EXHIBIT (13)
Annual Report to Shareholders
(pages 1-56)
SUSTAINING GROWTH
2003 ANNUAL REPORT
[COVER PAGE GRAPHIC]
P&G'S PROMISE
Two billion times a day, P&G brands touch the lives of people around the world.
We have one of the largest and strongest portfolios of trusted, quality brands,
including Pampers, Tide, Ariel, Always, Whisper, Pantene, Bounty, Pringles,
Folgers, Charmin, Downy, Lenor, Iams, Crest, Clairol Nice 'n Easy, Actonel, Dawn
and Olay. Nearly 98,000 P&G people working in almost 80 countries worldwide make
sure P&G brands live up to their promise to make everyday life just a little
better.
FINANCIAL HIGHLIGHTS
Years ended June 30
Amounts in millions ------------------------------------
except per share amounts 2003 2002 % Change
- -----------------------------------------------------------------------------------------
Net Sales $ 43,377 $ 40,238 8%
- ---------------------------------------------------------------------------------------
Operating Income 7,853 6,678 18%
- ---------------------------------------------------------------------------------------
Net Earnings 5,186 4,352 19%
- ---------------------------------------------------------------------------------------
Per Common Share
- ---------------------------------------------------------------------------------------
Diluted Net Earnings 3.69 3.09 19%
- ---------------------------------------------------------------------------------------
Dividends 1.64 1.52 8%
- ---------------------------------------------------------------------------------------
Net Sales
(in billions of dollars)
[BAR CHART]
2001 39.2
2002 40.2
2003 43.4
Operating Cash Flow
(in billions of dollars)
[BAR CHART]
2001 5.8
2002 7.7
2003 8.7
Diluted Net Earnings
(per common share)
[BAR CHART]
2001 $2.07
2002 $3.09
2003 $3.69
Additional Earnings Information(1)
(per common share, on a diluted basis)
[BAR CHART]
2001 $3.27
2002 $3.59
2003 $4.08
- - Reported EPS
- - Goodwill
- - Restructuring Charges
TABLE OF CONTENTS
Letter to Shareholders 1
P&G's Billion-Dollar Brands 6
Business Perspective 8
Directors and Corporate Officers 20
Financial Contents 22
Shareholder Information 56
(1)Restructuring charges per share total $1.05 in 2001, $0.50 in 2002 and $0.39
in 2003. 2001 includes charges of $0.15 per share for the amortization of
goodwill and indefinite-lived intangibles no longer required under accounting
rules beginning in 2002.
FELLOW SHAREHOLDERS,
[PHOTO OF A.G. LAFLEY]
A.G. LAFLEY
Chairman of the Board,
President and Chief Executive
Fiscal 2003 was a year of significant progress for Procter & Gamble - our best
overall performance in nearly a decade.
- - Volume was up 8%.
- - Sales were up 8% to $43.4 billion.
- - Earnings were up 19% to $5.2 billion; earnings per share were $3.69, up
19%.
- - The Company's multi-year restructuring program is now complete, a full year
ahead of schedule. Restructuring program charges for the year were $538
million.
- - Earnings per share increased 14%, excluding the impact of the restructuring
program.
- - Net earnings margins reached the highest level in more than 50 years.
- - Total Shareholder Return outperformed the Dow Jones Industrial Average and
the S&P 500.
- - P&G has declared a dividend increase of 11%, the 48th consecutive year of
increased dividend payments.
These excellent results represent broad-based strength:
- - All five Global Business Units grew earnings.
- - Six of seven Market Development Organizations delivered top-line growth.
- - 19 of the top 20 global brands grew volume.
- - P&G brands worldwide grew share in categories accounting for nearly 80% of
sales.
Most important, these results were driven from P&G's core existing businesses,
in a challenging global economy and political environment. In fact, 100% of this
year's growth was organic. The key element of P&G's growth strategy can most
simply be described as growth from the core. We are building on P&G's core
foundation of categories and brands, customers and countries, capabilities and
competencies to deliver long-term, sustainable growth.
That, of course, is the key challenge. It's long-term performance that counts.
P&G focuses on strategies that do what is right for the long-term health of the
business. Over the past 20 years, P&G has delivered an annualized Total
Shareholder Return of nearly 17%, ahead of both the Dow Jones Industrial Average
and the S&P 500.
2
Unit Volume Growth
(% increase versus previous year)
[BAR CHART]
2001 0.2%
2002 6.7%
2003 8.3%
100% of P&G's growth this year was organic.
The fundamental strengths that have driven this performance over time remain
relevant and important. The strategic choices we've made over the past three
years remain right. And the capabilities and systems we have developed
throughout the Company are key reasons to believe that we can build on what
we've done in the past to keep P&G growing in the future.
STRATEGIC CHOICES
We made five key choices to get P&G back on track. There are considerable
opportunities for continued growth within each area of strategic focus.
BUILD EXISTING CORE BUSINESSES AND LEADING BRANDS INTO STRONGER LEADERS. P&G's
four core categories - Fabric Care, Hair Care, Baby Care and Feminine Care -
account for nearly 50% of sales and an even greater percentage of profit. It's
essential that we keep these businesses healthy and growing. And we are. In
Fabric Care, where P&G is the global leader, we have a worldwide share of over
30%. In Hair Care, we are also the global leader - yet we have only about a 20%
share. There's plenty of upside in all four categories.
GROW FASTER WITH LEADING CUSTOMERS. In the U.S., the top 10 retailers increased
their share of the market from 30% to 55% in the past five years. In Europe,
concentration at the country level is even greater. This plays to P&G strengths.
We understand shoppers and partner with retailers in ways and on a scale few
competitors can match. We're helping retailers grow with joint business plans,
P&G's leading brand portfolio, and category-leading new product innovation. As
leading retailers grow, so do P&G brands.
GROW IN BIG COUNTRIES. More than 80% of P&G sales come from the top 10 markets.
We need to keep driving P&G growth in these countries, which are some of the
biggest and strongest economies in the world. P&G's business in the top 10
countries taken together is growing at a rate of 11% per year. P&G is a leader
in these markets. We have deep understanding of local consumers, strong retail
partnerships and important scale advantages. Yet, despite this strength in P&G's
10 largest countries, we still have significant opportunities to grow. In the
U.S. for example, P&G is the leader in 23 categories, but we have shares above
30% in only 18. We know we can extend P&G leadership in these big countries.
DEVELOP AND INVEST IN FASTER-GROWING, HIGHER-MARGIN BUSINESSES. We're
strengthening P&G's leadership in Health Care and Beauty Care, two of the
fastest-growing categories in which we compete. We have five billion-dollar
health and beauty brands today. The acquisition of Wella will add a sixth. In
fact, with the addition of Wella, Health Care and Beauty Care will account for
nearly half of P&G sales and profits, up from about one-fourth at the beginning
of the 1990s. We expect these two high-growth businesses to represent an
increasing share of P&G's total business in the future.
BUILD P&G LEADERSHIP IN FAST-GROWING DEVELOPING MARKETS. The consumer products
business is driven significantly by three basic demographic factors: population
growth, household formation and household income growth. These factors have
driven developed-market growth for decades, and are now driving strong growth in
many developing markets. China, for example, is now P&G's sixth largest market -
up from tenth just three years ago. We've focused decisively on higher-growth,
structurally attractive markets where P&G can achieve sustainable growth.
3
P&G's strategic choices are working. We have continued opportunities for
substantial growth in every strategic area. We will stay the strategic course.
COST AND CASH MANAGEMENT
The next plank of P&G's sustained growth strategy is a relentless focus on
productivity, cost reduction and cash management.
Free Cash Flow
(in billions of dollars)
[BAR CHART]
2001 3.3
2002 6.1
2003 7.2
- - Over the last three years, we've generated nearly $17 billion in free cash
flow, which is cash flow from operations less capital spending. This is
two-and-a-half times the amount generated in the previous three years and
more than enough to fund dividend growth, share repurchases and
acquisitions such as Clairol and Wella.
- - We've delivered substantial operating margin progress, excluding
restructuring charges. We've been disciplined and delivered both
restructuring savings and other structural cost improvements.
- - In the past three years, we've reduced annual capital spending by $1.5
billion - without foregoing any strategic investments in capacity or
innovation.
Capital Spending
(as % of sales)
[BAR CHART]
2001 6.3%
2002 4.2%
2003 3.4%
- - Goal
We're not letting up. There are more opportunities in virtually every area. We
will continue to improve productivity, to spend capital efficiently, to reduce
inventories and to increase the return on investments in marketing and new
products. We must conserve cash and control costs to continue to deliver
superior consumer and shareholder value.
CORE STRENGTHS
Three core capabilities set P&G apart from competition: branding, innovation and
scale.
BRANDING. P&G is one of the world's most successful brand-creation and
brand-building companies. Three years ago, we marketed 10 billion-dollar brands.
Today, we have 13, with Olay joining this exclusive club in 2003. We are
leveraging the advantages created by P&G's brand-building capabilities. Our deep
and global consumer research helps us to understand, anticipate and respond to
consumer needs and wants. Our expertise enables us to create marketing and
advertising innovations more effectively and efficiently than many other
companies. P&G's brand leadership, category and country scale helps us implement
brand-building innovations with retail and media partners in ways that few
companies can match.
INNOVATION. P&G creates more new brands and categories than any other consumer
goods company. Last year alone, three of the top 10 new non-food products
introduced in the U.S. were P&G products. Over the past eight years, P&G has had
the #1 or #2 new non-food product in the U.S. every single year.(1) P&G's
brand-creation and product development leadership is driven by the Company's
enormous innovative capacity. We have nearly 7,500 Ph.D.'s and researchers
working in 20 technical centers on four continents. We have more than 29,000
patented technologies for products that are in the market today. We are more
focused than ever on turning patents into products that consumers buy and use
every day. We're multiplying this capability by collaborating more extensively
with external innovation partners. The vision is that 50% of all P&G discovery
and invention will come from outside the Company.
(1)Source: Information Resources, Inc. New Product Pacesetters Annual Reports,
Dollar Sales, top FDMx Non-Food products (excludes Wal-Mart)
4
Total Shareholder Return
(indexed versus July 2000)
[LINE GRAPH]
GLOBAL SCALE. P&G has significant scale advantages. We're the global leader in
all four core categories. We know we can leverage these scale advantages for
even greater value. We have the resources to interact with retail customers on
multiple levels including finance, logistics, marketing, shopper understanding
and a wide range of services. We bring deep category understanding with global
consumer research. We create greater value through the total supply chain by
pooling knowledge, expertise and reach.
We've designed the new P&G organization with an eye toward these core
capabilities, and are focused more explicitly than ever on getting the greatest
value from them. The restructuring program is complete, and the new organization
structure is fully implemented. We have created an organization unlike any other
in the consumer products industry - and it is producing significant competitive
advantage.
- - The Global Business Units enhance speed to market. It used to take three
years or more to rollout new products around the world. We're now able to
expand an initiative worldwide in less than 18 months - as illustrated by
the recent Pantene, Head & Shoulders and Pampers Baby Stages of Development
rollouts.
- - The Market Development Organizations enable us to collaborate better with
customers. As the retail industry consolidates, it's more important to add
value at multiple levels with key customers. The multi-functional expertise
of our global and local MDOs enables us to leverage P&G's brand portfolio
and innovation capability in ways that drive retailers' growth as well as
our own. As a result, P&G brands are growing faster with the world's
largest customers.
- - Global Business Services provides best-in-class cost structures and service
levels. This organization enables P&G to leverage its global scale, and
increases our ability to collaborate with leading-edge business services
partners. The recent information technology services and facilities
management agreements with Hewlett-Packard and Jones Lang LaSalle are great
examples. Partnerships like these enable us to achieve best-in-class costs
that would not be possible without the unique combination of P&G's new
organization design, global scale and the capabilities of best-in-class
partners.
As we gain experience with the new organization, we are learning it offers
benefits we've only begun to tap.
P&G people are delivering the best results this Company has company achieved in
years.
INSPIRATIONAL LEADERS, UNSUNG HEROES
P&G's strategic choices, financial discipline, core strengths and unique
organization structure create a platform for growth from the core that is
sustainable. This growth is being led by the most diverse group of leaders in
P&G history.
We've built a substantially new leadership team in the past three years.
Two-thirds of the top 38 leaders are new to their present roles. They hail from
13 different countries. Half of the line presidents are from outside the U.S.
Most have worked in two or three major regions, in a number of categories and a
number of countries. Most of them have experience in developing countries as
well as developed markets. They know what it's like to compete against well-
entrenched international and local competitors. Most important, they are
inspirational leaders deeply committed to developing and energizing the men and
women in their organizations.
5
Those men and women - 98,000 unsung heroes - are the heart of our Company. They
have demonstrated remarkable dedication in the past three years and have
distinguished themselves as one of the strongest generations of P&G people in
our Company's 165-year history. I spend time with these professionals every
single day. They are inspired. They share a single purpose - to improve the
lives of the world's consumers. They focus on common goals and pursue clear
strategies. They operate with shared values and principles. They have unleashed
their passion for serving consumers - and creating value for shareholders - in a
way that is building billion-dollar brands and delivering the best results this
Company has achieved in years.
It's a privilege to be part of such an extraordinary organization.
/s/ A.G. Lafley
A.G. Lafley
Chairman of the Board, July 31, 2003
President and Chief Executive
[TIDE LOGOS]
6
P&G's BILLION-DOLLAR BRANDS
[PRODUCTS GRAPHIC]
7
With combined revenues of more than $24 billion, P&G's 13 billion-dollar brands
would rank among the top 70 U.S. companies in the Fortune 500.(R)
[PRODUCTS GRAPHIC]
[GRAPHIC]
FABRIC AND HOME CARE
Fabric and Home Care is the Company's largest and oldest business - and it
continues to grow to record levels with its fastest and most balanced growth in
a decade. Key brands include Tide, Ariel, Downy, Lenor, Gain, Cascade, Swiffer
and Febreze.
- - Fabric and Home Care net sales grew 8% to $12.6 billion.
- - Fabric and Home Care net earnings grew 12% to $2.1 billion.
Net Sales
(in billions of dollars)
[BAR CHART]
2001 11.7
2002 11.6
2003 12.6
Net Earnings
(in billions of dollars)
[BAR CHART]
2001 1.6
2002 1.8
2003 2.1
[GRAPHIC]
BOLD
P&G launched Bold in Japan in August 2002. Bold achieved nearly a 10% share, and
pushed P&G's total detergent category share in Japan to nearly 30%.
[GRAPHIC]
SWIFFER DUSTERS
Swiffer has changed the way we clean our homes and created a new $1.2 billion
(retail sales) surface cleaning systems category in North America and Western
Europe. More than five out of every $10 spent in this category are for Swiffer
products.
9
We're P&G's oldest business and still one of its most important engines of
growth. This past year, the growth we generated was nearly the same as adding a
very profitable, new billion-dollar brand to P&G.
[GRAPHIC]
ROBERT A. MCDONALD
President
P&G's Fabric and Home Care business is focused on growing global scale, market
share and profit. Given its size and importance to the Company, Fabric and Home
Care's goals are the same as the Company's goals. We're delivering broader,
stronger volume and sales growth to strengthen scale advantages and help ensure
sustainable double-digit profit growth.
This focus is paying off. We delivered record volume, sales and profits in
2002/03 - our third straight year of double-digit profit growth. Volume was up
9% - the highest in over a decade. We grew market share in the majority of
categories and countries in which we compete.
Two strategies are driving these results:
INNOVATION. We're growing our top-line with innovation across a broad portfolio
of brands. We have more than doubled the success rate of new product initiatives
on the strength of industry-leading product and commercial innovation. Tide and
Downy Clean Breeze enable consumers to get the same fresh scent in both their
detergent and fabric softener. Improved versions of Ariel and Tide have resulted
in our largest worldwide share gains in years. New Gain was the fastest-growing
brand in the U.S. Laundry detergent category. Improved dishwashing liquids have
broadened P&G's share leadership.
At the same time, we're driving overall category growth. Revolutionary products
like Swiffer WetJet and Swiffer Dusters are expanding the new surface cleaning
systems category. Febreze single-handedly created the new fabric refresher
category, creating a brand that generates over $250 million in sales.
In addition, we're expanding P&G's portfolio of Fabric and Home Care brands with
Mr. Proper in Germany, Bold in Japan and Gain Fabric Enhancer in North America.
INCREASING PRODUCTIVITY. We are increasing productivity to sustain double-digit
profit growth. This is an equally important strategy that leverages P&G's global
scale in the Fabric and Home Care business. We've built this scale through P&G's
portfolio of market-leading brands, as well as the size of our worldwide
business. This leads to increased productivity, which enables better value and
growing profits. In the past year, we have significantly reduced cost of goods
sold and have set the industry benchmark for capital spending as a percentage of
sales. We have strengthened decision-planning capabilities, reduced overheads as
a percentage of sales and improved the way we allocate financial and human
resources. Our target benchmarks are the companies that are best-in-class in
each area.
Innovation and productivity are critical. When Fabric and Home Care grows, P&G
grows. In 2002/03, Fabric and Home Care added $941 million in sales and $228
million in Company profit - nearly the same as adding a very profitable, new
billion-dollar brand to P&G.
P&G's biggest and oldest business is still one of its most important engines of
growth.
[GRAPHIC]
BEAUTY CARE
With the addition of Wella, Beauty Care will be one of the largest beauty care
companies in the world in sales and profits. Key brands include Pantene, Always,
Whisper, Olay, Head & Shoulders, Tampax, Cover Girl and Clairol Nice 'n Easy.
- - Beauty Care net sales grew 14% to $12.2 billion.
- - Beauty Care net earnings grew 23% to $2.0 billion.
Net Sales
(in billions of dollars)
[BAR CHART]
2001 10.0
2002 10.7
2003 12.2
Net Earnings
(in billions of dollars)
[BAR CHART]
2001 1.4
2002 1.6
2003 2.0
[GRAPHIC]
HEAD & SHOULDERS
Head & Shoulders achieved its second consecutive year of double-digit growth
with 16% volume growth in Fiscal 2003.
