Business Context and Reporting Period
This Form 10-Q covers The Procter & Gamble Company (P&G) for the quarterly period ended March 31, 2007, and the nine-month period ended March 31, 2007. P&G is a global consumer products company operating in three Global Business Units: Beauty and Health, Household Care, and the Gillette Global Business Unit (GBU). The results include the full impact of the Gillette acquisition, which was completed on October 1, 2005.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2007 | Nine Months Ended Mar 31, 2007 |
|---|---|---|
| Net Sales | $18,694 million | $57,204 million |
| Net Earnings | $2,512 million | $8,072 million |
| Diluted EPS | $0.74 | $2.37 |
| Operating Cash Flow | N/A | $9,853 million |
| Free Cash Flow | N/A | $7,857 million |
| Free Cash Flow Productivity | N/A | 97% |
| Debt Due Within One Year | $12,168 million | N/A |
| Long-Term Debt | $21,257 million | N/A |
| Cash and Cash Equivalents | $3,994 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8% for the quarter and 14% for the nine-month period compared to the prior year. Organic sales growth (excluding acquisitions, divestitures, and FX) was 6% for both periods.
- Profitability: Net earnings rose 14% for the quarter and 19% for the nine-month period. Operating margins improved to 19.5% (quarter) and 21.1% (nine months), driven by volume scale leverage, price increases, and cost savings.
- Segment Performance:
- Beauty & Health: Sales up 8% (quarter) and 11% (nine months). Health Care earnings surged 31% (quarter) and 25% (nine months) due to Prilosec OTC growth and lower R&D costs.
- Household Care: Sales up 10% (quarter) and 8% (nine months). Fabric Care and Home Care saw double-digit volume growth.
- Gillette GBU: Sales up 6% (quarter) and 59% (nine months). The nine-month increase is largely due to the inclusion of an additional three months of Gillette results compared to the prior year.
- Snacks, Coffee & Pet Care: Sales flat for the quarter due to a pet food recall and reduced coffee trade inventory.
- Balance Sheet: Cash and cash equivalents decreased from $6,693 million (June 30, 2006) to $3,994 million (March 31, 2007), primarily due to share repurchases and working capital changes. Short-term debt increased significantly to $12,168 million, while long-term debt decreased to $21,257 million.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted broad-based organic volume growth across all reportable segments. The company successfully managed commodity cost increases through pricing actions and cost savings projects. The Gillette integration is proceeding, with synergy savings contributing to margin expansion.
- Unusual Items:
- Pet Food Recall: A voluntary recall of Iams and Eukanuba wet pet foods negatively impacted volume and earnings in the Snacks, Coffee, and Pet Care segment.
- SK-II Disruption: Sales of SK-II were negatively impacted by business disruptions in Asia, though the brand is recovering.
- Legal Settlement: A favorable legal settlement in the prior year base period impacted the comparison for SG&A expenses.
- Pension Curtailment Gain: A $154 million gain was recognized due to the harmonization of Gillette U.S. postretirement benefits with P&G's structure.
- Risks and Contingencies:
- Cost Pressures: Fluctuations in commodity prices, raw materials, and foreign exchange rates remain key risks.
- Regulatory Environment: Changes in laws and regulations, including environmental and product-related laws, could impact operations.
- Accounting Standards: The company is evaluating the impact of adopting FIN 48 (uncertain tax positions) and SFAS 158 (pension accounting), which may result in a reduction to net assets and equity upon adoption.
Key Facts for Investor Verification
- Organic Growth Sustainability: Verify the sustainability of the 6% organic sales growth across all segments, particularly in developing regions.
- Gillette Integration Progress: Monitor the realization of cost synergies and the completion of integration activities, expected to be substantially complete by June 30, 2008.
- Commodity Cost Management: Assess the company's ability to offset rising commodity costs (e.g., zinc, pulp) through pricing and efficiency without eroding market share.
- Liquidity Position: Review the shift in debt structure (increase in short-term debt, decrease in long-term debt) and the company's ability to refinance at favorable rates.
- Accounting Changes: Track the impact of the upcoming adoption of FIN 48 and SFAS 158 on future financial statements and equity.