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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 1-434
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-0411980
(State of incorporation) (I.R.S. Employer Identification No.)
One Procter & Gamble Plaza, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 983-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
There were 2,494,479,366 shares of Common Stock outstanding as of March 31,
2005.
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Consolidated Statements of Earnings of The Procter & Gamble Company and
subsidiaries (the Company) for the three and nine months ended March 31, 2005
and 2004, the Consolidated Balance Sheets as of March 31, 2005 and June 30,
2004, and the Consolidated Statements of Cash Flows for the nine months ended
March 31, 2005 and 2004 follow. In the opinion of management, these unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods reported. However, such financial statements may not be
indicative necessarily of annual results.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in millions except per share amounts
Three Months Ended Nine Months Ended
March 31 March 31
---------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
NET SALES $ 14,287 $ 13,029 $ 42,483 $ 38,445
Cost of products sold 7,033 6,394 20,515 18,597
Selling, general and
administrative expense 4,566 4,332 13,340 12,160
-------- -------- -------- --------
OPERATING INCOME 2,688 2,303 8,628 7,688
Interest expense 222 164 603 454
Other non-operating income, net 60 67 297 136
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 2,526 2,206 8,322 7,370
Income taxes 806 678 2,562 2,263
-------- -------- -------- --------
NET EARNINGS $ 1,720 $ 1,528 $ 5,760 $ 5,107
======== ======== ======== ========
PER COMMON SHARE:
Basic net earnings $ 0.67 $ 0.58 $ 2.24 $ 1.94
Diluted net earnings $ 0.63 $ 0.55 $ 2.10 $ 1.83
Dividends $ 0.25 $ 0.23 $ 0.75 $ 0.68
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 2,718.7 2,790.1 2,738.6 2,796.2
See accompanying Notes to Consolidated Financial Statements
-2-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions
March 31 June 30
2005 2004
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,072 $ 4,232
Investment securities 1,706 1,660
Accounts receivable 4,396 4,062
Inventories
Materials and supplies 1,541 1,191
Work in process 361 340
Finished goods 3,368 2,869
-------- --------
Total inventories 5,270 4,400
Deferred income taxes 1,304 958
Prepaid expenses and other receivables 1,843 1,803
-------- --------
TOTAL CURRENT ASSETS 21,591 17,115
PROPERTY, PLANT AND EQUIPMENT
Buildings 5,370 5,206
Machinery and equipment 20,369 19,456
Land 650 642
-------- --------
26,389 25,304
Accumulated depreciation (12,108) (11,196)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 14,281 14,108
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 20,286 19,610
Trademarks and other intangible assets, net 4,616 4,290
-------- --------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 24,902 23,900
OTHER NON-CURRENT ASSETS 2,302 1,925
-------- --------
TOTAL ASSETS $ 63,076 $ 57,048
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,407 $ 3,617
Accrued and other liabilities 7,979 7,689
Taxes payable 2,720 2,554
Debt due within one year 11,216 8,287
-------- --------
TOTAL CURRENT LIABILITIES 25,322 22,147
LONG-TERM DEBT 12,936 12,554
DEFERRED INCOME TAXES 2,865 2,261
OTHER NON-CURRENT LIABILITIES 3,223 2,808
-------- --------
TOTAL LIABILITIES 44,346 39,770
SHAREHOLDERS' EQUITY
Preferred stock 1,493 1,526
Common stock - shares outstanding - Mar 31 2,494.4 2,494
June 30 2,543.8 2,544
Additional paid-in capital 2,975 2,425
Reserve for ESOP debt retirement (1,255) (1,283)
Accumulated other comprehensive income (838) (1,545)
Retained earnings 13,861 13,611
-------- --------
TOTAL SHAREHOLDERS' EQUITY 18,730 17,278
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,076 $ 57,048
======== ========
See accompanying Notes to Consolidated Financial Statements
-3-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions
Nine Months Ended
March 31
----------------------
2005 2004
------- -------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (1) $ 4,232 $ 5,428
OPERATING ACTIVITIES
Net earnings 5,760 5,107
Depreciation and amortization 1,403 1,279
Deferred income taxes 500 358
Change in:
Accounts receivable (197) (150)
Inventories (778) (119)
Accounts payable, accrued and other liabilities (143) 213
Other operating assets & liabilities (221) 23
Other 300 228
------- -------
TOTAL OPERATING ACTIVITIES 6,624 6,939
------- -------
INVESTING ACTIVITIES
Capital expenditures (1,386) (1,331)
Proceeds from asset sales 368 156
Acquisitions, net of cash acquired (528) (5,398)
Change in investment securities (56) (801)
------- -------
TOTAL INVESTING ACTIVITIES (1,602) (7,374)
------- -------
FINANCING ACTIVITIES
Dividends to shareholders (1,998) (1,865)
Change in short-term debt 1,317 2,068
Additions to long-term debt 3,048 1,963
Reductions of long-term debt (1,583) (1,104)
Proceeds from the exercise of stock options and other 371 437
Treasury purchases (3,580) (2,327)
------- -------
TOTAL FINANCING ACTIVITIES (2,425) (828)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 243 9
CHANGE IN CASH AND CASH EQUIVALENTS 2,840 (1,254)
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,072 $ 4,174
======= =======
(1) The Company reclassified its investments in auction rate securities as
current investment securities. These auction rate securities, for which
interest rates reset in less than 90 days, but the maturity date is greater
than 90 days, were included in cash and cash equivalents before the
reclassification.
See accompanying Notes to Consolidated Financial Statements
-4-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. These statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2004, the Form 8-K
filed on October 22, 2004 reflecting certain changes to the Company's
segment information and the Form 8-K filed on March 14, 2005, reflecting
the reclassification of certain investments from cash and cash equivalents
to investment securities. The results of operations for the three-month
and nine-month periods ended March 31, 2005 are not indicative necessarily
of annual results.
2. Comprehensive Income - Total comprehensive income is composed primarily of
net earnings, net currency translation gains and losses, impacts of net
investment and cash flow hedges and net unrealized gains and losses on
securities. Total comprehensive income for the three months ended March
31, 2005 and 2004 was $1,248 million and $1,373 million, respectively. For
the nine months ended March 31, 2005 and 2004, total comprehensive income
was $6,467 million and $5,739 million, respectively.
3. Segment Information - Following is a summary of segment results, including
supplemental data on the Fabric Care and Home Care, Snacks and Coffee,
Health Care, and Baby Care and Family Care businesses.
