EXHIBIT (13)
Annual Report to Shareholders
(pages 1-70)
Consumers around the world trust P&G brands - such as Pampers, Tide, Ariel,
Pantene, Wella, Always, Crest, Bounty, Charmin, Olay, Pringles, Iams, Downy,
Actonel, Folgers and Head & Shoulders - to make everyday life a little bit
better. Almost 110,000 P&G people in over 80 countries worldwide work hard to
earn that trust.
Touching lives, improving life. P&G.
FINANCIAL HIGHLIGHTS
Years ended June 30
Amounts in millions -------------------------------------------
except per share amounts 2004 2003 % Change
- ----------------------------------------------------------------------------------------------
Net Sales $51,407 $43,377 19%
Operating Income 9,827 7,853 25%
Net Earnings 6,481 5,186 25%
- -------------------------------------------------------------------------------------------
Per Common Share(1)
Diluted Net Earnings 2.32 1.85 25%
Dividends 0.93 0.82 13%
- -------------------------------------------------------------------------------------------
[BAR CHART]
Net Sales
(in billions of dollars)
2002 40.2
2003 43.4
2004 51.4
[BAR CHART]
Operating Cash Flow
(in billions of dollars)
2002 7.7
2003 8.7
2004 9.4
[BAR CHART]
Diluted Net Earnings(1)
(per common share)
2002 1.54
2003 1.85
2004 2.32
[BAR CHART]
Additional Earnings Information(1,2)
(per common share, on a diluted basis)
Reported Restructuring
EPS Charges Total
2002 1.54 .26 1.80
2003 1.85 .19 2.04
2004 2.32 - 2.32
TABLE OF CONTENTS
Letter to Shareholders 1
P&G's Billion-Dollar Brands 12
Business Unit Perspective 16
Financial Contents 28
Directors and Corporate Officers 68
Shareholder Information 70
ON THE COVER
A mother and her daughter enjoy one of life's moments in Russia. P&G sent
photographer Peter Menzel around the world to capture moments like these. The
photos you'll see in this publication reflect just some of the moments every day
where P&G touches consumers' lives.
(1) Restated for two-for-one stock split effective May 21, 2004.
(2) Restructuring charges per share total $0.26 in 2002 and $0.19 in 2003.
SUSTAINING P&G'S GROWTH
P&G is delivering broad-based, organic growth driven by clear strategies and a
unique combination of P&G strengths. P&G's performance has accelerated over the
past three years, and we are confident double-digit earnings-per-share growth is
sustainable for the foreseeable future.
FELLOW SHAREHOLDERS,
P&G is delivering broad-based, organic growth driven by clear strategies and a
unique combination of P&G strengths. The Company's performance has accelerated
over the past three years, and we are confident double-digit earnings-per-share
growth is sustainable for the foreseeable future.
P&G's goals are to deliver 4% - 6% sales growth (excluding the impact of foreign
exchange), 10% or better earnings-per-share growth, and free cash flow equal to
90% or more of net earnings.1 We know we have to earn your trust every year by
meeting or exceeding these goals consistently and reliably.
P&G exceeded all its financial goals in fiscal 2004.
- - Volume is up 17%. Organic volume is up 10%.(2)
- - Sales are $51.4 billion, up 19%. Organic sales are up 8%.(3)
- - Earnings are $6.5 billion, up 25%. Earnings are up 13% versus prior-year
core earnings.(4)
- - Earnings per share are $2.32, up 25%. Earnings per share are up 14% versus
prior-year core earnings per share.
- - Free Cash Flow is $7.3 billion, or 113% of earnings.
- - Dividends are up 13%, annualized.
- - Total Shareholder Return is 24%.
Growth was broad-based. All five Global Business Units delivered at or above the
sales goal; four of five were at or above the earnings goal. Every Market
Development Organization delivered sales and volume growth at or above Company
targets. P&G brands grew share in categories accounting for more than two-thirds
of total Company sales.
This year's results culminate increasingly strong performance over the past
three years. Since July 2001:
- - P&G cumulative sales have grown 30%. Fiscal 2004 marked the first time in
P&G history that sales exceeded $50 billion.
- - Earnings per share have grown over 40%, cumulatively, from core results
three years ago.(4)
- - P&G businesses have generated more than $20 billion in cumulative free
cash flow.
- - Most important, P&G has delivered a cumulative shareholder return of 81%
over the past three years, and the price of P&G's stock has increased more
than 70%. (In fact, over the past four years, cumulative shareholder
return is above 100%.)
Three years of strong performance is a good start. But we know it's only that -
a start. Necessary, but not sufficient. It's consistent long-term performance
that counts, and consistent performance is not easy. Growing P&G sales 4% - 6%
per year, for example, is the equivalent of adding a business the size of P&G's
total business in the U.K. or a brand the size of Tide - every year.
The challenge is significant, and we don't take it lightly, but I'm confident
P&G can reliably deliver the balanced, consistent growth to which we've
committed. There are three reasons for my confidence:
1. P&G strategies are working, and there is still considerable room for growth.
2. P&G strengths give us the ability to respond to major external trends and
challenges.
3. Systemic and structural changes implemented over the past several years are
improving the consistency and reliability of P&G performance.
When combined with the strength of P&G's culture and P&G people, these three
factors make P&G a better investment proposition today than we have been in many
years.
(1) This Annual Report contains a number of forward-looking statements. For
more information, please see page 32.
(2) Organic volume excludes the impact of acquisitions and divestitures.
(3) Organic sales exclude the impact of acquisitions, divestitures and foreign
exchange.
(4) Core earnings exclude restructuring charges of $538 million in 2003 and
$1.48 billion in 2001.
GROWTH STRATEGIES ARE WORKING
In my 2001 Letter to Shareholders, I outlined five growth
3
strategies. We've executed well over the last three years. Every strategy is
delivering, and there's plenty of room for additional growth.
