EXHIBIT (13)
Annual Report to Shareholders
(pages 1-48)
FELLOW SHAREHOLDERS:
P&G touches the lives of consumers around the world every day. Thirty million
times a day, in more than 160 countries, P&G brands face their first moment of
truth, when consumers stand in front of a store shelf - at a Wal-Mart store in
West Virginia, a Carrefour store in France, a bodega in Mexico, a corner market
in Egypt or a tiny "sari sari" store in the Philippines - and decide whether to
buy a P&G brand, or a competing product.
A lot happens in that moment, as consumers assess the performance, quality and
value P&G brands offer relative to other products on the shelf. When we strike
the right balance between brand promise and store price, we win that first
moment of truth.
Winning the first moment of truth is only half the battle. Soon after, P&G
brands face a second moment of truth. Nearly two billion times a day, P&G
products are put to the test when consumers use Tide to clean their clothes,
Pampers to care for their babies, Pantene to care for their hair, Olay to
improve the condition of their skin, Crest to brighten their smile. Every one of
P&G's brands is put to this test.
In every one of those nearly two billion experiences, consumers decide whether
P&G brands live up to their promises. When we get this right - when we deliver
the benefits promised, when we provide a delightful and memorable usage
experience, when we make everyday life a little bit better, a little more
convenient, a little bit healthier and more beautiful - then we begin to earn
the trust on which great brands are built.
At P&G, we've been competing for and winning these moments of truth for 165
years. As a result, we've built one of the largest and strongest portfolios of
leading brands in the world.
We have made substantial progress over the past two years in strengthening P&G's
business. We're back in the lead. We're committed to continuing this progress
and to ensuring we squarely face changing marketplace realities - to get out in
front and to stay in front of change.
2
BACK ON TRACK
Getting back in the lead has certainly been "Job One" over the past two years.
With clear strategic choices, operational excellence and financial discipline,
we are now returning to the consistent, reliable earnings and cash growth that
shareholders expect from P&G.
WE ARE DELIVERING LONG-TERM GROWTH OBJECTIVES AHEAD OF PLAN. Our long-term goals
are to consistently deliver double-digit core earnings per share growth, and 4%
to 6% sales growth, excluding the impacts of foreign exchange. Core net earnings
increased 10% to $5.1 billion. Core diluted net earnings per share, which
excludes the impact of restructuring charges and the prior-year amortization of
goodwill and indefinite-lived intangibles (which is no longer required under new
accounting rules), increased 10% to $3.59. Core operating income increased 12%
to $7.6 billion. Volume for the year grew 7%. Sales were up 4%, excluding
foreign exchange impact, despite corrective pricing actions taken over the last
18 months. Consumers have reacted positively to the improved value our brands
now offer, with volume and sales growth accelerating in the second half of the
year.
This growth is broad-scale. Every business unit delivered profitable growth at
rates above the corporate objective. Every geographic region delivered volume
growth. We have work yet to do, but we have achieved P&G's long-term growth
objectives a year earlier than we had projected.
Net Earnings Growth Net Sales Growth
(by segment versus previous year) (by quarter versus previous year)
[BAR GRAPH] [BAR GRAPH]
WE ACHIEVED P&G's LONG-TERM
GROWTH OBJECTIVES A YEAR
EARLIER THAN PROJECTED.
WE ARE INCREASING FREE CASH FLOW. Cash generation is a key indicator of a
company's underlying health, and P&G's management is focused on creating
leadership, sustained cash flow growth in each of our business units. Free cash
flow - operating cash after capital spending - was $6.1 billion, up 83% from
last year and more than triple the free cash flow generated two years ago.
Capital spending improvement has been a key driver. Our objective was to reduce
capital spending to 6% of sales by fiscal 2004, and we've exceeded that goal two
years ahead of schedule. We are now resetting our capital spending target to
below 5% of sales, and continue to look for opportunities to improve asset
efficiencies.
WE ARE DELIVERING SUPERIOR TOTAL SHAREHOLDER RETURN (TSR). TSR is the key
business unit metric upon which P&G's business planning and management
compensation are based. The combination of strong earnings growth and focus on
cash has resulted in superior business returns over the past year. P&G's share
price has responded accordingly, outpacing the major indices of Dow Jones and
the S&P 500.
These are substantial achievements, in tough economic times, in a very
competitive global marketplace. These are the kinds of results P&G has delivered
consistently and reliably for decades. This is the level of performance that P&G
shareholders expect and also that we - the men and women of P&G - expect of
ourselves. I want to commend the dedication, discipline and creativity of P&G
people who delivered these results.
Free Cash Flow
(in billions of dollars)
[BAR GRAPH]
Capital Spending
(as % of sales)
[BAR GRAPH]
Total Shareholder Return
(indexed versus July 1999)
[LINE GRAPH]
4
SUCCESS DRIVERS
There are six drivers of P&G's success: consumer focus, strategic choices,
operational excellence, financial discipline, organizational structure and
brand-building capability.
CONSUMER FOCUS. The consumer is boss and we put the consumer at the heart of all
we do. First and foremost, this means getting the consumer value equation right
on all our brands. It also means delivering superior, consumer-meaningful
innovation. Competitive pressures make this a continuing challenge, but we are
working hard in every part of our business to deliver a continual stream of
innovation that meets consumer needs in ways that reset performance expectations
and represent superior value.
We are also making sure that P&G business leaders - including me - get out of
the office and into stores and homes to talk directly with people who buy and
use our products. No other real-world experience clarifies the choices we must
make as much as these conversations with consumers.
STRATEGIC CHOICES. We've focused on P&G's core categories, leading brands, and
the biggest retail customers and country markets. And, we're investing in
faster-growing, higher-margin, more asset-efficient businesses. A good example
is the acquisition of Clairol, which complements the core Hair Care business and
helps P&G enter the fast-growing hair colorant category. Strategic choices like
these are paying off. For example, about one-fourth of total gross margin
improvement in fiscal 2002 came from our emphasis on faster-growing,
higher-margin businesses such as Beauty Care and Health Care.
OPERATIONAL EXCELLENCE. Execution determines success, and we've placed
heightened emphasis on operational excellence at P&G. Again, Clairol is a good
example. We closed this deal in less than six months and fully integrated
business operations seven months later. Most important, we accomplished a smooth
integration and we're on track to deliver the committed synergy savings ahead of
schedule.
FINANCIAL DISCIPLINE. We have reinforced P&G's long-standing commitment to
financial discipline. Our efforts are seen most clearly in the Company's
business results. Even before the highly publicized accounting failures at
several companies, we took a number of specific
5
steps to ensure strong corporate governance. We reiterated clear expectations
for ethical behavior. We instituted a broad-based Financial Stewardship program
- - more than 18 months ago - to provide even more focus on fiduciary
responsibilities, internal controls and accounting processes. We continue to
engage openly with P&G's Board of Directors, and with the Board's Audit
Committee, which is comprised entirely of independent directors. And we maintain
an independent relationship with Deloitte & Touche, including formal processes
to approve non-audit services. These practices are consistent with the way P&G
has operated for decades, and we are continually renewing the organization's
commitment to them.
ORGANIZATIONAL STRUCTURE. P&G's unique operating structure is creating
meaningful competitive advantage. In 1999, we reorganized the Company by
consolidating categories and brands into Global Business Units (GBUs),
aggregating country and regional go-to-market capabilities into Market
Development Organizations (MDOs) and providing single-source business services
through a Global Business Services organization (GBS). It has taken some time to
implement, but we're now reaping real advantage from consumer and market
responsiveness and the substantial synergies made possible by the new structure.
The success of Pampers Baby Stages of Development initiative in the United
Kingdom is one good example. The business unit focused on delivering superior
product, packaging and advertising; the MDO delivered an outstanding trial plan,
superior in-store fundamentals and strong External Relations support. By
"dividing and conquering" against a common business strategy and plan, we
achieved more, faster. Since the launch, Pampers' U.K. market share is back to
51%, 16 points ahead of the #2 brand.
BRAND BUILDING. Branding is more important than ever - and big, leading brands
are more valuable than ever. In a sea of choices where confusion reigns,
consumers value the reliable promise of their favorite brands. This plays to our
strength: branding is in P&G's DNA. P&G has 12 billion-dollar brands in its
portfolio today - and more are expected to come. These brands represent more
than half of the Company's sales and earnings. Equally important, these brands
account for the majority of P&G's consumer interactions - the millions of
"moments of truth" we face and win every day.
6
P&G'S BILLION-DOLLAR BRANDS
PAMPERS
Over 30 million babies
experience the comfort and
dryness of Pampers every day.
TIDE
Tide cleans more than 32
million loads of laundry
every day.
ARIEL
More than 300 million
pieces of clothing are
washed with Ariel every
day.
ALWAYS/WHISPER
On an average day, over 25
million women are using
Always.
PANTENE
Nearly 1.7 million
consumers purchase a
Pantene product every day.
CHARMIN
Every day, 50 million
households in North
America squeeze the
Charmin.
7
BOUNTY
Every day, 50 million
North American households
experience Bounty as the
Quicker Picker-Upper.
IAMS
Iams and Eukanuba provide
27 million dogs and cats
with superior nutrition
every day.
CREST
A Crest product brings a
beautiful, healthy smile
to over 150 million faces
every day.
FOLGERS
Americans drink 85 million
cups of Folgers every day.
PRINGLES
People pop 275 million
Pringles every day.
DOWNY/LENOR
Downy softens and freshens
over 21 million loads of
laundry every day.
9
1 CHANGING CONSUMER EXPECTATIONS
While we've made steady progress, we know we're in a fast-moving, global
marketplace in which the magnitude, pace and scope of change are accelerating.
To keep P&G in the lead, it is essential that we anticipate change and get in
front of it. We're doing that with a focus on three "new realities" that are
shaping the future marketplace.
First is the changing expectations of consumers. Our business has always been
about consumer value and in today's demanding economic environment, value is
more important than ever.
The key to winning in this environment is to reset expectations for performance
and price. Olay Total Effects is a good illustration. In global research, women
identified seven distinct signs of aging that affect the condition of their
skin. Many products addressed one or two of these signs, but no single product
fought all seven. Further, the products that performed best in this category
were high-end department store brands priced at $60 or $70 a bottle. With Olay
Total Effects, we created a single product for all seven signs of aging based on
technology that rivals or exceeds the best department store skin care brands -
and offered it at a fraction of the department store price but at the top end of
mass skin care pricing. Olay Total Effects is now the #1 anti-aging moisturizer
in the U.S., U.K., China, Canada and Australia - growing our total Olay Skin
Care franchise by nearly 20%.
The difficulty of meeting this performance/value challenge in developing markets
- - such as China or Eastern Europe - is even greater. Consumers in these markets
have similar performance expectations, but far less purchasing power. To succeed
in these markets, it's often necessary to rethink the fundamentals - everything
from manufacturing to product and packaging to marketing and distribution. We
have experience winning in developing markets with a range of creative
solutions: single-use Pantene sachets in China and van-based distribution in
Poland, for example. And we continue to develop other approaches. This will be
an area of increasing importance for P&G.
11
2 RETAILERS AS PARTNERS AND COMPETITORS
The second "new reality" is the changing nature of retailing. Increasingly, we
have a dual relationship with retail customers: we are strong partners and
sometimes competitors.
In concept, the need for tighter relationships between manufacturers and
retailers is obvious: we both serve the same consumer, we both want to build
consumer loyalty to our brands, we're both trying to grow sales faster and more
profitably. But, in practice, retailers and manufacturers can work at cross
purposes. Energy, resources and time that could be devoted to creating a
delightful "first moment of truth" shopping experience can be spent in
unproductive discussions over shelf space, pricing, discounts and terms.
Together with retail partners, we are working hard to change this practice. For
example, we know consumers are often frustrated when buying hair care products.
They find it hard to locate everything they want and are often left confused and
searching for product information. We're working with more than 30 retailers to
enhance the performance of their hair care departments. We've simplified the
shopping experience, provided more consumer education and made it easier for
consumers to find and ultimately use the products that best meet their needs.
Shoppers are spending half the time finding products and more time in the aisle
browsing and discovering products - all of which leads to increased volume,
sales and profits for P&G and our retail partners. These changes are delivering
department growth ranges between 10% and 44% for retailers and P&G.
Retailers are sometimes competitors as well as partners. Their own brands are
growing as the retailers, themselves, grow. Private labels or store brands
strive to match innovation quickly and try to present a compelling value
alternative in many categories. This is healthy, in my opinion. It requires that
we continue to lead innovation and to price P&G products competitively. Further,
the growing strength of store brands underscores the importance of always being
the #1 or #2 brand in any category. Brands that can't maintain this leadership
stature will find it difficult to compete effectively with the best store
brands. Based on our internal global share measures, we have the #1 or #2 brand
in 17 of our 19 key global categories - categories that account for about 70% of
sales and earnings. P&G is in a strong position, and ready to become an even
better retail partner.
13
3 THE NEW "INTERCONNECTED" ORGANIZATION
The third "new reality" is the emerging importance of operating as an
interconnected company. A recent report by industry consultant Booz Allen
Hamilton noted "'Vertical' thinking (i.e., own or control every link in the
supply chain) has given way to `virtual' thinking (i.e., create a flexible web
of supply relationships and focus exclusively on what one does best)."
At P&G, we see this as an enormous opportunity - in part, because that's where
the marketplace is headed and, even more so, because P&G has a strong history of
developing partnerships that bring out the best in us and our partners. We've
done it for years with advertising agencies, customers, joint venture partners
and technology suppliers.
When Dr. John's, the maker of SpinBrush toothbrushes, approached us about
licensing the Crest name, we recognized the opportunity. Within five months of
that first contact, we bought the company and then brought Crest's new, powered
SpinBrush to market in record time. Crest SpinBrush, now in 20 markets, has a
50% volume share of the growing powered-brush category in the U.S. and has
quadrupled the sales of the original Dr. John's product.
When we developed the bisphosphonate technology in Actonel, we increased
marketing capability by partnering with Aventis, whose field sales force had
broad access to and credibility with doctors. The partnership worked well, and
today Actonel is a nearly $400 million brand and growing.
Our vision is that P&G will be the best company in the world at spotting,
developing and leveraging partnerships in every area of the business. In fact, I
want P&G to be a magnet for best-in-class partners who want to build significant
new business together.
14
THE NEXT GENERATION OF LEADERSHIP
The bottom line is this: P&G is getting back on track. We have what it takes and
we're doing what it takes to stay in the lead - now, and in the future. We're
making clear strategic choices, strengthening operational excellence and
operating with rigorous financial discipline. We're delivering the earnings
growth to which we've committed - ahead of plan. We're generating cash from
every business unit - at record levels. We're delivering returns that exceed the
performance of the Dow Jones index and the S&P 500. In short, we are returning
to the level of performance you, and we, expect from P&G - and we are determined
to keep it up.
I want to close this letter with one final point. The reason things work well at
P&G is that everyone is an owner and a leader. We hire people because they're
leaders. We give them the training, development and experience to become even
stronger leaders. We promote people who deliver superior results, operate with
integrity and strengthen those around them. We have a culture that values and
embraces leadership. That's true at the top of our organization. In the middle.
At entry-level. It's true of people who've just joined P&G, as well as those
who've spent 20- or 30-year careers at P&G.
The key in such an organization is to provide individual and business unit
growth opportunities, and then to empower people to lead and execute with
excellence. That is precisely what we're doing at P&G. I have no doubt we have
the right organization to keep our Company growing. In these past two years, I
have witnessed a passionate sense of ownership for our business that deepens my
confidence in P&G's future, no matter what challenges we may face.
As owners of Procter & Gamble, you can be assured that the pioneering spirit,
operating discipline and dogged commitment to being in the lead that have always
characterized this Company - for 165 years! - are as alive today as they have
ever been.
/s/ A.G. Lafley
A.G. Lafley
Chairman of the Board, August 5, 2002
President and Chief Executive
15
MANAGEMENT CHANGES
JOHN PEPPER RETIRES
On July 1, 2002, John Pepper retired as chairman after 39 years of service with
P&G. Mr. Pepper will continue as chairman of the Board's Executive Committee
until July 1, 2003.
Mr. Pepper served as the ninth Chairman of the Board and Chief Executive from
July 1995 through September 1999, when he retired. He was re-elected chairman of
the Board of Directors, in addition to his role as chairman of the Executive
Committee of the Board, in June 2000.
To honor Mr. Pepper's life-long commitment to teaching and learning, and his
devotion to developing P&G people, the Company's new corporate training center
at the General Office in Cincinnati has been named "The John Pepper Learning
Center."
