Business Context and Reporting Period
The filing is Procter & Gamble’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, not a standalone 2009 fourth-quarter filing. P&G markets branded consumer packaged goods in more than 180 countries through six reportable segments: Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
The business is highly competitive and depends on brand strength, product innovation, consumer demand, retail relationships, pricing, and effective management of commodity, currency, regulatory, and operating risks.
Key Financial Metrics
- Net sales: The filing text provides U.S. net sales of $30.0 billion and international net sales of $48.9 billion for fiscal 2010, implying approximately $78.9 billion in total net sales. The consolidated income statement, profit, earnings-per-share, margin, and cash-flow figures are incorporated by reference and are not reproduced clearly in the supplied text.
- Geographic mix: North America represented 42% of sales, Western Europe 21%, Asia 15%, Latin America 9%, and Central and Eastern Europe, Middle East and Africa 13%.
- Profitability and margins: The supplied filing text does not provide clear consolidated operating income, net earnings, gross margin, operating margin, or net margin values.
- Cash flow and liquidity: The supplied text does not provide clear operating cash flow, free cash flow, cash and equivalents, current liabilities, or liquidity ratios.
- Debt: Specific debt balances, maturities, leverage ratios, and interest expense are not clearly provided in the supplied text. The company maintained a $10 billion commercial paper program and financed portions of its share repurchases with short- and long-term debt.
- Research and development: R&D expense was $1.950 billion in 2010, compared with $1.864 billion in 2009 and $1.946 billion in 2008.
- Customer concentration: Wal-Mart and affiliates represented approximately 16% of total revenue in each of 2010, 2009, and 2008. The top ten customers represented approximately 32% of total unit volume in 2010.
- Workforce: Estimated employees declined to 127,000 in 2010 from 132,000 in 2009 and 135,000 in 2008.
Material Changes Versus Prior Comparable Period
- On October 30, 2009, P&G sold its global pharmaceuticals business to Warner Chilcott for $2.8 billion. The pharmaceuticals results were classified as discontinued operations and excluded from continuing operations and segment results.
- Effective July 1, 2009, P&G reorganized the Beauty and Grooming businesses and retrospectively revised segment reporting for all periods presented.
- International net sales increased to $48.9 billion in 2010 from $47.1 billion in 2009, while U.S. net sales increased to $30.0 billion from $29.6 billion. International assets declined to $58.1 billion from $62.9 billion.
- Sales exposure shifted modestly toward Asia, which represented 15% of sales in 2010 versus 14% in 2009, while CEEMEA declined to 13% from 14%.
- P&G repurchased approximately $22 billion of common stock under a repurchase program that expired June 30, 2010. The company repurchased approximately 41.8 million shares during the fourth quarter, and no authorization remained at June 30, 2010.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management’s forward-looking objectives included volume and net sales growth, market-share gains, cost reduction, productivity improvement, portfolio migration toward faster-growing and higher-margin businesses, and disproportionate growth in developing markets. The filing does not provide a clear numerical fiscal 2011 earnings or sales outlook in the supplied text.
- Principal risks include weaker consumer demand, loss of market share, intense price and promotional competition, commodity and labor-cost inflation, foreign-exchange volatility, interest-rate changes, and supply-chain or sole-source supplier disruptions.
- International operations expose P&G to exchange controls, political and economic instability, inflation or deflation, terrorism, and restrictions on repatriating foreign earnings.
- Retailer consolidation and changes in customer trade terms, product assortment, or inventory levels could pressure revenue and margins.
- The company identified significant European antitrust investigations and complaints in several countries. The ultimate fines could not yet be reasonably estimated, although P&G stated that it had recorded and would record reserves as appropriate.
- An Italian environmental and criminal proceeding related to an accident at a contractor site could result in fines exceeding $100,000 against European affiliates.
- P&G planned to transition ordering, shipping, and billing systems in North America and Western Europe during fiscal 2011. Implementation problems could disrupt orders, deliveries, collections, and cash flow.
- Management concluded that disclosure controls and procedures and internal control over financial reporting were effective, with no material fourth-quarter changes to internal control.
Facts an Investor Should Verify
- Obtain the incorporated 2010 Annual Report financial statements to verify consolidated revenue, earnings, EPS, operating and net margins, cash flow, debt, liquidity, and segment results.
- Confirm the accounting effect, proceeds, taxes, and discontinued-operations presentation of the $2.8 billion pharmaceuticals divestiture.
- Review antitrust reserves, potential fines, and the status of European competition investigations.
- Assess the effect of the completed share-repurchase program on debt, interest expense, share count, and capital allocation.
- Evaluate fiscal 2011 guidance and the execution risk associated with the North America and Western Europe systems transition.
- Review exposure to Wal-Mart, commodity costs, foreign exchange, developing markets, and single-source suppliers.