Procter & Gamble Company — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2012. The requested “2011 Q4” period does not match this annual filing; the filing includes unaudited quarterly data for the quarter ended June 30, 2012.
Business Context
P&G is a global branded consumer-products company selling in more than 180 countries. Its five reportable segments are Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. The company operates in highly competitive markets and relies on brand strength, innovation, pricing, productivity, and international growth.
In May 2012, P&G completed the sale of its global snacks business to Kellogg for approximately $2.7 billion. Snacks results were classified as discontinued operations for all periods presented.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $83.7 billion | $81.1 billion | +3% |
| Operating income | $13.3 billion | $15.5 billion | -14% |
| Net earnings from continuing operations | $9.3 billion | $11.7 billion | -20% |
| Net earnings attributable to P&G | $10.8 billion | $11.8 billion | -9% |
| Diluted EPS from continuing operations | $3.12 | $3.85 | -19% |
| Total diluted EPS | $3.66 | $3.93 | -7% |
| Core EPS | $3.85 | $3.87 | -1% |
| Gross margin | 49.3% | 50.9% | -160 basis points |
| Operating margin | 15.9% | 19.1% | -320 basis points |
| Operating cash flow | $13.3 billion | $13.3 billion | Approximately flat |
| Free cash flow | $9.3 billion | $10.0 billion | -7% |
| Free cash flow productivity | 85% | 84% | +1 percentage point |
Reported net sales and organic sales each increased 3%. Unit volume was flat overall: mid-single-digit growth in developing regions was offset by a low-single-digit decline in developed regions. Price increases contributed approximately 4% to sales growth, while mix reduced growth by approximately 1%.
The company recorded $1.6 billion of impairment charges related primarily to goodwill and intangible assets in the Appliances and Salon Professional businesses. It also incurred $1.1 billion of restructuring charges, including $721 million of incremental charges attributed to the productivity plan.
At June 30, 2012, cash and cash equivalents were $4.4 billion, total debt was approximately $29.8 billion, long-term debt was $21.1 billion, and shareholders’ equity was $64.0 billion. Current liabilities exceeded current assets by approximately $3.0 billion, largely because of short-term borrowings. P&G reported unused $11.0 billion bank credit facilities and strong investment-grade credit ratings.
Capital expenditures increased to $4.0 billion from $3.3 billion, primarily for capacity expansion. Dividends paid were $6.1 billion, and share repurchases totaled $4.0 billion. The quarterly common dividend was increased to $0.562 per share, representing the 56th consecutive annual dividend increase.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed to 3% from 5%, while unit volume declined from 6% growth in 2011 to flat performance.
- Gross margin contracted because of higher commodity and energy costs, unfavorable product and geographic mix, and restructuring spending. Pricing and manufacturing savings only partly offset these pressures.
- Operating income and continuing-operations earnings declined substantially because of impairment charges, restructuring costs, margin contraction, and a higher effective tax rate.
- The effective tax rate increased to 27.1% from 22.0%, partly because impairment charges were not deductible and because of fewer favorable discrete tax adjustments.
- Free cash flow declined because capital spending increased, although operating cash flow remained approximately unchanged.
- Fabric Care and Home Care net earnings declined 6%, while Beauty net earnings declined 6%. Grooming, Health Care, and Baby Care and Family Care net earnings increased 2%, 2%, and 7%, respectively.
- The company reduced total debt from approximately $32.0 billion to $29.8 billion, while continuing to fund dividends and share repurchases.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management’s long-term targets are organic sales growth 1% to 2% faster than relevant markets, high-single-digit to low-double-digit Core EPS growth, and free cash flow productivity of at least 90%. These targets are not a specific fiscal 2013 forecast.
P&G announced a five-year, $10 billion productivity and cost-savings plan. The company expects approximately $3.5 billion of pretax restructuring costs through fiscal 2015 and approximately $2 billion of annual pretax savings after implementation. The plan includes a targeted reduction of approximately 5,700 non-manufacturing overhead positions by the end of fiscal 2013. Management expects capital spending as a percentage of sales to increase in fiscal 2013.
- Key operating risks include commodity, energy, labor, pension, health-care, interest-rate, and foreign-exchange cost volatility.
- Competitive pricing, private-label products, changing consumer demand, market-share losses, and the impact of price increases on volume remain material risks.
- International operations expose P&G to currency controls, political and economic instability, tariffs, tax changes, credit risk, and supply-chain disruptions. Venezuela is specifically exposed to exchange-rate and price-control risks.
- Remaining European antitrust matters could result in additional fines. The company has accrued amounts for certain matters but cannot reasonably estimate potential fines for others.
- The Appliances and Salon Professional businesses have limited valuation cushions following impairment charges; failure to meet recovery plans could produce additional impairment charges.
- The company disclosed an anticipated purchase of a partner’s interest in a Spanish joint venture for approximately $1 billion, subject to regulatory approvals, with an estimated holding gain of approximately $400 million to $600 million.
- Defined benefit pension and other retiree benefit obligations were underfunded by approximately $5.6 billion and $3.3 billion, respectively, at June 30, 2012.
- Management and Deloitte & Touche reported unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Checklist
- Confirm the requested period: this filing reports fiscal 2012, not 2011 fourth-quarter results.
- Review the reconciliation of reported earnings to Core EPS and separate recurring operating performance from the $1.6 billion impairment and restructuring charges.
- Assess whether pricing actions can offset commodity inflation without further volume or market-share deterioration.
- Monitor execution of the $10 billion productivity plan, restructuring cash costs, employee reductions, and realized savings.
- Evaluate liquidity against approximately $8.7 billion of debt due within one year and total contractual commitments of approximately $43.5 billion.
- Track the Spanish joint-venture put obligation, European antitrust investigations, tax audits, and potential additional legal or tax costs.
- Review the sustainability of free cash flow productivity below management’s 90% long-term target.