Procter & Gamble Co. Form 10-Q Summary
Business Context and Reporting Period
P&G is a global consumer products company selling branded products in more than 180 countries across Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. This filing covers the quarter and six months ended December 31, 2020, the second quarter of fiscal 2021, compared with the corresponding 2019 periods.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $19.745 billion | 8% | $39.063 billion | 8% |
| Operating income | $5.380 billion | 20% | $10.661 billion | 22% |
| Net earnings attributable to P&G | $3.854 billion | 4% | $8.131 billion | 11% |
| Diluted EPS | $1.47 | 4% | $3.10 | 12% |
| Core diluted EPS | $1.64 | 15% | $3.27 | 17% |
| Operating margin | 27.2% | +260 bps | 27.3% | +300 bps |
| Net earnings margin | 19.7% | -80 bps | 21.0% | +60 bps |
| Operating cash flow | Not separately provided | — | $10.163 billion | +$1.630 billion |
| Adjusted free cash flow | Not separately provided | — | $8.971 billion | — |
Quarterly gross margin was 53.1%, up 170 basis points, while six-month gross margin was 52.9%, also up 170 basis points. Adjusted free cash flow productivity was 104%, above management’s long-term target of at least 90%.
Revenue and Segment Performance
- Six-month organic sales increased 9%, with organic volume up 6%. Pricing contributed 1%, mix contributed 2%, and foreign exchange reduced reported sales by 1%.
- Fabric & Home Care was the strongest segment, with six-month sales up 13% and net earnings up 30%. Home Care sales increased more than 30%, supported by pandemic-related demand.
- Health Care sales increased 10% and net earnings increased 21%; global market share increased 1.3 points.
- Beauty sales increased 6% and net earnings increased 11%, although segment market share declined 0.7 points for the six-month period.
- Grooming sales increased 5% and net earnings increased 6%. Appliances grew strongly, but Shave Care sales declined low single digits and Grooming market share declined 1.4 points.
- Baby, Feminine & Family Care sales increased 5% and net earnings increased 21%. Family Care performed strongly, while Baby Care sales declined low single digits.
Cash Flow, Debt and Liquidity
- Operating cash flow was $10.163 billion for the six months, compared with $8.533 billion in the prior-year period. Capital expenditures were $1.417 billion.
- Cash and cash equivalents were $11.941 billion at December 31, 2020, down from $16.181 billion at June 30, 2020.
- Current liabilities exceeded current assets by approximately $7.1 billion. Current liabilities were $31.744 billion, including $8.586 billion of debt due within one year; long-term debt was $22.514 billion.
- Total reported debt was approximately $31.1 billion, consisting of current and long-term debt. The disclosed fair value of long-term debt, including the current portion, was $28.5 billion.
- Financing activities used $13.171 billion, including $5.008 billion for share repurchases and $4.055 billion for dividends. Net debt reductions were approximately $5.2 billion, including early debt extinguishment costs.
- Management expects operating cash flow, access to commercial paper and bond markets, strong credit ratings, and committed financial institution relationships to support short-term liquidity needs.
Material Changes Versus the Prior Comparable Period
- Sales growth was broad-based and driven primarily by higher volume, particularly in household cleaning, health, hygiene, and health care products.
- Operating margin expanded due to manufacturing productivity savings, pricing, lower commodity costs, lower restructuring costs, and SG&A leverage. These benefits were partly offset by unfavorable product and regional mix and foreign exchange.
- Net earnings growth lagged operating income growth because of a $512 million pretax charge for early extinguishment of debt, higher interest expense, lower interest income, and a higher effective tax rate.
- Six-month effective tax rate increased to 19.5% from 17.1%, primarily due to geographic earnings mix, the absence of a prior-year legal-entity restructuring tax benefit, and the debt extinguishment charge.
- Share repurchases were $5.008 billion in the first six months, compared with $6.504 billion in the prior-year period. On January 20, 2021, P&G stated that fiscal 2021 direct share repurchases could total up to $10 billion.
- Goodwill increased from $39.901 billion to $41.381 billion, primarily because of foreign currency translation.
Guidance, Outlook, Commentary and Risks
- Management stated that COVID-19 had not materially negatively affected consolidated sales, earnings, cash flow, or liquidity through the reporting period. Demand increased for cleaning, hygiene, and health products, while travel retail, professional channels, and certain Beauty and Grooming products experienced pressure.
- Management expects fiscal 2021 restructuring charges to return to the historical ongoing range of approximately $250 million to $500 million before tax, following completion of the larger multiyear program.
- The filing does not provide a full-year numerical sales or EPS guidance range in the provided text. Management’s long-term adjusted free cash flow productivity target is at least 90%.
- Future results may be affected by COVID-19 duration and resurgence, consumer pantry destocking, supply-chain disruption, retailer health, commodity and transportation costs, foreign exchange, inflation, competitive activity, pricing elasticity, and changes in consumer behavior.
- Shave Care and the Gillette indefinite-lived intangible asset remain particularly sensitive to impairment assumptions. No impairment was recorded in the quarter, but a 25-basis-point increase in the discount rate or decrease in growth rates would have reduced estimated fair value by approximately 6% for each tested asset; either change would have triggered an additional Gillette intangible impairment based on the disclosed sensitivity.
- The company reported no material litigation, environmental, or control deficiencies. Tax audits remain active across approximately 70 countries and more than 150 taxable jurisdictions; liabilities of approximately $60 million may be resolved over the following 12 months.
Most Important Facts to Verify
- Whether pandemic-related volume gains in Home Care, Fabric Care, Family Care, and Health Care persist or reverse through destocking and normalization.
- The sustainability of margin expansion after productivity savings, pricing, and lower commodity costs are compared with future inflation, freight, commodity, and foreign exchange pressures.
- The effect of the $512 million debt extinguishment charge on reported earnings versus the company’s Core EPS presentation.
- Future impairment risk for the $12.9 billion Shave Care goodwill balance and $14.1 billion Gillette indefinite-lived intangible asset.
- Whether the planned share repurchases of up to $10 billion are funded consistently with debt reduction, dividends, capital expenditures, and liquidity objectives.
- Segment market-share trends, particularly declines in Beauty, Grooming, Baby Care, and Family Care despite reported company-wide sales growth.