1. Build existing core businesses into stronger global leaders P&G's core
businesses are Baby Care, Fabric Care, Feminine Care and Hair Care. These are
categories in which P&G is #1 in global sales and #1 in global market share.
Together, they generate more than half of the Company's total profits. Most
important, they are categories in which we believe we can maintain and extend
P&G leadership.
In fact, over the past three years, we have steadily expanded P&G's share in all
these businesses. Baby Care now has a 36% global share - an increase of nearly
four percentage points over the past three years. P&G's 35% share of global
Feminine Care is up more than two percentage points in three years. We have a
31% share of global Fabric Care, and a 20% share of global Hair Care, each up
one point or more in three years. For perspective, a one-percentage-point
increase in market share across these four core businesses is worth about $1
billion in annual sales and more than $150 million in annual earnings.
[BAR CHART]
(Organic Unit Volume Growth
(% increase versus previous year)
2002 4%
2003 8%
2004 10%
[BAR CHART]
Free Cash Flow
(in billions of dollars)
2002 6.1
2003 7.2
2004 7.3
[LINE GRAPH]
Total Shareholder Return
(indexed versus June 30, 2001)
2. Grow leading brands, big countries, winning customers
I explained in 2001 that we intended to grow sales, market shares and profits -
at rates above total Company targets - on our leading brands, in our biggest
markets, in growing distribution channels, at winning retailers. Again, we've
delivered and continue to build momentum.
P&G now has 16 billion-dollar brands, up from 10 just four years ago. One of
these, Pampers, is a $5 billion brand. Another, Tide, is a $3 billion brand. And
two others, Pantene and Ariel, are $2 billion brands. Eight of these
billion-dollar brands are leaders in their category or segment. The portfolio of
billion-dollar brands delivered compounded annual sales and profit growth of 7%
and 16%, respectively, over the past three years.
Ten more P&G brands have sales between $500 million and $1 billion - with
credible potential to pass the billion-dollar mark in the years ahead. We don't
push brands to cross the billion-dollar line. They must have clear strategies to
achieve and sustain the growth, a brand equity grounded in deep consumer insight
and a solid innovation pipeline. But, as P&G brands join the billion-dollar
club, the Company takes important steps toward the strategic goal of having
global category leadership and the #1 global brand in every major category in
which we compete.
All top 10 countries grew volume and sales. Over the past three years, we've
demonstrated we can keep growing clear-cut leadership positions in core markets
by being closer to consumers and customers, leading innovation, delivering
superior value and building stronger local organizations. For example, in the
U.S., P&G Feminine Care has added seven percentage points to its share
leadership margin, and now has a 22-share-point advantage versus the next-best
competitor. In the U.K., Baby Care has added nearly 13 points to its share
leadership margin, and now has a 28-share-point advantage over the #2
competitor.
P&G is growing volume and share at 9 of our top 10 retail customers. Our
strategy is to develop highly collaborative partnerships with customers so we
both win when consumers choose where to shop and what to buy. We do this by
leveraging P&G strengths in shopper understanding, innovation that drives
category growth and supply chain efficiency.
3. Develop faster-growing, higher-margin, more asset-efficient businesses with
global leadership potential
Health Care and Beauty Care businesses now represent
4
nearly half of Company sales and profits. Since July 2001, we've delivered
double-digit compounded annual growth across the following Health Care and
Beauty Care businesses:
- - Skin Care sales are up 17% behind a strong initiative pipeline, including
Olay Total Effects, Olay Daily Facials and Olay Regenerist.
- - Hair Care sales are up 19% as we've strengthened global brands such as
Pantene and Head & Shoulders and as we've added new brands like Clairol
Herbal Essences.
- - Oral Care sales are up 18% on the strength of a solid-base dentifrice
business and fast-growing new segments led by Crest Whitestrips, Crest
Night Effects and Crest SpinBrush.
- - Pharmaceutical sales are up 26% and the business has become profitable -
led by Actonel, which has grown about 90% a year over the three-year
period. Actonel became a billion-dollar brand faster than any other brand
in P&G history.
- - Personal Health Care sales are up 15%, led most recently by Prilosec OTC,
which achieved market leadership within five days of launch and continued
to grow to its current 26% share of the heartburn remedy category.
In addition, profits in all of these Health Care and Beauty Care categories are
up double-digits.
4. Regain growth momentum and leadership in Western Europe
We have turned around this critical business - one of the largest consumer
markets in the world. Growth has been broad-based. Share is presently growing in
categories representing about 80% of Western Europe sales. Baby Care and
Feminine Care shares are now 50%. Laundry share is 30%. Shampoo, Feminine Care
and Home Care shares are at all-time highs.
5. Drive growth in key developing markets
Developing markets now account for about 20% of P&G sales. P&G volume in key
markets such as China and Russia has more than doubled in the past three years,
significantly outpacing market growth. In China, P&G's Laundry and Oral Care
market shares have all more than doubled in the past three years. And in Russia
over the past three years, Laundry, Hair Care and Oral Care - all category
leaders - have each earned at least five additional share points.
CONSISTENT PERFORMANCE
Three years of strong performance is a good start, but it's long term
performance that counts. Consistent performance is not easy. Growing P&G sales
4%-6% per year is roughly the equivalent of adding a brand the size of Tide -
every year.
ROOM TO GROW
These highlights demonstrate that P&G strategies are working. What's most
important, however, is that there's plenty of room to keep growing.
Global market shares in core categories - those where P&G is already the global
leader - are in the range of only 20% - 36%. In our most successful markets, we
have shares that are nearly twice the level of our current global shares. As a
result, we believe we can continue to expand P&G's market-share leadership in
these important categories.
