UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002 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 [ ]
There were 1,292,908,664 shares of Common Stock outstanding as of December
31, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Consolidated Statement of Earnings of The Procter & Gamble Company and
subsidiaries for the three and six months ended December 31, 2002 and 2001, the
Consolidated Balance Sheet as of December 31, 2002 and June 30, 2002, and the
Consolidated Statement of Cash Flows for the six months ended December 31, 2002
and 2001 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 STATEMENT OF EARNINGS
Amounts in millions except per share amounts
Three Months Ended Six Months Ended
December 31 December 31
----------------------------------- ------------------------------------
2002 2001 2002 2001
--------------- --------------- ---------------- ---------------
NET SALES $ 11,005 $ 10,403 $ 21,801 $ 20,169
Cost of products sold 5,490 5,339 10,979 10,450
Marketing, research, administrative
and other expenses 3,267 3,200 6,395 6,093
------------ ------------ ------------ ------------
OPERATING INCOME 2,248 1,864 4,427 3,626
Interest expense 143 150 287 307
Other non-operating income, net 74 200 177 222
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 2,179 1,914 4,317 3,541
Income taxes 685 615 1,359 1,138
------------ ------------ ------------ ------------
NET EARNINGS $ 1,494 $ 1,299 $ 2,958 $ 2,403
============ ============ ============ ============
PER COMMON SHARE:
Basic net earnings $ 1.13 $ 0.98 $ 2.23 $ 1.81
Diluted net earnings $ 1.06 $ 0.93 $ 2.10 $ 1.71
Dividends $ 0.41 $ 0.38 $ 0.82 $ 0.76
AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 1,402.6 1,401.5 1,404.9 1,401.0
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Amounts in millions
December 31 June 30
ASSETS 2002 2002
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 5,106 $ 3,427
Investment securities 218 196
Accounts receivable 3,240 3,090
Inventories
Materials and supplies 1,098 1,031
Work in process 336 323
Finished goods 2,176 2,102
-------------- --------------
Total Inventories 3,610 3,456
Deferred income taxes 458 521
Prepaid expenses and other receivables 1,559 1,476
-------------- --------------
TOTAL CURRENT ASSETS 14,191 12,166
PROPERTY, PLANT AND EQUIPMENT
Buildings 4,631 4,532
Machinery and equipment 18,151 17,963
Land 580 575
-------------- --------------
23,362 23,070
Accumulated depreciation (10,237) (9,721)
--------------- --------------
NET PROPERTY, PLANT AND EQUIPMENT 13,125 13,349
NET GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 11,038 10,966
Trademarks and other intangible assets 2,408 2,464
-------------- --------------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 13,446 13,430
OTHER NON-CURRENT ASSETS 1,680 1,831
-------------- --------------
TOTAL ASSETS $ 42,442 $ 40,776
============== ==============
December 31 June 30
2002 2002
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,021 $ 2,205
Accrued and other liabilities 5,352 5,330
Taxes payable 1,839 1,438
Debt due within one year 3,491 3,731
-------------- -------------
TOTAL CURRENT LIABILITIES 12,703 12,704
LONG-TERM DEBT 11,534 11,201
DEFERRED INCOME TAXES 1,223 1,077
OTHER NON-CURRENT LIABILITIES 2,146 2,088
-------------- -------------
TOTAL LIABILITIES 27,606 27,070
SHAREHOLDERS' EQUITY
Preferred stock 1,602 1,634
Common stock - shares outstanding - Dec 31 1,292.9 1,293
June 30 1,300.8 1,301
Additional paid-in capital 2,651 2,490
Reserve for ESOP debt retirement (1,324) (1,339)
Accumulated other comprehensive income (2,175) (2,360)
Retained earnings 12,789 11,980
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 14,836 13,706
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,442 $ 40,776
============== =============
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
Amounts in millions December 31
--------------------------------
2002 2001
------------- ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 3,427 $ 2,306
OPERATING ACTIVITIES
Net earnings 2,958 2,403
Depreciation and amortization 844 784
Deferred income taxes 166 115
Change in:
Accounts receivable (117) (397)
Inventories (89) (139)
Accounts payable and accruals 73 876
Other operating assets & liabilities 151 (542)
Other 340 77
------------- -------------
TOTAL OPERATING ACTIVITIES 4,326 3,177
------------- -------------
INVESTING ACTIVITIES
Capital expenditures (616) (668)
Proceeds from asset sales 117 151
Acquisitions - (5,061)
Change in investment securities (8) 96
------------- -------------
TOTAL INVESTING ACTIVITIES (507) (5,482)
------------- -------------
FINANCING ACTIVITIES
Dividends to shareholders (1,129) (1,047)
Change in short-term debt (1,188) 4,844
Additions to long-term debt 1,187 132
