Procter & Gamble Co. Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal third quarter and nine months ended March 31, 2011, compared with the corresponding 2010 periods. P&G sells branded consumer products in more than 180 countries across Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. The global pharmaceuticals business was divested in October 2009 and is reported as discontinued operations.
Key financial metrics
| Metric | Three months ended Mar. 31, 2011 | Year-over-year change | Nine months ended Mar. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $20.230 billion | Up 5% | $61.699 billion | Up 3% |
| Operating income | $3.772 billion | Down 5% | $12.533 billion | Down 4% |
| Net earnings from continuing operations | $2.873 billion | Up 11% | $9.287 billion | Up 6% |
| Net earnings | $2.873 billion | Up 11% | $9.287 billion | Down 12% |
| Diluted EPS from continuing operations | $0.96 | Up 16% | $3.09 | Up 10% |
| Operating margin | 18.6% | Down 210 basis points | 20.3% | Down 150 basis points |
| Effective tax rate | 21.1% | Down from 31.3% | 22.5% | Down from 29.5% |
| Operating cash flow | Not separately provided for the quarter | — | $9.385 billion | Down 26% |
| Free cash flow | Not separately provided for the quarter | — | $7.319 billion | Free cash flow productivity of 79% |
Quarterly gross margin was 50.5%, down 140 basis points, while SG&A increased to 31.9% of sales from 31.2%. Nine-month gross margin was 51.4%, down 140 basis points, and SG&A was 31.1% of sales.
At March 31, 2011, cash and cash equivalents were $2.946 billion. Current assets were $21.814 billion versus current liabilities of $26.175 billion, resulting in negative working capital of approximately $4.361 billion. Debt due within one year was $9.721 billion and long-term debt was $21.699 billion. Total liabilities were $69.106 billion and shareholders’ equity was $67.432 billion.
Material changes versus the prior comparable period
- Reported sales growth reflected 6% nine-month volume growth, offset by approximately 2 percentage points of unfavorable mix and 1 percentage point of unfavorable foreign exchange. Organic sales increased 4%.
- Profitability weakened operationally as higher commodity and energy costs, unfavorable product mix, and increased marketing investment reduced gross and operating margins.
- Continuing-operations earnings benefited materially from lower taxes. The nine-month effective tax rate declined to 22.5%, including approximately $424 million of favorable adjustments to uncertain tax positions; management stated that these benefits are not expected to be sustainable.
- Total nine-month earnings declined because the prior-year period included $1.790 billion of discontinued pharmaceutical earnings, including the gain on the divestiture. Continuing-operations earnings increased.
- Operating cash flow fell by $3.4 billion, primarily because working capital consumed approximately $1.5 billion, including $817 million for inventories and $495 million for accounts receivable.
- P&G repurchased $4.536 billion of treasury stock and paid $4.237 billion in dividends during the nine months. Average diluted shares declined to 3,008.6 million from 3,110.2 million.
- Segment performance was mixed. Nine-month net earnings increased in Beauty and Grooming, but declined in Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
Guidance, outlook, commentary, risks and unusual items
- Management expected fiscal-year capital expenditures of approximately 4% of net sales and planned fiscal 2011 share repurchases of $6 billion to $8 billion.
- Management expects liquidity and operating needs to be supported largely by operating cash flow, with access to commercial paper, bond markets, and committed financial-institution funding. The filing states that the company had strong debt ratings.
- Commodity prices, raw materials, foreign exchange, interest rates, competitive pricing, promotional activity, innovation execution, global economic conditions, political unrest, natural disasters, and regulatory changes remain principal risks.
- P&G had $606 million reserved at March 31, 2011 for potential European competition-law fines. The filing states that ultimate fines or costs could exceed reserves and materially affect earnings and cash flow.
- The company had approximately $709 million of Venezuelan net monetary assets denominated in local currency, including approximately $251 million remeasured using the parallel exchange rate. The availability of the parallel market and future currency actions create additional exposure.
- P&G and Teva announced a proposed consumer-health partnership expected to have more than $1 billion in sales, with closing expected by the end of calendar 2011 subject to regulatory approvals.
- In April 2011, P&G announced plans to divest its Snacks business through a transaction with Diamond Foods. Closing was expected by the end of calendar 2011, subject to regulatory approvals.
- The Snacks and Pet Care segment continued to be affected by pet-food recall-related supply constraints and restructuring costs.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether commodity inflation, pricing actions, product mix, and marketing investments continue to pressure gross and operating margins.
- Assess the sustainability of the lower effective tax rate and the approximately $424 million of favorable tax-position adjustments.
- Monitor working-capital trends, free cash flow productivity, and the company’s ability to fund dividends, repurchases, acquisitions, and debt maturities.
- Review the $606 million European antitrust reserve against potential additional fines and cash payments.
- Track the regulatory status and financial impact of the Teva consumer-health partnership and the proposed Snacks divestiture.
- Evaluate Venezuelan exchange-control exposure and broader foreign-exchange sensitivity.
- Reconcile continuing-operations performance with total earnings because prior-year results included substantial discontinued pharmaceutical gains.