Procter & Gamble Co. — Q1 Fiscal 2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended September 30, 2016, representing the first quarter of fiscal 2017. P&G sells branded consumer packaged goods in more than 180 countries through five continuing reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
The Beauty Brands and Batteries businesses are reported as discontinued operations. P&G completed the divestiture of 41 Beauty Brands to Coty on October 1, 2016, immediately after the reporting period.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $16.518 billion | $16.527 billion | Flat |
| Operating income | $3.771 billion | $3.768 billion | Flat |
| Operating margin | 22.8% | 22.8% | Flat |
| Gross margin | 51.0% | 50.7% | +30 basis points |
| Net earnings from continuing operations | $2.875 billion | $2.777 billion | +4% |
| Net earnings attributable to P&G | $2.714 billion | $2.601 billion | +4% |
| Diluted EPS from continuing operations | $1.00 | $0.96 | +4% |
| Diluted EPS | $0.96 | $0.91 | +5% |
| Operating cash flow | $3.025 billion | $3.538 billion | -$513 million |
| Free cash flow | $2.341 billion | Not clearly provided | Not clearly provided |
| Free cash flow productivity | 85% | Not clearly provided | Not clearly provided |
Organic sales increased 3%, organic volume increased 3%, and reported unit volume increased 2%. Foreign exchange reduced reported sales by approximately 3%. Pricing and mix had no net consolidated impact.
The effective tax rate on continuing operations was 23.1%, down 90 basis points. Adoption of new share-based payment accounting guidance produced a discrete tax benefit of $117 million.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $7.456 billion at September 30, 2016, compared with $7.102 billion at June 30, 2016.
- Restricted cash was $1.870 billion, primarily related to the Beauty Brands transaction.
- Available-for-sale investment securities totaled $6.615 billion.
- Debt due within one year was $12.215 billion; long-term debt was $18.910 billion.
- Current assets exceeded current liabilities by $2.8 billion; excluding Beauty Brands held-for-sale balances, current liabilities exceeded current assets by $1.2 billion.
- Capital expenditures were $684 million, or 4.1% of sales.
- P&G paid $1.851 billion in dividends and repurchased $1.002 billion of treasury stock.
- Financing activities included $1.519 billion of additional short-term debt, $891 million of long-term debt additions, and $1.001 billion of long-term debt reductions.
Material Changes Versus the Prior Comparable Period
- Continuing-operations earnings increased despite flat reported sales, primarily due to higher other non-operating income, a lower effective tax rate, and productivity savings.
- Other non-operating income improved to $63 million from a loss of $18 million, primarily reflecting gains from minor brand divestitures.
- Gross margin expanded 30 basis points, helped by manufacturing cost savings and volume leverage, but offset by foreign exchange, restructuring, product mix, commodity costs, and initiative investments.
- SG&A increased 1% and rose to 28.1% of sales, reflecting increased marketing activity partly offset by lower overhead spending.
- Foreign exchange reduced continuing-operations earnings by approximately $200 million, primarily due to currency weakness in Argentina, Mexico, Egypt, and the United Kingdom.
- Operating cash flow declined $513 million, reflecting working-capital uses, including increases in accounts receivable and inventories.
- Discontinued-operations loss improved to $118 million from $142 million, although the current period included $135 million of Beauty Brands transition costs.
Segment Performance
| Segment | Sales | Sales Change | Continuing-Operations Net Earnings | Earnings Change |
|---|---|---|---|---|
| Beauty | $2.996 billion | -1% | $592 million | -5% |
| Grooming | $1.658 billion | -1% | $415 million | +6% |
| Health Care | $1.861 billion | +4% | $320 million | +1% |
| Fabric & Home Care | $5.302 billion | +1% | $728 million | -3% |
| Baby, Feminine & Family Care | $4.595 billion | -1% | $697 million | -7% |
Organic sales growth was strongest in Health Care at 7%, followed by Fabric & Home Care at 4%, Beauty and Grooming at 3% each, and Baby, Feminine & Family Care at 2%.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative full-year earnings or sales guidance range.
- P&G expects approximately $5.5 billion of pretax restructuring costs over fiscal 2012–2017. Approximately 91% had been incurred through September 2016, including $168 million in the quarter.
- The restructuring program targets approximately $3 billion of annual gross pretax savings; cumulative savings were estimated at approximately $2.5 billion to $3.0 billion.
- Management expects to support liquidity and operating needs primarily through operating cash flow and debt-market access. P&G announced an expectation to reduce outstanding shares by approximately $15 billion in fiscal 2017 through repurchases and shares exchanged in the Beauty Brands transaction.
- Key risks include foreign-exchange volatility, economic and political instability, commodity and labor-cost inflation, competitive pricing and promotions, supply-chain disruption, cybersecurity and information-technology dependence, regulatory and tax changes, litigation, and execution of portfolio restructuring and cost-savings initiatives.
- Shave Care goodwill and related indefinite-lived intangible assets have fair-value cushions below 20% and could be vulnerable to impairment from further currency devaluation or weaker operating performance.
- P&G has accrued approximately $200 million for uncertain tax positions, interest, and penalties potentially subject to resolution over the next 12 months.
- Management states that outstanding litigation and environmental contingencies are not expected to materially affect financial position, earnings, or cash flow, although outcomes remain uncertain.
Important Facts for Investors to Verify
- Completion accounting and cash proceeds from the October 1, 2016 Coty transaction, including the $9.4 billion stock component and assumed $1.9 billion of debt.
- Post-transaction debt reduction, restricted-cash release, and the effect of the Beauty Brands divestiture on future sales, earnings, margins, and cash flow.
- Whether organic volume and sales growth can offset foreign-exchange pressure, competitive activity, and pricing-related consumption risks.
- Progress toward the fiscal 2017 restructuring completion target and the durability of the estimated annual savings.
- Execution of the planned approximately $15 billion fiscal 2017 share-count reduction and its financing.
- Exposure to potential impairment in Shave Care and other acquired reporting units.
- Future cash conversion relative to the company’s long-term free-cash-flow productivity target of at least 90%.