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FInancial statements analysis of P&G company
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PROCTER AND GAMBLE
Page | 1
Submitted to Prof. Vandana Gupta By:Shubham Jain 211138Shagun Gaurisaria 211133Yukti Agarwal 211169Vineet R. Singh 211165Varun Bagai 211159Tapsi Ahuja 211148
PROCTER AND GAMBLE
Table of Contents
Introduction on companyBrief background3 board of directors3shareholding pattern, 4Chapter2 Operating performance:7Net sales and earning8 analysis of sales mix9 peer comparison10 Financial statement analysis:, trends, profit and loss and balance sheet16Ratio analysis 25Cash flow analysis 29SWOT analysis of company39
CHAPTER 1INTRODUCTIONBRIEF BACKGROUNDP&G is one of the largest and amongst the fastest growing consumer goods companies in India. Established in 1964, P&G India now serves over 650 million consumers across India. Its presence pans across the Beauty & Grooming segment, the Household Care segment as well as the Health & Well Being segment, with trusted brands that are household names across India. These include Vicks, Ariel, Tide, Whisper, Olay, Gillette, Ambipur, Pampers, Pantene, Oral-B, Head & Shoulders, Wella and Duracell. Superior product propositions and technological innovations have enabled P&G to achieve market leadership in a majority of categories it is present in. P&G India is committed to sustainable growth in India, and is currently invested in the country via its five plants and over nine contract manufacturing sites, as well as through the 26,000 jobs it creates directly and indirectly. Their sustainability efforts focus on Environmental Protection as well as Social Responsibility to help develop the communities we operate in.
P&G operates under three entities in India - two listed entities Procter & Gamble Hygiene and Health Care Limited and Gillette India Limited, as well as one 100% subsidiary of the parent company in the U.S. called Procter & Gamble Home Products.
BOARD OF DIRECTORSThe board of directors of Procter & Gamble currently has eleven members:CEORobert A. McDonald
CEO , WELLPOINTAngela Braly
CEO, AMERICAN EXPRESSKenneth Chenault
CHAIRMAN INTUIT. INCScott. D, Cook
CEO. Boeing CompanyW.James Mc Nerney
CEO. ARCHER DANIELS,Patricia A. Woertz
CEO, HPMeg Whitman
OTHER BOARD MEMBERSJohnathan A. Rodgers,Ernesto Zedillo,,Susan D. Desmond-Hellmann,Maggie Wilderotter
Shareholding Pattern The Details of the shareholding pattern are as under:CATEGORY OFSHAREHOLDERNO. OFSHARE-HOLDERSTOTAL NO. OF SHARESTOTAL NO. OF SHARES HELD IN DEMATERIALIZED FORMTOTAL SHAREHOLDING AS A % OF TOTAL NO. OF SHARESSHARES PLEDGED OROTHERWISE ENCUMBERED NUMBER OFSHARES
AS A % OF (A+B) AS A % OF (A+B+C) AS A % OF TOTALNo. OF SHARES
(A) Shareholding of Promoter and Promoter Group
(1) Indian
Bodies Corporate1619,683619,6831.911.91--
Sub Total1619,683619,6831.911.91--
(2) Foreign
Bodies Corporate222,310,09022,310,09068.7368.73--
Sub Total222,310,09022,310,09068.7368.73--
Total shareholding of Promoter and Promoter Group (A)322,929,77322,929,77370.6470.64--
(B) Public Shareholding
(1) Institutions
Mutual Funds / UTI302,420,5162,417,8457.467.46--
Financial Institutions / Banks31201,618199,1830.620.62--
Insurance Companies4928,135928,1352.862.86--
Foreign Institutional Investors33645,724645,1811.991.99--
Sub Total984,195,9934,190,34412.9312.93--
(2) Non-Institutions
Bodies Corporate442853,071845,5332.632.63--
Individuals------
Individual shareholders holding nominal share capital up to Rs. 1 lakh21,5903,862,7693,223,83511.911.9--
Individual shareholders holding nominal share capital in excess of Rs. 1 lakh21484,523484,5231.491.49--
Any Others (Specify)619134,607108,4020.410.41--
Non Resident Indians45292,67287,6140.290.29--
Trusts5451451----
Directors & their Relatives & Friends715,3841120.050.05--
Hindu Undivided Families8322,50816,6330.070.07--
Clearing Members723,5923,5920.010.01--
Sub Total22,6725,334,9704,662,29316.4416.44--
Total Public shareholding (B)22,7709,530,9638,852,63729.3629.36--
Total (A)+(B)22,77332,460,73631,782,410100100--
(C) Shares held by Custodians and against which Depository Receipts have been issued-m-------
(1) Promoter and Promoter Group------
(2) Public------
Sub Total------
Total (A)+(B)+(C)22,77332,460,73631,782,410-100--
This Pattern shows that P & G is dependent on its internal sources for funds not on External sources.CHAPTER 2ENCLOSURE ON THE OPERATING PERFORMANCE OF THE COMPANY
MARKET SHAREGBUReportable SegmentCategoriesBillion Dollar BrandsMarket Share
BEAUTY AND GROOMINGBeautyCosmetics, Female Antiperspirant and Deodorant, Female Personal Cleansing, Female Shave Care, Hair Care, Hair Color, Hair Styling, Pharmacy Channel, Prestige Products, Salon Professional, Skin CareHead & Shoulders, Olay, Pantene, Wella20%
