Procter & Gamble Fiscal 2018 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the quarter ended September 30, 2017, the first quarter of fiscal 2018. P&G is a global consumer packaged-goods company operating in more than 180 countries and territories through five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The Beauty Brands divestiture to Coty closed on October 1, 2016; related results are presented as discontinued operations in the prior-year comparison.
Financial performance and key metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $16.653 billion | $16.518 billion | Up 1% |
| Operating income | $3.735 billion | $3.771 billion | Down 1% |
| Net earnings from continuing operations | $2.870 billion | $2.875 billion | Approximately flat |
| Net earnings attributable to P&G | $2.853 billion | $2.714 billion | Up 5% |
| Diluted EPS | $1.06 | $0.96 | Up 10% |
| Diluted EPS from continuing operations | $1.06 | $1.00 | Up 6% |
| Operating cash flow | $3.631 billion | $3.025 billion | Up $606 million |
| Free cash flow | $2.499 billion | Not clearly provided | 87% productivity |
- Gross margin was 50.6%, down 40 basis points, while operating margin was 22.4%, also down 40 basis points. SG&A increased to 28.2% of sales from 28.1%.
- Gross margin benefited from 150 basis points of manufacturing cost savings, but was pressured by higher commodity costs, unfavorable mix, foreign exchange, and other items.
- Cash and cash equivalents were $5.024 billion at September 30, 2017, compared with $5.569 billion at June 30, 2017. Current assets were $28.096 billion and current liabilities were $30.724 billion.
- Total debt comprised $14.026 billion due within one year and $20.188 billion of long-term debt, or $34.214 billion in reported debt. The filing states that P&G expects operating cash flow, refinancing access, and credit facilities to support liquidity needs.
- Capital expenditures were $1.132 billion, or 6.8% of sales. Dividends were $1.823 billion and treasury-stock purchases were $2.502 billion.
- The quarterly dividend was $0.6896 per common share, compared with $0.6695 in the prior-year quarter.
Material changes versus the prior comparable period
- Organic sales increased 1% and unit volume increased 1%; foreign exchange, pricing, and mix had no net consolidated impact on reported sales.
- Beauty sales increased 5% and earnings increased 7%; Fabric & Home Care sales increased 2% and earnings increased 6%.
- Grooming sales declined 5% and earnings declined 21%, primarily due to competitive pressure, lower Shave Care pricing, unfavorable mix, and higher SG&A as a percentage of sales.
- Health Care sales increased 2%, but earnings declined 5%; Baby, Feminine & Family Care sales declined 1% and earnings declined 10%.
- Reported earnings benefited from the absence of the prior-year $118 million loss from discontinued Beauty Brands operations. Continuing-operations earnings were essentially unchanged.
- Reduced diluted shares outstanding, partly reflecting share repurchases, supported the 6% increase in continuing-operations diluted EPS.
- The effective tax rate on continuing operations increased to 23.5% from 23.1%, primarily because of lower excess tax benefits related to share-based payments.
Guidance, outlook, commentary, risks, and unusual items
- Management expects approximately $1.2 billion of before-tax restructuring costs during fiscal 2018 and 2019 as part of a productivity and cost-savings plan. Q1 restructuring charges were approximately $157 million, including $118 million in cost of products sold and $39 million in SG&A.
- Management expects the restructuring program to reduce non-manufacturing headcount and optimize supply-chain and manufacturing processes. The filing does not provide a full-year earnings or sales guidance range.
- Management announced an expectation to reduce outstanding shares through approximately $4 billion to $7 billion of direct share repurchases in fiscal 2018, subject to change or discontinuation.
- Key risks include foreign-exchange volatility, commodity and labor-cost inflation, competitive pricing and market-share pressure, changing consumer habits, supply-chain disruption, economic and political instability, regulatory and tax changes, cybersecurity and information-technology risks, and execution of productivity initiatives.
- The Shave Care goodwill reporting unit and related Gillette indefinite-lived intangible asset have fair-value cushions below 10% and are more susceptible to future impairment. Their carrying values were approximately $19.5 billion and $15.7 billion, respectively.
- P&G disclosed ongoing litigation, environmental matters, and tax audits in approximately 140 jurisdictions. Management does not expect currently known matters to materially affect financial position, results, or cash flows, but the ultimate tax settlement range cannot presently be estimated reliably.
- A Pennsylvania environmental regulator indicated a potential $339,000 penalty related to alleged monitoring and emissions-permit non-compliance at the Mehoopany plant; P&G disputes the amount and is discussing the matter with the regulator.
- The company adopted new hedging guidance early in fiscal 2018; the filing states that the adoption did not materially affect the financial statements. Revenue and lease standards remain scheduled for later adoption and are not expected to have material impacts beyond limited presentation or balance-sheet effects.
Important facts for investors to verify
- Whether Grooming and Baby, Feminine & Family Care stabilize, given their sales declines and market-share pressure.
- Progress toward the stated $1.2 billion restructuring program and the effect of restructuring charges on reported versus core earnings.
- Execution of the planned $4 billion to $7 billion fiscal 2018 share-repurchase program and its effect on leverage and EPS.
- Commodity costs, foreign exchange, pricing actions, and mix trends that could further affect gross margin.
- Impairment sensitivity for the Shave Care and Gillette assets, particularly if competition or category growth deteriorates.
- Liquidity and refinancing requirements, including the relationship between cash balances, current debt maturities, dividends, and repurchases.
- Future developments in tax audits, environmental matters, litigation, and the potential Pennsylvania penalty.