Procter & Gamble Company: FY2018 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended June 30, 2018, not a standalone 2017 fourth-quarter filing. P&G sells branded consumer packaged goods in more than 180 countries through five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Financial performance and key metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $66.832 billion | $65.058 billion | +3% |
| Operating income | $13.711 billion | $13.955 billion | -2% |
| Gross margin | 48.7% | 50.0% | -130 bps |
| Operating margin | 20.5% | 21.5% | -100 bps |
| Net earnings from continuing operations | $9.861 billion | $10.194 billion | -3% |
| Net earnings attributable to P&G | $9.750 billion | $15.326 billion | -36% |
| Diluted EPS from continuing operations | $3.67 | $3.69 | -1% |
| Core EPS | $4.22 | $3.92 | +8% |
| Operating cash flow | $14.867 billion | $12.753 billion | +17% |
| Adjusted free cash flow | $11.150 billion | $9.787 billion | +14% |
| Adjusted free cash flow productivity | 104% | 94% | +10 pts |
Organic sales increased 1%, reflecting 2% organic volume growth, a 2% favorable foreign-exchange impact, a 1% negative pricing impact and a 1% favorable mix impact. Research and development expense was $1.908 billion and advertising expense was $7.103 billion.
Capital expenditures were $3.717 billion, or 5.6% of sales. Total debt was approximately $31.3 billion, including $10.4 billion due within one year and $20.9 billion of long-term debt. Cash and cash equivalents were $2.569 billion, while available-for-sale investment securities were $9.281 billion. Current liabilities exceeded current assets by $4.9 billion, largely because of short-term borrowings. P&G reported $8.0 billion of undrawn bank credit facilities and investment-grade ratings of Aa3/A-1 equivalent from Moody’s and AA-/A-1+ equivalent from Standard & Poor’s.
The company paid $7.3 billion in dividends and repurchased $7.0 billion of common stock. The dividend increased 3.3% to $2.79 per share, marking the 62nd consecutive annual dividend increase.
Material changes versus the prior comparable period
- Reported sales increased 3%, but organic sales growth slowed to 1% from 2% in FY2017.
- Gross and operating margins declined primarily because of higher commodity costs, lower pricing, unfavorable product mix, higher restructuring charges and unfavorable foreign exchange, partly offset by manufacturing cost savings and SG&A leverage.
- Continuing-operations EPS declined slightly, while Core EPS increased 8% after excluding specified unusual items.
- Reported net earnings fell sharply because FY2017 included a $5.2 billion gain from discontinued operations, principally the Beauty Brands divestiture; FY2018 had no discontinued-operations earnings.
- Operating cash flow improved substantially, aided by higher accounts payable and accrued liabilities, including extended supplier payment terms and the U.S. Tax Act payable.
- Debt composition shifted: commercial paper declined to $7.8 billion from $11.7 billion, while long-term debt increased to $20.9 billion from $18.0 billion.
- Restructuring charges increased to approximately $1.1 billion from $754 million. Management expects approximately $800 million of additional restructuring costs in FY2019.
Guidance, outlook, commentary, risks and unusual items
Management’s long-term financial targets are organic sales growth above category and geographic market growth, Core EPS growth in the mid-to-high single digits, and adjusted free cash flow productivity of at least 90%. The filing does not provide a specific FY2019 annual sales or EPS forecast.
P&G agreed to acquire Merck KGaA’s over-the-counter consumer health business for approximately €3.375 billion, or about $3.9 billion based on exchange rates at signing. Closing was expected during FY2019, subject to regulatory approval and customary conditions. The PGT Healthcare partnership with Teva was dissolved in July 2018, and P&G expected an after-tax gain of approximately $285 million.
The U.S. Tax Act produced a provisional net transitional charge of $602 million, comprising an estimated $3.8 billion repatriation-tax charge and a $3.2 billion deferred-tax benefit. The final amount remained subject to further interpretation, regulatory guidance and tax-return completion.
Key risks include foreign-exchange volatility, commodity and transportation cost inflation, pricing pressure, retailer concentration, intense competition and private-label growth, supply-chain disruption, cybersecurity incidents, changing consumer habits, tariffs and political instability, tax audits, litigation, pension and other postretirement obligations, and possible impairment of goodwill or intangible assets. Shave Care goodwill of $19.5 billion and the Gillette indefinite-lived intangible asset of $15.7 billion had fair-value cushions below 10% and were identified as particularly susceptible to future impairment.
P&G reported no material off-balance-sheet financing arrangements. Management stated that pending litigation, environmental matters and routine indemnifications were not expected to have a material effect, although outcomes remain uncertain. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Confirm that comparisons use continuing operations and account for the FY2017 Beauty Brands divestiture gain.
- Evaluate whether organic sales growth, volume trends and market-share performance improve, particularly in Grooming and Baby Care.
- Assess the sustainability of margin recovery amid commodity inflation, pricing actions, mix pressure and restructuring activity.
- Review the final accounting for the U.S. Tax Act and its effect on cash taxes, earnings and liquidity.
- Monitor completion, purchase accounting and expected synergies from the Merck consumer-health acquisition and the PGT Healthcare dissolution.
- Review short-term debt maturities, supplier-payment-term benefits and the company’s ability to fund dividends, repurchases and acquisitions.
- Track impairment sensitivity for Shave Care and Gillette goodwill and intangible assets.