Procter & Gamble Co. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the first quarter of fiscal 2020. The filing is unaudited and compares results with the three months ended September 30, 2018. P&G sells branded consumer packaged goods in more than 180 countries through five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $17.798 billion | $16.690 billion | 7% |
| Operating income | $4.290 billion | $3.554 billion | 21% |
| Net earnings | $3.617 billion | $3.211 billion | 13% |
| Net earnings attributable to P&G | $3.593 billion | $3.199 billion | 12% |
| Diluted EPS | $1.36 | $1.22 | 11% |
| Operating cash flow | $4.169 billion | $3.567 billion | +$602 million |
| Adjusted free cash flow | $3.305 billion | Not clearly provided | 91% productivity |
- Gross margin increased to 51.0% from 49.2%, while operating margin increased to 24.1% from 21.3%. SG&A declined to 26.9% of sales from 27.9%.
- The effective tax rate was 16.7%, down 180 basis points year over year. The filing attributes the reduction to higher excess tax benefits from share-based compensation, a non-recurring legal-entity simplification benefit, and favorable geographic earnings mix.
- Cash and cash equivalents were $9.304 billion at September 30, 2019, compared with $4.239 billion at June 30, 2019. The increase primarily reflected $6.151 billion of proceeds from sales and maturities of investment securities.
- Current liabilities exceeded current assets by approximately $8.3 billion. Current debt was $9.352 billion and long-term debt was $20.161 billion at quarter-end. Management stated that operating cash flow, refinancing access, credit facilities, and strong debt ratings should support liquidity needs.
- Capital expenditures were $1.079 billion. Dividends paid were $1.932 billion and treasury stock purchases were $3.000 billion.
Material Changes Versus Prior Comparable Period
- Organic sales increased 7%, with organic volume up 4%, pricing contributing 1%, mix contributing 2%, and foreign exchange reducing reported sales by 2%.
- Health Care led reported growth with sales up 20%, partly reflecting the Merck OTC acquisition. Beauty sales increased 8%, Fabric & Home Care 6%, and Baby, Feminine & Family Care 4%. Grooming sales declined 2%.
- Segment net earnings increased 15% in Beauty, 4% in Grooming, 21% in Health Care, 17% in Fabric & Home Care, and 26% in Baby, Feminine & Family Care.
- Operating income benefited from higher sales, manufacturing cost savings, favorable pricing, lower commodity costs, productivity savings, and lower SG&A as a percentage of sales.
- Other non-operating income fell to $103 million from $462 million because the prior-year period included a $353 million after-tax gain from dissolution of the PGT Healthcare partnership.
- Core EPS increased 22% to $1.37, excluding incremental restructuring charges and the prior-year PGT partnership gain. This non-GAAP measure exceeded reported diluted EPS of $1.36.
- P&G adopted the new lease accounting standard on July 1, 2019, increasing total assets and liabilities by approximately 1% without a material impact on the financial statements.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that approximately $0.6 billion of additional restructuring costs were expected in fiscal 2020, following $1.8 billion incurred during fiscal 2018 and fiscal 2019. The company incurred $93 million of restructuring charges during the quarter.
- On October 22, 2019, P&G stated that it expected fiscal 2020 direct share repurchases of $6 billion to $8 billion, financed through operating cash flow and short- and long-term debt. The filing does not provide broader sales or earnings guidance in the supplied text.
- Management identified risks from foreign-exchange volatility, commodity and transportation costs, economic and political instability, tariffs and trade policies, changing consumer habits, competitive activity, supply-chain disruptions, cybersecurity, regulatory and tax changes, and execution of productivity programs.
- Shave Care and the Gillette indefinite-lived intangible asset remain particularly sensitive to adverse changes in category growth, grooming habits, currency rates, competitive conditions, discount rates, and projected cash flows. Carrying values at September 30, 2019 were $12.4 billion for Shave Care goodwill and $14.1 billion for the Gillette intangible asset.
- Legal proceedings and environmental matters were not expected by management and counsel to materially affect financial position, results of operations, or cash flows. The company had approximately $140 million accrued for uncertain tax positions potentially subject to audit resolution over the following 12 months.
- Retailer inventory builds in Japan ahead of an October 2019 VAT increase supported reported volume in several segments and may affect comparability in subsequent periods.
Important Facts for Investors to Verify
- Reconcile reported sales growth with organic growth, including the effects of the Merck OTC acquisition, foreign exchange, pricing, mix, and retailer inventory timing.
- Assess whether gross-margin and SG&A improvements are sustainable after commodity, currency, marketing, and restructuring effects.
- Monitor Grooming and Baby Care market share trends, including competitive pressure and potential impairment risk for Shave Care and Gillette-related assets.
- Verify the cash-flow quality of the $4.169 billion operating cash flow and $3.305 billion adjusted free cash flow, including working-capital benefits and the company’s non-GAAP adjustments.
- Evaluate liquidity and refinancing needs given $9.352 billion of debt due within one year, the planned $6 billion to $8 billion of fiscal 2020 repurchases, and ongoing dividends.
- Track restructuring spending, expected savings, workforce reductions, and the remaining estimated $0.6 billion of fiscal 2020 restructuring costs.
- Review tax audit developments, foreign-exchange exposure, commodity costs, tariffs, supply-chain risks, and potential impairment sensitivities.