Procter & Gamble Co. Form 10-Q Summary
Reporting period: Quarterly and nine months ended March 31, 2019, compared with the corresponding 2018 periods. The request metadata identifies “2018 Q3,” but the filing is P&G’s fiscal 2019 third-quarter Form 10-Q, filed April 23, 2019.
Business context
P&G is a global branded consumer packaged goods company selling products in more than 180 countries and territories, with five reportable segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. The statements are unaudited interim financial statements.
Financial performance
| Metric | Three months ended March 31, 2019 | Year-over-year change | Nine months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $16.462 billion | 1% | $50.590 billion | 1% |
| Operating income | $3.229 billion | 1% | $10.679 billion | (1)% |
| Net earnings | $2.776 billion | 9% | $9.203 billion | 15% |
| Net earnings attributable to P&G | $2.745 billion | 9% | $9.138 billion | 16% |
| Diluted EPS | $1.04 | 9% | $3.48 | 18% |
| Core EPS | $1.06 | 6% | $3.42 | 4% |
Margins: Third-quarter gross margin was 48.8%, up 30 basis points, while operating margin was 19.6%, down 10 basis points. Nine-month gross margin was 48.9%, down 70 basis points, and operating margin was 21.1%, down 30 basis points. The nine-month net earnings margin increased to 18.2% from 15.8%, primarily because of lower income taxes and a nonrecurring partnership gain.
Sales drivers: Third-quarter organic sales increased 5% on 2% organic volume growth, 2% pricing and 1% favorable mix, despite a 5% foreign-exchange headwind. Nine-month organic sales increased 4% on 2% organic volume growth, with a 3% foreign-exchange headwind.
- Third-quarter sales growth was strongest in Health Care, up 9%, and Beauty, up 4%; Fabric & Home Care rose 2%.
- Grooming sales declined 8% and Baby, Feminine & Family Care declined 2%.
- For the nine months, Beauty sales rose 4%, Health Care and Fabric & Home Care each rose 2%, while Grooming declined 6% and Baby, Feminine & Family Care declined 2%.
Cash flow, liquidity and capital structure
- Operating cash flow was $11.091 billion for the nine months, compared with $10.668 billion in the prior-year period.
- Capital expenditures were $2.533 billion, or 5.0% of sales. Adjusted free cash flow was $8.793 billion, with adjusted free cash flow productivity of 99%.
- Investing activities used $4.137 billion, including $3.943 billion for acquisitions, primarily the Merck OTC transaction.
- Financing activities used $6.690 billion, including $5.561 billion of dividends and $3.253 billion of share repurchases.
- Cash and cash equivalents were $2.738 billion at March 31, 2019, versus $2.569 billion at June 30, 2018. Available-for-sale investment securities were $7.085 billion.
- Debt due within one year was $8.911 billion and long-term debt was $21.359 billion, for reported total debt of approximately $30.270 billion. The filing states that current liabilities exceeded current assets by $6.1 billion.
- Management expects operating cash flow, debt-market access and available credit facilities to support short-term liquidity and operating requirements.
Material changes and unusual items
- Net earnings benefited materially from lower income taxes following the U.S. Tax Cuts and Jobs Act. The nine-month 2018 period included a $650 million transitional tax charge; the 2019 period had no significant additional transitional impact.
- P&G recognized a $355 million pretax, $353 million after-tax gain from dissolution of the PGT Healthcare partnership. Core nine-month EPS excludes this gain and was $3.42 versus $3.28 in the prior-year period.
- P&G acquired Merck KGaA’s OTC healthcare business on November 30, 2018 for $3.7 billion in cash. The business was consolidated beginning December 1, 2018; its contribution was not material to consolidated results through March 31, 2019.
- Restructuring charges were $116 million in the quarter and $430 million for the nine months. The company expects approximately $0.7 billion of additional restructuring costs in fiscal 2019 as part of its productivity and cost-savings program.
- P&G repurchased 12.9 million shares for $1.25 billion during the quarter. It stated an expectation to reduce outstanding shares through approximately $5 billion of fiscal 2019 direct repurchases.
- The company adopted new revenue, pension presentation, restricted cash, intra-entity tax and stranded tax-effect accounting guidance. Revenue-standard adoption reduced retained earnings by $534 million and changed the classification of certain promotional spending.
Outlook, commentary and risks
Management’s results indicate continued underlying sales momentum, with organic sales growth led by Beauty, Health Care and Fabric & Home Care. However, reported results remain exposed to foreign exchange, commodity inflation, pricing elasticity, competitive pressure and product mix. No specific full-year GAAP revenue or earnings guidance is provided in the filing text.
- Key operating risks include currency devaluation and translation effects, commodity and transportation costs, tariffs and changing government policies, economic slowdowns, supply-chain disruption, innovation risk and competition from branded and private-label products.
- Grooming remains a significant risk area: market share declined, and the Shave Care reporting unit and Gillette indefinite-lived intangible asset have reduced fair-value cushions. The related carrying values were $19.3 billion and $15.7 billion, respectively, and are more susceptible to future impairment if growth, competition, currency or discount-rate assumptions deteriorate.
- The company is exposed to tax audits in approximately 40–50 jurisdictions, with open tax years dating from 2008 forward. Management cannot reliably estimate the potential range of future adjustments.
- Management states that existing litigation, environmental matters and other claims are not expected to materially affect financial position, results of operations or cash flows, although outcomes remain uncertain.
- The company plans to adopt lease accounting guidance on July 1, 2019, which is expected primarily to gross up the balance sheet for operating lease assets and liabilities.
Important facts for investors to verify
- Separate recurring operating performance from the $353 million after-tax PGT partnership gain and the large year-over-year tax benefit.
- Assess whether organic sales growth can continue after adjusting for pricing, acquisitions, divestitures and foreign exchange.
- Monitor Grooming volume, market share and the impairment sensitivity of Shave Care goodwill and Gillette intangible assets.
- Evaluate the sustainability of margin improvement amid commodity inflation, unfavorable currency and ongoing restructuring costs.
- Review liquidity relative to $8.911 billion of debt due within one year and the planned $5 billion of share repurchases.
- Confirm the final purchase-price allocation and integration performance of the Merck OTC acquisition.
- Track tax-audit exposures, restructuring execution, lease-accounting effects and the company’s ability to maintain dividend and repurchase funding.