10-QPeriod: Q2 FY2019

PROCTER & GAMBLE Co Quarterly Report for Q2 Ended Dec 31, 2018

Filed January 23, 2019For Securities:PG

Summary

Procter & Gamble (PG) reported solid results for the fiscal second quarter and first half of fiscal year 2019, ending December 31, 2018. The company demonstrated resilience with net sales remaining flat year-over-year for both periods, driven by a 2% increase in unit volume and a 1% positive impact from mix, which was partially offset by a 4% negative impact from foreign exchange. Net earnings saw a significant increase, rising 26% for the quarter and 18% for the half-year, largely attributable to favorable impacts from the U.S. Tax Act and a gain from the dissolution of the PGT Healthcare partnership. Diluted EPS also showed strong growth. The company's strategic focus on productivity and cost savings is evident, with gross margins improving due to manufacturing cost savings and pricing actions, though offset by higher commodity costs and unfavorable mix in some segments. The acquisition of Merck KGaA's OTC healthcare business was completed in November 2018, adding to the Health Care segment, though its immediate impact on overall financials was noted as not material.

Financial Highlights

53 data points
Beta

Revenue

$17.44B

48.9% Gross Margin

Net Income

$3.19B

18.3% Net Margin

EPS (Diluted)

$1.22

Total Assets

$123.69B

Cash & Equivalents

$3.70B

Free Cash Flow

$3.31B

Financial Statements
Beta
Revenue$17.44B
Cost of Revenue$8.92B
Gross Profit$8.52B
SG&A Expenses$4.62B
Operating Income$3.90B
Interest Expense$138.00M
Net Income$3.19B
EPS (Basic)$1.25
EPS (Diluted)$1.22
Shares Outstanding (Basic)2.50B
Shares Outstanding (Diluted)2.62B

Key Highlights

  • 1Net sales remained flat at $17.4 billion for the three months ended December 31, 2018, and $34.1 billion for the six months ended December 31, 2018, against the prior year periods.
  • 2Net earnings increased significantly by 26% to $3.2 billion for the quarter and 18% to $6.4 billion for the six months, largely driven by tax benefits and a gain on partnership dissolution.
  • 3Diluted Earnings Per Share (EPS) increased by 31% to $1.22 for the quarter and 22% to $2.44 for the six months, benefiting from higher net earnings and a reduction in shares outstanding.
  • 4Gross margin decreased slightly for the quarter (48.9% vs. 49.9%) and six months (49.0% vs. 50.1%), impacted by higher commodity costs and unfavorable mix, despite manufacturing cost savings and pricing benefits.
  • 5The company completed the acquisition of Merck KGaA's OTC healthcare business for $3.7 billion in November 2018, which was allocated to the Health Care segment.
  • 6Organic sales grew by 4% for both the three and six-month periods, indicating underlying business strength despite foreign exchange headwinds.
  • 7Operating cash flow was strong at $7.6 billion for the six-month period, with adjusted free cash flow of $6.0 billion and 99% adjusted free cash flow productivity.

Frequently Asked Questions

Foreign exchange had a negative impact on PG's results. For the three months ended December 31, 2018, foreign exchange negatively impacted net sales by 4% and net earnings by $229 million. For the six months ended December 31, 2018, foreign exchange negatively impacted net sales by 3% and net earnings by $484 million.

The U.S. Tax Act significantly reduced PG's effective tax rate. For the three months ended December 31, 2018, the effective tax rate decreased by 1,860 basis points, largely due to prior year transitional impacts and ongoing impacts of U.S. Tax reform. For the six months ended December 31, 2018, the effective tax rate decreased by 1,200 basis points, primarily due to transitional impacts and the lower U.S. federal tax rate.

The company noted that goodwill for the Shave Care reporting unit and the related Gillette indefinite-lived intangible asset are more susceptible to impairment risk. This is due to an increased competitive market, changing grooming habits, and currency devaluations, which have reduced cash flow projections. Sensitivity analysis indicates that a 25 basis point increase in the discount rate or a 25 basis point decrease in growth rates could result in impairment charges.

PG has ongoing productivity and cost savings initiatives. The company incurred $1.1 billion in total before-tax restructuring costs in fiscal year 2018 and expects approximately $0.8 billion in fiscal year 2019. These costs are primarily related to supply chain optimization, workforce reductions, and overhead expenses.