GroomingBeauty Electronics, Home Small Appliances, Male Blades and Razors,Male Personal Care Braun, Fusion, Gillette, Mach370%
HEALTH AND WELL-BEINGHealth CareFeminine Care, Gastrointestinal, Incontinence, Rapid Diagnostics, Respiratory, Toothbrush, Toothpaste,Water Filtration, Other Oral CareAlways, Crest, Oral-B20%
Snacks and Pet CarePet Care, SnacksIams, Pringles10%
HOUSEHOLD CAREFabric Care and Home CareAdditives, Air Care, Batteries, Dish Care, Fabric Enhancers, Laundry, Surface CareAce, Ariel, Dawn, Downy, Duracell, Gain, Tide30%
Baby Care and Family CareBaby Wipes, Diapers, Paper Towels, Tissues, Toilet PaperBounty, Charmin, Pampers15%
NET SALES AND NET EARNINGSGBUReportable SegmentCategoriesBillion Dollar Brands% of Net Sales*% of NetEarnings*
BEAUTY AND GROOMINGBeautyCosmetics, Female Antiperspirant and Deodorant, Female Personal Cleansing, Female Shave Care, Hair Care, Hair Color, Hair Styling, Pharmacy Channel, Prestige Products, Salon Professional, Skin CareHead & Shoulders, Olay, Pantene, Wella24%24%
GroomingBeauty Electronics, Home Small Appliances, Male Blades and Razors,Male Personal Care Braun, Fusion, Gillette, Mach39%14%
HEALTH AND WELL-BEINGHealth CareFeminine Care, Gastrointestinal, Incontinence, Rapid Diagnostics, Respiratory, Toothbrush, Toothpaste,Water Filtration, Other Oral CareAlways, Crest, Oral-B14%16%
Snacks and Pet CarePet Care, SnacksIams, Pringles4%2%
HOUSEHOLD CAREFabric Care and Home CareAdditives, Air Care, Batteries, Dish Care, Fabric Enhancers, Laundry, Surface CareAce, Ariel, Dawn, Downy, Duracell, Gain, Tide30%27%
Baby Care and Family CareBaby Wipes, Diapers, Paper Towels, Tissues, Toilet PaperBounty, Charmin, Pampers19%17%
SALES MIX
GBUReportable SegmentNet Sales*(2011)Net Sales*(2010)Net Sales*(2009)Net Sales*(2008)
BEAUTY AND GROOMINGBeauty$20,157 $19,491 $18,789 $19,515
Grooming$8,025 $7,631 $7,543 $8,254
HEALTH AND WELL-BEINGHealth Care$12,033 $11,493 $13,623 $14,578
Snacks and Pet Care$3,156 $3,135 $3,114 $3,204
HOUSEHOLD CAREFabric Care and Home Care$24,837 $23,805 $23,186 $23,714
Baby Care and Family Care$15,606 $14,736 $14,103 $13,898
Important Inferences:Net sales increased by 5% to $82.6 billion. Organic sales increased by 4%. Unit volume increased 6% versus the prior year, behind double-digit growth in developing regions and low single-digit growth in developed regions.
EARNINGS DATAGBUReportable SegmentNet Earnings*(2011)Net Earnings*(2010)Net Earnings*(2009)Net Earnings*(2008)
BEAUTY AND GROOMINGBeauty$2,686 $2,712 $2,531 $2,730
Grooming$1,631 $1,477 $1,492 $1,679
HEALTH AND WELL-BEINGHealth Care$1,796 $1,860 $2,435 $2,506
Snacks and Pet Care$241 $326 $234 $261
HOUSEHOLD CAREFabric Care and Home Care$3,009 $3,339 $3,032 $3,411
Baby Care and Family Care$1,978 $2,049 $1,770 $1,728
Net earnings from continuing operations increased by 8% to $11.8 billion behind sales growth and a lower effective tax rate, partially offset by operating margin contraction. Operating margin declined 110 basis points behind a reduction in gross margin partially offset by a reduction in selling, general and administrative expenses (SG&A) as a percentage of net sales. Gross margin declined behind higher commodity costs, partially offset by manufacturing cost savings. SG&A as a percentage of net sales declined due to reduced foreign currency exchange costs and a reduction in overhead spending as a percentage of net sales due to productivity improvements, partially offset by increased marketing investments. Net earnings decreased 7% to $11.8 billion. Net earnings from discontinued operations declined $1.8 billion due to the gains on the sale of the pharmaceutical business in the prior year.
PEER COMPARISON RONWRONW
2011201020092008
P&G33.62%40.64%37.91%30.85%
HUL87.57%85.25%121.34%122.97%
ITC31.36%28.98%23.85%25.99%
The Return on Net Worth of the company is low as compared to its competitor HUL and a bit high as compared to ITC but it has decreased in 2011 still Grow organic sales 1% to 2% faster than market growth in the categories and countries where P&G compete. Deliver core earnings per share (core EPS) growth of high single to low double-digits. Generate free cash flow productivity of 90% or greater.
The net worth of P&G is increasing at a faster rate as compared to the net profit and therefore the decline in the past few years. That is, the company is giving lesser returns with the increase in capital investment by the owners of the company.
PROFIT MARGINSReturn on Net Earnings
2011201020092008
P&G14.54%19.31%22.36%19.89%
HUL11.56%12.29%12.09%12.58%
ITC22.91%21.30%21.18%21.50%
P&G is not doing better than most peers as far as the Profit margins are concerned. P&G has shown a downward trend in the past 3 years whereas its peers have shown an increases in at least three of the P&Gs years.