[GRAPHIC]
TAMPAX PEARL
Feminine Care is extending its brands to reach millions of new consumers in
developing markets and new segments, such as plastic applicator tampons. Each
additional global share point earned in Feminine Care is worth $100 million of
P&G sales.
11
We're working to combine the best of P&G and the best of beauty companies to
create something better. P&G is now one of the world's largest beauty companies.
[GRAPHIC]
BRUCE L. BYRNES
President
Our clear goal is to become the best Beauty Care company in the world - for
consumers, customers and shareholders - and to lead the Company's growth. We
want to combine the best of P&G with the best of "beauty" companies to create
something even better.
We're well on our way to achieving this. With the addition of Wella, Beauty Care
will be one of the largest beauty care companies in the world in sales and
profits. We will have more billion-dollar brands than any competitor and profit
margins among the highest in the industry.
INNOVATION IS AT THE HEART OF OUR SUCCESS. We've grown Olay to billion-dollar
sales behind continuous step-change innovation that better meets women's skin
care needs. Daily Facials is the #1 cleansing cloth in the U.S. market - a novel
breakthrough that removes makeup, cleanses the skin, exfoliates and conditions
in a simple, single step. Total Effects, based on our proprietary VitaNiacin
ingredient, established Olay as the anti-aging leader in Skin Care. Regenerist,
our latest breakthrough in anti-aging, comes out of wound-healing cellular
science and is off to a tremendous start - already the U.S. market leader only
three months after launch.
In Cosmetics, Cover Girl Outlast and Max Factor Lipfinity products offer
patented, longer-wearing lip color and have been the most successful lipstick
launches ever. Outlast is now the single largest makeup product in the entire
U.S. market. In Feminine Care, we introduced Tampax Pearl. This new plastic
tampon was redesigned from top to bottom to better meet consumer needs and
wants. We've been very pleased with results to date, and both shipments and
share continue to grow. Our two largest brands, Pantene - the world's leading
hair care brand - and Head & Shoulders, each grew sales in double digits over
the last two-year period behind a series of product and marketing initiatives.
Much of the success here reflects hair conditioning technology unsurpassed in
the world.
WE'RE COMPLEMENTING INNOVATION WITH ACQUISITIONS. We have successfully
complemented internal innovation with acquisitions. The Clairol acquisition
moved P&G into the faster-growing Hair Colorants segment. Colorants appeal to
both aging baby boomers and experimental teens. This business is now fully
integrated, and we're launching our first innovations - on Nice 'n Easy and with
Herbal Essences Highlighting. At acquisition, Hugo Boss fragrance was a small
unknown brand with sales under $50 million. Hugo Boss is now the largest male
fine fragrance franchise in the world. At acquisition, SK-II was another small,
unknown brand with sales of less than $50 million. SK-II is now the leading
prestige skin care brand in Asia.
The Wella acquisition will give us access to the large and growing professional
hair care market, provide a geographic complement and a strong technology
partner to Clairol's colorant business, give us a greater presence in hair
styling and a complementary fragrance portfolio.
WE'RE MAINTAINING A STRONG COST FOCUS. A strong cost focus underpins all of our
activity in Beauty Care, which enables us to earn attractive margins while
providing value to consumers.
We're excited about the growth Beauty Care will continue to bring to the Company
as we go forward.
[GRAPHIC]
BABY AND FAMILY CARE
Baby and Family Care is home to the Company's single largest billion-dollar
brand, Pampers, and two other billion-dollar brands, Bounty and Charmin. Other
brands include Luvs, Puffs, Tempo and Dodot.
- - Baby and Family Care net sales grew 8% to $9.9 billion.
- - Baby and Family Care net earnings grew 20% to $882 million.
Net Sales
(in billions of dollars)
[BAR CHART]
2001 9.2
2002 9.2
2003 9.9
Net Earnings
(in millions of dollars)
[BAR CHART]
2001 658
2002 738
2003 882
[GRAPHIC]
BABY STAGES OF DEVELOPMENT
Around the world, parents bought 1.5 billion more Pampers diapers in 2002/03
than the previous year.
[GRAPHIC]
CHARMIN
Charmin was introduced in Germany/Austria/Switzerland in February 2002, and has
contributed over 25% of the total worldwide volume growth of Charmin since.
13
The challenge in Baby and Family Care is to be consumer- and customer-friendly
on the outside while managing complex innovation inside. We're meeting this
challenge.
[GRAPHIC]
MARK D. KETCHUM
President
Our goal is to delight consumers through better-performing products at a good
value, while delivering superior shareholder returns. The challenge in Baby and
Family Care is to do this in an environment of much higher capital costs and
longer innovation lead times. Our approach to managing complex innovation in
this environment is paying dividends with consumers and shareholders alike.
Baby and Family Care includes three of the Company's most recognizable
billion-dollar brands: Pampers, Bounty, and Charmin. Industry consolidation and
consumer expectations have increased competition and the importance of staying
in front on innovation. Babies are only in diapers about three years, so
one-third of our Baby Care consumer base turns over every year. New moms are
very interested in finding the latest and greatest performance and value.
We're focused on four strategies:
BETTER AND CHEAPER DESIGNS. Historically, we invented product improvements first
and cost-saved them later. We asked consumers to pay for this inefficiency with
higher prices. Today, we build structural cost reduction into original designs.
It's working. In the past year, unit costs have declined by more than $300
million. While delivering strong profit progress, we've still invested a
substantial portion of this cost reduction into more innovation and lower prices
to improve consumer value and grow market share.
360 degree INNOVATION. We're getting more out of every initiative by what we
call "360 degree innovation." We expect innovation in all elements that impact
consumer value: product, design, package, in-store presentation, price, and
clear, compelling marketing communication. We've developed a new research
technique to evaluate how these elements interact with each other for each new
initiative. Pampers Baby Stages of Development doubled the size of P&G's premium
diaper business, and Charmin was successfully launched in Mexico and Germany
leveraging 360 degree innovation.
INNOVATION-FRIENDLY EQUIPMENT. Consumers don't care what kind of equipment we
use to make products, but they will switch brands if we fall behind on
performance or value. This is why we invested $1 billion in a sustainable
capital standardization program over the past several years to make it easier
and more cost effective to innovate in Baby Care. Diaper production lines that
were different in every part of the world were replaced with a standard modular
converter. We can now innovate off-line and then quickly replace one or two
modules. Today, we make more diapers than we did five years ago with 30% fewer
lines - and our capital needs in the future will be lower. Total capital
spending in Baby and Family Care finished 2002/03 below 6% of sales, better than
key competition and well below our historical average.
VIRTUAL DESIGN. Designing physical prototypes of products and equipment is
expensive and time-consuming. Again, consumers don't want to pay for this. We've
expanded our capability to use computer-aided virtual design for everything from
better-fitting diapers to faster, more efficient paper machines. This has cut
development costs and accelerated time to market.
Baby Care and Family Care are very large categories that present significant
opportunities for category growth, share growth, geographic expansion and
improved shareholder returns. Being consumer- and customer-friendly on the
outside while managing complex innovation inside is the key to success.
[GRAPHIC]
HEALTH CARE
Health Care is the Company's fastest growing business, with innovations over the
last three years representing more than $1 billion in new sales. Key brands
include Crest, Iams, Eukanuba, Vicks, Actonel, Asacol, Scope, Pepto-Bismol and
ThermaCare.
- - Health Care net sales grew 16% to $5.8 billion.
- - Health Care net earnings grew 35% to $706 million.
Net Sales
(in billions of dollars)
[BAR CHART]
2001 4.4
2002 5.0
2003 5.8
Net Earnings
(in millions of dollars)
[BAR CHART]
2001 390
2002 521
2003 706
[GRAPHIC]
ACTONEL
Actonel delivered $650 million in global alliance sales worldwide.
[GRAPHIC]
PRILOSEC
Prilosec, the world's #1 selling drug in its class, is now available over the
counter to treat frequent heartburn.
15
We expect the future of Health Care to be one of continued high growth. We've
built a fast-growing, profitable business with breakthrough innovation,
strategic acquisitions and partnerships, and operating cost discipline.
[GRAPHIC]
BRUCE L. BYRNES
President
Our objective in Health Care is to lead Company growth by helping people and
pets live longer, healthier lives.
We've built a rapidly growing, profitable Health Care business by focusing on
the successful commercialization of breakthrough innovation, strategic
acquisitions and partnerships, and operating cost discipline.
INNOVATION. Successful innovations include Actonel, our prescription
osteoporosis drug, which reached $650 million in worldwide alliance sales after
only three years in the market. In Oral Care, Crest Whitestrips has reached
almost $300 million in sales and continues to grow. We've added another
whitening innovation with Night Effects, a "liquid strip" that whitens your
teeth while you sleep. In Personal Health Care, we created a new category with
ThermaCare, a therapeutic heat wrap that is 33% more effective than ibuprofen in
reducing lower back pain. We've grown our Pet Health and Nutrition business
behind breakthroughs such as Iams and Eukanuba Dental Defense. In just the last
three years, we've introduced innovations across Health Care that represent well
over $1 billion in new sales.
ACQUISITIONS, PARTNERSHIPS AND ALLIANCES. We actively seek to add to our own
innovation by identifying and effectively executing strategic acquisitions,
partnerships and alliances. We look for opportunities where the combination of
an external brand, product or technology and P&G's capabilities can create
significant incremental value for shareholders. We bought the Iams Company four
years ago. Since then, we've nearly doubled sales to $1.5 billion. Iams is now
the #1 dog and cat food brand in both the U.S. and Canada, up from #5 at
acquisition. We acquired the Dr. John's SpinBrush business in January of 2001
and more than doubled this business to more than $200 million, stimulating
growth of the power brush segment, which is increasing 25% per year. We're
creating a growing water purification business with PUR, which we bought three
years ago and have grown by more than 50%.
COST CONTROL. Innovations are successfully commercialized only if they provide
meaningful value to consumers. To ensure that we can offer good value to retail
customers and consumers day in and day out, and at the same time create value
for shareholders, we maintain constant focus on cost control. Our capital
spending as a percentage of sales in 2003 was 2.5% - among the lowest in the
Company and the industry in which we compete. Margins have improved over the
last two years, as profit growth has outpaced sales growth.
We believe the future for Health Care is one of continued high growth. We're
currently launching Prilosec OTC for the treatment of frequent heartburn.
Prescription-strength Prilosec was the top-selling pharmaceutical drug in the
world. Actonel continues to build share in major markets, including the U.S.,
Germany, France, Canada and the UK - and the prescription market for
osteoporosis treatments continues to grow. Less than 25% of consumers who have
osteoporosis are currently diagnosed.
We have an exciting pipeline of innovation across Health Care that we'll be
commercializing in the months and years ahead. We'll continue to develop this
with smart acquisitions, partnerships and alliances. With ongoing cost
optimization, we expect that profits will continue to grow ahead of sales.
[GRAPHIC]
SNACKS AND BEVERAGES
Snacks and Beverages is focused on salted snacks and coffee. Folgers is the #1
coffee brand in North America. Pringles is P&G's most global franchise, sold in
over 140 countries.
- - Snacks and Beverages net sales were flat at $3.2 billion.
- - Snacks and Beverages net earnings grew 1% to $306 million.
Net Sales
(in billions of dollars)
[BAR CHART]
2001 3.5
2002 3.2
2003 3.2
Net Earnings
(in millions of dollars)
[BAR CHART]
2001 242
2002 303
2003 306
[GRAPHIC]
FOLGERS PLASTIC PACKAGING
Folgers new AromaSeal(TM) Canister preserves freshness and has an easy-grip
handle and peel-off seal for greater convenience.
[GRAPHIC]
PRINGLES SNACK STACKS
Snack Stacks is one of the most successful initiatives in P&G's North America
snacks history.
17
We're providing sustained cash flow with rigorous cost discipline and a strong
innovation program supporting Folgers and Pringles, our two billion-dollar
brands.
[GRAPHIC]
JORGE P. MONTOYA
President
In Snacks and Beverages, the goal is to build our focused brands and provide
strong, sustained cash flow. Behind the strength of two billion-dollar brands -
Folgers and Pringles - rigorous cost discipline and a strong innovation program,
we're positioned to deliver.
We have faced a number of challenges over the past three years, but we have
responded to them squarely. Recognizing the need to deliver growth, we have
streamlined our Snacks and Beverages portfolio. Last year, we spun off the Jif
and Crisco brands, and we recently announced that we're exploring strategic
options for the juice business.
We're now sharply focused on salted snacks and coffee. These are the categories
in which P&G can leverage leadership to deliver value to consumers, customers
and shareholders. Folgers is the #1 coffee brand in North America. It has strong
retailer support and deep consumer loyalty. Pringles - P&G's most global
franchise - is one of the leading salted snack brands, sold in over 140
countries.
Three strategies will drive the growth of these big brands:
INNOVATION. P&G brings significant innovation scale to this business. Because of
the breadth of P&G businesses, our brands can access a broader portfolio of
relevant product and packaging technologies - inside and outside P&G - than many
competitors. For example, we recently introduced the new plastic AromaSeal(TM)
Canister on Folgers in the U.S., leveraging both technology and supplier
partnerships from elsewhere in the Company. This new package - a category first
- - is easier to carry and provides fresh aroma and taste day after day. Pringles'
innovations include Snack Stacks (a 23-gram lunchbox size) and customized
solutions for retailers: unique colors, flavors and sizes.
ENHANCED GO TO MARKET CAPABILITY. Our goal is for Folgers and Pringles to be
available to consumers whenever and wherever they shop. To do this, we're
developing stronger go to market capability. We're combining the scale and
leverage of P&G's Market Development Organizations with external distribution
and merchandising partners. New distribution alliances with Meiji in Japan and
Arnott's Snackfoods in Australia are expanding Pringles' presence in immediate
consumption channels.
COST DISCIPLINE. We continue to focus on improving the financial strength of
Snacks and Beverages. P&G Coffee margins are among the best-in-class. While
we've improved over the past four years, P&G Snacks margins remain below
best-in-class. We intend to close this gap by focusing on more efficient asset
utilization and ongoing cost reduction.
We want to acknowledge the heroic achievements of P&G employees, both active and
retired, during this past year. The Pringles plant in Jackson, Tennessee was
struck by a devastating tornado in May. Homes and businesses near the plant were
destroyed and virtually every tree surrounding the plant was snapped in two.
Fortunately, none of our employees was injured. Once safety had been assured,
these unsung heroes mounted an extraordinary effort to get the plant back up and
running. They worked in 24-hour shifts and, remarkably, in only two weeks, plant
lines had started producing again. The Jackson plant story is a profile in P&G
courage and dedication.
The Snacks and Beverages business is more focused today than ever. We have hard
work ahead of us. We must respond to aggressive competitive coffee discounting
and merchandising with better consumer value and category-leading innovation. We
must continue to improve margins in Snacks, while sustaining the pace of
consumer innovation and retailer customization. These are significant
challenges, but I'm convinced we have the brands, strategies and organization to
meet them head-on.
[GRAPHIC]
MARKET DEVELOPMENT ORGANIZATION
P&G's Market Development Organization is the Company's on-the-ground connection
to local consumers and customers. The global organization includes seven
regions:
- - ASEAN, Australasia and India
- - Central and Eastern Europe, Middle East and Africa
- - Greater China
- - Latin America
- - North America
- - Northeast Asia
- - Western Europe
- - P&G's top 10 countries grew volume 11% in fiscal 2003.
- - P&G grew volume 13% with its top 10 customers in fiscal 2003.
Top Ten Countries
Volume Growth
[BAR CHART]
2002 7%
7%
2003 7%
11%
Top Ten Customers
Volume Growth
[BAR CHART]
2002 5%
12%
2003 6%
13%
- - Balance
- - Top Ten
19
We combine deep brand and consumer knowledge with local market knowledge. We're
confident we have only scratched the surface of what this organization is
capable of delivering.
[GRAPHIC]
R. KERRY CLARK
President
P&G's Market Development Organization (MDO) is a unique, growing source of
competitive advantage. MDO professionals lead retailer and country business
teams to build P&G brands in the local markets, ranging from North America to
Greater China.
We combine deep brand and consumer knowledge embedded in P&G's Global Business
Units (GBUs) with local market knowledge in the MDOs. We bring together
initiatives from every GBU and create business-building plans for retail
partners in more than 160 countries. As a result, we go to market as one company
in every country to help leverage scale and get the full benefit of
understanding what works and what doesn't work across categories.
The Market Development Organization focuses primarily on winning the first
moment of truth - when the consumer chooses P&G brands at the retail shelf.
We have four key priorities:
FOCUS ON THE BIG OPPORTUNITIES. We focus on top P&G brands in top countries with
top retailers that account for most of P&G's business. Over the last year, the
top 10 countries grew volume four percentage points faster than the balance, and
top 10 customers grew seven percentage points faster.
CREATE VALUE FOR CONSUMERS. We know we must provide brands that represent good
value for consumers. Three years ago, too many P&G brands were failing this
test. Their prices were higher than competition, and not justified by
performance advantages that warranted the premium. We've fixed that. Our brand
pricing and promotion strategies have been reviewed, changes made and progress
tracked. While there will always be strong price competition, the vast majority
of top brands in major markets are now priced competitively, and will stay
priced competitively.
CREATE VALUE FOR RETAILERS. We've deepened P&G's extensive database of shopper
research to help retailers better understand the needs of shoppers and provide
shopping experiences that earn loyalty and generate profitable sales. We've
customized go to market plans around the world to reflect the unique needs of
retail customers. For large global, regional and local customers, we organize
around geographic scope; we have individual programs in place with virtually all
our top retailers. For developing markets, we tailor programs for very small
stores that are part of each retail landscape. As a result, we're seeing very
positive business results in both developed and developing markets.
MAKE SURE P&G PRODUCTS ARE AVAILABLE. We're improving availability and
replenishment of P&G products on store shelves. We've reduced the number of
incomplete orders by two-thirds. We're developing in-store programs to reduce
out-of-stock products. Our vision is to create a retail customer supply chain
driven by consumer purchases rather than factory production schedules.
