Procter & Gamble 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended December 31, 2015, P&G’s fiscal 2015 second quarter and first half. P&G sells branded consumer packaged goods in more than 180 countries through five continuing-operation segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care.
Beauty Brands, Batteries and Pet Care are reported as discontinued operations. The filing was signed January 26, 2016.
Financial performance and position
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $16.915 billion | (9%) | $33.442 billion | (10%) |
| Operating income | $3.853 billion | 8% | $7.621 billion | 6% |
| Net earnings from continuing operations | $2.905 billion | 9% | $5.682 billion | 5% |
| Net earnings attributable to P&G | $3.206 billion | 35% | $5.807 billion | 33% |
| Diluted EPS from continuing operations | $1.01 | 10% | $1.97 | 6% |
| Total diluted EPS | $1.12 | 37% | $2.03 | 34% |
- Second-quarter gross margin was 50.0%, up 170 basis points; six-month gross margin was 50.3%, up 210 basis points.
- Operating margin was 22.8% in both the quarter and six-month period, up 340 basis points from the comparable periods.
- Organic sales increased 2% in the quarter and were unchanged for the six months. Six-month organic volume declined 3%, while reported unit volume declined 4%.
- Operating cash flow was $8.018 billion for the six months, versus $7.068 billion in the prior year. Free cash flow was $6.795 billion, equal to 109% adjusted free cash flow productivity.
- Capital expenditures were $1.223 billion. The company paid $3.733 billion in dividends and repurchased $2.503 billion of treasury stock during the six months.
- At December 31, 2015, cash and cash equivalents were $9.403 billion and available-for-sale investment securities were $4.874 billion. Current debt was $13.931 billion and long-term debt was $17.595 billion.
- Reported current assets exceeded current liabilities by $4.3 billion, although excluding assets and liabilities held for sale, current liabilities exceeded current assets by $2.5 billion.
- Quarterly and six-month dividends per common share were $0.663 and $1.326, respectively.
Material changes versus the prior comparable period
- Reported sales declined primarily because of an 8% foreign-exchange headwind, lower volume and portfolio effects. Pricing added 3% in the quarter and 2% for the six months.
- Profitability improved despite lower sales. Manufacturing productivity, lower commodity costs, pricing, reduced SG&A and lower foreign-exchange transaction charges expanded margins.
- Foreign exchange reduced continuing-operations earnings by approximately $300 million in the quarter and approximately $590 million for the six months.
- Continuing-operations earnings increased, while total earnings benefited substantially from the prior-year Batteries impairment charges in discontinued operations. Discontinued operations generated $323 million of earnings in the quarter and $181 million for the six months, compared with a $276 million loss and $972 million loss, respectively, in the prior-year periods.
- Six-month segment sales declined across all continuing segments. Health Care and Fabric Care and Home Care increased earnings, while Beauty, Grooming and Baby, Feminine and Family Care declined earnings.
- Restructuring charges were $219 million for the quarter and $362 million for the six months. P&G expects more than $5 billion of pretax restructuring costs from fiscal 2012 through fiscal 2017 and had incurred approximately 85% of the estimated costs through December 2015.
Outlook, commentary, risks and unusual items
- Management expects to fund short-term liquidity and operating needs primarily through operating cash flow and states that its debt ratings and banking relationships should support refinancing needs.
- P&G plans to reduce shares outstanding by approximately $8 billion to $9 billion in fiscal 2016 through repurchases and shares exchanged in the Duracell transaction. The filing reports $26.0 million shares repurchased during the quarter for $2.0 billion; the six-month treasury-stock cash outflow was $2.5 billion.
- The company expects the Beauty Brands transaction with Coty to close in the second half of calendar 2016, subject to regulatory approvals. The accepted offer was $12.5 billion; the estimated transaction value was approximately $13.0 billion at December 31, 2015, subject to closing adjustments and Coty’s share price.
- The Duracell transaction with Berkshire Hathaway was expected to close in early calendar 2016. P&G expected to contribute approximately $1.8 billion in cash to Duracell and recorded a $402 million pretax, $350 million after-tax impairment charge in the six-month period.
- P&G identified risks from foreign-exchange volatility, economic weakness in developing markets, commodity and labor costs, pricing pressure, competitive activity, customer inventory reductions, supply-chain disruption, regulatory and legal matters, tax uncertainty, information technology, and execution of restructuring and portfolio transactions.
- Goodwill and indefinite-lived intangible assets remain subject to impairment risk, particularly if currencies devalue further or operating plans and macroeconomic conditions deteriorate.
- The company reported approximately $300 million of accrued uncertain tax positions, including interest and penalties, for which audit activity could be completed during the next 12 months. Management does not expect existing litigation, environmental matters or other claims to materially affect financial position, results or cash flows, although outcomes remain uncertain.
- P&G deconsolidated its Venezuelan subsidiaries effective June 30, 2015 because of currency exchange restrictions and loss of control for accounting purposes; subsequent results include only qualifying sales to the subsidiaries when payment is received.
Most important facts for investors to verify
- Whether margin expansion and cost savings can offset continuing foreign-exchange, volume and market-share pressure.
- The timing, final valuation, regulatory approvals and accounting effects of the Beauty Brands and Duracell transactions.
- The effect of discontinued operations and impairment charges on comparisons of reported earnings and EPS.
- Progress toward the fiscal 2017 restructuring objectives, including remaining charges and realized savings.
- Liquidity excluding held-for-sale assets, upcoming debt maturities, refinancing access and the sustainability of dividends and share repurchases.
- Exposure to further currency devaluation, especially in developing markets and Venezuela, and potential goodwill or intangible-asset impairment.