Business Context and Reporting Period
The Procter & Gamble Company is a global branded consumer products company selling in more than 180 countries and territories, with operations in approximately 70 countries. Reportable segments are Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The filing is a Form 10-K for the fiscal year ended June 30, 2019. The requested “2018 Q4” period does not match the filing period; the filing includes fourth-quarter results for fiscal 2019 and comparative fiscal 2018 information.
Financial Metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $67.684 billion | $66.832 billion | 1% |
| Gross profit | $32.916 billion | $32.400 billion | 2% |
| Gross margin | 48.6% | 48.5% | Up 10 bps |
| Operating income | $5.487 billion | $13.363 billion | Down 59% |
| Operating margin | 8.1% | 20.0% | Down 1,190 bps |
| Net earnings from continuing operations | $3.966 billion | $9.861 billion | Down 60% |
| Net earnings attributable to P&G | $3.897 billion | $9.750 billion | Down 60% |
| Diluted EPS | $1.43 | $3.67 | Down 61% |
| Core EPS | $4.52 | $4.22 | Up 7% |
| Operating cash flow | $15.242 billion | $14.867 billion | Up 3% |
| Adjusted free cash flow | $12.130 billion | $11.150 billion | Up 9% |
| Adjusted free cash flow productivity | 105% | Not clearly provided | Above 90% target |
| Total debt | $30.092 billion | $31.286 billion | Down approximately $1.2 billion |
| Capital expenditures | $3.347 billion | $3.717 billion | Down 10% |
Reported results were heavily affected by an $8.345 billion before-tax, non-cash impairment charge, consisting primarily of $6.8 billion for Shave Care goodwill and $1.6 billion for the Gillette indefinite-lived intangible asset. Excluding unusual items, core EPS increased 7%.
Cash and cash equivalents were $4.239 billion at June 30, 2019, compared with $2.569 billion at June 30, 2018. Current liabilities exceeded current assets by $7.5 billion, largely because of short-term borrowings. The company reported $6.183 billion of commercial paper and $9.697 billion of debt due within one year. It maintained an undrawn $8.0 billion bank credit facility and reported strong investment-grade credit ratings.
Material Changes Versus the Prior Comparable Period
- Net sales increased 1%, driven by 3% unit-volume growth, 2% pricing, and 1% favorable mix, partially offset by a 4% foreign-exchange headwind.
- Organic sales increased 5%, including 2% organic volume growth. Beauty, Health Care, and Fabric & Home Care were the strongest contributors.
- Grooming sales declined 5%, with a 1% volume decline and a 5% foreign-exchange impact. Management cited changing grooming habits, currency devaluations, and increased competition.
- Baby, Feminine & Family Care sales declined 2%, despite 1% volume growth, primarily due to foreign exchange and competitive pressure in Baby Care.
- Gross margin improved modestly due to manufacturing savings, pricing, and lower restructuring costs, but was offset by unfavorable mix, higher commodity costs, and foreign exchange.
- SG&A was approximately $19.1 billion and declined to 28.2% of sales from 28.5%, reflecting lower marketing spending partially offset by higher overhead and Merck-related integration costs.
- The company acquired Merck KGaA’s over-the-counter healthcare business for approximately $3.7 billion in an all-cash transaction completed November 30, 2018. The acquisition contributed approximately $2.1 billion of goodwill and $2.1 billion of identifiable intangible assets on a preliminary basis.
- P&G dissolved its PGT Healthcare partnership with Teva and recorded a $353 million after-tax gain.
- Share repurchases totaled $5.0 billion, down from $7.0 billion in fiscal 2018. Dividends paid increased to $7.5 billion, and the dividend per common share increased 4% to $2.90.
- Fiscal fourth-quarter operating income was a loss of $5.192 billion and net earnings attributable to P&G were a loss of $5.241 billion, primarily because of the Shave Care impairment.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management’s long-term financial targets are organic sales growth above category and geographic market growth, core EPS growth in the mid-to-high single digits, and adjusted free cash flow productivity of at least 90%. The filing does not provide a specific fiscal 2020 annual sales or EPS forecast.
Effective July 1, 2019, P&G planned to reorganize its ten product categories into six Sector Business Units while retaining the same five external reporting segments. Management expects continued productivity and cost savings, with approximately $0.6 billion of additional restructuring costs expected in fiscal 2020. Total restructuring charges were $754 million in fiscal 2019, and the restructuring reserve was $468 million at year-end.
- Future impairment risk remains material for Shave Care goodwill and the Gillette brand. A 25-basis-point increase in the discount rate or decrease in growth assumptions would reduce estimated fair value by approximately 5% to 6% and could result in additional charges.
- Foreign exchange is a significant risk because more than half of net revenue is generated outside the United States. Foreign exchange reduced fiscal 2019 net earnings by approximately $900 million.
- Other principal risks include commodity and transportation cost inflation, competitive pricing and private-label competition, customer concentration, supply-chain disruption, cybersecurity incidents, regulatory and tax changes, political instability, tariffs, litigation, and execution risks related to acquisitions and organizational change.
- Walmart and its affiliates represented approximately 15% of total sales in fiscal 2019 and 2018. No other customer represented more than 10%.
- The company reported no material off-balance-sheet financing arrangements and stated that pending litigation and environmental matters were not expected to materially affect financial position, results of operations, or cash flows.
- The company adopted the revenue recognition standard ASC 606 on July 1, 2018 using the modified retrospective method. Adoption reduced retained earnings by $534 million net of tax and prospectively reclassified certain customer payments as reductions of net sales.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP EPS of $1.43 with core EPS of $4.52 and assess whether the Shave Care impairment and other adjustments appropriately explain the difference.
- Review the carrying values, valuation assumptions, and sensitivity disclosures for Shave Care goodwill and the Gillette indefinite-lived intangible asset.
- Assess whether organic sales and volume growth can continue after adjusting for pricing, acquisitions, divestitures, accounting changes, and foreign exchange.
- Evaluate the sustainability of operating cash flow and 105% adjusted free cash flow productivity, particularly as supplier payment-term benefits may decline in fiscal 2020.
- Review short-term debt maturities, including approximately $3.388 billion of current-portion long-term debt and $6.183 billion of commercial paper.
- Monitor the integration and performance of the Merck OTC acquisition, including the preliminary goodwill and intangible-asset valuations.
- Assess Grooming segment competitiveness and the potential for further impairment or margin pressure.
- Verify the impact of restructuring, organizational changes, commodity costs, tariffs, foreign exchange, and customer concentration on fiscal 2020 results.