P&G's Market Development Organization is gaining momentum. We have learned a
great deal since designing this unique organization in 1999. This knowledge is
resulting in better business plans, tighter customer relationships and stronger,
sustainable growth for P&G. We're confident we've only scratched the surface of
what this organization is capable of delivering.
20
DIRECTORS
[PHOTO OF DIRECTORS]
In order, from left to right:
LYNN M. MARTIN
Former Professor, J.L. Kellogg Graduate School of Management, Northwestern
University and Chair of the Council for The Advancement of Women and Advisor to
the firm of Deloitte & Touche LLP. Director since 1994. Age 63. Member of the
Finance and Public Policy Committees.
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). Director since 1993. Age 65. Member of the
Compensation, Executive and Finance Committees.
CHARLES R. LEE
Chairman of the Board of Directors, Verizon Communications (telecommunication
services). Director since 1994. Age 63. Member of the Audit, Compensation and
Governance and Nominating Committees.
MARINA V.N. WHITMAN
Professor of Business Administration and Public Policy, University of Michigan.
Director since 1976. Age 68. Chairman of the Governance and Nominating
Committee, and member of the Compensation and Finance Committees.
ROBERT D. STOREY
Partner in the law firm of Thompson Hine, L.L.P. Director since 1988. Age 67.
Chairman of the Public Policy Committee and member of the Finance Committee.
BRUCE L. BYRNES
Vice Chairman of the Board and President - Global Beauty and Feminine Care and
Global Health Care. Director since 2002. Age 55.
W. JAMES MCNERNEY, JR.
Chairman of the Board and Chief Executive Officer, 3M Company (diversified
technology). Director since 2003. Age 54. Member of the Audit and Governance and
Nominating Committees.
SCOTT D. COOK
Chairman of the Executive Committee of the Board, Intuit Inc. (a software and
web services firm). Director since 2000. Age 51. Member of the Compensation and
Innovation and Technology Committees.
A.G. LAFLEY
Chairman of the Board, President and Chief Executive. Director since 2000. Age
56. Chairman of the Executive Committee.
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). Director since 1989. Age 68.
Chairman of the Compensation Committee and member of the Executive and
Innovation and Technology Committees.
JOHN F. SMITH, JR.
Retired Chairman of the Board and CEO, General Motors Corporation (automobile
and related businesses). Director since 1995. Age 65. Chairman of the Audit
Committee and member of the Governance and Nominating and Public Policy
Committees.
MARGARET C. WHITMAN
President and Chief Executive Officer, eBay Inc. (a global online marketplace
for the sale of goods and services). Director since 2003. Age 47. Member of the
Compensation and Governance and Nominating Committees.
JOHN E. PEPPER
Retired Chairman of the Board (retired from the Board on July 1, 2003).
R. KERRY CLARK
Vice Chairman of the Board and President - Global Market Development and
Business Operations. Director since 2002. Age 51.
RICHARD J. FERRIS
Retired Co-Chairman, Doubletree Corporation. Director since 1979. Age 66.
Chairman of the Finance Committee and member of the Executive and Public Policy
Committees.
DOMENICO DESOLE
President and Chief Executive Officer and Chairman of the Management Board,
Gucci Group N.V. (multibrand luxury goods company). Director since 2001. Age 59.
Member of the Audit and Governance and Nominating Committees.
ERNESTO ZEDILLO
Former President of Mexico and Director of the Center for the Study of
Globalization and Professor in the field of International Economics and Politics
at Yale University. Director since 2001. Age 51. Member of the Finance and
Public Policy Committees.
RALPH SNYDERMAN
Chancellor for Health Affairs and Executive Dean, School of Medicine at Duke
University, and President/CEO of Duke University Health Systems. Director since
1995. Age 63. Chairman of the Innovation and Technology Committee.
JOHNATHAN A. RODGERS
President and Chief Executive Officer, TV One (media and communications).
Director since 2001. Age 57. Member of the Innovation and Technology and Public
Policy Committees.
The Board of Directors has seven committees: Audit Committee, Compensation
Committee, Executive Committee, Finance Committee, Governance and Nominating
Committee, Innovation and Technology Committee, Public Policy Committee
21
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 and
Feminine Care and Global Health Care
R. KERRY CLARK
Vice Chairman of the Board and
President - Global Market
Development and Business Operations
FERNANDO AGUIRRE
President - Special Projects
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 and
India
MARK A. COLLAR
President - Global Pharmaceuticals
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 and
Family Care
ROBERT A. MCDONALD
President - Global Fabric and
Home Care
JORGE S. MESQUITA
President - Global Home Care
JORGE P. MONTOYA
President - Global Snacks and
Beverages and Latin America
TOM A. MUCCIO
President on Special Assignment
MARTIN J. NUECHTERN
President - Global Hair Care
DIMITRI PANAYOTOPOULOS
President - Central and 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 and
Family Care
NABIL Y. SAKKAB
Senior Vice President - Research
and Development, Global Fabric
and 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
MARIANO MARTIN
Global Customer Business
Development Officer
CHARLOTTE R. OTTO
Global External Relations Officer
FILIPPO PASSERINI
Global Business Services Officer
JAMES R. STENGEL
Global Marketing Officer
JUAN PEDRO HERNANDEZ
Vice President and Treasurer
JOHN K. JENSEN
Vice President and Comptroller
SHARON E. ABRAMS
Secretary
22 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
At Procter & Gamble, 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 and
in all countries. We have maintained strong governance policies and practices
for many years.
The management of Procter & Gamble is responsible for the objectivity and
integrity of the accompanying Consolidated Financial Statements. The Board of
Directors has engaged independent auditors, Deloitte & Touche LLP, to audit our
financial statements and they have expressed an unqualified opinion.
We are committed to providing timely, accurate and understandable information to
investors. This encompasses:
Maintaining a strong internal control environment. Our system of internal
controls includes written policies and procedures, segregation of duties and a
careful selection and development of employees. The system is designed to
provide reasonable assurance that transactions are executed as authorized and
accurately recorded, that assets are safe-guarded and that accounting records
are sufficiently reliable to permit the preparation of financial statements that
conform in all material respects with accounting principles generally accepted
in the United States of America. We maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in reports under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the specified time periods. We monitor these internal controls
through self-assessments and an ongoing program of internal 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 high ethical standards.
Focusing on financial stewardship. We maintain a specific program to ensure that
employees understand 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 financial
reporting 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.
Engaging our Disclosure Committee. Last fall, we formalized a Disclosure
Committee, a group of senior level executives responsible for ensuring that
significant business activities and events are appropriately identified,
reported to management and the Board of Directors and disclosed, as appropriate.
Encouraging strong and effective Corporate Governance from our Board of
Directors. We have an active, capable and diligent Board that meets the required
standards for independence, and we welcome the Board's oversight as a
representative of the shareholders. Our Audit Committee comprises independent
directors with the financial knowledge and experience to provide appropriate
oversight. We review key accounting policies and financial reporting and
internal control matters with them and encourage their independent discussions
with Deloitte & Touche LLP, our independent auditors.
Providing investors with financial results that are complete and under-
standable. 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 accounting principles
generally accepted in the United States of America, which require estimates
based on management's best judgment.
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
The Procter & Gamble Company and Subsidiaries 23
TABLE OF CONTENTS
FINANCIAL REVIEW
Results of Operations 23
Segment Results 25
Financial Condition 28
Key Accounting Policies 29
Hedging and Derivative Financial Instruments 31
Restructuring Program 31
Forward-Looking Statements 33
INDEPENDENT AUDITORS' REPORT 34
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Earnings 35
Balance Sheets 36
Shareholders' Equity 38
Cash Flows 39
Notes to Consolidated Financial Statements 40
FINANCIAL REVIEW
RESULTS OF OPERATIONS
The Company markets nearly 300 products in more than 160 countries around the
world in five distinct business segments: Fabric and Home Care, Beauty Care,
Baby and Family Care, Health Care and Snacks and Beverages.
The Company's results for the fiscal year ended June 30, 2003 reflect
broad-based business strength, with four of the five segments delivering
top-line sales growth and all five business segments delivering net earnings
growth.
The Company continues to make clear choices about where to play and how to win.
The framework for these decisions is grounded in focus areas that include:
building core categories and leading brands, growing with leading customers and
in the biggest geographic markets, investing in faster-growing, higher-margin
businesses and building leadership in fast-growing developing markets.
Consistent with this framework, in March 2003 the Company reached an agreement
with the controlling shareholders of Wella AG to acquire 77.6% of the voting
class shares. In June 2003, the Company completed a tender offer for the
remaining outstanding voting class shares and preference shares, securing
approximately 81% of the total outstanding Wella AG shares (99% of the voting
class shares and 45% of the preference shares). This acquisition is expected to
close in the first quarter of fiscal 2004. Wella AG is a leading beauty care
company selling its products in more than 150 countries, focused on professional
hair care, retail hair care and cosmetics and fragrances.
This framework also requires some difficult decisions, including the Company's
announcement in July 2003 to seek strategic alternatives for its Sunny Delight
and Punica juice drink brands. Another example is the Company's continuing
evaluation of outsourcing arrangements in areas where the Company can leverage
industry expertise and scale to obtain high quality services at a lower cost.
The Company has announced plans to outsource real estate and facilities
management, information technology and certain other administrative and
manufacturing processes.
Volume and Net Sales
The Company achieved record sales of $43.38 billion in 2003, exceeding 2002
sales by $3.14 billion, or 8%. Volume growth of 8% was broad-based, with
particular strength in Fabric and Home Care, Beauty Care and Health Care. In
fact, 19 of the Company's top 20 brands increased volume as compared to the
prior year. Excluding the impacts of acquisitions and divestitures, volume was
also up 8%, as the impact of the Clairol acquisition in November 2001 was offset
by the impact of the Jif and Crisco spin-off in May 2002. Net sales included a
favorable foreign exchange impact of 2%, as the strength of the Euro was
partially offset by weakness in certain Latin American currencies. The foreign
exchange impact was offset by pricing of 2% to stimulate growth and remain
competitive in key categories, including diapers, tissue, hair care, feminine
care, teeth whitening and coffee. Future pricing activities will be aimed at
providing value to both consumers and customers and will be influenced by
competitive activity and the Company's product initiative program.
24 The Procter & Gamble Company and Subsidiaries Financial Review
Fiscal year 2002 sales were $40.24 billion, an increase of 3%, compared to
$39.24 billion in 2001, on volume growth of 7% driven by Health Care and Beauty
Care. Net sales grew less than volume due to a 1% impact for exchange effects, a
1% impact for pricing and a 2% impact for mix.
Net Earnings
Net earnings were $5.19 billion in 2003, an increase of 19% compared to $4.35
billion in 2002. Reported results included after-tax restructuring charges of
$538 million in 2003 and $706 million in 2002. Increased earnings were driven
by volume growth, the shift in mix to higher profit products in the Health Care
and Beauty Care segments, lower restructuring costs and lower manufacturing
costs as a percentage of net sales. Net earnings in 2001 were $2.92 billion,
including after-tax restructuring charges of $1.48 billion. Net earnings in 2002
exceeded 2001 due to volume growth, manufacturing savings and lower
restructuring charges. The restructuring program covered enrollment reductions,
manufacturing consolidations and portfolio choices to scale back or discontinue
under-performing businesses and initiatives and was substantially complete at
June 30, 2003. It is discussed in more detail in the Restructuring Program
section and Note 2 to the Consolidated Financial Statements.
Diluted net earnings per share were $3.69 in 2003 compared to $3.09 in 2002 and
$2.07 in 2001, including the restructuring charge impact of $0.39, $0.50 and
$1.05 per share, respectively.
Operating Costs
Cost of products sold was $22.14 billion in 2003 compared to $20.99 billion in
2002 and $22.10 billion in 2001. Before-tax restructuring charges included in
cost of products sold were $381 million in 2003, $508 million in 2002 and $1.14
billion in 2001. Gross margin in 2003 improved to 49.0%, an increase of 120
basis points versus the previous year. Lower restructuring costs accounted for
40 basis points of the improvement with the remainder achieved behind lower
material costs and the benefits of restructuring and base business savings
delivered outside the restructuring program. Gross margin of 47.8% in 2002
improved versus 43.7% in 2001, which was more significantly impacted by
restructuring charges.
Marketing, research, administrative and other expense (MRA&O) was $13.38 billion
in 2003 versus $12.57 billion in 2002 and $12.41 billion in 2001. MRA&O included
before-tax restructuring charges of $374 million in 2003, $519 million in 2002
and $583 million in 2001. The increase in MRA&O in 2003 versus 2002 was driven
by additional marketing investments behind new product launches and expansions
of existing brands, including Tide with Bleach, Swiffer Duster, Crest
Whitestrips and Olay Regenerist. Marketing investments were partially offset by
lower research and administrative costs, reflecting savings from the Company's
restructuring program.
As a percent of net sales, MRA&O has improved with 2003 down 30 basis points to
30.9%. Marketing expenses as a percentage of net sales increased 75 basis points
due to the marketing investments discussed in the preceding paragraph as well as
other product launches and brand equity building activities. This was more than
offset by lower research and administrative expenses as a percentage of net
sales due to scale efficiencies and lower restructuring costs. MRA&O was 31.2%
of net sales in 2002 versus 31.6% in 2001, with higher marketing investments
more than offset by lower restructuring costs.
Non-Operating Items
Interest expense was $561 million in 2003, compared to $603 million in 2002 and
$794 million in 2001. The decline in interest expense in 2003 was driven by
lower interest rates and debt balances. The decline in 2002 versus 2001 was
driven by lower interest rates partially offset by an increase in debt to fund
the Clairol acquisition in November 2001.
Other non-operating income, which consists primarily of interest and investment
income and divestitures, contributed $238 million in 2003 compared to $308
million in 2002 and $674 million in 2001. This decline was driven by
significantly lower gains from divestitures and asset sales in 2003 and 2002
versus 2001, as the Company's activity to divest non-strategic brands declined.
The Company's effective tax rate for 2003 was 31.1%, a reduction of 70 basis
points compared to the 2002 rate of 31.8%. The effective tax rate for 2001 was
36.7%. The decline in the current year was driven primarily by the country mix
impact of foreign operations, as earnings increased in countries with lower
overall tax rates. The declining rate since 2001 also reflected the impact of
lower restructuring charges and amortization of goodwill and indefinite-lived
intangibles prior to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets."
Net Earnings Margins
Net earnings margin was 12.0% in 2003 versus 10.8% in 2002 and 7.4% in 2001. The
margin increase in 2003 was primarily driven by higher volume, lower unit cost
of products sold due to lower materials costs, the benefits of restructuring, as
well as base business savings, and a reduction in restructuring charges. In
2002, the margin increase reflected a reduction in restructuring charges, the
benefit of base and restructuring cost savings projects on both manufacturing
and overhead costs and the benefits of lower interest expense.
Financial Review The Procter & Gamble Company and Subsidiaries 25
2003 Net Sales by Business Segment (1)
[PIE CHART]
Fabric and Home Care 29%
Beauty Care 28%
Baby and Family Care 23%
Health Care 13%
Snacks and Beverages 7%
(1) Excludes net sales and net earnings held in Corporate
2003 Net Earnings by Business Segment (1)
Fabric and Home Care 35%
Beauty Care 33%
Baby and Family Care 15%
Health Care 12%
Snacks and Beverages 5%
Percentage Change in Net Sales vs. Prior Year
---------------------------------------------------
Foreign Total
Volume Exchange Pricing Mix/Other Net Sales
- -----------------------------------------------------------------------------
Fabric and Home Care 9% 1% -1% -1% 8%
- -----------------------------------------------------------------------------
Beauty Care 15% 3% -2% -2% 14%
- -----------------------------------------------------------------------------
Baby and Family Care 7% 3% -3% 1% 8%
- -----------------------------------------------------------------------------
Health Care 18% 2% -2% -2% 16%
- -----------------------------------------------------------------------------
Snacks and Beverages -2% 3% -2% 1% -%
- -----------------------------------------------------------------------------
Total Company 8% 2% -2% -% 8%
- -----------------------------------------------------------------------------
SEGMENT RESULTS
The following pages provide perspective on the Company's business segments. To
reflect management and business changes, the Company realigned its reporting
segments. Effective July 1, 2002, the feminine care business is included in the
Beauty Care segment and the former Baby, Feminine and Family Care segment was
renamed the Baby and Family Care segment. Prior year operating information has
been restated to conform to this change. In addition, the Food and Beverage
segment was renamed Snacks and Beverages to reflect its remaining businesses.
The historical results for the elements of the former Food and Beverage segment
that have been divested or spun off (i.e., Jif, Crisco and commercial
shortening and oils) are now reflected in Corporate.
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.
Investments in companies over which the Company exerts significant influence,
but does not control the financial and operating decisions, are managed as
integral parts of the Company's business units. Consistent with internal
management reporting, these investments are accounted for as if they were
consolidated subsidiaries in segment reporting, with 100% recognition of the
income statement and separate elimination of minority interest. Entries to
eliminate the individual revenue and expense line items, adjusting the method of
accounting to the equity method as required by accounting principles generally
accepted in the United States of America (U.S. GAAP), are included in Corporate.
Taxes are reflected in the business segments at estimated local statutory tax
rates. The effects of this convention are also eliminated in Corporate to adjust
management reporting conventions to U.S. GAAP.
Fabric and Home Care
Fabric and Home Care delivered balanced top and bottom line growth behind a
program of new product launches and cost reductions. Volume growth of 9% was
balanced across both fabric care and home care as well as across regions, with
particular strength in developing markets. Net sales increased 8% to $12.56
billion. Foreign exchange contributed a positive impact of 1% to overall sales,
driven primarily by the strong Euro. Sales were negatively impacted by 1% due to
pricing investments to deliver improved in-store presence and increased
merchandising, primarily in North America and Western Europe. Sales were also
reduced by 1% from mix due to growth of lower-priced products, including rapid
growth in developing markets and broadening of the mid-tier portfolio of
brands in major geographies, including the launches of Mr. Proper in Western
Europe and Bold in Japan.
