Procter & Gamble Co. — Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2017. The request labels the period “2016 Q3,” but the filing is the fiscal 2017 third-quarter Form 10-Q, filed April 26, 2017. Amounts are in millions unless otherwise stated.
Business Context and Reporting Period
P&G is a global consumer packaged goods company selling products in more than 180 countries and territories. Continuing operations comprise Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The Beauty Brands and Batteries businesses are reported as discontinued operations following divestitures.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2017 | Year-over-Year Change | Nine Months Ended March 31, 2017 |
|---|---|---|---|
| Net sales | $15,605 | (1)% | $48,979; unchanged |
| Operating income | $3,360 | 1% | $11,006; 1% |
| Net earnings from continuing operations | $2,556 | 9% | $7,992; unchanged |
| Net earnings attributable to P&G | $2,522 | (8)% | $13,111; 53% |
| Diluted EPS from continuing operations | $0.93 | 15% | $2.87; 3% |
| Total diluted EPS | $0.93 | (4)% | $4.76; 59% |
| Operating margin | 21.5% | +40 bps | 22.5%; +30 bps |
| Gross margin | 49.8% | Unchanged | 50.5%; +40 bps |
| Operating cash flow | Not separately provided for the quarter | — | $9,065; down from $11,296 |
| Adjusted free cash flow | Not separately provided for the quarter | — | $7,039 |
Adjusted free cash flow productivity was 86%, below management’s long-term target of at least 90%. The company paid $5,410 in dividends and repurchased $4,504 of treasury stock during the nine-month period. Dividends per common share were $0.6695 for the quarter and $2.0085 year to date.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $5,817 at March 31, 2017, compared with $7,102 at June 30, 2016.
- Available-for-sale investment securities were $8,510, up from $6,246.
- Debt due within one year was $13,781; long-term debt was $16,633. Total reported debt was approximately $30.4 billion.
- Total assets were $118,091 and total liabilities were $63,543.
- Current liabilities exceeded current assets by approximately $3.2 billion. Management expects operating cash flow, debt-market access, and available bank facilities to support short-term liquidity and operating needs.
- Capital expenditures were $2,230 year to date, or 4.6% of net sales.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 1% in the quarter and 2% year to date, while reported sales were reduced by approximately 2% from foreign exchange.
- Quarterly continuing-operations earnings increased 9%, supported by lower interest expense, a lower effective tax rate, and 1% higher operating income.
- The continuing-operations effective tax rate declined to 23.4% for the quarter and 22.6% year to date, partly due to excess tax benefits from share-based compensation accounting adoption and discrete tax items.
- Year-to-date continuing-operations earnings were affected by a $543 charge for early extinguishment of debt, including an after-tax impact of approximately $345.
- Year-to-date total earnings benefited from a $5.3 billion after-tax gain on the October 2016 Beauty Brands divestiture. The prior-year period included earnings and disposal-related gains from the Beauty Brands and Batteries businesses.
- Weighted average diluted shares declined to 2,705.5 million in the quarter and 2,755.4 million year to date, primarily due to shares tendered in the Beauty Brands transaction and ongoing repurchases.
- Restructuring charges were $157 for the quarter and $505 year to date. Approximately 98% of the estimated $5.5 billion six-year productivity and cost-savings program had been incurred through March 2017.
Segment Performance and Outlook
| Segment | Quarterly Sales Change | Year-to-Date Sales Change | Key Commentary |
|---|---|---|---|
| Beauty | (2)% | (1)% | Share declined; earnings fell 14% in the quarter and 8% year to date. |
| Grooming | (6)% | (3)% | Shave Care faced competitive pressure; Appliances grew strongly. |
| Health Care | 4% | 4% | Strongest reported sales growth; oral care innovation supported volume. |
| Fabric & Home Care | (1)% | (1)% | Organic sales increased, but currency, mix, commodities, and overhead affected results. |
| Baby, Feminine & Family Care | (1)% | (1)% | Organic sales increased, but margins and earnings declined. |
Management reported no formal full-year quantitative guidance in the provided filing text. Management’s stated priorities include productivity savings, innovation, marketing investment, portfolio optimization, share repurchases, and dividend payments. The company expects approximately $3 billion of annual gross savings from the productivity program, with cumulative savings estimated at approximately $2.5 billion to $3 billion through the current year.
Risks, Contingencies and Unusual Items
- Major risks include foreign-exchange volatility, commodity and labor cost inflation, economic and political instability, competitive pressure, supply-chain disruption, cyber and information-technology risks, regulatory and tax changes, litigation, and execution of acquisitions and divestitures.
- The Shave Care reporting unit and related Gillette indefinite-lived intangible asset had fair-value cushions below 10% and are particularly exposed to adverse operating, competitive, currency, or macroeconomic developments. Related carrying values were $18.9 billion of goodwill and $15.7 billion of indefinite-lived intangible assets.
- Management believes pending litigation and environmental matters will not materially affect financial position, results of operations, or cash flows, although outcomes remain uncertain.
- The company operates in approximately 140 taxable jurisdictions and has 50–60 audits underway. It reported approximately $170 of accrued uncertain tax positions that could be affected by audit activity over the next 12 months.
- Quarterly gross margin was affected by higher commodity costs, unfavorable mix, foreign exchange, and costs associated with tornado damage to a U.S. Family Care distribution facility.
- The company early adopted accounting guidance for share-based payments, recognizing $189 of excess tax benefits in income taxes during the nine-month period.
Important Facts for Investors to Verify
- Reconcile reported earnings and EPS with continuing operations, discontinued operations, the Beauty Brands gain, the debt-extinguishment charge, and restructuring adjustments.
- Assess whether organic volume and sales growth can offset currency pressure, competitive losses, pricing effects, and weaker performance in Beauty and Grooming.
- Monitor cash generation, the 86% adjusted free cash flow productivity rate, capital allocation, and the company’s ability to fund dividends, repurchases, and debt maturities.
- Review leverage and refinancing requirements given current liabilities exceeding current assets and approximately $13.8 billion of debt due within one year.
- Track impairment risk for Shave Care and Gillette intangible assets, as well as commodity, currency, litigation, tax, and restructuring exposures.