Finance
About the paper
The objective of writing this paper is to perform an in-depth yet succinct analysis of the financial statements and Management Discussion &Analysis (MD&A) section of Procter and Gamble (P&G). The attempt made will constitute a one-run discussion of all the financial statements and MD&A section within the accounting framework and a format of an accounting paper. The conclusion will thus assist our readers as how the company has performed during the recent years and how the management access their financial performance. However, before we initiate the core discussion, we will provide a brief discussion relating to profile of Procter and Gamble.
Company Profile
Founded in the year 1837, Procter and Gamble, popularly known as P&G, is an American multinational selling multiple consumer goods around the globe. The company operates through five business segments, namely, Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. The company is headquartered in Cincinnati, Ohio and listed on the New York Stock Exchange (NYSE) under the ticker symbol of ‘PG’. By the end of 2015, the company had employed 110,000 individuals.
History
Procter and Gamble (P&G) were founded by candle maker, William Procter and soap maker, James Gamble. Both of them had immigrated to the United States from United Kingdom and were married to two sisters, and it was at the suggestion of their father-in-law, both William Procter and James Gamble founded Prcoter and Gamble in 1837. Right from the days of their establishment, P&G products were a big hit, however, the blockbuster success was achieved at the time of American Civil War when the company received a significant demand for candles and soap. Following the success, the company expanded globally and set up its factories outside the United States.
Evaluating the trends in the financial statements and discussing MD&A section
-Income Statement
Beginning the analysis with the income statement of the company, we found that during 2015, the sales figures were down by approximately 5% compared to the previous year. Performing the due diligence, we found that the management of the company attributes the decline in revenue to the negative impact of foreign exchange fluctuation and higher prices in some regions that led to fall in the sales figure.
The impact of decrease in revenue was visible on the gross profit margins, which compared to 2014, decreased by 0.10% compared to 2014. Important to note, during 2015, while the revenue figures were down by 5%, the proportion of costs of goods sold was almost constant at 50.94%. This allowed the gross margin to decline merely by 10 basis points only.
However, the company could not control the operating costs and foreign exchange impact related to them, and consequently lost on its operating margin, which decreased from 18.3% to 15.5%. Following the MD&A section, we found extensive discussion of the management on the trends in the operating costs. During 2015, the operating costs were higher by 3.44%, which consequently resulted in lower operating income of $14.79 billion to $11.79billion, thus recording a 20.28% decline. To learn more about the operating expenses, we referred to the MD&A section and found useful information detailing the source of changes in the operating expenses during the year. To begin with, Selling, General and Administrative(SG&A), in proportion to the sales figure, decreased by 60 basis point courtesy improved efficiency in operations. However, it was the tax charge of $2.1 billion related to the deconsolidation of Venezuelan subsidiary that resulted in significant loss in the operating income. The management has exclusively stated that while it will continue to operate in Venezuela, however, some factors relating to currency fluctuations and other operating controls and restrictions in Venezuela, have resulted in lack of control over the Venezuelan subsidiary. Accordingly, from the fiscal year of 2015, P&G will no longer introduce the results of Venezuelan subsidiary, however, any investment in these subsidiaries will be accounted for using the cost method of accounting.
Finally, being affected by higher operating expenses, low revenue figures, the net earnings of the company declined by 21% and slumped to $8.9 billion during 2015. Even the management has profoundly discussed that the fall in the net income during the year was attributed to the deconsolidation charges related to Venezuelan subsidiaries and also because of the negative foreign exchange impact that affected net earnings by approximately $1.4 billion in 2015 due to the weakening of certain key currencies against the U.S. dollar, primarily in Russia, Ukraine, Venezuela and Argentina.
-Balance Sheet
Prima facie overlook of the balance sheet provides a concerning view with a significant fall in the current assets and total assets. As we noticed, during 2015, the current asset base of the company declined by 6.23%. On the other hand, even though the current liabilities of the company also declined by 11.67%, but this year the current liabilities exceeded the current assets by $144 million, thus sparking concern over the working capital position of the company. The MD&A section has detailed that the increase in current liabilities was largely attributed to short-term borrowings under the commercial paper program and plans to support the short-term liquidity using the operating cash flow. Most of all, a total of $11 billion of cash and cash equivalents is held in foreign banks by the company.
On the liabilities side, the most notable transaction was the decline in long-term debt by 7.48%. However, the decline here was not by choice but because of the maturity of the outstanding debt held by the company.
Finally, for the equity section, the total shareholder equity declined by 9.89% following a 66% increase in other comprehensive losses. However, amidst the bearish trend during the year, the company managed to maintain a near constant amount of retained reserves at $84 billion.
-Cash Flow Statement
During 2015, the operating cash flow of the company increased by 5% compared to the previous year. However, the increase here cannot be rated as sustainable as while the net income of the company decreased 21%, the surge in operating cash flow is attributed to add back transaction of $2028 million and $2174 million related to deconsolidation charges for Venezuelan subsidiary and asset impairment charges, respectively. In addition, following the MD&A section we found that the management has exclusively stated that around $928 million was generated in operating cash flow through an increase in accounts payable, accrued and other liabilities on the basis of extended payment terms.
As for cash flow from investing activities, a total of $2.5 billion was spent on capital spending during 2015. This amount was net of purchases of available-forsale securities and a reduction in cash due to Venezuela deconsolidation, partially offset by asset sales. Referring to the MD&A section, we found that despite of slowdown during 2015, the company continued to spend more of capital avenues in order to support innovation and cost efficiencies. During 2015, capital spend, as a percentage of sales, increased by 10 basis points to 4.9%. Most importantly, during 2015, P&G generated $4.5 billion in cash from multiple sell-offs and other brand divestitures.
Finally, for financing cash flow, a total cash outflow of $13.01 billion was spent on financing activities, predominately led by a cash outflow of $7.01 billion for dividend payments followed by $4.60 billion of treasury stock repurchase and $3.512 billion on long-term debt repayments. Referring to MD&A section, the management has largely focused on discussing the consistency of dividend payments, which P&G has been paying for 125 years now.
Conclusion
Considering the outcome of the analysis of the financial statements and MD&A section, it is clearly evident that Procter and Gamble have faced a bearish run during 2015 with a fall in the sales figure an profit figure. Moreover, the increase in operating cash flow is generated through a disconsolidation charge, while the actual scenario is highly pessimistic with the current liabilities amount recorded more than the current assets
Overall, we believe that for a company like P&G, which has a vintage brand equity of more than 180 years now, it is important that we hold and witness the financial performance in the upcoming quarters.
References
P&G History. (n.d.). Retrieved July 6, 2016, from P&G: http://www.pg.com/en_balkans/company/heritage.shtml
Procter and Gamble. (2016). SEC 10K. Procter and Gamble.
Profile: Procter and Gamble. (n.d.). Retrieved July 6, 2016, from Yahoo Finance: http://finance.yahoo.com/q/pr?s=PG+Profile