RETURN ON ASSETS
Return on Assets Including Revaluations
2011201020092008
P&G185.03164.7135.56106.79
HUL12.211.849.466.61
ITC20.6236.8436.3932
The figures may be misleading as it shows an downward trend over the years. That is because the company is investing more in the long term assets rather than going for short term investment. This can be summed up the profit has declined over the years because company is investing in Assets or the book value of Assets has increased but since company follows conservatism principle, second inference can be discarded.
Chapter 3FINANCIAL ANALYSIS I: ANALYSIS OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNTBALANCE SHEETConsolidated Balance Sheets
Amounts in millions
Assets2011201020092008
CURRENT ASSETS
Cash and cash equivalents2,7682,8794,7813,313
Accounts receivable6,2755,3355,8366,761
INVENTORIES
Materials and supplies2,1531,6921,5572,262
Work in process717604672765
Finished goods4,5094,0884,6515,389
Total inventories7,3796,3846,8808,416
Deferred income taxes1,14099012092012
Prepaid expenses and other current assets4,4083,1943,1994,013
TOTAL CURRENT ASSETS21,97018,78221,90524,515
PROPERTY, PLANT AND EQUIPMENT
Buildings7,7536,8686,7247,052
Machinery and equipment32,82029,29429,04230,145
Land934850885889
Total property, plant and equipment41,50737,01236,65138,086
Accumulated depreciation-20,214-17,768-17,189-17,446
NET PROPERTY, PLANT AND EQUIPMENT21,29319,24419,46220,640
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill57,56254,01256,51259,767
Trademarks and other intangible assets, net32,62031,63632,60634,233
NET GOODWILL AND OTHER INTANGIBLE ASSETS90,18285,64889,11894,000
OTHER NONCURRENT ASSETS4,9094,4984,3484,837
TOTAL ASSETS138,354128,172134,833143992
Liabilities and Shareholders Equity2011201020092008
CURRENT LIABILITIES
Accounts payable8,0227,2515,9806,775
Accrued and other liabilities9,2908,5598,60111,099
Debt due within one year9,9818,47216,32013,084
TOTAL CURRENT LIABILITIES27,29324,28230,90130,958
LONG-TERM DEBT22,03321,36020,65223,581
DEFERRED INCOME TAXES11,07010,90210,75211,805
OTHER NONCURRENT LIABILITIES9,95710,1899,1468,154
TOTAL LIABILITIES70,35366,73371,45174,498
SHAREHOLDERS EQUITY
Convertible Class A preferred stock, stated value1 per share (600 shares authorized)1,2341,2771,3241,366
Non-Voting Class B preferred stock, stated value1 per share (200 shares authorized)
Common stock, stated value1 per share (10,000 shares authorized; shares issued: 20114,007.9, 20104,007.6)4,0084,0084,0074,002
Additional paid-in capital62,40561,69761,11860,307
Reserve for ESOP debt retirement-1,357-1,350-1,340-1,325
Accumulated other comprehensive income (loss)-2,054-7,822-3,3583,746
Treasury stock, at cost (shares held: 20111,242.2, 20101,164.1)-67,278-61,309-55,961-47,588
Retained earnings70,68264,61457,30948,986
TOTAL SHAREHOLDERS EQUITY68,00161,43963,38269,494
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY138,354128,172134,833143,992
NATURE OF OPERATIONSThe Procter & Gamble Companys (the Company, we or us) business is focused on providing branded consumer packaged goods of superior quality and value. Our products are sold in more than 180 countries primarily through retail operations including mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons and high-frequency stores. P&G have on-the ground operations in approximately 80 countries.
BASIS OF PRESENTATIONThe Consolidated Financial Statements include the Company and its controlled subsidiaries. Intercompany transactions are eliminated.Use of EstimatesPreparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on managements best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, consumer and trade promotion accruals, pensions, postemployment benefits, stock options, valuation of acquired intangible assets, useful lives for depreciation and amortization of long-lived assets, future cash fl ows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the financial statements in any individual year. However, in regard to ongoing impairment testing of goodwill and indefinite-lived intangible assets, significant deterioration in future cash flow projections or other assumptions used in valuation models, versus those anticipated at the time of the valuations, could result in impairment charges that may materially affect the financial statements in a given year.
REVENUE RECOGNITIONSales are recognized when revenue is realized or realizable and has been earned. Revenue transactions represent sales of inventory. The revenue recorded is presented net of sales and other taxes P&G collect on behalf of governmental authorities. The revenue includes shipping and handling costs, which generally are included in the list price to the customer. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized. Trade promotions, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is recognized as incurred, generally at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the accrued and other liabilities line item in the Consolidated Balance Sheets. Cost of Products SoldCost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSESelling, general and administrative expense (SG&A) is primarily comprised of marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, depreciation and amortization expense on non-manufacturing assets and other miscellaneous operating items. Research and development costs are charged to expense as incurred and were $2,001 in 2011, $1,950 in 2010 and $1,864 in 2009. Advertising costs, charged to expense as incurred, include worldwide television, print, radio, internet and in-store advertising expenses and were $9,315 in 2011, $8,576 in 2010 and $7,519 in 2009. Non-advertising related components of the Companys total marketing spending include costs associated with consumer promotions, product sampling and sales aids, all of which are included in SG&A, as well as coupons and customer trade funds, which are recorded as reductions to net sales.