SEGMENT INFORMATION
Amounts in millions
Three Months Ended March 31 Nine Months Ended March 31
----------------------------------- -----------------------------------------
Net Earnings Before Net Net Earnings Before Net
Sales Income Taxes Earnings Sales Income Taxes Earnings
------- --------------- -------- -------- --------------- ------------
TOTAL BEAUTY CARE 2005 $ 4,876 $ 1,014 $ 701 $ 14,553 $ 3,188 $ 2,207
2004 4,465 882 571 12,710 2,784 1,824
Health Care 2005 2,000 373 252 5,887 1,220 820
2004 1,719 308 206 5,355 1,189 797
Baby Care & Family Care 2005 3,048 532 339 8,876 1,625 1,019
2004 2,707 357 218 7,987 1,275 793
------- ------------ -------- -------- ------- -------
TOTAL HEALTH, BABY & FAMILY CARE 2005 5,048 905 591 14,763 2,845 1,839
2004 4,426 665 424 13,342 2,464 1,590
Fabric Care & Home Care 2005 3,819 761 508 11,413 2,494 1,674
2004 3,581 826 543 10,381 2,501 1,671
Snacks & Coffee 2005 767 166 105 2,353 482 312
2004 660 88 55 2,201 427 279
------- ------------ -------- -------- ------- -------
TOTAL HOUSEHOLD CARE 2005 4,586 927 613 13,766 2,976 1,986
2004 4,241 914 598 12,582 2,928 1,950
CORPORATE 2005 (223) (320) (185) (599) (687) (272)
2004 (103) (255) (65) (189) (806) (257)
------- ------------ -------- -------- ------- -------
TOTAL 2005 $14,287 $ 2,526 $ 1,720 $ 42,483 $ 8,322 $ 5,760
2004 13,029 2,206 1,528 38,445 7,370 5,107
-5-
4. Goodwill and Other Intangible Assets - Goodwill as of March 31, 2005 is
allocated by reportable segment as follows (amounts in millions):
Nine Months Ended
March 31, 2005
-----------------
TOTAL BEAUTY CARE, BEGINNING OF YEAR $ 14,457
Acquistions & divestiture 122
Translation & other 440
GOODWILL, MARCH 31, 2005 15,019
HEALTH CARE, BEGINNING OF YEAR 3,315
Acquistions & divestiture 54
Translation & other 20
GOODWILL, MARCH 31, 2005 3,389
BABY CARE & FAMILY CARE, BEGINNING OF YEAR 941
Acquistions & divestiture -
Translation & other 30
GOODWILL, MARCH 31, 2005 971
TOTAL HEALTH, BABY & FAMILY CARE, BEGINNING OF YEAR 4,256
Acquistions & divestiture 54
Translation & other 50
GOODWILL, MARCH 31, 2005 4,360
FABRIC CARE & HOME CARE, BEGINNING OF YEAR 614
Acquistions & divestiture 27
Translation & other 6
GOODWILL, MARCH 31, 2005 647
SNACKS & COFFEE, BEGINNING OF YEAR 283
Acquistions & divestiture (25)
Translation & other 2
GOODWILL, MARCH 31, 2005 260
TOTAL HOUSEHOLD CARE, BEGINNING OF YEAR 897
Acquistions & divestiture 2
Translation & other 8
GOODWILL, MARCH 31, 2005 907
GOODWILL, NET, BEGINNING OF YEAR 19,610
Acquistions & divestiture 178
Translation & other 498
GOODWILL, MARCH 31, 2005 $ 20,286
The increase in goodwill from June 30, 2004 is primarily due to the completed
allocation of the purchase price relating to the September 2003 acquisition of
Wella AG and translation impacts. The Company finalized the allocation of Wella
purchase price to the individual assets acquired and liabilities assumed. In
addition, the Company completed its analysis of collaboration plans.
-6-
Identifiable intangible assets as of March 31, 2005 are comprised of
(amounts in millions):
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Amortizable intangible assets with determinable lives $ 2,312 $ 723
Intangible assets with indefinite lives 3,027 -
------- -----
Total identifiable intangible assets $ 5,339 $ 723
Amortizable intangible assets consist principally of patents, technology
and trademarks. The non-amortizable intangible assets consist primarily of
certain trademarks.
The amortization of intangible assets for the three and nine months ended
March 31, 2005 is $51 million and $149 million, respectively.
5. Pro Forma Stock-Based Compensation - The Company has a primary stock-based
compensation plan under which stock options are granted annually to key
managers and directors with exercise prices equal to the market price of
the underlying shares on the date of grant. Grants were made under plans
approved by shareholders in 1992, 2001 and 2003. Grants issued since
September 2002 are vested after three years and have a ten-year life.
Grants issued from July 1998 through August 2002 are vested after three
years and have a fifteen-year life, while grants issued prior to July 1998
are vested after one year and have a ten-year life. The Company also makes
other minor grants to employees, for which vesting terms and option lives
are not substantially different.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its employee stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees," which
recognizes expense based on the intrinsic value at date of grant. As stock
options have been issued with exercise prices equal to the market value of
the underlying shares on the grant date, no compensation cost has
resulted. Had compensation cost for all options granted been determined
based on the fair value at grant date consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been as follows:
-7-
Amounts in millions except per share data
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
---------------------- ----------------------
2005 2004 2005 2004
------- ------- ------- -------
Net earnings
As reported $ 1,720 $ 1,528 $ 5,760 $ 5,107
Pro forma expense 106 91 229 238
------- ------- ------- -------
Pro forma $ 1,614 $ 1,437 $ 5,531 $ 4,869
Net earnings per common share
Basic
As reported $ 0.67 $ 0.58 $ 2.24 $ 1.94
Pro forma adjustments (0.04) (0.04) (0.09) (0.09)
------- ------- ------- -------
Pro forma $ 0.63 $ 0.54 $ 2.15 $ 1.85
Diluted
As reported $ 0.63 $ 0.55 $ 2.10 $ 1.83
Pro forma adjustments (0.04) (0.03) (0.09) (0.09)
------- ------- ------- -------
Pro forma $ 0.59 $ 0.52 $ 2.01 $ 1.74
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience. The Company has estimated the fair value of stock option
grants after January 1, 2005 using a lattice-based model.
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123(R)). This
Statement revises SFAS No. 123 by eliminating the option to account for
employee stock options under APB No. 25 and generally requires companies
to recognize the cost of employee services received in exchange for awards
of equity instruments based on the grant-date fair value of those awards
(the "fair-value-based" method). The Company plans to adopt SFAS 123(R) on
July 1, 2005 using the modified retrospective method, whereby all prior
periods will be adjusted to give effect to the fair-value-based method of
accounting for awards granted in fiscal years beginning on or after July
1, 1995. The impact of adopting SFAS 123(R) will be consistent with the
impact previously disclosed pursuant to the pro forma disclosure
requirements of SFAS No. 123.
6. Postretirement Benefits - The Company offers various postretirement
benefits to its employees. Additional information about these benefits is
incorporated herein by reference to Note 9, Postretirement Benefits and
Employee Stock Ownership Plan, which appears on page 58-63 of the Annual
report to Shareholders for the fiscal year ended June 30, 2004.
