29 April 2010

PG: Income Statement Analysis for the March 2010 Quarter

Procter & Gamble (NYSE: PG) earned $0.83 per diluted share in the third quarter of fiscal 2010, which ended 31 March.  Earnings per share were $0.01 less than the $0.84 P&G made in the March 2009 quarter. 

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.

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