Allmarket share references represent the percentage of sales in dollarterms of our products relative to all product sales in the category. Incertain situations, we discuss volume share, which is the percentage ofunit volume of our products relative to all products sold in the category.

Recent Business DevelopmentsIn October 2009, we sold our global pharmaceuticals business to

Warner Chilcott plc (Warner Chilcott) for $2.8 billion, net of assumedand transferred liabilities. Under the terms of the agreement, WarnerChilcott acquired our portfolio of branded pharmaceuticals products,our prescription drug product pipeline and our manufacturing facilitiesin Puerto Rico and Germany. The pharmaceuticals business had histori-cally been part of the Health Care reportable segment. In accordancewith the applicable accounting guidance for the disposal of long-livedassets, the results of our pharmaceuticals business are presented asdiscontinued operations and, as such, have been excluded from con-tinuing operations and from segment results for all periods presented.

Effective July 2009, we implemented a number of changes to ourorganization structure for the Beauty Global Business Unit (GBU)which resulted in changes to the components of its segment structur

As a result, the Beauty GBU became the Beauty and Grooming GBand reportable segments under the GBU moved to a new consumeroriented alignment. The two reportable segments within the Beautyand Grooming GBU continue to be Beauty and Grooming. Howevfemale blades and razors transitioned from Grooming to Beauty. Inaddition, certain male-focused brands and businesses, such as OldSpice and Gillette personal care, moved from Beauty to GroomingThese changes have been reected in our segment reporting begin-ning in scal year 2010. Our historical segment reporting, includinboth the MD&A and footnotes to the accompanying ConsolidatedFinancial Statements for the years ended June 30, 2009 and 2008,has also been restated to reect the new structure.

In November 2008, we completed the divestiture of our coffeebusiness through the merger of our Folgers coffee subsidiary intoThe J.M. Smucker Company (Smucker) in an all-stock reverse MoTrust transaction. In connection with the merger, 38.7 million sharof P&G common stock were tendered by our shareholders andexchanged for all shares of Folgers common stock. Pursuant to thmerger, a Smucker subsidiary merged with and into Folgers andFolgers became a wholly owned subsidiary of Smucker.

The coffee business had historically been part of the CompanysSnacks, Coffee and Pet Care reportable segment, as well as the cofportion of the away-from-home business which was included in theFabric Care and Home Care reportable segment. In accordance witthe applicable accounting guidance for the disposal of long-livedassets, the results of our coffee business are presented as discontinued operations and, as such, have been excluded from continuingoperations and from segment results for all periods presented. TheSnacks, Coffee and Pet Care reportable segment was renamed Snacand Pet Care to reect this change.

OVERVIEWOur business is focused on providing branded consumer packagedgoods of superior quality and value to our consumers around theworld. This will enable us to execute our Purpose-inspired growthstrategy: to touch and improve more consumers lives, in more parof the world, more completely. We believe this will result in leaderssales, earnings and value creation, allowing employees, shareholdeand the communities in which we operate to prosper.

Our products are sold in more than 180 countries primarily throughmass merchandisers, grocery stores, membership club stores, drugstores and high-frequency stores, the neighborhood stores whichserve many consumers in developing markets. We continue toexpand our presence in other channels, including department storeperfumeries, pharmacies, salons and e-commerce. We have on-the-ground operations in approximately 80 countries.

Managements Discussion and Analysis



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Managements Discussion and Analysis The Procter & Gamble Company

RESULTS OF OPERATIONS

Net SalesNet sales increased 3% in 2010 to $78.9 billion on a 4% increase inunit volume. Volume increased low single digits in developed regionsand mid-single digits in developing regions. All geographic regionscontributed to volume growth, led by high single-digit growth in Asiaand CEEMEA. Volume growth for the reportable segments wasmixed, with low single-digit increases in the Beauty, Grooming andHealth Care segments, a mid-single-digit increase in the Fabric Careand Home Care segment and a high single-digit increase in the BabyCare and Family Care segment, partially offset by a low single-digitdecline in the Snacks and Pet Care segment. Price increases added1% to net sales as increases taken primarily in developing regions tooffset local currency devaluations were partially offset by more recentprice reductions to improve consumer value. Mix reduced net salesby 1% behind disproportionate growth in developing regions,which have lower than Company average selling prices, and relativelyweaker shipments of Salon Professional, Prestige, Personal HealthCare and Pet Care, which have higher than Company average sellingprices. Organic sales were up 3%, led by mid-single-digit growthacross the Fabric Care and Home Care and the Baby Care and FamilyCare segments. Unfavorable foreign exchange reduced net sales growthby 1% as the U.S. dollar strengthened versus key foreign currencies.

$ .

$ .

$ .

10

08

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NET SALES($ billions)

%

%

%

10

08

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DEVELOPING MARKETS

(% of net sales)

Net sales decreased 3% in 2009 to $76.7 billion behind a 3% declin unit volume. Unfavorable foreign exchange reduced net sales by4% as many foreign currencies weakened versus the U.S. dollar. Pr

increases, taken across all segments, primarily to offset higher commodity costs and foreign exchange impacts, added 5% to net sales.Negative product mix reduced net sales by 1% mainly due to disprportionate volume declines in our more discretionary categories anchannels (primarily Prestige, Salon Professional and Appliances), with Personal Health Care, all of which have higher than Companyaverage selling prices. Every reportable segment except Baby Care Family Care reported volume declines led by mid-single-digit declin Grooming and Snacks and Pet Care. Volume in both developed adeveloping regions was below previous year levels. Organic volumwhich excludes the impact of acquisitions and divestitures, decline2%. Organic sales increased 2% behind the net benet of pricing amix. Net sales levels in 2009 were negatively impacted by the glob

economic downturn and credit crisis that began during that periodwhich, along with the aforementioned price increases, contributed market contractions, trade inventory reductions and share declines certain businesses. These impacts were more pronounced in our mdiscretionary categories.