"John Pepper is the heart and soul of P&G - the living embodiment of our
Purpose, Values and Principles," A.G. Lafley told employees at Mr. Pepper's
retirement reception. "We are eternally grateful for his enormous personal and
professional contributions."
BRUCE BYRNES AND KERRY CLARK NAMED VICE-CHAIRMEN
Bruce Byrnes, President, Global Beauty & Feminine Care and Global Health Care,
and Kerry Clark, President, Global Market Development & Business Operations,
were named vice-chairmen of the Board of Directors and directors of the Company,
effective July 1, 2002. Mr. Byrnes and Mr. Clark bring great breadth of business
expertise and knowledge to their new roles, along with proven track records of
results.
16 The Procter & Gamble Company and Subsidiaries
CORPORATE GOVERNANCE AND MANAGEMENT'S RESPONSIBILITY
Procter & Gamble is committed to doing what's right. Our actions - the actions
of all employees - are governed by our Purpose, Values and Principles. These
core values set a tone of integrity for the entire Company - one that is
reinforced consistently at all levels, in all countries, internally and
externally.
Importantly, this extends to our accounting and financial reporting
responsibilities. We understand our responsibilities to investors. As part of
this, we are committed to providing accurate and understandable financial
reporting. This encompasses:
Maintaining a strong internal control environment. Our system of internal
controls is designed to provide reasonable assurance that transactions are
executed as authorized and accurately recorded, and that assets are safeguarded.
We monitor these controls through self-assessments and an ongoing program of
internal and external audits. Key employee responsibilities are reinforced
through the Company's "Worldwide Business Conduct Manual," which sets forth
management's commitment to conduct its business affairs with the highest ethical
standards.
Focusing on financial stewardship. Even before the events that have shaken
investor confidence, we had implemented a program to ensure employees understood
their fiduciary responsibilities to shareholders. This ongoing effort
encompasses financial discipline in our strategic and daily business decisions,
and brings particular focus to maintaining accurate accounting processes through
process improvement, skill development and oversight.
Exerting rigorous oversight of the business. We continuously review our business
results and strategic choices. Our Global Leadership Council is actively
involved - from understanding strategies to reviewing key initiatives and
financial performance. The intent is to ensure we remain objective in our
assessments, constructively challenge the approach to business opportunities and
potential issues, and monitor results and controls.
Encouraging strong and effective Corporate Governance from our Board of
Directors. We have an active, capable and diligent Board. We already meet the
standards being proposed for independence, and we welcome the Board's oversight
as a representative of the shareholders. Our Audit Committee is comprised of
independent directors with the financial knowledge and experience to provide
appropriate oversight. We review key accounting, financial reporting and
internal control matters with them and encourage their independent discussions
with Deloitte & Touche, our external auditors.
Providing investors with financial results that are complete and understandable.
The consolidated financial statements and financial information included in this
report are the responsibility of management. This includes preparing the
financial statements in accordance with generally accepted accounting principles
in the United States of America, which necessarily requires estimates based on
management's best judgment. Our independent auditing firm, Deloitte & Touche,
has audited our financial statements and has expressed an unqualified opinion.
We are committed to providing timely, accurate and understandable information to
investors.
P&G has a strong history of doing what's right. We know great companies are
built on strong ethical standards and principles. Our financial results are
delivered from that culture of accountability, and we take responsibility for
the quality and accuracy of our financial reporting.
/s/ A.G. Lafley /s/ Clayton C. Daley Jr.
A.G. Lafley Clayton C. Daley Jr.
Chairman of the Board, Chief Financial Officer
President and Chief Executive
TABLE OF CONTENTS
FINANCIAL REVIEW INDEPENDENT AUDITORS' REPORT 26
Results of Operations 17 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financial Condition 18 Earnings 27
Segment Results 20 Balance Sheet 28
Critical Accounting Policies 22 Shareholders' Equity 30
Hedging and Derivative Financial Instruments 23 Cash Flows 31
Restructuring Program 24 Notes to the Financial Statements 32
The Procter & Gamble Company and Subsidiaries 17
FINANCIAL REVIEW
RESULTS OF OPERATIONS
The Company's fiscal year ended June 30, 2002 reflects the benefits of clear
strategic choices, operational excellence and financial discipline. The Company
kept its commitment to deliver consistent, reliable earnings and cash growth. In
fact, it delivered its long-term sales and earnings growth targets ahead of the
established objective and substantially increased free cash flow.
During 2002, the Company completed the acquisition and integration of Clairol -
its largest acquisition ever - providing a strong presence in the high-margin
hair colorants business. It also divested Comet and spun off Jif and Crisco.
These transactions are part of the Company's choice to focus on building big
brands that offer the greatest potential for global growth.
The Company continues to make clear choices about where to play and how to win.
The framework for these is grounded in focus areas that include: building core
categories and leading brands; growing with the biggest retail customers in the
biggest geographic markets; and investing in faster-growing, higher-margin, more
asset-efficient businesses. This requires some difficult decisions, including
those reflected in the Company's restructuring program to reduce overheads and
streamline manufacturing and other work processes. As the fiscal year results
demonstrate, these strategic choices are paying off.
Volume and Net Sales
Record sales in 2002 of $40.24 billion exceeded 2001 sales by $994 million, or
3%. Excluding an unfavorable exchange rate impact of 1% in the current year, net
sales grew 4%. Core net sales, which exclude restructuring impacts, were $40.17
billion, up 2% versus $39.38 billion in 2001. Excluding an unfavorable exchange
rate impact of 2% in the current year, core net sales grew 4%. This is in line
with the Company's long-term objective of 4% to 6% sales growth, excluding the
impacts of foreign exchange. Sales growth in 2002 was driven by 7% unit volume
growth - with particularly strong performances in the health care and beauty
care segments.
Fiscal year 2001 sales were $39.24 billion compared to $39.95 billion in 2000.
Excluding unfavorable exchange effects of 3%, sales increased 2%, reflecting
improved pricing in beauty care, fabric and home care and baby, feminine and
family care. Unit volume was flat in 2001, as exceptionally strong performance
by new businesses in health care was offset by softness in food and beverage.
Net Earnings
In 2002, net earnings were $4.35 billion, compared to $2.92 billion in 2001 and
$3.54 billion in 2000. Reported results include after-tax restructuring charges
of $706 million, $1,475 million, and $688 million in 2002, 2001 and 2000,
respectively. This restructuring program covers a significant reduction in
enrollment, manufacturing consolidations and portfolio choices to scale back or
discontinue underperforming businesses and initiatives.
Net Earnings Per Share
(on a diluted basis)
[BAR GRAPH]
The Company's long-term earnings goal is to consistently deliver double-digit
core net earnings per share growth. Core diluted net earnings per share, which
excludes the impact of restructuring charges and the prior years' amortization
of goodwill and indefinite-lived intangibles, increased 10% to $3.59 in 2002.
This compares to core diluted net earnings per share of $3.27 in 2001 and $3.10
in 2000. The goodwill adjustment was $0.15 per share in both 2001 and 2000. In
the current year, every business unit delivered net earnings growth above the
corporate objective. Clear strategic focus and operational excellence are
enabling improved business performance across all fronts. Core diluted net
earnings per share growth in the prior year of 5% reflected cost increases and
exchange impacts, which were mitigated by pricing improvements, lower taxes and
divestiture gains.
Operating Costs
Costs of products sold was $20.99 billion in 2002, compared to $22.10 billion in
2001 and $21.51 billion in 2000. Restructuring costs included in cost of
products sold were $508 million in 2002, $1.14 billion in 2001, and $496 million
in 2000. Excluding restructuring charges, as a percent of core net sales, cost
of products sold was 51.0% in 2002, compared to 53.2% in 2001 and 52.6% in 2000.
The progress in the current year reflects a decline in material costs and a
continued focus on savings projects, including restructuring. Gross margin
progress accelerated throughout the year, as restructuring benefits and ongoing
operational savings increased.
18 The Procter & Gamble Company and Subsidiaries Financial Review
Additionally, the Company is beginning to see gross margin improvement from the
shift to higher-margin businesses, such as health care and beauty care.
Excluding restructuring charges, gross margin in 2001 reflects fairly stable
cost of products sold, despite raw material price increases - highlighting the
benefits of cost control efforts.
Marketing, research, administrative and other expense (MRA&O) was $12.57 billion
in 2002 versus $12.41 billion in 2001 and $12.48 billion in 2000. These include
restructuring costs of $519 million in 2002, $583 million in 2001 and $318
million in 2000. Excluding restructuring charges and amortization of goodwill
and indefinite-lived intangibles, MRA&O was $12.05 billion in the current year
versus $11.59 billion in 2001 and $11.94 billion in 2000. As a percent of core
net sales, MRA&O was 30.0% in 2002, 29.4% in 2001 and 29.9% in 2000. The Company
achieved good progress on restructuring savings that have reduced base selling,
research and administrative costs. The increase in the current year was due
primarily to Clairol integration costs and increases in other operating charges.
Additionally, marketing support efficiencies realized in the prior year
continued in the current year - although marketing costs did not decline as
dramatically due to the significant progress made in the prior year.
Operating & Net Earnings Margins
Operating margin was 16.6% compared to 12.1% in 2001 and 14.9% in 2000.
Excluding restructuring charges and amortization of goodwill and
indefinite-lived intangibles, core operating margin increased 170 basis points
to 19.0%, from 17.3% in 2001. Core operating margin was 17.5% in 2000.
Net earnings margin was 10.8% versus 7.4% in 2001 and 8.9% in 2000. Excluding
restructuring charges and amortization of goodwill and indefinite-lived
intangibles, core net earnings margin was 12.6%, up from 11.7% in 2001 and 11.1%
in 2000. The margin increase in 2002 reflects excellent operating earnings
progress and the benefits of lower interest expense. In 2001, the core net
margin increase reflected the gains from minor brand divestitures and lower
taxes, partially offset by increased product costs and unfavorable exchange
impacts.
Non-Operating Items
Interest expense was $603 million in 2002, compared to $794 million in 2001 and
$722 million in 2000. The decline in interest expense was driven by lower
interest rates partially offset by an increase in debt. The increase in 2001
reflected higher debt levels, primarily due to share repurchasing and
acquisitions.
Other non-operating income, net, which consists primarily of interest and
investment income and divestiture gains, contributed $308 million in 2002,
compared to $674 million in 2001 and $304 million in 2000. This decline is
driven by significantly lower income from divestitures and asset sales in 2002
versus 2001 as the Company's activity to divest non-core brands declined. Going
forward, divestitures are expected to remain at these lower levels.
The Company's effective tax rate for the current year was 31.8%, compared to
36.7% in 2001 and 36.0% in 2000. Excluding restructuring costs, amortization of
goodwill and indefinite-lived intangibles and related tax effects, the core
effective tax rate was flat versus 2001 at 31.1% compared to 32.5% in 2000.
FINANCIAL CONDITION
The Company's financial condition remains solid - particularly regarding cash
flow generation. One of the Company's focus areas is to improve its cash
efficiency as a key element of achieving superior shareholder return.
Cash
Operating cash flow provides the primary source of funds to finance operating
needs, capital expenditures and shareholder dividends. This is supplemented by
additional borrowings to provide funds to finance the share repurchase program
and acquisitions. The overall cash position of the Company reflects a global
strategy to optimize cash management while considering off-shore funding needs,
liquidity management objectives and other economic considerations.
Free Cash Flow
(in billions of dollars)
[BAR GRAPH]
Free cash flow, defined as operating cash flow less capital expenditures, for
2002 was $6.06 billion, up over 80% from
Financial Review The Procter & Gamble Company and Subsidiaries 19
2001. This increase is indicative of the heightened emphasis on cash generation
the Company has placed on all of its operating units. Free cash flow was $3.32
billion in 2001 and $1.66 billion in 2000.
The Company continues to generate strong cash flow from operations. In 2002,
cash flow from operations was $7.74 billion, up $1.94 billion from $5.80 billion
in 2001, which was an increase of $1.12 billion from $4.68 billion in 2000.
Higher earnings were the primary contributor. In addition, taxes payable
increased approximately $500 million versus the prior year, primarily driven by
utilization of prior year overpayments and deferred tax assets. Depreciation and
amortization charges declined by $578 million versus the prior year. Of this
decrease, $235 million is attributable to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, under which goodwill and indefinite-lived
intangible assets are no longer being amortized. The remaining decline is
primarily driven by lower accelerated depreciation from the restructuring
program in fiscal 2002 versus 2001.
Net cash used for acquisitions completed during 2002 totaled $5.47 billion,
primarily driven by the Clairol acquisition. This compares to $138 million in
2001 and $2.97 billion in 2000, which included the Iams and PUR acquisitions.
The Company continues to divest certain non-strategic brands in order to focus
resources on core businesses. The divestitures declined significantly in the
current year, returning to historical levels. The proceeds from these and other
asset sales generated $227 million in cash flow in the current year, which is
significantly reduced when compared to the $788 million generated in 2001 and
$419 million generated in 2000.
The Company maintains a share repurchase program, which authorizes the purchase
of shares annually on the open market. A primary purpose of the program is to
mitigate the dilutive impact of stock option grants - effectively prefunding
the exercise obligation. Additionally, there is a discretionary component under
which it may repurchase additional outstanding shares. Current year purchases
under the combined programs were $568 million, compared to $1.25 billion in 2001
and $1.77 billion in 2000. The decline in the current year is primarily due to
cash requirements associated with the Clairol acquisition. The Company
anticipates the buy-back program will return to historical levels in 2003.
Common share dividends grew 9% to $1.52 per share in 2002 versus $1.40 in 2001
and $1.28 in 2000. The annual dividend rate will increase to $1.64 per common
share in 2003, marking the 47th consecutive year of increased common share
dividend payments. Total dividend payments, to both common and preferred
shareholders, were $2.10 billion, $1.94 billion and $1.80 billion in 2002, 2001
and 2000, respectively.
Total debt increased $2.91 billion to $14.93 billion compared to $12.02 billion
in 2001 and $12.25 billion in 2000. This increase was primarily driven by the
Clairol acquisition - which had a purchase price of approximately $5.00 billion.
Long-term borrowing available under the Company's current shelf registration
statement filed in March 2002 was $4.00 billion at June 30, 2002. Additionally,
the Company is able to issue commercial paper at favorable rates and to access
general bank financing.
Capital Spending
Capital spending efficiency has been a focus area for the Company. Spending
decreased $807 million to $1.68 billion in 2002, compared to $2.49 billion in
2001 and $3.02 billion in 2000. Current year spending is 4.2% of net sales,
compared to 6.3% and 7.6% in 2001 and 2000, respectively.
Capital Spending
(in billions of dollars)
[BAR GRAPH]
This current year reduction of more than $800 million versus the prior year
surpasses the Company's 6% of net sales goal two years earlier than originally
anticipated. This improvement in capital spending is the result of three main
factors: 1) completing the majority of the re-platforming and capacity expansion
investment in the baby, feminine and family care business unit, 2) sourcing
consolidation and improved capacity utilization; and, 3) increasing emphasis on
reduced but sustainable capital spending levels to improve shareholder value.
Liquidity
The Company does not have off-balance sheet arrangements,
20 The Procter & Gamble Company and Subsidiaries Financial Review
commitments or related party transactions that are considered material. The
Company is not aware of factors that are reasonably likely to adversely affect
liquidity trends, other than the factors discussed in the Forward-Looking
Statements.
Purchase Commitments
The Company has purchase commitments for materials, supplies, services and fixed
assets as part of the normal course of business. In the aggregate, such
commitments are not at prices in excess of current market rates. Due to the
proprietary nature of many of the Company's materials and processes, certain
supply contracts contain penalty provisions for early termination. The Company
does not expect changes in such provisions to materially affect results of
operations or its financial condition. This conclusion is made based upon
reasonably likely outcomes assumed by reference to historical experience and
current business plans.
As discussed previously, the Company's primary source of liquidity is cash
generated from operations. Additionally, the Company is able to support its
short-term liquidity, if necessary, through agreements with a diverse group of
creditworthy financial institutions. The Company has never drawn on these
facilities and does not intend to do so in the foreseeable future. However,
should the facilities be needed, when combined with cash on hand, the Company
believes they would provide the Company with sufficient credit funding to cover
any short-term financing requirements.
SEGMENT RESULTS
The following pages provide perspective on the Company's business segments.
Product-based segment results exclude items that are not included in measuring
business performance for management reporting purposes, most notably certain
financing, investing, employee benefit and restructuring costs.
