Procter & Gamble Co. Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014, representing P&G’s fiscal second quarter and first six months of fiscal 2015. The filing was signed January 27, 2015. P&G sells consumer packaged goods in more than 180 countries and territories through five continuing reportable segments.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Year-over-year change | Six months ended Dec. 31, 2014 | Year-over-year change |
|---|
| Net sales | $20.161 billion | Down 4% | $40.347 billion | Down 2% |
| Operating income | $3.947 billion | Down 8% | $7.725 billion | Down 7% |
| Net earnings from continuing operations | $2.975 billion | Down 10% | $5.815 billion | Down 7% |
| Net earnings attributable to P&G | $2.372 billion | Down 31% | $4.362 billion | Down 32% |
| Diluted EPS from continuing operations | $1.02 | Down 9% | $2.00 | Down 5% |
| Total diluted EPS | $0.82 | Down 31% | $1.51 | Down 32% |
- Organic sales: Increased 2% for both the quarter and six-month period, despite reported declines caused primarily by foreign exchange and divestitures.
- Volume: Unchanged year over year for both periods. Fabric Care and Home Care and Health Care delivered volume growth, while Beauty, Hair and Personal Care and Grooming declined.
- Margins: Quarterly gross margin was 50.0%, down 40 basis points; operating margin was 19.6%, down 80 basis points. Six-month gross margin was 49.7%, down 20 basis points; operating margin was 19.1%, down 90 basis points.
- Core EPS: $1.06 for the quarter, down 8%, and $2.10 for six months, down 3%, excluding specified restructuring, European legal, and Venezuela-related items.
- Dividends: Common dividends were $0.644 per share for the quarter and $1.287 per share for six months, compared with $0.602 and $1.203, respectively, in the prior-year periods.
Cash flow, liquidity and capital structure
| Six months ended Dec. 31, 2014 | Amount |
|---|
| Operating cash flow | $7.068 billion |
| Capital expenditures | $1.642 billion |
| Free cash flow | $5.426 billion |
| Adjusted free cash flow | $5.789 billion |
| Adjusted free cash flow productivity | 95% |
| Cash and cash equivalents at Dec. 31, 2014 | $8.204 billion |
- Investing activities used $869 million, including $1.642 billion of capital expenditures, partly offset by $3.648 billion of asset-sale proceeds.
- Financing activities used $6.305 billion, including $3.614 billion of dividends and $4.253 billion of treasury-stock purchases. Net debt repayments were approximately $447 million.
- Current liabilities exceeded current assets by approximately $1.0 billion, or $3.9 billion excluding held-for-sale assets and liabilities. Management expects operating cash flow, debt-market access and available financial-institution credit to support liquidity needs.
- Debt due within one year was $16.329 billion and long-term debt was $18.124 billion at December 31, 2014. The disclosed fair value of long-term debt was $25.117 billion.
Material changes versus the prior comparable period
- Reported sales and earnings declined primarily because of unfavorable foreign exchange, lower volumes in several categories, margin pressure and divestitures. Foreign exchange reduced quarterly sales by approximately 5% and six-month sales by approximately 3%.
- Continuing-operations earnings were reduced by foreign-exchange impacts of approximately $450 million for the quarter and $750 million for six months. The six-month period also included a $104 million after-tax Venezuela balance-sheet remeasurement charge.
- Gross-margin pressure from commodities, foreign exchange and unfavorable geographic and product mix was partly offset by manufacturing savings and pricing. SG&A declined in dollars but increased as a percentage of sales because of lower revenue scale.
- Corporate expenses increased by $194 million for the quarter and $414 million for six months, largely from foreign exchange and the Venezuela remeasurement charge.
- Segment sales declined in the quarter across all continuing segments. For six months, Health Care sales increased 1%, Baby, Feminine and Family Care was flat, and the other segments declined.
- Net earnings from discontinued operations changed from income of $175 million in the quarter and $298 million for six months in the prior year to losses of $577 million and $1.397 billion, respectively.
Discontinued operations, portfolio actions and unusual items
- P&G agreed to divest the Duracell business to Berkshire Hathaway in exchange for Berkshire Hathaway’s P&G shares. The transaction was expected to close in the second half of calendar 2015, subject to approvals, and P&G expected to contribute approximately $1.8 billion in cash to recapitalize Duracell.
- P&G recorded $1.713 billion of impairment charges in the six-month period related to Batteries goodwill and indefinite-lived intangible assets, including a $740 million after-tax charge in the December quarter. The Batteries business remained classified as held for sale.
- The value received in the Duracell transaction depends partly on P&G’s share price at closing. A decline before closing could require additional non-cash impairment charges; changes in share price could also affect the eventual divestiture gain or loss.
- P&G completed the sale of its China-based battery joint venture for approximately $560 million in proceeds during the quarter and completed additional Pet Care divestitures. Pet Care and Batteries results are excluded from continuing operations.
- The productivity and cost-savings plan is expected to incur more than $4.5 billion of pretax restructuring costs through fiscal 2016. Approximately 70% had been incurred through December 2014, with $341 million recorded during the six-month period. Management expects more than $2.8 billion of annual gross savings when fully implemented.
Outlook, risks and contingencies
- No specific consolidated sales or earnings guidance is provided in the filing text. Management’s stated objectives include portfolio streamlining, productivity improvement, innovation and maintaining access to capital markets.
- Key risks include foreign exchange volatility, commodity and labor-cost inflation, competitive pricing and market-share pressure, changing consumer demand, supply-chain disruption, regulatory and tax changes, cybersecurity events, and the execution of acquisitions and divestitures.
- Venezuela remains subject to multiple exchange rates, import and price controls, and restrictions on repatriation. P&G had approximately $1.060 billion of local-currency net monetary assets at December 31, 2014, with approximately $600 million expected to satisfy liabilities for qualifying past imports.
- P&G had accrued $237 million for ongoing European competition-law matters. Management did not expect incremental losses from these matters to materially affect the financial statements, although ultimate outcomes remain uncertain.
- The company operates in approximately 140 taxable jurisdictions, with 50–60 tax audits underway and tax years open from 2002 forward. The filing does not provide a reliable estimate of the potential range of future uncertain-tax-position effects.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, regulatory approval and final economics of the Duracell exchange transaction, including the effect of P&G’s share price at closing.
- Whether additional Batteries impairment or divestiture charges arise before or at closing.
- Underlying organic sales, volume and market-share trends, particularly in Beauty, Hair and Personal Care, Grooming and developing markets.
- Ability to offset foreign exchange, commodity and mix pressures through pricing, productivity savings and manufacturing efficiencies.
- Execution of the more than $4.5 billion restructuring program and realization of projected annual gross savings.
- Liquidity and refinancing requirements given $16.329 billion of debt due within one year, ongoing share repurchases and dividends.
- Developments in Venezuela, European antitrust matters, tax audits and other legal or regulatory contingencies.