Reduction of long-term debt (50) (482)
Proceeds from stock options 58 99
Purchase of treasury shares (1,025) (352)
------------- -------------
TOTAL FINANCING ACTIVITIES (2,147) 3,194
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 7 (2)
CHANGE IN CASH AND CASH EQUIVALENTS 1,679 887
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,106 $ 3,193
============= =============
See accompanying Notes to Consolidated Financial Statements
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, 2002. The results of
operations for the three-month and six-month periods ended December 31,
2002 are not indicative necessarily of annual results.
2. Comprehensive Income - Total comprehensive income is comprised 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 December
31, 2002 and 2001 was $1.78 billion and $1.27 billion, respectively. For
the six months ended December 31, 2002 and 2001, total comprehensive income
was $3.14 billion and $2.31 billion, respectively.
3. Segment Information - To reflect management and business changes, the
Company has realigned its reporting segments. Effective July 1, 2002, the
feminine care business, which had been managed within the baby, feminine
and family care segment, is included in the beauty care segment, with the
baby, feminine and family care segment renamed the baby and family care
segment. In addition, the food and beverage segment was renamed snacks and
beverages to reflect its remaining businesses. The historical results for
the elements of the former food and beverage segment that have been
divested or spun-off (i.e., Jif, Crisco and commercial shortening and
oils) are now reflected in corporate. As required by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
prior year operating information in the following table has been restated
to conform with the current year presentation. In conjunction with the
realignments, approximately $1.8 billion in segment assets related to
the feminine care business are now part of the beauty care reporting
segment.
The basis for presenting segment results generally is consistent with
overall Company reporting. The primary difference relates to
partially-owned operations, where segment reporting reflects such
investments as consolidated subsidiaries with applicable adjustments to
comply with U.S. GAAP in the corporate segment. The corporate segment also
includes both operating and non-operating elements such as financing and
investment activities, certain employee benefit costs, intangible asset
amortization, certain restructuring charges, segment eliminations, prior
year results of certain divested businesses and other general corporate
items. Additionally, for interim periods certain non-recurring tax impacts
are reflected on a discrete basis for management and segment reporting
purposes, but are eliminated in corporate to arrive at the Company's
effective tax rate for the quarter.
SEGMENT INFORMATION (Amounts in millions)
Three Months Ended Fabric & Baby & Beauty Health Snacks &
December 31 Home Care Family Care Care Care Beverages Corporate Total
- ------------------------- -------------- ------------ ---------- ----------- ------------ ------------ ---------
Net Sales
2002 $ 3,102 $ 2,526 $ 2,997 $ 1,567 $ 881 $ (68) $ 11,005
2001 2,967 2,360 2,725 1,341 873 137 10,403
Earnings Before Income Taxes
2002 768 443 731 374 168 (305) 2,179
2001 660 381 613 264 144 (148) 1,914
Net Earnings
2002 514 276 507 253 110 (166) 1,494
2001 437 228 442 172 96 (76) 1,299
Six Months Ended Fabric & Baby & Beauty Health Snacks &
December 31 Home Care Family Care Care Care Beverages Corporate Total
- ------------------------- -------------- ------------ ---------- ----------- ------------ ------------ ---------
Net Sales
2002 $ 6,234 $ 4,952 $ 6,120 $ 2,977 $ 1,703 $ (185) $ 21,801
2001 5,850 4,672 5,182 2,517 1,671 277 20,169
Earnings Before Income Taxes
2002 1,577 843 1,535 649 290 (577) 4,317
2001 1,325 745 1,256 474 257 (516) 3,541
Net Earnings
2002 1,061 517 1,055 449 201 (325) 2,958
2001 887 451 887 312 170 (304) 2,403
4. Acquisitions - On November 16, 2001, the Company completed the acquisition
of the Clairol business from Bristol-Myers Squibb Company for approximately
$5 billion. The operating results of the Clairol business are reported in
the beauty care segment from November 16, 2001. The following table
provides pro forma results of operations for the three and six months ended
December 31, 2001, as if Clairol had been acquired as of July 1, 2001. The
pro forma results do not include any anticipated cost savings or other
effects of the planned integration of Clairol. Accordingly, such amounts
are not indicative necessarily of the results that would have occurred if
the acquisition had been completed on the date indicated or that may result
in the future.