Sales in companies over which the Company exerts significant influence, but does
not control the financial and operating decisions, are reported for segment
purposes in a manner similar to consolidated subsidiaries. Taxes are reflected
in the business segments at estimated local statutory tax rates. The effects of
these conventions are eliminated in the corporate segment to adjust management
reporting conventions to accounting principles generally accepted in the United
States of America.
2002 Net Sales by Business Segment
[PIE CHART]
2002 Net Earnings by Business Segment
[PIE CHART]
Health Care
Health care delivered exceptional results, as strength in the oral care and
pharmaceutical businesses drove a 15% increase in unit volume and a 14% increase
in net sales. Net sales were $4.98 billion in 2002. Excluding a 1% negative
impact of foreign exchange, net sales grew 15%. Health care's volume growth from
high-margin products funded increased marketing investments and yielded a net
earnings increase of 34% to $521 million.
Oral care led the volume growth, up significantly versus 2001. The global Crest
brand continued to grow behind strength across the portfolio, including Crest
SpinBrush, Crest Whitestrips and the base dentifrice business. In 2002, Crest
joined the ranks of the Company's billion dollar brands.
Pet health and nutrition volume increased 10% behind continued growth in the
United States. Global growth was driven by new product innovation and expansion
into new geographies and channels outside the United States in the second half
of the year.
Pharmaceuticals continued to deliver strong results with worldwide volume up
29%, behind the strength of Actonel, the Company's post-menopausal osteoporosis
drug.
In 2001, health care unit volume increased 15%, driven by the excellent
performance of the pet health and nutrition, pharmaceuticals and oral care
businesses. Net sales were
Financial Review The Procter & Gamble Company and Subsidiaries 21
$4.35 billion, up 11%. Excluding a 3% unfavorable exchange impact, net sales
grew 14%. Net earnings were $390 million, a 16% increase over fiscal 2000.
Fabric and Home Care
Fabric and home care delivered strong earnings driven by an excellent program of
cost reduction and sharpened consumer value. Unit volume grew 3%, with growth
across every geographic region. Net sales for the year were flat at $11.62
billion. Excluding a 1% unfavorable foreign exchange impact, net sales increased
1%, as volume growth was partially offset by pricing investments to improve
in-store presence and the consumer value equation, primarily in Western Europe.
Net earnings were $1.83 billion, up 11% behind lower material prices, product
reformulations and manufacturing plant efficiencies. North America delivered
exceptional earnings progress, reflecting disciplined cost management and
increased marketing support efficiencies. This earnings progress further expands
the segment's strong net earnings margin - to well above the Company average.
In 2001, unit volume decreased 2% due to heavy competitive activity, primarily
in Western Europe. Net sales were $11.66 billion, down 4% versus a strong 2000
base which included new brand introductions. Excluding a 3% unfavorable foreign
exchange impact, net sales decreased 1%. Net earnings increased 13% to $1.64
billion.
Baby, Feminine and Family Care
Baby, feminine and family care delivered strong earnings progress driven by
volume growth and extensive cost reduction. Family care and baby care drove a 3%
increase in unit volume. Net sales for the year were down 1% to $11.88 billion.
Excluding a 2% negative impact of exchange rates, net sales increased 1%, as
commodity driven price declines and pricing adjustments on Luvs and Western
European diapers partially offset volume growth.
Net earnings were $1.17 billion, up 11% behind an ongoing program of product and
overhead cost reductions, including benefits from restructuring activities that
have streamlined manufacturing operations.
Family care volume grew 7% behind strength in the North America Bounty and
Charmin businesses. Net sales increased 1%, as commodity pricing actions largely
offset volume growth.
Baby care volume increased 4% behind Pampers growth in North America and Western
Europe driven by the Baby Stages of Development product launch. Net sales
declined 1% as foreign exchange and targeted pricing adjustments more than
offset volume growth.
Feminine care volume declined 3%, stabilizing in the second half, and net sales
declined 5%. Nevertheless, net earnings improved mainly due to cost
efficiencies.
In 2001, baby, feminine and family care segment unit volume grew 2%, driven by
family care and baby care. Net sales were $11.99 billion, compared to $12.04
billion in 2000. Excluding a 4% negative impact of exchange rates, net sales
increased 4%. Net earnings decreased 2%, to $1.05 billion, despite progress in
family care and feminine care.
Beauty Care
Beauty care delivered strong results behind the Clairol acquisition, completed
in the second quarter. Throughout the fiscal year, beauty care's quarterly
growth rates for unit volume and net sales increased sequentially - delivering
unit volume growth of 19% and net sales of $8.08 billion, up 11%. Excluding a 2%
negative foreign exchange impact, net sales grew 13%. Excluding the impacts of
the Clairol acquisition, fiscal year unit volume grew 3%, primarily behind
strength in the base hair care business and solid growth in fine fragrances and
cosmetics. Net earnings were $1.18 billion, up 22%, driven by marketing support
efficiencies behind growing businesses and a continued focus on cost reductions.
The Clairol integration went according to plan during the year with North
America, the largest region, being completed in May. The Clairol acquisition
provides a strong presence in the high-margin colorants business and rounds out
the Company's hair care offerings.
In 2001, beauty care unit volume was down 1%. Excluding the impact of
divestitures, volume was flat. Net sales were $7.26 billion, down 2%, versus
$7.39 billion in 2000. Excluding a 4% impact of unfavorable exchange rates,
primarily in Western Europe and Asia, net sales grew 2%. Net earnings were $967
million, an 8% improvement behind the successful expansion of high-performance,
premium-priced products.
Food and Beverage
Food and beverage delivered solid earnings growth despite top-line challenges.
Unit volume declined 6%, including a 4%
22 The Procter & Gamble Company and Subsidiaries Financial Review
impact from divestitures. Volume declines and commodity-related pricing actions
in coffee drove an 8% decrease in net sales, to $3.80 billion. Net earnings grew
16%, to $384 million, as broad-based cost reductions more than offset declining
volumes.
The fourth quarter marked the completion of the Jif and Crisco spin-off. This
transaction, which is accounted for similar to a dividend, delivered excellent
value to shareholders - equivalent to approximately $0.60 per share.
In 2001, food and beverage unit volume declined 10%, including a 2% impact from
divestitures. Unit volume was negatively affected by reduced trade merchandising
and the impact of snacks pricing actions in North America and Western Europe and
the divestiture of the institutional shortening and oils business. Net sales
were $4.14 billion, down 11%. Net earnings were $332 million, down 9% versus
2000.
Corporate
The corporate segment includes both operating and non-operating elements such as
financing and investing activities, certain benefit costs, restructuring
charges, segment eliminations and other general corporate items.
Corporate includes adjustments from management reporting conventions to conform
with accounting principles generally accepted in the United States of America.
These primarily affect the treatment of entities over which the Company exerts
significant influence but does not control, and income taxes, which are
reflected in the business segments using estimated local statutory tax rates.
Corporate results reflect a decrease in one-time gains from the Company's
non-strategic divestiture program. Moreover, reduced corporate hedging gains
versus 2001 were partially offset by decreased restructuring costs, lower
interest expense and the discontinuation of amortizing goodwill and certain
indefinite-lived intangibles.
In 2001, corporate results reflect increased restructuring costs, higher benefit
costs and certain tax impacts not reflected in the businesses. These were
partially offset by one-time gains from the Company's divestiture program,
reduced overhead spending and corporate hedging gains.
CRITICAL ACCOUNTING POLICIES
The Company makes various estimates when applying accounting policies affecting
the Consolidated Balance Sheet, Consolidated Statement of Cash Flows and
Consolidated Statement of Earnings. Due to the nature of the Company's business,
these estimates generally are not considered highly uncertain at the time of
estimation - meaning they are not expected to result in a period-to-period
change that would materially affect the Company's results of operations or
financial condition.
The Company does apply certain key accounting policies as required by accounting
principles generally accepted in the United States of America. These key
accounting policies govern revenue recognition, restructuring, income taxes and
certain employee benefits.
Revenue Recognition
Revenue is recognized when it is realized or realizable and earned. The vast
majority of the Company's revenue relates to sale of inventory to customers, and
revenue is recognized when title and the risks and rewards of ownership pass to
the customer. Given the nature of the Company's business and the applicable
rules guiding revenue recognition, the Company's revenue recognition practices
do not contain estimates that materially affect results of operations.
Restructuring
Restructuring charges relate to the restructuring program that began in 1999.
The Company provides forward-looking information about the overall program,
including estimated costs and savings. Such disclosures represent management's
best estimate, but do require significant estimates about the program that may
change over time. However, the specific reserves recorded in each year under the
restructuring program are not considered highly uncertain, see Note 2 to the
Consolidated Financial Statements.
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes," income taxes are recorded
based on the current year amounts payable or refundable, as well as the
consequences of events that give rise to deferred tax assets and liabilities
based on differences in how those events are treated for tax purposes (see Note
11). The Company bases its estimate of deferred tax assets and liabilities on
current tax laws and rates and, in certain cases, business plans and other
expectations about future outcomes.
Changes in existing regulatory tax laws and rates may affect
Financial Review The Procter & Gamble Company and Subsidiaries 23
the Company's ability to successfully manage regulatory matters around the
world, and future business results may affect the amount of deferred tax
liabilities or the valuation of deferred tax assets over time. The Company's
accounting for deferred tax consequences represents management's best estimate
of future events that can be appropriately reflected in the accounting
estimates. Although certain changes cannot be reasonably assumed in the
Company's current estimates, management does not believe such changes would
result in a material period-to-period impact on the results of operations or
financial condition.
Employee Benefits
Employee benefits include pensions - both defined contribution and defined
benefit - and other post-employment benefits (OPEB), with plans and benefits
established locally. At the Corporate level, there is an employee stock
ownership plan (ESOP) and a stock option plan.
Under the provisions of SFAS No. 87, "Employer's Accounting for Pensions" and
SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions," measurement of the obligations under the defined benefit pension
plans and OPEB plans are subject to a number of assumptions. These include the
rate of return on plan assets, health care cost trend rates and the rate at
which the future obligations are discounted to the value of the liability at
June 30th of each year presented in the Consolidated Balance Sheet (see Note
10).
Certain defined contribution pension and OPEB benefits in the United States are
funded by the ESOP plan (see Note 9). The ESOP plan is accounted for under the
provisions of AICPA Statement of Position No. 76-3, "Accounting Practices for
Certain Employee Stock Ownership Plans." Series A shares are used to fund a
portion of the defined contribution plan and Series B shares are used to fund a
portion of retiree health care benefits - a component of OPEB. Changes in
estimates and assumptions that are implicit in accounting for the ESOP would not
have a material impact on the results of operations.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has
elected to account for stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," based on their intrinsic value at the date of grant.
Because options generally are granted at market value, there is no intrinsic
value and resultant compensation expense. Note 8 provides supplemental
information, including pro forma earnings and earnings per share, as if the
Company had accounted for options based on the method prescribed by SFAS No.
123. That methodology yields an estimate of fair value based on a measurement
method that contains a number of management estimates, including estimated
option life and future volatility. Changes in these assumptions could
significantly impact the estimated fair value of the options.
HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
As a multinational company with diverse product offerings, the Company is
exposed to market risks, such as changes in interest rates, currency exchange
rates and commodity prices. To manage the volatility relating to these
exposures, the Company evaluates its exposures on a global basis to take
advantage of the netting opportunities that exist. For the remaining exposures,
the Company enters into various derivative transactions in accordance with the
Company's hedging policies. The financial impacts of these hedging instruments
are offset in part or in whole by corresponding changes in the underlying
exposures being hedged. The Company does not hold or issue derivative financial
instruments for speculative trading purposes. Note 7 includes a more detailed
discussion of the Company's accounting policies for financial instruments.
Derivative positions are monitored using techniques including market valuation,
sensitivity analysis and value at risk modeling. The tests for interest rate and
currency rate exposures discussed below are based on a Monte Carlo simulation
value at risk model using a one year horizon and a 95% confidence level. The
model incorporates the impact of correlation and diversification from holding
multiple currency and interest rate instruments and assumes that financial
returns are normally distributed. Estimates of volatility and correlations of
market factors are drawn from the Risk- Metrics(TM) dataset as of June 28,
2002. In cases where data is unavailable in RiskMetrics(TM), a reasonable
proxy is included.
The Company's market risk exposures relative to interest and currency rates, as
discussed below, have not changed materially versus the previous reporting
period. In addition, the Company is not aware of any facts or circumstances that
would significantly impact such exposures in the near term.
Interest Rate Exposure
Interest rate swaps are used to hedge underlying debt obligations. Certain
currency interest rate swaps are designated as hedges of the Company's foreign
net investments.
24 The Procter & Gamble Company and Subsidiaries Financial Review
Based on the Company's overall interest rate exposure as of and during the year
ended June 30, 2002, including derivative and other instruments sensitive to
interest rates, the Company does not believe a near-term change in interest
rates, at a 95% confidence level based on historical interest rate movements,
would materially affect the Company's financial statements.
Currency Rate Exposure
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The primary purpose of the Company's foreign currency
hedging activities is to reduce the risk that the Company's financial position
will be adversely affected by short-term changes in exchange rates. Corporate
policy prescribes the range of allowable hedging activity. The Company primarily
utilizes forward exchange contracts and purchased options with maturities of
less than 18 months.
In addition, the Company enters into certain foreign currency swaps with
maturities of up to five years to hedge intercompany financing transactions.
The Company also utilizes purchased foreign currency options with maturities of
generally less than 18 months and forward exchange contracts to hedge against
the effect of exchange rate fluctuations on royalties and income from
international operations.
Based on the Company's overall currency rate exposure as of and during the year
ended June 30, 2002, including derivative and other instruments sensitive to
foreign currency movements, the Company does not believe a near-term change in
currency rates, at a 95% confidence level based on historical currency rate
movements, would materially affect the Company's financial statements.
Commodity Price Exposure
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions, political and economic variables and other
unpredictable factors. The Company uses futures, options and swap contracts to
manage the volatility related to the above exposures. Commodity hedging activity
is not considered material to the Company's financial statements.
Restructuring Program
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 is 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 its operations. This resulted in the
consolidation of manufacturing activity and various business processes.
The total cost of the program is expected to be $5.6 billion before tax ($4.4
billion after tax). Through 2002, cumulative charges are $4.1 billion before tax
($3.3 billion after tax). The remaining charges are expected to continue through
fiscal 2004. Given the nature and duration of the program, costs to be incurred
in future years are subject to varying degrees of estimation for key
assumptions, such as actual timing of execution, currency effects, enrollment
impacts and other variables. All restructuring costs are reported in the
corporate segment.
Summary of Restructuring Charges
Years Ended June 30
-----------------------------------
(in millions of dollars) 2002 2001 2000
- ----------------------------------------------------------------------
Separations $ 393 $ 341 $ 153
- ----------------------------------------------------------------------
Accelerated Depreciation 135 276 386
- ----------------------------------------------------------------------
Asset Write-Downs 208 731 64
- ----------------------------------------------------------------------
Other 222 502 211
- ----------------------------------------------------------------------
Total (before tax) 958 1,850 814
- ----------------------------------------------------------------------
Total (after tax) 706 1,475 688
- ----------------------------------------------------------------------
Separations represent the cost of packages offered to employees, which are
generally accrued upon employee acceptance. The separation packages,
predominantly voluntary, are formula driven based on salary levels and past
service. Separation costs are charged to cost of products sold for manufacturing
employees and marketing, research, administrative and other for all other
employees.
Approximately 16,600 separation packages have been provided for through June 30,
2002: 7,400 in 2002 and 9,200 from 1999 to 2001. While all geographies and
businesses are impacted by the enrollment reduction programs, a higher number of
United States employees are affected, given the concentration of operations. Net
enrollment for the Company may decline by less than the total separations, as
terminations will be offset by increased enrollment at remaining sites,
acquisitions and other impacts.
Financial Review The Procter & Gamble Company and Subsidiaries 25
Accelerated depreciation relates 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. For segment and
management reporting purposes, normal depreciation expense is reported by the
business segments, with the incremental accelerated depreciation reported in the
corporate segment. Accelerated depreciation and write-downs are charged to cost
of products sold for manufacturing assets and marketing, research,
administrative and other expense for all other assets.
Asset write-downs relate to establishment of new fair-value bases for assets
held for sale or disposal and for assets whose future cash flow expectations
have declined significantly as a direct result of restructuring decisions.