OTHER NON-OPERATING INCOME/(EXPENSE), NETOther non-operating income/(expense), net, primarily includes net divestiture gains, interest and investment income and the provision for income attributable to non-controlling interests.Currency Translation Financial statements of operating subsidiaries outside the United States of America (U.S.) generally are measured using the local currency as the functional currency. Adjustments to translate those statements into U.S. dollars are recorded in other comprehensive income (OCI). Currency translation adjustments in accumulated OCI were a gain of $5,632 at June 30, 2011 and a loss of $861 at June 30, 2010. For subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Re-measurement adjustments for financial statements in highly inflationary economies and other transactional exchange gains and losses are reflected in earnings.
STATEMENT OF EARNINGSConsolidated Statements of Earnings
Amounts in millions except per share amounts2011201020092008
NET SALES82,55978,93876,69481748
Cost of products sold40,76837,91938,69039,536
Selling, general and administrative expense25,97324,99822,63025,575
OPERATING INCOME15,81816,02115,37416,637
Interest expense8319461,3581,467
Other non-operating income/(expense), net202-28397462
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES15,18915,04714,41315,632
Income taxes on continuing operations3,3924,1013,7333,834
NET EARNINGS FROM CONTINUING OPERATIONS11,79710,94610,68011,798
NET EARNINGS FROM DISCONTINUED OPERATIONS1,7902,756277
NET EARNINGS11,79712,73613,43612075
BASIC NET EARNINGS PER COMMON SHARE:
Earnings from continuing operations4.123.703.553.77
Earnings from discontinued operations0.620.940.09
BASIC NET EARNINGS PER COMMON SHARE4.124.324.493.86
DILUTED NET EARNINGS PER COMMON SHARE:
Earnings from continuing operations3.933.533.393.56
Earnings from discontinued operations0.580.870.08
DILUTED NET EARNINGS PER COMMON SHARE3.934.114.263.64
DIVIDENDS PER COMMON SHARE1.971.801.641.45
NET EARNINGSNet earnings from continuing operations were $11.8 billion in 2011, an increase of 8% versus the prior year due mainly to net sales growth and a lower effective tax rate, partially offset by operating margin contraction. Operating margin decreased 110 basis points due to a decrease in gross margin, partially offset by a decrease in SG&A spending as a percentage of net sales. Gross margin declined behind higher commodity costs, partially offset by manufacturing cost savings. SG&A as a percentage of net sales declined due to reduced foreign currency exchange costs and a reduction in overhead spending as a percentage of net sales due to productivity improvements, partially offset by increased marketing investments. Net earnings from continuing operations were $10.9 billion in 2010, an increase of 2% versus the prior year due mainly to net sales growth and operating margin expansion, partially offset by a higher effective tax rate. Operating margin was up 30 basis points due to an increase in gross margin, mostly offset by an increase in SG&A as a percentage of net sales.
STATEMENT OF CASH FLOWSConsolidated Statements of CASH FLOWS
Amounts in millions2011201020092008
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR2,8794,7813,3135,354
OPERATING ACTIVITIES
Net earnings11,79712,73613,43612,075
Depreciation and amortization2,8383,1083,0823,166
Share-based compensation expense414453516555
Deferred income taxes128365961214
Gain on sale of businesses-203-2,670-2,377-284
Change in accounts receivable-426-14415432
Change in inventories-50186721-1050
Change in accounts payable, accrued and other liabilities3582,446-742297
Change in other operating assets and liabilities-1,190-305-758-1270
Other1619630-127
TOTAL OPERATING ACTIVITIES13,23116,07214,91915,008
INVESTING ACTIVITIES
Capital expenditures-3,306-3,067-3,238-3,046
Proceeds from asset sales2253,0681,087928
Acquisitions, net of cash acquired-474-425-368-381
Change in investments73-173166-50
TOTAL INVESTING ACTIVITIES-3,482-597-2,353-2,549
FINANCING ACTIVITIES
Dividends to shareholders-5,767-5,458-5,044-4,655
Change in short-term debt151-1,798-2,4202,650
Additions to long-term debt1,5363,8304,9267,088
Reductions of long-term debt-206-8,546-2,587-11,747
Treasury stock purchases-7,039-6,004-6,370-10,047
Impact of stock options and other1,3027216811867
TOTAL FINANCING ACTIVITIES-10,023-17,255-10,814-14,844
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS163-122-284344
CHANGE IN CASH AND CASH EQUIVALENTS-111-1,9021,468-2,041
CASH AND CASH EQUIVALENTS, END OF YEAR2,7682,8794,7813,313
SUPPLEMENTAL DISCLOSURE
Cash payments for:
Interest8061,1841,2261,373
Income taxes2,9924,1753,2483,499
Assets acquired through non-cash capital leases1320813
Divestiture of coffee business in exchange for shares of P&G stock2,466
CASH FLOW PRESENTATIONThe Consolidated Statements of Cash Flows are prepared using the indirect method, which reconciles net earnings to cash flow from operating activities. The reconciliation adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in net earnings. The adjustments also remove cash fl ows arising from investing and financing activities, which are presented separately from operating activities. Cash flows from foreign currency transactions and operations are translated at an average exchange rate for the period. Cash flows from hedging activities are included in the same category as the items being hedged. Cash flows from derivative instruments designated as net investment hedges are classified as financing activities. Realized gains and losses from non-qualifying derivative instruments used to hedge currency exposures resulting from intercompany financing transactions are also classified as financing activities. Cash flows from other derivative instruments used to manage interest, commodity or other currency exposures are classified as operating activities. Cash payments related to income taxes are classified as operating activities.