PRO FORMA RESULTS (AMOUNTS IN MILLIONS)
--------------------------------------
Three months ended Six months ended
December 31, 2001 December 31, 2001
----------------------- ----------------------
Net Sales $10,557 $20,711
Net Earnings 1,313 2,454
Diluted net earnings per
common share 0.93 1.74
5. Goodwill - Goodwill as of December 31, 2002, as adjusted for the segment
restatement of the feminine care business (See Note 3), is allocated by
reportable segment as follows (amounts in millions):
Fabric & Baby & Snacks &
Home Care Family Care Beauty Care Health Care Beverages Total
--------- ----------- ----------- ----------- --------- -----
Goodwill, December 31, 2002 $457 $849 $6,569 $2,884 $279 $11,038
6. Pro Forma Stock-Based Compensation - The Company has stock-based
compensation plans under which stock options are granted to key managers
and directors at the market price on the date of grant. Grants were issued
during the six months ended December 31, 2002 under stock-based
compensation plans approved by shareholders in 2001. These new grants are
fully exercisable after three years and have a ten-year life. Prior grants,
issued in 1999 through 2002, are fully exercisable after three years and
have a fifteen-year life. The Company also makes other grants to employees,
for which vesting terms and option life differ.
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 grant date fair
value, 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:
Three Months Ended Six Months Ended
December 31 December 31
----------------------------- -------------------------------
2002 2001 2002 2001
----------------------------- -------------------------------
Net earnings
As reported $1,494 $1,299 $2,958 $2,403
Pro forma expense 101 117 205 230
Pro forma 1,393 1,182 2,753 2,173
Net earnings per common share
Basic
As reported $1.13 $0.98 $2.23 $1.81
Pro forma adjustments (0.08) (0.09) (0.16) (0.18)
Pro forma 1.05 0.89 2.07 1.63
Diluted
As reported 1.06 0.93 2.10 1.71
Pro forma adjustments (0.07) (0.08) (0.14) (0.15)
Pro forma 0.99 0.85 1.96 1.56
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
7. Guarantees - In November 2002, the FASB issued FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which elaborates
on required disclosures by a guarantor in its financial statements about
obligations under certain guarantees that it has issued and clarifies the
need for a guarantor to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company is reviewing the provisions of this Interpretation
relating to initial recognition and measurement of guarantor liabilities,
which are effective for qualifying guarantees entered into or modified
after December 31, 2002, but does not expect it to have a material impact
on the Company's financial statements. The disclosure requirements of the
Interpretation, which are effective for the quarter ended December 31,
2002, are included in the following paragraphs.
In conjunction with certain transactions, primarily divestitures, the
Company may provide routine indemnifications (e.g., retention of previously
existing environmental, tax and employee liabilities) whose terms range in
duration and often are not explicitly defined. Where appropriate, an
obligation for such indemnifications is recorded as a liability. Generally,
a maximum obligation is not explicitly stated. Because the obligated
amounts of these types of indemnifications often are not explicitly stated,
the overall maximum amount of the obligation under such indemnifications
cannot be reasonably estimated. Other than obligations recorded as
liabilities at the time of divestiture, historically the Company has not
made significant payments for these indemnifications.