We're also optimistic that we can keep growing in big countries. For example,
while we've restored much of P&G's leadership in Western Europe, we are still
not back to peak share levels in several categories, such as Diapers and
Laundry. Further, we are substantially underdeveloped in health and beauty. In
Dentifrice, we have only a 13% share in Western Europe, versus a 32% share in
North America. In Hair Care, we have an 18% share in Western Europe, but this is
still 16 share points lower than in North America. We are committed to reaching
best-in-class share levels in all major Western Europe categories.
With a strong core business that we will keep strong, we're now in a position to
begin pushing out from that core into new markets, new channels, new customer
segments and new businesses.
Beauty Care is a good example. P&G has about a 10% share of the nearly $170
billion global beauty market. With billion-
5
dollar beauty brands and new capabilities added by Clairol and Wella, we are
well positioned for strong growth.
In Health Care, we have strong, growing franchises in Crest, Iams and Prilosec
OTC. We've only scratched the surface with Actonel, our first billion-dollar
pharmaceutical brand, and we're optimistic about our pipeline, particularly
Intrinsa, our female testosterone patch.
Home Care is another faster-growing, higher-margin growth opportunity. We have
more than doubled P&G's Home Care business in the past three years. Still, P&G
is a significant player in categories representing less than half of the total
home care market.
Developing markets, with 80% of the world's population, are another opportunity.
P&G's organic volume in these markets is growing more than 50% faster than in
developed markets. As we build leadership scale, we believe we can grow
developing markets to a third of P&G sales.
There are also important sources of continued bottom-line improvement. Global
Business Services, for example, has locked-in substantial guaranteed savings
over the next four fiscal years - and is expecting additional purchasing savings
over the same period. In addition, the shift in our portfolio toward Health Care
and Beauty Care has added almost three percentage points to the Company's gross
margin over the past five years. We expect the more balanced portfolio to
continue improving gross margins in the years ahead.
The key point is that P&G strategies are working, and there is plenty of room
left to grow. We are committed to keep leading product innovation in our
categories; nothing is more central to sustained growth than category-leading
innovation. We are equally committed to continued innovation in marketing and
sales, as well as other areas of the business. And we are focused on getting the
most from dedicated business units, global scale and the strength of our growth
businesses to capture the significant opportunities still ahead of us.
SOURCES OF CONFIDENCE
We're confident P&G can reliably deliver the future growth to which we've
committed. Our strategies are working. There still is room to grow. Our
strengths enable us to respond to external trends and challenges. Major changes
are improving the consistency of P&G performance.
CHALLENGES PLAY TO P&G STRENGTHS
While our business is strong, and future prospects are bright, there are clearly
challenges we must acknowledge and manage.
First, there are business issues we need to address in the near-term. Family
Care and Coffee categories have experienced considerable price competition and
commodity cost pressure. Hair Colorants faces heavy competitive activity. To
become a leader in Colorants, we need an even more competitive cost structure;
we need to lead innovation; and we need to build even stronger brand equities.
We recognize these issues and are taking decisive steps to address them.
There are also the ever-present risks of complacency and complexity. When times
are good, it's easy to lose focus, to lose touch with consumers and customers,
to let costs rise. We recognize this, and are committed to keeping P&G
businesses simple and focused like a laser on delivering superior consumer value
and better customer service.
Competitive pressure, of course, is an unrelenting challenge. We compete against
some of the best companies in the world, and they are not standing still. They
are responding to P&G share growth with their own initiatives. Branded
competition, as well as retailer brands in a variety of formats, present a
constant challenge to lead innovation and offer superior value.
Another challenge is rising commodity costs. Where possible, we recover these
costs via pricing. When we cannot fully price to recover higher costs, we must
find offsetting cost savings elsewhere. We cannot permit
6
rising costs to erode the consumer value of P&G brands, particularly as brand
choices and consumer expectations for value continue to grow.
Media fragmentation is yet another challenge. Today, the average U.S. household
has access to 90 television channels, up from 27 channels a decade ago.
Prime-time audience share for the big three U.S. networks has dropped 23
percentage points over the same period. The reality is that there is less "mass"
in mass media today. We have to develop capabilities to communicate with
consumers when, where and how they choose. We must be as innovative in marketing
as we are in product design and development.
Global economic and political disruptions are also a continuing risk. Our
diversified portfolio and geographic breadth provide significant shock
absorption, but we must always closely monitor these situations so we can
respond fast when crises occur - as we did in Latin America in 2003.
These are significant challenges. We believe, however, that P&G's strengths in
branding, innovation, go-to-market capability and scale will help ensure that
these challenges do not prevent us from delivering reliable, consistent growth.
- - In a world of abundant consumer choice and retail consolidation, branding
becomes more important than ever. P&G's proven ability to understand
consumers and build billion-dollar brands that consumers love and
retailers find indispensable can be an increasing source of advantage.
- - In an environment of rising consumer expectations, relentless competition
and rapid technological change, innovation becomes more important than
ever. P&G is setting the pace of innovation in its major businesses today,
and improving its innovation success rate. We are also thinking more
broadly about what innovation is, where it comes from, who is responsible
for it and how it can be commercialized. We're connecting externally with
a global network of innovation partners and strengthening internal
capabilities in design and marketing innovation.
- - In a marketplace that is simultaneously global and local, P&G's
go-to-market strengths and scale advantages are increasingly important. We
have the ability to reap the benefits of a $50 billion global company
while understanding and responding to needs in individual local markets.
P&G has a history of leading change. Our willingness to deal realistically with
change and our proven ability to turn change - and the challenges it presents -
to advantage are important sources of my confidence in P&G's future.
P&G'S GROWTH STRATEGY
Build existing core business into strong global leaders.
[GRAPHICS]
Grow leading brands in big countries with winning customers. Accelerate growth
in Western Europe.
