10-QPeriod: Q2 FY2014

PROCTER & GAMBLE Co Quarterly Report for Q2 Ended Dec 31, 2013

Filed January 24, 2014For Securities:PG

Summary

Procter & Gamble's (PG) Q2 2014 results (ended December 31, 2013) show stable net sales of $22.3 billion, flat year-over-year, but a 3% increase in organic sales driven by a 3% rise in unit volume. This top-line performance was somewhat overshadowed by a significant 15% decrease in net earnings to $3.4 billion, largely due to a substantial drop in "other non-operating income/(expense), net," primarily from prior-year gains related to acquisitions and divestitures. Despite these headwinds, the company demonstrated operational resilience with stable operating income and improved operating margin. Key financial metrics reveal the company's ongoing efforts to manage costs and improve efficiency. Gross margin saw a slight contraction due to unfavorable mix and foreign exchange, but this was partially offset by manufacturing cost savings. Selling, general, and administrative (SG&A) expenses decreased as a percentage of sales, benefiting from marketing efficiencies and overhead productivity. The company also highlighted its commitment to shareholder returns through dividends and share repurchases, though free cash flow generation was impacted by working capital changes and a discretionary pension contribution.

Financial Highlights

52 data points
Beta

Revenue

$21.10B

50.4% Gross Margin

Net Income

$3.43B

16.2% Net Margin

EPS (Diluted)

$1.18

Total Assets

$142.93B

Cash & Equivalents

$6.93B

Free Cash Flow

$2.36B

Financial Statements
Beta
Revenue$21.10B
Cost of Revenue$10.47B
Gross Profit$10.63B
SG&A Expenses$6.32B
Operating Income$4.30B
Interest Expense$185.00M
Net Income$3.43B
EPS (Basic)$1.24
EPS (Diluted)$1.18
Shares Outstanding (Diluted)2.91B

Key Highlights

  • 1Net sales remained flat at $22.3 billion, but organic sales grew by 3%, indicating underlying business strength driven by a 3% increase in unit volume.
  • 2Net earnings attributable to Procter & Gamble decreased by 16% to $3.4 billion, largely due to a significant drop in "other non-operating income/(expense), net" compared to the prior year.
  • 3Operating income saw a modest 1% increase, with operating margin improving slightly to 20.4% from 20.3%, reflecting effective cost management.
  • 4Gross margin contracted by 90 basis points to 50.0%, primarily impacted by unfavorable geographic/product mix and foreign exchange, partially offset by manufacturing cost savings.
  • 5Selling, general and administrative (SG&A) expenses as a percentage of net sales decreased by 100 basis points to 29.6%, driven by reduced marketing spend and overhead productivity.
  • 6The company paid $0.602 per share in dividends, a 7% increase year-over-year, and continued its share repurchase program.
  • 7Significant foreign currency headwinds impacted net sales by 3% and net earnings by approximately $320 million for the quarter.

Frequently Asked Questions

The substantial decrease in net earnings was primarily driven by a significant decline in "other non-operating income/(expense), net." In the prior year's comparable quarter, the company recorded large gains from acquisitions and divestitures (e.g., a $631 million holding gain from the Iberia joint venture purchase and a $247 million gain from selling its Italy bleach business). These large one-time gains were not present in the current quarter, leading to a sharp year-over-year reduction in this line item.

Despite a 90 basis point contraction in gross margin primarily due to unfavorable mix and foreign exchange, the company is actively managing costs. Manufacturing cost savings helped offset some of the decline. Furthermore, selling, general and administrative (SG&A) expenses were reduced both in absolute terms and as a percentage of sales, driven by decreases in marketing spending and overhead productivity improvements.

Foreign exchange presented a significant headwind, reducing net sales by 3% and negatively impacting net earnings by approximately $320 million for the quarter. The company's organic sales growth metric (excluding foreign exchange impact) highlights underlying business performance. While the company uses hedging strategies for risk management, these headwinds are expected to continue affecting reported results. The report also notes specific currency challenges in Venezuela, which may lead to revaluation charges.

Core EPS is a non-GAAP measure that excludes certain items deemed not part of the company's sustainable results or trends. For this quarter, it excludes incremental restructuring charges and, for comparison, the prior year's gain on the Iberian joint venture buyout. The Core EPS of $1.21 for the quarter, a 1% decrease, provides a view of ongoing operational performance, whereas reported diluted EPS of $1.18 decreased by 15% due to the large non-operating items.