Business Context and Reporting Period
The Procter & Gamble Company is a global branded consumer packaged goods manufacturer selling in more than 180 countries and territories through five reportable segments: Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. This Form 10-K covers the fiscal year ended June 30, 2015. The requested “2014 Q4” metadata does not align with the filing period; the filing includes fiscal fourth-quarter results for the quarter ended June 30, 2015, with comparable results for the quarter ended June 30, 2014.
Key Financial Metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $76.3 billion | $80.5 billion | Down 5% |
| Operating income | $11.8 billion | $14.7 billion | Down 20% |
| Net earnings from continuing operations | $8.9 billion | $11.3 billion | Down 21% |
| Net earnings attributable to P&G | $7.0 billion | $11.6 billion | Down 40% |
| Diluted EPS | $2.44 | $4.01 | Down 39% |
| Diluted EPS from continuing operations | $3.06 | $3.86 | Down 21% |
| Core EPS | $4.02 | $4.09 | Down 2% |
| Gross margin | 49.0% | 49.1% | Down 10 basis points |
| Operating margin | 15.5% | 18.3% | Down 280 basis points |
| Operating cash flow | $14.6 billion | $14.0 billion | Up 5% |
| Adjusted free cash flow | $11.6 billion | $10.1 billion | Up 15% |
| Adjusted free cash flow productivity | 102% | 86% | Up 16 percentage points |
| Total debt | $30.4 billion | $35.4 billion | Down $5.0 billion |
| Dividends per common share | $2.59 | $2.45 | Up 6% |
Fiscal fourth-quarter 2015 net sales were $17.8 billion versus $19.6 billion in the prior-year quarter. Operating income was $930 million versus $3.2 billion, net earnings from continuing operations were $640 million versus $2.6 billion, and diluted EPS from continuing operations was $0.22 versus $0.87. The fourth quarter included the $2.1 billion after-tax Venezuela deconsolidation charge.
Cash, Liquidity and Capital Allocation
- Cash and cash equivalents were $6.8 billion at June 30, 2015, compared with $8.6 billion a year earlier; available-for-sale investment securities were $4.8 billion.
- Current liabilities exceeded current assets by $144 million, largely because of commercial paper borrowings. Excluding Batteries assets and liabilities held for sale, the deficit was $2.5 billion.
- The Company maintained an undrawn $11.0 billion bank credit facility and reported strong credit ratings: Moody’s Aaa? The filing reports Moody’s long-term rating of Aa3 and S&P’s AA-, with stable outlook; short-term ratings were P-1 and A-1+.
- Capital expenditures were $3.7 billion, or 4.9% of sales. Share repurchases totaled $4.6 billion, and dividends paid totaled $7.3 billion.
- The Company had $41.4 billion of contractual commitments, including $30.2 billion of total debt, $6.9 billion of long-term debt interest payments, operating leases, pension funding and purchase obligations.
Material Changes Versus the Prior Comparable Period
- Reported sales declined primarily because unfavorable foreign exchange reduced sales by approximately 6%; higher pricing contributed approximately 2%, while unit volume declined 1%. Organic sales increased 1%.
- Foreign exchange reduced net earnings by approximately $1.4 billion and negatively affected reported sales by approximately $4.8 billion.
- Gross margin was broadly stable because manufacturing savings and pricing largely offset unfavorable mix, foreign exchange, initiative costs, restructuring and commodity pressures. SG&A declined 5% to $23.6 billion, but increased slightly as a percentage of sales because of lower sales scale.
- The Company deconsolidated its Venezuelan subsidiaries effective June 30, 2015, producing a $2.0 billion pretax and $2.1 billion after-tax charge, or $0.71 per share.
- Discontinued operations generated a $1.8 billion loss, principally from $2.1 billion of after-tax Batteries impairment charges. Pet Care was divested during fiscal 2015 and produced a nonmaterial gain.
- Segment sales declined in Beauty, Hair and Personal Care by 7%, Grooming by 7%, Health Care by 1%, Fabric Care and Home Care by 5%, and Baby, Feminine and Family Care by 3%. Health Care earnings increased 8%, while the other major segments reported lower or flat earnings.
- The portfolio-optimization program had sold, discontinued or consolidated 93 of approximately 100 targeted non-strategic brands by June 30, 2015. The targeted portfolio was approximately 65 brands representing about 85% of sales and 95% of before-tax profit.
- Restructuring charges were approximately $1.1 billion in fiscal 2015. The Company had incurred approximately $3.9 billion of the more than $5.0 billion expected through fiscal 2017 and had realized approximately $2.1 billion of cumulative pretax savings.
Guidance, Outlook, Management Commentary and Risks
- Long-term financial targets are organic sales growth above market growth rates, high-single-digit Core EPS growth and adjusted free cash flow productivity of at least 90%.
- Management emphasized portfolio simplification, innovation, productivity savings, supply-chain efficiency, marketing effectiveness and operating discipline. The filing does not provide a specific fiscal 2016 earnings or sales forecast.
- On July 9, 2015, P&G announced an agreement to divest 43 beauty brands to Coty. The affected businesses generated approximately $5.5 billion of fiscal 2015 sales and were expected to be reported as discontinued operations beginning in fiscal 2016. The transaction was expected to close in the second half of calendar 2016, subject to approvals.
- The remaining Duracell business was expected to be transferred to Berkshire Hathaway in early calendar 2016, subject to regulatory approvals. The transaction value and resulting discontinued-operations gain or loss could vary with P&G’s share price before closing.
- Principal risks include foreign exchange volatility, economic and political instability in emerging markets, currency controls and limited repatriation of overseas cash, commodity and supply-chain costs, intense competition and private-label pressure, customer concentration, product quality and reputational risks, cybersecurity, regulatory and legal matters, tax changes, pension obligations and execution risk related to divestitures and restructuring.
- Wal-Mart and its affiliates represented approximately 14% of total revenue, and the top ten customers represented approximately 33%. Research and development expense was $2.0 billion, and advertising expense was $8.3 billion.
- The filing identifies no material off-balance-sheet financing arrangements. Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the requested period: this filing is for fiscal 2015, while the filing’s fiscal fourth quarter ended June 30, 2015.
- Separate recurring operating performance from the $2.1 billion Venezuela charge and the $2.1 billion after-tax Batteries impairment charges.
- Reconcile reported sales declines with the 6% foreign-exchange headwind, 1% unit-volume decline, pricing actions and 1% organic sales growth.
- Review the sustainability of the 102% adjusted free cash flow productivity result and the extent to which cash flow benefited from working-capital changes, divestitures and non-cash charges.
- Assess debt maturities, commercial paper reliance, current-liability excess over current assets and the Company’s ability to continue dividends and repurchases.
- Track completion, valuation and accounting treatment of the Coty beauty-brand transaction and the Berkshire Hathaway Duracell transaction.
- Evaluate segment market-share trends, particularly declines in Beauty, Hair and Personal Care and Baby, Feminine and Family Care.
- Review restructuring execution, remaining expected charges and whether projected savings offset currency, commodity, wage and competitive pressures.