Procter & Gamble: Fiscal 2018 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2017; filed January 23, 2018. P&G is a global consumer packaged-goods company selling products in more than 180 countries across Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2017 | Year-over-year change | Six months ended Dec. 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $17.395 billion | Up 3% | $34.048 billion | Up 2% |
| Operating income | $4.003 billion | Up 3% | $7.738 billion | Up 1% |
| Operating margin | 23.0% | Flat | 22.7% | Down 20 basis points |
| Net earnings from continuing operations | $2.561 billion | Flat | $5.431 billion | Essentially flat |
| Diluted EPS from continuing operations | $0.93 | Flat | $2.00 | Up 4% |
| Reported diluted EPS | $0.93 | Down 68% | $2.00 | Down 48% |
| Operating cash flow | Not separately provided for the quarter | — | $7.315 billion | Up $1.290 billion |
| Free cash flow | Not separately provided for the quarter | — | $5.415 billion | Not clearly stated |
| Core EPS | $1.19 | Up 10% | $2.28 | Up 8% |
Gross margin was 50.2% in the quarter and 50.4% for the six-month period, down 60 and 50 basis points, respectively. Higher commodity costs, unfavorable mix, lower pricing, and foreign exchange pressure more than offset manufacturing productivity savings. SG&A as a percentage of sales improved to 27.2% for the quarter and 27.6% year to date.
Liquidity, Capital Structure, and Capital Allocation
- Cash and cash equivalents were $7.432 billion at December 31, 2017, compared with $5.569 billion at June 30, 2017.
- Available-for-sale investment securities were $11.326 billion; total current assets were $31.214 billion.
- Debt due within one year was $15.547 billion and long-term debt was $22.186 billion, for reported debt of approximately $37.7 billion.
- Current liabilities exceeded current assets by approximately $1.9 billion. Management expects operating cash flow, debt-market access, and credit facilities to support short-term liquidity needs.
- Capital expenditures were $1.900 billion, or 5.6% of year-to-date sales.
- P&G paid $3.636 billion in dividends and repurchased $4.253 billion of treasury stock during the six months. It repurchased 19.4 million shares during the quarter at an average price of $90.18 per share.
- Management stated that fiscal 2018 direct share repurchases are expected to be approximately $6 billion to $8 billion, financed through operating cash flow and short- and long-term debt.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 2% for both the quarter and six months. Volume increased 2% in the quarter and 1% for the six-month period; foreign exchange contributed approximately 1% to reported sales growth.
- Beauty was the strongest major segment, with sales up 10% in the quarter and 7% year to date. Health Care sales increased 7% and 5%, respectively.
- Grooming sales declined 1% in the quarter and 3% year to date, reflecting pricing reductions in Shave Care, unfavorable mix, and competitive pressure. Baby, Feminine & Family Care sales declined 1% in both periods.
- Reported net earnings attributable to P&G fell to $2.495 billion for the quarter and $5.348 billion year to date, primarily because the prior-year periods included a $5.335 billion quarterly and $5.217 billion year-to-date gain from the Beauty Brands divestiture.
- The December 2017 U.S. Tax Cuts and Jobs Act produced a provisional net transitional tax charge of $628 million, consisting of an estimated $3.8 billion repatriation tax charge and a $3.2 billion deferred-tax benefit. The final amount may change materially during the permitted measurement period.
- Operating cash flow increased despite lower reported earnings, aided by working-capital movements and a long-term payable related to the U.S. tax reform repatriation charge.
- Restructuring charges were $154 million for the quarter and $311 million year to date. P&G expects approximately $1.2 billion of before-tax restructuring costs during fiscal 2018 and 2019.
Outlook, Management Commentary, Risks, and Unusual Items
- Management’s long-term target is adjusted free-cash-flow productivity of at least 90%; year-to-date adjusted productivity was 89%.
- Management expects continuing benefits from productivity, supply-chain optimization, marketing and overhead savings, while acknowledging execution and workforce-reduction risks.
- Key operating pressures include commodity inflation, pricing actions, product mix, foreign exchange, competitive activity, changing consumer habits, and customer inventory levels.
- Shave Care goodwill and the Gillette indefinite-lived intangible asset had approximately 10% fair-value cushions at December 31, 2017. A 50-basis-point increase in the discount rate or decrease in long-term growth was estimated to reduce each related fair value by approximately 10%, increasing future impairment risk.
- P&G operates in approximately 140 taxable jurisdictions and has 50 to 60 jurisdictional audits underway at various stages. The filing does not provide a reliable range of potential changes to uncertain tax positions.
- Management states that pending litigation, environmental matters, and other claims are not expected to materially affect financial position, results, or cash flows, although outcomes remain uncertain.
- The company identified foreign exchange, geopolitical and macroeconomic conditions, supply-chain disruption, commodity costs, customer concentration, cybersecurity, regulatory matters, tax changes, competition, innovation, and execution of restructuring and portfolio actions as significant risks.
Most Important Facts for Investors to Verify
- Whether the provisional $628 million Tax Act charge and related repatriation-tax and deferred-tax estimates are finalized without a material additional adjustment.
- Whether organic volume and sales growth can offset commodity inflation, pricing pressure, and unfavorable mix, particularly in Grooming and Baby, Feminine & Family Care.
- Progress toward the $1.2 billion fiscal 2018–2019 restructuring program and whether planned savings are realized without impairing sales or brand investment.
- The sustainability of cash generation and whether adjusted free-cash-flow productivity reaches the 90% long-term target.
- Debt refinancing requirements, liquidity coverage, and the effect of planned $6 billion to $8 billion share repurchases on leverage.
- Potential impairment exposure associated with the relatively limited fair-value cushions for Shave Care goodwill and the Gillette intangible asset.
- Segment market-share trends, especially the declines reported in Grooming and Baby Care.