Procter & Gamble Co. Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended December 31, 2010, representing fiscal 2011 second-quarter and year-to-date results. P&G sells branded consumer products in more than 180 countries through six reportable segments: Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
The global pharmaceuticals business was divested in October 2009. Its results and the related gain are presented as discontinued operations, making year-over-year total earnings comparisons less meaningful.
Key financial metrics
| Metric | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2010 |
|---|---|---|
| Net sales | $21.347 billion | $41.469 billion |
| Operating income | $4.260 billion | $8.761 billion |
| Operating margin | 20.0% | 21.1% |
| Net earnings from continuing operations | $3.333 billion | $6.414 billion |
| Diluted EPS from continuing operations | $1.11 | $2.13 |
| Total net earnings | $3.333 billion | $6.414 billion |
| Operating cash flow | Not separately provided | $5.329 billion |
| Free cash flow | Not separately provided | $4.073 billion |
- Six-month gross margin was 51.8%, down 130 basis points, while SG&A was 30.7% of sales, down 10 basis points.
- Six-month free cash flow productivity was 64%, below management’s long-term target of at least 90%.
- Cash and cash equivalents were $3.249 billion at December 31, 2010, compared with $2.879 billion at June 30, 2010.
- Current assets were $21.830 billion versus current liabilities of $27.241 billion, resulting in negative working capital of approximately $5.4 billion.
- Debt due within one year was $11.158 billion and long-term debt was $21.317 billion; total reported debt was approximately $32.5 billion.
- Capital expenditures were $1.256 billion year to date, or approximately 3.0% of sales. Dividends were $2.834 billion and treasury stock purchases were $3.528 billion.
Material changes versus the prior comparable period
- Six-month sales increased 2%, supported by 7% unit-volume growth, but were constrained by unfavorable foreign exchange, lower pricing, and unfavorable mix. Organic sales increased 4%.
- Operating income declined 4% for the six months, and operating margin decreased 120 basis points, primarily due to higher commodity and energy costs and increased marketing investment.
- Net earnings from continuing operations increased 4%, and diluted continuing-operations EPS increased 8% to $2.13, helped by a lower effective tax rate and share repurchases.
- Total net earnings declined 19% and diluted EPS declined 17% because the prior-year period included $1.790 billion of earnings from discontinued operations, including the pharmaceuticals divestiture gain.
- Operating cash flow declined 32% to $5.329 billion. Working capital consumed approximately $2.1 billion, including $931 million from accounts receivable and $779 million from inventories.
- Segment performance was mixed. Six-month continuing-operations earnings increased in Beauty and Grooming, but declined in Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. Snacks and Pet Care was particularly weak, with sales down 5% and earnings down 30%.
- Share repurchases reduced diluted average shares outstanding to 3,013.0 million from 3,114.5 million. Management planned to repurchase $6 billion to $8 billion of stock during fiscal 2011.
Guidance, outlook, commentary, risks, and unusual items
- Management expected fiscal-year capital expenditures of approximately 4% of sales and continued to anticipate supporting liquidity and operations primarily through operating cash flow and access to commercial paper and bond markets.
- Management expected fiscal 2011 treasury stock repurchases of $6 billion to $8 billion.
- Management stated that the favorable tax adjustments recorded during the period were not expected to be sustainable. The six-month effective tax rate was 23.1%, compared with 28.7% in the prior year; tax benefits from uncertain tax positions were approximately $380 million.
- P&G recorded $574 million of reserves for potential European competition-law fines. The company stated that ultimate fines or costs could exceed reserves and materially affect earnings and cash flow.
- Commodity costs, foreign exchange, pricing pressure, developing-market mix, consumer demand, competitive activity, customer concentration, regulatory matters, tax audits, and global economic conditions remain key risks.
- Venezuela was treated as a highly inflationary economy. The company reported approximately $590 million of net monetary assets denominated in local currency, including approximately $280 million remeasured using the parallel exchange rate, creating exposure to exchange-control and devaluation risk.
- Snacks and Pet Care results were adversely affected by voluntary pet-food recalls, supply constraints, restructuring costs, and reduced operating scale.
- The company was transitioning ordering, shipping, and billing systems in North America and Western Europe during fiscal 2011; implementation problems could disrupt orders, deliveries, collections, and cash flow.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity inflation and unfavorable product mix continue to pressure gross and operating margins.
- The status and ultimate cost of the European competition-law investigations relative to the $574 million reserve.
- Whether working-capital investment normalizes and free cash flow productivity improves toward the 90% long-term target.
- The sustainability of the lower effective tax rate after the approximately $380 million of tax benefits.
- Progress and financial impact of the pet-food recall and supply-chain restructuring.
- Liquidity and refinancing capacity given negative working capital and approximately $11.2 billion of debt due within one year.
- Exposure to Venezuelan exchange controls and the potential effect of currency devaluation or restricted dollar availability.
- Whether planned share repurchases and related debt issuance remain consistent with cash generation and credit objectives.