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 September 30, 2004 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 2,536,682,989 shares of Common Stock outstanding as of September 30,
2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Consolidated Statements of Earnings of The Procter & Gamble Company and
subsidiaries for the three months ended September 30, 2004 and 2003, the
Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004, and the
Consolidated Statements of Cash Flows for the three months ended September 30,
2004 and 2003 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
September 30
---------------------
2004 2003
------- -------
NET SALES $13,744 $12,195
Cost of products sold 6,611 5,879
Selling, general and
administrative expense 4,263 3,673
------- -------
OPERATING INCOME 2,870 2,643
Interest expense 181 141
Other non-operating income, net 182 40
------- -------
EARNINGS BEFORE INCOME TAXES 2,871 2,542
Income taxes 870 781
------- -------
NET EARNINGS $ 2,001 $ 1,761
======= =======
PER COMMON SHARE:
Basic net earnings $ 0.77 $ 0.67
Diluted net earnings $ 0.73 $ 0.63
Dividends $ 0.25 $ 0.23
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 2,756.0 2,797.7
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions
September 30 June 30
ASSETS 2004 2004
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 6,262 $ 5,469
Investment securities 456 423
Accounts receivable 4,485 4,062
Inventories
Materials and supplies 1,309 1,191
Work in process 345 340
Finished goods 3,063 2,869
------------- ------------
Total Inventories 4,717 4,400
Deferred income taxes 961 958
Prepaid expenses and other receivables 1,835 1,803
------------- ------------
TOTAL CURRENT ASSETS 18,716 17,115
PROPERTY, PLANT AND EQUIPMENT
Buildings 5,169 5,206
Machinery and equipment 19,547 19,456
Land 627 642
------------- ------------
25,343 25,304
Accumulated depreciation (11,359) (11,196)
------------- ------------
NET PROPERTY, PLANT AND EQUIPMENT 13,984 14,108
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 19,889 19,610
Trademarks and other intangible assets, net 4,521 4,290
------------- ------------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 24,410 23,900
OTHER NON-CURRENT ASSETS 2,093 1,925
------------- ------------
TOTAL ASSETS $ 59,203 $ 57,048
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,392 $ 3,617
Accrued and other liabilities 7,775 7,689
Taxes payable 3,034 2,554
Debt due within one year 7,701 8,287
------------- ------------
TOTAL CURRENT LIABILITIES 21,902 22,147
LONG-TERM DEBT 13,731 12,554
DEFERRED INCOME TAXES 2,298 2,261
OTHER NON-CURRENT LIABILITIES 2,913 2,808
------------- ------------
TOTAL LIABILITIES 40,844 39,770
SHAREHOLDERS' EQUITY
Preferred stock 1,514 1,526
Common stock - shares outstanding - Sept 30 2,536.7 2,537
June 30 2,543.8 2,544
Additional paid-in capital 2,585 2,425
Reserve for ESOP debt retirement (1,267) (1,283)
Accumulated other comprehensive income (1,328) (1,545)
Retained earnings 14,318 13,611
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 18,359 17,278
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,203 $ 57,048
============= ============
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
Amounts in millions September 30
---------------------------
2004 2003
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 5,469 $ 5,912
OPERATING ACTIVITIES
Net earnings 2,001 1,761
Depreciation and amortization 480 407
Deferred income taxes 162 108
Change in:
Accounts receivable (377) (295)
Inventories (326) (174)
Accounts payable, accrued and other liabilities 65 (76)
Other operating assets & liabilities (112) (57)
Other 25 (68)
----------- -----------
TOTAL OPERATING ACTIVITIES 1,918 1,606
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (413) (364)
Proceeds from asset sales 366 88
Acquisitions, net of cash acquired (335) (5,035)
Change in investment securities (31) 11
----------- -----------
TOTAL INVESTING ACTIVITIES (413) (5,300)
----------- -----------
FINANCING ACTIVITIES
Dividends to shareholders (685) (623)
Change in short-term debt (2,429) 3,555
Additions to long-term debt 2,996 -
Reductions of long-term debt (130) (788)
Proceeds from the exercise of stock options and other 99 89
Treasury purchases (622) (274)
----------- -----------
TOTAL FINANCING ACTIVITIES (771) 1,959
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 59 (128)
CHANGE IN CASH AND CASH EQUIVALENTS 793 (1,863)
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,262 $ 4,049
=========== ===========
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, 2004 and the Form
8-K filed on October 22, 2004 reflecting certain changes to the Company's
segment information. The results of operations for the three-month period
ended September 30, 2004 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 September
30, 2004 and 2003 was $2,218 million and $1,937 million, respectively.
