Business Context and Reporting Period
The filing is Procter & Gamble’s Form 10-K for the fiscal year ended June 30, 2014. P&G sells branded consumer packaged goods in more than 180 countries through five reportable segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. The filing also provides unaudited fourth-quarter results for the quarter ended June 30, 2014.
The supplied request metadata references “2013 Q4,” but the filing text clearly covers fiscal 2014, including the fourth quarter of fiscal 2014. Pet Care is reported as discontinued operations for all periods presented.
Key Financial Metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $83.1 billion | $82.6 billion | +1% |
| Operating income | $15.3 billion | $14.3 billion | +7% |
| Net earnings from continuing operations | $11.7 billion | $11.3 billion | +4% |
| Net earnings attributable to P&G | $11.6 billion | $11.3 billion | +3% |
| Diluted EPS from continuing operations | $3.98 | $3.83 | +4% |
| Core EPS | $4.22 | $4.02 | +5% |
| Gross margin | 48.9% | 49.9% | Down 100 bps |
| Operating margin | 18.4% | 17.4% | Up 100 bps |
| Net earnings margin from continuing operations | 14.1% | 13.7% | Up 40 bps |
| Operating cash flow | $14.0 billion | $14.9 billion | Down 6% |
| Free cash flow | $10.1 billion | $10.9 billion | Down 7% |
| Free cash flow productivity | 86% | 95% | Down 9 percentage points |
Net sales growth included 3% organic sales growth and 3% unit-volume growth, offset by a 2% unfavorable foreign-exchange impact. Higher pricing contributed 1%, while unfavorable geographic and product mix reduced growth by 1%.
Gross margin contracted because of unfavorable mix, higher commodity costs and foreign exchange, partly offset by manufacturing savings and pricing. SG&A declined 5% to $25.3 billion, and SG&A as a percentage of sales improved 170 basis points to 30.5%. The effective tax rate on continuing operations declined to 21.4% from 23.1%.
Capital expenditures were $3.8 billion, or 4.6% of sales. Total debt was $35.4 billion at June 30, 2014, including $15.6 billion due within one year and $19.8 billion of long-term debt. Cash and cash equivalents were $8.6 billion, supplemented by $2.1 billion of available-for-sale investment securities. Current liabilities exceeded current assets by $2.1 billion, largely because of commercial paper borrowings.
Share repurchases totaled $6.0 billion. Dividends per common share increased 7% to $2.45, representing the 58th consecutive annual dividend increase. Shareholders’ equity was $70.0 billion and total assets were $144.3 billion.
Fourth-Quarter Fiscal 2014 Results
| Metric | Q4 FY2014 | Q4 FY2013 |
|---|---|---|
| Net sales | $20.2 billion | $20.3 billion |
| Operating income | $3.2 billion | $2.7 billion |
| Gross margin | 47.2% | 47.9% |
| Net earnings from continuing operations | $2.6 billion | $1.9 billion |
| Diluted EPS from continuing operations | $0.89 | $0.64 |
Material Changes Versus the Prior Comparable Period
- Organic sales growth remained 3%, while reported sales growth was limited by foreign exchange.
- Unit volume growth accelerated to 3%, led by Fabric Care and Home Care and Baby, Feminine and Family Care.
- Beauty sales declined 2% with flat volume; Grooming sales were flat; Health Care sales increased 1%; Fabric Care and Home Care increased 1%; and Baby, Feminine and Family Care increased 2%.
- Segment earnings increased in Beauty and Grooming but declined in Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care because of margin pressure.
- Operating margin improved primarily because of lower SG&A, reduced restructuring spending and the absence of the $308 million goodwill and intangible-asset impairment charge recorded in 2013.
- Operating cash flow and free cash flow declined largely because of a discretionary $1.0 billion contribution to a foreign pension plan.
- The Company incurred approximately $806 million of restructuring charges in 2014. It expects more than $4.5 billion of total restructuring costs through fiscal 2016 and expects more than $2.8 billion of annual gross pretax savings; approximately 62% of expected costs had been incurred through fiscal 2014.
- Net earnings from discontinued operations declined to $78 million from $101 million, reflecting continuing effects of prior Pet Care product recalls.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management’s long-term financial targets are organic sales growth modestly above market growth, high-single-digit Core EPS growth and free cash flow productivity of at least 90%, assuming current market growth rates. Management’s strategy emphasizes core categories and markets, selective investment in developing markets, portfolio simplification, innovation, productivity and execution discipline.
On July 31, 2014, after fiscal year-end, P&G completed the sale of most of its Pet Care operations to Mars for $2.9 billion in cash. The transaction’s gain or loss was not expected to be material and was to be recorded in fiscal 2015. P&G continued to pursue alternatives for Pet Care operations primarily in European Union countries.
Venezuela generated a $275 million after-tax remeasurement charge in January 2014. P&G reported approximately $1.0 billion of Venezuelan net monetary assets at June 30, 2014, with exposure to exchange controls, price controls, government approvals, VAT collections, liquidity and further devaluation.
Key risks include intense competition and private-label pressure, consumer demand and market-share declines, commodity and labor-cost inflation, foreign exchange, supply-chain disruption, sole-source suppliers, political and economic instability in emerging markets, cybersecurity and information-technology failures, brand or product-quality damage, regulatory and tax changes, litigation, pension obligations and potential goodwill or intangible-asset impairments. The Batteries reporting unit had an estimated fair-value cushion of approximately 5%, creating heightened impairment sensitivity.
P&G had $225 million accrued for European competition-law matters. Management did not expect other litigation, environmental contingencies or guarantees to have a material effect, although outcomes remain uncertain. The Company reported effective disclosure controls and effective internal control over financial reporting, and Deloitte & Touche issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether organic sales and unit-volume growth continue to offset foreign-exchange, pricing and mix pressures.
- Whether the productivity program delivers the targeted savings without impairing brand investment, market share or innovation.
- The effect of higher debt and commercial paper borrowings on liquidity, interest expense and refinancing requirements.
- Whether free cash flow productivity recovers toward management’s 90% or greater target after the pension contribution.
- Future developments in Venezuela, including exchange rates, repatriation restrictions, VAT receivables and local-currency exposure.
- Potential impairment charges for Batteries, Appliances and Salon Professional if projected cash flows or market conditions deteriorate.
- The fiscal 2015 accounting and cash-flow effects of the Pet Care divestiture and any remaining European Pet Care sale.
- Resolution and potential changes in accrued legal, tax and competition-law contingencies.