Operating Costs

Comparisons as a percentage of net sales; Years ended June 30 2010 Basis PointChange 2009 Basis PointChange 2

Gross margin 52.0% 250 49.5% (100) 50.Selling, general and administrative expense 31.7% 220 29.5% (80) 30.Operating margin 20.3% 30 20.0% (20 ) 20Earnings from continuing operations before income taxes 19.1% 30 18.8% 0 18.Net earnings from continuing operations 13.9% 0 13.9% (30) 14


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36 The Procter & Gamble Company Managements Discussion and Analysis

Gross margin expanded 250 basis points in 2010 to 52.0% of net sales.Manufacturing and logistics cost savings projects and lower commodityand energy costs positively impacted gross margin by about 280 basis

points. Volume scale leverage and price increases also contributed togross margin expansion. These impacts were partially offset by unfavor-able foreign exchange and product mix impacts.

Gross margin declined 100 basis points to 49.5% of net sales in2009. Higher commodity and energy costs, partially offset by savingsprojects on raw and packing materials, negatively impacted grossmargin by about 250 basis points. Unfavorable foreign exchange andincremental restructuring charges also negatively impacted grossmargin. These impacts were partially offset by price increases andmanufacturing and logistics cost savings.

. %

. %

. %

10

08

09

GROSS MARGIN

(% of net sales)

Total selling, general and administrative expenses (SG&A) increased10% to $25.0 billion in 2010 behind higher marketing, overhead andother operating expenses. SG&A as a percentage of net sales increased220 basis points to 31.7% due to higher marketing and other operat-ing expenses as a percentage of net sales, while overhead spending asa percentage of sales was in line with the prior year. Marketing spend-ing as a percentage of net sales was up 150 basis points as additionalmarketing investments, primarily to increase media impressions, andthe impact of reduced spending in the fourth quarter of 2009 werepartially offset by media rate savings. Advertising spending as apercentage of net sales was up 110 basis points versus 2009 behindinvestments to support initiatives and business growth. Overheadspending as a percentage of net sales was consistent with the prioryear as additional spending to support business growth was offset byproductivity improvements and lower restructuring charges. Otheroperating expenses as a percentage of net sales increased 70 basispoints mainly due to an increase in Venezuela-related foreign currencyexchange costs of $492 million (see further discussion in the follow-ing paragraphs) and charges for potential competition law nes of$283 million.

Because of currency restrictions in Venezuela, payments for certainimported goods and services have historically been satised byexchanging Bolivares Fuertes for U.S. dollars through securities trans-actions in the parallel market rather than at the more favorable ofcialexchange rate. At the discretion of management, these securitiestransactions can be utilized to manage exposure to currency move-ments on local cash balances. A reduction in the availability of foreigncurrency at the ofcial exchange rate and an increased spread betweenthe ofcial and parallel exchange rates during most of scal 2010resulted in increased costs for exchange transactions executed usingsecurities transactions in the parallel market during 2010. For a more

detailed discussion of the impacts of and recent events in Venezuela,see the section entitled Venezuela Currency Impacts at the end ofthis Results of Operations section.

SG&A decreased 6% to $22.6 billion in 2009 driven primarily by foreigncurrency impacts and cost reduction efforts. SG&A as a percentage ofnet sales was down 80 basis points due to lower marketing expensesand the impact of foreign currency transaction gains on workingcapital balances caused by strengthening of the U.S. dollar. Marketingexpenses were down as a percentage of net sales for the totalCompany and for most reportable segments mainly due to media ratereductions, foreign exchange and reductions in the amount of mediapurchased primarily in the fourth scal quarter. Overhead spending asa percentage of net sales was up 30 basis points versus the prior yearas productivity improvements were more than offset by the negativeimpacts of sales deleverage and incremental restructuring charges.

. %

. %

. %

10

08

09

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE(% of net sales)

We fund a number of restructuring-type activities, primarily relatedto manufacturing and workforce optimization efforts, to maintain acompetitive cost structure and to integrate acquired businesses.Within our results of continuing operations, after-tax charges to fundrestructuring-type activities declined approximately $220 million in2010. In 2009, we executed approximately $270 million after-tax ofadditional restructuring-type activities versus 2008 in order to offsetthe dilution caused by the disposition of our coffee business.

Non-Operating ItemsInterest expense decreased 30% in 2010 to $946 million due primarilyto a reduction in interest rates on oating rate debt and a reduction indebt outstanding. In 2009, interest expense decreased 7% to $1.4 bil-lion primarily driven by a reduction in U.S. dollar interest rates, partiallyoffset by a higher debt level primarily to fund share repurchases.

Other non-operating income/(expense), net primarily includes divesti-ture gains, interest and investment income and the provision for

income attributable to noncontrolling interests. Other non-operatingincome/(expense), net declined $425 million in 2010 to an expenseof $28 million mainly due to divestiture gains in the prior year, whichincluded gains on the sale of Thermacare, Noxzema, Infusium andother minor brands, and incremental costs in the current year associ-ated with exercising the call option on an outstanding bond. In 2009,other non-operating income increased $24 million mainly due tohigher divestiture gains.


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Income TaxesThe effective tax rate on continuing operations increased 140 basispoints to 27.3%. This was primarily due to a $152 million charge for

recently enacted legislation which changed the taxation of certainfuture retiree prescription drug subsidy payments in the United States,the non-deductibility of the aforementioned $283 million charge forpotential competition law nes and a lower current-year level of netfavorable adjustments to reserves for previously existing uncertain taxpositions and foreign tax credits, partially offset by a more favorablecurrent-year geographic mix of earnings. During the current year, netadjustments to prior-year reserves balances for uncertain tax positionsbenetted the effective tax rate by 40 basis points versus a 130-basispoint benet in the prior year. In 2009, the effective tax rate fromcontinuing operations was up 180 basis points to 25.9% primarilydue to a lower level of net favorable adjustments to reserves forpreviously existing uncertain tax positions and geographic mix of

earnings across all reporting segments resulting from a weakening ofkey foreign currencies versus the U.S. dollar, partially offset by theutilization of tax credits. Net adjustments to reserves for uncertain taxpositions benetted the effective tax rate by 130 basis points, versusa benet of 340 basis points in 2008.

