Procter & Gamble Company: Fiscal 2009 Second-Quarter Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended December 31, 2009, within fiscal 2010. 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.
Effective July 1, 2009, the company changed certain Beauty and Grooming segment classifications; prior periods were reclassified for comparability. The global pharmaceuticals business was sold in October 2009 and is reported as discontinued operations.
Financial performance and key metrics
| Metric | Three months ended December 31 | Six months ended December 31 |
|---|---|---|
| Net sales | $21.027 billion, up 6% | $40.834 billion, approximately flat |
| Operating income | $4.655 billion, up 15% | $9.103 billion, up 8% |
| Net earnings from continuing operations | $3.149 billion, up 12% | $6.176 billion, up 4% |
| Net earnings | $4.659 billion, down 7% | $7.966 billion, down 5% |
| Diluted EPS from continuing operations | $1.01, up 13% | $1.98, up 7% |
| Diluted EPS | $1.49, down 6% | $2.56, down 2% |
| Operating margin | 22.1%, up 160 basis points | 22.3%, up 160 basis points |
| Net earnings from discontinued operations | $1.510 billion | $1.790 billion |
Second-quarter organic sales growth was 5%, with unit volume up 5%. Six-month organic sales growth was 3%, with unit volume up 1%. Gross margin expanded to 53.7% for the quarter and 53.1% for the six-month period, primarily from lower commodity and energy costs, manufacturing savings, pricing, and volume leverage. SG&A increased to $6.636 billion for the quarter and $12.597 billion for six months, partly due to higher marketing spending, Venezuela-related foreign-exchange costs, and a $267 million competition-law charge.
Six-month operating cash flow was $7.849 billion, compared with $5.640 billion in the prior-year period. Capital expenditures were $1.274 billion, producing free cash flow of $6.575 billion and free cash flow productivity of 83%, versus the company’s stated long-term target of at least 90%.
Cash and cash equivalents were $4.130 billion at December 31, 2009, compared with $4.781 billion at June 30, 2009. Current assets were $21.761 billion and current liabilities were $23.676 billion, resulting in a current-liability excess of approximately $1.9 billion. Debt due within one year was $7.780 billion and long-term debt was $22.309 billion, for reported debt of approximately $30.089 billion. Total liabilities were $66.346 billion.
Material changes versus the prior comparable period
- Continuing operations improved despite essentially flat six-month reported sales, reflecting stronger margins and lower interest expense.
- Quarterly sales growth was driven by 5% volume growth, 2% favorable foreign exchange, and 1% pricing, partly offset by a 2% unfavorable mix effect.
- Six-month reported sales were held back by a 3% unfavorable foreign-exchange impact, while pricing contributed 2%.
- Quarterly segment performance was strongest in Baby Care and Family Care, Fabric Care and Home Care, and Snacks and Pet Care. Six-month Grooming sales declined 4% and earnings declined 6%; Snacks and Pet Care volume declined 5%.
- Interest expense declined to $224 million for the quarter and $511 million for six months, primarily because of lower floating-rate debt costs and lower debt outstanding.
- Net earnings declined because prior-year discontinued operations included a larger Folgers gain. The current period included a $1.464 billion after-tax gain on the pharmaceuticals divestiture, compared with a $2.011 billion after-tax Folgers gain in the prior-year period.
- Financing activities used $10.344 billion in the first six months, including $5.169 billion of long-term debt repayments, $2.672 billion of dividends, and $1.414 billion of treasury-stock purchases.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to repurchase approximately $5 billion of shares during fiscal 2010. The company repurchased approximately 22.8 million shares during the quarter and had approximately $12.3 billion remaining under its repurchase authorization at December 31, 2009.
- Beginning January 1, 2010, Venezuela was treated as a highly inflationary economy, with the U.S. dollar as the functional currency. Management expected the devaluation to reduce reported sales by less than 2% on an ongoing basis and reduce fiscal 2010 earnings by approximately $150 million to $300 million versus existing business plans.
- The company recorded a $267 million charge for potential European competition-law fines. Management stated that total eventual fines or other costs could materially exceed accrued amounts and materially affect income and cash flow.
- French and Italian authorities issued complaints in December 2009 alleging competition-law violations. Other investigations remain ongoing across Europe, and the ultimate amount and timing of potential fines were not reasonably estimable.
- The company expects to fund operations and short-term liquidity primarily through operating cash flow and continued access to commercial-paper and bond markets. Management stated that its debt ratings and financing arrangements should support refinancing needs.
- Key risks include consumer demand and brand reputation, competitive pricing and promotional pressure, commodity and labor costs, foreign exchange and exchange controls, political and economic instability, retail customer concentration, regulatory and tax matters, litigation, acquisitions and divestitures, and information-technology disruptions.
- The company acquired MDVIP, a physicians’ network, during the period. Goodwill increased to $56.979 billion, primarily from the acquisition and currency translation, partly offset by the pharmaceuticals divestiture.
Important facts investors should verify
- Whether European competition-law investigations result in additional fines or reserves beyond the $267 million recorded.
- The realized impact of Venezuela’s currency devaluation, exchange controls, and highly inflationary accounting on fiscal 2010 sales and earnings.
- Whether organic sales and unit-volume growth remain sufficient to offset foreign-exchange, pricing, and competitive pressures, particularly in Grooming and Snacks.
- Whether free cash flow productivity improves toward the company’s 90% long-term target while dividends, debt repayments, acquisitions, and share repurchases continue.
- The sustainability of margin expansion as commodity costs, marketing investment, pricing, and foreign-exchange effects change.
- The cash requirements and maturity profile associated with approximately $30.1 billion of reported debt, including $7.8 billion due within one year.
- The comparability of total earnings and EPS, given the pharmaceutical divestiture and large gains from discontinued operations.