In certain situations, the Company enters into capital guarantees for
suppliers that construct assets to produce materials for sale to P&G. The
total amount of guarantees issued under such arrangements is not
significant.
8. Other New Pronouncements - In January 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by a business of variable interest entities in
which it is the primary beneficiary. The Interpretation is effective
immediately for certain disclosure requirements and variable interest
entities created after January 31, 2003, and in fiscal 2004 for all other
variable interest entities. The Company is reviewing the provisions of this
Interpretation and complies with the disclosure requirements, but does not
expect it to have a material impact on the Company's financial statements.
Item 2. Management Discussion and Analysis
RESULTS OF OPERATIONS
- ---------------------
Despite continuing softness in the global economy the Company delivered sales
and earnings growth for the quarter ended December 31, 2002. Most businesses in
Latin America suffered declines in volume, sales and earnings, which had a
modest dampening effect on the Company. Going forward, economic and political
uncertainties in markets such as Latin America and the Middle East could affect
results. For a discussion of key factors that could impact and must be managed
by the Company, refer to the Management Discussion and Analysis section in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
The Company reported net earnings of $1.49 billion or $1.06 diluted net earnings
per share for the quarter ended December 31, 2002. Results included a $98
million ($0.07 per share) after-tax restructuring charge related to the
Company's program to streamline operations and its business portfolio. Net
earnings in the year ago quarter were $1.30 billion or $0.93 per share,
including a $146 million ($0.10 per share) after-tax restructuring charge.
Core net earnings, which exclude restructuring charges, grew ten percent to
$1.59 billion or $1.13 per share for the quarter. On a per share basis, core
earnings grew ten percent to $1.13. In the year ago period, core net earnings
were $1.45 billion or $1.03 per share.
Net sales were $11.01 billion, up six percent versus the year ago quarter. Unit
volume grew eight percent versus the prior year, including double-digit growth
in the health care and beauty care businesses and eight percent growth in fabric
and home care and baby and family care. Excluding acquisitions and divestitures,
unit volume increased seven percent. Sales trailed volume growth as strategic
pricing investments and a negative mix impact were partially offset by a
positive foreign exchange impact of one percent. The foreign exchange impact
represents the benefit of the Euro offset by Latin American devaluations. The
pricing and mix impacts were a function of the following primary effects:
promotional investments on baby and family care in the U.S., the pricing
adjustments taken on Crest Whitestrips following competitive entries and
portfolio extension strategies in the hair care business.
Gross margin was 50.1 percent for the quarter ended December 31, 2002, compared
to 48.7 percent in the same quarter of the prior year, an increase of 140 basis
points. Core gross margin also increased 140 basis points to 50.8 percent from
49.4 percent in the prior year. Core gross margin excludes before-tax charges in
cost of products sold related to the restructuring program of $84 million in the
current year and $82 million in the prior year. Core gross margin has expanded
by over 100 basis points in each of the last six quarters creating a challenging
base for future period growth comparisons. The current quarter improvement was
primarily driven by base business savings, which includes both systemic material
price improvements and volume benefits. Restructuring program savings and
improved margin mix also contributed.
Marketing, Research, Administrative, and Other costs (MRA&O), as a percent of
sales, decreased from 30.8 percent in the prior year to 29.7 percent in the
current year, an improvement of 110 basis points. Core MRA&O, which excludes
restructuring costs of $57 million in the current year and $121 million in the
prior year, decreased from 29.6 percent of sales in the prior year to 29.2
percent in the current year. These trends reflect reductions in overhead costs,
partially offset by increased marketing spending, primarily in beauty care.
Operating margin was 20.4 percent for the quarter, compared to 17.9 percent in
the same quarter a year ago. Excluding before tax net restructuring charges in
the current and prior year of $132 million and $189 million, core operating
margin increased to 21.6 percent from 19.8 percent, due to the gross margin and
MRA&O improvements discussed in the preceding paragraphs.