Net EarningsNet earnings from continuing operations were $10.9 billion in 2010,an increase of 2% versus the prior year due mainly to net sales growthand operating margin expansion, partially offset by a higher effectivetax rate. Operating margin was up 30 basis points due to an increasein gross margin, mostly offset by an increase in SG&A as a percentageof net sales. Net earnings from continuing operations decreased 5%

to $10.7 billion in 2009 mainly due to lower net sales and a highereffective tax rate. Operating margin was down 20 basis pointsbehind a commodity-driven decline in gross margin, partially offsetby lower SG&A as a percentage of net sales.

Net earnings from discontinued operations declined $1.0 billion to$1.8 billion in 2010 primarily due to the loss of contribution from thepharmaceuticals business divested in October 2009 and coffee businessdivested in November 2008 and lower gains on the sale of discontin-ued operations. The gains on the sale of the global pharmaceuticalsbusiness in scal 2010 were $1.6 billion versus a $2.0 billion gain onthe sale of the coffee business in scal 2009. In 2009, net earningsfrom discontinued operations, which included the results of the coffeeand pharmaceuticals businesses, increased $2.0 billion due to the gainon the sale of the coffee business. The loss of earnings contributionfrom the coffee business in 2009 was mostly offset by an increase inearnings of the pharmaceuticals business.

Diluted net earnings per share declined 4% to $4.11 in 2010 drivenby lower net earnings from discontinued operations, partially offsetby higher net earnings from continuing operations and a reduction inweighted average shares outstanding resulting from share repurchaseactivity. Diluted net earnings per share from continuing operationsincreased 4% to $3.53 behind higher net earnings from continuingoperations and the reduction in shares outstanding. Diluted net

earnings per share from discontinued operations declined $0.29 to$0.58. The reduction in the number of shares outstanding was drivby treasury share repurchases of $6.0 billion, nearly all of which w

made under our publicly announced share repurchase program. Thshare repurchase program expired on June 30, 2010.

Diluted net earnings per share in 2009 increased 17% to $4.26. Theincrease was due mainly to the gain on the sale of our coffee businepartially offset by lower net earnings from continuing operations.Diluted net earnings per share from continuing operations in 2009decreased $0.01 to $3.39. Diluted net earnings per share from discotinued operations was $0.87, comprised primarily of the gain on thsale of the coffee business and operating earnings of the pharmaceucals business. Diluted net earnings per share was positively impactby fewer shares outstanding as a result of share repurchase activityand shares tendered in the Folgers coffee transaction. Treasury sha

in the amount of $6.4 billion were repurchased in 2009, nearly allwhich were made under our publicly announced share repurchase

program.

$ .

$ .

$

10

08

09

DILUTED NET EARNINGS(per common share)

Core EPS was up 6% to $3.67 in 2010. Core EPS represents dilutenet earnings per share from continuing operations excluding chargin 2010 for potential competition law nes and recently enactedlegislation which changed the taxation of certain future retiree pre-scription drug subsidy payments in the United States, the 2009 impof incremental restructuring charges incurred to offset the dilutiveimpact of the Folgers divestiture and the 2008 impact of signicanadjustments to tax reserves. Core EPS grew 6% in 2009 to $3.47.

$

$ .

$ .

10

08

09

CORE EARNINGS PER SHARE(per common share)


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Venezuela Currency ImpactsOn January 1, 2010, Venezuela was designated as a highly inationaryeconomy under U.S. GAAP. As a result, the U.S. dollar became the

functional currency for our subsidiaries in Venezuela. Beginning in ourthird scal quarter, currency remeasurement adjustments for non-dollardenominated monetary assets and liabilities held by these subsidiariesand other transactional foreign exchange gains and losses are beingreected in earnings and will continue to be reected in earnings onan ongoing basis. Through December 31, 2009 (prior to being desig-nated as highly inationary), translation adjustments were reected inShareholders Equity as part of accumulated other comprehensiveincome.

On January 8, 2010, the Venezuelan government announced itsintention to devalue the Bolivar Fuerte relative to the U.S. dollar. Theofcial exchange rate for imported goods classied as essential, such

as food, medicine and capital investments, changed from 2.15 to 2.6,while payments for other non-essential goods moved to an exchangerate of 4.3. Many of our imported products fall into the essentialclassication and qualify for the 2.6 rate. However, our overall resultsin Venezuela are reected in our Consolidated Financial Statements atthe 4.3 rate expected to be applicable to dividend repatriations.

The remeasurement of our local balance sheets in the third scalquarter to reect the impact of the devaluation did not materiallyimpact our results. This was due to the relatively small non-dollardenominated net monetary asset position in Venezuela. There will bean ongoing impact related to measuring our income statement at thenew exchange rates. Moving from the 2.15 rate to 4.3 will reducefuture total Company reported sales by less than 2% on a going basis.For the year ended June 30, 2010, the impact was about 1%. Thisdoes not impact our organic sales growth rate, which excludes theimpact of foreign currency changes. Versus our original business plans,the exchange rate change reduced our reported earnings per share byapproximately $0.08 in 2010, with a similar impact expected in 2011.This impact includes the devaluation impact on Venezuela-relatedforeign currency exchange costs.

In our fourth scal quarter, the Venezuelan government introducedadditional exchange controls over securities transactions in the parallelmarket. They established the Central Bank of Venezuela as the onlylegal intermediary through which parallel market transactions canbe executed and established government control over the parallel

exchange rate (which was approximately 5.3 at June 30, 2010). Atthe same time, they signicantly reduced the notional amount oftransactions that run through this parallel market mechanism, whichhas eliminated our ability to access the parallel market to pay forimported goods and/or manage our local monetary asset balances.

