29 October 2009

PG: Income Statement Analysis for the September 2009 Quarter

Procter & Gamble (NYSE: PG) surpassed expectations by earning $1.06 per diluted share in the three months that ended 30 September 2009, which was the first quarter of fiscal 2010.  Net income was $1.03 per share in the same quarter last year.

This post examines the Income Statement in the earnings announcement and the accompanying 10-Q, and it compares the entries on each line to our "look-ahead" estimates.

In a second article, we will report P&G's scores as measured by the GCFR financial gauges.  The follow-up post will provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Some background information about P&G and the business environment in which it is currently operating can be found in the beginning of the look-ahead.  Based in Cincinnati, P&G sells well-known consumer products, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay.

Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

The results for the September 2008 quarter were restated to reflect last year's sale of the Folgers coffee business to J.M. Smucker (NYSE: SJM) and P&G's more recent agreement to sell pharmaceutical operations to Warner Chilcott (NASDAQ: WCRX).

P&G's Revenue was 5.6 percent less than the restated value for Revenue in the September 2008 quarter.  The $19.8 billion figure matched our estimate almost exactly, but the percentage change was lower because of the restatements.

The company attributed essentially all of the Revenue decline to the stronger U.S. dollar, which diminished the reported value of non-U.S. sales by about 7 percent.  Product price increases (+2 percent) and volume declines (-3 percent) essentially canceled each other out.

Of the company's various product lines, Revenue from Health Care products fell the least percent and Revenue from "Grooming" products declined by the greatest percent.

The Cost of Goods Sold was 47.4 percent of Revenue in the quarter, which translates into a Gross Margin of 52.6 percent.  The margin was almost three points higher than the (restated) 49.7 percent in September 2008.  "Price increases, lower commodity costs and manufacturing cost savings" were responsible for the margin expansion.

Sales, General, and Administrative (SG&A) expenses increased from 28.8 percent (restated) of Revenue last year to 30.1 percent. We expected 30.0 percent.  Changes in foreign currency exchange rates were blamed for the increase.  From the 10-Q:

The higher foreign exchange costs result primarily from our operations in Venezuela. Because of currency restrictions in Venezuela, payments for certain imported goods and services need to be satisfied by exchanging Bolivares Fuertes for U.S. dollars through a parallel exchange mechanism rather than at the more favorable official exchange rate. A reduction in the availability of foreign currency at the official exchange rate resulted in increased costs for exchange transactions executed using the parallel mechanism.

Operating Income, which is the difference between Revenue and the operating expenses identified above, increased 1.4 percent, when compared to the September 2008 quarter.  We had expected Operating Income to decline.  P&G's actual results surpassed our forecast because the Gross Margin was more profitable.

Interest and other non-operating items in the quarter summed to a net expense of $264 million, which was much worse than we expected.  The company did not realize the gains on the sales of various brands that it had in prior periods.

The 27.7-percent effective income tax rate wasn't much different from last year's 28 percent rate.  But, we thought it would be closer to 25 percent, which had been the case in more recent periods.

Excluding discontinued operations, Net Income fell from $3.1 billion to $3.0 billion.  This result exceeded our estimate by 2.4 percent.  With income from discontinued ops, which we didn't estimate, Net Income merely slipped from $3.35 billion to $3.31 billion.  With fewer shares outstanding, earnings per share increased from $1.03 to $1.06. 

In summary, Revenue merely matched expectations, but P&G achieved a much better-than-expected Gross Margin.  Income from discontinued operations were also a pleasant surprise.  The good results outweighed higher-than-expected non-operating expenses and income taxes. 

As a result, Net Income surged ahead of our target value by $0.10 per share.

Full disclosure: No position in PG at time of writing.

No comments:

Post a Comment