Non-operating income decreased $126 million, primarily due to the prior year
gain from the divestiture of the Comet business.
FABRIC & HOME CARE
- ------------------
Fabric and home care delivered eight percent unit volume growth. This was
broad-based, with strong growth across most regions - lead by double-digit
growth in the developing markets. Net sales were $3.10 billion, up five percent.
Sales trailed volume growth due to pricing and mix impacts. The pricing actions
included the restage of certain mid-tier brands and certain targeted actions
to sharpen consumer value in key markets. Mix impacts in laundry were driven
by the growth of mid-tier brands in Western Europe and North America, larger
sizes in Western Europe and growth in developing markets. Net earnings were
$514 million, up 18 percent, behind volume growth and gross margin expansion.
Gross margin expansion was achieved through lower material prices and a
continued focus on base business savings projects, which funded increased
marketing investments.
BABY & FAMILY CARE
- ------------------
Baby and family care delivered unit volume growth of eight percent behind
strength in both family care and baby care, driven primarily by the Baby Stages
of Development initiative, Charmin in the U.S., Western Europe and Mexico and
U.S. Bounty. Net sales were $2.53 billion, up seven percent, including a one
percent positive impact from foreign exchange. Sales trailed volume due
primarily to pricing adjustments in response to competitive activity in both the
baby and family care segments, which more than offset positive mix behind growth
in premium tier diapers. Earnings were $276 million, up twenty-one percent,
reflecting volume growth and cost savings, including benefits from previous
restructuring actions.
BEAUTY CARE
- -----------
Beauty care posted double-digit volume, sales and earnings growth, led by hair
care and fine fragrances. Unit volume increased 14 percent driven by the Clairol
acquisition, which was annualized in mid-November. Excluding the impact of
acquisitions and divestitures, volume was up six percent behind hair care, as
Pantene, Head & Shoulders, Pert and Rejoice all posted volume gains on a global
basis. Additionally, the fine fragrances business increased volume 30 percent.
Feminine care volume was up two percent, which follows last quarter's strong
shipments that included pipeline fill for the Tampax Pearl initiative. Beauty
care net sales were $3.00 billion, up 10 percent, including a one percent
positive foreign exchange impact. Volume growth was partially offset by mix
impacts driven by the Clairol business and value driven pricing investments
behind the repositioning of the hair care portfolio into mid-tier brands, which
more than offset devaluation driven pricing actions in Latin America. Net
earnings were $507 million, up 15 percent versus last year driven primarily by
volume growth and reduced overheads, partially offset by increased marketing
investments.
HEALTH CARE
- -----------
Health care delivered double-digit unit volume, sales and earnings growth. Unit
volume increased 18 percent, driven by results in oral care, pharmaceuticals and
pet health and nutrition. Net sales grew 17 percent to $1.57 billion, including
a positive one percent foreign exchange impact, which partially offset pricing
investments. Despite an October pricing adjustment, Crest Whitestrips still
delivered volume and sales growth relative to the prior year. Actonel, the
Company's drug for treatment and prevention of osteoporosis, surpassed $500
million in annual sales in calendar year 2002. Net earnings for health care were
$253 million, up 47 percent, reflecting volume growth and improved mix, driven
by the continued trend toward high-margin products, partially offset by the
funding of increased marketing investments.
SNACKS & BEVERAGES
- ------------------
Snacks and beverages delivered mixed results. Unit volume declined one percent,
as an increase in coffee was offset by declines in the snacks and juice
businesses. Net sales grew one percent to $881 million, including a two percent
positive foreign exchange impact. Net earnings grew 15 percent to $110 million,
behind positive mix and cost savings from operating efficiencies and
restructuring, which more than offset increased marketing investments.
CORPORATE
- ---------
The corporate segment contains both operating and non-operating items that are
not included in the business results. Current quarter results reflect decreased
divestiture gains and lower restructuring costs.