As of June 30, 2010, we had net monetary assets denominated inlocal currency of approximately $350 million. Approximately $170million of this balance has been remeasured using the parallel rate,because we plan to use that amount of the net assets (largely cash)to satisfy U.S. dollar denominated liabilities that do not qualify forofcial rate dollars. The availability of the parallel market to settle these

transactions is uncertain. The remaining net monetary asset balancesare currently reected within our Consolidated Financial Statementsat the 4.3 ofcial exchange rate. Depending on the future availability

of U.S. dollars at the ofcial rate, our local U.S. dollar needs and ouroverall repatriation plans, we have exposure for the differentialbetween the ofcial and parallel exchange rates on this portion ofour local monetary assets.

Over time, we will attempt to restore the sales and prot levelsachieved prior to the devaluation. However, our ability to do so will beimpacted by several factors, including the Companys ability to mitigatethe effect of the devaluation, further actions of the Venezuelangovernment, economic conditions in Venezuela such as ination andconsumer spending, the availability of raw materials, utilities and energyand the future state of exchange controls in Venezuela including theavailability of U.S. dollars at the ofcial foreign exchange rate.

SEGMENT RESULTSResults for the segments reect information on the same basis weuse for internal management reporting and performance evaluation.Within the Beauty and Grooming GBU, we provide data for theBeauty and the Grooming reportable segments. In the Health andWell-Being GBU, we provide data for the Health Care and the Snacksand Pet Care reportable segments. In the Household Care GBU, weprovide data for the Fabric Care and Home Care and the Baby Careand Family Care reportable segments. All references to net earningsthroughout the discussion of segment results refer to net earningsfrom continuing operations.

The results of these reportable business segments do not includecertain non-business unit specic costs such as interest expense,investing activities and certain restructuring costs. These costs arereported in our Corporate segment and are included as part of ourCorporate segment discussion. Additionally, as described in Note 11to the Consolidated Financial Statements, we have investments incertain companies over which we exert signicant inuence, butdo not control the nancial and operating decisions and, therefore, donot consolidate these companies for U.S. GAAP purposes (unconsoli-dated entities). Given that certain of these investments are managedas integral parts of the Companys business units, they are accountedfor as if they were consolidated subsidiaries for management andsegment reporting purposes. This means pretax earnings in the businessunits include 100% of each pretax income statement component.In determining after-tax earnings in the business units, we eliminatethe share of earnings applicable to other ownership interests, in amanner similar to noncontrolling interest, and apply the statutory taxrates. Eliminations to adjust each line item to U.S. GAAP are includedin our Corporate segment.


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Net Sales Change Drivers vs. Year Ago (2010 vs. 2009)

Volume withAcquisitions &

Divestitures

VolumeExcluding

Acquisitions &Divestitures

ForeignExchange Price Mix/Other

Net Gr

BEAUTY AND GROOMING

Beauty 3% 4% 0% 1% -1%Grooming 1% 1% 0% 4% -2%

HEALTH AND WELL-BEING

Health Care 3% 3% 0% 1% -2%Snacks and Pet Care -2% -2% 1% 3% -1%

HOUSEHOLD CARE

Fabric Care and Home Care 6% 6% -1% -1% -1%Baby Care and Family Care 7% 7% -1% 0% -2%

TOTAL COMPANY 4% 4% -1% 1% -1%Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.

Beauty and GroomingBEAUTY

($ millions) 2010Change vs.Prior Year 2009

Change vs.Prior Year

Volume n/a +3% n/a -2%Net sales $19,491 +3% $18,924 -4%Net earnings $ 2,712 +2% $ 2,664 -6%

Beauty net sales increased 3% in 2010 to $19.5 billion on unit volumegrowth of 3%. Price increases added 1% to net sales growth asearlier price increases taken in developing regions to offset currencydevaluations more than offset more recent price reductions in HairCare. Unfavorable geographic mix reduced net sales 1% due to

disproportionate growth in developing regions, which have lowerthan segment average selling prices. Organic sales were up 3% on a4% increase in organic volume. Volume growth was driven by highsingle-digit growth in developing regions, with developed regionvolume in line with the prior year. Hair Care volume grew mid-singledigits behind growth of Pantene, Head & Shoulders and Rejoiceprimarily in Asia and Latin America. Global share of the hair caremarket on a constant currency basis was in line with 2009. FemaleBeauty volume was up low single digits as higher shipments offemale skin care and personal cleansing products in developingregions were partially offset by the discontinuation of Max Factor inNorth America, the scal 2009 divestiture of Noxzema and volumeshare losses on non-strategic personal cleansing brands in developed

regions. Salon Professional volume was down double digits mainlydue to the exit of non-strategic businesses and continued marketcontractions. Prestige volume declined low single digits due to con-tinued contraction of the fragrance market.

Net earnings increased 2% in 2010 to $2.7 billion driven by net sagrowth, partially offset by a 20-basis point reduction in net earningmargin. Net earnings margins declined due to higher SG&A as apercentage of net sales, the impact of divestiture gains in the prioryear and a higher tax rate in the current year, partially offset by gromargin expansion. SG&A as a percentage of net sales was up due tincreased marketing spending and higher foreign currency exchangcosts. The tax rate increase was due to a shift in the geographic miof earnings to countries with higher statutory tax rates. Gross margexpansion was driven primarily by price increases and manufacturcosts savings.

Beauty net sales decreased 4% in 2009 to $18.9 billion on a 2%

decline in unit volume. Price increases to offset higher commoditycosts added 2% to net sales. Unfavorable foreign exchange reducednet sales by 4%. Organic sales increased 1% versus the prior yearbehind price increases. Volume in developed regions declined midsingle digits, while volume in developing regions grew low singledigits. Hair Care volume in the retail channel grew low single digitbehind growth of Pantene, Head & Shoulders and Rejoice. SalonProfessional volume declined mid-single digits mainly due to markcontractions and trade inventory reductions. Volume in FemaleBeauty declined mid-single digits primarily due to competitive actaffecting shipments of Olay and lower shipments of personal cleansproducts driven by trade inventory reductions, market contractionsand the divestiture of Noxzema. Prestige volume declined high sin

digits primarily due to market contractions and trade inventoryreductions of prestige fragrances. Our market shares in key categorwithin Beauty were generally consistent with the prior year. Netearnings decreased 6% in 2009 to $2.7 billion mainly due to lowenet sales and reduced net earnings margin. Net earnings margincontracted 30 basis points due to reduced gross margin and a higheeffective tax rate, partially offset by reduced SG&A as a percentagof net sales. Gross margin declined due to higher commodity costswhich were only partially offset by price increases and manufacturcost savings. SG&A was down primarily due to lower marketingspending as a percentage of net sales.