SYSTEMIC AND STRUCTURAL CHANGES ARE IMPROVING PERFORMANCE
I am also confident P&G can sustain growth because several systemic and
structural changes implemented over the past few years are improving the
consistency and reliability of P&G performance. Four changes in particular are
enabling more consistent growth and are creating competitive advantage: a more
balanced business portfolio, greater ability to serve lower-income consumers, a
unique organization structure, and strong cash and cost control.
A Balanced Portfolio Creates Flexibility
We have moved toward a more balanced mix of household businesses and health and
beauty businesses. Longer term, this more balanced portfolio will help us
sustain strong revenue growth, absorb inevitable short-term "bumps in the road,"
and deliver more balanced, consistent, predictable profit growth.
7
P&G's foundation is household products. These are large businesses that are
growing steadily and reliably generate earnings and cash. Overall Company
performance has been driven by these foundation categories for generations. We
grew P&G sales eightfold in the 1970s and 1980s when virtually all our business
was in household categories. Our enthusiasm and expectations for these household
businesses have not diminished. We remain the global leader in many of these
businesses, and are growing fast in categories such as Home Care.
Health Care and Beauty Care are faster-growing, higher-margin businesses in
which P&G is emerging as a global leader. We expect both Health and Beauty to be
disproportionate engines of growth in the first decade of the 21st century.
These businesses are appealing because they're huge markets - the beauty market
is more than four times the size of the fabric care market, for example - with
no dominant leaders. P&G shares are low, and we're developing the capabilities
to grow rapidly.
We will keep our foundation healthy and growing while we build momentum in these
newer businesses. Our near-term goal is to break out as a clear global leader in
Beauty and to continue building Health Care at a fast rate. This makes P&G a
unique investment proposition. We have strong healthy household businesses -
anchored by leading, billion-dollar brands like Pampers, Ariel and Downy that
are growing at rates above industry averages. We also have faster-growing,
higher-margin health and beauty businesses that are growing ahead of both
industry averages and P&G target growth rates. No other consumer products
company offers this unique portfolio balance.
[GRAPHICS]
Accelerate faster-growing, higher-margin health and beauty business.
[GRAPHICS]
Accelerate growth in developing markets and with lower-income consumers.
Serving More Consumers Drives Growth
We are building capability to serve lower-income consumers who are not buying
and using P&G products on a regular basis today.
There are major unserved and underserved populations in every market where P&G
competes. The opportunity is greatest in developing markets. The risk, however,
is greater, too. The key is to be selective, focused and disciplined. We have
made clear choices about where we will focus P&G investments and efforts, and
are executing plans in ways that minimize risks.
This approach is working in big developing markets such as China, Russia and
Mexico. In China, for example, we entered the market in 1988. Our first
categories were Shampoo, Skin Care and Personal Cleansing. We became market
leaders in these categories, and developed distribution and supply chains to
reach China's largest cities. In the mid-1990s, we entered Fabric Care, Feminine
Care and Oral Care. Then, we entered Baby Care in the late 1990s.
We accelerated entry into these categories by using the distribution and supply
chains we'd built earlier, and we leveraged P&G's branding and innovation
strengths to win with consumers. We've doubled the size of P&G's China business
over the past three years. We're now expanding these categories by innovating to
the needs of more Chinese consumers. In 2001, P&G brands were focused on
premium-tier consumers. The premium tier made up about 16% of the market in the
categories where we competed. Today, we've expanded our product offerings to
mid-tier consumers and are reaching more than 50% of the market. There still is
room to grow, and we remain optimistic about P&G's potential in China.
A Unique Organization Structure Creates Advantage
I explained in my 2002 Letter to Shareholders that P&G had moved to a new
operating structure. We organized around Global Business Units (GBUs), Market
Development Organizations (MDOs), a Global Business Services organization (GBS)
and Corporate Functions. We're now
8
able to capture the benefits of focused, smaller companies through dedicated
GBUs while capturing the go-to-market strengths and capabilities of a $50
billion company through local market development organizations, the shared
business services organization and lean corporate functions that ensure P&G's
functional disciplines continue to lead the industry.
Global Business Units are able to develop clearer, better long-term growth
strategies for P&G brands. They identify common consumer needs and quickly
expand brands and product innovations to different markets around the world.
They are aligned behind Total Shareholder Return metrics and are focused
exclusively on leadership in their individual industries.
Other companies have this single-minded strategic business-unit focus, but P&G
has two additional advantages that play to our unique combination of strengths:
Market Development Organizations and Global Business Services.
The MDO teams know local markets: people, retailers, supply chains and local
governments. They have a broader portfolio of brands to meet a wider range of
specific needs for local consumers and customers. They are aligned behind
top-line growth, market share, cash, cost and value-creation objectives, and are
focused exclusively on winning in local markets.
The key advantage of our structure is that the MDOs can focus 100% of their
resources on local consumers and customers without duplicating product
innovation, product sourcing, brand advertising or other activities that are now
led by the Global Business Units. We have eliminated inefficient overlaps and,
as a result, freed up resources to collaborate better with customers and focus
exclusively on winning in local markets.
In addition, there is an intangible but important benefit that comes from P&G's
"promote from within" culture. The men and women working in the GBUs and MDOs
often know each other because they've spent their entire careers at P&G. They're
focused on the same purpose. They have similar values. They've had similar
career experiences. This strengthens their ability to debate issues, make
decisions and execute with excellence.
The third advantage of P&G's structure is Global Business Services, which
delivers better service and better technology at best-in-class costs to P&G
businesses. Very few other companies in any industry have global business
services capability that rivals P&G's for quality, innovation, cost and scale.
Multiply these benefits across categories, markets and trade channels, and you
can see the scale advantages available to P&G:
- - We can compete on multiple fronts simultaneously without spreading
ourselves too thin.