3. Segment Information - Following is a summary of segment results, including
supplemental data on the Fabric and Home Care, Snacks and Coffee, Health
Care and Baby and Family Care businesses.
SEGMENT INFORMATION
Amounts in millions
Three Months Ended September 30
----------------------------------------
Earnings Before
Net Sales Income Taxes Net Earnings
----------------------------------------
Total Beauty Care 2004 $ 4,655 $ 1,008 $ 692
2003 3,753 891 599
Health Care 2004 $ 1,844 $ 375 $ 255
2003 1,728 393 266
Baby & Family Care 2004 $ 2,850 $ 516 $ 320
2003 2,607 472 294
----------------------------------------
Total Health, Baby & Family Care 2004 $ 4,694 $ 891 $ 575
2003 4,335 865 560
Fabric & Home Care 2004 $ 3,810 $ 897 $ 600
2003 3,393 832 560
Snacks & Coffee 2004 $ 740 $ 126 $ 83
2003 733 143 95
----------------------------------------
Total Household Care 2004 $ 4,550 $ 1,023 $ 683
2003 4,126 975 655
Corporate 2004 $ (155) $ (51) $ 51
2003 (19) (189) (53)
Total 2004 $ 13,744 $ 2,871 $ 2,001
2003 12,195 2,542 1,761
4. Goodwill and Other Intangible Assets - Goodwill as of September 30, 2004 is
allocated by reportable segment as follows (amounts in millions):
September 30,
2004
Total Beauty Care, beginning of year $ 14,457
Acquistions & divestiture 109
Translation & other 141
Goodwill, September 30, 2004 $ 14,707
Health Care, beginning of year $ 3,315
Acquistions & divestiture 11
Translation & other 7
Goodwill, September 30, 2004 $ 3,333
Baby & Family Care, beginning of year $ 941
Acquistions & divestiture --
Translation & other 8
Goodwill, September 30, 2004 $ 949
Total Health, Baby & Family Care, beginning of year $ 4,256
Acquistions & divestiture 11
Translation & other 15
Goodwill, September 30, 2004 $ 4,282
Fabric & Home Care, beginning of year $ 614
Acquistions & divestiture 27
Translation & other --
Goodwill, September 30, 2004 $ 641
Snacks & Coffee, beginning of year $ 283
Acquistions & divestiture (25)
Translation & other 1
Goodwill, September 30, 2004 $ 259
Total Household Care, beginning of year $ 897
Acquistions & divestiture 2
Translation & other 1
Goodwill, September 30, 2004 $ 900
Goodwill, Net, beginning of year $ 19,610
Acquistions & divestiture 122
Translation & other 157
Goodwill, September 30, 2004 $ 19,889
The increase in goodwill is due to the completed allocation of the purchase
price relating to the September 2003 acquisition of Wella AG. 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.
Identifiable intangible assets as of September 30, 2004 are comprised of:
Gross Carrying Accumulated
Amount Amortization
Amortizable intangible assets
with determinable lives 2,283 622
Intangible assets with indefinite lives 3,029 169
---------------------------------------------------------------------
Total identifiable intangible assets 5,312 791
Amortizable intangible assets consist principally of patents, technology
and trademarks. The intangible assets with indefinite lives consist
primarily of certain trademarks. The amortization of intangible assets
for the three months ended September 30, 2004 was $48 million.
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:
Three Months Ended
September 30
-----------------------------
2004 2003
-----------------------------
Net earnings
As reported $2,001 $1,761
Pro forma expense 59 82
-----------------------------
Pro forma 1,942 1,679
-----------------------------
Net earnings per common share
Basic
As reported $0.77 $0.67
Pro forma adjustments (0.02) (0.03)
-----------------------------
Pro forma 0.75 0.64
-----------------------------
Diluted
As reported 0.73 0.63
Pro forma adjustments (0.03) (0.03)
-----------------------------
Pro forma 0.70 0.60
-----------------------------
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
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.