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The economic downturn which began in scal 2009 resulted in adisproportionate decline in the Salon Professional business, given themore discretionary nature of salon visits and purchases. Over time,

we believe the Salon Professional business will return to sales andearnings growth rates consistent with our long-term business plans.Failure to achieve these business plans or a further deterioration ofthe macroeconomic conditions could result in an impairment of thegoodwill and intangible assets of the Salon Professional business.See the discussion of Acquisitions, Goodwill and Intangibles in theSignicant Accounting Policies and Estimates section for additionalinformation.

GROOMING



Volume n/a +1% n/a -5%Net sales $7,631 +3% $7,408 -9%Net earnings $1,477 +9% $1,359 -14%

Grooming net sales increased 3% to $7.6 billion in 2010 on a 1%increase in unit volume. Price increases, taken primarily in developingregions to offset currency devaluations and across blades and razors,added 4% to net sales. Product mix had a negative 2% impact on netsales due mainly to disproportionate growth in developing regionsand of disposable razors, both of which have lower than segmentaverage selling prices. Organic sales grew 3%. Volume in developingregions increased low single digits, while volume in developed regionswas in line with the prior year. Volume in Male Grooming was up lowsingle digits mainly due to growth of disposable razors in developing

regions. Mach3 shipments declined high single digits, while GilletteFusion shipments increased double digits behind the launch of the newFusion ProGlide. On a constant currency basis, global market shareof the blades and razors category was down about half a point versusthe prior year. Volume in Appliances was down low single digits behinda mid-single-digit decline in developing regions, due mostly to marketcontractions and volume share losses in home and hair care appliances.Global value share of the dry shaving market was up half a point on aconstant currency basis.

Net earnings increased 9% to $1.5 billion in 2010 behind sales growthand net earnings margin expansion. Net earnings margin increased100 basis points driven by gross margin expansion and a lower taxrate, partially offset by higher SG&A as a percentage of net sales. Grossmargin increased mainly due to price increases and manufacturingcost savings. The reduction in the tax rate was mainly due to a shift inthe geographic mix of earnings to developing regions which generallyhave lower statutory tax rates. The increase in SG&A as a percentageof net sales was driven by higher marketing spending and incrementalforeign currency exchange costs, partially offset by lower overheadspending as a percentage of net sales.

Grooming net sales declined 9% in 2009 to $7.4 billion on a 5%decline in unit volume. Unfavorable foreign exchange reduced netsales by 6%. Product mix had a negative 2% impact on net sales asfavorable product mix from growth of the premium-priced Gillette

Fusion brand was more than offset by a disproportionate decline ofAppliances, both of which have higher than segment average sellingprices. Price increases, taken across most product lines and in part to

offset foreign exchange impacts in developing regions, added 4% tonet sales. Organic sales were down 2% versus the prior year on a 5%decline in organic volume, mainly due to the sharp decline of theAppliances business. Volume in both developed and developing regionsdeclined mid-single digits. Male Grooming volume declined lowsingle digits primarily driven by market contractions in developedregions and trade inventory reductions. Growth of Gillette Fusion wasmore than offset by declines in legacy shaving systems. Global valueshare of male blades and razors was up less than half a point versusthe prior year. Volume in Appliances was down double digits due tomarket contractions, trade inventory reductions and the exits of theU.S. home appliance and Tassimo coffee appliance businesses. Globalvalue share of the male dry shaving market was down less than half a

point. Net earnings were down 14% in 2009 to $1.4 billion primarilyon the decline in net sales and a 120-basis point reduction in netearnings margin. Net earnings margin was down due to a highereffective tax rate and reduced gross margin, partially offset by lowerSG&A as a percentage of net sales. Gross margin declined due tounfavorable product mix resulting from disproportionate growth ofdisposable razors, higher commodity costs and volume scale delever-age which were partially offset by price increases and manufacturingcost savings.

The economic downturn in scal 2009 resulted in a disproportionatedecline in the Appliances business, particularly in developing geogra-phies, given the more discretionary nature of home and personal

grooming appliance purchases. Over time, we believe the Appliancesbusiness will return to sales and earnings growth rates consistent withour long-term business plans. Failure to achieve these business plansor a further deterioration of the macroeconomic conditions couldresult in an impairment of the goodwill and intangible assets of theAppliance business. See the discussion of Acquisitions, Goodwill andIntangibles in the Signicant Accounting Policies and Estimates sectionfor additional information.

Health and Well-BeingHEALTH CARE



Volume n/a +3% n/a -3%Net sales $11,493 +2% $11,288 -7%Net earnings $ 1,860 +1% $ 1,835 -9%

Health Care net sales increased 2% in 2010 to $11.5 billion on unitvolume growth of 3%. Price increases, taken mainly in developingregions to offset currency devaluations, added 1% to net sales.Unfavorable mix reduced net sales by 2% mainly due to disproportion-ate growth of developing regions, which have lower than segmentaverage selling prices. Organic sales increased 2%. Volume grew mid-single digits in developing regions and low single digits in developedregions. Oral Care volume grew mid-single digits behind initiative


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activity in Western Europe, Latin America and Asia. Personal HealthCare volume was up low single digits behind higher shipments ofVicks and diagnostic products, partially offset by a continuing decline

of Prilosec OTC in North America due to increased competitive activity.All-outlet value share of the U.S. personal health care market hasdeclined 1 point, led by a 5-share point decline of Prilosec OTCs shareof the upper stomach remedies segment. Feminine Care volumeincreased low single digits behind initiative-driven growth of Alwaysand expansion of Naturella into China. Global market share of thefeminine care category was down about half a point on a constantcurrency basis.