Assets held for sale or disposal represent excess capacity that is in the
process of being removed from service as well as businesses held for sale within
the next 12 months. Such assets are written down to the net amount expected to
be realized upon sale or disposal. Assets continuing in operation, but whose
nominal cash flows are no longer sufficient to recover existing book values, are
written down to estimated fair value, generally determined by reference to
discounted expected future cash flows. Write-downs of assets that will continue
to be used were approximately $45 million before tax ($33 million after tax) in
2002, $160 million before tax ($133 million after tax) in 2001 and $0 in 2000.
Asset write-downs are not expected to significantly impact future annual
depreciation expense.
Other contains charges incurred as a direct result of restructuring decisions
including relocation, training, discontinuation of initiatives and the
establishment of global business services and the new legal and organization
structure. These costs are charged to the applicable income statement line item
based on the underlying nature of the charge.
Most restructuring accruals are classified as current liabilities. Reserve
balances were $245 million, $460 million and $88 million at June 30, 2002, 2001
and 2000, respectively. During the current year, approximately 60% of
restructuring charges were cash compared to 40% in 2001 and 55% in 2000. Going
forward, approximately 60% of future charges are expected to be cash - primarily
separations.
Savings from the restructuring program are difficult to estimate, given the
nature of the activities, the corollary benefits achieved, timing and the degree
of reinvestment. Overall, the program is expected to deliver nearly $2 billion
in after tax annual savings by fiscal 2004. Estimated incremental savings were
$700 million in 2002, $235 million in 2001 and $65 million in 2000. Incremental
savings in 2003 are estimated to be approximately $400 to $500 million after
tax.
FORWARD-LOOKING STATEMENTS
The Company has made and will make certain forward-looking statements in the
Annual Report and in other contexts relating to volume growth, increases in
market shares, financial goals and cost reduction, among others.
These forward-looking statements are based on assumptions and estimates
regarding competitive activity, pricing, product introductions, economic
conditions, technological innovation, currency movements, governmental action
and the development of certain markets. Among the key factors necessary to
achieve the Company's goals are: (1) the successful integration of the Company's
new organization structure, including achievement of expected cost and tax
savings; (2) the ability to achieve business plans, including growing volume
profitably, despite high levels of competitive activity, especially with respect
to the product categories and geographical markets in which the Company has
chosen to focus; (3) the ability to maintain key customer relationships; (4) the
achievement of growth in significant developing markets such as China, Turkey,
Mexico, the Southern Cone of Latin America, the countries of Central and Eastern
Europe and the countries of Southeast Asia; (5) the ability to successfully
manage regulatory, tax and legal matters, including resolution of pending
matters within current estimates; (6) the successful and timely execution of
planned brand divestitures; (7) the ability to successfully implement, achieve
and sustain cost improvement plans in manufacturing and overhead areas; (8)
the ability to successfully manage currency (including currency issues in Latin
America), interest rate and certain commodity cost exposures; and (9) the
ability to manage the continued political and/or economic uncertainty in Latin
America and the Middle East, as well as any political and/or economic
uncertainty due to terrorist activities. 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 performance could
vary materially from the forward-looking statements made herein.
26 The Procter & Gamble Company and Subsidiaries
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LOGO]
To the Board of Directors and Shareholders of The Procter & Gamble Company:
We have audited the accompanying consolidated balance sheet of The Procter &
Gamble Company and subsidiaries as of June 30, 2002 and 2001 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at June 30, 2002
and 2001 and the results of its operations and cash flows for each of the three
years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche
250 East Fifth Street
Cincinnati, Ohio 45202 August 5, 2002
The Procter & Gamble Company and Subsidiaries 27
CONSOLIDATED STATEMENT OF EARNINGS
Amounts in millions except per share amounts Years Ended June 30
---------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------
NET SALES $40,238 $39,244 $39,951
- -----------------------------------------------------------------------------------
Cost of products sold 20,989 22,102 21,514
- -----------------------------------------------------------------------------------
Marketing, research, administrative and other expense 12,571 12,406 12,483
- -----------------------------------------------------------------------------------
OPERATING INCOME 6,678 4,736 5,954
- -----------------------------------------------------------------------------------
Interest expense 603 794 722
- -----------------------------------------------------------------------------------
Other non-operating income, net 308 674 304
- -----------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 6,383 4,616 5,536
- -----------------------------------------------------------------------------------
Income taxes 2,031 1,694 1,994
- -----------------------------------------------------------------------------------
NET EARNINGS $4,352 $2,922 $3,542
- -----------------------------------------------------------------------------------
BASIC NET EARNINGS PER COMMON SHARE $3.26 $2.15 $2.61
- -----------------------------------------------------------------------------------
DILUTED NET EARNINGS PER COMMON SHARE $3.09 $2.07 $2.47
- -----------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $1.52 $1.40 $1.28
- -----------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
28 The Procter & Gamble Company and Subsidiaries
<Table>
CONSOLIDATED BALANCE SHEET
Amounts in millions June 30
------------------
2002 2001
- --------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $3,427 $2,306
- --------------------------------------------------------------------
Investment securities 196 212
- --------------------------------------------------------------------
Accounts receivable 3,090 2,931
- --------------------------------------------------------------------
INVENTORIES
Materials and supplies 1,031 1,096
- --------------------------------------------------------------------
Work in process 323 373
- --------------------------------------------------------------------
Finished goods 2,102 1,915
- --------------------------------------------------------------------
TOTAL INVENTORIES 3,456 3,384
Deferred income taxes 521 397
- --------------------------------------------------------------------
Prepaid expenses and other receivables 1,476 1,659
- --------------------------------------------------------------------
TOTAL CURRENT ASSETS 12,166 10,889
PROPERTY, PLANT AND EQUIPMENT
Buildings 4,532 4,148
- --------------------------------------------------------------------
Machinery and equipment 17,963 18,165
- --------------------------------------------------------------------
Land 575 508
- --------------------------------------------------------------------
23,070 22,821
- --------------------------------------------------------------------
Accumulated depreciation (9,721) (9,726)
- --------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 13,349 13,095
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 10,966 7,429
- --------------------------------------------------------------------
Trademarks and other intangible assets, net 2,464 871
- --------------------------------------------------------------------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 13,430 8,300
OTHER NON-CURRENT ASSETS 1,831 2,103
- --------------------------------------------------------------------
TOTAL ASSETS $40,776 $34,387
- --------------------------------------------------------------------
</Table>
See accompanying Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 29
CONSOLIDATED BALANCE SHEET
Amounts in millions June 30
----------------
2002 2001
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $2,205 $2,075
- -----------------------------------------------------------------------------
Accrued and other liabilities 5,330 4,631
- -----------------------------------------------------------------------------
Taxes payable 1,438 907
- -----------------------------------------------------------------------------
Debt due within one year 3,731 2,233
- -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,704 9,846
- -----------------------------------------------------------------------------
LONG-TERM DEBT 11,201 9,792
- -----------------------------------------------------------------------------
DEFERRED INCOME TAXES 1,077 894
- -----------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES 2,088 1,845
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 27,070 22,377
- -----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Convertible Class A preferred stock, stated value $1 per
share (600 shares authorized) 1,634 1,701
- -----------------------------------------------------------------------------
Non-Voting Class B preferred stock,
stated value $1 per share
(200 shares authorized) -- --
- -----------------------------------------------------------------------------
Common stock, stated value $1 per share
(5,000 shares authorized; shares outstanding:
2002 - 1,300.8, 2001 - 1,295.7) 1,301 1,296
- -----------------------------------------------------------------------------
Additional paid-in capital 2,490 2,057
- -----------------------------------------------------------------------------
Reserve for ESOP debt retirement (1,339) (1,375)
- -----------------------------------------------------------------------------
Accumulated other comprehensive income (2,360) (2,120)
- -----------------------------------------------------------------------------
Retained earnings 11,980 10,451
- -----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 13,706 12,010
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,776 $34,387
- -----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
30 The Procter & Gamble Company and Subsidiaries
Consolidated Statement of Shareholders' Equity
Accumulated
Dollars in millions/ Common Additional Reserve for Other
Shares in thousands Shares Common Preferred Paid-In ESOP Debt Comprehensive Retained
Outstanding Stock Stock Capital Retirement Income Earnings Total
- --------------------------------------------- -------------------------------------------------------------------------------
BALANCE JUNE 30, 1999 1,319,754 $1,320 $1,781 $1,337 $(1,552) $(1,606) $10,778 $12,058
- --------------------------------------------- -------------------------------------------------------------------------------
Net earnings 3,542 3,542
- --------------------------------------------- -------------------------------------------------------------------------------
Other comprehensive income:
- --------------------------------------------- -------------------------------------------------------------------------------
Financial statement translation (449) (449)
- --------------------------------------------- -------------------------------------------------------------------------------
Net investment hedges,
net of $88 tax 150 150
- --------------------------------------------- -------------------------------------------------------------------------------
Other, net of tax 63 63
- --------------------------------------------- -------------------------------------------------------------------------------
Total comprehensive income
- --------------------------------------------- -------------------------------------------------------------------------------
Dividends to shareholders:
- --------------------------------------------- -------------------------------------------------------------------------------
Common (1,681) (1,681)
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred, net of tax benefit (115) (115)
- --------------------------------------------- -------------------------------------------------------------------------------
Treasury purchases (24,296) (24) 72(1) (1,814) (1,766)
- --------------------------------------------- -------------------------------------------------------------------------------
Employee plan issuances 7,592 7 344 351
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred stock conversions 2,817 3 (44) 41 --
- --------------------------------------------- -------------------------------------------------------------------------------
ESOP debt guarantee reduction 134 134
- --------------------------------------------- -------------------------------------------------------------------------------
BALANCE JUNE 30, 2000 1,305,867 1,306 1,737 1,794 (1,418) (1,842) 10,710 12,287
- --------------------------------------------- -------------------------------------------------------------------------------
Net earnings 2,922 2,922
- --------------------------------------------- -------------------------------------------------------------------------------
Other comprehensive income:
- --------------------------------------------- -------------------------------------------------------------------------------
Financial statement translation (715) (715)
- --------------------------------------------- -------------------------------------------------------------------------------
Net investment hedges,
net of $276 tax 460 460
- --------------------------------------------- -------------------------------------------------------------------------------
Other, net of tax benefit (23) (23)
- --------------------------------------------- -------------------------------------------------------------------------------
Total comprehensive income
- --------------------------------------------- -------------------------------------------------------------------------------
Dividends to shareholders:
- --------------------------------------------- -------------------------------------------------------------------------------
Common (1,822) (1,822)
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred, net of tax benefit (121) (121)
- --------------------------------------------- -------------------------------------------------------------------------------
Treasury purchases (18,238) (18) 6(1) (1,238) (1,250)
- --------------------------------------------- -------------------------------------------------------------------------------
Employee plan issuances 5,924 6 223 229
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred stock conversions 2,185 2 (36) 34 --
- --------------------------------------------- -------------------------------------------------------------------------------
ESOP debt guarantee reduction 43 43
- --------------------------------------------- -------------------------------------------------------------------------------
BALANCE JUNE 30, 2001 1,295,738 1,296 1,701 2,057 (1,375) (2,120) 10,451 12,010
- --------------------------------------------- -------------------------------------------------------------------------------
Net earnings 4,352 4,352
- --------------------------------------------- -------------------------------------------------------------------------------
Other comprehensive income:
- --------------------------------------------- -------------------------------------------------------------------------------
Financial statement translation 263 263
- --------------------------------------------- -------------------------------------------------------------------------------
Net investment hedges,
net of $238 tax benefit (397) (397)
- --------------------------------------------- -------------------------------------------------------------------------------
Other, net of tax benefit (106) (106)
- --------------------------------------------- -------------------------------------------------------------------------------
Total comprehensive income
- --------------------------------------------- -------------------------------------------------------------------------------
Dividends to shareholders:
- --------------------------------------------- -------------------------------------------------------------------------------
Common (1,971) (1,971)
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred, net of tax benefit (124) (124)
- --------------------------------------------- -------------------------------------------------------------------------------
Spin-off of Jif and Crisco (150) (150)
- --------------------------------------------- -------------------------------------------------------------------------------
Treasury purchases (7,681) (8) 18(1) (578) (568)
- --------------------------------------------- -------------------------------------------------------------------------------
Employee plan issuances 8,323 9 352 361
- --------------------------------------------- -------------------------------------------------------------------------------
Preferred stock conversions 4,390 4 (67) 63 --
- --------------------------------------------- -------------------------------------------------------------------------------
ESOP debt guarantee reduction 36 36
- --------------------------------------------- -------------------------------------------------------------------------------
BALANCE JUNE 30, 2002 1,300,770 $1,301 $1,634 $2,490 $(1,339) $(2,360) $11,980 $13,706
- --------------------------------------------- -------------------------------------------------------------------------------
Dollars in millions/ Total
Shares in thousands Comprehensive
Income
- --------------------------------- --------
BALANCE JUNE 30, 1999
- --------------------------------- --------
Net earnings $3,542
- --------------------------------- --------
Other comprehensive income:
- --------------------------------- --------
Financial statement translation (449)
- --------------------------------- --------
Net investment hedges,
net of $88 tax 150
- --------------------------------- --------
Other, net of tax 63
- --------------------------------- --------
Total comprehensive income $3,306
- --------------------------------- --------
Dividends to shareholders:
Common
Preferred, net of tax benefit
Treasury purchases
Employee plan issuances
Preferred stock conversions
ESOP debt guarantee reduction
BALANCE JUNE 30, 2000
- --------------------------------- --------
Net earnings $2,922
- --------------------------------- --------
Other comprehensive income:
- --------------------------------- --------
Financial statement translation (715)
- --------------------------------- --------
Net investment hedges,
net of $276 tax 460
- --------------------------------- --------
Other, net of tax benefit (23)
- --------------------------------- --------
Total comprehensive income $2,644
- --------------------------------- --------
Dividends to shareholders:
Common
Preferred, net of tax benefit
Treasury purchases
Employee plan issuances
Preferred stock conversions
ESOP debt guarantee reduction
BALANCE JUNE 30, 2001
- --------------------------------- --------
Net earnings $4,352
- --------------------------------- --------
Other comprehensive income:
- --------------------------------- --------
Financial statement translation 263
- --------------------------------- --------
Net investment hedges,
net of $238 tax benefit (397)
- --------------------------------- --------
Other, net of tax benefit (106)
- --------------------------------- --------
Total comprehensive income $4,112
- --------------------------------- --------
(1) Premium on equity put options.
See accompanying Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 31
CONSOLIDATED STATEMENT OF CASH FLOWS
Amounts in millions Years Ended June 30
----------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $2,306 $1,415 $2,294
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Net earnings 4,352 2,922 3,542
- --------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,693 2,271 2,191
- --------------------------------------------------------------------------------------------------------
Deferred income taxes 389 (102) 463
- --------------------------------------------------------------------------------------------------------
Change in accounts receivable 96 (122) 64
- --------------------------------------------------------------------------------------------------------
Change in inventories 159 (67) (176)
- --------------------------------------------------------------------------------------------------------
Change in accounts payable, accrued and other liabilities 684 801 (883)
- --------------------------------------------------------------------------------------------------------
Change in other operating assets and liabilities (98) 57 (404)
- --------------------------------------------------------------------------------------------------------
Other 467 44 (122)
- --------------------------------------------------------------------------------------------------------
TOTAL OPERATING ACTIVITIES 7,742 5,804 4,675
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Capital expenditures (1,679) (2,486) (3,018)
- --------------------------------------------------------------------------------------------------------
Proceeds from asset sales 227 788 419
- --------------------------------------------------------------------------------------------------------
Acquisitions (5,471) (138) (2,967)
- --------------------------------------------------------------------------------------------------------
Change in investment securities 88 (7) 221
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTING ACTIVITIES (6,835) (1,843) (5,345)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Dividends to shareholders (2,095) (1,943) (1,796)
- --------------------------------------------------------------------------------------------------------
Change in short-term debt 1,394 (1,092) 243
- --------------------------------------------------------------------------------------------------------
Additions to long-term debt 1,690 1,356 4,196
- --------------------------------------------------------------------------------------------------------
Reductions of long-term debt (461) (226) (1,409)
- --------------------------------------------------------------------------------------------------------
Proceeds from the exercise of stock options 237 141 336
- --------------------------------------------------------------------------------------------------------
Treasury purchases (568) (1,250) (1,766)
- --------------------------------------------------------------------------------------------------------
TOTAL FINANCING ACTIVITIES 197 (3,014) (196)
- --------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 17 (56) (13)
- --------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,121 891 (879)
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,427 $2,306 $1,415
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
- --------------------------------------------------------------------------------------------------------
Cash payments for:
- --------------------------------------------------------------------------------------------------------
Interest $629 $735 $700
- --------------------------------------------------------------------------------------------------------
Income taxes 941 1,701 1,712
- --------------------------------------------------------------------------------------------------------
Non-cash spin-off of Jif and Crisco 150 -- --
- --------------------------------------------------------------------------------------------------------
Liabilities assumed in acquisitions 571 108 236
- --------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
32 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include The Procter
& Gamble Company and its controlled subsidiaries (the Company). Intercompany
transactions are eliminated in consolidation. Investments in companies over
which the Company exerts significant influence, but does not control the
financial and operating decisions, are accounted for using the equity method.
