Procter & Gamble Co. — Fiscal 2016 First-Quarter Form 10-Q
Reporting period: Three months ended September 30, 2015, compared with the three months ended September 30, 2014. P&G is a global consumer-products company operating in more than 180 countries and territories. The Beauty Brands, Batteries and Pet Care businesses are presented as discontinued operations and excluded from continuing-operations and segment results.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $16.527 billion | $18.771 billion | Down 12% |
| Operating income | $3.768 billion | $3.633 billion | Up 4% |
| Net earnings from continuing operations | $2.777 billion | $2.716 billion | Up 2% |
| Net earnings attributable to P&G | $2.601 billion | $1.990 billion | Up 31% |
| Diluted EPS from continuing operations | $0.96 | $0.93 | Up 3% |
| Total diluted EPS | $0.91 | $0.69 | Up 32% |
| Operating cash flow | $3.538 billion | $3.633 billion | Down $95 million |
| Free cash flow | $3.006 billion | Not clearly provided | Not clearly provided |
- Margins: Gross margin increased to 50.7% from 48.1%, while operating margin increased to 22.8% from 19.4%. Net earnings from continuing operations as a percentage of sales increased to 16.8% from 14.5%.
- Sales drivers: Reported sales were reduced by 9% from foreign exchange, 5% from lower unit volume, and 1% from divestitures and the Venezuela deconsolidation. Pricing contributed 2% and mix contributed 1%. Organic sales declined 1%.
- Core EPS: Core EPS declined 1% to $0.98 from $0.99, excluding incremental restructuring charges and Venezuela-related remeasurement effects.
- Cash deployment: P&G paid $1.865 billion in dividends, repurchased $502 million of treasury stock, reduced long-term debt by $537 million, and generated $483 million from stock options and other financing activities.
Liquidity, capital structure and balance sheet
- Cash and cash equivalents were $7.705 billion at September 30, 2015, compared with $6.836 billion at June 30, 2015. Available-for-sale investment securities were $4.901 billion.
- Debt due within one year was $13.093 billion and long-term debt was $17.394 billion, for total reported debt of approximately $30.487 billion.
- Total current assets were $35.620 billion and total current liabilities were $31.567 billion. Management stated that liquidity and operating needs are expected to be supported primarily by operating cash flow, debt-market access and available financing arrangements.
- Capital expenditures were $532 million, or 3.2% of sales, compared with $810 million in the prior-year quarter.
Material changes versus the prior comparable period
- Sales declined materially despite improved pricing and mix, primarily because of currency translation, lower volume, competitive pressures and pricing-related volume declines in developing markets.
- Profitability improved because of manufacturing productivity, lower commodity costs, pricing, lower SG&A and reduced foreign-exchange transactional charges. Interest expense also declined by $30 million.
- Discontinued-operations losses improved to $142 million from $696 million. The primary factor was a lower after-tax impairment charge for Batteries: $350 million in the current quarter versus $932 million in the prior-year quarter.
- Foreign exchange reduced continuing-operations earnings by approximately $280 million and reduced reported sales by 9%.
- Unit volume declined 5% overall and 4% on an organic basis. Organic sales were down 2% in Beauty, 1% in Health Care and 3% in Baby, Feminine and Family Care, and were unchanged in Grooming and Fabric Care and Home Care.
- Segment net earnings increased 4% in Fabric Care and Home Care but declined 2% in Beauty, 16% in Grooming, 1% in Health Care and 9% in Baby, Feminine and Family Care.
Guidance, outlook, commentary and unusual items
- P&G expects to incur more than $5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2017. Approximately 81% of the estimated costs had been incurred through September 2015. The company estimates approximately $3 billion of annual gross savings at completion and $2.2 billion to $2.5 billion of cumulative pretax savings to date.
- Restructuring charges were approximately $143 million in the quarter, including $43 million in SG&A and $90 million in cost of products sold. The restructuring program reduced non-manufacturing enrollment by approximately 13,300 employees, or about 23%, through September 30, 2015.
- The company plans to reduce shares outstanding by approximately $8 billion to $9 billion in fiscal 2016 through share repurchases and shares exchanged in the Duracell transaction. The plan may be financed partly with operating cash flow and new debt.
- P&G expects the Beauty Brands transaction with Coty to close in the second half of calendar 2016, subject to regulatory approvals. The accepted offer was $12.5 billion; the estimated transaction value was approximately $13.0 billion at September 30, 2015, but the final value will depend on closing conditions and Coty’s share price.
- The Duracell transaction with Berkshire Hathaway was expected to close in early calendar 2016. P&G expected to contribute approximately $1.8 billion in cash to Duracell before closing. The company recorded a $402 million pretax, or $350 million after-tax, impairment charge and warned that additional noncash impairment charges could be required if relevant values decline.
- Key risks include foreign-exchange volatility, economic and political instability, commodity and labor costs, pricing-related volume pressure, competitive activity, supply-chain disruption, execution of restructuring and portfolio changes, regulatory and litigation matters, information-security risks, and tax uncertainty.
- Management stated that current litigation and environmental matters are not expected to materially affect financial position, results of operations or cash flows. Tax audits are ongoing in approximately 60 to 70 jurisdictions; accrued liabilities of $440 million could be affected by audit activity over the next 12 months.
- Disclosure controls were assessed as effective, and the filing reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether reported sales and organic sales stabilize as currency headwinds, pricing actions and volume declines continue.
- The sustainability of margin expansion given lower volume, competitive pressure, commodity-price changes and foreign-exchange exposure.
- The final consideration, timing, regulatory approvals and accounting effects of the Beauty Brands and Duracell transactions.
- Whether further Batteries impairment charges or other discontinued-operations adjustments are required before closing.
- Progress toward the restructuring plan’s remaining costs, workforce reductions and estimated savings.
- Liquidity available for debt maturities, dividends and the planned $8 billion to $9 billion fiscal 2016 share-count reduction.
- Potential outcomes of tax audits, legal proceedings, environmental matters and other contingencies not resolved at the reporting date.