The components of net periodic benefit cost are as follows:
Amounts in millions
Pension Benefits Other Retiree Benefits
----------------------- -----------------------
Three Months Ended Three Months Ended
September 30 September 30
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service Cost $ 38 $ 34 $ 17 $ 22
Interest Cost 58 48 36 43
Expected Return on Plan Assets (43) (37) (83) (82)
Amortization of deferred amounts 1 -- (5) --
Recognized Net Actuarial Loss (Gain) 8 7 -- --
---------- ---------- ---------- ----------
Gross Benefit Cost 62 52 (35) (17)
Dividends on ESOP Preferred Stock -- -- (18) (18)
---------- ---------- ---------- ----------
Net Periodic Benefit Cost $ 62 $ 52 $(53) $(35)
========== ========== ========== ==========
In 2004, the average expected return on plan assets is 7.2% and 9.5% for
pension benefit and other retiree benefit plans, respectively.
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 September 30, 2004
Business Segment Discussion - Three Months Ended September 30, 2004
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 compete 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 three months ended September 30, 2004 (excludes net
sales and net earnings in Corporate):
Net Sales Net Earnings
Beauty Care 34% 36%
Health, Baby and Family Care: 34% 29%
Health Care 13% 13%
Baby and Family Care 21% 16%
Household Care: 32% 35%
Fabric and Home Care 27% 31%
Snacks and Coffee 5% 4%
Total 100% 100%
Summary of Results. For the quarter ended September 30, 2004, the Company
delivered sales and earnings growth above long-term targets.
o Net sales increased 13 percent (10 percent excluding the impact of
foreign exchange). Unit volume increased 12 percent.
o Net earnings increased 14 percent. Earnings growth was due primarily to
strong top line growth, as well as the juice business divestiture completed
in August.
o Diluted net earnings per share increased 16 percent to $0.73.
o Free cash flow productivity was 75 percent. Operating cash flow increased
by 19 percent versus the comparable prior year period. While first quarter
results for free cash flow productivity are below the long-term target, our
objective for the fiscal year remains at 90 percent 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) successfully executing, managing and integrating key acquisitions
(including the Domination and Profit Transfer Agreement with Wella);
(3) the ability to manage and maintain key customer relationships;
(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 success of the
Company's outsourcing projects;
(7) the ability to successfully manage currency (including currency issues in
volatile countries), 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 increases in the prices of raw materials
used to make the Company's products;
(10) the ability to stay close to consumers in an era of increased media
fragmentation; and
(11) 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.
RESULTS OF OPERATIONS - Three Months Ended September 30, 2004
The following discussion provides a review of results for the three months ended
September 30, 2004 versus the three months ended September 30, 2003.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
Three Months Ended September 30
---------------------------------------------------
2004 2003 % CHG
---------------------------------------------------
NET SALES $ 13,744 $ 12,195 13 %
COST OF PRODUCTS SOLD 6,611 5,879 12 %
---------------------------------
GROSS MARGIN 7,133 6,316 13 %
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 4,263 3,673 16 %
---------------------------------
OPERATING INCOME 2,870 2,643 9 %
TOTAL INTEREST EXPENSE 181 141
OTHER NON-OPERATING INCOME, NET 182 40
---------------------------------
EARNINGS BEFORE INCOME TAXES 2,871 2,542 13 %
INCOME TAXES 870 781
NET EARNINGS 2,001 1,761 14 %
=================================
EFFECTIVE TAX RATE 30.3% 30.7%
PER COMMON SHARE:
BASIC NET EARNINGS $ 0.77 $ 0.67 15 %
DILUTED NET EARNINGS $ 0.73 $ 0.63 16 %
DIVIDENDS $ 0.25 $ 0.23
AVERAGE DILUTED SHARES OUTSTANDING 2,756.0 2,797.7
COMPARISONS AS A % OF NET SALES
- -------------------------------
GROSS MARGIN 51.9% 51.8% 10
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 31.0% 30.1% 90
OPERATING MARGIN 20.9% 21.7% (80)
EARNINGS BEFORE INCOME TAXES 20.9% 20.8% 10
NET EARNINGS 14.6% 14.4% 20
Unit volume increased 12 percent reflecting the overall strength of the
Company's portfolio. Each of the Company's geographic regions grew volume
mid-single digits or greater led by developing markets with more than 20 percent
volume growth. Beauty care and the fabric and home care business also grew
volume double-digits. Health care volume increased mid-single digits against a
base period comparison that includes the impact of the Prilosec OTC launch.