FINANCIAL CONDITION
- -------------------
For the six months ended December 31, 2002, cash generated from operating
activities totaled $4.33 billion. Earnings, adjusted for non-cash charges,
increased $555 million and are a key driver of operating cash flow and the $1.15
billion increase from the first half of last year. Working capital increased
slightly from June 30. Receivables days sales outstanding and inventory days on
hand both improved versus the same period last year. Accounts payable and other
accruals decreased cash year-over-year, reflecting a decrease in taxes payable
that reflects a return to historical levels, a reduction in days outstanding for
trade payables and normal timing differences for other accruals. The remaining
increase in operating cash flow versus the prior year was driven by changes in
other operating assets and liabilities, including deferred taxes, and a
reduction in investments in non-consolidated entities for dividends received.
Free cash flow for the first half of the year, defined as cash flow from
operations less capital expenditures, was $3.71 billion, representing a $1.20
billion increase over the same period last year. This increase reflects the
increase in operating cash flow discussed in the preceding paragraph and reduced
capital spending levels in the quarter. The Company anticipates that this
capital spending rate may increase through the year, but the fiscal year average
will be below the Company's revised target of below five percent of sales.
Investing activities used $507 million of cash year to date compared to $5.48
billion in the comparable prior year period, which included the Clairol
acquisition during the October-December quarter. There has been no significant
acquisition activity in the current year. This generated a $4.98 billion net
cash increase versus the prior year. Divestiture proceeds in the current year
include the Vicks throat drop business in Japan, certain Clairol small brands
and a paper divestiture in China. Prior year divestitures included Comet and PUR
Outdoor.
Financing activities used $2.15 billion of cash for the current fiscal year
versus a source of $3.19 billion in the first half of the prior year. The
largest driver of this $5.34 billion difference is the prior year issuance of
short-term debt to finance the Clairol acquisition. Treasury share purchases
used more cash in the current year, reflecting lower repurchase activity in the
prior year base period driven by cash needs for the Clairol acquisition. Share
repurchase in the current year reflects a return to historical levels.
RESTRUCTURING PROGRAM UPDATE
- ----------------------------
In 1999, concurrent with a reorganization of its operations into product-based
global business units, the Company initiated a multi-year restructuring program.
The program was designed to accelerate growth and deliver cost reductions by
streamlining management decision-making, manufacturing and other work processes
and discontinuing under-performing businesses and initiatives. Technology
improvements as well as standardization of manufacturing and other work
processes allow the Company to streamline operations, resulting in the
consolidation of manufacturing activity and various business processes.
Costs to be incurred include separation related costs, asset write-downs,
accelerated depreciation and other costs directly related to the restructuring
efforts.
During the quarter ended December 31, 2002, the Company recorded charges
totaling $132 million before tax ($98 million after tax) related to its
restructuring program, as detailed in the following table. In addition, the
Company continues to execute similar projects as part of ongoing operations.
Costs for these projects are included in core earnings.
RESTRUCTURING PROGRAM JULY - DECEMBER, 2002 CHARGES (BEFORE TAX)
----------------------------------------------------------------
Amounts in millions
Previous
Beginning Quarter Current Applied Ending
Reserves Charges Quarter Total Cash Against Reserves
6/30/02 Jul-Sep 02 Charges Charges Spent Assets 12/31/02
------- ---------- ------- ------- ----- ------ --------
Employee separations $159 $52 $54 $106 ($120) $ - $145
Asset write-downs - 25 34 59 - (59) -
Accelerated depreciation - 33 30 63 - (63) -
Other 86 41 14 55 (27) (13) 101
---------------- ------------- -------------- ------------- ----------- ----------- -----------
245 151 132 283 (147) (135) 246
During October - December 2002, restructuring charges included in the Company's
cost of products sold amounted to $84 million before tax and charges included in
MRA&O amounted to $57 million before tax. In addition, the Company had $9
million of net sales from discontinued initiatives, which are reflected in
corporate.
Employee separation charges in October - December 2002 are associated with
severance packages for approximately 1,150 people. The packages are
predominantly voluntary and are formula driven based on salary levels and past
service. Severance costs related to voluntary separations are charged to
earnings when the employee accepts the offer. The current and planned
separations span the entire organization, including manufacturing, selling,
research and administrative positions.