- - We can deliver a higher frequency of new products across multiple markets.
- - We can plan long term globally while focusing locally on superior
execution every day.
In short, we can reap the benefits of global scale while acting like a local
company everywhere we compete. P&G now has sufficient experience with the new
structure to begin taking fuller advantage of the benefits it creates.
EARNING YOUR TRUST
P&G strategies, strengths, and the systemic and structural changes we've made to
improve the reliability of our performance should give shareholders confidence
that P&G can sustain double-digit earnings-per-share growth for the foreseeable
future.
Focus on Cost and Cash Is Keeping P&G Brands Competitive
The final change I want to highlight is the degree to which cash and cost
discipline is now ingrained in the organization. We're driving a cost-reduction
and cash-improvement mindset deeper into the Company with clearer reporting
structures, clearer accountability and the disciplined use of Total Shareholder
Return at the business unit level.
9
P&G's approach to Research and Development is a good example. Historically,
systems for evaluating R&D were strongly linked to technical product
performance. There was a heavy focus on patents and internally generated
innovation. There was less focus on perceived consumer value, on the
cost/benefit trade-off for consumers versus competition, and on fast, successful
commercialization.
In the new structure, R&D leaders are more effectively integrated into the
global business units. There's greater emphasis on winning when consumers
compare brands for overall value. We're integrating commercial and technical
innovation more seamlessly, and we're leveraging the Company's "connect and
develop" capability to build even stronger relationships with external
innovation partners for increased speed to market.
We're accelerating the pace of innovation and increasing the efficiency of R&D
investments. We've doubled P&G's innovation success rate. Our portfolio of
initiatives launched in the last calendar year is on track to deliver more than
100% of going-in expectations. At the same time, R&D investment as a percent of
sales is down from 4.5% of net sales three years ago to 3.5% of net sales this
past fiscal year. P&G R&D is now much more effective and efficient.
The focus on rigorous cost control and cash management ensures consumer value
that keeps P&G brands competitive worldwide.
STRENGTH OF P&G PEOPLE
It's been genuinely inspiring to watch the way P&G people have responded to the
Company's challenges over the past four years. In the end, P&G people - their
values and capabilities, commitment and dedication to excellence - are the best
guarantee of consistent, reliable growth.
EARNING YOUR TRUST
The three factors I've outlined - strategies that are working, strengths that
enable us to deal effectively with challenges and trends, systemic and
structural changes that are improving the reliability of P&G performance -
convince me that P&G can sustain double-digit earnings-per-share growth for the
foreseeable future, particularly when combined with the capability and
commitment of P&G people.
It's almost a cliche in CEO letters to shareholders to credit employees as a
company's greatest asset. It's far more than a cliche at P&G. There is no
greater evidence of this than the performance of P&G people over the past four
years. We committed ourselves at the beginning of this decade to get P&G back on
track and to ensure that P&G is and is seen as one of the world's great
companies. In many companies, a crisis like the one P&G faced in the spring and
summer of 2000 could have sent people running for the doors. Not here. P&G
people are proud of their company, and they refused to let P&G be anything other
than the industry leader we've always been. They dealt with the reality of what
we were up against and set about the hard work of fixing problems, creating and
seizing opportunities, and getting P&G back in the lead. It's been genuinely
inspiring to watch and be part of this tremendous employee response.
Ultimately, this is the reason P&G is where it is today. P&G strategies provide
clear direction. P&G systems and structure leverage P&G strengths. But it's P&G
people who are the best guarantee of consistent, reliable growth. It's P&G
people who create and execute strategies, who get to know consumers and create
the innovations that delight them, who work side-by-side with customers and
business partners. It's P&G people whose individual efforts ultimately deliver
the returns we provide to you, as shareholders. In the end, you place your trust
in P&G people. And, we work hard to earn your trust by delivering consistent,
reliable sales and earnings growth year after year.
/s/ A.G. Lafley
A.G. Lafley
Chairman of the Board, August 6, 2004
President and Chief Executive
10
BALANCED ORGANIZATION
We rebalanced and refocused our Global Business Units to create units of about
the same size. Beauty Care, Household Care, and Health, Baby and Family Care are
each about $17 billion in sales. Individually, each would rank within the top
115 companies in the Fortune 500.(R)
ORGANIZATION/MANAGEMENT CHANGES
In July 2004, we realigned P&G's business units and made associated management
changes. The realignments streamline our business operations to support further
growth. They affect organization alignment only (they will not result in any
special charges). P&G retains its unique Global Business Unit/Market Development
Organization/Global Business Services structure. It is building businesses and
delivering competitive advantage.
We're implementing these changes as several senior P&G leaders prepare to
retire. We owe these leaders a great debt of gratitude. They have made lasting
contributions to accelerating P&G's growth and building strong organizations.
We'll tap their experience in their remaining months with the Company to ensure
a smooth transition to the next generation of P&G leaders:
- - STEVE DAVID, Chief Information Officer and Business-to-Business Officer.
Steve will retire January 2, 2005 after more than 34 years of service.
- - MIKE GRIFFITH, President - Global Beverages. Mike will retire January 2,
2005 after more than 23 years of service.
- - MARK KETCHUM, President - Global Baby and Family Care. Mark will retire
November 1, 2004 after more than 33 years of service.
- - JORGE MONTOYA, President - Global Snacks and Beverages/Latin America
Market Development Organization. Jorge will retire October 1, 2004 after
more than 33 years of service.
- - MARTIN NUECHTERN, President - Global Hair Care. Martin will retire June
30, 2005 after more than 26 years of service.
Why are we realigning the business units? Our Beauty and Health Care businesses
have grown dramatically. As the size of key businesses changed with acquisitions
and divestitures, it became clear we needed to rebalance and refocus our Global
Business Units to create units of about the same size. Beauty Care, Household
Care, and Health, Baby and Family Care are each about $17 billion in sales.
