Procter & Gamble Co. 10-Q Summary
Business Context and Reporting Period
P&G is a global branded consumer packaged goods company operating in more than 180 countries and territories, with five reportable segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2019, compared with the corresponding prior-year periods.
Key Financial Metrics
| Metric | Three Months | Six Months |
|---|---|---|
| Net sales | $18.24 billion, up 5% | $36.04 billion, up 6% |
| Operating income | $4.48 billion, up 15% | $8.77 billion, up 18% |
| Net earnings | $3.74 billion, up 16% | $7.36 billion, up 15% |
| Net earnings attributable to P&G | $3.72 billion, up 16% | $7.31 billion, up 14% |
| Diluted EPS | $1.41, up 16% | $2.77, up 14% |
| Gross margin | 51.4%, up 250 basis points | 51.2%, up 220 basis points |
| Operating margin | 24.6%, up 230 basis points | 24.3%, up 250 basis points |
| Net earnings margin | 20.5%, up 210 basis points | 20.4%, up 160 basis points |
| Operating cash flow | Not separately provided | $8.53 billion |
| Adjusted free cash flow | Not separately provided | $7.06 billion; 96% productivity |
Six-month sales growth reflected 4% unit-volume growth, 3% organic volume growth, a 1% favorable pricing effect, a 2% favorable mix effect and a 1% unfavorable foreign-exchange effect. The Health Care segment was the fastest-growing business, with sales up 17% for the six months, followed by Beauty up 8%, Fabric & Home Care up 5%, and Baby, Feminine & Family Care up 2%. Grooming sales were unchanged.
At December 31, 2019, cash and cash equivalents were $6.28 billion. Current assets were $18.92 billion versus current liabilities of $30.16 billion, resulting in a working-capital deficit of approximately $11.25 billion. Debt due within one year was $9.15 billion and long-term debt was $18.99 billion. Total reported debt was approximately $28.14 billion.
Material Changes Versus the Prior Comparable Period
- Operating performance improved substantially as manufacturing productivity savings, lower commodity costs, pricing and lower restructuring costs expanded gross margin.
- Six-month SG&A increased 4%, but declined to 26.8% of sales from 27.2%, reflecting productivity and scale benefits partly offset by higher marketing and overhead spending.
- Operating cash flow increased $959 million year over year to $8.53 billion. Capital expenditures were $1.68 billion, or 4.7% of sales.
- Financing activities used $10.91 billion, including $6.50 billion of share repurchases, $3.86 billion of dividends and $1.55 billion of long-term debt repayments.
- Cash increased by $2.04 billion, primarily reflecting operating cash flow and proceeds from sales and maturities of investment securities, partly offset by shareholder distributions and debt repayments.
- The company adopted the new lease standard on July 1, 2019, increasing total assets and liabilities by approximately 1%; management reported no material earnings impact.
Guidance, Outlook, Commentary and Unusual Items
- Management expected approximately $0.6 billion of additional restructuring costs in fiscal 2020, following approximately $1.8 billion incurred in fiscal 2018 and fiscal 2019. Restructuring charges were $198 million for the six months ended December 31, 2019.
- Management’s long-term target is adjusted free-cash-flow productivity of at least 90%; reported six-month productivity was 96%.
- On January 23, 2020, the company stated that fiscal 2020 direct share repurchases were expected to total $7 billion to $8 billion, funded through operating cash flow and debt issuance as needed.
- Six-month results benefited from a 110-basis-point reduction in the effective tax rate to 17.1%, including a non-recurring tax benefit from legal-entity simplification and favorable geographic earnings mix.
- The prior-year period included a $353 million after-tax gain from dissolution of the PGT Healthcare partnership. This depressed the prior-year comparison and was excluded from core earnings.
- The company completed its annual impairment testing. Shave Care fair value exceeded carrying value by more than 20%, while the Gillette indefinite-lived intangible asset exceeded carrying value by approximately 5%. Management stated that the Gillette asset remains susceptible to future impairment.
- Material risks include foreign-exchange volatility, commodity and transportation costs, pricing pressure, changing consumer habits, competitive activity, supply-chain disruption, regulatory and tax developments, litigation, cybersecurity and macroeconomic or geopolitical instability.
- Management stated that litigation and environmental contingencies were not expected to materially affect financial position, results or cash flows. Tax audits were ongoing in approximately 40 to 50 jurisdictions; existing liabilities related to matters potentially resolved over the next 12 months were approximately $146 million.
Important Facts for Investors to Verify
- Whether organic sales and volume growth remain durable after separating the benefit from the Merck OTC acquisition, pricing and mix.
- Progress toward the stated $7 billion to $8 billion fiscal 2020 repurchase program and the resulting effect on share count, leverage and liquidity.
- Execution and cash costs of the restructuring program, including the approximately $0.6 billion expected fiscal 2020 incremental charges.
- Whether Health Care and Beauty growth offsets weakness in Grooming and market-share declines in portions of Baby Care and Beauty.
- The sensitivity of the Gillette intangible asset and Shave Care reporting unit to discount rates, growth assumptions, currency movements and competitive conditions.
- The sustainability of margin expansion given commodity prices, foreign exchange, marketing reinvestment and product-mix pressures.