26 The Procter & Gamble Company and Subsidiaries Financial Review
Net earnings were up 12% to $2.06 billion, driven primarily by strong volume
growth, with additional benefits from lower manufacturing costs. Approximately
half of the manufacturing cost savings were achieved from restructuring and base
cost reduction programs, with the remainder coming from a combination of lower
material costs and commodity prices. The impact of strong volumes and lower
manufacturing costs on earnings was partially offset by increased marketing
spending in support of new product launches and expansion of existing brands,
including Bold in Japan, Mr. Proper in Western Europe, and Tide with Bleach and
Swiffer in North America.
For fiscal year 2002, unit volume grew 3%, with growth across every geographic
region. Net sales for the year were flat at $11.62 billion, and were negatively
impacted by 1% of foreign exchange and 2% of negative price and mix. The
negative price and mix was the result of growth in lower-priced products,
including mid-tier brands, larger sizes and developing market business. Net
earnings were $1.83 billion in 2002, up 11% behind lower material prices, cost
savings from product reformulations and manufacturing plant efficiencies.
Beauty Care
Beauty Care delivered double-digit unit volume, sales and net earnings
growth in 2003. Unit volume grew 15%. Excluding the impacts of the Clairol
acquisition, unit volume increased 8% behind solid growth in hair care. Net
sales grew 14% to $12.22 billion, as volume and a positive 3% impact from
foreign exchange were partially offset by a negative 2% impact from pricing and
2% from mix. The pricing impact was driven by price reductions taken to expand
the Company's portfolio of hair care brands to consumers that shop within the
category's lower priced, mid-tier brands. The mix impact was driven by the
increased sales of Clairol brands, which carry lower revenue per unit than the
Company's base hair care brands.
Net earnings grew 23% to $1.98 billion. Approximately half of this increase was
driven by volume, with the remainder driven by reductions in manufacturing costs
through restructuring, base savings programs and lower material costs. Lower
overhead spending due in part to the Clairol integration was offset by
investments in marketing.
In 2002, Beauty Care results also benefited from the Clairol acquisition, which
was completed in the second quarter. Unit volume increased 13%, driving sales
growth of 7% to $10.72 billion. Excluding the impact of the Clairol acquisition,
unit volume increased 3%, primarily behind the base hair care business and fine
fragrances and cosmetics. Sales were negatively impacted by 2% of foreign
exchange, pricing of 1% and product mix of 3%, driven by lower revenue per unit
for the Clairol brands and higher volume growth in developing regions. Earnings
were $1.61 billion, up 18%, driven by more efficient marketing spending against
a growing business and a continued focus on cost reductions.
Baby and Family Care
Baby and Family Care delivered volume growth of 7%. Baby care growth was driven
by the continued success of the Baby Stages of Development initiative launch.
Family care growth was driven by strength in the North American Bounty and
Charmin businesses. Net sales grew 8% to $9.93 billion as 3% positive foreign
exchange impact and 1% positive mix impact were partially offset by a 3%
negative impact from pricing. Positive mix was driven by increased sales of
higher priced, premium tier diapers behind the Baby Stages of Development
initiative launch. The pricing impact was driven by targeted investments to
match competitive pricing and merchandising across the segment, primarily in
North America and Western Europe.
Net earnings grew 20% to $882 million behind continued cost reductions,
primarily achieved through increased scale from volume growth and lower product
cost behind base business and restructuring savings.
In 2002, Baby and Family Care delivered earnings progress driven by volume
growth and extensive cost reductions. Volume grew 5%, with increases in both
baby care and family care. Net sales for the year were essentially flat at $9.23
billion versus 2001 as volume growth was offset by commodity driven price
declines and pricing adjustments on Luvs in North America and diapers in Western
Europe and a negative 2% impact from foreign exchange. Net earnings were $738
million, up 12%, behind an ongoing program of product and overhead cost
reductions, including benefits from restructuring activities that streamlined
manufacturing operations.
Health Care
Health Care delivered 18% volume growth with every geographic region and
category contributing, led by oral care and pharmaceuticals. Oral care grew
behind Crest Whitestrips and Crest Night Effects. Pharmaceutical volume growth
continued behind Actonel, including the Once-a-week dosage. Net sales for the
year were $5.80 billion, an increase of 16% as compared to 2002. A favorable
foreign exchange impact of 2%, driven primarily by the strength of the Euro, was
more than offset by a negative pricing impact of 2%, primarily driven by lower
pricing on Crest Whitestrips to match a competitive entry, and a
Financial Review The Procter & Gamble Company and Subsidiaries 27
negative mix impact of 2%. The negative product mix impact was primarily driven
by growth in developing regions and a shift in Actonel volume mix, which is sold
under an alliance agreement, to support the global Once-a-week dosage launch.
Under the agreement, the sales rate differs based upon geography.
Net earnings for Health Care were $706 million, an increase of 35%. The majority
of the increase was driven by volume growth and the shift to higher margin
products, partially offset by additional marketing investments to support
product initiatives, including Actonel, Crest Whitestrips and Crest Night
Effects.
In 2002, Health Care delivered a 15% increase in unit volume, driven by growth
in the oral care and pharmaceutical businesses. Net sales increased 14% to $4.98
billion, including a 1% negative impact of foreign exchange. Health Care's
volume growth from high-margin products funded increased marketing investments
while still delivering a net earnings increase of 34% to $521 million.
Snacks and Beverages
Snacks and Beverages unit volume declined 2% reflecting the impact of the
business interruption on snacks shipments caused by tornado damage to the
Jackson, Tennessee manufacturing facility, as well as softness in the juice
category. Net sales were $3.24 billion, or essentially flat versus the prior
year, as a positive 3% impact from foreign exchange and 1% from mix were
partially offset by a negative 2% impact from pricing, primarily driven by price
declines in the coffee category in response to increased competitive promotional
spending. Despite the impact of the tornado and lower volume, net earnings
increased 1% to $306 million, driven by reductions in cost of products sold,
reflecting the impact of both base business and restructuring savings.
In 2002, Snacks and Beverages delivered earnings growth despite top-line
challenges. Unit volume declined 2% and sales declined 6% to $3.25 billion
driven by commodity-related pricing actions in coffee and negative foreign
exchange impacts. Net earnings grew 25%, to $303 million, as broad-based cost
reductions more than offset declining volumes.
In July 2003, the Company announced it was exploring strategic alternatives with
respect to the global juice business, which could include the sale of its brands
and related assets. The impacts of any potential sale of this business are not
currently determinable. While clearly a significant portion of Snacks and
Beverages, the ongoing impacts of a potential divestiture are not expected to be
material to the Company's operations or financial condition.
Corporate
Corporate includes certain operating and non-operating activities as well as
eliminations to adjust management reporting principles to U.S. GAAP. Operating
activities in Corporate include the results of incidental businesses managed at
the corporate level along with the elimination of individual line item results
for companies over which the Company exerts significant influence, but does not
control the operations. Operating elements also include intangible asset
amortization charges, restructuring program charges, certain employee benefit
costs and other general corporate items. The non-operating elements include
financing and investing activities. In addition, Corporate includes the
historical results of certain divested businesses of the former Food and
Beverage segment.
Corporate net sales in 2003 primarily reflected the elimination of sales by
companies over which the Company exerts significant influence, but does not
control. Sales in 2002 included these eliminations along with net sales of the
divested businesses of the former Food and Beverage segment. Lower Corporate
earnings in 2003 primarily reflected the impact of the Jif and Crisco operations
in the base period. Corporate earnings were also lower due to financing elements
of employee benefit plans and hedging impacts from a stronger Euro, partially
offset by decreased restructuring costs.
In 2002, Corporate earnings reflected lower restructuring costs, lower interest
expense and the discontinuation of amortization of goodwill and indefinite-lived
intangibles. These were partially offset by reduced gains from hedging.
28 The Procter & Gamble Company and Subsidiaries Financial Review
FINANCIAL CONDITION
The Company's financial condition remains solid, particularly as demonstrated by
cash flow generation. One of the Company's key focus areas is cash management,
including capital spending targets, to achieve 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 offshore funding needs,
liquidity management objectives and other economic considerations.
The Company continues to generate strong operating cash flow. In 2003, operating
cash flow was $8.70 billion, up $958 million from $7.74 billion in 2002. The
increase in 2003 was primarily driven by higher earnings. Changes in working
capital also contributed, primarily behind an increase in current liabilities.
Operating cash flow in 2002 was up $1.94 billion from $5.80 billion in 2001,
driven by higher earnings as adjusted for lower depreciation and amortization
charges, and an increase in taxes payable.
Operating cash flow less capital spending, or free cash flow, was $7.22 billion
for 2003, a 19% increase over the prior year. The majority of the year-over-year
improvement was driven by increased earnings with lower capital spending also
contributing. Free cash flow was $6.06 billion in 2002 and $3.32 billion in
2001.
Free Cash Flow
(in billions of dollars)
[BAR CHART]
2001 3.32
2002 6.06
2003 7.22
Net cash used for acquisitions in 2003 was $61 million. This compares to $5.47
billion in cash used in 2002, primarily for the Clairol acquisition, and $138
million in 2001. The pending acquisition of Wella AG will be funded using a
combination of debt and available cash balances.
Proceeds from the divestiture of certain non-strategic brands and other asset
sales generated $143 million in cash flow in the current year, compared to $227
million generated in 2002. Divestitures in both years reflect historical levels,
but represent a significant decline when compared to the $788 million generated
in 2001 during the Company's program to divest minor brands.
The Company maintains a share repurchase program, which authorizes the purchase
of shares of Company stock 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 the Company may repurchase additional outstanding shares.
Current year purchases under the combined programs were $1.24 billion,
reflecting a return to historical levels, compared to $568 million in 2002 and
$1.25 billion in 2001. The decline in 2002 was primarily due to cash
requirements associated with the Clairol acquisition.
Common share dividends grew 8% to $1.64 per share in 2003 versus $1.52 in 2002
and $1.40 in 2001. The annual dividend rate will increase 11% to $1.82 per
common share in 2004, marking the 48th consecutive fiscal year of increased
common share dividend payments. Total dividend payments, to both common and
preferred shareholders, were $2.25 billion, $2.10 billion and $1.94 billion in
2003, 2002 and 2001, respectively.
Total debt decreased from $14.93 billion in 2002 to $13.65 billion in 2003, a
reduction of $1.28 billion. Total debt in 2001 was $12.02 billion. The decrease
in 2003 was primarily due to the utilization of cash flow from operations to pay
down existing balances. The increase in debt in 2002 was primarily driven by the
Clairol acquisition.
Long-term borrowing available under the Company's current shelf registration
statement filed in March 2002 was $3.50 billion at June 30, 2003. Additionally,
due to strong credit ratings, the Company is able to issue commercial paper at
favorable rates and to readily access general bank financing. The Company's
Standard & Poor's (S&P) and Moody's short-term credit ratings are A-1+ and P-1,
respectively.
Capital Spending
Capital spending efficiency continues to be a focus area for the Company. Total
capital spending in 2003 was $1.48 billion, a decrease of $197 million compared
to 2002 spending of $1.68 billion. Capital spending in 2001 was $2.49 billion.
Capital spending in 2003 as a percentage of net sales was 3.4%, the lowest level
in over a decade. Capital spending was 4.2% and 6.3% of net sales in 2002 and
2001,
Financial Review The Procter & Gamble Company and Subsidiaries 29
respectively. This is a result of the systemic interventions the Company has
made to improve capital spending efficiencies and asset utilization and is
primarily the result of lower spending in Baby and Family Care. On an ongoing
basis, while there may be exceptional years when specific business
circumstances, such as capacity additions, may lead to higher spending, the
Company's goal is to maintain capital spending at about 4% of net sales.
Capital Spending
(in billions of dollars)
[BAR CHART]
[PLOT POINTS TO COME]
Guarantees and Other Off-Balance Sheet Arrangements
The Company does not have guarantees or other off-balance sheet financing
arrangements that the Company believes could have a material impact on financial
condition or liquidity.
Purchase Commitments
The Company has purchase commitments for materials, supplies, services and fixed
assets as part of the normal course of business. Due to the proprietary nature
of many of the Company's materials and processes, certain supply contracts
contain penalty provisions for either early termination or failure to purchase
contracted quantities. The Company does not expect potential payments under
these provisions to materially affect results of operations or financial
condition. This conclusion is made based upon reasonably likely outcomes assumed
by reference to historical experience and current business plans.
Liquidity
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 sufficient credit funding to meet any short-term
financing requirements. The Company does not have other commitments or related
party transactions that are considered material to the Consolidated Financial
Statements.
KEY ACCOUNTING POLICIES
The Company applies 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,
certain employee benefits and goodwill and intangible assets. These accounting
policies, and others set forth in Note 1 to the Consolidated Financial
Statements, are integral to understanding the results of operations and
financial condition of the Company.
Inherent in the application of accounting principles are necessary estimates,
judgments and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. 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 change that would materially affect the Company's results of operations or
financial condition in any given year.
The Company has discussed the selection of key accounting policies and the
effect of estimates with the Audit Committee of the Company's Board of
Directors.
Revenue Recognition
Sales are recognized when revenue is realized or realizable and earned. Most
revenue transactions represent sales of inventory, and revenue is recognized
when risk and title to the product transfers to the customer. A provision for
payment discounts and product return allowances is recorded as a reduction of
sales within the same period that the revenue is recognized. Given the nature of
the Company's business, 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 and
was substantially complete at the end of 2003. The Company provides
forward-looking information about the overall program, including estimated
savings and costs. Such disclosures represent management's best estimate and do
require significant estimates about the program. The specific reserves related
to the restructuring program also require judgment and estimation, but are not
considered highly uncertain. See Note 2 to the Consolidated Financial
Statements.
30 The Procter & Gamble Company and Subsidiaries Financial Review
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
10 to the Consolidated Financial Statements). 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 tax laws and rates, and their related interpretations, may
affect 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. Certain changes or future events, such as changes in legislation, tax
rates or the geographic mix of earnings, could have an impact on the Company's
estimates.
Employee Benefits
The Company sponsors various post-employment benefits throughout the world.
These include pension plans, both defined contribution plans and defined benefit
plans, and other post-employment benefit (OPEB) plans, consisting primarily of
health care and life insurance for retirees. For accounting purposes, the
defined benefit and OPEB plans require assumptions to estimate the projected and
accumulated benefit obligations, including discount rate, expected salary
increases and health care cost trend rates. These and other assumptions,
including the expected return on plan assets, also affect the annual expense
recognized for these plans.
The expected rates of return on the various defined benefit pension plans'
assets are based on the asset allocation of each plan and the long-term
projected return of those assets, which represent a diversified mix of U.S. and
international corporate equities and government and corporate debt securities.
For 2003, the average return on assets assumption is 7.7%. A change in the rate
of return of 1% would impact annual benefit expense by approximately $10 million
after tax. The rate of return on OPEB assets, comprised primarily of Company
stock, also is based on the long-term projected return and reflects the
historical pattern of favorable returns on the Company's stock relative to
broader market indices (e.g., S&P 500). For 2003, the return on assets
assumption is 9.5%. A 1% change in the rate of return would impact annual
benefit expense by approximately $20 million after tax.
The discount rates used for defined benefit and OPEB plans are set by
benchmarking against investment grade corporate bonds rated AA or better. The
average rate on the defined benefit plans of 5.1% represents a weighted average
of local rates in countries where such plans exist. A 1% reduction in the
discount rate would increase annual benefit expense by approximately $50 million
after tax. The rate on the OPEB plan of 5.8% reflects the higher interest rates
generally available in the U.S., which is where a majority of the plan
participants receive benefits. A 1% reduction in the discount rate would
increase annual benefit expense by approximately $20 million after tax.
Certain defined contribution pension and OPEB benefits in the U.S. are funded by
the Employee Stock Ownership Plan (ESOP), as described in Note 9 to the
Consolidated Financial Statements. The ESOP is accounted for under the
provisions of the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 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. Series B shares, used to fund a portion of retiree
health care benefits, a component of OPEB, are considered plan assets (net of
related debt) under SFAS No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions."
The Company also has employee stock option plans which are accounted for under
the intrinsic value recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As stock options have been issued with
exercise prices equal to the market value of the underlying shares on the grant
date, no compensation cost has resulted. Notes 1 and 8 to the Consolidated
Financial Statements provide supplemental information, including pro forma
earnings and earnings per share, as if the Company had accounted for options
based on the fair value method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation." That methodology yields an estimate of fair value
based in part on 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 stock options.
Goodwill and Intangible Assets
The Company has significant goodwill and intangible assets. Management's
assessment of the recovery of these assets involves a number of estimates. The
Company tests goodwill and indefinite-lived intangible assets for impairment at
least annually. For intangible assets subject to amortization, the Company
reviews the remaining life of the assets on an annual basis to determine whether
events or circumstances warrant a revision to the remaining period of
amortization. The Company's assessments to date have indicated that goodwill and
indefinite-lived intangible assets have not been impaired.
Financial Review The Procter & Gamble Company and Subsidiaries 31
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 to the Consolidated
Financial Statements includes a 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 RiskMetrics(TM) dataset as of June 30, 2003.
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.
Based on the Company's overall interest rate exposure as of and during the year
ended June 30, 2003, 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 products in a number of countries throughout
the world and, as a result, is exposed to the impact on revenue and expenses of
movements in currency exchange rates. The primary purpose of the Company's
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 uses forward exchange contracts and purchased options with maturities
of less than 18 months.
In addition, the Company enters into certain currency swaps with maturities of
up to five years to hedge intercompany financing transactions. The Company also
uses purchased currency options with maturities of generally less than 18 months
and forward exchange contracts to hedge against the effect of exchange rate
fluctuations on intercompany royalties and to offset a portion of the effect of
exchange rate fluctuations on income from international operations.
Based on the Company's overall currency rate exposure as of and during the year
ended June 30, 2003, including derivative and other instruments sensitive to
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 was designed to accelerate growth and deliver cost reductions by
streamlining management decision-making, manufacturing and other work processes
and discontinuing under-performing businesses and initiatives. Charges for the
program are reflected in Corporate because they are corporate-driven decisions
and are not reflected in the operating results used internally to measure and
evaluate the operating segments.
