10-QPeriod: Q1 FY2011

PROCTER & GAMBLE Co Quarterly Report for Q1 Ended Sep 30, 2010

Filed October 28, 2010For Securities:PG

Summary

Procter & Gamble (PG) reported its fiscal first-quarter results for the period ending September 30, 2010, showing a modest increase in net sales to $20.1 billion, a 2% rise year-over-year. This growth was primarily driven by an 8% increase in unit volume, indicating strong consumer demand across many of its product categories, especially Fabric Care & Home Care and Baby Care & Family Care. However, net earnings saw a decline of 7% to $3.1 billion, largely due to the absence of the previously divested pharmaceuticals business, which significantly impacted the prior year's comparative results. Despite challenges like unfavorable foreign exchange rates and price reductions, the company demonstrated resilience. Diluted net earnings per share from continuing operations saw a healthy 5% increase to $1.02, outperforming net earnings growth due to active share repurchase programs. While operating cash flow decreased due to higher working capital needs, free cash flow remained substantial at $1.9 billion. Investors should note the ongoing legal proceedings in Europe concerning competition law violations, for which the company has reserved $275 million, although the ultimate impact remains uncertain and could be material.

Financial Highlights

50 data points
Beta

Revenue

$19.78B

51.0% Gross Margin

Net Income

$3.08B

15.6% Net Margin

EPS (Diluted)

$1.02

Total Assets

$133.69B

Cash & Equivalents

$2.60B

Free Cash Flow

$1.93B

Financial Statements
Beta
Revenue$19.78B
Cost of Revenue$9.69B
Gross Profit$10.10B
SG&A Expenses$5.93B
Operating Income$4.42B
Interest Expense$208.00M
Net Income$3.08B
EPS (Basic)$1.07
EPS (Diluted)$1.02
Shares Outstanding (Diluted)3.03B

Key Highlights

  • 1Net sales increased 2% to $20.1 billion, driven by an 8% rise in unit volume.
  • 2Organic sales grew 4%, excluding the impact of acquisitions, divestitures, and foreign exchange.
  • 3Net earnings declined 7% to $3.1 billion primarily due to the prior year's inclusion of divested pharmaceutical business results.
  • 4Diluted EPS from continuing operations increased 5% to $1.02, outperforming net earnings growth due to share repurchases.
  • 5Operating cash flow decreased significantly to $2.5 billion, impacted by higher working capital, but free cash flow was $1.9 billion.
  • 6The company has established a reserve of $275 million for potential fines related to European competition law investigations.
  • 7Significant share repurchase activity continued, with approximately $3 billion in treasury stock purchases during the quarter.

Frequently Asked Questions

The primary driver for the year-over-year decrease in net earnings was the absence of the net earnings from discontinued operations, specifically the global pharmaceuticals business divested in October 2009. While net earnings from continuing operations saw a slight increase, the loss of the significant contribution from the pharmaceuticals business in the prior year's comparable period led to an overall decline.

Unfavorable foreign exchange movements reduced net sales by 3%. The company also implemented price reductions, which lowered net sales by 1%, partly offset by price increases in developing regions to counter currency devaluations. Product mix also negatively impacted net sales by 2% due to growth in lower-priced products and developing regions.

Procter & Gamble is subject to investigations into potential competition law violations in Europe. The company has identified violations in certain European countries and has taken appropriate actions. As of September 30, 2010, the company has reserved $275 million for potential fines related to these violations. However, it notes that the ultimate resolution could result in fines or costs significantly in excess of the amounts reserved, and the impact could be material to its income statement and cash flows.

The company generated $2.5 billion in operating cash flow but experienced a significant decline compared to the prior year, largely due to an increase in working capital. Free cash flow was $1.9 billion. Financing activities consumed $1.9 billion, primarily for share repurchases ($3.0 billion) and dividends ($1.4 billion), partially funded by issuing $2.4 billion in short-term debt. The company expects to support its liquidity needs through ongoing cash generation and has strong debt ratings for refinancing.