These investments are managed as integral parts of the Company's business units,
and segment reporting reflects such investments as consolidated subsidiaries
with applicable adjustments to comply with U.S. GAAP in the corporate segment.
Use of Estimates: Preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying disclosures.
These estimates are based on management's best knowledge of current events and
actions the Company may undertake in the future. Actual results may ultimately
differ from estimates, although management does not believe such changes will
materially affect the financial statements in any individual year.
New Pronouncements: On July 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets."
SFAS No. 141 applies to all business combinations with a closing date after June
30, 2001. This Statement eliminates the pooling-of-interests method of
accounting and further clarifies the criteria for recognition of intangible
assets separately from goodwill.
SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived
intangible assets and initiates an annual review for impairment. Identifiable
intangible assets with determinable useful lives will continue to be amortized.
Beginning July 1, 2001, the Company ceased amortizing goodwill and
indefinite-lived intangible assets. At that time, management performed an
impairment test of existing goodwill and concluded there was no goodwill
impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company will adopt both SFAS No. 143 and SFAS No. 144
on July 1, 2002, and does not expect these Statements to materially impact the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This pronouncement is effective for exit or
disposal activities that are initiated after December 31, 2002, and requires
these costs to be recognized when the liability is incurred and not at project
initiation. The Company is reviewing the provisions of this Statement, but does
not expect it to have a material impact on the financial statements.
Revenue Recognition: Sales are recognized when revenue is realized or realizable
and has been earned. Most revenue transactions represent sales of inventory. In
general, revenue is recognized when risk and title to the product transfers to
the customer. A provision for discounts and other allowances is taken as a
reduction in sales within the same period the revenue is recognized.
Currency Translation: Financial statements of subsidiaries outside the U.S.
generally are measured using the local currency as the functional currency.
Adjustments to translate those statements into U.S. dollars at the balance sheet
date are recorded in other comprehensive income. For subsidiaries operating in
highly inflationary economies, the U.S. dollar is the functional currency.
Remeasurement adjustments for highly inflationary economies and other
transactional exchange gains and losses are reflected in earnings.
Cash Equivalents: Highly liquid investments with maturities of three months or
less when purchased are considered cash equivalents and recorded at cost, which
approximates fair value.
Investment Securities: Investment securities consist of short-term readily
marketable instruments that mature within one year. These securities are
reported at fair value and classified as available for sale, with unrealized
gains or losses recorded net of tax in other comprehensive income.
Inventory Valuation: Inventories are valued at cost, which is not in excess of
current market prices. Cost is primarily determined by either the average cost
or the first-in, first-out method, with minor amounts maintained on the last-in,
first-out method. The replacement cost of last-in, first-out inventories
exceeded carrying value by approximately $27 and $55 at June 30, 2002 and 2001,
respectively.
Goodwill and Other Intangible Assets: The cost of intangible assets with
determinable useful lives is amortized to reflect the pattern of economic
benefits consumed, principally on a straight-line basis, over the estimated
periods benefited, ranging from 5 to 40 years. Goodwill and
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indefinite-lived intangibles are evaluated annually for impairment. Beginning in
2002, such determination of fair value is based on valuation models that
incorporate expected future cash flows and profitability projections. Prior to
2002, goodwill was amortized over periods not exceeding 40 years.
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost reduced by accumulated depreciation. Depreciation expense is recognized
over the assets' estimated useful lives using the straight-line method.
Estimated useful lives are based on Company averages and range from 3 to 20
years for machinery and equipment and 40 years for buildings. Estimated useful
lives are periodically reviewed and, where appropriate, changes are made
prospectively.
Fair Values of Financial Instruments: Fair values of cash equivalents, short-
and long-term investments and short-term debt approximate cost. The estimated
fair values of other financial instruments, including debt, equity and risk
management instruments, have been determined using market information and
valuation methodologies, primarily discounted cash flow analysis. These
estimates require considerable judgment in interpreting market data, and changes
in assumptions or estimation methods could significantly affect the fair value
estimates.
Reclassifications: Certain reclassifications of prior years' amounts have been
made to conform to the current year presentation.
NOTE 2 RESTRUCTURING PROGRAM
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 is 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
effort.
Due to the nature of the charges and the duration of the program, estimates of
the timing and amount of costs and savings require significant judgment and may
change over time. Based on current estimates, the overall program is expected to
result in total charges of $5.6 billion ($4.4 billion after tax) over the
six-year period that began in 1999. Through 2002, cumulative charges are $4.1
billion ($3.3 billion after tax). Under current accounting rules, many
restructuring charges may not be recognized at project initiation, but rather
are charged to expense as established criteria for recognition are met. This
accounting yields ongoing charges over the entire restructuring period, rather
than a large reserve at initiation.
Before-tax restructuring activity was as follows:
Asset Accelerated
Separations Write-Downs Depreciation Other Total
- ---------------------------------------------------------------------------------------------------
Reserve balance
June 30, 1999 $35 $ -- $ -- $9 $44
- ---------------------------------------------------------------------------------------------------
2000:
- ---------------------------------------------------------------------------------------------------
Charges 153 64 386 211 814
- ---------------------------------------------------------------------------------------------------
Cash spent (100) -- -- (220) (320)
- ---------------------------------------------------------------------------------------------------
Charged against
assets -- (64) (386) -- (450)
- ---------------------------------------------------------------------------------------------------
Reserve balance
June 30, 2000 88 -- -- -- 88
- ---------------------------------------------------------------------------------------------------
2001:
- ---------------------------------------------------------------------------------------------------
Charges 341 731 276 502 1,850
- ---------------------------------------------------------------------------------------------------
Cash spent (186) -- -- (199) (385)
- ---------------------------------------------------------------------------------------------------
Charged against
assets -- (731) (276) (86) (1,093)
- ---------------------------------------------------------------------------------------------------
Reserve balance
June 30, 2001 243 -- -- 217 460
- ---------------------------------------------------------------------------------------------------
2002:
- ---------------------------------------------------------------------------------------------------
CHARGES 393 208 135 222 958
- ---------------------------------------------------------------------------------------------------
CASH SPENT (477) -- -- (336) (813)
- ---------------------------------------------------------------------------------------------------
CHARGED AGAINST
ASSETS -- (208) (135) (17) (360)
- ---------------------------------------------------------------------------------------------------
RESERVE BALANCE
JUNE 30, 2002 159 -- -- 86 245
- ---------------------------------------------------------------------------------------------------
Charges for the program are reflected in the corporate segment.
Separation Costs
Employee separation charges relate to severance packages for approximately 7,400
people in 2002, 6000 people in 2001, 2800 people in 2000 and 400 people in 1999.
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.
Millions of dollars except per share amounts
34 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
Asset Write-Downs
Asset write-downs relate to the establishment of new carrying values for assets
held for sale or disposal. These assets represent excess capacity in the process
of being removed from service or disposed as well as businesses held for sale in
the next 12 months. These assets were written down to the amounts expected to be
realized upon sale or disposal, less minor disposal costs.
Additionally, asset write-downs include certain manufacturing assets that are
expected to operate at levels significantly below their planned capacity,
primarily capital expansions related to recent initiatives that have not met
expectations. The projected cash flows from such assets over their remaining
useful lives are no longer estimated to be greater than their current carrying
values; therefore, they were written down to estimated fair value, generally
determined by reference to discounted expected future cash flows. Such
before-tax charges represented approximately $45 in 2002, $160 in 2001 and $0 in
2000.
Accelerated Depreciation
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.
Other Restructuring Charges
Other costs incurred as a direct result of the program include relocation,
training, certain costs associated with discontinuation of initiatives and the
establishment of global business services and the new legal and organization
structure.
NOTE 3 ACQUISITIONS AND SPIN-OFF
Acquisitions
The purchase method of accounting was used for acquisitions in all periods
presented. In 2002, acquisitions totaled $5.5 billion, resulting in additions to
goodwill of $3.6 billion and other intangible assets of $1.7 billion (see Note
4). These acquisitions consisted primarily of Clairol along with an incremental
payment for Dr. John's Spinbrush.
On November 16, 2001, the Company completed the acquisition of the Clairol
business from the Bristol-Myers Squibb Company for approximately $5.0 billion in
cash, financed primarily with debt. Total cash paid includes final purchase
price adjustments based on a working capital formula. The Clairol business
consists of hair care, hair colorants and personal care products, giving the
Company entry into the hair colorant market, while providing potential for
significant synergies. The operating results of the Clairol business are
reported in the Company's beauty care segment from November 16, 2001.
The following table provides pro forma results of operations for the years ended
June 30, 2002, 2001 and 2000, as if Clairol had been acquired as of the
beginning of each fiscal year presented. The pro forma results include
adjustments for estimated interest expense on acquisition debt and amortization
of intangible assets, excluding goodwill and indefinite-lived intangibles.
However, pro forma results do not include any anticipated cost savings or other
effects of the planned integration of Clairol. Accordingly, such amounts are not
necessarily indicative of the results that would have occurred if the
acquisition had closed on the dates indicated, or that may result in the future.
Pro forma results Years Ended June 30
---------------------------
2002 2001 2000
- -------------------------------------------------------------------
Net sales $40,780 $40,801 $41,488
- -------------------------------------------------------------------
Net earnings 4,406 2,927 3,517
- -------------------------------------------------------------------
Diluted net earnings per common share $3.13 $2.07 $2.45
- -------------------------------------------------------------------
The initial purchase price allocation of the Clairol business resulted in the
following condensed balance sheet of assets acquired and liabilities assumed. It
is anticipated that there will be changes to the initial allocation as fair
values are finalized next quarter, but the Company does not expect these changes
to have a material impact on the results of operations or financial condition of
the Company in future periods.
Opening Balance
- ----------------------------------------------
Current assets $487
- ----------------------------------------------
Property, plant and equipment 184
- ----------------------------------------------
Intangible assets 1,533
- ----------------------------------------------
Goodwill (1) 3,300
- ----------------------------------------------
Other non-current assets 18
- ----------------------------------------------
Total assets acquired 5,522
- ----------------------------------------------
Current liabilities 450
- ----------------------------------------------
Non-current liabilities 47
- ----------------------------------------------
Total liabilities assumed 497
- ----------------------------------------------
Net assets acquired 5,025
- ----------------------------------------------
(1)Approximately $2.6 billion is expected to be deductible for tax purposes.
The Clairol acquisition resulted in $1,533 in total intangible assets acquired
with $1,220 allocated to trademarks with indefinite lives. The remaining $313 of
acquired intangibles have determinable useful lives and were assigned to
trademarks of $128, patents and technology of $146 and other intangible assets
of $39. Total intangible assets acquired with determinable lives have a weighted
average useful life of 9 years (11 years for trademarks, 9 years for patents and
technology and 5 years for other intangible assets).
Millions of dollars except per share amounts
Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 35
During 2002, the Company completed a buyout of the purchase price contingency
associated with the prior acquisition of Dr. John's Spin-brush. The total
adjusted purchase price is approximately $475, with the incremental payment
resulting in additional goodwill.
In 2001, acquisitions totaled $246 resulting in additions to goodwill and other
intangibles of $208. In 2000, acquisitions consisted of The Iams Company and
Affiliates, Recovery Engineering, Inc. and a joint venture ownership increase in
China. These acquisitions totaled $2,967, resulting in additions to goodwill and
other intangibles of $2,508.
Spin-off
On May 31, 2002, the Jif peanut butter and Crisco shortening brands were spun
off to the Company's shareholders, and subsequently merged into The J.M. Smucker
Company (Smucker). The Company's shareholders received one new common Smucker
share for every 50 shares held in the Company, totaling 26 million shares, or
approximately $900 in market value. This transaction was not included in the
results of operations, since a spin-off to the Company's shareholders is
recorded at net book value, or $150, in a manner similar to dividends.
NOTE 4 GOODWILL AND INTANGIBLE ASSETS
The change in the net carrying amount of goodwill for the year ended June 30,
2002 is allocated by reportable business segment as follows:
2002
- ----------------------------------------------------------
FABRIC & HOME CARE, beginning of year $457
- ----------------------------------------------------------
Translation & other (6)
- ----------------------------------------------------------
End of year 451
- ----------------------------------------------------------
BABY, FEMININE & FAMILY CARE, beginning of year 2,806
- ----------------------------------------------------------
Translation & other (163)
- ----------------------------------------------------------
End of year 2,643
- ----------------------------------------------------------
BEAUTY CARE, beginning of year 1,344
- ----------------------------------------------------------
Acquisitions 3,330
- ----------------------------------------------------------
Translation & other 55
- ----------------------------------------------------------
End of year 4,729
- ----------------------------------------------------------
HEALTH CARE, beginning of year 2,544
- ----------------------------------------------------------
Acquisitions 284
- ----------------------------------------------------------
Translation & other 38
- ----------------------------------------------------------
End of year 2,866
- ----------------------------------------------------------
FOOD & BEVERAGE, beginning of year 278
- ----------------------------------------------------------
Translation & other (1)
- ----------------------------------------------------------
End of year 277
- ----------------------------------------------------------
GOODWILL, NET, beginning of year 7,429
- ----------------------------------------------------------
Acquisitions 3,614
- ----------------------------------------------------------
Translation & other (77)
- ----------------------------------------------------------
End of year 10,966
- ----------------------------------------------------------
Goodwill increased in beauty care primarily due to the Clairol acquisition. The
increase in goodwill in health care related to the buyout of the purchase price
contingency for Dr. John's Spinbrush.
Identifiable intangible assets as of June 30, 2002 and 2001 are comprised of:
June 30, 2002 June 30, 2001
------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
- ------------------------------------------------------------------------------
Intangible Assets with
Determinable Lives
Trademarks $457 $48 $155 $27
- ------------------------------------------------------------------------------
Patents and technology 494 160 333 78
- ------------------------------------------------------------------------------
Other 385 173 385 186
- ------------------------------------------------------------------------------
1,336 381 873 291
- ------------------------------------------------------------------------------
Trademarks with
Indefinite Lives 1,678 169 458 169
- ------------------------------------------------------------------------------
3,014 550 1,331 460
- ------------------------------------------------------------------------------
The amortization of intangible assets for the years ended June 30, 2002, 2001
and 2000 was $97, $80 and $77, respectively. Estimated amortization expense over
the next five years is as follows: 2003-$85, 2004-$85, 2005-$80, 2006-$80 and
2007-$50. Such estimates do not reflect the impact of future foreign exchange
rate changes.
The following table provides pro forma disclosure of net earnings and earnings
per common share for the years ended June 30, 2001 and 2000, as if goodwill and
indefinite-lived intangible assets had not been amortized.
Pro forma results Years Ended June 30
- -----------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------
Net earnings $2,922 $3,542
- ----------------------------------------------------------------------
Amortization, net of tax (1) 218 212
- ----------------------------------------------------------------------
Adjusted net earnings 3,140 3,754
- ----------------------------------------------------------------------
Basic net earnings per common share $2.15 $2.61
- ----------------------------------------------------------------------
Amortization, net of tax (1) 0.15 0.16
- ----------------------------------------------------------------------
Adjusted basic net earnings per common share 2.30 2.77
- ----------------------------------------------------------------------
Diluted net earnings per common share 2.07 2.47
- ----------------------------------------------------------------------
Amortization, net of tax (1) 0.15 0.15
- ----------------------------------------------------------------------
Adjusted diluted net earnings per common share 2.22 2.62
- ----------------------------------------------------------------------
(1) Amortization of goodwill and indefinite-lived intangible assets.
