Don't one-time events happen just once?
Not at Proctor & Gamble . The maker of Tide detergent and other household staples has booked restructuring charges with tidal regularity -- in each of the past seven quarters.
And that, critics note, has led to a cleansing of the earnings figure that Wall Street analysts use to calculate the company's growth rate and stock-market value, making this much more than an academic accounting question. P&G's growth rate is a particularly prickly issue because the company faces a mature U.S. market for its products and is trying to prove it can still expand sales by operating more efficiently, producing innovative products and out-marketing the competition.
The tally of the charges since 1999: $1.3 billion. And more of these nonrecurring events are expected to recur. P&G says it plans to take such quarterly charges for the next three years. It expects to wrap up restructuring efforts by June 2004, at which time the charges are likely to total $3.9 billion to $4.3 billion.
P&G says its accounting is entirely appropriate, because restructuring isn't business as usual. The charges stem from an overhaul of the company's operations that was begun in June 1999, and the new ones will be the result of a big expansion of that restructuring effort, announced two weeks ago. The company notes that Securities and Exchange Commission rules preclude it from taking a mammoth charge upfront to cover all anticipated costs, and that it instead is required to book the charges as the costs are actually incurred.
Critics, however, say the treatment ignores the fact that closing factories and cutting jobs are part of running a big company in tough markets. "They've got to do them to do business," says Jack Ciesielski, an independent accounting expert in Baltimore, who publishes the Analyst's Accounting Observer, a newsletter. "It's a cost of doing business."
Adds J. Douglas Hanna, a professor at the University of Chicago: "It's just not safe to ignore these charges." Mr. Hanna, who studies what he calls "the infamous recurring nonrecurring charge," says more companies are booking charges. According to his research, more than a quarter of all companies filing with the SEC take a charge each year, up from 1% in 1970.
There are some companies that have bucked the trend, including International Business Machines-IBM . Since 1996, it has included restructuring costs as part of operating expenses. An IBM spokesman says, "It's a cost of doing business."
But even as P&G excludes the restructuring charges from what it calls its "core net earnings," it includes gains from selling brands, sales that some analysts and investors believe should be treated as one-time events. Sales of smaller brands have helped P&G post gains in its core net earnings over the past three quarters; excluding those gains, operating income dropped in those periods.
The company, based in Cincinnati, says it includes gains from selling business units because shedding brands is part of a continuing strategy to narrow its focus. For investors who prefer not to include such gains, the company notes that it breaks out the components so investors can do their own math.
Depending on investors' views of the charges and gains, P&G earnings are either rising or falling. Ignore the charges and gains, and operating earnings have declined in the past four quarters. Include the charges and gains: Net income rose in the past three quarters but fell in the quarter preceding those three.
Consider the most recent quarter, the three months ended Dec. 31. P&G reported net income of $1.19 billion for the fiscal second quarter, a 6% increase from $1.126 billion in the year-earlier quarter. The most-recent quarter included a restructuring charge of $120 million and a gain of about $141 million from the sale of brands (primarily its Clearasil skin-care products). Excluding the charge and including the gain, "core net earnings" were $1.314 billion, up 4% from $1.263 billion the year earlier and beat Wall Street estimates by a penny a share.
If you back out the gain, as does Tim Drake, a senior equity analyst at Banc One Investment Advisors, in Columbus, Ohio, P&G's core earnings actually dropped 7%, to $1.16 billion.
"Their business isn't manufacturing brands and companies to sell. Their business is manufacturing products to sell," Mr. Drake says. "My projections for this year and next year are well below what anybody's talking about on Wall Street." The funds he advises continue to hold about $449 million of P&G stock, though, because the company has strong brands.
P&G shares have traded down so far this year, along with those of the company's peers. The stock is off 22% since year end, and at 4 p.m. Tuesday in New York Stock Exchange composite trading, it fell 50 cents to $61.10.
Some analysts have expressed doubts about P&G's ability to meet its growth objectives in recent months. While P&G says its double-digit earnings-growth target may be hard to hit next fiscal year because of disruption from the restructuring, it is sticking with this as a goal. The restructuring is to help the company gain ground on rivals with lower operating costs.
P&G says the overhaul will take through June 2004 because the company, with $40 billion in annual sales, is so big and the program so extensive. P&G is putting thousands of managers in new jobs in an effort to work globally, instead of regionally. In revamping the plan two weeks ago, the company said it would have three global business units, down from the seven planned in 1999, and would cut 24,600 jobs, instead of 15,000. As a result, it will spend twice as much as originally planned, necessitating as much as $4.3 billion in charges.
Most Wall Street analysts accept P&G's view of how its earnings should be analyzed. The 14 Wall Street analysts who follow the company and submit per-share earnings estimates to Thomson Financial/First Call exclude the restructuring charges and include the gains. "It's considered part of normal operating procedure," says Heather Murren, a Merrill Lynch analyst. A big purpose of analysts' estimates is to allow comparisons of a company's results over the years. In order to do that, "to be consistent you've got to exclude [charges] now," she says.
But that doesn't mean they're all thrilled with the situation. "The reality," says William Steele, a Banc of America Securities analyst who is among the Thomson Financial/First Call filers and who rates P&G a "buy," is that P&G shares are "being judged on consensus estimates which are probably not that accurate, or not totally representative of the ongoing operating strength of the company."
Given that P&G has laid out a schedule for coming charges, "you can chastise the company for the way it puts a [news] release out, but it is still the analysts' job to put some thought into this issue and decide what should or shouldn't be included," says Chuck Hill, director of research at Thomson Financial/First Call.