Organic volume increased eight percent, which excludes the impact of
acquisitions and divestitures from year-over-year comparisons.
Net sales increased 13 percent to $13.74 billion. Net sales growth includes a
positive foreign exchange impact of three percent driven primarily by continued
strength of the Euro, British pound and Japanese yen. Mix effects reduced sales
by one percent due mainly to strong growth in developing markets, which
generally have a lower average unit sales price than the Company average.
Pricing reduced sales by one percent. Price increases in family care and health
care were offset primarily by reductions initiated in prior quarters, mainly in
Europe to address the growth of hard discounters. Sales growth reflects progress
on key brands and countries, with 14 of the Company's top 16 brands and all of
the top 16 countries delivering year-to-year volume growth. Organic sales, which
exclude the impacts of acquisitions and divestitures and foreign exchange from
year-over-year comparisons, increased six percent.
Volume
------------------------------
With Without
Acquisitions Acquisitions Total
& & Mix/ Total Impact
Divestitures Divestitures FX Price Other Impact Ex-FX
--------------------------------------------------------------------------
BEAUTY CARE 25% 10% 3% -1% -3% 24% 21%
HEALTH, BABY & FAMILY CARE
HEALTH CARE 6% 4% 2% 1% -2% 7% 5%
BABY AND FAMILY CARE 7% 8% 3% 0% -1% 9% 6%
HOUSEHOLD CARE
FABRIC AND HOME CARE 11% 10% 3% -1% -1% 12% 9%
SNACKS AND COFFEE -1% -1% 2% -1% 1% 1% -1%
TOTAL COMPANY 12% 8% 3% -1% -1% 13% 10%
Note: These sales percentage changes are approximations based on quantitative
formulas that are consistently applied.
Gross margin improved 10 basis points against a strong base period comparison
where gross margin improved 260 basis points (including approximately 80 basis
points of improvement as a result of restructuring program charges in the three
months ending September 30, 2002). Despite higher commodity prices, gross margin
expanded due to the scale benefit of volume, cost reduction programs and the
shift towards higher margin businesses, primarily Wella. Strong growth in
developing markets negatively impacted gross margins, particularly in the fabric
and home care business. The Company expects higher commodity prices will
continue through the remaining quarters of the fiscal year and have a negative
impact on gross margin.
Selling, general and administrative expenses (SG&A) as a percentage of net sales
increased 90 basis points. Most of the increase was due to the impact of Wella.
The remaining increase was due to marketing investments to support geographic
product expansions, including Herbal Essences and Lenor, and support for oral
care initiatives in North America and Western Europe. The current quarter
includes two additional months of Wella results, as the acquisition was
completed in September of 2003.
Substantially all of the increase in other non-operating income compared to the
prior year is due to the before-tax gain on the sale of the juice
business.
Net earnings increased 14 percent to $2.00 billion. Earnings growth was
primarily driven by volume, as well as the impact from the divestiture of the
juice business. This was partially offset by marketing investments, including
introductory support for new product launches and on-going support for the base
business, and the pricing activity previously discussed.
Diluted net earnings per share increased 16 percent to $0.73. As expected, the
divestiture of the juice business contributed $0.02 to earnings per share for
the quarter, or three percent of the earnings per share growth. The juice impact
reflects the gain on the sale, which is reflected in non-operating income,
partially offset by the effect of lower operating income versus the base period
due to the divestiture.
BUSINESS SEGMENT DISCUSSION
- ---------------------------
The following discussion provides a review of results by business segment. An
analysis of the results for the three months ended September 30, 2004 are
compared to the same period ended September 30, 2003.