Individually, each would rank within the top 115 companies in the Fortune
500.(R)
Business Unit Detail
- -------------------------------------------------------------------------------------------------
Global Beauty Care Cosmetics, Deodorant, Feminine Care, Fine Fragrances,
Hair Care, Hair Colorants, Personal Cleansing,
Professional Hair Care, Skin Care
- -------------------------------------------------------------------------------------------------
Global Household Care Coffee, Commercial Products Group, Fabric Care, Home
Care, Snacks
- -------------------------------------------------------------------------------------------------
Global Health, Baby and Family Care Baby Care, Family Care, Oral Care, Personal Health Care,
Pet Health and Nutrition, Pharmaceuticals
- -------------------------------------------------------------------------------------------------
We also re-titled the combination of our Market Development Organizations,
Global Business Services and other business functions into one new unit called
Global Operations.
The four business units are led by vice chairmen:
- - SUSAN ARNOLD is Vice Chairman - Global Beauty Care. Susan was previously
the president - Global Personal Beauty Care and Global Feminine Care.
- - BRUCE BYRNES is Vice Chairman of the Board - Global Household Care. Bruce
was previously vice chairman of the board and president - Global Beauty
and Feminine Care and Global Health Care.
- - KERRY CLARK is Vice Chairman of the Board - Global Health, Baby and Family
Care. Kerry was previously vice chairman of the board and president -
Global Market Development and Business Operations.
- - BOB MCDONALD is Vice Chairman - Global Operations. Bob was previously the
president - Global Fabric and Home Care.
These vice chairmen and the other senior managers - line presidents and global
staff officers - provide us with an extremely strong, collaborative leadership
team. Few companies can match the diversity and breadth of their total
experience. The changes build on our successful organization structure, and
maintain significant continuity of leadership to drive further growth.
11
P&G'S BILLION-DOLLAR BRANDS
P&G added three billion-dollar brands this year: Actonel, Head & Shoulders and
the Wella family of Professional and Retail Hair Care products. P&G has 16
brands with over one billion dollars in sales - up from 10 billion-dollar brands
four years ago. Together, these 16 brands generate about $30 billion in annual
sales.
12
FABRIC AND HOME CARE
[BAR CHART]
Net Sales
(in billions of dollars)
2002 11.6
2203 12.6
2004 13.9
[BAR CHART]
Net Earnings
(in billions of dollars)
2002 1.8
2003 2.1
2004 2.2
FISCAL YEAR 2004 RESULTS
The Fabric and Home Care business unit delivered another year of solid results.
Volume increased 9%, sales grew 10% and net earnings grew 7%. The growth in
fiscal 2004 came from strengthening leadership positions in existing categories,
growing rapidly in developing markets and with lower-income consumers, and
launching and leveraging new products that have created entirely new categories.
In addition, we supported this exceptional top-line growth with increased
investments in marketing and supply systems.
P&G grew its leadership share in the mature Fabric Care market to more than 31%
of this $40 billion category. Innovations like Tide Clean White in China, Downy
One Rinse in Latin America and Gain Fabric Enhancer in North America are great
examples of new products that helped Fabric Care grow market share globally.
In addition, Home Care products such as Swiffer, Febreze, Mr. Clean Magic Eraser
and Mr. Clean AutoDry Carwash have created entirely new product categories for
P&G and our customers. These products led P&G Home Care to 12% unit volume
growth.
WHAT'S WORKING
P&G's Fabric and Home Care business has accelerated pro?table market share and
sales growth by improving fundamentals, strengthening innovation and developing
low-cost activity systems to reach more consumers more profitably. Our business
fundamentals are sound. Nearly all of our products test superior to the best
competitive products and are supported by business-building marketing and
advertising programs.
We have more than doubled our innovation success rate and more than doubled the
future value potential of the innovations in our pipeline. Importantly, we are
introducing new-to-the-world products that are making consumers' lives easier
and building business for our trade customers.
We are satisfying more lower-income consumers with unique product designs and
marketing programs. We are building unique activity systems that integrate
product design, manufacturing supply chain and customer distribution systems to
keep our costs competitive with local, low-cost competition. The Tide Clean
White initiative is an excellent example of a locally tailored product using a
low-cost activity system to significantly grow our share in China.
Over the past year we have profitably built global market share in all of our
categories (detergents, fabric conditioners, dishwashing and surface care), and
we begin ?scal year 2005 with strong momentum and a full innovation pipeline.
Fabric and Home Care continues to be an important engine of growth for P&G.
[GRAPHICS] [GRAPHICS] [GRAPHICS] [GRAPHICS]
TIDE CLEAN WHITE SWIFFER DUSTER MR. CLEAN GAIN FABRIC ENHANCER
Tide Clean White The Swiffer Mr. Clean Magic The Gain brand
has led China's household Eraser and delivered volume
laundry business cleaning system AutoDry Carwash, growth of over
to a 50% market franchise grew two very 20% in the U.S.
share increase volume by more successful new A steady stream
in 12 months. than 20% versus product of new scents on
P&G now holds the prior year. innovations, Gain laundry
over 16% value New versions, spurred this detergent and
share of the such as Swiffer well-known brand the launch of
China laundry Duster with to volume growth Gain Fabric
detergent Extendable of nearly 20% in Enhancer in
market. Handle, continue fiscal year 2004. early 2003 have
to attract new driven the
consumers to the strong
brand. performance.
13
BEAUTY CARE
[BAR CHART]
Net Sales
(in billions of dollars)
2002 10.7
2003 12.2
2004 17.1
[BAR CHART]
Net Earnings
(in billions of dollars)
2002 1.6
2003 2.0
2004 2.4
FISCAL YEAR 2004 RESULTS
The Beauty Care business unit delivered excellent results in fiscal 2004. Unit
volume increased 37%, sales grew 40% and net earnings increased 22%. This
excellent performance was driven by a combination of double-digit organic growth
and the acquisition of Wella. Wella joined P&G Beauty Care in September 2003 and
added approximately $3.3 billion to Beauty Care sales in fiscal 2004.
