Procter & Gamble Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended March 31, 2015, P&G’s fiscal third quarter and year-to-date period, compared with the corresponding 2014 periods. P&G is a global consumer packaged goods company operating in more than 180 countries and territories across Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care.
The Batteries and Pet Care businesses are presented as discontinued operations. P&G expects to divest the remaining Batteries business, including Duracell, to Berkshire Hathaway by the end of calendar 2015, subject to regulatory approvals and closing adjustments.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $18.1 billion, down 8% | $58.5 billion, down 4% |
| Organic sales growth | 1% | 2% |
| Operating income | $3.1 billion, down 5% | $10.9 billion, down 6% |
| Operating margin | 17.3%, up 50 basis points | 18.6%, down 40 basis points |
| Net earnings from continuing operations | $2.5 billion, down 2% | $8.3 billion, down 5% |
| Net earnings attributable to P&G | $2.2 billion, down 17% | $6.5 billion, down 28% |
| Diluted EPS from continuing operations | $0.85, down 2% | $2.84, down 5% |
| Total diluted EPS | $0.75, down 17% | $2.26, down 28% |
| Operating cash flow | Not provided for the quarter | $10.6 billion |
| Adjusted free cash flow | Not provided for the quarter | $8.7 billion |
Third-quarter gross margin was 48.6%, down 30 basis points, while SG&A declined to 31.3% of sales from 32.1%. Year-to-date gross margin was 49.4%, down 20 basis points, and SG&A was 30.8% of sales, up 20 basis points. Foreign exchange reduced third-quarter sales by 8% and year-to-date sales by 5%; management estimated after-tax earnings impacts from foreign exchange of approximately $530 million for the quarter and $1.0 billion year to date.
At March 31, 2015, cash and cash equivalents were $8.4 billion and available-for-sale investment securities were $4.8 billion. Current assets were $31.6 billion versus current liabilities of $31.9 billion, a $319 million shortfall; excluding Batteries held for sale, the shortfall was $2.8 billion. Debt consisted of $15.1 billion due within one year and $17.4 billion of long-term debt. The fair value of long-term debt was $23.7 billion, including current maturities.
Year-to-date operating cash flow increased from $9.5 billion to $10.6 billion. Capital expenditures were $2.5 billion, proceeds from asset sales were $3.7 billion, dividends were $5.4 billion, treasury stock purchases were $4.3 billion, and net debt repayment was approximately $1.6 billion. Adjusted free cash flow productivity was 101%, above the company’s long-term target of at least 90%.
Material changes versus the prior comparable period
- Reported sales declined primarily because of unfavorable currency translation, despite pricing and mix benefits. Organic sales increased 1% in the quarter and 2% year to date.
- Quarterly unit volume declined 2%; year-to-date unit volume declined 1%, while organic volume was flat.
- Continuing-operations earnings declined less than sales because of overhead and marketing efficiencies, manufacturing cost savings, and lower interest expense.
- Discontinued operations shifted from earnings of $105 million in the prior-year quarter to a loss of $287 million, and from earnings of $403 million to a loss of $1.7 billion year to date.
- The Batteries business recorded $308 million of after-tax impairment charges in the quarter and approximately $2.0 billion year to date. The impairment reflected the expected value of the Berkshire Hathaway transaction and changes in P&G’s share price.
- Goodwill declined to $46.9 billion from $53.7 billion at June 30, 2014, primarily because of Batteries-related divestiture activity and currency translation.
- Health Care was the strongest continuing-operations segment by earnings growth, with quarterly earnings up 12% and year-to-date earnings up 9%. Beauty, Hair and Personal Care was the weakest, with quarterly earnings down 17% and year-to-date earnings down 7%.
Outlook, commentary, risks and unusual items
Management continued a productivity and cost-savings program expected to generate approximately $3 billion of annual gross savings. Total before-tax restructuring costs are expected to be approximately $5 billion through fiscal 2017; approximately 70% had been incurred through March 2015. Restructuring charges were $322 million in the quarter and $663 million year to date. Non-manufacturing enrollment reductions reached approximately 19% through March 31, 2015, against an updated fiscal 2017 target of 25% to 30%.
Management expects to fund operating and short-term liquidity needs primarily through operating cash flow and believes its debt ratings and access to commercial paper and bond markets will support refinancing needs. Fiscal 2015 share repurchases were estimated at approximately $5 billion, although no shares were repurchased under the publicly announced program during the quarter.
Key risks include foreign currency volatility, economic and political instability, commodity and labor cost inflation, competitive pricing and market-share pressure, execution of restructuring and portfolio changes, supply-chain disruption, regulatory and tax matters, information technology risks, and litigation. Venezuela remains subject to exchange controls, price controls and multiple exchange rates; further devaluation or restrictions could adversely affect earnings, liquidity and asset recoverability.
The company expects the Duracell transaction value to vary with P&G’s share price before closing. A further decline could require additional non-cash impairment charges in discontinued operations. European competition-law matters carried accrued liabilities of $216 million at March 31, 2015. The company also disclosed environmental enforcement matters in California and Mexico; the filing does not provide a clear estimate of potential monetary exposure for those matters.
P&G will adopt the new revenue-recognition standard on July 1, 2017 and was still evaluating its impact. Management stated that disclosure controls and internal control over financial reporting were effective, with no material changes during the quarter.
Important facts for investors to verify
- Whether the Berkshire Hathaway/Duracell transaction closes by the expected end-of-calendar-2015 date and the final value of the P&G shares received.
- Whether further Batteries impairment charges arise before closing.
- Underlying organic volume, market share and pricing trends, particularly in Beauty, Hair and Personal Care, Grooming and developing markets.
- The durability of manufacturing, marketing and overhead savings relative to restructuring costs and reinvestment needs.
- Foreign-exchange exposure, especially in Venezuela, Russia, Ukraine, Argentina and other volatile markets.
- Debt maturities, refinancing conditions and the company’s ability to fund dividends and planned share repurchases while current liabilities exceed current assets.
- Resolution and final costs of European antitrust matters, tax audits, and the disclosed California and Mexico environmental proceedings.