01—Abstract
Summary
Summary of the 10-Q filed January 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Procter & Gamble's (PG) third quarter 2018 filing (period ending December 31, 2017) shows steady performance in core operations despite a significant impact from the U.S. Tax Cuts and Jobs Act.
Net sales increased by 3% year-over-year to $17.4 billiona, driven by a 2% rise in unit volume and positive foreign exchange impacts. Diluted earnings per share (EPS) from continuing operations remained flat at $0.93, but "Core EPS," which excludes the transitional impacts of the U.S. Tax Act and other one-time items, grew by 10% to $1.19, indicating underlying operational strength. The company experienced robust growth in its Beauty segment, with net sales up 10%, and solid performance in Health Care (up 7%) and Fabric & Home Care (up 3%).
However, Grooming and Baby, Feminine & Family Care segments saw slight declines in net sales. The significant year-over-year decrease in reported net earnings (down 68%b) and diluted EPS was primarily due to a large gain from the Beauty Brands divestiture in the prior year's comparable period, making the current period's core performance more relevant for investors. Operationally, the company is focused on productivity and cost savings, with ongoing initiatives to optimize its supply chain and reduce overhead.
While commodity costs and unfavorable product mix presented some headwinds to gross margin, these were partially offset by manufacturing cost savings. The company also highlighted its commitment to returning capital to shareholders through share repurchases and dividends, demonstrating confidence in its financial position and future prospects.
02—Key points
Key Highlights
- Net sales for the quarter increased 3% to $17.4 billion, driven by 2% unit volume growth and favorable foreign exchange.
- Diluted net earnings per share from continuing operations remained flat at $0.93, but "Core EPS" (adjusted for tax reform and other items) increased 10% to $1.19, signaling underlying business strength.
- The Beauty segment showed strong growth with net sales up 10%, while Health Care (up 7%) and Fabric & Home Care (up 3%) also performed well.
- The company incurred a significant provisional net charge of $628 million related to the U.S. Tax Cuts and Jobs Act, impacting reported net earnings.
- Gross margin declined 60 basis points due to higher commodity costs and unfavorable mix, partially offset by manufacturing cost savings.
- The company generated $7.3 billion in operating cash flow for the first six months of fiscal year 2018, with free cash flow of $5.4 billion.
- Share repurchases and dividends remain a focus, with significant amounts returned to shareholders as part of capital allocation strategy.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2018, Procter & Gamble Co kept $0.14.
- Revenue$17.39B100.0%
- Cost of revenue−$8.71B50.1%
- Gross profit$8.69B49.9%
- Operating costs−$4.77B27.4%
- Operating income$3.92B22.5%
- Interest, other & tax−$1.42B8.2%
- Net income$2.50B14.3%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2018filed January 23, 2018Financial Statements
Q2 FY2018 against Q2 FY2017
| Line item | Q2 FY2018Q2 FY2017 | Change |
|---|---|---|
| Revenue | $17.39B$16.86B | +3.2% |
| Cost of Revenue | $8.71B$8.30B | +5.0% |
| Gross Profit | $8.69B$8.56B | +1.5% |
| SG&A Expenses | $4.77B$4.68B | +1.8% |
| Operating Income | $3.92B$3.88B | +1.1% |
| Interest Expense | $122.00M$122.00M | 0.0% |
| Net Income | $2.50B$7.88B | −68.3% |
| EPS (Basic) | $0.96$3.01 | −68.1% |
| EPS (Diluted) | $0.93$2.88 | −67.7% |
| Shares Outstanding (Basic) | 2.53B2.60B | −2.4% |
| Shares Outstanding (Diluted) | 2.67B2.74B | −2.5% |
05—Questions
Frequently Asked Questions
How did the U.S. Tax Cuts and Jobs Act impact the company's financial results?
The U.S. Tax Cuts and Jobs Act, enacted in December 2017, resulted in a provisional net charge of $628 million for the quarter ended December 31, 2017. This charge was primarily due to a one-time repatriation tax on deemed repatriation of foreign earnings and adjustments to deferred tax assets and liabilities. While this significantly impacted reported net earnings and effective tax rate, the company's "Core EPS" metric excludes this transitional impact, showing an underlying operational improvement.
What is the performance of the company's different business segments?
The Beauty segment demonstrated strong growth with a 10% increase in net sales for the quarter, driven by premium innovation and the SK-II brand. Health Care saw a 7% net sales increase, supported by Oral Care and Personal Health Care. Fabric & Home Care also grew, with net sales up 3%. However, the Grooming and Baby, Feminine & Family Care segments experienced slight declines in net sales, down 1% and 1% respectively, with Grooming particularly impacted by pricing reductions in Shave Care.
What is the company's outlook on returning capital to shareholders?
Procter & Gamble continues to prioritize returning capital to shareholders. For the six months ended December 31, 2017, the company returned $4.3 billion through treasury stock purchases and $3.6 billion in dividends. Management expects to reduce outstanding shares through direct repurchases valued at approximately $6 to $8 billion in fiscal year 2018, funded by operating cash flows and debt.
What factors are impacting the company's gross margin?
Gross margin declined by 60 basis points in the quarter. This was primarily due to a 90 basis point increase from higher commodity costs and a 70 basis point decline from unfavorable product mix. These negative impacts were partially offset by 150 basis points of manufacturing cost savings projects.
06—Continue