Procter & Gamble Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013, compared with the corresponding 2012 periods. The filing is unaudited and states that interim results may not indicate full-year performance. P&G sells branded consumer products in more than 180 countries and operates in approximately 75 countries.
Financial Performance
| Metric | Three months ended March 31 | Change | Nine months ended March 31 | Change |
|---|---|---|---|---|
| Net sales | $20.598 billion | +2% | $63.512 billion | Flat |
| Operating income | $3.405 billion | +3% | $11.848 billion | +16% |
| Net earnings attributable to P&G | $2.566 billion | +6% | $9.437 billion | +32% |
| Diluted EPS from continuing operations | $0.88 | +9% | $3.22 | +36% |
| Operating margin | 16.5% | +20 basis points | 18.7% | +260 basis points |
| Gross margin | 49.8% | +50 basis points | 50.3% | +60 basis points |
| Effective tax rate on continuing operations | 21.2% | Down 250 basis points | 22.8% | Down 530 basis points |
Third-quarter organic sales grew 3%, supported by 2% unit-volume growth and 1% pricing, partly offset by 1% unfavorable foreign exchange. Nine-month organic sales grew 2%, with 1% volume growth and 2% pricing offset by unfavorable mix and 2% foreign exchange headwinds.
Core diluted EPS increased 5% to $0.99 in the quarter and 8% to $3.27 for the nine months. Core results exclude specified restructuring charges, Venezuela devaluation effects, acquisition and divestiture gains, prior-year impairment charges and certain legal matters.
Segment trends
- Health Care: Third-quarter sales increased 8% and net earnings increased 20%; nine-month sales increased 2% and net earnings increased 1%.
- Baby Care and Family Care: Third-quarter sales increased 3% and net earnings increased 6%; nine-month sales increased 2% and net earnings increased 9%.
- Grooming: Third-quarter sales decreased 2%, while net earnings increased 12%; nine-month sales decreased 4% and net earnings increased 2%.
- Beauty: Third-quarter sales decreased 2% but net earnings increased 2%; nine-month sales decreased 3% and net earnings increased 3%.
- Fabric Care and Home Care: Sales were flat in both periods; net earnings decreased 3% in the quarter but increased 10% year to date.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow for the nine months was $10.481 billion, up from $9.311 billion.
- Capital expenditures were $2.426 billion, producing free cash flow of $8.055 billion and free-cash-flow productivity of 85%, below the company’s long-term target of at least 90% of net earnings.
- Investing cash use was $4.675 billion, including $1.148 billion for acquisitions and $1.504 billion for available-for-sale investment securities.
- Financing cash use was $4.396 billion, including $4.797 billion of dividends and $4.985 billion of treasury-stock purchases, partly funded by increased debt.
- Cash and cash equivalents were $5.876 billion at March 31, 2013, versus $4.436 billion at June 30, 2012.
- Current assets were $24.298 billion and current liabilities were $27.412 billion, resulting in negative working capital of approximately $3.1 billion.
- Debt due within one year was $11.098 billion and long-term debt was $21.125 billion. Total liabilities were $71.178 billion.
Management expects operating cash flow, access to commercial paper and bond markets, strong debt ratings and available bank facilities to support short-term liquidity and operating needs. The filing provides no clear quantitative earnings guidance for the remainder of fiscal 2013.
Material Changes and Unusual Items
- Venezuela: The official exchange rate was devalued from 4.3 to 6.3 bolivars per U.S. dollar in February 2013. P&G recorded a $236 million after-tax charge, or $0.08 per share. Management expects the exchange-rate change to reduce reported sales by less than 1% on an ongoing basis and fourth-quarter EPS by approximately $0.02, with possible additional exposure depending on the future SICAD rate.
- Iberian joint venture: P&G acquired its partner’s interest for approximately $1.1 billion. The transaction generated a $631 million after-tax holding gain, included in other non-operating income, and added approximately $1.1 billion of goodwill.
- Prior-year impairment comparison: The prior-year nine-month period included $1.576 billion of goodwill and intangible-asset impairment charges related primarily to the Appliances and Salon Professional businesses. No comparable impairment charge was recorded in the current period.
- Restructuring: The company incurred $772 million of restructuring charges in the nine months, including $180 million in the quarter. The five-year productivity program is expected to incur more than $3.5 billion of before-tax restructuring costs through fiscal 2016 and is expected to generate more than $2 billion of annual before-tax savings. P&G reported that the planned reduction of approximately 5,700 non-manufacturing overhead positions by fiscal year-end 2013 had already been exceeded.
- Discontinued operations: The Snacks business was divested in May 2012. Accordingly, current-period results contain no Snacks earnings, compared with $34 million in the quarter and $133 million in the prior-year nine-month period.
- Capital returns: P&G repurchased $4.985 billion of treasury stock during the nine months and paid $4.797 billion of dividends. The company estimated fiscal 2013 share repurchases of approximately $6 billion, excluding compensation-plan purchases.
Risks, Contingencies and Management Commentary
- Key risks include competitive pricing and promotions, declining market share, consumer demand weakness, product innovation execution, commodity and labor-cost inflation, foreign exchange volatility, supply-chain disruption, and dependence on productivity savings.
- International operations expose P&G to currency controls, import restrictions, price controls, tax and regulatory changes, collection risk and political or economic instability, particularly in Venezuela, Argentina, China and India.
- European antitrust investigations remain at various stages. P&G had accrued $48 million for competition-law violations at March 31, 2013; additional fines from certain unresolved investigations cannot be reasonably estimated.
- The company stated that other litigation and environmental matters are not expected to materially affect financial position, results of operations or cash flows, although outcomes remain uncertain.
- Tax audits are ongoing in approximately 40–50 jurisdictions, with open tax years dating from 2002. The filing does not provide a reliable estimate of the potential range of additional tax impacts.
- P&G identifies information-technology failures, cybersecurity threats, reputational damage, product liability and dependence on key customers and suppliers as additional material risks.
Important Facts for Investors to Verify
- Whether organic sales, unit volume and market share trends improve in Beauty, Grooming and other pressured categories.
- Whether the productivity program delivers the expected savings while restructuring costs remain within the stated plan.
- The ongoing earnings, cash-repatriation and balance-sheet effects of Venezuela’s currency controls and potential additional devaluation.
- Whether the $8.1 billion of year-to-date free cash flow reaches the company’s 90% productivity target and supports dividends, repurchases and debt refinancing.
- The timing and outcome of remaining European antitrust matters, Turkish environmental proceedings and global tax audits.
- The sustainability of reported earnings growth after excluding the Iberian holding gain and the prior-year impairment comparison.