Procter & Gamble Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended March 31, 2014, P&G’s fiscal third quarter and year-to-date period. The request metadata identifies “2013 Q3,” but the filing itself reports fiscal 2014 results compared with the corresponding 2013 periods. P&G sells branded consumer packaged goods in more than 180 countries and territories across Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care.
Effective July 1, 2013, P&G reorganized its Global Business Units and recast prior-period segment information.
Key financial metrics
| Metric | Three months ended March 31, 2014 | Year-over-year change | Nine months ended March 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $20.559 billion | Flat | $64.044 billion | +1% |
| Operating income | $3.458 billion | +2% | $12.161 billion | +3% |
| Net earnings attributable to P&G | $2.609 billion | +2% | $9.064 billion | -4% |
| Diluted EPS | $0.90 | +2% | $3.12 | -3% |
| Operating margin | 16.8% | +30 basis points | 19.0% | +30 basis points |
| Gross margin | 48.4% | -140 basis points | 49.2% | -110 basis points |
| Effective tax rate | 20.8% | -40 basis points | 22.1% | -70 basis points |
Quarterly organic sales increased 3% on 3% volume growth. Year-to-date organic sales increased 3% on 4% reported unit-volume growth. Unfavorable foreign exchange reduced sales by approximately 3% in both periods.
Quarterly core EPS increased 5% to $1.04; year-to-date core EPS increased 1% to $3.30. Core measures exclude specified restructuring, Venezuela devaluation, legal, and prior-year transaction items and are not U.S. GAAP measures.
Cash flow, liquidity and capital structure
- Year-to-date operating cash flow was $9.452 billion, compared with $10.481 billion in the prior-year period.
- Capital expenditures were $2.607 billion, producing free cash flow of $6.845 billion and free cash flow productivity of 75%, below the company’s long-term target of at least 90%.
- Cash and cash equivalents were $8.182 billion at March 31, 2014, compared with $5.947 billion at June 30, 2013. Available-for-sale investment securities were $1.570 billion.
- Debt due within one year was $15.528 billion and long-term debt was $20.837 billion. Fair-value disclosure showed total long-term debt, including the current portion, of $28.160 billion.
- Year-to-date financing cash outflows included $5.097 billion of dividends and $5.505 billion of treasury-stock purchases. Net debt issuance was approximately $4.535 billion.
- Current liabilities exceeded current assets by approximately $4.0 billion. Management expects operating cash flow, debt-market access and committed financial-institution facilities to support short-term liquidity and operating needs.
Material changes versus the prior comparable period
- Quarterly sales were essentially unchanged, while operating income and P&G-attributable earnings increased because lower SG&A, particularly marketing and overhead spending, more than offset gross-margin pressure.
- Gross margin declined because of foreign exchange, unfavorable geographic and product mix, capacity investments, commodity costs and restructuring costs. Manufacturing savings and pricing partially offset these pressures.
- Year-to-date earnings declined primarily because the prior-year period included approximately $878 million of acquisition and divestiture-related gains, including the Iberian joint-venture holding gain and an Italy bleach-business divestiture gain. Foreign exchange reduced year-to-date earnings by approximately $920 million.
- Quarterly segment earnings increased in Beauty and Grooming but declined in Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care. Year-to-date Beauty and Grooming earnings increased, while Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care earnings declined.
- The company incurred restructuring charges of approximately $212 million in the quarter and $514 million year to date. The five-year productivity program is expected to incur more than $3.5 billion of before-tax restructuring costs through fiscal 2016 and is expected to deliver more than $2 billion of annual pretax savings.
Guidance, outlook, risks and unusual items
- Management estimated that Venezuela-related currency effects would reduce fiscal 2014 earnings by approximately $30 million after the quarter, with most of the impact expected in the fourth quarter. A $275 million after-tax charge was recorded in the quarter to remeasure Venezuelan balances using the SICAD exchange rate.
- Venezuelan operations remain exposed to exchange-rate changes, import and price controls, limited dollar availability, dividend-repatriation restrictions, customer and government receivables, and potential additional devaluations.
- On April 9, 2014, P&G announced an agreement to sell the IAMS, EUKANUBA and NATURA brands in major markets to Mars for $2.9 billion in cash, subject to regulatory approval and expected to close in the second half of calendar 2014. P&G also began activities to exit the remainder of its Pet Care business.
- Pet Care results are expected to be classified as discontinued operations beginning with the quarter ending June 30, 2014. The filing estimates that approximately $0.03 per share of fiscal 2013 and $0.04 per share of fiscal 2014 earnings will move to discontinued operations.
- Goodwill assigned to the Batteries reporting unit had an estimated fair-value cushion of approximately 6% after annual impairment testing. A further deterioration in projected cash flows could result in a future non-cash impairment charge.
- P&G had accrued $171 million for ongoing European competition-law matters. Management does not currently expect additional losses to materially affect the financial statements, but ultimate outcomes may exceed recorded reserves.
- The company faces risks from competition, consumer demand, commodity costs, foreign exchange, interest rates, supply-chain disruption, global economic conditions, regulatory matters, litigation, tax audits and execution of restructuring and productivity programs.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the applicable reporting period: the filing is for the quarter ended March 31, 2014, not calendar 2013 Q3.
- Reconcile GAAP EPS of $3.12 year to date with core EPS of $3.30 and review all excluded items.
- Assess whether foreign-exchange pressure, particularly Venezuela, continues to offset volume growth and pricing.
- Monitor gross-margin recovery, commodity costs, geographic and product mix, and the sustainability of SG&A reductions.
- Evaluate liquidity and refinancing needs given current liabilities exceeding current assets and substantial debt maturities.
- Track restructuring charges, realized savings and progress toward the more than $2 billion annual savings objective.
- Review the Pet Care divestiture, discontinued-operations presentation, regulatory approvals and use of the $2.9 billion proceeds.
- Monitor the Batteries goodwill cushion, European antitrust matters and unresolved tax-audit exposures.