The table below provides supplemental information on net earnings by business
segment for the three months ended September 30, 2004 versus the comparable
prior year period:
Three Months Ended September 30, 2004
% Change Earnings % Change % Change
Versus Before Versus Versus
Net Sales Year Ago Income Taxes Year Ago Net Earnings Year Ago
--------------------------------------------------------------------------------
BEAUTY CARE $ 4,655 24% $ 1,008 13% $ 692 16%
HEALTH, BABY & FAMILY CARE
HEALTH CARE 1,844 7% 375 -5% 255 -4%
BABY AND FAMILY CARE 2,850 9% 516 9% 320 9%
--------------------------------------------------------------------------------
4,694 8% 891 3% 575 3%
--------------------------------------------------------------------------------
HOUSEHOLD CARE
FABRIC AND HOME CARE 3,810 12% 897 8% 600 7%
SNACKS AND COFFEE 740 1% 126 -12% 83 -13%
--------------------------------------------------------------------------------
4,550 10% 1,023 5% 683 4%
--------------------------------------------------------------------------------
TOTAL BUSINESS SEGMENT 13,899 14% 2,922 7% 1,950 7%
CORPORATE (155) n/a (51) n/a 51 n/a
--------------------------------------------------------------------------------
TOTAL COMPANY 13,744 13% 2,871 13% 2,001 14%
BEAUTY CARE
- -----------
Beauty care unit volume increased 25 percent. Organic volume increased 10
percent. The hair care business grew organic volume by double-digits led by the
Head and Shoulders, Rejoice and Herbal Essences brands. Hair care volume in
North America was down slightly, due to softness in colorants and in minor
shampoo brands which have been de-emphasized in the hair care portfolio. Olay
delivered double-digit growth behind continued geographic expansion and growth
from new initiatives including Regenerist Eye Serum. The fine fragrances
business also delivered double-digit growth led by the Lacoste brand. The
feminine care business posted double-digit growth driven by the Always/Whisper
and Naturella brands. Net sales increased 24 percent to $4.66 billion. Foreign
exchange had a positive impact of three percent which was offset by a three
percent mix impact from growth in developing markets, where unit sales prices
are generally lower than the segment average, and a one percent impact from
pricing. Net earnings increased 16 percent to $692 million due to the impact of
volume growth and cost reduction programs, which more than offset the impact of
higher commodity prices. Net earnings were also impacted by increased marketing
spending in support of initiatives, including Herbal Essences and Olay
Moisturinse "in shower" body lotion in North America. Net earnings margin
decreased due to the impact of two incremental months of Wella, which currently
has a higher SG&A expense ratio compared to the other P&G beauty care
businesses.
HEALTH, BABY AND FAMILY CARE
- ----------------------------
Health care delivered mid single-digit volume and sales growth against a base
period comparison that included the pipeline shipments and launch of Prilosec
OTC. Unit volume increased six percent. Pharmaceuticals delivered double-digit
growth led by the continued success of Actonel and Asacol. Despite softness in
certain tooth whitening products, oral care volume increased low-single digits
behind growth in dentifrice and developing markets. Net sales increased seven
percent to $1.84 billion, including a positive foreign exchange impact of two
percent, which was offset by two percent of negative mix due primarily to
developing market growth, where unit sales prices are generally lower than the
average for the business. Pricing added one percent to sales. Net earnings
decreased four percent to $255 million, primarily due to the impact of Prilosec
OTC in the base period, which included significant pipeline volume but a lower
proportion of marketing spending. In addition, marketing investments in the
current year contributed to the earnings decline, including support of oral care
initiatives in North America and Western Europe, as well as marketing spending
in pharmaceuticals. Excluding the impact of Prilosec OTC, health care delivered
double-digit sales and earnings growth.
The baby and family care business delivered unit volume growth of seven percent
for the quarter. Volume growth was driven primarily in baby care behind Feel n'
Learn training pants in North America and Baby Dry in Western Europe. Family
care volume also grew behind recent Bounty and Charmin initiatives. Net sales
increased nine percent to $2.85 billion, including a positive foreign exchange
impact of three percent. Pricing had no significant impact on sales growth.
Gains from the recent North America family care price increase were offset
primarily by the continuation of prior-quarter reductions in baby care,
including in select Western European countries to address the growth of hard
discounters and in North America for new package formats. Mix reduced sales by
one percent due primarily to growth in developing markets that have a lower
average sales price than the average for the business. Net earnings grew nine
percent to $320 million against a difficult base period comparison where
earnings grew 23 percent. Earnings improved behind the scale benefits of volume,
pricing in North America family care and cost saving projects, partly offset by
higher commodity costs and targeted pricing investments in baby care.
