01—Abstract
Summary
Summary of the 8-K filed April 30, 2002. Cited figures are marked; the original filing is the authoritative source.
P&G's third-quarter fiscal 2002 (January–March 2002) results, released April 30, 2002, showed strong top-line and earnings momentum.
Reported net sales rose 4% to $9.90 billiona, and unit volume grew 10% (6% excluding acquisitions and divestitures, led by the Clairol acquisition). Core net earnings rose 12% to $1.19 billion, or $0.84 per diluted share, excluding a $147 million after-tax restructuring charge. Reported diluted EPS was $0.74, up 17%.
Management described this as the second consecutive quarter of core earnings growth across every business unit and a return to double-digit total-company earnings growth. Margin expansion drove the quarter. Core gross margin rose 310 basis points to 49.8%b, reflecting lower material costs, restructuring savings and volume leverage, while core operating margin expanded 280 basis points to 18.7%.
Core marketing, research and administration spending rose 30 basis points as a share of sales, partly due to Clairol integration costs and higher marketing investment. Cash flow from operations for the first nine months reached $5.4 billionc, up $1.6 billion, though management noted that part of this gain reflects a non-recurring shift in payment timing on operating accruals. Year-to-date capital spending fell $0.7 billion, bringing capex to the long-term target of 6% of sales.
Looking ahead, P&G expects fourth-quarter volume growth in the high single digits and core EPS growth in the low teens. It reaffirmed its long-term sales growth objective of 4–6%d, which it expects to land toward the low end in fiscal 2003 because of the full-year effect of the Crisco/Jif spin-merge, and it still expects double-digit core EPS growth for the year.
Full fiscal 2003 guidance is scheduled for August. Foreign exchange is a headwind of roughly 2–3% to fourth-quarter sales at current rates.
02—Key points
Key Highlights
- Reported Q3 net sales of $9.90B, up 4% year over year; unit volume up 10% (6% excluding acquisitions/divestitures)
- Core diluted EPS of $0.84, up 12%; reported diluted EPS of $0.74, up 17%, after a $147M after-tax restructuring charge
- Core operating margin expanded 280 bps to 18.7%, driven by a 310 bps gain in core gross margin
- Fabric & Home Care and Health Care posted strong earnings growth (net earnings up 36% each); Beauty Care volume rose 28% on the Clairol acquisition
- Nine-month operating cash flow of $5.4B, up $1.6B, partly reflecting a non-recurring timing benefit in payables and accruals
- Year-to-date capex fell $0.7B to reach the 6%-of-sales target several quarters early
- Q4 guidance: high-single-digit volume growth and low-teens core EPS growth; FY03 sales growth expected toward the low end of 4–6%, with double-digit core EPS growth targeted
03—Questions
Frequently Asked Questions
Did P&G beat expectations and return to growth in the January–March 2002 quarter?
Yes. The company reported double-digit unit volume and core EPS growth that exceeded Wall Street consensus, the third straight quarter of sequential volume and core earnings growth. Core EPS grew 12% to $0.84, and management characterized this as a return to total-company double-digit earnings growth.
How much of the earnings improvement came from one-time items or accounting changes?
Reported results include a $147M after-tax restructuring charge, which reduced reported EPS to $0.74. The core figures exclude that charge and also remove the prior-year goodwill and intangible amortization that is no longer required under new accounting rules. Management also cited a one-time non-operating licensing gain in the Baby, Feminine and Family Care segment; excluding it, that segment's earnings would have grown about 4% rather than 11%.
Is the strong cash flow sustainable?
Only partly. Management acknowledged that the $1.6B increase in nine-month operating cash flow includes a non-recurring shift in payment timing on certain operating accruals. The underlying cash generation improved, but investors should not extrapolate the full increase into future periods.
What is the outlook for the remainder of fiscal 2002 and for fiscal 2003?
For Q4, P&G expects high-single-digit volume growth, mid-single-digit sales growth excluding FX, and low-teens core EPS growth, with FX reducing sales by 2–3%. For FY03, it expects sales growth toward the low end of its 4–6% long-term objective due to the full-year effect of the Crisco/Jif spin-merge, and it still targets double-digit core EPS growth despite higher interest rates and lower income from minor brand divestitures. Full FY03 guidance is due in August.
Which business segments are driving results, and which are lagging?
Health Care (unit volume up 16%, earnings up 36%) and Fabric & Home Care (unit volume up 6%, earnings up 36%) led the quarter. Beauty Care volume jumped 28% on the Clairol acquisition, but mix effects muted earnings growth to 11%. Food & Beverage was the weakest segment, with sales down 6% and volume down 1%, although earnings rose 18% on cost reductions.
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