32 The Procter & Gamble Company and Subsidiaries Financial Review
The program was substantially complete at the end of 2003. Cumulative charges
through June 30, 2003 totaled $4.85 billion before tax ($3.79 billion after
tax), below the initial estimate of $5.60 billion before tax ($4.40 billion
after tax). Because the program is substantially complete, the Company intends
to discontinue separate reporting of the program in future periods. The Company
will continue to undertake projects to maintain a competitive cost structure,
including manufacturing consolidation and work force rationalization, as a part
of its normal operations.
Summary of Restructuring Charges
Years ended June 30
----------------------------------
Amounts in millions 2003 2002 2001
- --------------------------------------------------------------------------
Separations $ 351 $ 393 $ 341
- --------------------------------------------------------------------------
Accelerated Depreciation 87 135 276
- --------------------------------------------------------------------------
Asset Write-Downs 190 208 731
- --------------------------------------------------------------------------
Other 123 222 502
- --------------------------------------------------------------------------
TOTAL (BEFORE TAX) 751 958 1,850
- --------------------------------------------------------------------------
TOTAL (AFTER TAX) 538 706 1,475
==========================================================================
Separations represent the cost of packages offered to employees, which generally
are accrued upon employee acceptance. The separation packages are predominantly
voluntary and 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 expense for all
other employees.
Approximately 21,600 separation packages have been provided for through June 30,
2003: 5,000 in 2003, 7,400 in 2002, 6,000 in 2001 and 3,200 from 1999 to 2000.
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. The changes in the net enrollment for the Company
are different from the total separations, as terminations have been offset by
increased enrollment at remaining sites, acquisitions and other impacts.
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
Corporate. Accelerated depreciation is 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 the
discounted expected future cash flows. Write-downs of assets that will continue
to be used were approximately $60 million before tax ($40 million after tax) in
2003, $45 million before tax ($33 million after tax) in 2002 and $160 million
before tax ($133 million after tax) in 2001. Asset writedowns 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.
Restructuring accruals are classified as current liabilities. Reserve balances
were $335 million, $245 million and $460 million at June 30, 2003, 2002 and
2001, respectively. Approximately 60% of restructuring charges incurred during
2003 are expected to be settled with cash, compared to 60% in 2002 and 40% in
2001.
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 $1.65
billion in after-tax annual savings, including additional after-tax savings of
approximately $200 million in 2004 as a result of charges incurred in the
current year. Estimated after-tax incremental savings delivered were $450
million in 2003, $700 million in 2002, $235 million in 2001 and $65 million in
2000.
While the total charges and incremental savings for the program are less than
previous estimates, the ratio of savings to charges is in line with the original
expectations.
Financial Review The Procter & Gamble Company and Subsidiaries 33
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 and sales growth,
increases in market shares, financial goals and reduction of costs, among
others.
These forward-looking statements are based on assumptions and estimates
regarding competitive activity, pricing, product introductions, economic
conditions, customer and consumer trends, technological innovation, currency
movements, governmental action and the development of certain markets available
at the time the statements are made. Among the key factors necessary to achieve
the Company's goals are: (1) the ability to achieve business plans, including
growing existing sales and volume profitably and successfully managing and
integrating key acquisitions (including Wella) and completing planned
divestitures (including a potential sale of the Company's juice business),
despite high levels of competitive activity, especially with respect to the
product categories and geographical markets (including developing markets) on
which the Company has chosen to focus; (2) the ability to manage and maintain
key customer relationships; (3) the ability to maintain key manufacturing and
supply sources (including sole supplier and plant manufacturing sources); (4)
the ability to successfully manage regulatory, tax and legal matters (including
product liability matters), and to resolve pending matters within current
estimates; (5) the ability to successfully implement, achieve and sustain cost
improvement plans in manufacturing and overhead areas, including successful
completion of the Company's outsourcing projects; (6) the ability to
successfully manage currency (including currency issues in volatile countries),
interest rate and certain commodity cost exposures; (7) the ability to manage
the continued global political and/or economic uncertainty, especially in the
Company's significant geographical markets, as well as any political and/or
economic uncertainty due to terrorist activities; and (8) the ability to
successfully manage increases in the prices of raw materials used to make the
Company's products. 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.
34 The Procter & Gamble Company and Subsidiaries
INDEPENDENT AUDITORS' REPORT
Deloitte
& Touche
To the Board of Directors and Shareholders of The Procter & Gamble Company:
We have audited the accompanying consolidated balance sheets of The Procter &
Gamble Company and subsidiaries as of June 30, 2003 and 2002 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 2003. 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, 2003
and 2002 and the results of its operations and cash flows for each of the three
years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
250 East Fifth Street July 31, 2003
Cincinnati, Ohio 45202
The Procter & Gamble Company and Subsidiaries 35
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30
----------------------------------
Amounts in millions except per share amounts 2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Net Sales $ 43,377 $ 40,238 $ 39,244
- ---------------------------------------------------------------------------------------------------
Cost of products sold 22,141 20,989 22,102
- ---------------------------------------------------------------------------------------------------
Marketing, research, administrative and other expense 13,383 12,571 12,406
===================================================================================================
Operating Income 7,853 6,678 4,736
===================================================================================================
Interest expense 561 603 794
- ---------------------------------------------------------------------------------------------------
Other non-operating income, net 238 308 674
- ---------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 7,530 6,383 4,616
- ---------------------------------------------------------------------------------------------------
Income taxes 2,344 2,031 1,694
===================================================================================================
NET EARNINGS $ 5,186 $ 4,352 $ 2,922
===================================================================================================
BASIC NET EARNINGS PER COMMON SHARE $ 3.90 $ 3.26 $ 2.15
- ---------------------------------------------------------------------------------------------------
DILUTED NET EARNINGS PER COMMON SHARE $ 3.69 $ 3.09 $ 2.07
- ---------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ 1.64 $ 1.52 $ 1.40
===================================================================================================
See accompanying Notes to Consolidated Financial Statements
36 The Procter & Gamble Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30
----------------------
Amounts in millions 2003 2002
- ----------------------------------------------------------------------
Current Assets
- ----------------------------------------------------------------------
Cash and cash equivalents $ 5,912 $ 3,427
- ----------------------------------------------------------------------
Investment securities 300 196
- ----------------------------------------------------------------------
Accounts receivable 3,038 3,090
- ----------------------------------------------------------------------
Inventories
- ----------------------------------------------------------------------
Materials and supplies 1,095 1,031
- ----------------------------------------------------------------------
Work in process 291 323
- ----------------------------------------------------------------------
Finished goods 2,254 2,102
======================================================================
Total Inventories 3,640 3,456
======================================================================
Deferred income taxes 843 521
- ----------------------------------------------------------------------
Prepaid expenses and other receivables 1,487 1,476
======================================================================
TOTAL CURRENT ASSETS 15,220 12,166
======================================================================
Property, Plant and Equipment
- ----------------------------------------------------------------------
Buildings 4,729 4,532
- ----------------------------------------------------------------------
Machinery and equipment 18,222 17,963
- ----------------------------------------------------------------------
Land 591 575
======================================================================
23,542 23,070
- ----------------------------------------------------------------------
Accumulated depreciation (10,438) (9,721)
======================================================================
NET PROPERTY, PLANT AND EQUIPMENT 13,104 13,349
======================================================================
Goodwill and Other Intangible Assets
- ----------------------------------------------------------------------
Goodwill 11,132 10,966
- ----------------------------------------------------------------------
Trademarks and other intangible assets, net 2,375 2,464
======================================================================
NET GOODWILL AND OTHER INTANGIBLE ASSETS 13,507 13,430
======================================================================
Other Non-Current Assets 1,875 1,831
======================================================================
TOTAL ASSETS $ 43,706 $ 40,776
======================================================================
See accompanying Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 37
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30
------------------------
Amounts in millions 2003 2002
- ------------------------------------------------------------------------
Current Liabilities
- ------------------------------------------------------------------------
Accounts payable $ 2,795 $ 2,205
- ------------------------------------------------------------------------
Accrued and other liabilities 5,512 5,330
- ------------------------------------------------------------------------
Taxes payable 1,879 1,438
- ------------------------------------------------------------------------
Debt due within one year 2,172 3,731
========================================================================
TOTAL CURRENT LIABILITIES 12,358 12,704
========================================================================
Long-Term Debt 11,475 11,201
- ------------------------------------------------------------------------
Deferred Income Taxes 1,396 1,077
- ------------------------------------------------------------------------
Other Non-Current Liabilities 2,291 2,088
========================================================================
TOTAL LIABILITIES 27,520 27,070
========================================================================
Shareholders' Equity
- ------------------------------------------------------------------------
Convertible Class A preferred stock,
stated value $1 per share
(600 shares authorized) 1,580 1,634
- ------------------------------------------------------------------------
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:
2003 - 1,297.2, 2002 - 1,300.8) 1,297 1,301
- ------------------------------------------------------------------------
Additional paid-in capital 2,931 2,490
- ------------------------------------------------------------------------
Reserve for ESOP debt retirement (1,308) (1,339)
- ------------------------------------------------------------------------
Accumulated other comprehensive income (2,006) (2,360)
- ------------------------------------------------------------------------
Retained earnings 13,692 11,980
========================================================================
TOTAL SHAREHOLDERS' EQUITY 16,186 13,706
========================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,706 $ 40,776
========================================================================
See accompanying Notes to Consolidated Financial Statements
38 The Procter & Gamble Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Additional Reserve for Other Total
Dollars in millions/ Shares Common Preferred Paid-In ESOP Debt Comprehensive Retained Comprehensive
Shares in thousands Outstanding Stock Stock Capital Retirement Income Income Total Income
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 2,922
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
- ----------------------------------------------------------------------------------------------------------------------------------
Financial statement translation (715) (715) (715)
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment hedges,
- ----------------------------------------------------------------------------------------------------------------------------------
net of $276 tax 460 460 460
- ----------------------------------------------------------------------------------------------------------------------------------
Other, net of tax benefit (23) (23) (23)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 2,644
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 4,352
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
- ----------------------------------------------------------------------------------------------------------------------------------
Financial statement translation 263 263 263
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment hedges,
- ----------------------------------------------------------------------------------------------------------------------------------
net of $238 tax (397) (397) (397)
- ----------------------------------------------------------------------------------------------------------------------------------
Other, net of tax benefits (106) (106) (106)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 4,112
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders:
- ----------------------------------------------------------------------------------------------------------------------------------
Common (1,971) (1,971)
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred, net of tax benefits (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
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings 5,186 5,186 $ 5,186
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
- ----------------------------------------------------------------------------------------------------------------------------------
Financial statement translation 804 804 804
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment hedges,
- ----------------------------------------------------------------------------------------------------------------------------------
net of $251 tax (418) (418) (418)
- ----------------------------------------------------------------------------------------------------------------------------------
Other, net of tax benefits (32) (32) (32)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 5,540
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders:
- ----------------------------------------------------------------------------------------------------------------------------------
Common (2,121) (2,121)
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred, net of tax benefit (125) (125)
- ----------------------------------------------------------------------------------------------------------------------------------
Treasury purchases (14,138) (14) 6(1) (1,228) (1,236)
- ----------------------------------------------------------------------------------------------------------------------------------
Employee plan issuances 7,156 7 384 391
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock conversions 3,409 3 (54) 51 -
- ----------------------------------------------------------------------------------------------------------------------------------
ESOP debt guarantee reduction 31 31
- ----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003 1,297,197 $1,297 $ 1,580 $ 2,931 $ (1,308) $ (2,006) $13,692 $16,186
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Premium on equity put options.
See accompanying Notes to Consolidated Financial Statements
The Procter & Gamble Company and Subsidiaries 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30
---------------------------------
Amounts in millions 2003 2002 2001
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 3,427 $ 2,306 $ 1,415
- --------------------------------------------------------------------------------------------------
Operating Activities
- --------------------------------------------------------------------------------------------------
Net earnings 5,186 4,352 2,922
- --------------------------------------------------------------------------------------------------
Depreciation and amortization 1,703 1,693 2,271
- --------------------------------------------------------------------------------------------------
Deferred income taxes 63 389 (102)
- --------------------------------------------------------------------------------------------------
Change in accounts receivable 163 96 (122)
- --------------------------------------------------------------------------------------------------
Change in inventories (56) 159 (67)
- --------------------------------------------------------------------------------------------------
Change in accounts payable, accrued and other liabilities 936 684 801
- --------------------------------------------------------------------------------------------------
Change in other operating assets and liabilities 178 (98) 57
- --------------------------------------------------------------------------------------------------
Other 527 467 44
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING ACTIVITIES 8,700 7,742 5,804
- --------------------------------------------------------------------------------------------------
Investing Activities
- --------------------------------------------------------------------------------------------------
Capital expenditures (1,482) (1,679) (2,486)
- --------------------------------------------------------------------------------------------------
Proceeds from asset sales 143 227 788
- --------------------------------------------------------------------------------------------------
Acquisitions (61) (5,471) (138)
- --------------------------------------------------------------------------------------------------
Change in investment securities (107) 88 (7)
- --------------------------------------------------------------------------------------------------
TOTAL INVESTING ACTIVITIES (1,507) (6,835) (1,843)
- --------------------------------------------------------------------------------------------------
Financing Activities
- --------------------------------------------------------------------------------------------------
Dividends to shareholders (2,246) (2,095) (1,943)
- --------------------------------------------------------------------------------------------------
Change in short-term debt (2,052) 1,394 (1,092)
- --------------------------------------------------------------------------------------------------
Additions to long-term debt 1,230 1,690 1,356
- --------------------------------------------------------------------------------------------------
Reductions of long-term debt (1,060) (461) (226)
- --------------------------------------------------------------------------------------------------
Proceeds from the exercise of stock options 269 237 141
- --------------------------------------------------------------------------------------------------
Treasury purchases (1,236) (568) (1,250)
- --------------------------------------------------------------------------------------------------
TOTAL FINANCING ACTIVITIES (5,095) 197 (3,014)
- --------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 387 17 (56)
- --------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 2,485 1,121 891
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,912 $ 3,427 $ 2,306
- --------------------------------------------------------------------------------------------------
Supplemental Disclosure
- --------------------------------------------------------------------------------------------------
Cash payments for:
- --------------------------------------------------------------------------------------------------
Interest $ 538 $ 629 $ 735
- --------------------------------------------------------------------------------------------------
Income taxes 1,703 941 1,701
- --------------------------------------------------------------------------------------------------
Non-cash spin-off of Jif and Crisco businesses - 150 -
- --------------------------------------------------------------------------------------------------
Liabilities assumed in acquisitions - 571 108
- --------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
40 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, except for certain translation impacts resulting
from the application of Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation." Investments in companies over which the
Company exerts significant influence, but does not control the financial and
operating decisions, are managed as integral parts of the Company's business
units. Consistent with internal management reporting, these investments are
accounted for as if they were consolidated subsidiaries in segment reporting,
with 100% recognition of the individual income statement line items and separate
elimination of the minority interest. Entries to eliminate the individual
revenues and expenses, adjusting the method of accounting to the equity method
as required by accounting principles generally accepted in the United States of
America (U.S. GAAP), are included in Corporate.
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP 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 under take 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.
Revenue Recognition
Sales are recognized when revenue is realized or realizable and has been earned.
Most revenue transactions represent sales of inventory, and the revenue recorded
includes shipping and handling costs, which generally are included in the list
price to the customer. The Company's policy is to recognize revenue when risk
and title to the product transfers to the customer, which generally is on the
date of shipment. A provision for payment discounts and product return
allowances is recorded as a reduction of sales within the same period that the
revenue is recognized.
Trade promotions, consisting primarily of customer pricing allowances,
merchandising funds and consumer coupons, are offered through various programs
to customers and consumers. Sales are recorded net of trade promotion spending,
which is recognized as incurred, generally at the time of the sale. Most of
these arrangements have terms of approximately one year. Accruals for expected
payouts under these programs are included as accrued marketing and promotion in
the accrued and other current liabilities line in the Consolidated Balance
Sheets (see Note 5).
Cost of Products Sold
Cost of products sold primarily comprises direct materials and supplies consumed
in the manufacture of product, as well as manufacturing labor and direct
overhead expense necessary to acquire and convert the purchased materials and
supplies into finished product. Cost of products sold also includes the cost to
distribute products to customers, inbound freight costs, internal transfer
costs, warehousing costs and other shipping and handling activity.
Reimbursements of shipping and handling costs charged to customers are included
in net sales.
Marketing, Research, Administrative and Other
Marketing, research, administrative and other expenses primarily include: the
cost of media, advertising and related marketing costs; selling expenses;
research and development; corporate, administrative and other indirect overhead
costs; and other miscellaneous operating items.
Currency Translation
Financial statements of subsidiaries outside the United States generally are
measured using the local currency as the functional currency. Adjustments to
translate those statements into U.S. dollars are recorded in other comprehensive
income (OCI). 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 Flow Presentation
The statement of cash flows is prepared using the indirect method, which
reconciles net earnings to cash flow from operating activities. These
adjustments include the removal of timing differences between the occurrence of
operating receipts and payments and their recognition in net earnings. The
adjustments also remove cash flows arising from investing and financing
activities, which are presented separately from operating activities. Cash flows
from foreign currency transactions and operations are translated at an average
exchange rate for the period. Cash flows from hedging activities are included in
the same category as cash flows from the items being hedged. Cash flows from
derivative instruments designated as net investment hedges are classified as
financing activities. Cash flows from other derivative instruments used to
manage interest, commodity or currency exposures are classified as operating
activities.
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 41
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. Unrealized
gains or losses on securities classified as trading are charged to earnings.
Unrealized gains or losses on securities classified as available for sale are
recorded net of tax in OCI.
Inventory Valuation
Inventories are valued at cost, which is not in excess of current market prices.
Product-related inventories are primarily maintained on the first-in, first-out
method. Minor amounts of product inventories, including certain pet health,
cosmetics and commodities are maintained on the last-in, first-out method. The
replacement cost of last-in, first-out inventories exceeded carrying value by
approximately $26 and $27 at June 30, 2003 and 2002, respectively. The cost of
spare part inventories is maintained using the average cost method.
