Procter & Gamble 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended December 31, 2018, representing P&G’s fiscal second quarter and first-half fiscal 2019. P&G is a global consumer packaged-goods company operating through Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. Products are sold in more than 180 countries and territories.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31 | Six Months Ended Dec. 31 |
|---|---|---|
| Net sales | $17.438 billion, flat year over year | $34.128 billion, flat year over year |
| Operating income | $3.896 billion, down 1% | $7.450 billion, down 2% |
| Net earnings | $3.216 billion, up 26% | $6.427 billion, up 18% |
| Net earnings attributable to P&G | $3.194 billion, up 28% | $6.393 billion, up 20% |
| Diluted EPS | $1.22, up 31% | $2.44, up 22% |
| Core diluted EPS | $1.25, up 5% | $2.36, up 4% |
| Gross margin | 48.9%, down 100 basis points | 49.0%, down 110 basis points |
| Operating margin | 22.3%, down 20 basis points | 21.8%, down 40 basis points |
| Net earnings margin | 18.4%, up 370 basis points | 18.8%, up 280 basis points |
| Operating cash flow | Not separately provided for the quarter | $7.574 billion |
| Adjusted free cash flow | Not separately provided for the quarter | $6.028 billion; 99% productivity |
Six-month organic sales increased 4%, while unit volume increased 2% and organic volume increased 3%. Foreign exchange reduced sales by 3% for the six-month period and reduced net earnings by approximately $484 million. SG&A declined 2% to $9.275 billion for the six months, helped by lower marketing spending and productivity savings.
At December 31, 2018, cash and cash equivalents were $3.696 billion and available-for-sale investment securities were $8.421 billion. Current assets were $24.431 billion versus current liabilities of $31.247 billion. Debt due within one year was $12.113 billion and long-term debt was $21.514 billion. The company stated that operating cash flow, debt-market access, strong credit ratings, and committed financial institutions should support short-term liquidity needs.
Material Changes Versus the Prior Comparable Period
- Reported sales were essentially unchanged, but organic sales grew 4%, reflecting volume, pricing, mix, acquisitions and divestitures, offset by foreign exchange.
- Net earnings benefited substantially from lower income taxes following the U.S. Tax Cuts and Jobs Act. The six-month effective tax rate declined to 18.2% from the prior-year period’s higher rate, while the prior-year period included a $628 million transitional tax charge.
- Six-month gross margin declined 110 basis points because of higher commodity costs, unfavorable mix, and foreign exchange, partly offset by manufacturing savings and pricing.
- Grooming was the weakest major segment: six-month sales declined 5%, earnings declined 8%, and segment net earnings declined 5%. Beauty sales increased 4%, Fabric & Home Care sales increased 2%, and Baby, Feminine & Family Care sales declined 2%.
- The company completed the $3.7 billion all-cash acquisition of Merck KGaA’s over-the-counter healthcare business on November 30, 2018. The acquisition added approximately $2.0 billion of goodwill and $2.1 billion of identifiable intangible assets on a preliminary basis.
- The company paid $3.703 billion in dividends and repurchased $2.003 billion of common stock during the six months, compared with $4.253 billion of repurchases in the prior-year period.
Guidance, Outlook, Risks, and Unusual Items
- No explicit full-year sales or earnings guidance is provided in the filing text. Management expects approximately $0.8 billion of additional before-tax restructuring costs in fiscal 2019 under its productivity and cost-savings program.
- On January 23, 2019, P&G stated that it expected to reduce outstanding shares through direct repurchases of up to $5 billion during fiscal 2019. Repurchases may be increased, reduced, or discontinued without notice and may be financed partly with additional debt.
- The six-month results included a $355 million before-tax, $353 million after-tax gain from dissolution of the PGT Healthcare partnership. Core results exclude this gain, incremental restructuring charges, and the prior-year U.S. Tax Act transition charge.
- Restructuring charges were $177 million in the quarter and $314 million year to date. The restructuring reserve was $482 million at December 31, 2018.
- Shave Care and the Gillette indefinite-lived intangible asset have reduced impairment cushions because of competition, changing grooming habits, currency devaluations, and lower projected cash flows. Carrying values were $19.4 billion for Shave Care goodwill and $15.7 billion for the Gillette intangible asset. A 25-basis-point increase in the discount rate or a 25-basis-point decrease in growth rates would reduce estimated fair values by approximately 5% to 6% and would result in impairment charges under the company’s sensitivity analysis.
- Principal risks include foreign exchange, commodity and transportation costs, pricing and competitive pressure, changing consumer habits, supply-chain disruptions, regulatory and tax changes, geopolitical and economic volatility, cyber and information-technology risks, litigation, and the execution of acquisitions, divestitures, restructuring, and productivity programs.
- The company reports ongoing legal proceedings and tax audits across approximately 150 taxable jurisdictions. Management does not currently expect these matters to materially affect financial position, results, or cash flows, but the filing does not provide a reliable estimate of potential changes in uncertain tax positions over the next 12 months.
Most Important Facts to Verify
- Whether organic sales growth can continue to offset reported foreign-exchange pressure and flat nominal sales.
- Progress in restoring gross and operating margins as commodity inflation, mix, and currency pressures continue.
- Grooming and Shave Care volume, market share, and the potential for goodwill or Gillette intangible-asset impairment.
- The final purchase-price allocation and earnings contribution from the Merck OTC acquisition.
- The cash and debt effects of the planned share repurchases, dividends, acquisition spending, and upcoming debt maturities.
- Whether restructuring savings and the planned fiscal 2019 restructuring costs produce sustainable operating efficiencies.
- The ongoing effects of U.S. tax reform, foreign tax audits, and any subsequent legislative or regulatory changes.