PG

Business Context and Reporting Period

Company: The Procter & Gamble Company (P&G)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended March 31, 2009
Business Overview: P&G is a multinational consumer goods corporation operating in three Global Business Units (GBUs): Beauty, Health & Well-Being, and Household Care. The company sells products in over 180 countries. A significant event during this period was the completion of the divestiture of its Coffee business (Folgers) to The J.M. Smucker Company in November 2008, which is reported as discontinued operations.

Key Financial Metrics

Note: Total Debt calculated as Debt due within one year ($18,366) + Long-term debt ($20,452).

Material Changes vs. Prior Period

• Revenue: Net sales for the nine months ended March 31, 2009, declined 1% to $60.4 billion compared to the prior year. This was driven by a 2% decline in unit volume and a 3% negative impact from foreign exchange, partially offset by a 5% increase in pricing.
• Profitability: Net earnings from continuing operations were flat (0% change) at $8.8 billion for the nine-month period. However, total net earnings increased 21% to $11.0 billion, primarily due to a $2.0 billion after-tax gain on the sale of the Coffee business (discontinued operations).
• Margins: Gross margin decreased 150 basis points to 50.9% for the nine-month period due to higher commodity and energy costs, unfavorable foreign exchange, and negative product mix. Operating margin decreased 40 basis points to 20.8%.
• Cash Flow: Operating cash flow decreased 11% to $9.9 billion. Free cash flow productivity was 71% (defined as operating cash flow less capital expenditures divided by net earnings).
• Balance Sheet: Total assets decreased to $132.4 billion from $144.0 billion at the prior fiscal year-end. Cash and cash equivalents increased to $4.4 billion. Total shareholders' equity decreased to $60.8 billion, largely due to treasury stock purchases and accumulated other comprehensive income adjustments.

Guidance, Outlook, and Risks

• Outlook: Management expects the global economic downturn, credit crisis, and currency market volatility to continue negatively impacting net sales for the remainder of the fiscal year and into the next. Organic sales growth of 3% for the nine-month period was below the company's long-term financial target range.
• Capital Allocation: The company repurchased $6.4 billion of treasury stock and paid $3.7 billion in dividends during the nine-month period. Management anticipates supporting short-term liquidity through operating cash flows and access to credit markets, though they noted that a worsening credit crisis could impair funding for discretionary spending like share buybacks.
• Legal and Regulatory Risks: P&G is subject to investigations into potential competition law violations in Europe (including the EU, UK, France, Germany, Spain, Italy, and others). The company has identified violations in certain countries and is cooperating with authorities. While no formal claims have been made, fines could be substantial and materially impact future income statements. Additionally, an environmental accident involving a contractor in Italy is under investigation.
• Market Risks: The company faces exposure to commodity price fluctuations, foreign exchange rates, and interest rates. Hedging activities are utilized to manage these risks, with significant derivative positions held for foreign currency, interest rates, and commodities.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the $2.0 billion gain from the Folgers divestiture inflated total net earnings and EPS, masking the flat performance of continuing operations.
• Organic Growth Trends: Confirm the sustainability of the 3% organic sales growth given the reported market contractions and trade inventory reductions in developed and developing regions.
• Commodity Cost Exposure: Assess the ability to maintain margins given the 300 basis point hit to gross margin from commodity costs and the reliance on price increases to offset them.
• European Antitrust Exposure: Monitor the status of European competition law investigations and the potential magnitude of fines, as the company states it is "too early" to estimate costs.
• Liquidity and Debt: Review the company's ability to refinance its significant debt load ($38.8 billion total) in the context of the ongoing global credit crisis.