Procter & Gamble Fiscal 2021 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2020, compared with the three months ended September 30, 2019. P&G is a global branded consumer-packaged-goods company operating in more than 180 countries and territories across Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The period was materially influenced by COVID-19-related changes in consumer demand, pantry loading, retailer replenishment, and restrictions on travel and movement.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $19.318 billion | $17.798 billion | +9% |
| Operating income | $5.281 billion | $4.290 billion | +23% |
| Net earnings | $4.308 billion | $3.617 billion | +19% |
| Net earnings attributable to P&G | $4.277 billion | $3.593 billion | +19% |
| Diluted EPS | $1.63 | $1.36 | +20% |
| Operating cash flow | $4.739 billion | $4.169 billion | +$570 million |
| Adjusted free cash flow | $4.114 billion | Not clearly provided | 95% productivity |
Gross margin was 52.7%, up 170 basis points, while operating margin was 27.3%, up 320 basis points. Net earnings margin was 22.3%, up 200 basis points. Sales increased on 7% unit-volume growth, with positive contributions from pricing, mix, and a favorable acquisition/divestiture effect, partly offset by a 1% foreign-exchange headwind.
Cash and cash equivalents were $13.392 billion at September 30, 2020, down from $16.181 billion at June 30, 2020. Current assets were $26.026 billion versus current liabilities of $30.008 billion, resulting in a $3.982 billion excess of current liabilities over current assets. Debt due within one year was $7.707 billion and long-term debt was $23.948 billion. The disclosed fair value of long-term debt, including the current portion, was $29.5 billion.
Cash uses included $2.030 billion of dividends, $2.000 billion of share repurchases, $850 million of capital expenditures, and $3.568 billion of short-term debt reductions. Treasury stock purchases totaled $2.000 billion in the cash-flow statement; the equity table reports 14.642 million shares purchased under the repurchase program for $2.000 billion.
Material changes versus the prior comparable period
- Organic sales also increased 9%, with organic volume up 7%.
- Fabric & Home Care sales rose 14% to $6.644 billion and net earnings rose 31% to $1.349 billion.
- Health Care sales rose 11% to $2.471 billion and net earnings rose 31% to $525 million.
- Beauty sales rose 7% and net earnings rose 12%; Grooming sales rose 5% but net earnings increased only 1%, reflecting mix and foreign-exchange pressure.
- Baby, Feminine & Family Care sales rose 3% and net earnings rose 16%; Baby Care experienced volume and market contraction in several regions.
- SG&A increased 2% in dollars but declined to 25.3% of sales from 26.9%, supported by scale and productivity savings.
- The effective tax rate increased to 18.7%, up 200 basis points, primarily because the prior-year period included a tax benefit and because of unfavorable geographic earnings mix.
- Foreign exchange reduced net earnings by approximately $100 million and reduced net sales by approximately 1%.
Guidance, outlook, risks, and unusual items
P&G stated that fiscal 2021 restructuring costs are expected to return to the historical ongoing range of approximately $250 million to $500 million before tax, following approximately $1.5 billion of incremental restructuring costs across fiscal 2019 and fiscal 2020. The quarter included $22 million of restructuring costs and ended with a $303 million restructuring reserve.
Management expects to meet short-term liquidity and operating needs primarily through operating cash flow and continued access to commercial paper and bond markets. Subsequent to quarter-end, P&G announced a plan to retire approximately $2.3 billion of debt securities early during the quarter ending December 31, 2020, funded through existing liquidity and potentially new debt financing. P&G also stated that it expected fiscal 2021 direct share repurchases of $7 billion to $9 billion.
Management reported no material negative consolidated impact from COVID-19 during the quarter. Demand benefited fabric care, home cleaning, health care, hygiene, and certain at-home grooming products, while beauty and grooming products, travel retail, professional channels, and certain regions were adversely affected. Management cautioned that future results could be volatile because of potential pantry destocking, recessionary conditions, supply-chain disruption, government restrictions, and uncertain recovery in Asia Pacific, Latin America, and IMEA.
Key risks include foreign-exchange volatility, commodity and transportation costs, supply-chain disruption, competitive pricing and market-share pressure, changing consumer behavior, cyber and technology risks, regulatory and tax developments, litigation, geopolitical conditions, and COVID-19. The Gillette indefinite-lived intangible asset was identified as particularly susceptible to future impairment; its carrying value was $14.1 billion at September 30, 2020. A 25-basis-point increase in the discount rate or decrease in growth rates would reduce the estimated fair value of the Gillette asset by approximately 6% and, in isolation, would result in an additional impairment. No impairment charge was recorded for the quarter.
Management stated that pending litigation and environmental matters were not expected to materially affect financial position, results of operations, or cash flows. Tax audits across multiple jurisdictions could result in settlements related to approximately $60 million of accrued uncertain tax positions over the next 12 months.
Important facts for investors to verify
- Whether COVID-19-driven demand increases, particularly in Fabric & Home Care and North America, persist or reverse through pantry destocking.
- The sustainability of the 52.7% gross margin and 27.3% operating margin amid commodity, freight, labor, pricing, mix, and foreign-exchange pressures.
- Execution and funding of the announced $7 billion to $9 billion fiscal 2021 share-repurchase plan and the approximately $2.3 billion early debt retirement.
- Net debt maturities, refinancing conditions, and the effect of current liabilities exceeding current assets by approximately $4.0 billion.
- Future impairment risk for the $12.7 billion Shave Care goodwill balance and $14.1 billion Gillette indefinite-lived intangible asset.
- Regional and category market-share trends, particularly Grooming, Beauty, Baby Care, and Family Care.
- Whether restructuring and productivity savings continue to offset inflation, commodity costs, and increased marketing investment.
- The filing does not provide a full-year quantitative sales or EPS guidance range in the supplied text; investors should verify any subsequent guidance disclosure.