-8-
The components of net periodic benefit cost are as follows:
Amounts in millions
Pension Benefits Other Retiree Benefits
------------------------------- -------------------------------
Three Months Ended Three Months Ended
March 31 March 31
------------------------------- -------------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Service Cost $ 42 $ 41 $ 17 $ 22
Interest Cost 62 55 37 43
Expected Return on Plan Assets (47) (41) (83) (82)
Amortization of Prior Service Cost
and Prior Transition Amount 1 1 (6) -
Recognized Net Actuarial Loss 8 7 - -
---------- ---------- ---------- ----------
GROSS BENEFIT COST 66 63 (35) (17)
Dividends on ESOP Preferred Stock - - (18) (18)
---------- ---------- ---------- ----------
NET PERIODIC BENEFIT COST $ 66 $ 63 $ (53) $ (35)
---------- ---------- ---------- ----------
Amounts in millions
Pension Benefits Other Retiree Benefits
------------------------------- ------------------------------
Nine Months Ended Nine Months Ended
March 31 March 31
------------------------------- ------------------------------
2005 2004 2005 2004
---------- ---------- --------- ----------
Service Cost $ 120 $ 116 $ 51 $ 67
Interest Cost 180 156 110 129
Expected Return on Plan Assets (136) (118) (250) (246)
Amortization of Prior Service Cost
and Prior Transition Amount 4 2 (17) (1)
Recognized Net Actuarial Loss 24 21 - 1
---------- ---------- --------- ----------
GROSS BENEFIT COST 192 177 (106) (50)
Dividends on ESOP Preferred Stock - - (54) (55)
---------- ---------- --------- ----------
NET PERIODIC BENEFIT COST $ 192 $ 177 $ (160) $ (105)
---------- ---------- --------- ----------
In 2005, the expected return on plan assets is 7.2% and 9.5% for defined
benefit and other retiree benefit plans, respectively.
-9-
7. Income Taxes - The American Jobs Creation Act of 2004 (the "Act") was
passed during the fourth quarter of 2004. The Act permits United States
corporations to repatriate earnings of foreign subsidiaries at a special
one-time favorable effective federal statutory tax rate of 5.25 percent as
compared to the highest corporate tax rate of 35 percent. The maximum
amount of P&G's foreign earnings that may qualify for this temporary rate
reduction is approximately $10.7 billion. The Company is waiting for
proposed technical corrections to the Act to be adopted prior to deciding
the amount of earnings, if any, it may repatriate under the Act. Because
of the uncertainties relating to the ultimate outcome of these technical
corrections, the accompanying financial statements do not reflect any tax
expense for repatriation of foreign earnings under the Act. The actual
cost to the Company depends on the passage of the clarifying provisions as
well as a number of other factors that are currently being analyzed. P&G
expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, as well as the related one time tax expense, if the
statutory language is revised and interpretations are issued.
8. The Gillette Company Acquisition - On January 27, 2005 the Company entered
into an agreement to acquire 100% of the Gillette Company. The agreement,
which has been approved by the boards of directors of both companies,
provides for a stock-for-stock exchange in which 0.975 shares of The
Procter & Gamble Company common stock will be issued and exchanged, on a
tax-free basis, for each share of The Gillette Company. Under the purchase
method of accounting, the total consideration would be approximately $54
billion, determined using the average Company stock prices beginning two
days before and ending two days after January 28, 2005, the date the
acquisition was announced.
The Gillette Company is the world leader in male grooming, a category that
includes blades, razors and shaving preparations, and in selected female
grooming products. Gillette also holds the number one position worldwide
in alkaline batteries and toothbrushes. The acquisition, which is expected
to be completed in Fall 2005, is subject to approval by the stockholders
of both companies as well as U.S. federal and state and non-U.S.
regulatory authorities.
In connection with the proposed acquisition, the Company has filed a
registration statement on Form S-4 on March 14, 2005, with the Securities
and Exchange Commission, containing a preliminary joint proxy
statement/prospectus and Amendment No. 1 to the preliminary joint proxy
statement/prospectus on April 22, 2005. Investors and security holders are
advised to read the definitive joint proxy statement/prospectus when it
becomes available, because it will contain important information.
The Federal Trade Commission has issued a request for additional
information in connection with its review of the proposed acquisition. The
Company plans to respond promptly and continues to believe that the
transaction will close in Fall 2005.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is organized in the following sections:
Overview
Results of Operations - Three Months Ended March 31, 2005
Results of Operations - Nine Months Ended March 31, 2005
Business Segment Discussion (three and nine months ended March 31, 2005)
Financial Condition
Throughout MD&A, we refer to several measures used by management to evaluate
performance including unit volume growth, net sales and after-tax profit. We
also refer to organic sales growth (net sales excluding the impacts of
acquisitions and divestitures and foreign exchange), free cash flow and free
cash flow productivity, which are not defined under accounting principles
generally accepted in the United States of America (U.S. GAAP). The explanation
of these measures at the end of MD&A provides more details.
OVERVIEW
Our business is focused on providing branded products of superior quality and
value to improve the lives of the world's consumers. We believe this will lead
to leadership sales, profits and value creation, allowing employees,
shareholders and the communities in which we operate to prosper.
Procter & Gamble markets approximately 300 consumer products in more than 160
countries. Our products are sold primarily through mass merchandisers, grocery
stores, membership club stores and drug stores. We are organized and report our
segment results in three global business units: Beauty Care; Health, Baby and
Family Care; and Household Care. We have operations in over 80 countries through
our Market Development Organization, which leads country business teams to build
our brands in local markets and is organized along seven geographic areas: North
America, Western Europe, Northeast Asia, Latin America, Central and Eastern
Europe/Middle East/Africa, Greater China and ASEAN/Australasia/India.
The following table provides the percentage of net sales and net earnings by
business segment for the nine months ended March 31, 2005 (excludes net sales
and net earnings in Corporate):
-11-
NET SALES NET EARNINGS
--------- ------------
BEAUTY CARE 34% 37%
HEALTH, BABY AND FAMILY CARE: 34% 31%
Health Care 14% 14%
Baby Care and Family Care 20% 17%
HOUSEHOLD CARE: 32% 32%
Fabric Care and Home Care 27% 27%
Snacks and Coffee 5% 5%
--- ---
TOTAL 100% 100%
=== ===
Summary of Results. Following are highlights of results for the nine months
ended March 31, 2005:
- Unit volume increased nine percent.
- Net sales increased 11 percent (eight percent excluding the impact
of foreign exchange).
- Organic sales increased seven percent, which excludes a three
percent impact from foreign exchange and one percent impact from
acquisitions and divestitures.
- Net earnings increased 13 percent. Earnings increased due primarily
to top line growth and price increases in several product
categories, partially offset by marketing investments and higher
commodity costs.
- Diluted net earnings per share increased 15 percent versus the
comparable prior year period.
- Free cash flow productivity was 91 percent. Cash from operating
activities was down slightly versus the comparable prior year period
due to increases in working capital. Free cash flow productivity for
the first nine months of fiscal year 2005 is in line with our
long-term target of 90 percent or greater free cash flow
productivity.
