Procter & Gamble Co. — Fiscal 2013 First-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended September 30, 2013, compared with the three months ended September 30, 2012. Procter & Gamble sells branded consumer packaged goods in more than 180 countries and territories, with operations in approximately 70 countries. Effective July 1, 2013, the company changed its reportable segment structure to Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $21,205 million | $20,739 million | 2% |
| Operating income | $4,151 million | $3,951 million | 5% |
| Net earnings | $3,057 million | $2,853 million | 7% |
| Net earnings attributable to P&G | $3,027 million | $2,814 million | 8% |
| Diluted EPS | $1.04 | $0.96 | 8% |
| Dividends per share | $0.602 | $0.562 | 7% |
| Operating cash flow | $2,044 million | $2,770 million | Down $726 million |
| Capital expenditures | $725 million | $805 million | Down $80 million |
| Free cash flow | $1,319 million | Not clearly provided | 43% productivity |
Reported sales growth reflected 4% unit-volume growth, a 2% unfavorable foreign-exchange impact, and minimal price and mix effects. Organic sales increased 4%. Foreign exchange reduced net earnings by approximately $250 million.
Gross margin declined 110 basis points to 49.0%, primarily because of unfavorable geographic and product mix and foreign exchange, partly offset by manufacturing cost savings and lower restructuring spending. Operating margin improved 50 basis points to 19.6%. Net earnings attributable to P&G margin increased 70 basis points to 14.3%. The effective tax rate declined to 23.8% from 25.4%.
At September 30, 2013, cash and cash equivalents were $6,122 million, and available-for-sale investment securities were $1,580 million. Current assets were $26,322 million versus current liabilities of $33,217 million, resulting in a $6.9 billion working-capital deficit. Debt due within one year was $16,300 million and long-term debt was $18,480 million. Management stated that operating cash flow, refinancing access, strong debt ratings, and available financial-institution credit agreements should support liquidity needs.
Financing activities used $971 million of cash, including $2,502 million for treasury-stock purchases and $1,708 million for dividends, partly funded by a net $2.9 billion increase in debt. The company estimated fiscal 2013–2014 share repurchases of $5 billion to $7 billion, excluding purchases under compensation and benefit plans.
Material changes versus the prior comparable period
- Unit volume increased 4%, with mid-single-digit growth in Fabric Care and Home Care and Baby, Feminine and Family Care; volume declined in Grooming and Health Care.
- Net earnings growth was aided by a $204 million after-tax reduction in restructuring charges. Core EPS declined 1% to $1.05 after excluding specified restructuring and prior-year European legal charges.
- SG&A decreased 3% to $6,244 million, while cost of products sold increased 4% to $10,810 million.
- Operating cash flow fell substantially because working capital consumed cash and the company made an approximately $1.0 billion discretionary contribution to its German defined-benefit pension plan.
- Share repurchases reduced average diluted shares outstanding to 2,924.3 million from 2,931.7 million.
- Corporate net income improved primarily because of lower restructuring charges and reduced eliminations following the buyout of an Iberian joint-venture partner.
Segment results
| Segment | Net sales | Sales change | Net earnings | Earnings change |
|---|---|---|---|---|
| Beauty | $4,903 million | Down 1% | $690 million | Up 5% |
| Grooming | $1,956 million | Down 3% | $453 million | Down 3% |
| Health Care | $2,306 million | Down 1% | $267 million | Down 17% |
| Fabric Care and Home Care | $6,700 million | Up 3% | $857 million | Down 2% |
| Baby, Feminine and Family Care | $5,503 million | Up 5% | $725 million | Flat |
Health Care earnings were pressured by product and geographic mix, higher SG&A, and the impact of Natura pet-care recalls. Fabric Care and Home Care earnings declined despite sales growth because of lower pricing, higher commodity costs, and foreign exchange. Baby, Feminine and Family Care sales growth was offset by lower margins.
Guidance, outlook, risks, contingencies, and unusual items
- The productivity and cost-savings program is expected to generate more than $2 billion in annual before-tax savings and incur more than $3.5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2016. The company had incurred approximately $2.0 billion through fiscal 2013 and recorded $129 million of restructuring charges in the quarter.
- Management stated that cumulative before-tax savings were expected to be approximately $1.3 billion to $1.6 billion at the current-year point. The filing does not provide formal consolidated sales or EPS guidance for the full fiscal year.
- Venezuela presented material currency and liquidity uncertainty. The company had approximately $1.0 billion of net monetary assets denominated in local currency and identified approximately $183 million of net assets that could require remeasurement at a less favorable exchange rate, potentially resulting in an additional devaluation charge.
- European competition-law matters included $143 million of accrued liabilities as of September 30, 2013; all but $16 million of assessed fines had been paid. Some matters were under appeal.
- Other key risks include weak consumer demand, intense competition and private-label pressure, commodity and labor-cost inflation, foreign-exchange volatility, supply-chain disruption, emerging-market political and regulatory conditions, tax uncertainty, product recalls, litigation, information-technology failures, and potential credit-rating deterioration.
- The company disclosed no material changes in market-risk exposure from June 30, 2013. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether organic volume growth and the productivity program can offset foreign exchange, mix pressure, commodities, and promotional pricing.
- The timing and magnitude of the remaining restructuring charges and the realization of the projected annual savings.
- Refinancing requirements for the $16.3 billion of debt due within one year and the sustainability of the working-capital deficit.
- Developments in Venezuela, including exchange-rate access, price controls, VAT collections, repatriation, and any remeasurement charge.
- Progress in Health Care, Grooming, and other segments with declining sales or earnings, including the effects of recalls and market-share changes.
- Changes in accrued European competition-law liabilities, tax audits, and other litigation or environmental contingencies.
- Whether free-cash-flow productivity can move toward the company’s long-term target of at least 90% of net earnings; reported Q1 productivity was 43%.