Net earnings increased 1% to $1.9 billion for 2010 on higher netsales, partially offset by a 10-basis point reduction in net earningsmargin. Net earnings margin contracted due to higher SG&A as apercentage of net sales, partially offset by higher gross margin. SG&A

as a percentage of net sales increased due to higher marketing andoverhead spending and incremental foreign currency exchange costs.Gross margin grew behind price increases, lower commodity costsand manufacturing cost savings.

Health Care net sales were down 7% to $11.3 billion in 2009 on a3% decline in unit volume. Unfavorable foreign exchange reducednet sales by 5%. Negative product mix from disproportionately highervolume declines of Personal Health Care, which have higher thansegment average selling prices, reduced net sales by 2%. Thesenegative impacts were partially offset by positive pricing impacts of3%. Organic sales were down 1% versus scal 2008. Volume declinedmid-single digits in developed regions and low single digits in devel-oping regions. Personal Health Care volume was down double digitsdue to the loss of marketplace exclusivity of Prilosec OTC in NorthAmerica, the impact of a mild cold and u season on Vicks and thedivestiture of Thermacare. All-outlet value share of the U.S. personalhealth care market has declined over 2 points, including a double-digitshare decline of Prilosec OTC. Oral Care volume declined low singledigits behind trade inventory reductions and market contractions inNorth America and CEEMEA. Our global market share of oral carewas in line with the prior year. Feminine Care volume was down lowsingle digits mainly due to trade inventory reductions and marketcontractions in North America and CEEMEA. Our global feminine caremarket share was down half a point versus the prior year. Net earningsdeclined 9% to $1.8 billion in 2009 mainly due to lower net sales.Net earnings margin was down 50 basis points due primarily to lowergross margin and higher overhead spending as a percentage of netsales, partially offset by a reduction in marketing spending as apercentage of net sales. The decline in gross margin was driven byhigher commodity costs, which were partially offset by price increasesand manufacturing cost savings.

SNACKS AND PET CARE


ChangPrior

Volume n/a -2% n/a -Net sales $3,135 +1% $3,114 -Net earnings $ 326 +39% $ 234 -1

Snacks and Pet Care net sales increased 1% in 2010 to $3.1 billionon a 2% decline in unit volume. Price increases, taken primarily tooffset prior-year commodity cost increases, added 3% to net sales.Favorable foreign exchange added 1% to net sales. Mix reduced nesales by 1% due to the discontinuation of certain premium snackproducts, which have higher than segment average selling prices, ahigher shipments of large size pet products, which have lower thansegment average selling prices. Organic sales were in line with theprior year. Volume in Snacks was down mid-single digits behind

volume share losses driven by lower merchandising activity in NorAmerica and the discontinuation of certain premium snack productOn a constant currency basis, global market share of the snackscategory was down half a point versus the prior year. Volume in PeCare was up low single digits behind the continued success of prodinitiatives, increased marketing support and incremental merchandisactivity.

Net earnings increased 39% to $326 million in 2010 driven by hignet sales and a 290-basis point increase in net earnings margin. Neearnings margin expanded due to higher gross margin and a lower trate, partially offset by higher SG&A as a percentage of net sales. Gmargin expanded behind price increases, commodity cost declinesand manufacturing cost savings. The tax rate declined due to a shifin the geographic mix of earnings to countries with lower statutorytax rates. SG&A as a percentage of net sales increased due to highmarketing and overhead spending.

Snacks and Pet Care net sales decreased 3% to $3.1 billion in 200on a 6% decline in unit volume. Price increases to offset highercommodity costs added 9% to net sales. Product mix reduced netsales by 2% due to lower shipments of Eukanuba and premium snacproducts, which have higher than segment average selling prices.Unfavorable foreign exchange reduced net sales by 4%. Organic salincreased 1%. Snacks volume decreased high single digits due tolower merchandising support and trade inventory levels, a high basperiod, which included the Rice Infusion, Extreme Flavors and Stixproduct launches and volume share declines following price increasOur global snacks market share declined about 1 point versus theprior year. Volume in Pet Care declined mid-single digits mainly dto declines in the premium nutrition business following multiple princreases. Net earnings in 2009 were down 10% to $234 million lower net sales and a 60-basis point reduction in net earnings margA reduction in gross margin and a higher effective tax rate eachreduced net earnings margin. These impacts were partially offset blower SG&A as a percentage of net sales. Gross margin declined dto higher commodity costs, partially offset by higher selling pricesand manufacturing cost savings. SG&A as a percentage of net saledeclined due to reductions in both marketing and overhead spendin


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Household CareFABRIC CARE AND HOME CARE

($ millions) 2010

Change vs.

Prior Year 2009

Change vs.

Prior YearVolume n/a +6% n/a -3%Net sales $23,805 +3% $23,186 -2%Net earnings $ 3,339 +10% $ 3,032 -11%

Fabric Care and Home Care net sales increased 3% to $23.8 billion in2010 on a 6% increase in unit volume. Pricing reduced net sales by1% as the impact of price reductions to improve consumer valuewere partially offset by price increases taken primarily in developingregions to offset currency devaluations. Mix lowered net sales by 1%due mainly to unfavorable geographic mix and a shift toward largersize products, which have lower than segment average selling prices.Unfavorable foreign exchange reduced net sales by 1%. Organic sales

grew 4%. Volume increased mid-single digits in both developed anddeveloping regions. Fabric Care volume grew mid-single digits behindnew product launches, price reductions and incremental merchandis-ing activity. Global market share of the fabric care category was downabout half a point on a constant currency basis. During 2010, theAce laundry brand became the Companys 23rd billion-dollar brand.Home Care volume was up high single digits mainly due to newproduct launches, media spending increases and market size expan-sion. On a constant currency basis, global market share of the homecare category was up about half a point versus 2009. Batteries volumeincreased mid-single digits primarily due to growth in Greater China,price reductions to improve consumer value in North America andhigher demand from business customers.