Forward Looking Statements. The markets in which the Company sells its products
are highly competitive and comprised of both global and local competitors. Going
forward, business and market uncertainties may affect results. Among the key
factors that could impact results and must be managed by the Company are:
(1) the ability to achieve business plans, including with respect to lower
income consumers and growing existing sales and volume profitably despite
high levels of competitive activity, especially with respect to the
product categories and geographical markets (including developing markets)
in which the Company has chosen to focus;
(2) the ability to successfully execute, manage and integrate key acquisitions
and mergers, including (i) the Domination and Profit Transfer Agreement
with Wella, and (ii) the Company's agreement to merge with The Gillette
Company, including obtaining the related required shareholder and
regulatory approvals;
(3) the ability to manage and maintain key customer relationships;
-12-
(4) the ability to maintain key manufacturing and supply sources (including
sole supplier and plant manufacturing sources);
(5) the ability to successfully manage regulatory, tax and legal matters
(including product liability, patent, and other intellectual property
matters), and to resolve pending matters within current estimates;
(6) the ability to successfully implement, achieve and sustain cost
improvement plans in manufacturing and overhead areas, including the
Company's outsourcing projects;
(7) the ability to successfully manage currency (including currency issues in
volatile countries), debt (including debt related to the Company's
announced plan to repurchase shares of the Company's stock), interest rate
and certain commodity cost exposures;
(8) the ability to manage the continued global political and/or economic
uncertainty and disruptions, especially in the Company's significant
geographical markets, as well as any political and/or economic uncertainty
and disruptions due to terrorist activities;
(9) the ability to successfully manage the pattern of sales, including the
variation in sales volume within periods;
(10) the ability to successfully manage competitive factors, including prices,
promotional incentives and trade terms for products;
(11) the ability to obtain patents and respond to technological advances
attained by competitors and patents granted to competitors;
(12) the ability to successfully manage increases in the prices of raw
materials used to make the Company's products;
(13) the ability to stay close to consumers in an era of increased media
fragmentation; and
(14) the ability to stay on the leading edge of innovation.
If the Company's assumptions and estimates are incorrect or do not come to
fruition, or if the Company does not achieve all of these key factors, then the
Company's actual results could vary materially from the forward-looking
statements made herein.
-13-
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005
The following discussion provides a review of results for the three months ended
March 31, 2005 versus the three months ended March 31, 2004.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE)
CONSOLIDATED EARNINGS INFORMATION
THREE MONTHS ENDED
MARCH 31
----------------------------------------------
2005 2004 % CHG
----------- ----------- ------------
NET SALES $ 14,287 $ 13,029 10%
COST OF PRODUCTS SOLD 7,033 6,394 10%
----------- ----------- ------------
GROSS MARGIN 7,254 6,635 9%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 4,566 4,332 5%
----------- ----------- ------------
OPERATING INCOME 2,688 2,303 17%
TOTAL INTEREST EXPENSE 222 164
OTHER NON-OPERATING INCOME, NET 60 67
----------- ----------- ------------
EARNINGS BEFORE INCOME TAXES 2,526 2,206 15%
INCOME TAXES 806 678
----------- ----------- ------------
NET EARNINGS $ 1,720 $ 1,528 13%
=========== =========== ============
EFFECTIVE TAX RATE 31.9% 30.7%
PER COMMON SHARE:
BASIC NET EARNINGS $ 0.67 $ 0.58 16%
DILUTED NET EARNINGS $ 0.63 $ 0.55 15%
DIVIDENDS $ 0.25 $ 0.23
AVERAGE DILUTED SHARES OUTSTANDING 2,718.7 2,790.1
COMPARISONS AS A % OF NET SALES BASIS PT CHG
GROSS MARGIN 50.8% 50.9% (10)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 32.0% 33.2% (120)
OPERATING MARGIN 18.8% 17.7% 110
EARNINGS BEFORE INCOME TAXES 17.7% 16.9%
NET EARNINGS 12.0% 11.7% 30
Unit volume for the January - March quarter increased six percent. Organic
volume grew seven percent, which excludes the impact of acquisitions and
divestitures - primarily the divestiture of the juice business. Growth continues
to be broad-based with all global business units delivering unit volume growth
of mid-single digits or greater, led by Health, Baby and Family Care and Beauty
Care. Additionally, unit volume increased in all geographic regions led by
developing market growth in the mid-teens.
-14-
Net sales for the quarter increased 10 percent to $14.29 billion. Organic sales
increased eight percent, which is above our long-term target of three to five
percent. Acquisitions and divestitures reduced sales by one percent. Organic
sales exclude the impacts of acquisitions, divestitures and foreign exchange
from year-over-year comparisons. Foreign exchange added three percent to net
sales growth behind strengthening of the Euro, British pound and Canadian
dollar. Pricing added one percent to sales growth primarily behind increases
that partially recovered commodity costs in the Family Care, Coffee and Pet
Health and Nutrition categories.
Volume
--------------------------
With Without
Acquisitions Acquisitions Total
& & Mix/ Total Impact
Divestitures Divestitures FX Price Other Impact Ex-FX
------------ ------------- -- ----- ----- ------ ------
BEAUTY CARE 7% 7% 3% 0% -1% 9% 6%
HEALTH, BABY & FAMILY CARE
HEALTH CARE 14% 13% 2% 1% -1% 16% 14%
BABY CARE AND FAMILY CARE 8% 8% 3% 1% 1% 13% 10%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 5% 4% 3% 0% -1% 7% 4%
SNACKS AND COFFEE 6% 6% 1% 9% 0% 16% 15%
TOTAL COMPANY 6% 7% 3% 1% 0% 10% 7%
NOTE: Sales percentage changes are approximations based on quantitative formulas
that are consistently applied.
Gross margin declined 10 basis points versus the prior year quarter. The over
100 basis point margin impact of higher commodity costs was partially offset by
the scale benefits of volume growth, higher selling prices and cost reduction
programs. In addition, a positive gross margin impact of a shift to higher gross
margin products, including a higher percentage of sales in the Beauty and Health
Care businesses than in the base period, more than offset the negative margin
impact of higher developing market growth. Developing markets have lower gross
margins than the Company average.
Selling, general and administrative expenses (SG&A) increased versus the prior
year, but at a lower rate compared to net sales. SG&A as a percentage of net
sales declined 120 basis points. Although absolute spending increased, marketing
expenses as a percentage of net sales decreased, reflecting continued
investments to support the base business and product initiatives, including Olay
Quench, the expansion of Olay in Europe and Asia, Pantene Color Expressions,
Pampers Feel `n Learn, Pampers Kandoo and Rejoice. Base period SG&A expense also
included a higher provision for minority interest than in the current year, with
the reduction driven by our purchase of the remaining stake in the China venture
from Hutchison Whampoa China Ltd. and completion of a domination and profit
transfer agreement with Wella AG.
Interest expense in the current quarter increased versus the comparable prior
year period due to the increase in the Company's average debt position and
higher interest rates.
-15-
Net earnings increased 13 percent to $1.72 billion and diluted net earnings per
share increased 15 percent to $0.63. Earnings growth was primarily driven by
volume and the previously discussed price increases, partially offset by higher
commodity costs. Diluted net earnings per share grew ahead of net earnings due
to the lower number of diluted shares outstanding, which was driven by our share
repurchases in the current fiscal year.
The tax rate in the current quarter was negatively impacted by approximately 5.7
percentage points to reflect a provision for tax costs on anticipated dividends
originating from foreign subsidiaries. This was largely offset by successful
resolution of tax audits in certain countries. The effective tax rate for the
quarter was also up due to an increase in the estimated annual effective rate,
reflecting revised estimates on the overall country mix of taxable income.
Separately, as described in Note 7 to the Consolidated Financial Statements, we
are still analyzing the American Jobs Creation Act of 2004 (the "Act"),
including uncertainties that need clarifying action to determine the amount of
earnings we may repatriate, if any, under the Act. The tax rate for the balance
of the year could be impacted by our ultimate plans under the Act. Absent the
impact of the Act, we continue to expect the full fiscal year tax rate to be
below the prior year rate.