Millions of dollars except per share amounts
36 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 5 SUPPLEMENTAL FINANCIAL INFORMATION
Selected components of current and non-current liabilities were as follows:
June 30
---------------
2002 2001
- -------------------------------------------------------
ACCRUED AND OTHER CURRENT LIABILITIES
Marketing expenses $1,658 $1,271
- -------------------------------------------------------
Compensation expenses 771 576
- -------------------------------------------------------
Restructuring reserves 245 460
- -------------------------------------------------------
Other 2,656 2,324
- -------------------------------------------------------
5,330 4,631
- -------------------------------------------------------
OTHER NON-CURRENT LIABILITIES
Other postretirement benefits $344 $534
- -------------------------------------------------------
Pension benefits 1,158 925
- -------------------------------------------------------
Other 586 386
- -------------------------------------------------------
2,088 1,845
- -------------------------------------------------------
Selected Operating Expenses
Research and development costs are charged to earnings as incurred and were
$1,601 in 2002, $1,769 in 2001 and $1,899 in 2000. Advertising costs are charged
to earnings as incurred and were $3,773 in 2002, $3,612 in 2001 and $3,793 in
2000. Both of these are components of marketing, research, administrative and
other expense.
NOTE 6 SHORT-TERM AND LONG-TERM DEBT
June 30
---------------
2002 2001
- ---------------------------------------------------
SHORT-TERM DEBT
USD commercial paper $2,142 $675
- ---------------------------------------------------
Non-USD commercial paper 461 559
- ---------------------------------------------------
Current portion of long-term debt 618 414
- ---------------------------------------------------
Other 510 585
- ---------------------------------------------------
3,731 2,233
- ---------------------------------------------------
The weighted average short-term interest rates were 2.9% and 5.3% as of June 30,
2002 and 2001, respectively.
2002 2001
- ------------------------------------------------------------
LONG-TERM DEBT
6.00% USD note due March, 2003 $500 $500
- ------------------------------------------------------------
5.25% USD note due September, 2003 750 750
- ------------------------------------------------------------
8.00% USD note due November, 2003 200 200
- ------------------------------------------------------------
6.60% USD note due December, 2004 1,000 1,000
- ------------------------------------------------------------
8.33% ESOP debentures due 2003-2004 212 306
- ------------------------------------------------------------
4.00% USD note due April, 2005 400 --
- ------------------------------------------------------------
5.75% EUR note due September, 2005 1,478 1,270
- ------------------------------------------------------------
1.50% JPY note due December, 2005 459 441
- ------------------------------------------------------------
4.75% USD note due June, 2007 1,000 --
- ------------------------------------------------------------
6.13% USD note due May, 2008 500 500
- ------------------------------------------------------------
6.88% USD note due September, 2009 1,000 1,000
- ------------------------------------------------------------
2.00% JPY note due June, 2010 417 401
- ------------------------------------------------------------
9.36% ESOP debentures due 2007-2021 1,000 1,000
- ------------------------------------------------------------
8.00% USD note due September, 2024 200 200
- ------------------------------------------------------------
6.45% USD note due January, 2026 300 300
- ------------------------------------------------------------
6.25% GBP note due January, 2030 763 705
- ------------------------------------------------------------
All other long-term debt 1,640 1,633
- ------------------------------------------------------------
Current portion of long-term debt (618) (414)
- ------------------------------------------------------------
11,201 9,792
- ------------------------------------------------------------
Long-term weighted average interest rates were 4.0% and 5.0% as of June 30, 2002
and 2001, respectively, and include the effects of related interest rate swaps
discussed in Note 7.
The fair value of the long-term debt was $11,673 and $10,164 at June 30, 2002
and 2001, respectively. Long-term debt maturities during the next five fiscal
years are as follows: 2003-$618; 2004-$1,099; 2005-$1,475; 2006-$2,200 and
2007-$1,006.
NOTE 7 RISK MANAGEMENT ACTIVITIES
As a multinational company with diverse product offerings, the Company is
exposed to market risks, such as changes in interest rates, currency exchange
rates and commodity pricing. To manage the volatility related to these
exposures, the Company evaluates exposures on a consolidated basis to take
advantage of logical exposure netting. For the remaining exposures, the Company
enters into various derivative transactions in accordance with the Company's
policies in areas such as counterparty exposure and hedging practices. Effective
July 1, 2000, such derivative transactions are accounted for under SFAS No. 133,
" Accounting for Derivative Instruments and Hedging Activities," as amended and
interpreted. The Company does not hold or issue derivative financial instruments
for speculative trading purposes.
Millions of dollars except per share amounts
Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 37
At inception, the Company formally designates and documents the financial
instrument as a hedge of a specific underlying exposure. The Company formally
assesses, both at inception and at least quarterly on an ongoing basis, whether
the financial instruments used in hedging transactions are effective at
offsetting changes in either the fair value or cash flows of the related
underlying exposure. Fluctuations in the derivative value are generally offset
by changes in the fair value or cash flows of the exposures being hedged. This
offset is driven by the high degree of effectiveness between the exposure being
hedged and the hedging instrument. Any ineffective portion of an instrument's
change in fair value is immediately recognized in earnings.
Credit Risk
The Company has established strict counterparty credit guidelines and enters
into transactions only with financial institutions of investment grade or
better. Counterparty exposures are monitored daily and downgrades in credit
rating are reviewed immediately. Credit risk arising from the inability of a
counterparty to meet the terms of the Company's financial instrument contracts
is generally limited to the amounts, if any, by which the counterparty's
obligations exceed the obligations of the Company. It is the Company's policy to
enter into financial contracts with a diverse group of creditworthy
counterparties. Therefore, the Company does not expect to incur material credit
losses on its risk management or other financial instruments.
Interest Rate Management
The Company's policy is to manage interest cost using a mix of fixed- and
variable-rate debt. To manage this risk in a cost efficient manner, the Company
enters into interest rate swaps in which the Company agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed-upon notional principal amount.
Interest rate swaps that meet specific conditions under SFAS No. 133 are
accounted for as fair value hedges. Accordingly, the changes in the fair value
of these agreements are immediately recorded in earnings. The mark-to-market
values of both the fair value hedging instruments and the underlying debt
obligations are recorded as equal and offsetting gains and losses in the
interest expense component of the income statement. The fair value of the
Company's interest rate swap agreements was approximately $231 at June 30, 2002
and $125 at June 30, 2001. All existing fair value hedges are 100% effective. As
a result, there is no impact to earnings due to hedge ineffectiveness.
Foreign Currency Management
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The purpose of the Companys' foreign currency hedging
program is to reduce the risk caused by short-term changes in exchange rates.
The Company primarily utilizes forward exchange contracts and purchased options
with maturities of less than 18 months and currency swaps with maturities up to
five years. These instruments are intended to offset the effect of exchange rate
fluctuations on forecasted sales, inventory purchases, intercompany royalties
and intercompany loans denominated in foreign currencies. The fair value of
these instruments at June 30, 2002 and 2001 were $60 and $94 in assets and $29
and $101 in liabilities, respectively. The effective portions of the changes in
fair value for these contracts, which have been designated as cash flow hedges,
are reported in Other Comprehensive Income (OCI) and reclassified in earnings in
the same financial statement line item and in the same period or periods during
which the hedged transactions affect earnings. The ineffective portion, which is
not material for any year presented, is immediately recognized in earnings.
Qualifying cash flow hedges currently recorded in OCI are not considered
material.
The Company also utilizes the same instruments for purposes that do not meet
the requirements for hedge accounting treatment. In these cases, the change in
value offsets the foreign currency impact of inter-company financing
transactions and income from international operations. The fair value of these
instruments at June 30, 2002 and 2001 was $93 in 2002 and $126 in 2001 in assets
and $25 in 2002 and $6 in 2001 in liabilities, respectively. The gain or loss on
these instruments is immediately recognized in earnings. The net impact included
in marketing, research, administrative and other expense was a $31 and $24
after-tax gain in 2002 and 2001, respectively.
Net Investment Hedging
The Company hedges its net investment position in major currencies and generates
foreign currency interest payments that offset other transactional exposures in
these currencies. To accomplish this, the Company borrows directly in foreign
currency and designates a portion of foreign currency debt as a hedge of net
investments. In addition, certain foreign currency interest rate swaps are
designated as hedges of the Company's related foreign net investments. Under
SFAS No. 133, changes in the fair value of these instruments are immediately
recognized in OCI, to offset the change in the value of the net investment being
hedged. Currency effects of these hedges reflected in OCI were a $397 after-tax
loss in 2002 and a $460 after-tax gain in 2001. Accumulated net balances were
$180 and $577 in 2002 and 2001, respectively.
Commodity Price Management
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions, political and economic variables and other
unpredictable factors. To manage the volatility related to
Millions of dollars except per share amounts
38 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
anticipated inventory purchases, the Company uses futures and options with
maturities generally less than one year and swap contracts with maturities up to
five years. These market instruments are designated as cash flow hedges under
SFAS No. 133. Accordingly, the mark-to-market gain or loss on qualifying hedges
is reported in OCI and reclassified into cost of products sold in the same
period or periods during which the hedged transaction affects earnings.
Qualifying cash flow hedges currently recorded in OCI are not considered
material. The mark-to-market gain or loss on non-qualifying, excluded and
ineffective portions of hedges is immediately recognized in cost of products
sold. Commodity hedging activity was not material to the Company's financial
statements for the years ended June 30, 2002 and 2001.
NOTE 8 EARNINGS PER SHARE AND STOCK OPTIONS
Net Earnings Per Common Share
Net earnings less preferred dividends (net of related tax benefits) are divided
by the weighted average number of common shares outstanding during the year to
calculate basic net earnings per common share. Diluted net earnings per common
share is calculated to give effect to stock options and convertible preferred
stock. The dilutive effect of outstanding employee stock options is reflected by
application of the treasury stock method under SFAS No. 128, "Earnings per
Share."
Basic and diluted net earnings per common share are as follows:
Years Ended June 30
----------------------------
2002 2001 2000
- --------------------------------------------------------------
Net earnings available to
common shareholders $4,228 $2,801 $3,427
- --------------------------------------------------------------
Preferred dividends, net
of tax benefit 124 121 115
- --------------------------------------------------------------
Preferred dividend impact on
funding of ESOP (see Note 9) (12) (15) (18)
- --------------------------------------------------------------
Diluted net earnings 4,340 2,907 3,524
- --------------------------------------------------------------
Years Ended June 30
---------------------------
Shares in millions 2002 2001 2000
- -----------------------------------------------------------------
Basic weighted average common
shares outstanding 1,297.4 1,300.3 1,313.2
- -----------------------------------------------------------------
Conversion of preferred shares (1) 88.8 91.9 94.3
- -----------------------------------------------------------------
Exercise of stock options (2) 18.7 13.4 19.7
- -----------------------------------------------------------------
Diluted weighted average common
shares outstanding 1,404.9 1,405.6 1,427.2
- -----------------------------------------------------------------
(1) Despite being included currently in diluted net earnings per common share,
the actual conversion to common stock occurs pursuant to the repayment of
the ESOP debt over a period exceeding 20 years.
(2) Approximately 36 million in 2002, 38 million in 2001 and 17 million in 2000
of the Company's outstanding stock options were not included in the diluted
net earnings per common share calculation because to do so would have been
antidilutive (i.e., the exercise price exceeded market value.)
Stock-Based Compensation
The Company has stock-based compensation plans under which stock options are
granted annually to key managers and directors at the market price on the date
of grant. Grants were made under stock-based compensation plans approved by
shareholders in 1992 and 2001. Grants issued since 1998 are fully exercisable
after three years and have a fifteen-year life, while prior years' grants are
fully exercisable after one year and have a ten-year life.
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 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 the plans been determined based on the
fair value at grant date consistent with SFAS No. 123, the Company's net
earnings and earnings per common share would have been as follows:
Years Ended June 30
-------------------------------
2002 2001 2000
- ------------------------------------------------------------------
NET EARNINGS
As reported $4,352 $2,922 $3,542
- ------------------------------------------------------------------
Pro forma 3,910 2,612 3,363
- ------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE
Basic
As reported $3.26 $2.15 $2.61
- ------------------------------------------------------------------
Pro forma 2.92 1.92 2.47
- ------------------------------------------------------------------
Diluted
As reported 3.09 2.07 2.47
- ------------------------------------------------------------------
Pro forma 2.77 1.85 2.34
- ------------------------------------------------------------------
The fair value of grants issued in 2001 and 2000 was estimated using the
binomial options-pricing model. For options granted in 2002, the Company has
estimated the fair value of each grant using the more widely recognized
Black-Scholes option-pricing model. Assumptions are evaluated annually and
revised, as necessary, to reflect market conditions and additional experience.
The following assumptions were used:
Options Granted Years Ended June 30
------------------------
2002 2001 2000
- ----------------------------------------------------
Interest rate 5.4% 5.8% 6.0%
- ----------------------------------------------------
Dividend yield 2.2% 2.0% 1.5%
- ----------------------------------------------------
Expected volatility 20% 26% 28%
- ----------------------------------------------------
Expected life in years 12 9 9
- ----------------------------------------------------
Millions of dollars except per share amounts
Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 39
The following table summarizes stock option activity during 2002, 2001 and 2000:
Options in thousands June 30
-------------------------------
2002 2001 2000
- -------------------------------------------------------------------------
Outstanding, beginning of year 104,196 82,744 76,810
- -------------------------------------------------------------------------
Granted 25,040 28,400 14,360
- -------------------------------------------------------------------------
Jif and Crisco spin-off adjustment 811 -- --
- -------------------------------------------------------------------------
Exercised (8,149) (5,709) (7,401)
- -------------------------------------------------------------------------
Canceled (1,735) (1,239) (1,025)
- -------------------------------------------------------------------------
Outstanding, end of year 120,163 104,196 82,744
- -------------------------------------------------------------------------
Exercisable 46,332 48,805 54,667
- -------------------------------------------------------------------------
Available for grant 114,536 27,994 41,387
- -------------------------------------------------------------------------
Average price
- -------------------------------------------------------------------------
Outstanding, beginning of year $63.64 $61.73 $52.11
- -------------------------------------------------------------------------
Granted 70.19 62.20 96.10
- -------------------------------------------------------------------------
Exercised 29.07 24.77 25.21
- -------------------------------------------------------------------------
Outstanding, end of year 66.68 63.64 61.73
- -------------------------------------------------------------------------
Exercisable, end of year 56.99 49.14 46.67
- -------------------------------------------------------------------------
Weighted average fair value of options
granted during the year 21.14 22.45 37.21
- -------------------------------------------------------------------------
Stock options outstanding at June 30, 2002 were in the following exercise price
ranges:
Outstanding Options
-----------------------------------------------
Number Weighted Avg.
Outstanding Weighted Avg. Remaining
Range of prices (Thousands) Exercise Price Contractual Life
- -----------------------------------------------------------------------
$25 to 46 21,331 $33.81 2.6 years
- -----------------------------------------------------------------------
54 to 64 37,139 61.35 11.2
- -----------------------------------------------------------------------
65 to 75 24,756 69.39 13.7
- -----------------------------------------------------------------------
76 to 106 36,937 89.21 9.1
- -----------------------------------------------------------------------
Stock options exercisable at June 30, 2002 were in the following exercise price
ranges:
Exercisable Options
------------------------------
Number Weighted
Exercisable Average
Range of prices (Thousands) Exercise Price
- -----------------------------------------------
$25 to 46 21,331 $33.81
- -----------------------------------------------
54 to 64 8,182 59.75
- -----------------------------------------------
65 to 75 946 73.14
- -----------------------------------------------
76 to 106 15,873 85.76
- -----------------------------------------------
As a component of its treasury share repurchase program, the Company generally
repurchases common shares to fund the stock options granted. Additionally, the
Company enters into equity put options on its common stock in order to reduce
the cash outlay for share repurchases. These agreements typically mature in six
months and can be settled on a physical or net-share basis at the Company's
option. The premium received from the sale of the instruments is credited to
equity.
The put options entered into during 2002 were equivalent to three million shares
at approximately $81 per share. The last of the equity put option contracts will
expire in the second quarter of 2003. The 2001 options were equivalent to one
million common shares, at approximately $74 per share and the options entered
into in 2000 were equivalent to 12 million common shares, at prices ranging from
$60 to $71 per share. The 2001 and 2000 options have expired mostly unexercised.
Over the past three years, $96 of premiums received have been credited to
equity.
In limited cases, the Company also issues stock appreciation rights, generally
in countries where stock options are not permitted by local governments. The
obligations and associated compensation expense are adjusted for changes in
intrinsic value. The impact of these adjustments is insignificant.
NOTE 9 EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains The Procter & Gamble Profit Sharing Trust and Employee
Stock Ownership Plan (ESOP) to provide funding for certain employee benefits.