Net earnings increased 10% to $3.3 billion due to higher net sales anda 90-basis point increase in net earnings margin. Net earnings marginincreased due to higher gross margin and a lower tax rate, partiallyoffset by an increase in SG&A as a percentage of net sales. Grossmargin increased mainly due to lower commodity costs and manufac-turing cost savings, while SG&A as a percentage of net sales increaseddue to higher marketing spending. The tax rate declined due to a shiftin the geographic mix of earnings to countries with lower statutorytax rates.

Fabric Care and Home Care net sales were down 2% in 2009 to$23.2 billion on a 3% decline in unit volume. Price increases, takenprimarily to offset higher commodity costs, added 6% to net sales,while unfavorable foreign exchange reduced net sales by 5%. Organicsales increased 3%. Fabric Care, Home Care and Batteries unit volumewere each down in both developed and developing regions. Volume inFabric Care declined low single digits due to trade inventory reductionsand net market volume share declines following price increases. Lowershipments of premium-priced Tide and Ariel were only partially offsetby growth of Gain and Downy. Global value share of the fabric caremarket was down less than half a point behind declines in U.S. all-outlet shares of Tide and Downy, partially offset by share growth ofGain. Home Care volume was down low single digits due to marketcontractions and trade inventory reductions. Batteries volume declined

high single digits due to market contractions, trade inventory reduc-tions and competitive activity, which drove a 1-point market sharedecline of general purpose batteries. Net earnings declined 11% to

$3.0 billion primarily due to reduced net earnings margin and lowernet sales. Net earnings margin contracted 130 basis points due to acommodity-driven decline in gross margin, which was partially offsetby price increases and manufacturing cost savings. Lower marketingspending as a percentage of net sales was largely offset by higheroverhead spending as a percentage of net sales.

In July 2010, we acquired Ambi Pur, a leading air care brand withpresence in 80 countries, as well as several toilet care products fromthe Sara Lee Corporation for approximately $400 million. This businesswill be integrated into Home Care and will be reected in the resultsof operations of the Fabric Care and Home Care segment beginning inscal 2011. This acquisition is not expected to have a material impact

on the results of operations for the Company or the reportable segment.BABY CARE AND FAMILY CARE



Volume n/a +7% n/a +1%Net sales $14,736 +4% $14,103 +1%Net earnings $ 2,049 +16% $ 1,770 +2%

Baby Care and Family Care net sales grew 4% to $14.7 billion in 2010on 7% volume growth. Pricing was in line with the prior year as theimpact of price increases primarily taken in developing regions tooffset local currency devaluations were offset by price reductions toimprove consumer value. Negative mix reduced net sales by 2% drivenmainly by disproportionate growth of mid-tier product lines, largecount packs and developing regions, all of which have lower thansegment average selling prices. Unfavorable foreign exchange reducednet sales by 1%. Organic sales increased 5%. Volume grew doubledigits in developing regions and mid-single digits in developed regions.Volume in Baby Care increased high single digits behind incrementalinitiative activity, market size expansion and price reductions to improveconsumer value, primarily in CEEMEA. Global share of the baby caremarket was up over half a point on a constant currency basis. Volumein Family Care grew high single digits due to increased merchandisingand initiative activity, market growth and price reductions to improveconsumer value.

Net earnings increased 16% to $2.0 billion in 2010 behind net salesgrowth and 140 basis points of net earnings margin expansion drivenby higher gross margin, partially offset by higher SG&A as a percentageof net sales. Gross margin increased mainly due to lower commoditycosts and manufacturing cost savings. SG&A as a percentage of netsales increased primarily behind incremental marketing investmentsand higher foreign currency exchange costs.

Baby Care and Family Care net sales increased 1% to $14.1 billion in2009 on 1% volume growth. Pricing to help recover higher commodityand energy costs contributed 5% to net sales growth. Unfavorableforeign exchange reduced net sales by 4%. Negative product mix from


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higher shipments of mid-tier brands, which have lower than segmentaverage selling prices, reduced net sales by 1%. Organic sales wereup 7% on a 2% increase in organic volume. Volume growth was

driven by low single-digit growth in developing regions, while volumein developed regions was in line with the prior year. Baby Care volumeincreased low single digits due to growth of Pampers primarily indeveloping regions and double-digit growth of Luvs in North America.Our global market share of baby care was up nearly half a point.Family Care volume was down low single digits due to the WesternEuropean family care divestiture. Organic volume for Family Care wasup low single digits behind double-digit growth of Charmin Basic andBounty Basic. U.S. market share on Bounty was up nearly 1 point,while Charmin market share remained consistent with the prior year.Net earnings were up 2% versus the prior year to $1.8 billion due tonet sales growth and higher net earnings margin. Net earnings marginincreased 10 basis points as higher gross margin was partially offset

by an increase in SG&A as a percentage of net sales and a highereffective tax rate. Gross margin improved due to the impact of priceincreases, manufacturing cost savings and more positive product mixfollowing the Western European family care divestiture, which morethan offset higher commodity and energy costs. SG&A as a percent-age of net sales increased due to the higher current period overheadspending and base period reimbursements for services related tothe Western European family care divestiture, partially offset by lowermarketing spending.

CorporateCorporate includes certain operating and non-operating activities notallocated to specic business units. These include: the incidental

businesses managed at the corporate level; nancing and investingactivities; other general corporate items; the historical results ofcertain divested brands and categories; and certain restructuring-typeactivities to maintain a competitive cost structure, including manufac-turing and workforce optimization. Corporate also includes reconcilingitems to adjust the accounting policies used in the segments to U.S.GAAP. The most signicant reconciling items include income taxes(to adjust from statutory rates that are reected in the segments tothe overall Company effective tax rate), adjustments for unconsoli-dated entities (to eliminate net sales, cost of products sold and SG&Afor entities that are consolidated in the segments but accounted forusing the equity method for U.S. GAAP) and noncontrolling interestadjustments for subsidiaries where we do not have 100% ownership.

