Balance Sheet and Cash Flow

Operating cash flow in 1Q10 was $4.6 billion, an increase of 32% y/y, mainly due to reductions in working capital balances.

Cash on hand was $6.3 billion in 1Q10, up from $4.8 billion at the end of FY09.  PG’s cash conversion cycle improved 9 days y/y in 1Q10, compared to the 4 day improvement seen in 4Q09.  This quarter’s improvement resulted from lower average inventory (6 days), lower average receivables (1 day), and higher average payables (1 day).

The company’s inventory decreased 23% y/y in 1Q10, attributable to decline in materials and supplies, 20% decline in finished goods, and 17% reduction in work in process.  PG's working capital decreased to $2.5 billion in 1Q10 from $3.5 billion in 1Q09, and fell 90 bps y/y as a percentage of sales, to 3.2%.

PG used $2.8 billion in cash on financing activities in 1Q10, a 62% increase over the $1.7 billion in cash used on financing activities in 1Q09.  The increase can largely be attributed to net debt payments in 1Q10 of $1.6 billion, as opposed to the net debt additions of $3.0 billion in 1Q09.

Share Repurchases

PG did not repurchase any shares in 1Q10; however it will resume repurchasing shares in 2Q10.  Management noted that FY10 repurchases will be below the $8 billion annual threshold established prior to the economic crisis.
 

High commodity prices: High commodity costs remain a concern as these have a negative impact on gross margin.

Global market stability: As PG’s sales occur globally, social, political, or economic unrest not only in the US but elsewhere could impact the Company more substantially than in the past through foreign exchange and tax rates, limitations on cash repatriation, consumer purchasing habits, stock market trends, etc.

Intense competition: Intensified competition in the market means the need for competitive marketing, which leads to an increase in marketing expenditure.

Challenging cost and revenue synergies: PG’s biggest near-term challenge lies in achieving cost and revenue synergies going forward.