-16-
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2005
The following discussion provides a review of results for the nine months ended
March 31, 2005 versus the nine months ended March 31, 2004.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE)
CONSOLIDATED EARNINGS INFORMATION
NINE MONTHS ENDED
MARCH 31
-------------------------------------------
2005 2004 % CHG
---------- ----------- ------------
NET SALES $ 42,483 $ 38,445 11%
COST OF PRODUCTS SOLD 20,515 18,597 10%
---------- ----------- ------------
GROSS MARGIN 21,968 19,848 11%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 13,340 12,160 10%
---------- ----------- ------------
OPERATING INCOME 8,628 7,688 12%
TOTAL INTEREST EXPENSE 603 454
OTHER NON-OPERATING INCOME, NET 297 136
---------- ----------- ------------
EARNINGS BEFORE INCOME TAXES 8,322 7,370 13%
INCOME TAXES 2,562 2,263
---------- ----------- ------------
NET EARNINGS $ 5,760 $ 5,107 13%
========== =========== ============
EFFECTIVE TAX RATE 30.8% 30.7%
PER COMMON SHARE:
BASIC NET EARNINGS $ 2.24 $ 1.94 15%
DILUTED NET EARNINGS $ 2.10 $ 1.83 15%
DIVIDENDS $ 0.75 $ 0.68
AVERAGE DILUTED SHARES OUTSTANDING 2,738.6 2,796.2
COMPARISONS AS A % OF NET SALES BASIS PT CHG
GROSS MARGIN 51.7% 51.6% 10
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 31.4% 31.6% (20)
OPERATING MARGIN 20.3% 20.0% 30
EARNINGS BEFORE INCOME TAXES 19.6% 19.2%
NET EARNINGS 13.6% 13.3% 30
Fiscal year to date, unit volume increased nine percent. All businesses and
geographic regions posted unit volume growth. Organic volume, which excludes
acquisitions and divestitures, increased eight percent. Additional volume from
the acquisition of Wella, which was acquired in September of 2003, was partially
offset by the divestiture of the juice business in August of 2004. Unit volume
growth was led by Beauty Care, up 13 percent. Developing markets also delivered
double-digit volume growth led by Greater China and Central and Eastern
Europe/Middle East/Africa.
-17-
For the first nine months of the fiscal year, net sales increased 11 percent to
$42.48 billion. Foreign exchange contributed three percent to sales growth
driven primarily by the strength of the Euro, British pound and Japanese yen.
The impacts of acquisitions and divestitures added one percent to sales growth,
primarily due to the Wella acquisition partially offset by the juice
divestiture. Organic sales increased seven percent. Pricing had no net impact on
sales growth, as price increases in Family Care, Health Care, the Coffee
category and certain laundry markets were offset by price investments, including
in Europe to address the growth of hard discounters. Higher relative growth in
developing markets, where the average unit sales price is lower than the Company
average, resulted in a negative mix impact of one percent on sales.
Volume
---------------------------
With Without
Acquisitions Acquisitions Total
& & Mix/ Total Impact
Divestitures Divestitures FX Price Other Impact Ex-FX
------------ ------------ -- ----- ----- ------ ------
BEAUTY CARE 13% 8% 4% -1% -1% 15% 11%
HEALTH, BABY & FAMILY CARE
HEALTH CARE 9% 8% 2% 1% -2% 10% 8%
BABY CARE AND FAMILY CARE 7% 7% 3% 1% 0% 11% 8%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 9% 7% 3% -1% -1% 10% 7%
SNACKS AND COFFEE 3% 3% 2% 2% 0% 7% 5%
TOTAL COMPANY 9% 8% 3% 0% -1% 11% 8%
NOTE: Sales percentage changes are approximations based on quantitative formulas
that are consistently applied.
Gross margin fiscal year to date improved 10 basis points against the comparable
base period where gross margin improved 200 basis points (including
approximately 60 basis points of improvement as a result of restructuring
program charges in the nine months ended March 31, 2003). Gross margin expanded
behind the scale benefits of volume growth and cost reduction programs, offset
by commodity price increases. Mix was about neutral to gross margin, as the
negative margin impact of strong developing market growth was offset by the
impact of the Wella acquisition, which has a higher gross margin than the
Company average (current fiscal year to date results include a full nine months
of Wella versus seven months in the comparable prior year period). Additionally,
the sale of the juice business in August, 2004 contributed to gross margin
expansion, as the juice business had a lower gross margin than the Company
average. We expect higher commodity prices will continue to adversely impact
gross margins well into the next fiscal year.
Selling, general and administrative expenses (SG&A) decreased by 20 basis points
as a percentage of net sales, as absolute spending increased at a lower rate
than net sales. The basis point reduction was driven primarily by lower overhead
spending as a percentage of sales. SG&A spending was also reduced by lower
minority interest expense than in the base period, reflecting our purchase of
the remaining stake in the China venture from Hutchison Whampoa China Ltd. and
completion of a domination and profit transfer agreement with Wella AG. Spending
for marketing as a percentage of sales was essentially flat
-18-
versus the base period. Marketing investments were made to support the base
business and product initiatives, including the expansion of Lenor and Herbal
Essences, Febreze, and the Olay brand.
Interest expense in the current fiscal year to date increased 33 percent versus
the comparable prior year period due to higher debt balances. The increase in
other non-operating income compared to the prior year is primarily due to the
before-tax gain on the sale of the juice business in the current year.
Net earnings increased 13 percent to $5.76 billion. Earnings growth for the
fiscal year to date was driven primarily by volume and cost reduction efforts,
partially offset by higher commodity costs and the marketing investments
discussed above. Diluted net earnings per share increased 15 percent to $2.10
compared to $1.83 in the comparable prior year period. Earnings per share grew
ahead of net earnings due to the impact of share repurchases.