HOUSEHOLD CARE
- --------------
For the quarter, fabric and home care unit volume was up behind geographic
expansion and an increasing presence in multiple price tiers, including the Gain
brand in North America. Volume increased 11 percent behind developing market
growth, recent initiatives including Tide with a Touch of Downy, Febreze Scent
Stories and Air Effects, and the expansion of Lenor fabric softener in Northeast
Asia. Net sales increased 12 percent to $3.81 billion. Foreign exchange
increased sales by three percent. Pricing reduced sales by one percent driven
mainly by actions to remain competitive in Germany and France, and mix reduced
sales by one percent due to developing market growth. Net earnings increased
seven percent to $600 million. The impacts of volume growth and ongoing savings
programs were partially offset by SG&A investments to support new product
initiatives, higher costs associated with the fabric care capacity expansion in
North America and higher commodity prices. Additionally, earnings margin was
negatively impacted by the aforementioned pricing actions and the mix effect of
developing market growth, which has a lower gross margin than the balance of the
business.
Snacks and coffee sales were $740 million, an increase of one percent behind
positive foreign exchange of two percent that offset the impact of a one percent
volume decline. Continued competitive discounting and trade promotion activity
had an adverse impact on volume growth. Net earnings were $83 million, down 13
percent driven by higher coffee commodity prices and marketing investments
behind innovation in the snacks business.
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, which 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, which are reflected in the segments at statutory rates,
adjustments for unconsolidated entities (where we do not control the financial
and operating decisions, and therefore, do not consolidate them) and
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 we recognize 100
percent of each income statement component to before-tax earnings. In
determining net earnings for the segments, we apply the statutory tax rates and
eliminate the share of earnings appliable to other ownership interests, in a
manner similar to minority interest. Accordingly, the relationship between
before-tax earnings and net earnings is impacted by the adjustments necessary to
offset the effect of the business segment treatment of taxes, unconsolidated
entities, and less than 100 percent owned subsidiaries discussed above.
Net earnings for the quarter were $51 million versus a net loss in the base
period of $53 million. The current year earnings reflect the net impact of the
juice divestiture, which more than offset the normal level of Corporate
expenses. The current period non-operating gain was partially offset by the
reduction in operating results for the juice business versus the prior year. Due
to the divestiture, the current period includes only one month of operating
results.
FINANCIAL CONDITION
- -------------------
Operating Activities
- --------------------
Cash generated from operating activities for the three months ended September
30, 2004 was $1.92 billion compared to $1.61 billion in the prior year period,
an increase of 19%. The increase in cash from operating activities was driven by
earnings growth adjusted for non-cash items (depreciation, amortization and
deferred income taxes). Accounts receivable and inventory both increased, but at
a lower percentage than overall sales growth.
Investing Activities
- --------------------
Investing activities in the current year used $413 million compared to $5.30
billion in the prior year period, which included the acquisition of Wella.
Capital expenditures were $413 million, or three percent of net sales which is
below the Company's long-term target of four percent. Acquisitions used $335
million of cash, primarily driven by the acquisitions of a pharmaceutical and a
fabric and home care business in Europe. Proceeds from asset sales were $366
million, which includes the divestiture of the juice business.
Financing Activities
- --------------------
Financing activities used net cash of $771 million in the current year compared
to a source of cash of $1.96 billion in the base period. The difference relates
primarily to increased borrowing in the base period to fund the Wella
acquisition. The Company's gross debt position increased $437 million during the
three months ended September 30, 2004. The Company also issued $3 billion of
long-term debt during the current year to reduce its short-term commercial paper
balances. Treasury purchases were $622 million compared to $274 million last
year, when the Company was preserving capital for the Wella acquisition.
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 September 30, 2004, this excess had been reduced to
$3.19 billion. The Company anticipates being able to support its short-term
liquidity through cash generated from operations. The Company also has very
strong 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.
NON-GAAP MEASURES
- -----------------
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.
OTHER MEASURES
- --------------
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 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%
Jul - Sep'04 1,918 413 1,505 2,001 75%
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 SEC
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 first
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum Number
Shares Purchased as of Shares that May
Part of Publicly Yet Be Purchased
Total Number of Average Price Paid Announced Plans or Under the Plans or
Period Shares Purchased(1) per Share(2) Programs(3) Programs(3)
7/1/04-7/31/04 2,291,462 $53.67 0 0
8/1/04-8/31/04 4,582,484 $53.58 0 0
9/1/04-9/30/04 4,602,469 $54.97 0 0
(1) All share repurchases were made in open-market transactions. None of these
transactions were made pursuant to a publicly announced repurchase plan.