The charges for accelerated depreciation and asset write-downs, which totaled
$64 million before tax in the quarter ended December 31, 2002, are primarily
related to manufacturing operations. Charges for accelerated depreciation relate
to long-lived assets that will be taken out of service prior to the end of their
normal service period due to manufacturing consolidations, technology
standardization, plant closures or strategic choices to discontinue initiatives.
The Company has shortened the estimated useful lives of such assets, resulting
in incremental depreciation expense. Charges for asset write-downs relate to the
establishment of new fair value bases for assets held for sale or disposal that
represent excess capacity in the process of being removed from service or
disposed and businesses held for sale in the next 12 months.
Asset write-downs also include certain manufacturing assets that are expected to
operate at levels significantly below their planned capacity. The projected cash
flows from such assets over their remaining useful lives were no longer
estimated to be greater than their current carrying values; therefore, they are
written down to estimated fair value, generally determined by reference to
discounted expected future cash flows. Such charges represented $23 million
before tax in this quarter.
Other costs incurred as a direct result of the restructuring program amounted to
$14 million before tax during October - December 2002. These were primarily for
relocation, training, establishment of global business services and results from
discontinued initiatives.
The Company recently announced its intent to discontinue separate reporting of
its current Restructuring Program at the conclusion of the current fiscal year.
The Company will continue to undertake projects in future periods to maintain a
competitive cost structure, including manufacturing consolidation and work force
rationalization. The costs of such activities will be reported as part of core
operations.
Item 4: Controls and Procedures
The Company's President, Chief Executive, and Chairman of the Board, 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 within
90 days of the filing of 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 SEC
suggestion, the Company has formed a Disclosure Committee consisting of key
Company personnel designed to review the accuracy and completeness of all
disclosures made by the Company.
Since Messrs. Lafley's and Daley's most recent review of the Company's internal
controls systems, there have been no significant changes in internal controls or
in other factors that could significantly affect these controls.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3-1) Amended Articles of Incorporation (Incorporated by reference to
Exhibit (3-1) of the Company's Annual Report on Form 10-K for
the year ended June 30, 1998).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(99) Certification of Periodic Financial Reports Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K containing information
pursuant to Item 5 ("Other Events") dated October 24, 2002, relating to
realignment of the Company's reporting segments; dated October 29,
2002, relating to the announcement of earnings for the July-September
2002 quarter; dated November 26, 2002, relating to the entry of A.G.
Lafley, Chairman of the Board, President and Chief Executive of the
Company into a 10b5-1 stock trading plan; and dated November 26, 2002,
relating to realignment of the Company's reporting segments. The
Company also filed Current Reports on Form 8-K containing information
pursuant to Item 9 ("Regulation FD Disclosure") and dated December 11,
2002, relating to updating previously issued guidance for the
October-December 2002 quarter.
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
/S/JOHN K. JENSEN
- ------------------------------
(John K. Jensen)
Vice President and Comptroller
Date: January 29, 2003
-----------------------
I, A.G. Lafley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Procter & Gamble
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/S/A.G. LAFLEY
- -----------------------------
(A.G. Lafley)
Chairman of the Board,
President and Chief Executive
Date: January 29, 2003
------------------------
I, Clayton C. Daley, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Procter & Gamble
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/S/CLAYTON C. DALEY, JR.
- ------------------------------
(Clayton C. Daley, Jr.)
Chief Financial Officer
Date: January 29, 2003
---------------------
EXHIBIT INDEX
Exhibit No. Page No.
(3-1) Amended Articles of Incorporation (Incorporated by
reference to Exhibit (3-1) of the Company's Annual Report
on Form 10-K for the year ended June 30, 1998).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2)
of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
(11) Computation of Earnings per Share 24
(12) Computation of Ratio of Earnings to Fixed Charges 25
(99) Certification of Periodic Financial Reports Pursuant 26-27
to 18 U.S.C. Section 1350