Procter & Gamble Company: Fiscal 2010 First-Quarter 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended September 30, 2010, the first quarter of fiscal 2011. P&G sells branded consumer products in more than 180 countries through three global business units: Beauty and Grooming, Health and Well-Being, and Household Care. Results exclude the global pharmaceuticals business, which was divested in October 2009 and is presented as discontinued operations.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $20.122 billion | $19.807 billion | Up 2% |
| Operating income | $4.501 billion | $4.448 billion | Up 1% |
| Net earnings from continuing operations | $3.081 billion | $3.027 billion | Up 2% |
| Total net earnings | $3.081 billion | $3.307 billion | Down 7% |
| Diluted EPS from continuing operations | $1.02 | $0.97 | Up 5% |
| Total diluted EPS | $1.02 | $1.06 | Down 4% |
| Operating margin | 22.4% | 22.5% | Down 10 basis points |
| Gross margin | 51.9% | 52.6% | Down 70 basis points |
| Net earnings margin | 15.3% | 16.7% | Down approximately 140 basis points |
| Operating cash flow | $2.452 billion | $4.555 billion | Down 46% |
| Free cash flow | $1.933 billion | Not clearly provided in the filing text | Free cash flow productivity was 63% |
Organic sales increased 4%, unit volume increased 8%, and organic volume increased 7%. Foreign exchange reduced reported sales by 3%, while pricing reduced sales by 1% and unfavorable mix reduced sales by 2%. Higher commodity and energy costs and unfavorable mix pressured gross margin; manufacturing savings and volume leverage partly offset those effects.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $2.603 billion at September 30, 2010, compared with $2.879 billion at June 30, 2010.
- Total current assets were $20.496 billion versus current liabilities of $27.640 billion, producing a reported current-liabilities excess of approximately $7.1 billion.
- Debt due within one year was $11.512 billion, and long-term debt was $21.464 billion. The filing states that long-term debt had a fair value of $23.707 billion.
- Operating cash flow declined primarily because working capital consumed cash: accounts receivable used $434 million, inventories used $604 million, and accounts payable, accrued and other liabilities used $303 million.
- Capital expenditures were $519 million, or 2.6% of sales. Management expected fiscal-year capital expenditures of approximately 4% of sales.
- Investing activities used $928 million, including $398 million for acquisitions, principally Ambi Pur.
- Financing activities used $1.901 billion, including $3.010 billion for treasury stock purchases and $1.422 billion for dividends, partly funded by $2.412 billion of short-term debt issuance.
Material Changes Versus the Prior Comparable Period
- Continuing-operations earnings rose 2%, but total earnings fell 7% because the prior-year quarter included $280 million of net earnings from the pharmaceuticals business.
- Share repurchases reduced diluted average shares outstanding from 3,109.6 million to 3,025.6 million, helping diluted continuing-operations EPS grow faster than net earnings.
- Interest expense declined $79 million to $208 million because of lower debt outstanding and lower floating-rate borrowing costs.
- SG&A was essentially flat at $5.932 billion; lower overhead and much lower Venezuela-related foreign-exchange costs offset higher marketing spending.
- Segment earnings were strongest in Grooming, up 13%, and Beauty, up 7%. Health Care earnings fell 10%, Snacks and Pet Care fell 27%, Fabric Care and Home Care fell 7%, and Baby Care and Family Care fell 16%.
- Snacks and Pet Care results were affected by pet-food recall costs and supply-chain restructuring, while the Ambi Pur acquisition contributed to Home Care volume.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management planned fiscal 2011 share repurchases of $6 billion to $8 billion. The company repurchased $3.010 billion of treasury stock during the quarter.
- Management stated that operating and short-term liquidity needs were expected to be supported largely by operating cash flow, with refinancing access supported by strong debt ratings and credit arrangements with financial institutions.
- The company’s long-term target is free cash flow productivity of at least 90%; first-quarter productivity was 63%.
- Management highlighted risks from commodity, energy, labor, foreign-exchange and interest-rate volatility; competitive pricing and promotions; global economic and political conditions; regulatory and tax changes; supply-chain dependencies; and execution of innovation, cost savings, acquisitions and divestitures.
- European competition-law investigations remained unresolved. P&G had reserves of $275 million for potential fines, but stated that ultimate fines or related costs could be materially higher and could materially affect earnings and cash flow.
- Venezuela remained a significant currency risk. Approximately $490 million of net monetary assets were denominated in local currency, including approximately $260 million remeasured using the parallel exchange rate. The availability of U.S. dollars through the parallel market was uncertain.
- The company disclosed 50 to 60 tax audits underway across more than 150 taxable jurisdictions and stated that the ultimate effect of uncertain tax positions could not be reasonably estimated.
- Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Reconcile continuing-operations trends with total earnings, particularly the loss of the divested pharmaceuticals contribution.
- Assess whether the sharp decline in operating cash flow and 63% free cash flow productivity are temporary working-capital effects or a sustained trend.
- Monitor gross-margin pressure from commodities, pricing and mix, especially in Household Care.
- Track European antitrust investigations and whether reserves remain adequate relative to potential fines.
- Evaluate Venezuela’s exchange controls, repatriation capacity and exposure to further devaluation.
- Review the planned $6 billion to $8 billion share-repurchase program alongside increased short-term debt and the current-liabilities deficit.
- Confirm the effect of pet-food recall and supply-chain restructuring costs on future Snacks and Pet Care performance.