Procter & Gamble Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2021, compared with the corresponding 2020 periods. The request metadata identifies “2020 Q3,” but the filing is for the March 31, 2021 quarter.
Business context
P&G is a global consumer packaged goods company operating in more than 180 countries and territories, with five reportable segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. Products are sold through mass retailers, e-commerce, grocery, club, drug, specialty and professional channels.
Financial performance and liquidity
| Metric | Three months ended March 31, 2021 | Change vs. 2020 | Nine months ended March 31, 2021 | Change vs. 2020 |
|---|---|---|---|---|
| Net sales | $18.109 billion | +5% | $57.172 billion | +7% |
| Operating income | $3.785 billion | +10% | $14.446 billion | +18% |
| Net earnings attributable to P&G | $3.269 billion | +12% | $11.400 billion | +11% |
| Diluted EPS | $1.26 | +13% | $4.37 | +12% |
| Operating margin | 20.9% | +80 bps | 25.3% | +230 bps |
| Net earnings margin | 17.9% | +70 bps | 20.0% | +60 bps |
- Third-quarter organic sales increased 4% on unchanged organic volume; pricing contributed 2%, mix 2% and foreign exchange 1%. Nine-month organic sales increased 7% on 4% organic volume growth.
- Gross margin increased to 50.7% for the quarter and 52.2% for the nine-month period, supported primarily by manufacturing productivity, pricing and lower restructuring costs.
- Nine-month SG&A was $15.409 billion, or 27.0% of sales, down 60 basis points from the prior-year period. Quarterly SG&A was 29.8% of sales, up 50 basis points due principally to higher marketing and overhead spending.
- Effective tax rates were 16.2% for the quarter and 18.6% year to date, increases of 70 and 200 basis points, respectively.
- Nine-month operating cash flow was $14.250 billion. Adjusted free cash flow was $12.402 billion, representing 104% adjusted free cash flow productivity.
- Capital expenditures were $2.073 billion year to date. Dividends were $6.066 billion and share repurchases were $8.009 billion.
- Cash and cash equivalents were $10.007 billion at March 31, 2021, compared with $16.181 billion at June 30, 2020. Current liabilities exceeded current assets by approximately $9.4 billion.
- Debt due within one year was $8.773 billion and long-term debt was $21.053 billion at March 31, 2021. The filing states that strong credit ratings and capital-market access support refinancing and liquidity needs.
Material changes versus the prior comparable periods
- Fabric & Home Care was the leading growth contributor, with nine-month sales up 11% and net earnings up 23%. Home Care benefited from pandemic-related demand for cleaning products.
- Beauty sales increased 9% in the quarter and 7% year to date; quarterly net earnings increased 32%. Grooming sales increased 4% in the quarter and 5% year to date, primarily reflecting strong Appliances performance.
- Health Care sales increased 4% in the quarter and 8% year to date. Quarterly earnings declined 8%, principally because of unfavorable mix, foreign exchange, higher marketing spending and a weaker cough, cold and flu season.
- Baby, Feminine & Family Care sales were flat in the quarter and increased 3% year to date. Baby Care volume declined amid competitive activity, market contraction and comparisons with pandemic-related pantry loading.
- Nine-month results included a $512 million pretax, $427 million after-tax charge for early extinguishment of debt. Core EPS, excluding this charge and prior-year incremental restructuring costs, increased 14% to $4.53.
- Foreign exchange had no net sales impact year to date but reduced nine-month net earnings by approximately $168 million.
- The company repurchased 23.1 million shares during the quarter at an average price of $129.96. Management stated that fiscal 2021 direct share repurchases were expected to total approximately $11 billion.
Guidance, outlook, commentary and risks
- Management expects fiscal 2021 restructuring costs to return to the historical ongoing range of approximately $250 million to $500 million before tax, following completion of the major multi-year productivity program.
- Management’s long-term target is adjusted free cash flow productivity of at least 90%; year-to-date productivity was 104%.
- The filing does not provide a complete quantified fiscal-year sales or earnings guidance range in the supplied text.
- COVID-19 has not materially negatively affected consolidated sales, margins, earnings or cash flow, but it has created demand volatility, supply-chain disruption, higher transportation and manufacturing costs, and changing regional and channel demand.
- Key risks include commodity and transportation inflation, foreign exchange movements, pricing and consumption effects, supply-chain interruptions, competitive pressure, changing consumer behavior, market contractions, regulatory and tax changes, cyber and technology risks, litigation and the continuing pandemic.
- Gillette’s indefinite-lived intangible asset remains particularly sensitive to impairment. At March 31, 2021, Shave Care goodwill was $12.7 billion and the Gillette intangible asset was $14.1 billion; a 25-basis-point increase in the discount rate or decrease in growth rates would have reduced estimated fair value by approximately 6% and would have resulted in an impairment of the Gillette asset.
- Management concluded that pending litigation and environmental matters were not expected to materially affect financial position, earnings or cash flow. Tax audits across multiple jurisdictions could settle during the next 12 months against approximately $60 million of existing uncertain-tax-position liabilities, including interest and penalties.
Important facts for investors to verify
- Reconcile reported sales growth with underlying volume, pricing, mix, foreign exchange and potential post-pandemic normalization.
- Assess whether productivity savings and pricing can offset commodity, transportation, labor and other inflationary pressures.
- Monitor the recovery or deterioration of Grooming, Beauty and Baby Care categories, including market-share trends and Gillette impairment sensitivity.
- Evaluate cash deployment among dividends, approximately $11 billion of planned fiscal-year repurchases, debt refinancing and capital expenditures.
- Review the effect of the $512 million debt-extinguishment charge and the use of non-GAAP Core EPS and adjusted free cash flow measures.
- Track COVID-19-related demand changes, supply-chain disruptions, pantry destocking and regional economic conditions.