The ESOP borrowed $1,000 in 1989 and the proceeds were used to purchase Series A
ESOP Convertible Class A Preferred Stock to fund a portion of the defined
contribution plan. Principal and interest requirements are $117 per year, paid
by the trust from dividends on the preferred shares and from cash contributions
and advances from the Company. Each share is convertible at the option of the
holder into one share of the Company's common stock. The liquidation value is
$13.64 per share.
In 1991, the ESOP borrowed an additional $1,000. The proceeds were used to
purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of
retiree health care benefits. These shares are considered plan assets of the
other retiree benefits plan as discussed in Note 10. Debt service requirements
are $94 per year, funded by preferred stock dividends and cash contributions
from the Company. Each share is convertible at the option of the holder into one
share of the Company's common stock. The liquidation value is $25.92 per share.
Millions of dollars except per share amounts
40 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
The number of preferred shares outstanding were:
Shares in thousands June 30
-------------------------
2002 2001 2000
- -----------------------------------------------
Outstanding, June 30
Allocated 33,095 34,459 33,610
- -----------------------------------------------
Unallocated 17,687 19,761 22,315
- -----------------------------------------------
Total Series A 50,782 54,220 55,925
- -----------------------------------------------
Allocated 9,869 9,267 8,661
- -----------------------------------------------
Unallocated 26,454 27,338 28,424
- -----------------------------------------------
Total Series B 36,323 36,605 37,085
- -----------------------------------------------
As permitted by American Institute of Certified Public Accountants (AICPA)
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," the Company has elected, where applicable, to continue its practices,
which are based on Statement of Position 76-3, "Accounting Practices for Certain
Employee Stock Ownership Plans." ESOP debt which is guaranteed by the Company is
recorded in short- and long-term liabilities (see Note 6). Preferred shares
issued to the ESOP are offset by the reserve for ESOP debt retirement in the
Consolidated Balance Sheet and the Consolidated Statement of Shareholders'
Equity. Interest incurred on the ESOP debt is recorded as interest expense.
Dividends on all preferred shares, net of related tax benefits, are charged to
retained earnings.
The preferred shares held by the ESOP are considered outstanding from inception
for purposes of calculating diluted net earnings per common share. Diluted net
earnings are calculated assuming that all preferred shares are converted to
common, and therefore are adjusted to reflect the incremental ESOP funding that
would be required due to the difference in dividend rate between preferred and
common shares (see Note 8).
NOTE 10 POSTRETIREMENT BENEFITS
The Company offers various postretirement benefits to its employees.
Defined Contribution Retirement Plans
The most significant employee benefit plan offered is the defined contribution
plan in the United States, which is fully funded.
Under the defined contribution profit sharing plan, annual credits to
participants' accounts are based on individual base salaries and years of
service and do not exceed 15% of total participants' annual salaries and wages.
The fair value of the ESOP Series A shares serves to reduce the Company's cash
contribution required to fund the profit sharing plan contributions earned.
Under SOP 76-3, shares of the ESOP are allocated at original cost based on debt
service requirements, net of advances made by the Company to the trust. The
defined contribution expense pursuant to this plan was $279, $303 and $89 in
2002, 2001 and 2000, respectively.
Other Retiree Benefits
The Company also provides certain health care and life insurance benefits for
substantially all U.S. employees who become eligible for these benefits when
they meet minimum age and service requirements. Generally, the health care plans
require contributions from retirees and pay a stated percentage of expenses,
reduced by deductibles and other coverages. Retiree contributions change
annually in line with health care cost trends. These benefits primarily are
funded by ESOP Series B shares as well as certain other assets contributed by
the Company.
Certain other employees, primarily outside the U.S., are covered by local
defined benefit pension, health care and life insurance plans.
The following table sets forth the aggregate change in benefit obligation for
the Company`s defined benefit plans:
Years Ended June 30
-----------------------------------------
Pension Benefits Other Retiree Benefits
---------------- ----------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
- --------------------------------------------------------------------------
Benefit obligation
at beginning of year $2,567 $2,627 $1,577 $1,270
- --------------------------------------------------------------------------
Service cost 114 115 49 40
- --------------------------------------------------------------------------
Interest cost 153 149 116 101
- --------------------------------------------------------------------------
Participants' contributions 7 4 22 18
- --------------------------------------------------------------------------
Amendments 1 (10) 5 --
- --------------------------------------------------------------------------
Actuarial loss 72 86 401 250
- --------------------------------------------------------------------------
Acquisitions/(Divestitures) 40 (14) 32 (5)
- --------------------------------------------------------------------------
Curtailments and
settlements (101) (22) (1) --
- --------------------------------------------------------------------------
Special termination benefits 9 -- 37 --
- --------------------------------------------------------------------------
Currency exchange 255 (232) 5 (4)
- --------------------------------------------------------------------------
Benefit payments (147) (136) (108) (93)
- --------------------------------------------------------------------------
Benefit obligation
at end of year 2,970 2,567 2,135 1,577
- --------------------------------------------------------------------------
Millions of dollars except per share amounts
Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 41
The following table sets forth the aggregate change in plan assets:
Years Ended June 30
-----------------------------------------
Pension Benefits Other Retiree Benefits
---------------- ----------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- ------------------------------------------------------------------------
Fair value of plan assets
at beginning of year $1,432 $1,691 $1,449 $1,274
- ------------------------------------------------------------------------
Actual return on plan assets (150) (88) 947 235
- ------------------------------------------------------------------------
Acquisitions/(Divestitures) 18 (19) -- --
- ------------------------------------------------------------------------
Employer contributions 116 81 38 14
- ------------------------------------------------------------------------
Participants' contributions 7 4 22 18
- ------------------------------------------------------------------------
Settlements (22) (3) -- --
- ------------------------------------------------------------------------
Currency exchange 78 (98) (1) 1
- ------------------------------------------------------------------------
Benefit payments (147) (136) (108) (93)
- ------------------------------------------------------------------------
Fair value of plan assets
at end of year 1,332 1,432 2,347 1,449
- ------------------------------------------------------------------------
Pension plan assets are comprised of a diversified mix of assets including
corporate equities, government securities and corporate debt securities. Other
retiree assets are comprised of Company stock, net of Series B ESOP debt, of
$2,243 and $1,335, as of June 30, 2002 and 2001, respectively.
The accrued pension and other retiree benefit costs recognized in the
accompanying Consolidated Balance Sheet are computed as follows:
Years Ended June 30
-----------------------------------------------
Pension Benefits Other Retiree Benefits
--------------------- ----------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------
FUNDED STATUS
- -------------------------------------------------------------------------
Funded status at
end of year $(1,638) $(1,135) $212 $(128)
- -------------------------------------------------------------------------
Unrecognized net
actuarial loss (gain) 571 243 (579) (418)
- -------------------------------------------------------------------------
Unrecognized transition
amount 14 17 -- --
- -------------------------------------------------------------------------
Unrecognized prior
service cost 21 20 (1) (8)
- -------------------------------------------------------------------------
Net amount recognized (1,032) (855) (368) (554)
- -------------------------------------------------------------------------
Prepaid benefit cost 94 75 2 2
- -------------------------------------------------------------------------
Accrued benefit cost (1,250) (1,006) (370) (556)
- -------------------------------------------------------------------------
Intangible asset 18 16 -- --
- -------------------------------------------------------------------------
Accumulated other
comprehensive income 106 60 -- --
- -------------------------------------------------------------------------
Net liability recognized (1,032) (855) (368) (554)
- -------------------------------------------------------------------------
The underfunding of pension benefits primarily is a function of the different
funding incentives that exist outside of the U.S. In certain countries where the
Company has major operations, there are no legal requirements or financial
incentives provided to companies for pension fund contributions. In these
instances, the associated pension liabilities are typically financed directly
from the Company's cash as they become due, rather than via the creation of a
separate pension fund. Both the benefit and the financing costs have been
reflected in net earnings.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $1,718, $1,385 and $276, respectively, as of June 30,
2002, and $1,414, $1,124 and $230, respectively, as of June 30, 2001.
The Company evaluates its actuarial assumptions on an annual basis. These
assumptions are revised based on an evaluation of long-term trends and market
conditions that may have an impact on the cost of providing retirement benefits.
Assumptions, which are reflected on a weighted average basis of individual
country plans, for the postretirement benefit calculations are as follows:
Years Ended June 30
----------------------------------------
Pension Benefits Other Retiree Benefits
---------------- ----------------------
2002 2001 2002 2001
WEIGHTED AVERAGE
ASSUMPTIONS
- --------------------------------------------------------------
Discount rate 5.6% 5.9% 7.0% 7.3%
- --------------------------------------------------------------
Expected return
on plan assets 8.6% 8.3% 9.5% 10.0%
- --------------------------------------------------------------
Rate of compensation
increase 3.5% 4.1% -- --
- --------------------------------------------------------------
Initial health care
cost trend rate (1) -- -- 11.3% 8.8%
- --------------------------------------------------------------
(1) Five year trend rate assumption was adjusted in 2002 to reflect market
trends. Rate is assumed to decrease to 5.0% by 2009 and remain at that
level thereafter. Rate is applied to current plan costs net of Medicare;
estimated initial rate for "gross eligible charges" (charges inclusive of
Medicare) is 9.1% for 2002 and 8.0% for 2001.
Millions of dollars except per share amounts
42 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
Components of the net periodic benefit cost are as follows:
Years Ended June 30
-------------------------------------------------
Pension Benefits Other Retiree Benefits
---------------------- -----------------------
2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------
COMPONENTS OF NET
PERIODIC BENEFIT COST
- ------------------------------------------------------------------------------
Service cost $114 $115 $120 $49 $40 $39
- ------------------------------------------------------------------------------
Interest cost 153 149 151 116 101 90
- ------------------------------------------------------------------------------
Expected return on
plan assets (133) (127) (122) (320) (317) (294)
- ------------------------------------------------------------------------------
Amortization of
prior service cost 4 5 7 (1) (1) (2)
- ------------------------------------------------------------------------------
Amortization of prior
transition amount 3 3 4 -- -- --
- ------------------------------------------------------------------------------
Settlement loss (gain) -- 6 (6) -- -- --
- ------------------------------------------------------------------------------
Curtailment loss (gain) 1 (13) (3) (1) -- --
- ------------------------------------------------------------------------------
Recognized net
actuarial loss (gain) 9 3 4 (64) (85) (92)
- ------------------------------------------------------------------------------
Gross benefit cost 151 141 155 (221) (262) (259)
- ------------------------------------------------------------------------------
Dividends on ESOP
preferred stock -- -- -- (76) (76) (77)
- ------------------------------------------------------------------------------
Net periodic
benefit cost 151 141 155 (297) (338) (336)
- ------------------------------------------------------------------------------
In addition to the net periodic benefit cost, additional expense of $46 was
recognized during the year ended June 30, 2002, for special termination benefits
provided as part of early retirement packages in connection with the Company's
restructuring program.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One-Percentage One-Percentage
Point Increase Point Decrease
- ----------------------------------------------------------------------
Effect on total of service and
interest cost components $29 $(23)
- ----------------------------------------------------------------------
Effect on postretirement
benefit obligation 291 (239)
- ----------------------------------------------------------------------
NOTE 11 INCOME TAXES
Under SFAS No. 109, "Accounting for Income Taxes," income taxes are recognized
for the following: a) amount of taxes payable for the current year, and b)
deferred tax liabilities and assets for future tax consequences of events that
have been recognized differently in the financial statements than for tax
purposes. Deferred tax assets and liabilities are established using the enacted
statutory tax rates and adjusted for tax rate changes. Earnings before income
taxes consist of the following:
Years Ended June 30
----------------------
2002 2001 2000
- ----------------------------------------
United States $4,411 $3,340 $3,006
- ----------------------------------------
International 1,972 1,276 2,530
- ----------------------------------------
6,383 4,616 5,536
- ----------------------------------------
The income tax provision consists of the following:
Years Ended June 30
--------------------------
2002 2001 2000
- ------------------------------------------------------
CURRENT TAX EXPENSE
U.S. Federal $975 $1,030 $648
- ------------------------------------------------------
International 551 676 816
- ------------------------------------------------------
U.S. State & Local 116 90 67
- ------------------------------------------------------
1,642 1,796 1,531
- ------------------------------------------------------
DEFERRED TAX EXPENSE
U.S. Federal 571 142 241
- ------------------------------------------------------
International & other (182) (244) 222
- ------------------------------------------------------
389 (102) 463
- ------------------------------------------------------
2,031 1,694 1,994
- ------------------------------------------------------
The Company's effective income tax rate was 31.8%, 36.7% and 36.0% in 2002, 2001
and 2000, respectively, compared to the U.S. statutory rate of 35.0%. The
country mix impacts of foreign operations reduced the Company's effective tax
rate to a larger degree than prior years - 3.1% for 2002. Excluding
restructuring costs and adjustments to remove amortization of goodwill and
indefinite-lived intangibles that is no longer required, and their related tax
effects, the effective tax rate was 31.1%, 31.1% and 32.5% in 2002, 2001 and
2000, respectively.
Taxes impacted shareholders' equity with a $477 credit for the year ended June
30, 2002 and a $155 charge for the year ended June 30, 2001. These primarily
relate to the tax effects of net investment hedges and tax benefits from the
exercise of stock options.
Undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely were $10,698 and $9,231 at June 30, 2002 and 2001,
respectively. If such earnings were repatriated, additional taxes may result.
Millions of dollars except per share amounts
43
Realization of certain deferred tax assets is dependent upon generating
sufficient taxable income in the appropriate jurisdiction prior to expiration of
the carryforward periods. Although realization is not assured, management
believes it is more likely than not the deferred tax assets net of applicable
valuation allowances will be realized.
Deferred income tax assets and liabilities are comprised of the following:
June 30
-----------------
2002 2001
- ----------------------------------------------------
TOTAL DEFERRED TAX ASSETS
Other postretirement benefits $109 $196
- ----------------------------------------------------
Loss and other carryforwards 454 516
- ----------------------------------------------------
Other 742 350
- ----------------------------------------------------
Valuation allowances (106) (104)
- ----------------------------------------------------
1,199 958
- ----------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES
Fixed assets (1,110) (1,093)
- ----------------------------------------------------
Other (495) (362)
- ----------------------------------------------------
(1,605) (1,455)
- ----------------------------------------------------
Net operating losses and other tax credit carryforwards were $1,211 and $1,220
as of June 30, 2002 and 2001, respectively. If unused, $711 will expire between
2003 and 2012. The remainder, totaling $500 at June 30, 2002, may be carried
forward indefinitely.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company's business creates a need to enter into commitments with suppliers
that could affect liquidity and capital resources. These commitments do not
create immediate liabilities for the Company.
The Company has purchase commitments for materials, supplies and property, plant
and equipment incidental to the ordinary conduct of business. In the aggregate,
such commitments are not in excess of current market prices. Additionally, the
Company normally commits to some level of marketing related expenditures that
extend beyond the fiscal year. These marketing related commitments are necessary
in order to maintain a normal course of business and the risk associated with
them is limited. It is not expected that these commitments will have a material
effect on the Company's financial condition.
At various points from 2007 to 2017, the minority partner in a subsidiary that
holds most of the Company's China operations has the right to exercise a put
option to require the Company to purchase from half to all of its outstanding
20% interest at a price not greater than fair market value. The impact of this
put option is dependent on factors that can change prior to its exercise. Given
the put price cannot exceed fair market value and the Company's current
liquidity, the Company does not believe that exercise of the put would
materially impact its results of operations or financial condition.
The Company leases certain property and equipment for varying periods under
operating leases. Future minimum rental payments with terms in excess of one
year total approximately $500.
The Company is subject to various lawsuits and claims with respect to matters
such as governmental regulations, income taxes and other actions arising out of
the normal course of business. The Company is also subject to contingencies
pursuant to environmental laws and regulations that in the future may require
the Company to take action to correct the effects on the environment of prior
manufacturing and waste disposal practices. Accrued environmental liabilities
for remediation and closure costs were $39 and $43 at June 30, 2002 and 2001,
respectively. In management's opinion, such accruals are appropriate based on
existing facts and circumstances. Current year expenditures were not material.
While considerable uncertainty exists, in the opinion of management and Company
counsel, the ultimate liabilities resulting from such lawsuits and claims would
not materially affect the Company's financial statements.
Millions of dollars except per share amounts
44 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 13 SEGMENT INFORMATION
The Company is organized by product-based global business units. The segments
manufacture and market products as follows:
- - Fabric and home care includes laundry, dish, fabric enhancers and hard
surface cleaners.
