Procter & Gamble Company — Form 10-Q Summary
Business context and reporting period
P&G is a global consumer packaged goods company selling branded products in more than 180 countries and territories. This filing covers the three and nine months ended March 31, 2016, representing the fiscal third quarter and year-to-date period of fiscal 2016. The request metadata identifies “2015 Q3,” but the filing itself is for fiscal 2016 Q3.
Continuing operations exclude the Beauty Brands, Batteries and Pet Care businesses, which are reported as discontinued operations.
Key financial metrics
| Metric | Three months ended March 31 | Change | Nine months ended March 31 | Change |
|---|---|---|---|---|
| Net sales | $15.755 billion | Down 7% | $49.197 billion | Down 9% |
| Operating income | $3.318 billion | Up 10% | $10.939 billion | Up 7% |
| Net earnings from continuing operations | $2.337 billion | Down 3% | $8.019 billion | Up 3% |
| Net earnings attributable to P&G | $2.750 billion | Up 28% | $8.557 billion | Up 31% |
| Diluted EPS from continuing operations | $0.81 | Down 1% | $2.78 | Up 4% |
| Total diluted EPS | $0.97 | Up 29% | $3.00 | Up 33% |
| Operating margin | 21.1% | Up 320 bps | 22.2% | Up 330 bps |
| Gross margin | 49.8% | Up 250 bps | 50.1% | Up 220 bps |
For the nine-month period, operating cash flow was $11.296 billion, capital expenditures were $2.023 billion and free cash flow was $9.273 billion. Adjusted free cash flow productivity was 108%.
At March 31, 2016, cash and cash equivalents were $7.895 billion and available-for-sale investment securities were $5.924 billion. Debt due within one year was $13.681 billion and long-term debt was $19.134 billion. Current assets exceeded current liabilities by $3.0 billion, although excluding businesses held for sale, current liabilities exceeded current assets by $1.8 billion.
Dividends paid during the first nine months were $5.589 billion, treasury stock purchases were $3.504 billion, and dividends per common share were $1.989 year to date.
Material changes versus the prior comparable period
- Sales declined primarily because of unfavorable foreign exchange, lower volume and divestitures; organic sales were flat year to date and increased 1% in the quarter.
- Year-to-date unit volume declined 4% on an all-in basis and 2% organically. Foreign exchange reduced sales by 7% year to date, while pricing increased sales by 2%.
- Operating margin expanded because of manufacturing productivity savings, lower commodity costs and pricing, partly offset by foreign exchange, unfavorable mix and restructuring costs.
- Continuing-operations earnings improved year to date despite lower sales, but quarterly earnings declined because of the higher effective tax rate and lower sales.
- Total earnings benefited materially from discontinued operations. The current period included a $422 million after-tax gain on the Batteries divestiture, while the prior-year period included significant Batteries impairment charges.
- Segment sales declined in every continuing segment year to date: Beauty 10%, Grooming 11%, Health Care 8%, Fabric Care and Home Care 8%, and Baby, Feminine and Family Care 10%. Fabric Care and Home Care was the strongest earnings contributor, with earnings up 8% year to date; Grooming earnings declined 19%.
- P&G completed the Duracell divestiture to Berkshire Hathaway in February 2016 in exchange for 52.5 million P&G shares. The transaction increased treasury stock by approximately $4.2 billion in value.
Guidance, outlook, commentary and risks
Management continued to expect more than $5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2017. Approximately 90% of the estimated costs had been incurred through March 2016. The program is expected to generate approximately $3 billion of annual gross savings; cumulative savings were estimated at $2.2 billion to $2.5 billion.
The Beauty Brands transaction with Coty was expected to close in the second half of calendar 2016, subject to regulatory approvals. The accepted offer was $12.5 billion, while the estimated transaction value based on March 31, 2016 market data was approximately $13.5 billion. The final value remained subject to Coty’s stock price, contractual adjustments and transaction terms.
Key risks include foreign currency volatility, economic and political instability, commodity and labor cost inflation, competitive pricing and market-share pressure, supply-chain disruption, innovation and intellectual-property risks, customer and brand risks, cybersecurity, regulatory and litigation matters, tax uncertainty, execution of portfolio changes and restructuring, and the ability to maintain sufficient cash flow for dividends and share repurchases.
Management reported no material changes in market-risk exposure since June 30, 2015. It also concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
The filing states that litigation and environmental matters are not expected to materially affect financial position, earnings or cash flow based on currently available information. P&G had approximately $300 million accrued for uncertain tax positions, including interest and penalties, for audits potentially completed over the next 12 months.
Most important facts for investors to verify
- Whether foreign-exchange pressure, pricing actions and declining volume continue to affect organic growth and market share.
- The final structure, closing date and economic value of the Beauty Brands transaction with Coty.
- The sustainability of margin expansion after productivity savings, lower commodity costs and restructuring benefits.
- The effect of the higher effective tax rate and geographic earnings mix on continuing-operations EPS.
- Debt maturities, refinancing requirements and liquidity excluding assets and liabilities held for sale.
- Execution of the remaining restructuring program and whether projected annual savings are realized.
- Impairment risk for the Shave Care reporting unit and related indefinite-lived intangible assets, whose fair-value cushion was below 20%.
- The extent to which total earnings and EPS comparisons are affected by discontinued-operation gains, impairment charges and other unusual items.