Procter & Gamble — Fiscal Q1 2018 10-Q Summary
Business context and reporting period
Procter & Gamble is a global branded consumer packaged goods company selling products in more than 180 countries and territories through mass retailers, e-commerce, grocery, club, drug and other channels. The filing covers the three months ended September 30, 2018, the first quarter of fiscal 2019, compared with the three months ended September 30, 2017. Reportable segments are Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $16.690 billion | $16.653 billion | Flat |
| Operating income | $3.554 billion | $3.648 billion | Down 3% |
| Net earnings | $3.211 billion | $2.870 billion | Up 12% |
| Net earnings attributable to P&G | $3.199 billion | $2.853 billion | Up 12% |
| Diluted EPS | $1.22 | $1.06 | Up 15% |
| Core EPS | $1.12 | $1.09 | Up 3% |
| Operating cash flow | $3.567 billion | $3.631 billion | Down 2% |
| Adjusted free cash flow | $2.722 billion | Not provided | 95% productivity |
Gross margin was 49.2%, down 110 basis points, while SG&A declined to 27.9% of sales from 28.4%. Operating margin was 21.3%, down 60 basis points. Net earnings margin increased to 19.2% from 17.2%, primarily because of lower taxes and a gain related to the PGT Healthcare partnership dissolution.
Foreign exchange reduced sales growth by approximately 3% and reduced net earnings by approximately $255 million. Organic sales increased 4%, and unit volume increased 3%.
At September 30, 2018, cash and cash equivalents were $2.545 billion and available-for-sale investment securities were $8.708 billion. Current liabilities exceeded current assets by approximately $5.9 billion. Debt due within one year was $10.508 billion and long-term debt was $20.779 billion. The company stated that operating cash flow, refinancing access and credit facilities should support short-term liquidity needs.
Capital expenditures were $1.080 billion. The company paid $1.853 billion in dividends, repurchased $1.252 billion of treasury stock and used $237 million for acquisitions. The quarterly dividend was $0.7172 per common share.
Material changes versus the prior comparable period
- Sales were essentially unchanged as 3% volume growth and 1% favorable mix offset foreign exchange, pricing and portfolio effects.
- Organic sales increased 4%; Beauty increased 7%, Grooming and Health Care increased 4% each, Fabric & Home Care increased 5%, and Baby, Feminine & Family Care declined 1%.
- Operating income declined despite lower SG&A, primarily because of lower gross margin from commodity costs, unfavorable mix and currency impacts.
- Net earnings benefited from a $355 million pretax gain, or $353 million after tax, from the dissolution of the PGT Healthcare partnership, as well as lower effective taxes. The effective tax rate decreased to 18.5% from 23.5%.
- Core net earnings attributable to P&G were $2.915 billion versus $2.928 billion in the prior-year quarter, indicating that reported earnings growth was largely driven by unusual items and tax benefits.
- The company incurred $137 million of restructuring charges, including approximately $72 million in SG&A and $64 million in cost of products sold. Approximately 470 employees were covered by separation packages.
- The company adopted new revenue recognition guidance, resulting in a $534 million after-tax cumulative adjustment to retained earnings. The adoption did not materially affect revenue timing or operating profit.
- The company early adopted guidance permitting reclassification of certain tax effects from accumulated other comprehensive income to retained earnings, increasing retained earnings and decreasing AOCI by $326 million.
Outlook, commentary, risks and unusual items
Management did not provide a specific full-year revenue or earnings outlook in the filing text. It expects approximately $0.8 billion of additional restructuring costs in fiscal 2019 under its productivity and cost-savings program. On October 19, 2018, the company stated that it expected to reduce outstanding shares through up to $5 billion of direct share repurchases during fiscal 2019, financed through operating cash flow and short- and long-term debt.
Key operating pressures include commodity and transportation cost inflation, foreign exchange volatility, pricing and promotional competition, changing consumer habits, supply-chain disruption, cybersecurity and information technology risks, political and economic uncertainty, tariffs and tax-law changes. The Shave Care reporting unit and Gillette indefinite-lived intangible asset had fair value cushions below 10% and were identified as more susceptible to future impairment if competitive conditions, category growth, currencies, discount rates or cash-flow expectations deteriorate.
P&G is subject to litigation, environmental matters and tax audits in approximately 150 taxable jurisdictions. Management does not expect current legal or environmental matters to materially affect financial position, results of operations or cash flows, but the company cannot reliably estimate the ultimate resolution of certain tax uncertainties.
Investor verification items
- Verify the sustainability of earnings excluding the PGT partnership gain, tax benefits and restructuring adjustments; core EPS rose only 3%.
- Monitor gross-margin recovery against commodity inflation, unfavorable mix, pricing actions and foreign exchange.
- Assess whether organic sales and volume growth persist, particularly in Baby Care, Grooming and Health Care.
- Review liquidity and refinancing needs given the $5.9 billion working-capital deficit and $10.5 billion of debt due within one year.
- Track execution and total cost of the restructuring program, including the approximately $0.8 billion of expected fiscal 2019 charges.
- Evaluate impairment sensitivity for Shave Care goodwill and the Gillette brand intangible assets.
- Reconcile adjusted free cash flow and 95% productivity with GAAP operating cash flow, capital spending and U.S. Tax Act payments.