Procter & Gamble Co. — Form 10-Q Summary
Business context and reporting period
This filing covers the three and nine months ended March 31, 2010, P&G’s fiscal third quarter and year-to-date period. The request identifies “2009 Q3,” but the filing itself is for fiscal 2010 Q3. P&G sells branded consumer products in more than 180 countries through six reportable segments: Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
Key financial metrics
| Metric | Three months ended Mar. 31, 2010 | Year-to-date ended Mar. 31, 2010 |
|---|---|---|
| Net sales | $19.178 billion | $60.012 billion |
| Operating income | $3.968 billion | $13.071 billion |
| Operating margin | 20.7% | 21.8% |
| Net earnings from continuing operations | $2.585 billion | $8.761 billion |
| Net earnings | $2.585 billion | $10.551 billion |
| Diluted EPS from continuing operations | $0.83 | $2.82 |
| Diluted EPS | $0.83 | $3.39 |
| Operating cash flow | Not provided for the quarter | $12.759 billion |
| Free cash flow | Not provided for the quarter | $10.779 billion |
- Year-to-date gross margin was 52.8%, up 310 basis points, while SG&A was 31.0% of sales, up 180 basis points.
- Year-to-date free cash flow productivity was 102% of net earnings, compared with a stated long-term target of at least 90%.
- Cash and cash equivalents were $4.899 billion at March 31, 2010.
- Current assets were $21.490 billion versus current liabilities of $23.272 billion. Debt due within one year was $7.038 billion and long-term debt was $22.938 billion.
- Total debt was approximately $29.976 billion, compared with approximately $36.972 billion at June 30, 2009.
- The quarterly dividend was $0.44 per share, up from $0.40; year-to-date dividends were $1.32 per share.
Material changes versus the prior comparable period
- Third-quarter sales increased 7%, driven by 7% unit-volume growth and favorable foreign exchange. Organic sales increased 4%.
- Year-to-date sales increased 2% to $60.012 billion; organic sales increased 3% and unit volume increased 3%.
- Third-quarter continuing-operations earnings increased 6%, while year-to-date continuing-operations earnings increased 5%. Diluted continuing-operations EPS increased 6% for the quarter and 7% year to date.
- Total net earnings declined 1% for the quarter and 4% year to date because prior-period discontinued-operations gains were larger. The year-to-date comparison includes a $1.464 billion after-tax gain from the October 2009 pharmaceuticals divestiture versus a $2.011 billion after-tax gain from the Folgers divestiture in the prior-year period.
- Operating cash flow increased 29% year to date, primarily from working-capital changes, including higher accounts payable and accrued liabilities.
- Financing activities used $13.538 billion year to date, including $6.7 billion of net debt repayments, $4.001 billion of dividends, and $3.417 billion of treasury-stock purchases.
- SG&A increased 15% in the quarter and 8% year to date, reflecting higher marketing and overhead spending. Lower commodity and energy costs and manufacturing savings substantially improved gross margin.
- Segment strength was concentrated in Household Care. Year-to-date net earnings increased 23% in Fabric Care and Home Care and 25% in Baby Care and Family Care. Snacks and Pet Care sales declined 1% and volume declined 5%; Grooming sales were flat and volume declined 2%.
Guidance, outlook, commentary, risks and unusual items
- Management expected to repurchase approximately $6 billion of shares during fiscal 2010. The filing does not provide a formal full-year revenue or EPS guidance range.
- Management stated that short-term liquidity and operating needs should be supported largely by operating cash flow, with access to commercial-paper and bond markets and committed financial-institution funding.
- Venezuela was designated a highly inflationary economy effective January 1, 2010. Currency devaluation reduced third-quarter reported EPS by approximately $0.05 and was expected to reduce fourth-quarter EPS by approximately $0.03. Management expected reported sales to be reduced by less than 2% on an ongoing basis.
- P&G recorded $279 million of year-to-date reserves for potential European competition-law fines. The company stated that ultimate fines or other costs could exceed accrued amounts and materially affect earnings and cash flow.
- A $152 million charge related to recently enacted U.S. legislation affecting the taxation of future retiree prescription-drug subsidy payments increased the continuing-operations tax rate. The effective tax rate was 31.3% for the quarter and 29.5% year to date.
- The company faces ongoing antitrust investigations in Europe, tax audits in multiple jurisdictions, currency and exchange-control exposure, commodity and raw-material volatility, competitive pricing pressure, global economic uncertainty, regulatory risks, and information-technology and supply-chain risks.
- P&G estimated that audit activity over the next 12 months could address uncertain tax positions supported by approximately $500 million of existing liabilities.
- Goodwill declined to $55.538 billion from $56.512 billion, primarily because of the pharmaceuticals divestiture and currency translation. The filing states that no significant nonrecurring fair-value measurements occurred during the nine months.
Most important facts for investors to verify
- Confirm the period designation: the filing is for fiscal Q3 2010, ended March 31, 2010, rather than Q3 2009.
- Assess the sustainability of sales growth after separating volume, pricing, mix, foreign exchange, and discontinued-business effects.
- Review whether marketing and overhead investments can be absorbed without reversing the reported gross-margin improvement.
- Track the resolution and additional accrual requirements related to European competition-law investigations.
- Evaluate Venezuela’s continuing effect on reported sales, earnings, cash repatriation, and foreign-exchange costs.
- Reconcile continuing-operations performance with total EPS, which remains affected by divestiture gains and other unusual items.
- Monitor liquidity and refinancing needs given that current liabilities exceeded current assets by approximately $1.8 billion despite strong operating cash flow.
- Verify the pace and funding of planned share repurchases and the effect on diluted share count and EPS.