This table excludes shares withheld from employees to satisify 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) No share repurchases were made pursuant to a publicly announced plan or
program. The Company's strategy for cash flow utilization is to pay
dividends first and then repurchase Company common stock to cover option
exercises made pursuant to the Company's stock option programs. The
remaining cash is then available for strategic acquisitions and
discretionary repurchase of the Company's common stock.
Item 4. Submission of Matters to a Vote of Security Holders:
At the Company's 2004 Annual Meeting of Shareholders held on October 12, 2004,
the following actions were taken:
The following Directors were elected for terms of office expiring in 2007:
VOTES BROKER
VOTES FOR WITHHELD ABSTENTIONS* NON-VOTES*
--------------------------------------------------------
R. KERRY CLARK 2,164,762,645 56,976,813 N/A N/A
JOSEPH T. GORMAN 2,168,269,583 53,460,875 N/A N/A
LYNN M. MARTIN 2,166,210,366 55,520,092 N/A N/A
RALPH SNYDERMAN 2,170,824,127 50,906,331 N/A N/A
ROBERT D. STOREY 2,157,608,947 64,121,511 N/A N/A
* Pursuant to the terms of the Notice of Annual Meeting and Proxy Statements,
proxies received were voted, unless authority was withheld, in favor of the
election of the five nominees named.
In addition, the following Directors continued to serve as Directors after the
meeting:
Norman R. Augustine
Bruce L. Byrnes
Scott D. Cook
Domenico DeSole
A. G. Lafley
Charles R. Lee
W. James McNerney, Jr.
Johnathan A. Rodgers
John F. Smith, Jr.
Margaret C. Whitman
Ernesto Zedillo
A proposal by the Board of Directors to ratify the appointment of Deloitte &
Touche LLP as the Company's independent registered public accounting firm to
conduct the annual audit of the financial statements of the Company and its
subsidiaries for the fiscal year ending June 30, 2005, was approved by the
shareholders. The shareholders cast 2,135,461,711 votes in favor of this
proposal and 64,340,955 votes against. There were 21,927,792 abstentions.
A proposal by the Board of Directors to approve an amendment to the Amended
Articles of Incorporation to increase the authorized number of shares of Common
Stock was approved by the shareholders. The shareholders cast 1,991,734,532
votes in favor of this proposal and 205,903,439 votes against. There were
24,092,487 abstentions.
A proposal by the Board of Directors to approve an amendment to the Code of
Regulations to provide for the annual election of Directors was defeated by the
shareholders. The Board recommended a vote against the amendment. The proposal
required the affirmative vote of a majority of the Company's issued and
outstanding shares. The shareholders cast 963,030,553 (35.63% of the issued and
outstanding shares) votes in favor of this proposal and 852,001,796 votes
against. There were 32,478,467 abstentions and 374,219,642 broker non-votes.
A shareholder resolution proposed by the People for the Ethical Treatment of
Animals was defeated by the shareholders. The proposal requested that the Board
of Directors implement rules and regulations consistent with in-home food
studies for pet nutrition. The Board opposed the resolution. The shareholders
cast 53,743,362 votes in favor of the resolution and 1,642,826,656 against.
There were 150,003,199 abstentions and 375,157,241 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3-1) Amended Articles of Incorporation
(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).
(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.
(b) Reports on Form 8-K
During the quarter ended September 30, 2004, the Company did not file
any Current Reports on Form 8-K. During the quarter ended September 30,
2004, the Company furnished reports on Form 8-K pursuant to Item 7.01
("Regulation FD Disclosure") dated September 9, 2004, relating to
updating previously issued guidance for the July-September 2004
quarter. The Company also furnished reports on Form 8-K containing
information pursuant to Item 8.01 ("Other Events") dated September 1,
2004, relating to A.G. Lafley's extension of his Rule 10b5-1 stock
trading plan. The Company also furnished reports on Form 8-K containing
information pursuant to Item 9 ("Regulation FD Disclosure") dated July
14, 2004, relating to the announcement of a quarterly dividend of
twenty-five cents ($.25) per share on the Common Stock and on the
Series A ESOP Convertible Class A Preferred Stock. The Company also
furnished reports on Form 8-K containing information pursuant to Item
12, ("Results of Operations and Financial Condition") dated August 2,
2004, relating to the announcement of earnings for the quarter and
fiscal year ended June 30, 2004.
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
October 28, 2004
- -------------------------------
Date
EXHIBIT INDEX
Exhibit No.
(3-1) Amended Articles of Incorporation
(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).
(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.