CASH FLOW STATEMENT ANALYSISAfter thorough analysis we believe that the financial condition of P&G is of high quality.The company enjoys high degree of financial flexibility as well as it is not dependant on debt ad can raise debt for its future needs.Operating cash flow provides the primary source of funds to finance operating needs and capital expenditures. Excess operating cash is used first to fund shareholder dividends. The overall cash position of the Company reflects their strong business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.OPERATING ACTIVITIESOperating cash flow was $13.2 billion in 2011, an 18% decrease versus the prior year. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, stock-based compensation, deferred income taxes and gain on the sale of businesses), partially offset by an increase in working capital. The net of accounts receivable, inventory and accounts payable consumed $569 million of operating cash flow in 2011 mainly due to increases in inventories and accounts receivables. Inventory consumed $501 million driven by higher commodity costs, business growth and increased stock levels in advance of initiatives and sourcing changes.Operating cash flow was $16.1 billion in 2010, an 8% increase versus the prior year whereas in 2009, operating cash flow was $14.9 billion, a decrease of 1% versus the prior year total of $15.0 billion. Operating cash flow in 2010 resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, stock-based compensation, deferred income taxes and gain on the sale of businesses) and a reduction in working capital. The increase in operating cash flow was primarily due to the current year reduction in working capital balances, partially offset by a decline in earnings versus 2009. Working capital reductions contributed $2.5 billion to operating cash flow in 2010 mainly due to an increase in accounts payable, accrued and other. Inventory contributed to operating cash flow despite growth in the business due to a reduction in days on hand due primarily to inventory management improvement efforts In 2009 Operating cash flow resulted primarily from net earnings adjusted for non-cash items. The decrease in operating cash flow versus 2008 was primarily due to a decline in net earnings from continuing operations. INVESTING ACTIVITIESNet investing activities consumed $3.5 billion of cash in 2011 and $597 million in 2010 mainly due to capital spending and acquisitions, partially offset by proceeds from asset sales, including $3.0 billion in cash received from the sale of our global pharmaceuticals business in 2010.Net investing activities consumed $597 million of cash in 2010 and $2.4 billion in 2009 mainly due to capital spending and acquisitions, partially offset by proceeds from asset sales, including $3.0 billion in cash received from the sale of their global pharmaceuticals business in 2010. Discontinued operations consumed $1 million of cash from investing activities in 2010 and contributed $69 million in 2009.FINANCING ACTIVITIES Dividend Payments.Their first discretionary use of cash is dividend payments. Dividends per common share increased 9% to $1.97 per share in 2011. Total dividend payments to common and preferred shareholders were $5.8 billion in 2011 and $5.5 billion in 2010. The increase in dividend payments resulted from increases in our quarterly dividends per share, partially offset by a reduction in the number of shares outstanding. Dividends per common share increased 10% to $1.80 per share in 2010. Total dividend payments to both common and preferred shareholders were $5.5 billion in 2010 and $5.0 billion in 2009.
Long-Term and Short-Term Debt.They maintain debt levels they consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and the overall cost of capital. Total debt was $32.0 billion in 2011 and $29.8 billion in 2010. Our total debt increased in 2011 mainly due to net debt issuances to fund general corporate purposes.Total debt was $29.8 billion in 2010, $37.0 billion in 2009 and $36.7 billion in 2008. Their total debt decreased in 2010 mainly due to repayments funded by operating cash flow and cash provided by the global pharmaceuticals divestiture.
CASH EQUIVALENTSHighly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.
InvestmentsInvestment securities consist of readily marketable debt and equity securities. Unrealized gains or losses are charged to earnings for investments classified as trading. Unrealized gains or losses on securities classified as available-for-sale are generally recorded in shareholders equity. If an available-for-sale security is other than temporarily impaired, the loss is charged to either earnings or shareholders equity depending on our intent and ability to retain the security until P&G recover the full cost basis and the extent of the loss attributable to the creditworthiness of the issuer. Investments in certain companies, over which P&G exert significant influence but do not control the financial and operating decisions, are accounted for as equity method investments. Other investments that are not controlled, and over which P&G do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as other noncurrent assets in the Consolidated Balance Sheets.
Inventory ValuationInventories are valued at the lower of cost or market value. Product related inventories are primarily maintained on the first-in, first-out method. Minor amounts of product inventories, including certain cosmetics and commodities, are maintained on the last-in, first-out method. The cost of spare part inventories is maintained using the average cost method.