- - Baby, feminine and family care includes diapers, wipes, tampons, pads,
liners, tissues and towels.
- - Beauty care includes cosmetics, hair care, deodorants and fine fragrances.
- - Health care includes personal health care, oral care, pharmaceuticals and
pet health and nutrition.
- - Food and beverage includes coffee, snacks, commercial services, juice,
peanut butter and shortening and oil.
The corporate segment includes both operating and non-operating elements such as
financing and investing activities, intangible asset amortization, goodwill and
indefinite-lived intangible asset amortization prior to SFAS No. 142 adoption on
July 1, 2001, certain employee benefit costs, charges related to restructuring,
segment eliminations and other general corporate items. The segment eliminations
adjust management reporting principles to accounting principles generally
accepted in the United States of America and primarily affect the treatment of
unconsolidated investees and income taxes, which are reflected in the business
segments using estimated local statutory tax rates. Corporate assets primarily
include cash, investment securities and goodwill.
The Company had net sales in the United States of $21,198, $20,334 and $20,038
for the years ended June 30, 2002, 2001 and 2000, respectively. Assets in
the United States totaled $23,434 and $18,318 as of June 30, 2002 and 2001,
respectively.
The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 17%, 15% and 14% of consolidated net sales in 2002, 2001 and 2000,
respectively. These sales occurred primarily in the United States.
Baby,
Fabric and Feminine & Beauty Health Food and
Home Care Family Care Care Care Beverage Corporate Total
- ---------------------------------------------------------------------------------------------------------
Net Sales 2002 $11,618 $11,877 $8,079 $4,979 $3,801 $(116) $40,238
- ---------------------------------------------------------------------------------------------------------
2001 11,660 11,991 7,257 4,353 4,139 (156) 39,244
- ---------------------------------------------------------------------------------------------------------
2000 12,157 12,044 7,389 3,909 4,634 (182) 39,951
- ---------------------------------------------------------------------------------------------------------
Net Earnings 2002 1,831 1,170 1,177 521 384 (731) 4,352
- ---------------------------------------------------------------------------------------------------------
2001 1,643 1,052 967 390 332 (1,462) 2,922
- ---------------------------------------------------------------------------------------------------------
2000 1,450 1,069 894 335 364 (570) 3,542
- ---------------------------------------------------------------------------------------------------------
Before-Tax Earnings 2002 2,728 1,961 1,664 795 604 (1,369) 6,383
- ---------------------------------------------------------------------------------------------------------
2001 2,430 1,745 1,392 584 546 (2,081) 4,616
- ---------------------------------------------------------------------------------------------------------
2000 2,318 1,817 1,393 540 566 (1,098) 5,536
- ---------------------------------------------------------------------------------------------------------
Depreciation and Amortization 2002 326 621 221 163 135 227 1,693
- ---------------------------------------------------------------------------------------------------------
2001 328 673 183 159 146 782 2,271
- ---------------------------------------------------------------------------------------------------------
2000 354 664 194 159 153 667 2,191
- ---------------------------------------------------------------------------------------------------------
Total Assets 2002 5,149 8,771 3,798 2,542 2,091 18,425 40,776
- ---------------------------------------------------------------------------------------------------------
2001 5,533 8,629 3,371 2,290 2,479 12,085 34,387
- ---------------------------------------------------------------------------------------------------------
Capital Expenditures 2002 368 856 200 158 137 (40) 1,679
- ---------------------------------------------------------------------------------------------------------
2001 516 1,307 261 231 235 (64) 2,486
- ---------------------------------------------------------------------------------------------------------
Millions of dollars except per share amounts
Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 45
NOTE 14 QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
----------------------------------
Total
Sept. 30 Dec. 31 Mar. 31 June 30 Year
- --------------------------------------------------------------------------------------------------------
Net Sales 2001-2002 $9,766 $10,403 $9,900 $10,169 $40,238
- --------------------------------------------------------------------------------------------------------
2000-2001 9,969 10,182 9,511 9,582 39,244
- --------------------------------------------------------------------------------------------------------
Operating Income 2001-2002 1,762 1,864 1,654 1,398 6,678
- --------------------------------------------------------------------------------------------------------
2000-2001 1,779 1,711 1,302 (56) 4,736
- --------------------------------------------------------------------------------------------------------
Net Earnings 2001-2002 1,104 1,299 1,039 910 4,352
- --------------------------------------------------------------------------------------------------------
2000-2001 1,155 1,194 893 (320) 2,922
- --------------------------------------------------------------------------------------------------------
Core Net Earnings (1) 2001-2002 1,342 1,445 1,186 1,085 5,058
- --------------------------------------------------------------------------------------------------------
2000-2001 1,293 1,369 1,062 891 4,615
- --------------------------------------------------------------------------------------------------------
Diluted Net Earnings Per Common Share 2001-2002 0.79 0.93 0.74 0.64 3.09
- --------------------------------------------------------------------------------------------------------
2000-2001 0.82 0.84 0.63 (0.23) 2.07
- --------------------------------------------------------------------------------------------------------
Diluted Core Net Earnings Per Common Share (1) 2001-2002 0.96 1.03 0.84 0.77 3.59
- --------------------------------------------------------------------------------------------------------
2000-2001 0.92 0.97 0.75 0.63 3.27
- --------------------------------------------------------------------------------------------------------
(1) Amounts exclude restructuring costs and amortization of goodwill and
indefinite-lived intangibles that is no longer required under accounting
rules for 2002.
Millions of dollars except per share amounts
46 The Procter & Gamble Company and Subsidiaries
Notes to Consolidated Financial Statements
Financial Summary
<Table>
<Caption>
2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Net Sales $40,238 $39,244 $39,951 $38,125 $37,154
- ----------------------------------------------------------------------------------------------------
Operating Income 6,678 4,736 5,954 6,253 6,055
- ----------------------------------------------------------------------------------------------------
Net Earnings 4,352 2,922 3,542 3,763 3,780
- ----------------------------------------------------------------------------------------------------
Core Net Earnings (1) 5,058 4,615 4,442 4,338 3,947
- ----------------------------------------------------------------------------------------------------
Net Earnings Margin 10.8% 7.4% 8.9% 9.9% 10.2%
- ----------------------------------------------------------------------------------------------------
Core Net Earnings Margin (1) 12.6% 11.7% 11.1% 11.4% 10.6%
- ----------------------------------------------------------------------------------------------------
Basic Net Earnings Per Common Share $3.26 $2.15 $2.61 $2.75 $2.74
- ----------------------------------------------------------------------------------------------------
Diluted Net Earnings Per Common Share 3.09 2.07 2.47 2.59 2.56
- ----------------------------------------------------------------------------------------------------
Diluted Core Net Earnings Per Common Share (1) 3.59 3.27 3.10 2.98 2.68
- ----------------------------------------------------------------------------------------------------
Dividends Per Common Share 1.52 1.40 1.28 1.14 1.01
- ----------------------------------------------------------------------------------------------------
Research and Development Expense $1,601 $1,769 $1,899 $1,726 $1,546
- ----------------------------------------------------------------------------------------------------
Advertising Expense 3,773 3,612 3,793 3,639 3,801
- ----------------------------------------------------------------------------------------------------
Total Assets 40,776 34,387 34,366 32,192 31,042
- ----------------------------------------------------------------------------------------------------
Capital Expenditures 1,679 2,486 3,018 2,828 2,559
- ----------------------------------------------------------------------------------------------------
Long-Term Debt 11,201 9,792 9,012 6,265 5,774
- ----------------------------------------------------------------------------------------------------
Shareholders' Equity 13,706 12,010 12,287 12,058 12,236
- ----------------------------------------------------------------------------------------------------
(1) Amounts exclude restructuring costs for 2002, 2001, 2000 and 1999 and
exclude amortization of goodwill and indefinite-lived intangibles for all
periods presented, that is no longer required under accounting rules for
2002.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 47
Directors
NORMAN R. AUGUSTINE
Retired Chairman and Chief
Executive Officer,
Lockheed Martin
Corporation and Chairman
of the Executive
Committee, Lockheed Martin
(aerospace, electronics,
telecommunications and
information management)
DONALD R. BEALL
Retired Chairman and Chief
Executive Officer, Rockwell
International Corporation (industrial
automation) and Chairman of the
Board, Rockwell Collins, Inc.
(avionics)
BRUCE L. BYRNES
Vice Chairman of the Board and
President - Global Beauty &
Feminine Care and Global Health
Care
R. KERRY CLARK
Vice Chairman of the Board and
President - Global Market
Development & Business
Operations
SCOTT D. COOK
Chairman of the Executive
Committee of the Board, Intuit Inc.
(a software and Web services firm)
DOMENICO DESOLE
President and Chief Executive
Officer and Chairman of the
Management Board, Gucci Group
N.V. (multibrand luxury goods
company)
RICHARD J. FERRIS
Retired Co-Chairman,
Doubletree Corporation
JOSEPH T. GORMAN
Retired Chairman and Chief
Executive Officer, TRW Inc.
(automotive, aerospace and
information systems) and
Chairman and Chief Executive
Officer, Moxahela Enterprises LLC
(venture capital)
A.G. LAFLEY
Chairman of the Board,
President and Chief Executive
CHARLES R. LEE
Chairman of the Board of
Directors, Verizon
Communications
(telecommunication services)
LYNN M. MARTIN
Professor, J.L. Kellogg
Graduate School of Management,
Northwestern University; Chair
of the Council for the
Advancement of Women, and
Advisor to the firm of Deloitte
& Touche LLP
JOHN E. PEPPER
Retired Chairman of the Board
JOHNATHAN A. RODGERS
Former President, Discovery
Networks, U.S. (media and
communications)
JOHN F. SMITH, JR.
Chairman of the Board, General
Motors Corporation (automobile
and related businesses)
RALPH SNYDERMAN
Chancellor for Health Affairs,
Executive Dean, School of
Medicine at Duke University,
and President/CEO of Duke
University Health Systems
ROBERT D. STOREY
Partner in the law firm of
Thompson Hine, L.L.P.
MARINA V.N. WHITMAN
Professor of Business
Administration and Public
Policy, University of Michigan
ERNESTO ZEDILLO
Former President of Mexico
CORPORATE OFFICERS
A.G. LAFLEY
Chairman of the Board,
President and Chief Executive
BRUCE L. BYRNES
Vice Chairman of the Board and
President - Global Beauty &
Feminine Care and Global Health
Care
R. KERRY CLARK
Vice Chairman of the Board and
President - Global Market
Development & Business
Operations
FERNANDO AGUIRRE
President on Special Assignment
JEFFREY P. ANSELL
President - Global Pet Health
and Nutrition
SUSAN E. ARNOLD
President - Global Personal
Beauty Care and Global Feminine
Care
CHARLES V. BERGH
President - ASEAN, Australasia
& India
FABRIZIO FREDA
President - Global Snacks
WERNER GEISSLER
President - Northeast Asia
MICHAEL J. GRIFFITH
President - Global Beverage
DEBORAH A. HENRETTA
President - Global Baby Care
MARK D. KETCHUM
President - Global Baby &
Family Care
ROBERT A. MCDONALD
President - Global Fabric & Home Care
JORGE S. MESQUITA
President - Global Home Care
JORGE P. MONTOYA
President - Global Snacks & Beverages
and Latin America
TOM A. MUCCIO
President - Global Customer Teams
MARTIN J. NUECHTERN
President - Global Hair Care
DIMITRI PANAYOTOPOULOS
President - Central & Eastern
Europe, Middle East and Africa
LAURENT L. PHILIPPE
President - Greater China
CHARLES E. PIERCE
President - Global Family Care
PAUL POLMAN
President - Western Europe
ROBERT A. STEELE
President - North America
RICHARD G. PEASE
Senior Vice President - Human
Resources, Global Baby &
Family Care
NABIL Y. SAKKAB
Senior Vice President -
Research & Development, Global Fabric &
Home Care
RICHARD L. ANTOINE
Global Human Resources Officer
G. GILBERT CLOYD
Chief Technology Officer
CLAYTON C. DALEY JR.
Chief Financial Officer
STEPHEN N. DAVID
Chief Information Officer and
Business-to-Business Officer
R. KEITH HARRISON, JR.
Global Product Supply Officer
JAMES J. JOHNSON
Chief Legal Officer
CHARLOTTE R. OTTO
Global External Relations Officer
MICHAEL J. POWER
Global Business Services Officer
JAMES R. STENGEL
Global Marketing Officer
JUAN PEDRO HERNANDEZ
Vice President and Treasurer
JOHN K. JENSEN
Vice President and Comptroller
TERRY L. OVERBEY
Secretary
48 The Procter & Gamble Company and Subsidiaries
SHAREHOLDER INFORMATION
IF ... CALL PERSON-TO-PERSON
- - You need help with your account Shareholder Services representatives are available
- - You need automated access to your account Monday-Friday, 9-4 EST at 1-800-742-6253
- - You are interested in our certificate safekeeping service (call 1-513-983-3034 outside the U.S. and Canada)
- - You want to arrange for direct deposit of dividends Automated service available after U.S. business hours
- - You have a lost, stolen or destroyed stock certificate
OR WRITE
CONTACT P&G - 24 HOURS A DAY The Procter & Gamble Company
Visit our Web site at www.pg.com/investor Shareholder Services Department
E-mail us at shareholders.im@pg.com P.O. Box 5572
Call for financial information at 1-800-764-7483 Cincinnati, OH 45201-5572
(call 1-513-945-9990 outside the U.S. and Canada)
CORPORATE HEADQUARTERS SHAREHOLDERS OF COMMON STOCK
The Procter & Gamble Company There were approximately 1,004,000 common stock
P.O. Box 599 shareowners, including shareholders of record, participants
Cincinnati, OH 45201-0599 in the Shareholder Investment Program, participants in P&G
stock ownership plans and beneficial owners with accounts
TRANSFER AGENT/SHAREHOLDER SERVICES at banks and brokerage firms, as of July 26, 2002.
The Procter & Gamble Company
Shareholder Services Department FORM 10-K
P.O. Box 5572 Shareholders may obtain a copy of the Company's 2002
Cincinnati, OH 45201-5572 report to the Securities and Exchange Commission on
Form 10-K by going to P&G's investor Web site at
REGISTRAR www.pg.com/investor or by calling us at 1-800-764-7483.
The Fifth Third Bank This information is also available at no charge by sending a
Stock Transfer Administration request to Shareholder Services at the address listed above.
Corporate Trust Department, MD 10AT60
38 Fountain Square Plaza SHAREHOLDERS' MEETING
Cincinnati, OH 45263 The next annual meeting of shareholders will be held on
Tuesday, October 8, 2002. A full transcript of the meeting
EXCHANGE LISTING will be available from Linda D. Rohrer, Assistant Secretary.
New York, Cincinnati, Amsterdam, Paris, Basle, Geneva, Ms. Rohrer can be reached at One P&G Plaza, Cincinnati,
Lausanne, Zurich, Frankfurt, Brussels, Tokyo OH 45202-3315.
www.pg.com/investor P&G ALUMNI NETWORK P&G GALLERIA
You can now access your Shareholder The P&G Alumni Network is an You can order imprinted P&G
Investment Program account, including independent group whose mission is merchandise from the P&G Galleria.
your account balance and transactions, to advance the personal and Shop online for umbrellas,
24 hours a day on pg.com/investor. This professional interests of former P&G business
site is designed for you, the investor, with employees. The group's Web site, accessories and clothing through
stock purchase information, transaction www.pgalums.com, has a worldwide www.pg.com in Try and Buy, or call
forms, Company reports and Webcasts. member directory, career center and 1-800-969-4693 (1-513-651-1888
And pg.com is your one-stop connection more. The organization is planning outside the U.S.).
to P&G product information, newsletters a Cincinnati reunion for the weekend
and samples. of April 25-27, 2003.
Common Stock Price Range and Dividends
Price Range Dividends
------------------------------------------------- -------------------------
2001-2002 2001-2002 2000-2001 2000-2001 2001-2002 2000-2001
Quarter ended High Low High Low
- ------------------------------------------------------------------------------------------------
September 30 $77.28 $63.75 $67.81 $54.19 $0.38 $0.35
- ------------------------------------------------------------------------------------------------
December 31 81.72 69.73 79.31 66.56 0.38 0.35
- ------------------------------------------------------------------------------------------------
March 31 90.73 76.38 79.19 59.25 0.38 0.35
- ------------------------------------------------------------------------------------------------
June 30 94.75 87.00 68.30 55.96 0.38 0.35
- ------------------------------------------------------------------------------------------------