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. The Company's policy
is to amortize trademarks with determinable lives over periods ranging from 5 to
40 years. Patents, technology and other intangibles with contractual terms are
amortized over the respective contractual lives, with the remainder generally
amortized over periods ranging from 5 to 20 years. Goodwill and indefinite-lived
intangibles are not amortized, but are evaluated annually for impairment. The
annual evaluation is based on valuation models that incorporate expected future
cash flows and profitability projections. To date, there has been no impairment
of these assets. 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. Machinery and equipment includes
office furniture and equipment (15-year life), computer equipment (3 to 5-year
lives), manufacturing equipment (3 to 20-year lives) and building services
(20-year life). Buildings are depreciated over an estimated useful life of 40
years. Estimated useful lives are periodically reviewed and, where appropriate,
changes are made prospectively.
Fair Values of Financial Instruments
Fair values of cash equivalents, short-term and long-term investments and
short-term debt approximate cost. The estimated fair values of other financial
instruments, including debt, equity and financial derivatives, 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. However, the Company does not
believe any such changes would have a material impact on its financial condition
or results of operations.
Stock-Based Compensation
The Company has employee stock option plans, which are described more fully in
Note 8. The Company accounts for its employee stock option plans under the
intrinsic value recognition and measurement provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As stock options have been issued with exercise prices
equal to the market value of the underlying shares on the grant date, no
compensation cost has resulted.
Had compensation cost for the plans been determined based on the fair value of
the options on the grant date, consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings and earnings per common
share would have been as follows:
Years ended June 30
-----------------------------
2003 2002 2001
- ------------------------------------------------------------------
Net Earnings
- ------------------------------------------------------------------
As reported $5,186 $4,352 $2,922
- ------------------------------------------------------------------
Pro forma adjustments (398) (442) (310)
- ------------------------------------------------------------------
PRO FORMA 4,788 3,910 2,612
- ------------------------------------------------------------------
Net Earnings Per Common Share
- ------------------------------------------------------------------
Basic
- ------------------------------------------------------------------
As reported $ 3.90 $ 3.26 $ 2.15
- ------------------------------------------------------------------
Pro forma adjustments (0.30) (0.34) (0.23)
- ------------------------------------------------------------------
PRO FORMA 3.60 2.92 1.92
- ------------------------------------------------------------------
Diluted
- ------------------------------------------------------------------
As reported 3.69 3.09 2.07
- ------------------------------------------------------------------
Pro forma adjustments (0.28) (0.32) (0.22)
- ------------------------------------------------------------------
PRO FORMA 3.41 2.77 1.85
- ------------------------------------------------------------------
Millions of dollars except per share amounts
42 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain reclassifications of prior years' amounts have been made to conform to
the current year presentation.
New Pronouncements
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." 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 continue to be amortized.
On July 1, 2002, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 143 addresses the financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Adoption of this
Statement did not have a material impact on the Company's financial statements.
SFAS No. 144 addresses the financial accounting and re porting for the
impairment or disposal of long-lived assets. This Statement did not have a
material impact on the Company's financial statements.
The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," for exit or disposal activities that were initiated after
December 31, 2002. This Statement requires these costs to be recognized pursuant
to specific guidance on when the liability is incurred and not at project
initiation. This Statement did not have a material impact on the Company's
financial statements.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
This Statement amends the transition alter- natives for companies choosing to
adopt the fair value method of accounting for the compensation cost of options
issued to employees and requires additional disclosure on all stock-based
compensation plans. The Company has adopted the disclosure provisions.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 addresses the disclosures to
be made by a guarantor in its financial statements about its obligations under
certain guarantees and clarifies the need for a guarantor to recognize, at the
inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of the Interpretation were adopted by the Company for
guarantees issued or modified after December 31, 2002. Adoption of FIN No. 45
did not have a material impact on the Company's financial statements.
In January 2003, the FASB is issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses the requirements for business
enterprises to consolidate related entities in which they are determined to be
the primary economic beneficiary as a result of their variable economic
interests. The adoption of FIN No. 46 on July 1, 2003 did not have a material
impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." In May 2003, the FASB issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." The Company will adopt both SFAS No. 149 and
SFAS No. 150 on July 1, 2003 and does not expect these Statements to materially
impact the Company's financial statements.
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 was designed to accelerate growth and deliver cost reductions by
streamlining management decision making, manufacturing and other work processes
and discontinuing under-performing businesses and initiatives. Costs include
separation-related costs, asset write-downs, accelerated depreciation and other
costs directly related to the restructuring effort.
Since inception, the overall program resulted in total charges of $4.85 billion
before tax ($3.79 billion after tax). At the end of 2003, this restructuring
program was substantially complete.
Many restructuring charges are not 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. Charges for the program are reflected in
Corporate because they are corporate-driven decisions and are not reflected in
the operating results used internally to measure and evaluate the operating
segments.
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 43
Before-tax restructuring activity was as follows:
Asset Accelerated
Separations Write-Downs Depreciation Other Total
- -----------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------
2003
- -----------------------------------------------------------------------------------------
Charges 351 190 87 123 751
- -----------------------------------------------------------------------------------------
Cash spent (265) - - (94) (359)
- -----------------------------------------------------------------------------------------
Charged against
assets - (190) (87) (25) (302)
- -----------------------------------------------------------------------------------------
RESERVE BALANCE
JUNE 30, 2003 245 - - 90 335
- -----------------------------------------------------------------------------------------
Separation Costs
Employee separation charges relate to severance packages for approximately 5,000
people in 2003, 7,400 people in 2002 and 6,000 people in 2001. 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 separations span the entire
organization, including manufacturing, selling, research and administrative
positions across substantially all geographies. Separation costs are charged to
cost of products sold for manufacturing employees and marketing, research,
administrative and other expense for all other employees.
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 of, as well as assets held for sale in
the next 12 months. These assets are written down to the amounts expected to be
realized upon sale or disposal, less minor disposal costs. Such before-tax
charges were $130 in 2003, $163 in 2002 and $571 in 2001 and are generally
included in cost of products sold.
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 are written down to estimated fair value, generally
determined by reference to discounted expected future cash flows. Such
before-tax charges were $60 in 2003, $45 in 2002 and $160 in 2001 and generally
are included in cost of products sold.
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. Accelerated depreciation is charged to cost of products sold for
manufacturing assets and marketing, research, administrative and other expense
for all other assets.
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. These costs are charged to the applicable income statement line item
based on the underlying nature of the charge.
NOTE 3 ACQUISITIONS AND SPIN-OFF
2003 Acquisitions
In March 2003, the Company reached an agreement with the controlling
shareholders of Wella AG, a beauty and hair care company based in Darmstadt,
Germany, to acquire 77.6% of the voting class shares. In June 2003, the Company
completed a tender offer for the remaining outstanding voting class shares and
preference shares, securing approximately 81% of the outstanding Wella shares
(99% of the voting class shares and 45% of the preference shares). Total
consideration for shares to be acquired under the agreement with the controlling
shareholders and the tender offer is 4.65 billion Euros (approximately $5.35
billion based on June 30, 2003 exchange rates). The acquisition will be financed
with a combination of available cash and debt. Completion of the transaction is
expected to occur in the first quarter of fiscal 2004.
Millions of dollars except per share amounts
44 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 Acquisitions
In 2002, purchase acquisitions, primarily the Clairol business, totaled $5.47
billion and resulted in additions to goodwill of $3.61 billion and other
intangible assets of $1.73 billion.
On November 16, 2001, the Company completed the acquisition of the Clairol
business from The Bristol-Myers Squibb Company for approximately $5.03 billion
in cash, financed primarily with debt. The operating results of the Clairol
business are reported in the Company's Beauty Care segment beginning November
16, 2001.
The following table provides pro forma results of operations for the years ended
June 30, 2002 and 2001 as if Clairol had been acquired as of the beginning of
each fiscal year presented. Pro forma information for 2003 is not presented as
the results of Clairol are included with those of the Company for the entire
year. 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 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.
Years ended June 30
-------------------
Pro forma results 2002 2001
- -----------------------------------------------------------
Net Sales $40,780 $40,801
- -----------------------------------------------------------
Net Earnings 4,406 2,927
- -----------------------------------------------------------
Diluted Net Earnings per Common Share $ 3.13 $ 2.07
- -----------------------------------------------------------
The following table presents the allocation of purchase price related to the
Clairol business as of the date of acquisition.
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 $2,600 in goodwill is deductible for tax purposes.
The Company finalized the purchase price allocation of Clairol in the second
quarter of 2003. There were no significant changes to the initial allocation.
The Clairol acquisition resulted in $3,330 in goodwill, all of which was
allocated to the Beauty Care segment, and $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 ($128), patents and technology ($146) and other
intangible assets ($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).
The Company completed a buyout of the purchase price contingency associated with
the prior acquisition of Dr. John's Spinbrush during 2002. The total adjusted
purchase price approximates $475, with the incremental payment resulting in
additional goodwill in the Health Care segment.
2001 Acquisitions
In 2001, purchase acquisitions totaled $246 resulting in additions to goodwill
and other intangibles of $208.
2002 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 years ended June 30,
2003 and 2002 was allocated by reportable business segment as follows:
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 45
2003 2002
- ---------------------------------------------------------------------
Fabric and Home Care, beginning of year $ 451 $ 457
- ---------------------------------------------------------------------
Translation and other 9 (6)
- ---------------------------------------------------------------------
END OF YEAR 460 451
- ---------------------------------------------------------------------
Baby and Family Care, beginning of year 830 987
- ---------------------------------------------------------------------
Translation and other 54 (157)
- ---------------------------------------------------------------------
END OF YEAR 884 830
- ---------------------------------------------------------------------
Beauty Care, beginning of year 6,542 3,163
- ---------------------------------------------------------------------
Acquisitions - 3,330
- ---------------------------------------------------------------------
Translation and other 58 49
- ---------------------------------------------------------------------
END OF YEAR 6,600 6,542
- ---------------------------------------------------------------------
Health Care, beginning of year 2,866 2,544
- ---------------------------------------------------------------------
Acquisitions - 284
- ---------------------------------------------------------------------
Translation and other 42 38
- ---------------------------------------------------------------------
END OF YEAR 2,908 2,866
- ---------------------------------------------------------------------
Snacks and Beverages, beginning of year 277 278
- ---------------------------------------------------------------------
Translation and other 3 (1)
- ---------------------------------------------------------------------
END OF YEAR 280 277
- ---------------------------------------------------------------------
Goodwill, Net, beginning of year 10,966 7,429
- ---------------------------------------------------------------------
Acquisitions - 3,614
- ---------------------------------------------------------------------
Translation and other 166 (77)
- ---------------------------------------------------------------------
END OF YEAR 11,132 10,966
- ---------------------------------------------------------------------
Feminine care goodwill was moved from Baby and Family Care to Beauty Care for
all periods presented, consistent with the segment realignment discussed in Note
12.
Identifiable intangible assets as of June 30, 2003 and 2002 were composed of:
June 30, 2003 June 30, 2002
-------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------
Intangible Assets with
Determinable Lives
Trademarks $ 499 $ 85 $ 457 $ 48
- -----------------------------------------------------------------------------
Patents and technology 492 204 494 160
- -----------------------------------------------------------------------------
Other 316 140 385 173
- -----------------------------------------------------------------------------
1,307 429 1,336 381
- -----------------------------------------------------------------------------
Trademarks with
Indefinite Lives 1,666 169 1,678 169
- -----------------------------------------------------------------------------
2,973 598 3,014 550
- -----------------------------------------------------------------------------
The amortization of intangible assets for the years ended June 30, 2003, 2002
and 2001 was $100, $97 and $80, respectively. Amortization of intangibles is
determined based on the estimated useful life of the underlying asset as more
fully discussed in Note 1. Estimated amortization expense over the next five
years is as follows: 2004 - $95, 2005 - $92, 2006 - $91, 2007 - $61 and 2008 -
$51. Such estimates do not reflect the impact of future foreign exchange rate
changes or the pending acquisition of Wella AG (see Note 3).
The following table provides pro forma disclosure of net earnings and earnings
per common share for the year ended June 30, 2001 as if goodwill and
indefinite-lived intangible assets had not been amortized.
Pro forma results 2001
- -------------------------------------------------------------
Net earnings $ 2,922
- -------------------------------------------------------------
Amortization, net of tax (1) 218
- -------------------------------------------------------------
ADJUSTED NET EARNINGS 3,140
- -------------------------------------------------------------
Basic net earnings per common share $ 2.15
- -------------------------------------------------------------
Amortization, net of tax (1) 0.15
- -------------------------------------------------------------
ADJUSTED BASIC NET EARNINGS PER COMMON SHARE 2.30
- -------------------------------------------------------------
Diluted net earnings per common share 2.07
- -------------------------------------------------------------
Amortization, net of tax (1) 0.15
- -------------------------------------------------------------
ADJUSTED DILUTED NET EARNINGS PER COMMON SHARE 2.22
- -------------------------------------------------------------
(1) Amortization of goodwill and indefinite-lived in tangible assets.
NOTE 5 SUPPLEMENTAL FINANCIAL INFORMATION
Selected components of current and non-current liabilities were as follows:
June 30
---------------
2003 2002
- ---------------------------------------------------------
Accrued and Other Current Liabilities
Marketing and promotion $1,802 $1,658
- ---------------------------------------------------------
Compensation expenses 804 771
- ---------------------------------------------------------
Restructuring reserves 335 245
- ---------------------------------------------------------
Other 2,571 2,656
- ---------------------------------------------------------
5,512 5,330
- ---------------------------------------------------------
Other Non-Current Liabilities
Pension benefits $1,301 $1,158
- ---------------------------------------------------------
Other postretirement benefits 181 344
- ---------------------------------------------------------
Other 809 586
- ---------------------------------------------------------
2,291 2,088
- ---------------------------------------------------------
Millions of dollars except per share amounts
46 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected Operating Expenses
Research and development costs are charged to earnings as incurred and were
$1,665 in 2003, $1,601 in 2002 and $1,769 in 2001. Advertising costs are charged
to earnings as incurred and were $4,373 in 2003, $3,773 in 2002 and $3,612 in
2001. Both of these are components of marketing, research, administrative and
other expense.
NOTE 6 SHORT-TERM AND LONG-TERM DEBT
June 30
-------------------
2003 2002
- --------------------------------------------------------------------
Short-Term Debt
USD commercial paper $ 717 $2,142
- --------------------------------------------------------------------
Non-USD commercial paper 147 461
- --------------------------------------------------------------------
Current portion of long-term debt 1,093 618
- --------------------------------------------------------------------
Other 215 510
- --------------------------------------------------------------------
2,172 3,731
- --------------------------------------------------------------------
The weighted average short-term interest rates were 3.6% and 2.9% as of June 30,
2003 and 2002, respectively. The rate increase reflected a change in mix between
short-term debt and the current portion of long-term debt.
June 30
----------------------
2003 2002
- -------------------------------------------------------------------------
Long-Term Debt
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
- -------------------------------------------------------------------------
4.00% USD note due April, 2005 400 400
- -------------------------------------------------------------------------
5.75% EUR note due September, 2005 1,725 1,478
- -------------------------------------------------------------------------
1.50% JPY note due December, 2005 459 459
- -------------------------------------------------------------------------
3.50% CHEF note due February, 2006 222 201
- -------------------------------------------------------------------------
4.75% USED note due June, 2007 1,000 1,000
- -------------------------------------------------------------------------
6.13% USD note due May, 2008 500 500
- -------------------------------------------------------------------------
4.30% USD note due August, 2008 500 -
- -------------------------------------------------------------------------
6.88% USD note due September, 2009 1,000 1,000
- -------------------------------------------------------------------------
2.00% JPY note due June, 2010 417 417
- -------------------------------------------------------------------------
9.36% Series B 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 827 763
- -------------------------------------------------------------------------
5.25% GBP note due January, 2033 331 -
- -------------------------------------------------------------------------
All other long-term debt 1,737 2,151
- -------------------------------------------------------------------------
Current portion of long-term debt (1,093) (618)
- -------------------------------------------------------------------------
11,475 11,201
- -------------------------------------------------------------------------
Long-term weighted average interest rates were 3.7% and 4.0% as of June 30, 2003
and 2002, respectively, and included the effects of related interest rate swaps
discussed in Note 7.
The fair value of the long-term debt was $12,396 and $11,673 at June 30, 2003
and 2002, respectively. Long-term debt maturities during the next five fiscal
years are as follows: 2004-$1,093; 2005-$1,495; 2006-$2,463; 2007-$1,091 and
2008-$804. The Company has no material obligations that are secured.
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. For all
periods presented, 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.
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 generally are 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 normally
enters into transactions with investment grade financial institutions.
Counterparty exposures are monitored daily and downgrades in credit rating are
reviewed on a timely basis. Credit risk arising from the inability of a
counterparty to meet the terms of the Company's financial instrument contracts
generally is limited to the amounts, if any, by which the counterparty's
obligations exceed the obligations of the Company. The Company does not expect
to incur material credit losses on its risk management or other financial
instruments.
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 47
Interest Rate Management
The Company's policy is to manage interest cost using a mix of fixed-rate 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 $322 at June 30, 2003 and $231 at
June 30, 2002. 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 Company's 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, 2003 and June 30, 2002 was $27 and $60 in assets
and $92 and $29 in liabilities, respectively. The effective portion of the
changes in fair value for these instruments, which have been designated as cash
flow hedges, are reported in 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.
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
of the instruments offsets the foreign currency impact of intercompany financing
transactions, income from international operations and other balance sheet
revaluations. The fair value of these instruments at June 30, 2003 and 2002 was
$113 and $93 in assets and $26 and $25 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 $264, $50
and $38 of gains in 2003, 2002 and 2001, respectively, which substantially
offset foreign currency transaction losses of the items being hedged.
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 foreign subsidiaries. In addition, certain foreign currency 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 $418 and $397
after-tax loss in 2003 and 2002, respectively. Accumulated net balances were a
$238 after-tax loss in 2003 and a $180 after-tax gain in 2002.