CHAPTER 5 RATIO ANALYSISRatiosJun-11Jun-10Jun-09Jun-08
Current Ratio0.804968310.773494770.708876740.79187932Current Asset/ Current Liability
Acid-Test Ratio0.331330380.338275270.343581110.32540862Current Asset- Total Inventories/ Current Liability
Creditors Turnover Ratio8.739736799.510543429.615052929.6104797Cost of products sold/ Average Inventories
Creditors payment period1.373039061.261757551.248043051.2486369412/ Payment Period
Projected daily cash requirement36.249315144.032876740.873972641.1178082TOTAL OPERATING ACTIVITIES/365
Defensive Interval Ratio79.4221903108.57796281.0540251130.211221CASH AND CASH EQUIVALENTS/Projected Daily Cash Requirement
Cash-flow From Operations Ratio0.484776320.661889470.482799910.48478584TOTAL OPERATING ACTIVITIES/Current Liabilities
Debt-equity ratio0.725371690.742883180.813369730.78480157TOTAL CURRENT LIABILITIES+LONG-TERM DEBT/ Share Holder's Equity
Debt to Total Capital0.54785970.551238540.613477880.58596831TOTAL CURRENT LIABILITIES+LONG-TERM DEBT/ Share Holder's Equity+LONG-TERM DEBT
Debt-assets ratio0.356520230.356099620.382347050.3787641TOTAL CURRENT LIABILITIES+LONG-TERM DEBT/Total Asset
Equity-assets ratio
Interest coverage ratio18.277978317.798097312.642857110.8445808Net Earnings+Income taxes on continuing operations/ Interest Expense
Dividend coverage ratio 2.04560432.333455482.663758922.59398496Net Earnings/Dividends to shareholders
Total fixed charge coverage ratio------------------------------------
Total Cashflow Coverage Ratio------------------------------------
Debt Service Coverage Ratio------------------------------------
Gross Profit Margin18.40%19.06%18.79%19.12%Gross Profit/ Net Sales
Net Profit Margin
Operating Profit Ratio 14.29%16.13%17.52%14.77%NetProfit before interest and Tax/ net Sales
Pre-tax Profit Ratio 13.28%14.94%15.75%12.98%NetProfit before Tax/ net Sales
Net Profit Ratio 9.17%9.74%10.88%8.29%NetProfit after interest and Tax/ net Sales
Expenses Ratio
Cost of goods sold0.493804430.480364340.504472320.48363263Cost of products sold/Net Sales
Operating expenses 0.314599260.316678910.295068710.31285169Selling, general and administrative expense/Net Sales
Administrative expenses ------------------------------------
Selling expenses ratio ------------------------------------
Operating ratio 0.808403690.797043250.799541030.79648432Cost of Product Sold + Selling, general and administrative expense/Net sales
Financial expenses 0.010065530.011984090.017706730.01794539Interest Expense /Net Sales
Return on Investments
Return on Assets (ROA)0.08852420.096849870.096375860.08385883Net Earnings/Total Assets
Return on Capital Employed (ROCE)0.071217710.083539950.081069670.06901972Net Earnings/Total Assets-Total Current Liabilities
Return on Shareholders Equity
Return on total shareholders equity 0.18227750.204068230.202233660.17375601Net Earnings/Average Share Holder's Equity
Return on ordinary shareholders equity (Net worth)0.18227750.204068230.202233660.17375601Net Earnings/Average Share Holder's Equity
Earnings per share (EPS) 46.4855.3855.140.48Net profit available to equity shareholders (EAT Dp)/Number of equity shares outstanding (N)
Dividends per share (DPS)22.522.522.520Dividend paid to ordinary shareholders/Number of ordinary shares outstanding (N)
Earnings yield8.46.827.57EPS/Market price per share
Dividend Yield3.25%3.10%3.25%3.25%DPS/Market price per share
Dividend payment/payout (D/P) ratio56.2647.3747.7757.79DPS/EPS
Price-earnings (P/E) ratio49.0541.5844.2252.91Market price of a share/EPS.
Book value per share185.03164.7135.56106.79Ordinary shareholders equity/Number of equity shares outstanding.
Efficiency Ratio
Inventory Turnover Ratio 5.924289765.717581425.058838914.69771863Cost of products sold/ Average Inventories
Inventory holding period2.025559262.098789532.372085812.554431412/ Inventoryturnover ratio
Raw materials turnover ------------------------------------
Work-in-progress turnover ------------------------------------
Debtors Turnover Ratio
Debtors turnover 14.2220514.132664912.1765512.0911108Total Sales/Accounts receivable
Average collection period 0.843760220.849096760.985500820.9924646512/ debtors turnover ratio
Assets Turnover Ratio
Total assets turnover 0.294664410.295844650.286947560.27457081COGS/Total Assets
Fixed assets turnover 1.914619831.970432341.987976571.91550388COGS/Fixed Assets
Capital turnover 0.59952060.617181270.610425670.56891242COGS/Total Shareholder's Equity
Current assets turnover1.85562132.018901081.766263411.6127269COGS/Current Assets
Working capital turnover 0.367077550.364991820.372262630.34977087COGS/Total Assets-Current Liabilities
LIQUIDITYThe current liabilities exceeded current assets by $5.3 billion, largely due to P&Gs commercial paper program. This anticipates that being able to support the short-term liquidity and operating needs largely through cash generated from operations. P&G utilize short- and long-term debt to fund discretionary items such as acquisitions and share repurchases. P&G have strong short- and long-term debt ratings which have enabled and should continue to enable us to refinance P&Gs debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, P&G have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.On June 30, 2011, P&Gs short-term credit ratings P&G A-1+ (Standard & Poors), while P&Gs long-term credit ratings are AA- (Standard & Poors), both with a stable outlook. P&G maintain bank credit facilities to support P&Gs ongoing commercial paper program. These facilities can be extended for certain periods of time as specified in, and in accordance with, the terms of each credit agreement. The current facility is an $11.0 billion facility split bet P&G en a $7.0 billion 5-year facility and a $4.0 billion 364-day facility, which expire in August 2016 and August 2012, respectively. P&G anticipate that these facilities will remain largely undrawn for the foreseeable future. These credit facilities do not have cross-default or ratings triggers, nor do they have material adverse events clauses, except at the time of signing. In addition to these credit facilities, P&G have an automatically effective registration statement on Form S-3 filed with the SEC that is available for registered offerings of short- or long-term debt securities. SOLVENCYSolvency ratios indicate that the capital structure of P&G are similar, with the former having slightly higher leverage. The main note in the solvency of the firm is its capacity to affront debt long-term, which is given by companys ability to generate cash. P&G is a money machine firm, it has double the percentage of operating