BUSINESS SEGMENT DISCUSSION
The following discussion provides a review of results by business segment. An
analysis of the results for the three and nine months ended March 31, 2005 is
provided compared to the same period ended March 31, 2004. The primary financial
measures used to evaluate segment performance are net sales and net earnings
after tax. The table below provides supplemental information on net sales,
earnings before income taxes and net earnings by business segment for the three
and nine months ended March 31, 2005 versus the comparable prior year period:
Three Months Ended March 31, 2005
(amounts in millions)
% Change Earnings % Change % Change
Versus Before Versus Net Versus
Net Sales Year Ago Income Taxes Year Ago Earnings Year Ago
--------- -------- ------------ -------- -------- --------
BEAUTY CARE $ 4,876 9% $ 1,014 15% $ 701 23%
HEALTH CARE 2,000 16% 373 21% 252 22%
BABY CARE AND FAMILY CARE 3,048 13% 532 49% 339 56%
--------- -------- -------- -------- -------- --------
HEALTH, BABY & FAMILY CARE 5,048 14% 905 36% 591 39%
FABRIC CARE AND HOME CARE 3,819 7% 761 -8% 508 -6%
SNACKS AND COFFEE 767 16% 166 89% 105 91%
--------- -------- -------- -------- -------- --------
HOUSEHOLD CARE 4,586 8% 927 1% 613 3%
TOTAL BUSINESS SEGMENT 14,510 10% 2,846 16% 1,905 20%
CORPORATE (223) N/A (320) N/A (185) N/A
--------- -------- -------- -------- -------- --------
TOTAL COMPANY $ 14,287 10% $ 2,526 15% $ 1,720 13%
-19-
Nine Months Ended March 31, 2005
(amounts in millions)
% Change Earnings % Change % Change
Versus Before Versus Net Versus
Net Sales Year Ago Income Taxes Year Ago Earnings Year Ago
--------- -------- ------------ -------- -------- --------
BEAUTY CARE $ 14,553 15% $ 3,188 15% $ 2,207 21%
HEALTH CARE 5,887 10% 1,220 3% 820 3%
BABY CARE AND FAMILY CARE 8,876 11% 1,625 27% 1,019 28%
--------- -------- -------- -------- -------- --------
HEALTH, BABY & FAMILY CARE 14,763 11% 2,845 15% 1,839 16%
FABRIC CARE AND HOME CARE 11,413 10% 2,494 0% 1,674 0%
SNACKS AND COFFEE 2,353 7% 482 13% 312 12%
--------- -------- -------- -------- -------- --------
HOUSEHOLD CARE 13,766 9% 2,976 2% 1,986 2%
TOTAL BUSINESS SEGMENT 43,082 12% 9,009 10% 6,032 12%
CORPORATE (599) N/A (687) N/A (272) N/A
--------- -------- -------- -------- -------- --------
TOTAL COMPANY $ 42,483 11% $ 8,322 13% $ 5,760 13%
BEAUTY CARE
For the quarter, Beauty Care unit volume increased seven percent with developing
markets contributing double-digit growth. Skin Care and Fine Fragrances both
grew volume double-digits behind the Olay and Hugo Boss brands, respectively.
Hair Care volume increased mid-single digits behind the growth of Pantene, Head
& Shoulders, Rejoice and Aussie brands. In Feminine Care, unit volume increased
high-single digits behind double-digit growth of the Always/Whisper and
Naturella brands. Beauty Care net sales for the quarter increased nine percent
to $4.88 billion. Foreign exchange contributed three percent to sales growth,
while mix reduced sales by one percent due to strong growth in developing
markets. Net earnings increased 23 percent to $701 million driven by robust
volume growth, the impact of the Company's increased ownership of the China
operation and the domination and profit transfer agreement with Wella. Net
earnings were reduced by continued marketing investments to support initiatives
including the launch of Olay Quench, the expansion of Olay in Europe and Asia,
Herbal Essences in Japan, Rejoice in Greater China and Pantene Pro-Health.
For the first nine months of the fiscal year, Beauty Care unit volume is up 13
percent, which includes two additional months of Wella compared to the base
period. Organic volume, which excludes the impacts of acquisitions and
divestitures, increased eight percent. Net sales increased 15 percent to $14.55
billion. Foreign exchange contributed four percent to sales growth. Pricing
reduced sales by one percent, while the mix impact of strong developing market
growth reduced sales by one percent. Net earnings increased 21 percent to $2.21
billion. Net earnings increased primarily due to volume growth, cost reduction
programs, the impacts of the Company's increased ownership of the China
operation and domination and profit transfer agreement with Wella AG, partially
offset by marketing spending to support initiatives.
-20-
HEALTH, BABY AND FAMILY CARE
Health Care unit volume increased 14 percent for the quarter behind the growth
of Prilosec OTC, Actonel and double-digit growth in developing markets,
primarily in Oral Care. Globally, Oral Care posted high single-digit volume
growth despite a challenging competitive environment in dentifrice and a
declining market for tooth whitening products. Developing market Oral Care
volume was up strongly, which more than offset slight volume declines in
developed markets. The soft developed market results were mainly due to
contraction of the U.S. tooth whitening market. Vicks also contributed to unit
volume growth due to the later cough/cold season in North America and Western
Europe this year. Net sales increased 16 percent to $2.00 billion aided by a
positive two percent foreign exchange impact. Pricing added one percent to
sales, while product mix reduced sales by one percent due to the shift of
Macrobid branded sales to generic sales and developing market growth. Net
earnings were $252 million, an increase of 22 percent, against a base period
comparison where earnings grew 48 percent. Earnings growth was driven by
increased volume, partially offset by the negative profit impact from the
generic sales of Macrobid versus branded Macrobid in the base. Earnings were
also lower due to the impacts of the higher royalty expense rate for Prilosec
OTC.
Fiscal year to date, Health Care unit volume increased nine percent. Net sales
grew 10 percent to $5.89 billion. Foreign exchange added two percent to sales
growth and price increases in Pharmaceuticals and Pet Health and Nutrition added
one percent to sales growth. Net sales were reduced by two percent due to the
mix impact of developing market growth, particularly in Greater China, and the
shift of Macrobid branded sales to generic sales. Net earnings were $820
million, an increase of three percent. Earnings grew due to higher volume and
price increases. Earnings growth trailed sales growth year-over-year due, in
part, to product mix impacts of lower volume in Macrobid and Crest Whitestrips.
Earnings were also lower due to the impacts of the higher royalty expense rate
for Prilosec OTC, higher commodity costs and marketing investments in support of
initiatives.
For the quarter, Baby Care and Family Care unit volume increased eight percent
led by Baby Care behind continued growth of the Baby Stages of Development line.
Family Care posted volume growth behind recent initiatives on Charmin in North
America. Net sales increased 13 percent to $3.05 billion, with foreign exchange
contributing three percent to sales growth. Pricing added one percent to sales
growth. Pricing actions in Family Care to recover higher commodity costs were
partially offset by targeted pricing investments in select Baby Care markets,
primarily in Western Europe in response to competitive activity. Product mix
added one percent to sales growth due to higher sales growth in North America.
Earnings grew 56 percent to $339 million behind the scale benefits of volume
growth and manufacturing cost savings. The impact of pricing actions largely
offset the negative affect of higher commodity prices versus the prior year.
Through the first three quarters of the fiscal year, Baby Care and Family Care
unit volume increased seven percent. Growth was driven behind Baby Care's
continued stream of innovation including Feel and Learn training pants in North
America, Baby Dry fit upgrade and Baby Stages of Development upgrades in Western
Europe and the expansion of Pampers Kandoo, as well as Family Care's recent
Bounty and Charmin initiatives. Net sales increased 11 percent to $8.88 billion,
including a positive three percent impact from foreign exchange. Pricing added
one percent to sales growth driven by a price increase in North America Family
Care to recover higher commodity costs, partially offset by targeted pricing
investments in Western Europe in response to competitive activity. Net earnings
increased 28 percent to $1.02 billion. Earnings increased driven by the scale
benefits of volume, pricing in North
-21-
America Family Care and manufacturing cost savings projects, partly offset by
higher commodity costs and marketing investments in support of initiatives.
HOUSEHOLD CARE
Unit volume increased by five percent in Fabric Care and Home Care driven
primarily by double-digit growth in developing markets. Also contributing to
volume growth were the continued success of Lenor and Febreze Air Effects and
the launches of Tide Coldwater and Mr. Clean Magic Reach. Home Care volume was
flat against a base period that includes the impacts of several initiatives.