Beauty Care's organic growth was led by brands that have been favorites of
consumers for many years. Head & Shoulders delivered 18% global volume growth
and became P&G Beauty Care's fifth billion-dollar brand, joining Pantene,
Always, Olay and Wella. Pantene passed the $2 billion sales mark and
strengthened its position as the world's leading hair care brand. Olay grew
global sales 26% with new innovations like Regenerist and continued growth of
the Total Effects and Daily Facials product lines. Always feminine care products
grew global volume double-digits and Tampax Pearl has helped grow the brand to
over 46% of the U.S. tampon market. Lacoste, with annual volume up nearly 400%
in just two years, has helped make P&G a global leader in men's fine fragrances.
WHAT'S WORKING
Leadership innovation and holistic marketing programs are the cornerstones of
P&G Beauty's growth strategy. We are continuously improving the performance of
our existing products and launching new products to meet previously unmet
consumer needs. Products like Olay Total Effects, with our proprietary
VitaNiacin ingredient, established Olay as the leader in anti-aging skin care.
We then followed with Olay Regenerist - developed from wound-healing science and
marketed to Olay skin care's most demanding consumers as an anti-aging
alternative to cosmetic medical procedures. Next, we built upon the success of
Regenerist in the U.S. and expanded it to delight consumers in all corners of
the world. Priced at the top end of mass market skin care products, Regenerist
is driving outstanding growth in China and Southeast Asia.
In addition, Beauty Care is successfully complementing innovation with
acquisitions. In 2001, the Clairol acquisition moved P&G into the growing hair
colorants category. In 2003, the addition of Wella connected P&G to the cutting
edge of hair trends - the professional hair care market. Both acquisitions have
expanded P&G's Beauty portfolio, added world-class brands and strengthened P&G's
capabilities to win long term in Beauty Care.
Beauty Care is an attractive market. It has high margins, low capital intensity
and is growing worldwide at a pace well ahead of population growth. Combined
with P&G's historical capabilities in building leadership brands and leveraging
scale for low costs, Beauty Care should be a growth leader for P&G for many
years to come.
[GRAPHICS] [GRAPHICS] [GRAPHICS] [GRAPHICS]
WELLA HEAD & SHOULDERS OLAY PANTENE
Wella joined the In fiscal year Olay is one of The Pantene
P&G family in 2004, Head & P&G's brand passed a
September 2003, Shoulders became fastest-growing significant
making P&G one Beauty Care's billion-dollar growth milestone
of the largest, fifth brands, with in fiscal year
most profitable billion-dollar global sales up 2004, delivering
Beauty Care brand. Over the 26% in 2004. over $2 billion
companies in the past three Regenerist, in annual sales.
world. years, global Olay's latest
sales growth for breakthrough in
Head & Shoulders anti-aging, is
has averaged 16% fueling strong
per year. growth in the
U.S. as well as
in China and
Southeast Asia.
14
BABY AND FAMILY CARE
[BAR CHART]
Net Sales
(in billions of dollars)
2002 9.2
2003 9.9
2004 10.7
[BAR CHART]
Net Earnings
(in millions of dollars)
2002 738
2003 882
2004 996
FISCAL YEAR 2004 RESULTS
Baby and Family Care delivered another strong year of volume, sales and profit
growth. Unit volume grew 6%, net sales grew 8% and net earnings increased 13%.
The Baby Care business continued its strong global growth, increasing unit
volume double-digits and growing global market share. Western Europe and Latin
America led the way. Western Europe grew baby care market share to 50%, a
five-year high, and Latin America grew diaper volume by almost 30%. In the U.S.,
Pampers delivered mid-single-digit volume growth behind continuing leverage of
the Baby Stages of Development and Baby Dry product lines.
Family Care delivered modest volume growth in a difficult competitive
environment. Despite competitive marketing spending increases and new product
launches, Charmin and Bounty maintained market share and product performance
leadership versus key competitors. Both brands announced price increases
effective in July 2004 to partially offset rising commodity costs. The business
is well positioned for profit growth in line with company targets in fiscal
2005.
WHAT'S WORKING
The strong results delivered by Baby and Family Care are a direct outcome of
delighting consumers with better performing products that represent good value
for the money, and a relentless focus on cost reduction and cash generation. We
have strengthened all elements of our innovation system - better understanding
consumers' desires, reducing innovation costs and lead times, and creating
holistic marketing plans that resonate at every consumer touch point.
We are designing new products, such as Pampers Basica in Latin America, that are
tailored to meet the unique product performance and affordability needs of
lower-income consumers. Pampers diaper volume has grown double-digits in each
Latin American market since the Basica launch. We have increased market share in
Western Europe by continuing to leverage our Baby Stages of Development and Baby
Dry diaper lines and by rapidly growing our Kandoo toddler personal care
business.
Our investment in Baby Care's standardized manufacturing platform is paying off
as we better leverage our scale for cost savings and faster speed to market with
new products. We are improving manufacturing productivity, which helps reduce
the capital investment necessary to meet increased consumer demand. We
introduced our softest, strongest, thickest Charmin ever last year and
simultaneously increased capacity and lowered costs. Cost-savings efforts have
allowed us to maintain sharp consumer value, invest behind new products with
strong marketing programs, offset rising commodity costs, and improve profit
margins and cash generation - all of which are critical to delivering superior
shareholder returns.
