Procter & Gamble Co. — Form 10-Q Summary
Reporting period: Quarterly period ended December 31, 2013, representing fiscal 2014 second-quarter and six-month results. The financial statements are unaudited. P&G sells branded consumer products in more than 180 countries and territories across Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby, Feminine and Family Care.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31 | Six Months Ended Dec. 31 |
|---|---|---|
| Net sales | $22.3 billion, flat year over year | $43.5 billion, up 1% |
| Organic sales growth | 3% | 3% |
| Unit volume growth | 3% | 4% |
| Operating income | $4.6 billion, up 1% | $8.7 billion, up 3% |
| Net earnings attributable to P&G | $3.4 billion, down 16% | $6.5 billion, down 6% |
| Diluted EPS | $1.18, down 15% | $2.21, down 6% |
| Operating margin | 20.4%, up 10 basis points | 20.0%, up 30 basis points |
| Gross margin | 50.0%, down 90 basis points | 49.5%, down 100 basis points |
| Effective tax rate | 21.6% | 22.7% |
| Operating cash flow | Not separately provided for the quarter | $5.3 billion |
| Free cash flow | Not separately provided for the quarter | $3.7 billion; 56% productivity |
Foreign exchange reduced second-quarter sales by approximately 3% and six-month sales by approximately 2%. Foreign exchange reduced net earnings by approximately $320 million in the quarter and $570 million year to date.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $6.9 billion at December 31, 2013, compared with $5.9 billion at June 30, 2013. Available-for-sale investment securities were $1.6 billion.
- Current assets were $27.5 billion versus current liabilities of $30.7 billion, resulting in a $3.3 billion excess of current liabilities over current assets.
- Debt due within one year was $14.1 billion and long-term debt was $21.5 billion. The fair value of total debt disclosed in the filing was approximately $30.1 billion.
- Six-month financing cash outflows included $3.4 billion of dividends and $4.0 billion of treasury stock purchases. Debt additions were $4.3 billion, while stock-option activity generated $937 million.
- P&G stated that fiscal 2013-14 share repurchases were estimated at $5 billion to $7 billion, excluding purchases under compensation and benefit plans.
- Management expects operating cash flow, debt-market access and available bank facilities to support short-term liquidity and operating needs.
Material Changes Versus the Prior Comparable Period
- Sales growth remained modest despite stronger underlying volume and organic sales, because unfavorable currency effects and geographic/product mix offset growth.
- Gross margin declined due to unfavorable mix, foreign exchange, higher commodity costs in certain businesses and, in the first six months, lower pricing and increased trade promotions. Manufacturing savings partly offset these pressures.
- SG&A declined 3% in both the quarter and six-month period, reflecting lower marketing and restructuring spending, overhead productivity savings and scale benefits.
- Operating income improved, but reported net earnings declined because the prior-year periods included significant non-operating gains, principally a $631 million after-tax-equivalent holding gain related to the Iberian joint venture buyout and a $247 million gain from an Italy bleach-business divestiture.
- Core EPS declined 1% to $1.21 in the quarter and $2.26 for the six-month period, a smaller decline than reported EPS after excluding specified restructuring, legal and prior-year transaction items.
- Operating cash flow decreased from $6.6 billion to $5.3 billion year to date. Working capital consumed approximately $2.0 billion, and the company made an approximately $1.0 billion discretionary contribution to its German defined benefit pension plan.
Segment Performance
| Segment | Q2 Sales | Q2 Net Earnings | Six-Month Sales | Six-Month Net Earnings |
|---|---|---|---|---|
| Beauty | $5.3 billion, down 2% | $927 million, up 6% | $10.2 billion, down 2% | $1.6 billion, up 5% |
| Grooming | $2.1 billion, flat | $553 million, up 7% | $4.1 billion, down 1% | $1.0 billion, up 2% |
| Health Care | $2.6 billion, up 4% | $377 million, up 8% | $4.9 billion, up 2% | $644 million, down 4% |
| Fabric Care and Home Care | $6.9 billion, up 1% | $877 million, flat | $13.6 billion, up 2% | $1.7 billion, down 1% |
| Baby, Feminine and Family Care | $5.6 billion, up 1% | $765 million, down 4% | $11.1 billion, up 3% | $1.5 billion, down 2% |
Effective July 1, 2013, P&G changed its reportable segment structure and recast prior periods. Feminine Care moved to Baby, Feminine and Family Care, and Pet Care moved to Health Care.
Guidance, Outlook, Commentary and Risks
- P&G expects to incur more than $3.5 billion of before-tax restructuring costs from fiscal 2012 through fiscal 2016. Approximately $300 million was incurred during the first two quarters of fiscal 2014, bringing cumulative costs through fiscal 2013 and the current period to approximately $2.3 billion.
- The company expects the restructuring program to generate more than $2 billion of annual before-tax savings; cumulative savings were estimated at approximately $1.3 billion to $1.6 billion at the current year.
- Management’s long-term target is free-cash-flow productivity at or above 90% of net earnings; current six-month productivity was 56%.
- The annual goodwill impairment test found that the Batteries reporting unit’s estimated fair value exceeded carrying value by approximately 6%. A further deterioration in projected cash flows could require a future non-cash impairment charge.
- Following January 2014 Venezuelan government announcements, dividends and royalties were expected to use the SICAD exchange program rather than the official rate. P&G had approximately $1.2 billion of Venezuelan net monetary assets and had not yet determined the magnitude of any potential revaluation charge or ongoing effects.
- Principal risks include competitive pricing and private-label pressure, commodity and labor costs, foreign exchange, political and economic instability, supply-chain disruption, regulatory and tax changes, intellectual-property matters, product liability and litigation.
- The company had accrued $155 million for European competition-law violations at December 31, 2013; $17 million of assessed fines remained unpaid. Management did not expect incremental losses from these matters to materially affect the financial statements, although ultimate outcomes remain uncertain.
- P&G reported no material changes in market-risk exposure since June 30, 2013. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether organic sales and volume growth can offset continued foreign-exchange pressure, unfavorable mix and commodity-cost inflation.
- The sustainability of gross-margin performance and the extent to which restructuring and productivity savings offset reduced marketing or other investments.
- The timing and funding of $5 billion to $7 billion of planned share repurchases relative to debt maturities and the company’s negative working-capital position.
- The ultimate accounting impact of Venezuela’s exchange-rate changes, including potential revaluation of the $1.2 billion local-currency net monetary asset position.
- Progress toward the company’s more than $2 billion annual restructuring-savings objective and the remaining restructuring-cost commitment.
- The limited 6% fair-value cushion for the Batteries reporting unit and the potential for future goodwill impairment.
- Resolution and cash requirements related to European competition-law matters and outstanding tax audits.