Earnings from continuing operations increased from $0.78 to $0.83 per diluted share. Core EPS, a non-GAAP measure, rose from $0.81 to $0.89.
This post examines P&G's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Reported earnings fell $0.04 short of the $0.87 per share we had forecast, mainly because of a one-time tax item.
Our principal sources for the income statement analysis were the earnings announcement and the conference call.
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.
Procter & Gamble, which traces its roots back to 1837, sells well-known personal and household products to consumers worldwide from its Cincinnati headquarters. Additional 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.
Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as restated quarterly Income Statements for the last couple of years. After selling its pharmaceuticals business to Warner Chilcott (NASDAQ: WCRX), P&G restated some historical financial statements to depict the pharmaceutical results as a discontinued operation.
Also 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.
Revenue increased from $17.9 billion in the March 2009 quarter to $19.2 billion in the latest period, a rise of 7.4 percent. Revenue missed our $19.4 billion estimate, but only by 1.1 percent.
P&G attributed rising Revenue to product unit volume growth of 7 percent. Organic volume growth, which excludes the effects of acquisitions, divestitures and foreign exchange, was a more modest 4 percent. Volume increased in all designated operating regions and at five of P&G's six reportable business segments.
The Baby Care and Family Care unit had the fastest organic sales growth, 7 percent. Snack and Pet Care was the laggard, with organic sales declining 6 percent.
The Cost of Goods Sold was $9.2 billion, or 48.1 percent of Revenue, in the quarter. This ratio translates into a Gross Margin of 51.9 percent, an impressive 290 basis points higher than last year's 49.0 percent. The latest margin was within 20 basis points of our 52.1-percent target.
Lower commodity costs and manufacturing cost savings led to the Gross Margin expansion, according to P&G.
Sales, General, and Administrative expenses increased 15 percent to $6.0 billion, due to higher marketing costs. The latest amount for SG&A essentially matched our estimate.
As a percentage of Revenue, SG&A increased from 29.1 percent to 31.2 percent.
Subtracting the various operating expenses from Revenue yields Operating Income of $3.97 billion, which exceeded last year's $3.55 billion by 11.7 percent. Operating Income for the quarter was less than our $4.1 billion estimate but only by 3 percent. The Operating Income increase can be credited to Revenue growth and margin expansion, offset by higher SG&A costs.The $206-million net expense for Interest and other items was $37 million less than in the same period last year, and it was a significant $94 million less than our $300 million estimate.
The 31.3-percent effective income tax rate was more burdensome than March 2009's 26.6 percent and the expected 28 percent. The higher rate is the result of a charge P&G recorded in the latest quarter due to a certain provision, related to retiree health-care subsidy payments, in the legislation recently enacted in the U.S. P&G indicated that the tax charge reduced reported earnings by $0.05 per share in the March 2010 quarter. The per-share number indicates that the charge was somewhere around $150 million.
At the bottom line, Net Income fell 1 percent to $2.585 billion ($0.83 per diluted share), compared to earnings (including discontinued operations) in the year-earlier quarter of $2.613 billion ($0.84 per share). Net Income was less than our $2.73 billion ($0.87 per share) estimate by about 5.3 percent.
In summary, Revenue rose on strong volume growth, and the Gross Margin expanded substantially. SG&A expenses rose on higher marketing costs, but the increase was not unexpected. The interest expense came down more than we expected. A one-time health care-related tax charge of around $150 million was not included in our model and caused our EPS estimate to be off by $0.04 instead of $0.01.
Full disclosure: No position in PG at time of writing.