cash flow to total liabilities Furthermore, P&Gs interest coverage ratio is more. The difference in capacity to generate cash reduces a firms risk, therefore improving credit ratings and decreasing cost of debt. Price earnings ratio and market to book ratio, also assessed by the solvency ratios, illustrates the assessment of the market on each firm. In P&Gs case the market provides a considerable premium. This was expected given the higher profit margin, lower risk and strong cash flow provided by P&G. PROFITABILITY ANALYSISProcter & Gamble has considerable higher profit margin, but in order to perform a detail assessment on both of ROA and ROCE. P&G has higher profit margin for return of assets. The table shows the composition of the profit margin by providing the value of each major element of the income statement as a percentage of sales. There is an inverse relationship between the cost of goods sold and selling and administrative expenses between the firms. By assessing the overall percentage of both measures, P&G presents a lower amount of COGS and SGA. This was expected given P&Gs higher operating leverage and savings the firm has in its sales efforts due to its market power with ad agencies and other service providers, furthermore given that P&Gs brands are leaders in their respective industries (High brand equity) the firm is expected to have to invest smaller amounts of capital in SGAs.As previously indicated by the liquidity ratios P&Gs current assets turnovers are higher, but its overall asset turnover is of similar value. This is caused by the low fix asset turnover of P&Gs , furthermore, as seen in the appendix (Financial statements), P&Gs has considerable higher percentage on investments and other current assets. This account usually reflects long-term investments and holdings in other companies, which increases the amount of assets of the firm and reduces its asset turnover. The higher return on common equity for P&G can further support the higher market to book value ratio and price earnings premiums, given that P&G provides an average 35% return on common equity, investors will be willing to pay premium to hold a piece of the equity of the firm.
RISK ANALYSISEnterprise risk is measured by liquidity (short term capacity to fund debt) and solvency (long-term ability to fund debt) ratios and indicate the capacity of the firm to support its debt. It can be inferred that P&G has higher current and quick ratios, further analysis of the calculated liquidity ratios indicate that there is a considerable difference of the cash cycle (Net Working Capital Days). The table indicates that P&G has had approximately 50 days of cash cycle financing. Given P&G market power, large array of resources and experience managing businesses; it is believed that the simple adaptation of corporate procedures will allow P&G to generate enough synergies in the short-term to guarantee increases of cash flow. Analyzing the elements of the cash cycle It is noticed that the firm is concentrated in days inventory and receivables held. Days inventory held would immediately improve by the re-assessment of inventory management which usually requires advance integrated information systems and market power, both of which P&G has in place. Furthermore, as previously stated in the analysis of synergies, P&G is improving its COGS and ultimately days payable held. Days receivable held are usually driven by the firms relationship with the customer and improvement of collection practices. Given P&Gs market power, I expect that P&Gs will improve receivables by discounts and re-structuring of terms, therefore improving its collection period. GROWTH DRIVERSP&Gs Purpose is to touch and improve peoples everyday lives. This is an inspiring but demanding aspiration. There are nearly seven billion people on the planet today and P&G are currently reaching about 4.4 billion of them. P&G want to reach all of them with products and services that make their everyday live a little better. P&G know that if P&G do this well, well be rewarded with sales and profit growth, market share leadership, a strong company reputation and, ultimately, the creation of value that allows P&Gs people, P&Gs shareholders and the communities in which P&G live and work to prosper. P&Gs growth strategy, which P&G established two years ago, is inspired by P&Gs Purpose. P&G are executing this strategy by innovating to improve peoples everyday lives in every part of the world, and by then expanding P&Gs portfolio of innovation up and down price tiers, into new markets, and into new and existing product categories. This strategy is fundamentally right for P&G because it inspires P&Gs people and P&Gs partners, focuses us where the growth opportunities are greatest, and leverages P&Gs core strengths: consumer understanding, brand building, go-to-market capability, global scale and, most importantly, innovation.
TREND ANALYSISThe factors that are driving and challenging P&Gs growth today have been discussed earlier. It can be concluded by looking forward and reaffirming the strong confidence that P&G have the right strategy and supporting capability to grow well into the future. The growth opportunities created by P&Gs strategy are clearest when one look at population and economic growth trends and P&Gs geographic expansion plans. Its estimated that the worlds population will be nearly eight billion people by 2020. All these people in developed and developing countries alike will have the same fundamental needs, wants and aspirations for products and services that make their lives better. There is tremendous potential for P&G to grow by meeting those needs. P&G are going after this potential by making P&Gs products available in more categories, countries and channels, expanding product lines to meet a fuller range of regimen needs, and stimulating market growth. P&G currently compete in a total of 38 product categories. Today, on average, P&G compete in 19 categories in any given country. In P&Gs most developed market, the United States, P&G compete in 35 product categories. In Russia and Mexico, were in the 20s. In China, Brazil and India, were in the mid-to-high teens. In Nigeria, were in the mid-single-digits. P&Gs five-year plan will increase the average number of categories from 19 to 24. Within each of these categories and countries, there are generally five distinct price tiers ranging from the best performing and highest priced products in the super premium and premium tiers, down to products that offer basic benefits at a lower price in the value tie.
