Procter & Gamble — Fiscal 2009 First-Quarter 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three months ended September 30, 2009, compared with the three months ended September 30, 2008. P&G sells branded consumer products in more than 180 countries through the Beauty and Grooming, Health and Well-Being, and Household Care global business units. Reportable segments include Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
Effective July 1, 2009, P&G revised the composition of the Beauty and Grooming segments; prior periods were conformed to the new presentation. The global pharmaceuticals business was classified as discontinued operations and was under an agreement to be sold to Warner Chilcott for $3.1 billion in cash.
Financial Performance and Position
| Metric | Q1 FY2009 | Q1 FY2008 | Change |
|---|---|---|---|
| Net sales | $19.807 billion | $20.983 billion | Down 6% |
| Operating income | $4.448 billion | $4.386 billion | Up 1% |
| Net earnings from continuing operations | $3.027 billion | $3.115 billion | Down 3% |
| Net earnings | $3.307 billion | $3.348 billion | Down 1% |
| Diluted earnings per share | $1.06 | $1.03 | Up 3% |
| Dividends per share | $0.44 | $0.40 | Up 10% |
| Operating cash flow | $4.555 billion | $3.444 billion | Up 32% |
| Capital expenditures | $552 million | $699 million | Down 21% |
| Free cash flow | $4.003 billion | Not clearly provided | Not clearly provided |
Gross margin increased to 52.6% from 49.7%, while operating margin increased to 22.5% from 20.9%. Continuing-operations net margin was approximately 15.3%, compared with 14.8% in the prior-year quarter. The effective tax rate on continuing operations declined to 27.7% from 28.0%.
Reported sales were reduced by a 7% unfavorable foreign-exchange impact and a 3% decline in unit volume. Price increases contributed 3% and product mix contributed 1%. Organic sales grew 2%, although organic volume declined 2%.
Cash and cash equivalents were $6.294 billion at September 30, 2009, versus $4.781 billion at June 30, 2009. Current assets were $24.517 billion and current liabilities were $28.674 billion, producing a current-asset shortfall of approximately $4.2 billion, primarily because of short-term debt. Debt due within one year was $12.957 billion and long-term debt was $22.439 billion; reported total debt was approximately $35.4 billion.
Material Changes Versus the Prior Comparable Period
- Sales declined 6%, but lower commodity and energy costs, pricing, and manufacturing savings expanded gross margin by 290 basis points.
- SG&A declined 1% in dollars but increased to 30.1% of sales from 28.8%, reflecting sales deleveraging and higher foreign-currency costs, particularly in Venezuela.
- Interest expense fell 15% to $287 million, primarily because of lower U.S. interest rates.
- Other non-operating income declined to $23 million from $280 million, mainly because the prior-year period included larger gains on minor brand divestitures.
- Operating cash flow increased $1.111 billion, aided by more favorable working-capital movements and lower inventory-related cash use.
- Financing activities used $2.803 billion, including $4.986 billion of long-term debt reductions and $1.336 billion of dividends. Treasury-stock purchases were only $8 million, compared with $3.911 billion in the prior-year period.
- Segment results were mixed: Grooming earnings declined 21%, while Health Care increased 9%, Snacks and Pet Care increased 35%, Fabric Care and Home Care increased 22%, and Baby Care and Family Care increased 8%.
- Discontinued-operations earnings increased to $280 million from $233 million, including a $121 million after-tax gain on the sale of the Actonel brand in Japan; the prior-year period included earnings from the subsequently divested Folgers coffee business.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear numerical earnings or sales forecast. Management expects to support short-term liquidity and operating needs principally through operating cash flow, refinancing, commercial paper and bond markets, and available bank credit facilities.
- European competition-law investigations remain active. P&G identified violations in certain countries and stated that fines or other costs could materially affect income and cash flow, although the total exposure could not yet be reasonably estimated.
- P&G faces continuing exposure to foreign exchange, commodity prices, interest rates, labor costs, economic conditions, competitive promotions, regulatory matters, product liability, intellectual property, environmental claims, and tax audits.
- Venezuelan currency controls and reliance on a parallel foreign-exchange mechanism increased costs. Further restrictions, devaluation, or high-inflation designation could negatively affect results.
- The company had approximately $400 million of unrecognized tax benefits for which audit activity could be completed over the following 12 months; settlement amounts and timing were not reliably estimable.
- The pharmaceuticals sale was expected to close by the end of calendar 2009, subject to regulatory approvals. Assets held for sale totaled $989 million and liabilities held for sale totaled $526 million at September 30, 2009.
- The company disclosed no material changes in market-risk exposure from June 30, 2009. Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Most Important Facts for Investors to Verify
- Progress, closing status, and final economics of the $3.1 billion pharmaceuticals divestiture.
- Potential fines and reserves arising from European antitrust and competition-law investigations.
- Ability to refinance approximately $13.0 billion of debt due within one year while current liabilities exceed current assets.
- Whether foreign-exchange pressure, especially in Venezuela and developing markets, persists or worsens.
- Sustainability of gross-margin expansion from pricing, commodity savings, and manufacturing efficiencies after volume declines.
- Segment recovery prospects, particularly in Grooming, Snacks and Pet Care, and markets affected by economic contraction.
- Conversion of strong operating cash flow into debt reduction, dividends, and other capital allocation priorities.