Business Context and Reporting Period
The Procter & Gamble Company filed this unaudited Form 10-Q for the fiscal quarter and nine months ended March 31, 2012. Although the request metadata identifies “2011 Q3,” the filing clearly reports fiscal 2012 third-quarter results, compared with the periods ended March 31, 2011. P&G sells branded consumer products in more than 180 countries across Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales | $20.194 billion, up 2% | $63.468 billion, up 5% |
| Operating income | $3.299 billion, down 11% | $10.229 billion, down 17% |
| Net earnings attributable to P&G | $2.411 billion, down 16% | $7.125 billion, down 23% |
| Diluted EPS | $0.82, down 15% | $2.42, down 22% |
| Diluted EPS from continuing operations | $0.81, down 14% | $2.37, down 22% |
| Operating cash flow | Not separately provided | $9.311 billion, down 1% |
| Free cash flow | Not separately provided | $6.648 billion |
| Free cash flow productivity | Not separately provided | 92% |
- Three-month gross margin was 49.3%, down 150 basis points; nine-month gross margin was 49.7%, down 190 basis points.
- Three-month operating margin was 16.3%, down 230 basis points; nine-month operating margin was 16.1%, down 420 basis points.
- Organic sales increased 3% for the quarter and 4% year to date. Unit volume was flat for the quarter and increased 1% year to date.
- Cash and cash equivalents were $3.991 billion at March 31, 2012, compared with $2.768 billion at June 30, 2011.
- Debt due within one year was $11.771 billion and long-term debt was $21.341 billion at March 31, 2012, for reported debt of approximately $33.1 billion.
- Current liabilities exceeded current assets by approximately $3.8 billion. Management stated that operating cash flow, refinancing access, strong debt ratings and bank relationships should support liquidity needs.
- Capital expenditures were $2.663 billion year to date, compared with $2.066 billion in the prior-year period.
- Year-to-date financing cash outflows included $4.521 billion of dividends and $4.023 billion of treasury stock purchases. Net long-term debt issuance was $1.471 billion.
- The quarterly dividend increased 9% to $0.5250 per share; the nine-month dividend was $1.5750 per share.
Material Changes Versus the Prior Comparable Period
- Sales growth was offset by weaker profitability. Higher commodity and energy costs, unfavorable product mix, restructuring spending and impairment charges reduced margins.
- Quarterly pricing added approximately 5% to sales, but negative mix reduced sales by approximately 2% and unfavorable foreign exchange reduced sales by approximately 1%.
- Year-to-date pricing added approximately 4% to sales, while negative mix reduced sales by approximately 1%; favorable foreign exchange added approximately 1%.
- Year-to-date results included $1.576 billion of goodwill and indefinite-lived intangible impairment charges, including $1.330 billion of goodwill impairments related to Appliances and Salon Professional and a $246 million impairment of Koleston Perfect and Wella trade names.
- The effective tax rate on continuing operations increased to 23.7% for the quarter from 20.7% and to 28.1% year to date from 22.2%, primarily due to geographic earnings mix and the nondeductibility of impairment charges.
- Segment sales increased year to date in all continuing segments, led by Baby Care and Family Care at 7%; however, earnings declined in Beauty and Fabric Care and Home Care, while Grooming and Health Care earnings increased modestly.
- P&G announced the sale of its global Snacks business to The Kellogg Company for $2.7 billion in cash. Snacks results were reclassified to discontinued operations, and $642 million of net assets were classified as held for sale.
- The Company began a productivity and cost savings plan expected to generate approximately $2 billion of annual pretax savings, with approximately $3.5 billion of pretax restructuring costs over four years. Year-to-date restructuring charges were $686 million, with $285 million accrued at March 31, 2012.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects more than half of the restructuring costs to be incurred by the end of fiscal 2013, with the remainder in fiscal 2014 and 2015. The plan includes an intended 10% net reduction in non-manufacturing overhead personnel, or approximately 5,700 separations, by the end of fiscal 2013.
- Management did not provide a clear consolidated earnings or sales forecast in the filing. It stated that the Snacks divestiture was expected to close by the end of fiscal 2012, subject to regulatory approvals.
- Key operating pressures include commodity and energy inflation, competitive pricing and innovation, weak developed-market demand, unfavorable product and geographic mix, and the risk that pricing actions reduce volume.
- The impairment analysis was based on discounted cash flow estimates that depend on macroeconomic conditions, category growth, competition, pricing, cost savings and management business plans. Failure to achieve projected cash flows could result in additional noncash impairment charges.
- European antitrust matters remained outstanding. The Company had accrued $19 million for competition-law violations as of March 31, 2012, had paid all but $16 million of assessed fines, and could not reasonably estimate additional fines for certain investigations.
- Tax audits were underway in approximately 50 to 60 jurisdictions, with open tax years ranging from 2002 onward. The filing states that the potential range and timing of changes in uncertain tax positions could not be reasonably estimated.
- P&G reported exposure to Venezuelan currency controls and potential devaluation. Approximately $984 million of local-currency net monetary assets were outstanding, including approximately $302 million remeasured using the SITME rate.
- Other principal risks include global economic and political disruption, foreign exchange, supply-chain interruptions, regulatory and environmental matters, customer concentration and trade pressures, information technology failures, brand reputation, and execution of acquisitions, divestitures and restructuring.
Facts an Investor Should Verify
- Confirm that reported year-to-date earnings comparisons properly isolate the $1.576 billion impairment charges, restructuring costs and discontinued Snacks operations.
- Assess whether pricing actions can offset commodity inflation without causing further volume declines, particularly in developed markets.
- Monitor delivery of the productivity plan, including the approximately $2 billion annual savings objective and the remaining restructuring liability.
- Verify the timing, regulatory approvals and final proceeds from the $2.7 billion Snacks divestiture.
- Evaluate liquidity and refinancing needs given current liabilities exceeding current assets by approximately $3.8 billion and debt maturities of $11.771 billion within one year.
- Track potential additional goodwill or intangible impairments, especially in Appliances and Salon Professional, and developments in European antitrust investigations and uncertain tax positions.