SWOT ANALYSISSTRENGTHS1. P&G currently competes in 38 product categories and this provides a highly strategic platform for market leadership and sustainable growth.2. From the past 55 years p&G is continuously paying dividends and it is growing at an annual compound average rate of 9.5%3. The greatest Assets of the company, its employees are performing heroically to improve lives, to grow the business and to create value to shareholders.4. The main strength is the purpose- inspired growth strategy of P&G i.e. They invest about $2 billion a year on research and development to have an unrelenting focus on innovation. It is aiming to increase productivity, so that resources can be freed for innovation. It is continuously trying to strengthen its portfolio of business up and down price tiers, into new markets, and into new and existing product categories. They are tackling growth challenges head on5. It is continuously earning external recognition for their innovations.6. Most recently P&G agreed to divest Pringles to Diamond Foods, thus completely exiting from food and beverages business.WEAKNESSES1. Top brand losing market share to competitors.2. It is operating only in health and beauty sector only.3. Lagging behind in online media presence.OPPORTUNITIES1. P&G currently reaches only 4.4 billion out of 7 billion people on the planet. There is an opportunity to reach them with products and services that make their everyday lives a little better.2. Its estimated that the worlds population will be nearly eight billion people by 2020. All these people in developed and developing countries alike will have the same fundamental needs, wants and aspirations for products and services that make their lives better. There is tremendous potential for P&G to grow by meeting those needs. They are going after this potential by making products available in more categories, countries and channels, expanding product lines to meet a fuller range of regimen needs, and stimulating market growth.3. The increase in productivity through 1) integrating as one company, 2) simplifying the process and 3) digitalizing the process is a great opportunity to free resources for innovation. Their integrated plans will double the number of categories in which P&G competes in the next few years. And above all they are launching 2 new categories this year (skin care and air care) with three more planned for 2012. They are creating multi brand programs such as Olympic Games sponsorship. These multi brand initiatives earn significantly higher returns than many independent brand programs. The company is moving from large, single-category manufacturing plants to more localized, scaled multi-category facilities that enable them to lower cost by leveraging the same infrastructure, as well as lower transportation and delivery costs. This will enable them to use local talent and material and thus will enable them to provide better customer service. Simplification of the business from 500 platforms to 150 platforms till 2014 will be worth about $500 million savings worldwide. Product and packaging simplification is a big opportunity in terms of cost savings. Digitizing P&G will enable them to manage the business in real time and on a demand-driven basis. Theyll be able to collaborate more effectively and efficiently, inside and outside the Company. And theyll interact with consumers, retail partners and others far more directly and frequently than they can do today
4. They are planning to enter pharmaceuticals sector. They announced earlier that they will have a joint venture with Teva pharmaceutical industries.5. Increasing market share in health care, household care and grooming business is more than a $20 billion sales opportunity.6. Company is expanding into various categories, countries and channels. They are now trying to meet a broader range of consumer needs. They are trying to stimulate market growth in developed and developing markets alike. And thus there portfolio of business presents abundant opportunity to grow. Company is currently globalizing products such as Gillette fusion Proglide, Crest 3D white, laundry additives and the pamper Thinness and absorbency Upgrade.7. Theyre also expanding successful marketing innovation such as the Shiksha education program in India, in which P&G contributes a brick to build a school for each pack of product purchased, or the Pampers One Pack Equals One Vaccine campaign with its focus on eradicating maternal and neonatal tetanus.8. P&G is trying to fill product lines to fulfill consumers regimen needs. A good example of this can be Pantene in japan.9. In addition to this it is trying to grow current market share by increasing the usage frequency. Eg. Diaper market in Egypt and India.10. The increasing Economic growth can be of great help in future. A study revealed that 41% of the current middle-income and affluent class plans to trade up to more premium products especially in packaged goods and clothing.11. A great opportunity which awaits P&G is that still large chunk of rural market is untapped. Along with this penetration in urban areas can be increased.12. Company can enter into Health and Beauty for men. Through Gillett they have made their first step in this sector.13. Company can adopt eco- friendly policies and strategies.
THREATS1. Company is facing rapid and significant increases in commodity costs. Materials and energy costs were up more than $1.8 billion before tax for the fiscal year. They are taking a holistic approach to manage these cost increases.2. Developed markets are growing slower than expected. These markets principally North America, Western Europe and Japan account for about two-thirds of their sales. Their underperformance reduced total Company growth by one percentage point in fiscal year 2011.3. Government is allowing FDI in retail thereby allowing international brands4. Competition from unbranded and local products5. Tremendous pressure due to fluctuating exchange rate.6. Increase of regulations by the government. 7. A major threat from Substitute brands that have a cheaper price8. Due to recession, the consumer spending has decreased globally.9. Intense and increasing competition among other FMCG companies. Key competitors expanding their product portfolios through acquisitions and thus posing serious threat to P&Gs market share in different countries.
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