01—Abstract
Summary
Summary of the 8-K filed October 29, 2002. Cited figures are marked; the original filing is the authoritative source.
Procter & Gamble reported fiscal first-quarter 2003 results (quarter ended September 30, 2002) that beat Wall Street expectations, with core diluted EPS up 17% to $1.12a, exceeding consensus by two cents.
Reported net sales rose 11% to $10.80 billionb and unit volume grew 13% (10% excluding acquisitions and divestitures), led by double-digit growth in fabric & home care and health care and beauty care. Reported net earnings were $1.46 billion, or $1.04 per share, after a $113 million after-tax restructuring charge. Management said it is maintaining momentum despite softness in the global economy, and noted volume growth in both developed and developing markets.
Profitability and cash generation also improved. Core gross margin expanded 120 basis points on segment mix, base business savings and material price improvements, while core marketing, research and administration spending rose 90 basis points, largely on beauty care advertising and pharmaceutical clinical and milestone costs. Free cash flow before dividends reached $1.73 billionc, up 77% year over year, reflecting lower capital spending.
The Clairol acquisition, completed in the prior year, is a meaningful contributor to beauty care volume growth until it is annualized on November 16, 2002. Guidance was mostly reaffirmed. For the December quarter, P&G expects volume up in the high single digits, sales up mid to upper single digits, and EPS growth in the mid to high single digits, with the Comet divestiture weighing on the base period.
For fiscal 2003, management kept its long-term growth goals, expecting sales growth of 4% to 6% and double-digit EPS growth. The company's balance sheet grew, with cash rising to $4.70 billion and shareholders' equity to $14.24 billiond, though total debt also increased.
02—Key points
Key Highlights
- Core diluted EPS rose 17% to $1.12, beating consensus estimates by two cents; reported diluted EPS was $1.04 after a $113 million after-tax restructuring charge.
- Reported net sales increased 11% to $10.80 billion; unit volume grew 13%, or 10% excluding acquisitions and divestitures.
- Core operating margin expanded 30 basis points to 21.6%, with gross margin up 120 basis points, partly offset by 90 basis points of higher marketing, research and administration spending.
- Beauty care sales rose 27% to $3.12 billion (volume up 32%, aided by Clairol), while health care sales grew 20% to $1.41 billion with net earnings up 40%.
- Fabric and home care net earnings increased 22% to $547 million on 11% volume growth, and baby and family care earnings rose 8% to $241 million.
- Free cash flow before dividends was $1.73 billion, up 77% from the prior-year quarter, reflecting lower capital expenditures.
- Guidance: December-quarter EPS growth expected in the mid to high single digits; fiscal 2003 sales growth of 4% to 6% and double-digit EPS growth reaffirmed.
03—Questions
Frequently Asked Questions
Did P&G beat expectations in the September 2002 quarter?
Yes. Core diluted EPS of $1.12 rose 17% and beat Wall Street consensus by two cents. Reported EPS of $1.04 was lower because of a $113 million after-tax restructuring charge, though that charge was smaller than the $238 million charge in the year-ago quarter.
How much of the sales growth came from acquisitions?
Total unit volume grew 13%, but only 10% excluding acquisitions and divestitures. The gap reflects the Clairol acquisition, which contributed heavily to beauty care volume growth of 32% (10% excluding acquisitions and divestitures). Clairol will be annualized on November 16, 2002, so its contribution to growth will fade in later periods.
What is driving margin changes?
Core gross margin improved 120 basis points on favorable segment mix, structural base business and restructuring savings, and lower material prices. Core marketing, research and administration spending rose 90 basis points, mainly from higher beauty care advertising and pharmaceutical clinical costs and milestone payments, so core operating margin rose only 30 basis points, to 21.6%.
What is the outlook for the coming quarter and fiscal year?
For the December quarter, P&G expects volume up in the high single digits and sales up in the mid to upper single digits, with EPS growth in the mid to high single digits despite the Comet divestiture in the base period. For fiscal 2003, the company reaffirmed its long-term goals, expecting sales growth of 4% to 6%, a slightly positive currency impact on sales, and double-digit EPS growth.
How strong is P&G's cash generation and balance sheet?
Operating cash flow was $2.01 billion, and free cash flow before dividends was $1.73 billion, up 77% year over year on lower capital spending. Cash and equivalents rose to $4.70 billion, and shareholders' equity increased to $14.24 billion. Total debt also increased, with short-term debt rising to $4.20 billion and long-term debt to $11.26 billion, so investors may want to watch leverage alongside the cash build.
04—Continue