Procter & Gamble Company — Fiscal 2012 Second-Quarter 10-Q
Reporting period: Three and six months ended December 31, 2012. The unaudited results cover P&G’s global consumer packaged goods business across Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. Prior-year periods exclude the divested Snacks business from continuing operations.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Net sales | $22.175 billion, up 2% | $42.914 billion, down 1% |
| Operating income | $4.492 billion | $8.443 billion |
| Operating margin | 20.3%, up 800 basis points | 19.7%, up 370 basis points |
| Net earnings attributable to P&G | $4.057 billion, up 140% | $6.871 billion, up 46% |
| Diluted EPS from continuing operations | $1.39, up 148% | $2.35, up 50% |
| Core diluted EPS | $1.22, up 12% | $2.28, up 9% |
| Gross margin | 50.9%, up 80 basis points | 50.5%, up 50 basis points |
| Operating cash flow | Not separately provided | $6.619 billion, up 20% |
| Free cash flow | Not separately provided | $5.090 billion; productivity 73% |
Six-month sales performance reflected 1% unit-volume growth, 2% pricing, a 1% unfavorable mix impact and 3% unfavorable foreign exchange. Organic sales increased 2% for the six-month period and 3% in the second quarter.
At December 31, 2012, cash and cash equivalents were $6.643 billion. Current assets were $25.601 billion versus current liabilities of $26.230 billion, resulting in a $629 million working-capital deficit. Debt due within one year was $9.819 billion and long-term debt was $23.607 billion. Management stated that operating cash flow, debt-market access, strong credit ratings and committed financing relationships should support liquidity and refinancing needs.
Six-month financing cash outflows included $3.206 billion of dividends and $3.984 billion of treasury-stock purchases. Net debt increased financing cash availability by approximately $3.5 billion. Dividends per common share increased 7% to $0.562 for the quarter and $1.124 year to date.
Material changes versus the prior comparable period
- Reported earnings benefited significantly from nonrecurring or unusual items: the prior-year period included a $1.554 billion goodwill and intangible-asset impairment charge, while the current period included a gain of approximately $623 million after tax related to acquiring the remaining interest in an Iberian joint venture and gains from business divestitures.
- Core EPS, which excludes specified unusual items, increased 12% in the quarter and 9% year to date, providing a more comparable view of underlying performance.
- Gross margin expanded due primarily to pricing and manufacturing cost savings, partly offset by unfavorable product and geographic mix, higher commodity costs and restructuring spending.
- Interest expense declined 16% year to date to $341 million, primarily because of lower rates on floating-rate debt.
- Segment performance was strongest in Fabric Care and Home Care and Baby Care and Family Care. Six-month net earnings increased 16% and 11%, respectively. Beauty earnings increased 3%, while Grooming declined 2% and Health Care declined 6%.
- The Snacks business generated no current-period sales or earnings following its May 2012 divestiture to Kellogg; the prior-year six-month period included $99 million of discontinued-operation earnings.
Outlook, management commentary and risks
- P&G expects more than $3.5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2016, with approximately 50% expected by the end of fiscal 2013. The plan targets more than $2 billion of annual before-tax savings; fiscal 2013 savings were expected to be approximately $700 million to $1 billion.
- The company incurred $592 million of restructuring charges during the six months ended December 31, 2012, and had a $411 million restructuring accrual at period-end. Approximately 5,700 non-manufacturing overhead positions were expected to be eliminated by the end of fiscal 2013.
- On January 25, 2013, P&G estimated fiscal 2012–2013 share repurchases of $5 billion to $6 billion, expected to be financed partly with short- and long-term debt. The company repurchased 20.2 million shares during the quarter.
- Key risks include intense competition and market-share pressure, consumer response to pricing, commodity and labor-cost volatility, foreign-exchange exposure, execution of productivity savings, supply-chain disruptions, acquisitions and divestitures, regulatory and tax changes, litigation and antitrust matters, and information-technology or cybersecurity failures.
- Venezuela presented specific currency and liquidity risks. P&G reported approximately $1.3 billion of net monetary assets denominated in local currency, including exposure to uncertain access to foreign exchange, price controls and potential devaluation.
- European competition-law matters remained at various stages. The company had accrued $49 million for competition-law violations as of December 31, 2012, but stated that additional fines for certain unresolved matters could not reasonably be estimated.
- Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor verification checklist
- Reconcile reported EPS growth with core EPS growth and quantify the effects of the Iberian joint-venture gain, divestiture gains, restructuring charges and prior-year impairment charges.
- Monitor whether the restructuring program delivers the targeted annual savings while avoiding disruption to innovation, supply chains and employee retention.
- Assess debt maturities, refinancing requirements and the effect of planned share repurchases on leverage and liquidity.
- Track organic sales, unit volume and market share by segment, particularly the declines in Grooming and Health Care and the market-share pressure across several categories.
- Review developments in European antitrust investigations, uncertain tax positions and Venezuelan currency restrictions.
- Confirm the sustainability of the 73% free-cash-flow productivity rate relative to management’s long-term target of at least 90%.