Procter & Gamble Company: Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2013. The provided filing is an annual 10-K, not a 2012 fourth-quarter filing; it includes unaudited quarterly information for the quarter ended June 30, 2013.
Business context
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 Care and Family Care. The company operates in highly competitive markets, with significant exposure to international currencies, commodity costs, retail customers and developing markets. Wal-Mart and its affiliates represented approximately 14% of total revenue in both 2013 and 2012.
Reported segment sales were led by Fabric Care and Home Care at $27.4 billion, Beauty at $20.0 billion, Baby Care and Family Care at $16.8 billion, Health Care at $12.8 billion and Grooming at $8.0 billion.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $84.2 billion | $83.7 billion | +1% |
| Organic sales growth | 3% | 3% | Flat |
| Unit volume growth | 2% | Approximately 0% | Improved |
| Gross margin | 49.6% | 49.3% | +30 basis points |
| Operating income | $14.5 billion | $13.3 billion | +9% |
| Operating margin | 17.2% | 15.9% | +130 basis points |
| Net earnings from continuing operations | $11.4 billion | $9.3 billion | +22% |
| Net earnings attributable to P&G | $11.3 billion | $10.8 billion | +5% |
| Diluted EPS | $3.86 | $3.66 | +5% |
| Core EPS | $4.05 | $3.85 | +5% |
| Operating cash flow | $14.9 billion | $13.3 billion | +12% |
| Free cash flow | $10.9 billion | $9.3 billion | +17% |
| Free cash flow productivity | 95% | 85% | Improved |
Capital expenditures were $4.0 billion, or 4.8% of sales. Cash and cash equivalents were $5.9 billion at June 30, 2013. Total debt was $31.5 billion, including $12.4 billion due within one year; long-term debt was $19.1 billion. Current liabilities exceeded current assets by $6.0 billion, primarily because of commercial paper borrowings. The company reported strong credit ratings and maintained undrawn credit facilities totaling $11.0 billion.
Dividends per common share increased 7% to $2.29. P&G repurchased approximately $6.0 billion of shares during fiscal 2013.
Material changes versus the prior comparable period
- Sales growth remained modest, but volume improved 2%; pricing contributed approximately 1% and foreign exchange reduced reported sales by approximately 2%.
- Gross margin expanded due to pricing and manufacturing savings, partly offset by higher commodity costs, capacity investments and unfavorable geographic and product mix.
- Continuing-operations earnings benefited substantially from lower impairment charges and acquisition and divestiture gains. Fiscal 2013 impairment charges were $308 million versus $1.6 billion in fiscal 2012.
- The effective tax rate on continuing operations declined to 23.2% from 27.1%, aided by acquisition and divestiture activity, favorable tax adjustments and the prior-year impact of nondeductible impairment charges.
- Operating cash flow increased to $14.9 billion and free cash flow productivity increased to 95%.
- The company acquired the remaining interest in its Iberian joint venture for approximately $1.1 billion and recognized a holding gain of approximately $631 million. It also recorded approximately $250 million from the sale of its Italian bleach business.
- The prior-year comparison included a $1.4 billion after-tax gain from the 2012 sale of the snacks business; snacks were therefore reported as discontinued operations in 2012 and not in 2013.
- Fiscal 2013 included a $236 million after-tax charge from the Venezuelan currency devaluation and additional non-cash impairment charges of $259 million for Appliances goodwill and $49 million for the Braun trade name before tax.
Guidance, outlook, commentary and risks
Management’s stated 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%. The filing does not provide a specific fiscal 2014 revenue or earnings forecast.
P&G expects to incur more than $3.5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2016, intended to generate more than $2.0 billion of annual savings. Approximately 55% of the expected costs had been incurred by June 30, 2013; cumulative savings realized were approximately $940 million, and the restructuring reserve was $323 million.
Effective July 1, 2013, P&G reorganized its global business units into four industry-based sectors and planned to restate historical segment reporting beginning in fiscal 2014.
- Key risks include weak consumer demand, competitive pricing and private-label products, market-share declines, unsuccessful innovation and brand or product-quality issues.
- Commodity, energy, labor, pension, healthcare, interest-rate and foreign-exchange volatility may pressure margins.
- International operations face political, regulatory, tax, exchange-control, repatriation and infrastructure risks. Venezuela remains particularly exposed to further devaluation, price controls and limits on access to U.S. dollars.
- Supply-chain disruptions, sole-source suppliers, manufacturing interruptions, natural disasters, cybersecurity events and information-technology failures could adversely affect operations.
- Goodwill and intangible assets totaled approximately $86.8 billion. Further deterioration in Appliances, Salon Professional or other businesses could result in additional impairment charges.
- The company faces antitrust, product liability, intellectual property, tax, environmental and other legal contingencies. Competition-law liabilities totaled $139 million at June 30, 2013, with some matters still subject to appeal.
Important facts for investors to verify
- Reconcile reported EPS growth with Core EPS and quantify the effects of impairment charges, the Iberian joint-venture gain, restructuring costs, European legal matters and the Venezuela devaluation.
- Assess whether volume growth and market-share trends can improve, particularly in Beauty, Grooming, Fabric Care and Home Care, and Baby Care.
- Monitor foreign-exchange effects, commodity costs, pricing actions and mix, which materially affected reported sales and margins.
- Evaluate liquidity and refinancing needs given $12.4 billion of debt due within one year, the commercial paper balance and the $6.0 billion current-liability excess over current assets.
- Track execution of the restructuring program, including remaining costs, realized savings and workforce reductions.
- Review potential additional impairment exposure, especially for Appliances, Salon Professional and significant Gillette-related goodwill and intangible assets.
- Review pension and other postretirement obligations, including the estimated $1.0 billion foreign pension contribution made in July 2013.
- Confirm the impact of the fiscal 2014 segment reorganization when comparing future segment results.