Procter & Gamble Company — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited fiscal quarter ended September 30, 2012, compared with the quarter ended September 30, 2011. Procter & Gamble is a global consumer packaged goods company selling branded products in more than 180 countries across Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $20.739 billion | $21.530 billion | Down 4% |
| Gross profit | $10.389 billion | $10.724 billion | Down 3% |
| Operating income | $3.951 billion | $4.250 billion | Down 7% |
| Net earnings attributable to P&G | $2.814 billion | $3.024 billion | Down 7% |
| Diluted EPS from continuing operations | $0.96 | $1.01 | Down 5% |
| Operating cash flow | $2.770 billion | $2.167 billion | Up 28% |
| Free cash flow | $1.965 billion | Not clearly provided | Free cash flow productivity: 69% |
- Gross margin increased 30 basis points to 50.1%, while operating margin declined 60 basis points to 19.1%. SG&A increased to 31.0% of sales from 30.1%.
- Organic sales increased 2%, but reported sales were reduced by a 6% foreign-exchange impact. Pricing contributed 2%; total unit volume was consistent with the prior year.
- The effective tax rate on continuing operations decreased to 25.4% from 25.8%.
- Cash and cash equivalents were $5.302 billion at September 30, 2012, compared with $4.436 billion at June 30, 2012.
- Current liabilities exceeded current assets by $774 million. Debt due within one year was $8.314 billion and long-term debt was $23.563 billion.
- Capital expenditures were $805 million, or 3.9% of sales. Dividends paid were $1.605 billion and treasury stock purchases were $2.584 billion.
- The quarterly dividend increased to $0.562 per common share from $0.525.
Material Changes Versus the Prior Comparable Period
- Reported sales declined across all reportable segments: Beauty down 7%, Grooming down 7%, Health Care down 4%, Fabric Care and Home Care down 2%, and Baby Care and Family Care down 2%.
- Fabric Care and Home Care earnings increased 10% and Baby Care and Family Care earnings increased 4%, while Beauty, Grooming, and Health Care earnings declined 4%, 4%, and 6%, respectively.
- Gross-margin expansion reflected pricing and manufacturing cost savings, partly offset by unfavorable product and geographic mix, commodity costs, and restructuring charges.
- Operating results were pressured by incremental restructuring costs and European legal charges. Core EPS, which excludes specified restructuring and European legal items, increased 5% to $1.06.
- Interest expense declined $35 million to $172 million, primarily because of lower rates on floating-rate debt, partly offset by higher debt balances.
- Prior-year results included $58 million of net earnings from discontinued Snacks operations; the Snacks business had been divested in May 2012.
Guidance, Outlook, Commentary, Risks and Unusual Items
- P&G announced a $10 billion productivity and cost savings plan. It expects approximately $3.5 billion of pretax restructuring costs over fiscal 2012 through fiscal 2015, with more than half incurred by the end of fiscal 2013, and approximately $2 billion of annual pretax savings when implemented.
- The company expects approximately $700 million to $1 billion of pretax savings in the current year. It also plans a net reduction of approximately 5,700 non-manufacturing overhead positions by the end of fiscal 2013.
- Restructuring charges were $354 million in the quarter, with a September 30, 2012 restructuring reserve of $466 million. Approximately 1,800 employees were covered by current-quarter separation charges.
- On October 22, 2012, after the reporting period, P&G completed the purchase of its joint-venture partner’s interest in a Spain business for $1.1 billion. The company expects a gain of approximately $500 million to $700 million on its previously held interest.
- European competition-law investigations remain outstanding. Accrued liabilities for competition-law violations totaled $49 million at September 30, 2012; additional fines for certain matters cannot be reasonably estimated.
- Management expects to fund operating and short-term liquidity needs primarily with operating cash flow and believes its credit ratings and financing facilities support refinancing needs.
- Key risks include weak consumer demand, competitive pricing and promotions, commodity and labor-cost inflation, foreign-exchange volatility, international political and economic conditions, supply-chain disruptions, regulatory and tax changes, litigation, execution of the productivity plan, and information-technology failures.
- Venezuela presented elevated currency and repatriation risk. The company reported approximately $1.1 billion of local-currency net monetary assets, including approximately $336 million remeasured using the parallel-market rate.
Investor Verification Priorities
- Verify the sustainability and timing of the productivity plan’s approximately $2 billion annual pretax savings against restructuring spending and workforce reductions.
- Assess whether pricing actions can offset foreign-exchange effects and commodity costs without further volume or market-share losses, particularly in developed markets.
- Review debt maturities, refinancing requirements, and the effect of share repurchases and dividends on liquidity.
- Monitor European antitrust investigations, accrued fines, appeals, and potential unreserved exposure.
- Evaluate the accounting and cash-flow effects of the October 2012 Spain joint-venture acquisition and expected gain.
- Reconcile reported EPS with Core EPS and identify the effect of restructuring, legal charges, tax adjustments, discontinued operations, and currency movements.
- Confirm the extent of Venezuela-related currency, liquidity, and repatriation exposure.