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 certain 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 30,2003,2002 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 are calculated to give effect to stock options and convertible preferred
stock (see Note 9).
Millions of dollars except per share amounts
48 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net earnings and common shares balances used to calculate basic and diluted net
earnings per share were as follows:
Years ended June 30
-----------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------
Net Earnings $ 5,186 $ 4,352 $ 2,922
- ---------------------------------------------------------------------------------
Preferred dividends,
net of tax benefit (125) (124) (121)
- ---------------------------------------------------------------------------------
NET EARNINGS AVAILABLE
TO COMMON SHAREHOLDERS 5,061 4,228 2,801
- ---------------------------------------------------------------------------------
Preferred dividends,
net of tax benefit 125 124 121
- ---------------------------------------------------------------------------------
Preferred dividend impact
on funding of ESOP (9) (12) (15)
- ---------------------------------------------------------------------------------
DILUTED NET EARNINGS 5,177 4,340 2,907
- ---------------------------------------------------------------------------------
Years ended June 30
-----------------------------------
Shares in millions 2003 2002 2001
- ---------------------------------------------------------------------------------
Basic weighted average
common shares outstanding 1,296.6 1,297.4 1,300.3
- ---------------------------------------------------------------------------------
Effect of dilutive securities
- ---------------------------------------------------------------------------------
Conversion of preferred shares (1) 85.1 88.8 91.9
- ---------------------------------------------------------------------------------
Exercise of stock options (2) 19.6 18.7 13.4
- ---------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 1,401.3 1,404.9 1,405.6
- ---------------------------------------------------------------------------------
(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 through 2021.
(2) Approximately 33 million in 2003, 36 million in 2002 and 38 million in
2001 of the Company's stock options were not included in the diluted net
earnings per share calculation because to do so would have been antidilutive
(i.e., the exercise price exceeded market value).
Stock-Based Compensation
The Company has a primary stock-based compensation plan under which stock
options are granted annually to key managers and directors with exercise prices
equal to the market price of the underlying shares on the date of grant. Grants
were made under plans approved by shareholders in 1992 and 2001. Grants issued
since September 2002 are vested after three years and have a ten-year life.
Grants issued from July 1998 through August 2002 are vested after three years
and have a fifteen-year life, while grants issued prior to July 1998 are vested
after one year and have a ten-year life. The Company also makes other grants to
employees, for which vesting terms and option lives differ.
Had the provision of SFAS No. 123 expensing been applied, the Company's net
earnings and earnings per common share would have been impacted as summarized in
the discussion of the Company's stock-based compensation accounting policy in
Note 1. In calculating the impact for options granted in 2003 and 2002, the
Company has estimated the fair value of each grant using the Black-Scholes
option-pricing model. The fair value of grants issued in 2001 was estimated
using the binomial options-pricing model. The fair value estimates of these
models is not materially different. Assumptions are evaluated and revised, as
necessary, to reflect market conditions and experience. The following
assumptions were used:
Years ended June 30
-------------------------------
Options Granted 2003 2002 2001
- -------------------------------------------------------------------------------
Interest rate 3.9% 5.4% 5.8%
- ------------------------------------------------------------------------------
Dividend yield 1.8% 2.2% 2.0%
- ------------------------------------------------------------------------------
Expected volatility 20% 20% 26%
- ------------------------------------------------------------------------------
Expected life in years 8 12 9
- ------------------------------------------------------------------------------
The following table summarizes stock option activity during 2003, 2002 and 2001:
June 30
-----------------------------------
Options in Thousands 2003 2002 2001
- ---------------------------------------------------------------------------------
Outstanding, beginning of year 120,163 104,196 82,744
- ---------------------------------------------------------------------------------
Granted 17,880 25,040 28,400
- ---------------------------------------------------------------------------------
Jif and Crisco spin-off adjustment - 811 -
- ---------------------------------------------------------------------------------
Exercised (6,952) (8,149) (5,709)
- ---------------------------------------------------------------------------------
Canceled (1,292) (1,735) (1,239)
- ---------------------------------------------------------------------------------
OUTSTANDING, END OF YEAR 129,799 120,163 104,196
- ---------------------------------------------------------------------------------
Exercisable 59,101 46,332 48,805
- ---------------------------------------------------------------------------------
Available for grant 101,797 114,536 27,994
- ---------------------------------------------------------------------------------
Average price
- ---------------------------------------------------------------------------------
Outstanding, beginning of year $ 66.68 $ 63.64 $ 61.73
- ---------------------------------------------------------------------------------
Granted 91.37 70.19 62.20
- ---------------------------------------------------------------------------------
Exercised 38.70 29.07 24.77
- ---------------------------------------------------------------------------------
Outstanding, end of year 71.50 66.68 63.64
- ---------------------------------------------------------------------------------
Exercisable, end of year 70.87 56.99 49.14
- ---------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year 21.99 21.14 22.45
- ---------------------------------------------------------------------------------
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter and Gamble Company and Subsidiaries 49
Stock options outstanding at June 30, 2003 were in the following exercise price
ranges:
Outstanding Options
--------------------------------------------------
Weighted Avg.
Number Remaining
Outstanding Weighted Avg. Contractual
Range of Prices (Thousands) Exercise Price Life Years
- --------------------------------------------------------------------------------------------
$28 to 46 15,847 $ 35.78 2.0
- -----------------------------------------------------------------------------------------
54 to 66 36,470 61.35 10.2
- -----------------------------------------------------------------------------------------
67 to 85 40,575 74.85 9.7
- -----------------------------------------------------------------------------------------
85 to 106 36,907 93.17 10.0
- -----------------------------------------------------------------------------------------
Stock options exercisable at June 30, 2003 were in the following exercise price
ranges:
Exercisable Options
--------------------------------
Number Weighted
Exercisable Average
Range of Prices (Thousands) Exercise Price
- -----------------------------------------------------------------------------------------
$28 to 46 15,847 $ 35.78
- ---------------------------------------------------------------------------------------
54 to 66 7,938 59.77
- ---------------------------------------------------------------------------------------
67 to 85 16,826 82.63
- ---------------------------------------------------------------------------------------
85 to 106 18,490 95.02
- ---------------------------------------------------------------------------------------
As a component of its treasury share repurchase program, the Company generally
repurchases common shares to fund the stock options granted.
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 POSTRETIREMENT BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company offers various postretirement benefits to its employees.
Defined Contribution Retirement Plans
The most prevalent employee benefit plans offered are defined contribution
plans, which cover substantially all employees in the United States as well as
employees in certain other countries. These plans are fully funded.
Under the defined contribution plans, the Company generally makes annual
contributions to participants' accounts based on individual base salaries and
years of service. In the United States, the Company makes annual contributions
to participants' accounts that do not exceed 15% of total participants' annual
wages and salaries.
The Company maintains The Procter & Gamble Profit Sharing Trust (Trust) and
Employee Stock Ownership Plan (ESOP) to provide funding for the U.S. defined
contribution plan, as well as other retiree benefits. Operating details of the
ESOP are provided at the end of this Note. 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 the American Institute of
Certified Public Accountants (AICPA) Statement of Position (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.
Defined contribution expense pursuant to this plan was $286, $279 and $303 in
2003, 2002 and 2001, respectively, which approximates the amount funded by the
Company.
Defined Benefit Retirement Plans and Other Retiree Benefits
Certain other employees, primarily outside the United States, are covered by
local defined benefit pension, as well as other retiree benefit plans.
The Company also provides certain other retiree benefits, primarily health care
and life insurance, 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. These
benefits primarily are funded by ESOP Series B shares as well as certain other
assets contributed by the Company.
Millions of dollars except per share amounts
50 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the aggregate change in benefit obligation for
the Company's defined benefit and other retiree benefit plans:
Years ended June 30
-------------------------------------------------------
Pension Benefits Other Retiree Benefits
-------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Benefit obligation at
beginning of year $ 2,970 $ 2,567 $ 2,135 $ 1,577
- ----------------------------------------------------------------------------------------------
Service cost 124 114 62 49
- ----------------------------------------------------------------------------------------------
Interest cost 173 153 150 116
- ----------------------------------------------------------------------------------------------
Participants' contributions 7 7 27 22
- ----------------------------------------------------------------------------------------------
Amendments (33) 1 (2) 5
- ----------------------------------------------------------------------------------------------
Actuarial loss 138 72 645 401
- ----------------------------------------------------------------------------------------------
Acquisitions 42 40 - 32
- ----------------------------------------------------------------------------------------------
Curtailments and
settlements (29) (101) - (1)
- ----------------------------------------------------------------------------------------------
Special termination
benefits 1 9 7 37
- ----------------------------------------------------------------------------------------------
Currency translation 305 255 13 5
- ----------------------------------------------------------------------------------------------
Benefit payments (155) (147) (123) (108)
- ----------------------------------------------------------------------------------------------
BENEFIT OBLIGATION
AT END OF YEAR 3,543 2,970 2,914 2,135
- ----------------------------------------------------------------------------------------------
The following table sets forth the aggregate change in plan assets, as well as
the cash contributions made for each plan:
Years ended June 30
-------------------------------------------------------
Pension Benefits Other Retiree Benefits
-------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Fair value of plan assets
at beginning of year $ 1,332 $ 1,432 $ 2,347 $ 1,449
- ----------------------------------------------------------------------------------------------
Actual return on
plan assets (36) (150) 1 947
- ----------------------------------------------------------------------------------------------
Acquisitions 1 18 - -
- ----------------------------------------------------------------------------------------------
Employer contributions 337 116 25 38
- ----------------------------------------------------------------------------------------------
Participants' contributions 7 7 27 22
- ----------------------------------------------------------------------------------------------
Settlements (27) (22) - -
- ----------------------------------------------------------------------------------------------
Currency translation 99 78 - (1)
- ----------------------------------------------------------------------------------------------
Benefit payments (155) (147) (123) (108)
- ----------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS
AT END OF YEAR 1,558 1,332 2,277 2,347
- ----------------------------------------------------------------------------------------------
Pension plan assets comprise a diversified mix of assets including corporate
equities, government securities and corporate debt securities. The asset
allocation is based on the structure of the liability. Other retiree plan assets
were comprised of Company stock, net of Series B ESOP debt (see Note 6), of
$2,182 and $2,243, as of June 30, 2003 and 2002, respectively.
The accrued pension and other retiree benefit costs recognized in the
accompanying Consolidated Balance Sheets were computed as follows:
Years ended June 30
-------------------------------------------------------
Pension Benefits Other Retiree Benefits
-------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Funded status
- ----------------------------------------------------------------------------------------------
at end of year $ (1,985) $ (1,638) $ (637) $ 212
- ----------------------------------------------------------------------------------------------
Unrecognized net
actuarial loss (gain) 930 571 435 (579)
- ----------------------------------------------------------------------------------------------
Unrecognized
transition amount 13 14 - -
- ----------------------------------------------------------------------------------------------
Unrecognized
prior service cost (9) 21 (2) (1)
- ----------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED (1,051) (1,032) (204) (368)
- ----------------------------------------------------------------------------------------------
Prepaid benefit cost 173 94 2 2
- ----------------------------------------------------------------------------------------------
Accrued benefit cost (1,407) (1,250) (206) (370)
- ----------------------------------------------------------------------------------------------
Intangible asset 31 18 - -
- ----------------------------------------------------------------------------------------------
Accumulated other
comprehensive income 152 106 - -
- ----------------------------------------------------------------------------------------------
NET LIABILITY RECOGNIZED (1,051) (1,032) (204) (368)
- ----------------------------------------------------------------------------------------------
The underfunding of pension benefits primarily is a function of the different
funding incentives that exist outside of the United States. 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 through 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 defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $2,945, $2,310 and $979, respectively,
as of June 30, 2003, and $1,718, $1,385 and $276, respectively, as of June 30,
2002.
The recent underfunding of other retiree benefits is primarily due to changes in
the assumed discount and health care cost trend rates. Benefit obligations
exceed the fair value of plan assets for each retiree benefit plan. Annual
funding requirements are met through cash from operations.
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 51
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 in each country that may have an impact on the cost of providing
retirement benefits.
Assumptions for the defined benefit and other retiree benefit calculations,
which are reflected on a weighted average basis of individual country plans,
were as follows:
Years ended June 30
-------------------------------------------------------
Pension Benefits Other Retiree Benefits
-------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Discount rate 5.1% 5.6% 5.8% 7.0%
- ----------------------------------------------------------------------------------------------
Expected return
on plan assets 7.7% 8.6% 9.5% 9.5%
- ----------------------------------------------------------------------------------------------
Rate of compensation
increase 3.1% 3.5% - -
- ----------------------------------------------------------------------------------------------
Initial health care
cost trend rate (1) - - 11.4% 11.3%
- ----------------------------------------------------------------------------------------------
(1) Trend rate assumption was adjusted in 2003 to reflect market trends. Rate is
assumed to decrease to 5.0% by 2010 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 8.8% for 2003 and
9.1% for 2002.
Components of the net periodic benefit cost were as follows:
Years ended June 30
--------------------------------------------------------------------
Pension Benefits Other Retiree Benefits
--------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Service cost $ 124 $ 114 $ 115 $ 62 $ 49 $ 40
- ------------------------------------------------------------------------------------------------------
Interest cost 173 153 149 150 116 101
- ------------------------------------------------------------------------------------------------------
Expected return
on plan assets (127) (133) (127) (333) (320) (317)
- ------------------------------------------------------------------------------------------------------
Amortization of
prior service cost 2 4 5 (1) (1) (1)
- ------------------------------------------------------------------------------------------------------
Amortization of prior
transition amount 2 3 3 - - -
- ------------------------------------------------------------------------------------------------------
Settlement loss 5 - 6 - - -
- ------------------------------------------------------------------------------------------------------
Curtailment loss (gain) - 1 (13) - (1) -
- ------------------------------------------------------------------------------------------------------
Recognized net
actuarial loss (gain) 13 9 3 (27) (64) (85)
- ------------------------------------------------------------------------------------------------------
GROSS BENEFIT COST 192 151 141 (149) (221) (262)
- ------------------------------------------------------------------------------------------------------
Dividends on ESOP
preferred stock - - - (74) (76) (76)
- ------------------------------------------------------------------------------------------------------
NET PERIODIC
BENEFIT COST 192 151 141 (223) (297) (338)
- ------------------------------------------------------------------------------------------------------
In addition to the net periodic benefit cost, additional expense of $8 and $46
was recognized during the fiscal years ended June 30, 2003 and 2002,
respectively, 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 $ 37 $ (30)
- -------------------------------------------------------------------------------------
Effect on postretirement benefit obligation 435 (422)
- -------------------------------------------------------------------------------------
Employee Stock Ownership Plan
The Company maintains the ESOP to provide funding for certain employee benefits
discussed in the preceding paragraphs.
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 retirement plan in the United States. 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, net of
the associated debt, of the other retiree benefits plan discussed above. 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.
The number of preferred shares outstanding at June 30 was as follows:
June 30
--------------------------------
Shares in Thousands 2003 2002 2001
- --------------------------------------------------------------------------------
Allocated 32,246 33,095 34,459
- --------------------------------------------------------------------------------
Unallocated 15,767 17,687 19,761
- --------------------------------------------------------------------------------
TOTAL SERIES A 48,013 50,782 54,220
- --------------------------------------------------------------------------------
Allocated 10,324 9,869 9,267
- --------------------------------------------------------------------------------
Unallocated 25,359 26,454 27,338
- --------------------------------------------------------------------------------
TOTAL SERIES B 35,683 36,323 36,605
- --------------------------------------------------------------------------------
Millions of dollars except share amounts
52 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As permitted by SOP 93-6, "Employers Accounting for Employee Stock Ownership
Plans," the Company has elected, where applicable, to continue its practices,
which are based on SOP 76-3, "Accounting Practices for Certain Employee Stock
Ownership Plans." ESOP debt, which is guaranteed by the Company, is recorded in
short-term 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 Sheets and the Consolidated Statements 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 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 consisted of the following:
Years ended June 30
--------------------------------
2003 2002 2001
- ----------------------------------------------------------
United States $ 4,920 $ 4,411 $ 3,340
- ----------------------------------------------------------
International 2,610 1,972 1,276
- ----------------------------------------------------------
7,530 6,383 4,616
- ----------------------------------------------------------
The income tax provision consisted of the following:
Years ended June 30
--------------------------------
2003 2002 2001
- ----------------------------------------------------------
CURRENT TAX EXPENSE
U.S. Federal $ 1,595 $ 975 $ 1,030
- ----------------------------------------------------------
International 588 551 676
- ----------------------------------------------------------
U.S. State and Local 98 116 90
- ----------------------------------------------------------
2,281 1,642 1,796
- ----------------------------------------------------------
DEFERRED TAX EXPENSE
U.S. Federal 125 571 142
- ----------------------------------------------------------
International and other (62) (182) (244)
- ----------------------------------------------------------
63 389 (102)
- ----------------------------------------------------------
2,344 2,031 1,694
- ----------------------------------------------------------
The Company's effective income tax rate was 31.1%, 31.8% and 36.7% in 2003, 2002
and 2001, 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 in 2003 and 2002 than in 2001 - 3.8% in 2003 and 3.1% in
2002. The Company's higher tax rate in 2001 reflected the impact of
restructuring costs and amortization of goodwill and indefinite-lived
intangibles prior to the adoption of SFAS No. 142. Taxes impacted shareholders'
equity with credits of $361 and $477 for the years ended June 30, 2003 and 2002,
respectively. These primarily relate to the tax effects of net investment hedges
and tax benefits from the exercise of stock options.
The Company has undistributed earnings of foreign subsidiaries of $14,021 at
June 30, 2003, for which deferred taxes have not been provided. Such earnings
are considered indefinitely invested in the foreign subsidiaries. If such
earnings were repatriated additional tax expense may result, although the
calculation of such additional taxes is not practicable.