Since certain unconsolidated entities and less than 100%-ownedsubsidiaries are managed as integral parts of the Company, they areaccounted for similar to a wholly-owned subsidiary for managementand segment purposes. This means our segment results recognize100% of each income statement component through before-taxearnings in the segments, with eliminations for unconsolidatedentities and noncontrolling interests in Corporate. In determiningsegment after-tax net earnings, we apply the statutory tax rates (withadjustments to arrive at the Companys effective tax rate in Corporate)and eliminate the share of earnings applicable to other ownershipinterests, in a manner similar to noncontrolling interest.

Corporate net sales primarily reect the adjustment to eliminate thsales of unconsolidated entities included in business segment resulAccordingly, Corporate net sales is generally a negative balance. In

2010, negative net sales in Corporate were up 2% mainly due tochanges in reconciling items needed to adjust the accounting policused in the segments to U.S. GAAP. Net expenses from continuingoperations increased $603 million to $817 million. The increase wprimarily due to current period charges for potential competition lanes and for recently enacted legislation impacting the taxation ofcertain future retiree prescription drug subsidy payments and the impof higher prior-period divestiture gains and tax audit settlements.These impacts were partially offset by lower current-period interesexpense and restructuring charges. Additional discussion of the itemimpacting net expenses in Corporate can be found in the Results ofOperations section.

In 2009, negative net sales in Corporate declined $86 million primdriven by lower adjustments to eliminate the sales of unconsolidate

entities included in business segment results. These adjustmentsdecreased due to lower net sales of existing unconsolidated entitiesNet expenses from continuing operations decreased $325 million $214 million. The decrease was primarily due to corporate hedginimpacts, lower interest expense and higher current period divestitugains, partially offset by higher restructuring spending.

FINANCIAL CONDITIONWe believe our nancial condition continues to be of high quality, aevidenced by our ability to generate substantial cash from operatioand ready access to capital markets at competitive rates.

Operating cash ow provides the primary source of funds to nancoperating needs and capital expenditures. Excess operating cash is urst to fund shareholder dividends. Other discretionary uses includshare repurchases and tack-on acquisitions to complement our portfolio of brands and geographies. As necessary, we may supplementoperating cash ow with debt to fund these activities. The overallcash position of the Company reects our strong business results aa global cash management strategy that takes into account liquiditymanagement, economic factors and tax considerations.

Operating ActivitiesOperating cash ow was $16.1 billion in 2010, an 8% increase vethe prior year. Operating cash ow resulted primarily from net earninadjusted for non-cash items (depreciation and amortization, stock-based compensation, deferred income taxes and gain on the sale ofbusinesses) and a reduction in working capital. The increase in operatcash ow was primarily due to the current year reduction in workincapital balances, partially offset by a decline in earnings versus 20Working capital reductions contributed $2.5 billion to operating caow in 2010 mainly due to an increase in accounts payable, accrueand other liabilities. Accounts payable, accrued and other liabilitieincreased primarily due to increased expenditures to support busingrowth, primarily related to the increased marketing investments.Accounts receivable days were down year over year due mainly to t


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global pharmaceuticals divestiture and improved collection efforts.Inventory contributed to operating cash ow despite growth in thebusiness due to a reduction in days on hand due primarily to inven-

tory management improvement efforts. Cash ow from discontinuedoperations contributed $285 million to operating cash ow.

In 2009, operating cash ow was $14.9 billion, a decrease of 1% versusthe prior year total of $15.0 billion. Operating cash ow resultedprimarily from net earnings adjusted for non-cash items. The decreasein operating cash ow versus 2008 was primarily due to a decline innet earnings from continuing operations. A net decrease in workingcapital also added to cash ow as lower accounts receivable andinventory balances were partially offset by a decline in accounts payable.The decrease in working capital was primarily due to the impact oflower net sales and our ability to adequately adjust production to bettermeet unit volume requirements. Accounts receivable days declined

primarily due to improved collection efforts. Inventory and accountspayable days declined due in part to the optimization of our manu-facturing process and inventory levels and a moderation of commoditycosts late in the year. Other operating assets and liabilities reducedcash ow primarily due to changes in postretirement benet plans.Cash ow from discontinued operations contributed $662 million tooperating cash ow.

Free Cash Flow. We view free cash ow as an important measurebecause it is one factor impacting the amount of cash available fordividends and discretionary investment. It is dened as operating cashow less capital expenditures and is one of the measures used toevaluate senior management and determine their at-risk compensation.Free cash ow was $13.0 billion in 2010, an increase of 11% versusthe prior year. Free cash ow increased due to higher operating cashow and lower capital spending. Free cash ow productivity, denedas the ratio of free cash ow to net earnings, was 102% in 2010. Thisincludes a negative 23% impact resulting from the global pharmaceu-ticals divestiture, which increased net earnings and lowered operatingcash ow due to tax payments on the divestiture gain.

In 2009, free cash ow was $11.7 billion, compared to $12.0 billion in2008. Free cash ow decreased as a result of higher capital spendingand lower operating cash ow. Free cash ow productivity was 87%in 2009. This was below our 90% target primarily due to the gain onthe Folgers coffee transaction which lowered productivity by approxi-mately 15% because the gain is included in net earnings but had no

material impact on operating cash ow.

%

%

%

10

08

09

FREE CASH FLOW PRODUCTIVITY

(% of net earnings)

Investing ActivitiesNet investing activities consumed $597 million of cash in 2010 and$2.4 billion in 2009 mainly due to capital spending and acquisitions,

partially offset by proceeds from asset sales, including $3.0 billion incash received from the sale of our global pharmaceuticals businessin 2010. Discontinued operations consumed $1 million of cash frominvesting activities in 2010 and contributed $69 million in 2009.

Capital Spending. We view capital spending efciency as a criticalcomponent of our overall cash management strategy. We managecapital spending to support our business growth plans and have costcontrols to deliver our cash generation targets. Our target for capitalspending is 4% of net sales. Capital expenditures, primarily to supportcapacity expansion, innovation and cost savings, were $3.1 billion in2010 and $3.2 billion in 2009. The decline in capital spending resultedprimarily from cost control efforts and capacity expansion of our

Family Care bu

Documents

PG 2010 AnnualReport