Procter & Gamble 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended December 31, 2011, representing fiscal 2012 second-quarter and year-to-date results. Procter & Gamble 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.
The company changed the composition of the Beauty and Grooming segments during the quarter; prior periods were recast for comparability. The financial statements are unaudited and may not be indicative of full-year results.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Year-over-Year | Six Months Ended Dec. 31, 2011 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $22.135 billion | Up 4% | $44.052 billion | Up 6% |
| Operating income | $2.739 billion | Down 36% | $7.073 billion | Down 19% |
| Net earnings attributable to P&G | $1.690 billion | Down 49% | $4.714 billion | Down 27% |
| Diluted EPS | $0.57 | Down 49% | $1.60 | Down 25% |
| Gross margin | 49.7% | Down 210 basis points | 49.6% | Down 220 basis points |
| Operating margin | 12.4% | Down 760 basis points | 16.1% | Down 500 basis points |
| Effective tax rate | 36.7% | Up from 17.8% | 30.2% | Up from 22.9% |
| Operating cash flow | Not separately provided | Not applicable | $5.495 billion | Up 2% |
| Free cash flow | Not separately provided | Not applicable | $3.715 billion | Not clearly comparable in the filing |
Quarterly dividends were $0.5250 per share, up 9% from $0.4818. Six-month dividends were $1.0500 per share, also up 9%. Average diluted shares declined to 2,949.7 million for the quarter and 2,946.5 million year to date, reflecting share repurchases.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents increased to $4.414 billion at December 31, 2011, from $2.768 billion at June 30, 2011.
- Current assets were $23.651 billion versus current liabilities of $29.792 billion, resulting in a $6.141 billion working-capital deficit.
- Debt due within one year was $14.118 billion, up from $9.981 billion at June 30, 2011. Long-term debt was $19.270 billion, down from $22.033 billion.
- Total debt based on current and long-term debt was approximately $33.388 billion at December 31, 2011.
- Year-to-date operating cash flow of $5.495 billion was reduced by $1.780 billion of capital expenditures, producing $3.715 billion of free cash flow and 78% free-cash-flow productivity.
- Financing activities used $2.296 billion, including $3.013 billion of dividends and $1.764 billion of treasury-stock purchases, partially funded by $1.990 billion of long-term debt issuance and $2.416 billion of short-term debt increases.
Material Changes Versus the Prior Comparable Period
- Sales growth was supported by 1% unit-volume growth and approximately 4% pricing in both the quarter and year-to-date period. Organic sales growth was 4% for both periods.
- Developing-region volume grew at high-single-digit rates, while developed-region volume declined. Negative product and geographic mix reduced sales growth because of greater growth in lower-priced products and markets.
- Gross margin contracted primarily because commodity and energy costs increased. Pricing, manufacturing savings and volume leverage only partially offset the pressure.
- The company recorded $1.554 billion of noncash impairment charges, including $1.308 billion of goodwill impairments for Appliances and Salon Professional and $246 million of indefinite-lived trademark impairments for Koleston Perfect and Wella. The after-tax impact was approximately $1.481 billion.
- SG&A declined 1% in the quarter but increased 4% year to date. Competition-law fines were lower than in the prior year, while marketing investment increased to support innovation and expansion.
- Corporate results deteriorated materially because impairment charges were allocated to Corporate. Corporate six-month net earnings attributable to P&G were a loss of $1.508 billion versus a $5 million loss in the prior year.
- Segment sales increased across all businesses. Year-to-date net earnings declined in Beauty and Fabric Care and Home Care, while Grooming, Health Care, Snacks and Pet Care, and Baby Care and Family Care reported increases.
- The company changed its annual goodwill impairment testing date from July 1 to October 1, effective prospectively. The second-step impairment evaluations were preliminary and expected to be finalized in the quarter ending March 31, 2012.
Guidance, Outlook, Commentary and Risks
- Management did not provide a specific full-year revenue or earnings guidance figure in the filing. It stated that results depend on continued innovation, brand strength, pricing, productivity improvements and growth in developing markets.
- The company’s long-term target is free-cash-flow productivity of at least 90% of net earnings; year-to-date productivity was 78%.
- On January 27, 2012, the company estimated fiscal 2012 share repurchases to reduce shares outstanding at approximately $4 billion to $5 billion, excluding purchases under compensation and benefit plans. The program is expected to be financed partly with short- and long-term debt.
- P&G expected to divest its Snacks business through a proposed all-stock transaction with Diamond Foods by the end of fiscal 2012, subject to resolution of Diamond Foods investigations. Closing remained uncertain.
- Competition-law investigations in Europe remained ongoing. Accrued liabilities for competition-law violations totaled $335 million at December 31, 2011; additional fines for other matters could not be reasonably estimated.
- Key operating risks include commodity inflation, competitive pricing and innovation, weaker developed-market demand, foreign-exchange volatility, economic and political instability, supply-chain disruption, customer concentration, regulatory and tax matters, information-technology failures, and brand or product-reputation damage.
- Venezuela presented heightened currency and repatriation risk. The company reported approximately $827 million of local-currency net monetary assets, including approximately $352 million remeasured using the SITME rate, with uncertainty regarding access to foreign currency and potential devaluation.
- Management stated that liquidity needs should be supported principally by operating cash flow and access to commercial-paper and bond markets, supported by strong debt ratings and committed financial-institution relationships.
Most Important Facts for Investors to Verify
- Whether the preliminary impairment estimates are revised when the Appliances and Salon Professional evaluations are finalized.
- Whether commodity costs, pricing actions and mix trends improve gross margin in subsequent quarters.
- Progress, timing and valuation of the proposed Snacks divestiture and the related Diamond Foods investigations.
- Potential additional European competition-law fines beyond the $335 million accrued.
- Execution of the $4 billion to $5 billion share-repurchase estimate and its effect on leverage and diluted EPS.
- Changes in Venezuela’s exchange controls, currency rates, asset repatriation and local pricing restrictions.
- Whether free-cash-flow productivity recovers toward the company’s 90% long-term target.