Volume was negatively affected by lower volume in the current quarter for
Swiffer cleanings products, due to market size declines, and hand dishwashing
liquids, due to heavy competitive merchandising activity. Acquisitions in Europe
and Latin America added one percent to volume growth. Net sales increased seven
percent to $3.82 billion. Foreign exchange added three percent to sales growth.
The mix impact of higher relative growth in developing markets reduced sales by
one percent. Net earnings were $508 million, a decrease of six percent. The
decrease in earnings is due primarily to higher commodity costs and a one-time
charge related to supply chain optimization, which more than offset the scale
benefits of volume growth. Additionally, earnings margin was negatively impacted
by the mix effect of higher growth rates in developing markets.
Fabric Care and Home Care unit volume increased nine percent fiscal year to date
behind geographic expansion and growth in multiple price tiers. Acquisitions
added two percent to volume versus the prior year. Net sales increased 10
percent to $11.41 billion. Foreign exchange improved sales by three percent.
Pricing, primarily in Western Europe, reduced sales by one percent. The mix
effect of developing market growth, where the average unit sales price is
generally lower than the business average, reduced sales by one percent. Net
earnings of $1.67 billion were in line with the comparable prior year period.
The benefit of volume growth on earnings was offset by commodity price
increases, higher spending to support initiatives and pricing actions. Earnings
were also negatively impacted by the mix effect of developing market growth,
which has a lower gross margin than the balance of the business. The impacts of
higher commodity costs and expansion in developing markets are expected to
continue to negatively impact earnings margins.
For the quarter, Snacks and Coffee unit volume was up six percent, with the
Coffee category up double-digits. Pringles volume grew behind expanded
distribution and merchandizing due to customized flavors and Pringles Prints.
Net sales increased 16 percent to $767 million. Pricing increased sales nine
percent due to the recent action taken on Folgers to recover higher commodity
costs. Foreign exchange had a positive one percent effect on sales growth. Net
earnings increased 91 percent to $105 million. Current year earnings growth
reflects higher volume, pricing and lower merchandising spending versus the base
period.
Fiscal year to date, Snacks and Coffee volume was up three percent. Net sales
increased seven percent to $2.35 billion. Foreign exchange added two percent to
sales growth. Pricing increased net sales by two percent behind actions in the
coffee category to recover increases in commodity costs. Net earnings were $312
million, an increase of 12 percent, due primarily to the scale benefits of
volume growth and higher selling prices, partially offset by increased
commodities costs and marketing spending.
-22-
CORPORATE
Corporate includes certain operating and non-operating activities not allocated
to specific business units. These include: the incidental businesses managed at
the corporate level, financing and investing activities, certain restructuring
charges, other general corporate items and the historical results of divested
businesses, including the juice business that was divested in August of 2004.
Corporate also includes reconciling items to adjust the accounting policies used
in the segments to U.S. GAAP. The most significant reconciling items include
income taxes (to adjust from statutory rates that are reflected in the segments
to the overall Company effective tax rate), adjustments for unconsolidated
entities (to eliminate sales, cost of products sold and SG&A for entities that
are consolidated in the segments but accounted for using the equity method for
U.S. GAAP) and minority interest adjustments for subsidiaries where we do not
have 100% ownership. Because both unconsolidated entities and less than 100
percent owned subsidiaries are managed as integral parts of the Company, they
are accounted for similar to a wholly-owned subsidiary for management and
segment purposes. This means our segment results recognize 100 percent of each
income statement component through before-tax earnings in the segments, with
eliminations in Corporate. In determining segment net earnings after tax, we
apply the statutory tax rates (with adjustments to arrive at the Company's
effective tax rate in Corporate) and eliminate the share of earnings applicable
to other ownership interests, in a manner similar to minority interest.
For the quarter, net sales were -$223 million compared to -$103 million in the
prior year period. For the fiscal year to date, net sales were -$599 million
versus -$189 million. The decline is primarily due to higher sales from the
divested juice business in the base period. Net earnings in the quarter were
- -$185 million compared to -$65 million in the comparable prior year period. Net
earnings were -$272 million in the first nine months of the fiscal year
compared to -$257 million in the prior year. Current year net earnings reflect
the net impact of the juice divestiture, higher interest expense, and the
guaranteed dividend to Wella shareholders under the domination and profit
transfer agreement.
FINANCIAL CONDITION
Operating Activities
Cash generated from operating activities for the nine months ended March 31,
2005 was $6.62 billion versus to $6.94 billion in the comparable prior year
period. The cash increase from higher net earnings was offset primarily by an
increase in inventory. Inventory levels increased due to higher commodity costs,
inventory build-up in preparation for upcoming initiatives and to rebuild
inventory levels in product categories that could not meet customer demand.
Accounts receivable increased, but days sales are in line with the comparable
prior year period.
Investing Activities
Investing activities in the current year decreased cash by $1.60 billion
compared to $7.37 billion in the prior year, which included the cost of the
acquisition of Wella AG. Capital expenditures as a percent of net sales were 3.3
percent - slightly lower than the comparable prior year period and below our
long-term target of 4 percent of sales. Proceeds from asset sales increased
primarily due to the divestiture of the juice business. Acquisitions (net of
cash acquired) used $528 million of cash in the current year which includes
acquisitions for a pharmaceuticals business in Spain and increased ownership in
our Glad joint venture.
-23-
Financing Activities
Total cash used by financing activities was $2.42 billion compared to $828
million in the base period. The Company's long term debt position provided $1.46
billion of net cash, as borrowings exceeded repayments. Short-term debt provided
$1.32 billion in cash. Treasury share purchases used $3.58 billion of cash
compared to $2.33 billion in the base period reflecting additional repurchases
consistent with the announcement in January of 2005 of a share repurchase
program in connection with our planned acquisition of The Gillette Company.
At June 30, 2004, the Company's current liabilities exceeded current assets by
$5.03 billion. The key driver was the use of commercial paper to partially fund
the Wella acquisition. At March 31, 2005, this excess has been reduced to $3.73
billion. We anticipate being able to support short-term liquidity needs through
cash generated from operations. The Company also has long- and short-term
ratings which will enable it to refinance this debt at favorable rates in
commercial paper and bond markets. In addition, the Company has agreements with
a diverse group of creditworthy financial institutions that, if needed, would
provide sufficient credit funding to meet short-term financing requirements.
Gillette Acquisition
As noted in footnote 8 to the financial statements, the Company entered into an
agreement to acquire 100% of The Gillette Company on January 27, 2005. Pursuant
to the agreement, the Company will issue 0.975 shares of stock for each share of
Gillette common stock. Under the purchase method of accounting, the total
consideration would be approximately $54 billion. This is based on the average
stock prices of the Company for the period beginning two days before and ending
two days after the January 28, 2005 announcement data. In connection with this
transaction, the Company also announced a share buyback plan under which it will
acquire in open market and/or private transactions approximately $18 billion to
$22 billion of Company shares. As of March 31, 2005, approximately $1.58 billion
was spent under this plan, financed by a temporary $2.5 billion credit facility.
The Company intends to refinance this facility and the remaining treasury share
purchases, which are largely expected to be completed by June 30, 2006, by
issuing a combination of long-term and short-term debt. Due to the Company's
long- and short-term credit ratings, the Company does not anticipate any
significant issues in securing the required debt. In addition, the Company does
not anticipate any significant impacts on its overall liquidity as a result of
the acquisition or share buyback program.
