Procter & Gamble Co. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The supplied metadata references “2019 Q4,” but the filing is the fiscal 2020 annual report, including fourth-quarter results.
Business Context
P&G is a global branded consumer products company operating in approximately 70 countries, with products sold in more than 180 countries and territories. Its five reportable segments are Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. Walmart and its affiliates represented approximately 15% of total sales.
The company’s strategy emphasizes brand superiority, innovation, productivity savings, market-share leadership, balanced sales and earnings growth, and strong cash generation.
Key Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $70.950 billion | $67.684 billion | +5% |
| Organic sales growth | 6% | Not clearly provided in source | Driven by 4% organic volume growth |
| Gross profit | $35.700 billion | $32.916 billion | +8% |
| Gross margin | 50.3% | 48.6% | +170 bps |
| Operating income | $15.706 billion | $5.487 billion | +186% |
| Operating margin | 22.1% | 8.1% | +1,400 bps |
| Net earnings attributable to P&G | $13.027 billion | $3.897 billion | +234% |
| Diluted EPS | $4.96 | $1.43 | +247% |
| Core EPS | $5.12 | $4.52 | +13% |
| Operating cash flow | $17.403 billion | $15.242 billion | +14% |
| Adjusted free cash flow | $14.873 billion | $12.130 billion | +23% |
| Adjusted free cash flow productivity | 114% | Not clearly provided in source | Above 90% long-term target |
| Total debt | $34.7 billion | $30.1 billion | Increase |
| Cash and cash equivalents | $16.181 billion | $4.239 billion | Increase |
Gross margin benefited from manufacturing cost savings, lower commodity costs, and pricing, partly offset by unfavorable product mix and foreign exchange. SG&A increased 5% to $19.994 billion, while remaining at 28.2% of sales.
Segment Performance
| Segment | FY2020 Sales | Sales Change | Net Earnings Change |
|---|---|---|---|
| Beauty | $13.359 billion | +4% | +4% |
| Grooming | $6.069 billion | -2% | -13% |
| Health Care | $9.028 billion | +10% | +9% |
| Fabric & Home Care | $23.735 billion | +7% | +18% |
| Baby, Feminine & Family Care | $18.364 billion | +3% | +27% |
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $17.4 billion; capital expenditures were $3.1 billion, or 4.3% of sales.
- Dividends paid totaled $7.8 billion, and share repurchases totaled $7.4 billion. The company increased its dividend per common share by approximately 5% to $3.0284 and reported 64 consecutive years of dividend increases.
- Current liabilities exceeded current assets by $5.0 billion, primarily because of short-term borrowings under the commercial paper program.
- Debt due within one year was $11.183 billion, including $8.545 billion of commercial paper. Long-term debt was $23.537 billion.
- P&G reported strong credit ratings: Moody’s P-1/Aa3 and S&P A-1+/AA-, each with a stable outlook. Its $8.0 billion bank credit facilities were undrawn.
- Approximately $4 billion owed to suppliers participating in the supply-chain-finance program was included in accounts payable at both June 30, 2020 and June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Reported profit and margins rebounded sharply because fiscal 2019 included an $8.3 billion pretax non-cash impairment charge related to Shave Care goodwill and the Gillette indefinite-lived intangible asset.
- Fiscal 2020 sales benefited from increased demand for health, hygiene, home-cleaning, and family-care products, including pantry loading associated with COVID-19.
- Grooming declined because of lower shaving frequency, competitive pressure, unfavorable foreign exchange, and pandemic-related changes in consumer behavior.
- Foreign exchange reduced sales by approximately 2% and reduced net earnings by approximately $390 million.
- The effective tax rate declined to 17.2% from 34.7%, largely because the prior-year impairment generated no tax benefit and fiscal 2020 included a legal-entity-structure tax benefit.
- Total debt increased by approximately $4.6 billion, primarily from new bond issuance used to support financing needs, including shareholder distributions.
- The company incurred $782 million of restructuring charges in fiscal 2020 and expects ongoing restructuring costs of approximately $250 million to $500 million annually in fiscal 2021 and thereafter.
Guidance, Outlook, Commentary and Risks
Management’s long-term targets are organic sales growth above category and geographic market growth, core EPS growth in the mid-to-high single digits, and adjusted free cash flow productivity of at least 90%. The filing does not provide a specific fiscal 2021 annual sales or EPS forecast.
Management stated that COVID-19 had no material net impact on consolidated fiscal 2020 sales, earnings, or cash flow, but demand effects were uneven. Future results may be volatile because of possible recessionary conditions, pantry destocking, supply-chain disruption, restricted consumer movement, reduced travel, and changing demand for grooming and discretionary products.
- Shave Care goodwill and the Gillette brand intangible asset remain material valuation risks. At June 30, 2020, their carrying values were $12.5 billion and $14.1 billion, respectively. A 25-basis-point increase in the discount rate or decrease in growth assumptions would reduce estimated fair value by approximately 6% for each asset; the filing states that either change would result in an additional Gillette impairment.
- Other principal risks include foreign-currency volatility, commodity and transportation costs, competitive pricing and private-label pressure, customer concentration, supply-chain and single-source supplier dependence, cybersecurity, regulatory and tax changes, litigation, political instability, and the duration and severity of COVID-19.
- The company is subject to legal, environmental, tax, product liability, antitrust, intellectual-property, and other proceedings. Management does not expect current matters to have a material adverse effect, but outcomes remain uncertain.
- Internal control over financial reporting and disclosure controls were assessed as effective, and Deloitte & Touche issued unqualified audit opinions.
Investor Verification Checklist
- Verify that reported earnings growth is not interpreted without adjusting for the $8.3 billion fiscal 2019 Shave Care impairment and other unusual items; compare GAAP EPS with core EPS.
- Review the sustainability of COVID-related volume increases, particularly in Fabric & Home Care, Health Care, and Family Care, and assess the risk of post-pandemic destocking.
- Monitor Grooming performance and the sensitivity of Shave Care goodwill and Gillette intangible valuations to demand, currency, discount-rate, and growth assumptions.
- Reconcile operating cash flow and adjusted free cash flow, including the effects of extended supplier payment terms and supply-chain financing.
- Assess debt maturities, commercial paper exposure, refinancing needs, and the ability to fund dividends and repurchases while maintaining credit ratings.
- Review foreign-exchange exposure, commodity costs, restructuring spending, tax contingencies, pension obligations, and pending legal matters.