Procter & Gamble Fiscal Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three and nine months ended March 31, 2020, corresponding to Procter & Gamble’s fiscal third quarter and year-to-date period. P&G sells branded consumer products in more than 180 countries through retail, e-commerce, distribution and direct-to-consumer channels. Reportable segments are Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
The filing metadata references “2019 Q3,” but the reported period is March 31, 2020, compared primarily with March 31, 2019.
Financial Performance and Position
| Metric | Three Months Ended March 31 | Year-over-Year | Nine Months Ended March 31 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $17.214 billion | 5% | $53.252 billion | 5% |
| Operating income | $3.453 billion | 7% | $12.225 billion | 14% |
| Net earnings | $2.957 billion | 7% | $10.317 billion | 12% |
| Net earnings attributable to P&G | $2.917 billion | 6% | $10.227 billion | 12% |
| Diluted EPS | $1.12 | 8% | $3.89 | 12% |
| Core EPS | $1.17 | 10% | $3.96 | 16% |
Three-month operating margin was 20.1%, up 50 basis points, while net margin was 17.2%, up 30 basis points. Nine-month operating margin was 23.0%, up 190 basis points, and net margin was 19.4%, up 120 basis points. Three-month gross margin increased to 49.4% from 48.8%; nine-month gross margin increased to 50.6% from 48.9%.
Fiscal year-to-date operating cash flow was $12.597 billion, compared with $11.091 billion in the prior-year period. Capital expenditures were $2.415 billion, producing adjusted free cash flow of $10.397 billion and adjusted free cash flow productivity of 101%.
Cash and cash equivalents were $15.393 billion at March 31, 2020, compared with $4.239 billion at June 30, 2019. Current assets were $27.140 billion and current liabilities were $32.896 billion. Debt due within one year was $12.701 billion and long-term debt was $23.310 billion. The filing states that strong debt ratings and access to commercial paper and bond markets should support refinancing and liquidity needs.
Material Changes Versus Prior Comparable Period
- Fiscal year-to-date net sales increased 5%, with organic sales growth of 6%, organic volume growth of 4%, a 1% pricing benefit and a 2% foreign-exchange headwind.
- Three-month organic sales increased 6% on 6% organic volume growth; foreign exchange reduced reported sales by 2%.
- Health Care was the strongest year-to-date growth segment, with sales up 13% and net earnings up 14%, partly reflecting the Merck OTC acquisition and demand for personal health products.
- Fabric & Home Care sales increased 6% year to date and net earnings increased 15%; quarterly sales increased 8% and net earnings increased 13%.
- Baby, Feminine & Family Care sales increased 3% year to date and net earnings increased 24%; quarterly sales increased 6% and net earnings increased 32%.
- Beauty sales increased 5% year to date and net earnings increased 4%, but quarterly sales declined 1% and net earnings declined 21%, primarily from unfavorable mix, lower SK-II demand and COVID-19 effects.
- Grooming sales declined 1% year to date and net earnings declined 4%; quarterly sales declined 3% and net earnings declined 26%, with pressure in Greater China, North America and Appliances.
- Gross margin benefited from manufacturing productivity, lower commodity costs and pricing, partly offset by unfavorable product mix, foreign exchange and higher restructuring charges.
- Share repurchases were $7.405 billion during the nine-month period, compared with $3.253 billion in the prior-year period. Dividends paid were $5.761 billion.
Guidance, Outlook, Commentary and Risks
Management did not provide a clear full-year earnings or sales guidance figure in the supplied filing text. The company expected fiscal 2020 restructuring costs of approximately $0.5 billion to $0.6 billion, following $1.8 billion incurred across fiscal 2018 and 2019.
Management stated that COVID-19 had no material net impact on consolidated operating results for the quarter because increased demand for health, hygiene, cleaning and household products offset declines in Greater China, Japan, travel retail, beauty and grooming. The company broadly maintained manufacturing and distribution operations and considered liquidity adequate. Management cautioned that future results could be volatile because of demand shifts, pantry loading followed by destocking, recessionary conditions, government restrictions, supply-chain interruptions and customer disruptions.
COVID-19 and macroeconomic conditions could reduce demand, restrict consumer access, disrupt suppliers or transportation, increase costs, weaken retail customers and trigger impairment charges. The Shave Care reporting unit and Gillette indefinite-lived intangible asset were identified as particularly sensitive to lower growth rates, higher discount rates, currency devaluation and changing grooming habits. A triggering event was not identified as of March 31, 2020, but a prolonged pandemic could cause future impairment.
Other significant risks include foreign-exchange volatility, commodity and transportation costs, credit-market access, competitive pricing and private-label competition, supply-chain concentration, cybersecurity and information-technology failures, litigation, tax audits, regulatory changes, political instability and execution of productivity, acquisition and restructuring programs.
The company recorded $222 million of restructuring charges in the quarter and $420 million year to date. It also adopted the new lease standard on July 1, 2019, increasing total assets and liabilities by approximately 1% at adoption without a material overall financial statement impact. The company stated that pending litigation and environmental matters were not expected to materially affect financial position, results of operations or cash flows based on currently available information.
Important Facts for Investors to Verify
- Confirm that the intended period is fiscal Q3 2020 ended March 31, 2020, rather than calendar Q3 2019.
- Assess the sustainability of COVID-19-related volume gains, including potential pantry destocking and weaker demand in beauty, grooming and Greater China.
- Reconcile GAAP EPS of $3.89 year to date with Core EPS of $3.96 and review the effects of restructuring charges and the prior-year PGT Healthcare partnership gain.
- Monitor Shave Care goodwill and the Gillette intangible asset for potential impairment if pandemic, currency or grooming-market conditions worsen.
- Evaluate liquidity against $12.701 billion of debt due within one year, planned dividends and the stated fiscal 2020 share-repurchase objective of $7 billion to $8 billion.
- Review the impact of foreign exchange, commodity costs, supply-chain disruptions and the company’s ability to achieve planned productivity savings.
- Verify subsequent developments after March 31, 2020, including changes in COVID-19 demand, borrowing, repurchases, dividends, guidance or contingencies.