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 were comprised of the following:
Years ended June 30
--------------------
2003 2002
- ------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS
Loss and other carryforwards $ 311 $ 454
- ------------------------------------------------------------------------
Unrealized loss on financial instruments 287 55
- ------------------------------------------------------------------------
Advance payments 182 -
- ------------------------------------------------------------------------
Other postretirement benefits 93 109
- ------------------------------------------------------------------------
Other 820 687
- ------------------------------------------------------------------------
Valuation allowances (158) (106)
- ------------------------------------------------------------------------
1,535 1,199
- ------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES
Fixed assets (1,175) (1,110)
- ------------------------------------------------------------------------
Goodwill and other non-current intangible assets (410) (286)
- ------------------------------------------------------------------------
Other (287) (209)
- ------------------------------------------------------------------------
(1,872) (1,605)
- ------------------------------------------------------------------------
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 53
Net operating loss carryforwards were $1,222 at June 30, 2003. Net operating
losses and other tax credit carryforwards were $1,211 at June 30, 2002. If
unused, $348 will expire between 2004 and 2013. The remainder, totaling $874 at
June 30, 2003, may be carried forward indefinitely.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Guarantees
In conjunction with certain transactions, primarily divestitures, the Company
may provide routine indemnifications (e.g., retention of previously existing
environmental, tax and employee liabilities) whose terms range in duration and
often are not explicitly defined. Where appropriate, an obligation for such
indemnifications is recorded as a liability. Generally, the maximum obligation
under such indemnifications is not explicitly stated and as a result the overall
amount of these obligations cannot be reasonably estimated. Other than
obligations recorded as liabilities at the time of divestiture, historically the
Company has not made significant payments for these indemnifications. The
Company believes that if it were to incur a loss in any of these matters, the
loss would not have a material effect on the Company's financial condition or
results of operations.
In certain situations, the Company guarantees loans for suppliers that construct
assets to produce materials for sale to P&G. The total amount of guarantees
issued under such arrangements is not material.
Purchase Commitments
The Company has purchase commitments for materials, supplies, services and
property, plant and equipment as part of the normal course of business. 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 potential payments under these provisions to materially affect
results of operations or its financial condition in any individual year.
Minority Partner Put Option
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
that 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.
Operating Leases
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 $550.
Litigation
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 $34 and $39 at June 30, 2003 and 2002,
respectively. 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 will
not materially affect the Company's financial condition.
NOTE 12 SEGMENT INFORMATION
The Company's reportable segments are organized into five product-based global
business units. The segments, which are generally determined by the product type
and end-point user benefits offered, manufacture and market products as follows:
- - Fabric and Home Care includes laundry detergents, dish care, fabric enhancers
and surface cleaners.
- - Beauty Care includes hair care, skin care, cosmetics, fine fragrances,
deodorants, tampons, pads and pantiliners.
- - Baby and Family Care includes diapers, wipes, tissue and towels.
- - Health Care includes oral care, personal health care, pharmaceuticals and pet
health and nutrition.
- - Snacks and Beverages includes coffee, snacks, commercial services and juice.
To reflect management and business changes, the Company realigned its reporting
segments. Effective July 1, 2002, the feminine care business, which had been
managed within the Baby and Family Care segment, is included in the Beauty Care
segment. In addition, the Food and Beverage segment was renamed Snacks and
Beverages to reflect its remaining businesses. The historical results for the
elements of the former Food and Beverage segment that have been divested or
spun-off (i.e., Jif, Crisco and commercial shortening and oils) are now
reflected in
Millions of dollars except per share amounts
54 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporate, consistent with management reporting. As required by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," prior
year operating information in the following table, as well as other segment in
formation presented in the footnotes, has been restated to conform to the
current year presentation.
The accounting policies of the operating segments are generally the same as
those described in Note 1, Summary of Significant Accounting Policies.
Differences from these policies and U.S. GAAP primarily reflect: income taxes,
which are reflected in the business segments using estimated local statutory
rates; the treatment of unconsolidated investees (see Note 1); and the recording
of fixed assets at historical exchange rates in certain high inflation
economies.
Corporate includes certain operating and non-operating activities as well as
eliminations to adjust management reporting principles to U.S. GAAP. Operating
activities in Corporate include the results of incidental businesses managed at
the corporate level along with the elimination of individual revenues and
expenses generated by companies over which the Company exerts significant
influence, but does not control. Operating elements also comprise intangible
asset amortization, including amortization of indefinite-lived intangibles and
goodwill prior to SFAS No. 142 adoption on July 1, 2001, charges related to
restructuring, certain employee benefit costs and other general corporate items.
The non-operating elements include financing and investing activities. These
items have not been allocated to operating segments because they are
corporate-driven decisions and are not reflected in the operating results used
internally to measure and evaluate the operating segments. In addition,
Corporate includes the historical results of certain divested businesses of the
former Food and Beverage segment. Corporate assets primarily include cash,
investment securities, goodwill and other non-current intangible assets.
The Company had net sales in the United States of $21,853, $21,198 and $20,334
for the years ended June 30, 2003, 2002 and 2001, respectively. Assets in the
United States totaled $23,424 and $23,434 as of June 30, 2003 and
2002, respectively.
The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 18%, 17% and 15% of consolidated net sales in 2003, 2002 and 2001,
respectively. These sales occurred primarily in the United States.
Fabric and Beauty Baby and Health Snacks and
Home Care Care Family Care Care Beverages Corporate Total
- --------------------------------------------------------------------------------------------------------------------------
Net Sales 2003 $ 12,560 $ 12,221 $ 9,933 $ 5,796 $ 3,238 $ (371) $ 43,377
- --------------------------------------------------------------------------------------------------------------------------
2002 11,618 10,723 9,233 4,979 3,249 436 40,238
- --------------------------------------------------------------------------------------------------------------------------
2001 11,660 10,027 9,221 4,353 3,460 523 39,244
- --------------------------------------------------------------------------------------------------------------------------
Before-Tax Earnings 2003 3,080 2,899 1,448 1,034 460 (1,391) 7,530
- --------------------------------------------------------------------------------------------------------------------------
2002 2,728 2,354 1,272 795 476 (1,242) 6,383
- --------------------------------------------------------------------------------------------------------------------------
2001 2,430 2,017 1,119 584 401 (1,935) 4,616
- --------------------------------------------------------------------------------------------------------------------------
Net Earnings 2003 2,059 1,984 882 706 306 (751) 5,186
- --------------------------------------------------------------------------------------------------------------------------
2002 1,831 1,610 738 521 303 (651) 4,352
- --------------------------------------------------------------------------------------------------------------------------
2001 1,643 1,361 658 390 242 (1,372) 2,922
- --------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization 2003 332 345 558 156 125 187 1,703
- --------------------------------------------------------------------------------------------------------------------------
2002 326 339 503 163 121 241 1,693
- --------------------------------------------------------------------------------------------------------------------------
2001 328 293 563 159 128 800 2,271
- --------------------------------------------------------------------------------------------------------------------------
Total Assets 2003 5,174 5,389 6,974 2,642 2,040 21,487 43,706
- --------------------------------------------------------------------------------------------------------------------------
2002 5,149 5,500 7,069 2,542 2,012 18,504 40,776
- --------------------------------------------------------------------------------------------------------------------------
Capital Expenditures 2003 357 343 548 144 125 (35) 1,482
- --------------------------------------------------------------------------------------------------------------------------
2002 368 354 702 158 125 (28) 1,679
- --------------------------------------------------------------------------------------------------------------------------
2001 516 416 1,152 231 217 (46) 2,486
- --------------------------------------------------------------------------------------------------------------------------
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Procter & Gamble Company and Subsidiaries 55
NOTE 13 QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
--------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Total Year
- --------------------------------------------------------------------------------------------------------------
Net Sales 2002-2003 $ 10,796 $ 11,005 $ 10,656 $ 10,920 $ 43,377
- --------------------------------------------------------------------------------------------------------------
2001-2002 9,766 10,403 9,900 10,169 40,238
- --------------------------------------------------------------------------------------------------------------
Operating Income 2002-2003 2,179 2,248 1,957 1,469 7,853
- --------------------------------------------------------------------------------------------------------------
2001-2002 1,762 1,864 1,654 1,398 6,678
- --------------------------------------------------------------------------------------------------------------
Net Earnings 2002-2003 1,464 1,494 1,273 955 5,186
- --------------------------------------------------------------------------------------------------------------
2001-2002 1,104 1,299 1,039 910 4,352
- --------------------------------------------------------------------------------------------------------------
Diluted Net Earnings Per Common Share 2002-2003 $ 1.04 $ 1.06 $ 0.91 $ 0.68 $ 3.69
- --------------------------------------------------------------------------------------------------------------
2001-2002 0.79 0.93 0.74 0.64 3.09
- --------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY (UNAUDITED)
2003 2002 2001 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales $ 43,377 $ 40,238 $ 39,244 $ 39,951 $ 38,125 $ 37,154 $ 35,764 $ 35,284
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 7,853 6,678 4,736 5,954 6,253 6,055 5,488 4,815
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings 5,186 4,352 2,922 3,542 3,763 3,780 3,415 3,046
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings Margin 12.0% 10.8% 7.4% 8.9% 9.9% 10.2% 9.5% 8.6%
- -----------------------------------------------------------------------------------------------------------------------------
Basic Net Earnings Per Common Share $ 3.90 $ 3.26 $ 2.15 $ 2.61 $ 2.75 $ 2.74 $ 2.43 $ 2.14
- -----------------------------------------------------------------------------------------------------------------------------
Diluted Net Earnings Per Common Share 3.69 3.09 2.07 2.47 2.59 2.56 2.28 2.01
- -----------------------------------------------------------------------------------------------------------------------------
Dividends Per Common Share 1.64 1.52 1.40 1.28 1.14 1.01 0.90 0.80
- -----------------------------------------------------------------------------------------------------------------------------
Restructuring Program Charges (1) $ 751 $ 958 $ 1,850 $ 814 $ 481 $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
Research and Development Expense 1,665 1,601 1,769 1,899 1,726 1,546 1,469 1,399
- -----------------------------------------------------------------------------------------------------------------------------
Advertising Expense 4,373 3,773 3,612 3,793 3,639 3,801 3,574 3,374
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets 43,706 40,776 34,387 34,366 32,192 31,042 27,598 27,762
- -----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures 1,482 1,679 2,486 3,018 2,828 2,559 2,129 2,179
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 11,475 11,201 9,792 9,012 6,265 5,774 4,159 4,678
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 16,186 13,706 12,010 12,287 12,058 12,236 12,046 11,722
- -----------------------------------------------------------------------------------------------------------------------------
(1)Restructuring program charges, on an after-tax basis, totaled $538, $706,
$1,475, $688 and $385 for 2003, 2002, 2001, 2000 and 1999, respectively.
Millions of dollars except per share amounts
56 THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
SHAREHOLDER INFORMATION
IF ...
- - You need help with your account
- - You need automated access to your account
- - You are interested in our certificate safekeeping service
- - You want to arrange for direct deposit of dividends
- - You have a lost, stolen or destroyed stock certificate
CONTACT P&G 24 HOURS A DAY
Visit our Web site at www.pg.com/investor
E-mail us at shareholders.im@pg.com
Call for financial information at 1-800-764-7483
(call 1-513-945-9990 outside the U.S. and Canada)
CALL PERSON-TO-PERSON
Shareholder Services representatives are available
Monday-Friday, 9-4 EST at 1-800-742-6253
(call 1-513-983-3034 outside the U.S. and Canada)
Automated service available after U.S. business hours
OR WRITE
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, OH 45201-5572
CORPORATE HEADQUARTERS
The Procter & Gamble Company
P.O. Box 599
Cincinnati, OH 45201-0599
TRANSFER AGENT/SHAREHOLDER SERVICES
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, OH 45201-5572
REGISTRAR
The Fifth Third Bank
Stock Transfer Administration
Corporate Trust Department, MD 10AT60
38 Fountain Square Plaza
Cincinnati, OH 45263
EXCHANGE LISTING
New York, Cincinnati, Amsterdam, Paris, Basle, Geneva,
Lausanne, Zurich, Frankfurt, Brussels, Tokyo
SHAREHOLDERS OF COMMON STOCK
There were approximately 1,234,000 common stock shareowners, including
shareholders of record, participants in the Shareholder Investment Program,
participants in P&G stock ownership plans and beneficial owners with accounts at
banks and brokerage firms, as of August 1, 2003.
FORM 10-K
Shareholders may obtain a copy of the Company's 2003 report to the Securities
and Exchange Commission on Form 10-K by going to P&G's investor Web site at
www.pg.com/investor or by calling us at 1-800-764-7483. This information is also
available at no charge by sending a request to Shareholder Services at the
address listed above.
SHAREHOLDERS' MEETING
The next annual meeting of shareholders will be held on Tuesday, October 14,
2003. A full transcript of the meeting will be available from Linda D. Rohrer,
Assistant Secretary. Ms. Rohrer can be reached at One P&G Plaza, Cincinnati, OH
45202-3315.
WWW.PG.COM/INVESTOR
You can access your Shareholder Investment Program account, including your
account balance and transactions, 24 hours a day at www.pg.com/investor. And
pg.com is your one-stop connection to stock purchase information, transaction
forms, Company reports and webcasts, as well as product information, newsletters
and samples.
CORPORATE SUSTAINABILITY REPORT
Sustainable development is a simple idea: ensuring a better quality of life for
everyone, now and for generations to come. P&G embraces sustainable development
as a potential business opportunity, as well as a corporate responsibility. For
more information, please find our Corporate Sustainability Report at
www.pg.com/sr.
GLOBAL CONTRIBUTIONS REPORT
P&G strives to make a difference beyond our brands to help improve people's
everyday lives. P&Gers around the world are engaged in their communities as
volunteers and as partners in important community activities. See P&G's Global
Contributions Report to learn more about these efforts, including P&G's
financial support, at www.pg.com/contributionsreport.
P&G GALLERIA
You can order imprinted P&G merchandise from the P&G Galleria. Shop online for
umbrellas, business accessories and clothing through www.pg.com in Try and Buy,
or call 1-800-969-4693 (1-513-651-1888 outside the U.S.).
Common Stock Price Range and Dividends
Price Range Dividends
--------------------------------------------- ---------------------
2002-2003 2002-2003 2001-2002 2001-2002 2002-2003 2001-2002
Quarter ended HIGH LOW High Low
- ------------------------------------------------------------- ---------------------
September 30 $ 93.50 $ 74.08 $ 77.28 $ 63.75 $ 0.41 $ 0.38
- ------------------------------------------------------------- ---------------------
December 31 92.35 82.00 81.72 69.73 0.41 0.38
- ------------------------------------------------------------- ---------------------
March 31 90.00 79.57 90.73 76.38 0.41 0.38
- ------------------------------------------------------------- ---------------------
June 30 92.53 87.60 94.75 87.00 0.41 0.38
- ------------------------------------------------------------- ---------------------
Design: Landor Associates
P&G AT A GLANCE
Net Sales
by Segment*
Global Business Unit Product Lines Key Brands (in billions)
- --------------------------------------------------------------------------------------------------
Fabric and Home Care Laundry detergent, Tide, Ariel, Downy, Lenor, $ 12.6
fabric conditioners, Dawn, Fairy, Joy, Gain, Ace
dish care, household Laundry and Bleach, Swiffer,
cleaners, fabric Bold, Cascade, Dash, Cheer,
refreshers, bleach Bounce, Febreze, Mr.
and care for special Clean/Proper, Era, Bonux,
fabrics Dreft, Daz, Vizir, Flash,
Salvo, Viakal, Rindex,
Alomatik, Dryel, Myth, Maestro
Limpio, Ivory Dish, Hi Wash,
Lang
- --------------------------------------------------------------------------------------------------
Beauty Care Hair care/hair color, Pantene, Olay, Head & 12.2
skin care and Shoulders, Cover Girl,
cleansing, cosmetics, Clairol's Herbal Essences,
fragrances and Nice'n Easy, Natural Instincts
antiperspirants/ and Hydrience, SK-II, Max Factor,
deodorants Hugo Boss, Secret, Zest,
Old Spice, Safeguard, Rejoice,
Vidal Sassoon, Pert, Ivory
Personal Care, Aussie,
Lacoste, Infusion 23, Noxzema, Camay,
Sure, Physique, Infasil, Laura
Biagiotti, Muse, Wash&Go, Giorgio, Mum
Feminine protection Always, Whisper, Tampax,
pads, tampons and Lines Feminine Care, Naturella,
pantiliners Evax, Ausonia, Orkid
- --------------------------------------------------------------------------------------------------
Baby and Family Care Baby diapers, baby Pampers, Luvs, Kandoo, Dodot 9.9
and toddler wipes,
baby bibs, baby
change and bed mats
Paper towels, toilet Charmin, Bounty, Puffs, Tempo,
tissue and facial Codi
tissue
- --------------------------------------------------------------------------------------------------
Health Care Oral care, pet health Crest, Iams, Bukanuba, Vicks, 5.8
and nutrition, Actonel, Asacol, Metamucil,
pharmaceuticals and Fixodent, PUR, Scope,
personal health care Pepto-Bismol, Macrobid,
Didronel, ThermaCare
- --------------------------------------------------------------------------------------------------
Snacks and Beverages Snacks and beverages Pringles, Folgers, Millstone, 3.2
Torengos, Sunny Delight, Punica
- --------------------------------------------------------------------------------------------------
[PIE CHART]
- - Fabric and Home Care 29%
- - Beauty Care 28%
- - Baby and Family Care 23%
- - Health Care 13%
- - Snacks and Beverages 7%
RECOGNITION
- - P&G is in the top 10 of the World's Most Admired Companies (Fortune
magazine) and Best Corporate Citizens (Business Ethics magazine).
- - P&G ranks among the top companies for Executive Women (National Association
of Female Executives), African Americans (Family Digest magazine), and Best
Companies to Work For (Fortune magazine).
[GRAPHIC]
* Includes $0.4 billion of net sales generated by companies for which P&G exert
significant influence but does not consolidate.
[GRAPHIC]
TOUCHING LIVES, IMPROVING LIFE. P&G
(C) 2003 Procter & Gamble
0038-7121