MEASURES NOT DEFINED BY U.S. GAAP
Our discussion of financial results includes several measures not defined by
U.S. GAAP. We believe these measures provide our investors with additional
information about the underlying results and trends of the Company, as well as
insight to some of the metrics used to evaluate management. When used in MD&A,
we have provided the comparable GAAP measure in the discussion.
Organic Sales Growth. Organic sales growth is a non-GAAP measure of sales growth
excluding the impacts of acquisitions, divestitures and foreign exchange from
year-over-year comparisons. We believe this provides investors with a more
complete understanding of underlying sales trends by providing sales growth on a
consistent basis.
Free Cash Flow. Free cash flow is defined as operating cash flow less capital
spending. We view free cash flow as an important measure because it is one
factor in determining the amount of cash available
-24-
for dividends and discretionary investment. Free cash flow is also one of the
measures used to evaluate senior management and is a factor in determining their
at-risk compensation.
Free Cash Flow Productivity. Free cash flow productivity is defined as the ratio
of free cash flow to net earnings. The Company's long-term target is to generate
free cash at or above 90 percent of net earnings. Free cash flow is also one of
the measures used to evaluate senior management. The reconciliation of free cash
flow and free cash flow productivity is provided below:
Operating Capital Free Net Free Cash
($MM) Cash Flow Spending Cash Flow Earnings Flow Productivity
- ------------ --------- -------- --------- -------- -----------------
Jul - Sep'03 1,606 364 1,242 1,761 71%
Oct - Dec'03 2,355 446 1,909 1,818 105%
Jan - Mar'04 2,978 521 2,457 1,528 161%
Apr - Jun'04 2,423 693 1,730 1,374 126%
----- ----- ----- ----- ---
Jul - Jun'04 9,362 2,024 7,338 6,481 113%
Jul - Sep'04 1,918 413 1,505 2,001 75%
Oct - Dec'04 2,061 498 1,563 2,039 77%
Jan - Mar'05 2,645 475 2,170 1,720 126%
----- ----- ----- ----- ---
Jul - Mar'05 6,624 1,386 5,238 5,760 91%
-25-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's exposure to market risk
since June 30, 2004. See Item 7A in the Company's Annual Report on Form 10-K for
the year ended June 30, 2004.
Item 4. Controls and Procedures
The Company's Chairman of the Board, President and Chief Executive, A.G. Lafley,
and the Company's Chief Financial Officer, Clayton C. Daley, Jr., have evaluated
the Company's internal controls and disclosure controls systems as of the end of
the period covered by this report.
Messrs. Lafley and Daley have concluded that the Company's disclosure controls
systems are functioning effectively to provide reasonable assurance that the
Company can meet its disclosure obligations. The Company's disclosure controls
system is based upon a global chain of financial, staff and general business
reporting lines that converge in the world-wide headquarters of the Company in
Cincinnati, Ohio. The reporting process is designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
with the Commission is recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms. Consistent with the
SEC's suggestion, the Company has a Disclosure Committee consisting of key
Company personnel designed to review the accuracy and completeness of all
disclosures made by the Company.
In connection with the evaluation described above, no changes in the Company's
internal control over financial reporting occurred during the Company's third
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
-26-
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
APPROXIMATE DOLLAR
TOTAL NUMBER OF VALUE OF SHARES THAT
SHARES PURCHASED AS MAY YET BE PURCHASED
PART OF PUBLICLY UNDER OUR SHARE
TOTAL NUMBER OF AVERAGE PRICE PAID ANNOUNCED PLANS OR REPURCHASE PROGRAM
PERIOD SHARES PURCHASED(1) PER SHARE(2) PROGRAMS(3) ($ IN BILLIONS)(3)
- ---------------- ------------------- ------------------ ------------------- ---------------------
1/1/05 - 1/31/05 6,371,902 $55.71 0 0
2/1/05 - 2/28/05 17,842,343 $53.01 17,802,000 21.1
3/1/05 - 3/31/05 11,936,910 $53.21 11,936,600 20.4
(1) All share repurchases were made in open-market transactions. The number of
shares purchased other than through a publicly announced repurchase plan
were 6,412,555 for the quarter. This table excludes shares withheld from
employees to satisfy minimum tax withholding requirements on option
exercises and other equity-based transactions. The Company administers
employee cashless exercises through an independent, third party broker and
does not repurchase stock in connection with cashless exercises.
(2) Average price paid per share is calculated on a settlement basis and
excludes commission.
(3) On January 28, 2005 the Company announced a share buyback plan in
connection with its planned acquisition of The Gillette Company. Pursuant
to the plan, the Board of Directors authorized the Company and its
subsidiaries to acquire in open market and/or private transactions up to
$22 billion of shares of Company common stock to be financed by issuing a
combination of long-term and short-term debt. The share repurchases are
expected to be largely completed by June 30, 2006.
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Item 6. Exhibits
Exhibits
(3-1) Amended Articles of Incorporation (Incorporated by reference to
Exhibit (3-1) of the Company's Form 10-Q for the quarter ended
September 30, 2004).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Annual Report on Form 10-K for the year ended June 30,
2003).
(10-1) The Procter & Gamble 2001 Stock and Incentive Compensation Plan (as
amended on March 8, 2005) which was adopted by shareholders at the
annual meeting on October 9, 2001.
(10-2) The Procter & Gamble Future Shares Plan (as adjusted for the stock
split effective May 21, 2004) which was adopted by the Board of
Directors on October 14, 1997.
(10-3) The Procter & Gamble 2003 Non-Employee Directors' Stock Plan (as
adjusted for the stock split effective May 21, 2004) which was
adopted by shareholders at the annual meeting on October 14, 2003
(Incorporating by reference the accompanying related correspondence
and terms and conditions contained in Exhibit (10-9) of the
Company's Annual Report on Form 10-K for the year ended June 30,
2004).
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.
-28-
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PROCTER & GAMBLE COMPANY
JOHN K. JENSEN
- -------------------------------
(John K. Jensen)
Vice President and Comptroller
May 9, 2005
- -------------------------------
Date
-29-
EXHIBIT INDEX
Exhibit No.
(3-1) Amended Articles of Incorporation (Incorporated by reference to
Exhibit (3-1) of the Company's Form 10-Q for the quarter ended
September 30, 2004).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Annual Report on Form 10-K for the year ended June 30,
2003).
(10-1) The Procter & Gamble 2001 Stock and Incentive Compensation Plan (as
amended on March 8, 2005) which was adopted by shareholders at the
annual meeting on October 9, 2001.
(10-2) The Procter & Gamble Future Shares Plan (as adjusted for the stock
split effective May 21, 2004) which was adopted by the Board of
Directors on October 14, 1997.
(10-3) The Procter & Gamble 2003 Non-Employee Directors' Stock Plan (as
adjusted for the stock split effective May 21, 2004) which was
adopted by shareholders at the annual meeting on October 14, 2003
(Incorporating by reference the accompanying related correspondence
and terms and conditions contained in Exhibit (10-9) of the
Company's Annual Report on Form 10-K for the year ended June 30,
2004).
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.