[GRAPHICS] [GRAPHICS] [GRAPHICS] [GRAPHICS]
PAMPERS CHARMIN ULTRA BOUNTY PAMPERS BASICA
Pampers became The latest In early 2004, Pampers Basica,
P&G's first upgrade to Bounty launched designed to
brand to deliver Charmin Ultra a new array of broaden the base
over $5 billion has maintained prints and of consumers who
in annual sales. the brand's package formats. can appreciate
advantages in Bounty is the and afford
softness, clear market Pampers, helped
thickness, leader in the increase baby
absorbency and U.S., with over care shipments
wet strength 40% share of by almost 30% in
against all category value. Latin America.
competitors.
15
HEALTH CARE
[BAR CHART]
Net Sales
(in billions of dollars)
2002 5.0
2003 5.8
2004 7.0
[BAR CHART]
Net Earnings
(in billions of dollars)
2002 521
2003 706
2004 962
FISCAL YEAR 2004 RESULTS
The Health Care business unit delivered its fifth consecutive year of strong
double-digit growth in volume, sales and profit. Volume increased 18%, sales
grew 21% and net earnings increased 36% behind outstanding new product
innovations and improving profit margins.
All of the Health Care business segments delivered great results in fiscal 2004.
Actonel led the growth in Pharmaceuticals, building global value share in the
fast-growing osteoporosis treatment category to become a billion-dollar brand.
Personal Health Care growth was fueled by the launch of Prilosec OTC for the
treatment of frequent heartburn. Prilosec OTC is widely regarded as one of the
most successful over-the-counter health care launches ever. The Crest brand
became the clear Oral Care market leader in the U.S. Crest Whitening Expressions
and Vivid White drove share in the U.S. toothpaste segment to over 33%, and
Crest Whitestrips Premium drove U.S. tooth whitening share to over 70%. Iams
continued to deliver steady growth, posting its fifth consecutive year of U.S.
market share increases. Iams is now the #1 pet nutrition brand in the U.S.
WHAT'S WORKING
P&G's Health Care business continues to be driven by a powerful combination of
breakthrough innovation, strategic acquisitions and alliances, and operating
cost discipline. In the last four years alone, new health care innovations have
contributed more than $1.5 billion in incremental sales. This growth comes from
a strict application of P&G's "launch and leverage" approach.
First, Health Care develops and launches outstanding new products with holistic
introductory marketing plans and excellent in-store execution. Prilosec OTC is
an excellent example of P&G's initiative launch capabilities.
Second, we leverage these new products with strong marketing support and product
improvements for several years after initial launch. Two great examples of this
"launch and leverage" approach are Crest Whitestrips and Actonel, which have
continued to deliver strong sales growth in their third and fourth years in the
market, respectively.
The acquisition of Crest SpinBrush in 2001 and Glide Floss last year have helped
make P&G a leading player in all major segments of the oral care market.
Upstream development alliances with pharmaceutical companies have helped us
develop a full pipeline of life-enhancing drugs that are at various stages of
testing. And while we invest to support new product launches and research to
develop tomorrow's breakthrough new products, we are in tight control of
operating costs. Only with strict cost control can we deliver new products at a
great value for consumers while still delivering an excellent return for our
shareholders.
[GRAPHICS] [GRAPHICS] [GRAPHICS] [GRAPHICS]
PRILOSEC OTC ACTONEL CREST IAMS
Prilosec OTC In fiscal year Crest worldwide Iams latest dog
became the 2004, Actonel sales grew more and cat
leading became P&G's than 13% in nutrition
over-the-counter third Health fiscal year innovation
heartburn remedy Care brand to 2004, behind new delivers a
in the U.S. reach $1 billion innovations like significant
within five days in global sales. Crest taste
of launch. First Actonel reached Whitestrips improvement for
year retail the Premium, Crest better feeding
sales are billion-dollar Vivid White and and includes
expected to milestone in Crest Whitening seven nutrients
approach $400 just four years Expressions. for healthy
million. based on global hearts.
alliance sales.
16
SNACKS AND BEVERAGES
[BAR CHART]
Net Sales
(in billions of dollars)
2002 3.2
2003 3.2
2004 3.5
[BAR CHART]
Net Earnings
(in millions of dollars)
2002 303
2003 306
2004 363
FISCAL YEAR 2004 RESULTS
Snacks and Beverages delivered strong profit growth in a difficult competitive
environment. Volume increased 4%, sales grew 8% and net earnings increased 19%
versus the prior year.
New products like Pringles Dippers, Pringles Prints and the Folgers AromaSeal
package upgrade have kept P&G in the innovation lead. These initiatives also
helped Snacks and Beverages post mid-single-digit unit volume growth for fiscal
year 2004.
Folgers faced both rising coffee bean prices and heavy competitive promotional
spending for much of the fiscal year. Despite these challenges, Folgers
increased its leadership market share in the U.S. to 32%.
Pringles posted high-single-digit global volume growth for the year, led by
North America and Western Europe, which both grew double-digits.
WHAT'S WORKING
P&G's Snacks and Beverages business is focused on continuing to strengthen the
consumer appeal of its billion-dollar brands - Folgers and Pringles. This starts
with leadership innovation. For Pringles, it is products like Prints, Dippers
and customer-specific customization initiatives. For Folgers, it is products
like the AromaSeal canister initiative and the Home Cafe system. These
breakthroughs are being delivered on top of an ongoing stream of new flavors
that continue to attract new consumers to these leading brands.
In addition to delivering leadership innovation, Pringles and Folgers are
relentless at driving out non-value-added costs and improving capacity
utilization. This strict cost focus is critical to maintaining superior consumer
value. Profit margins for the segment have improved from 7% in fiscal 2001 to
over 10% for fiscal 2004.
Much of the margin improvement has come from detailed cost-reduction programs
and asset-utilization improvements on Pringles. Pringles and Folgers have very
scale-driven cost structures, and we are leveraging the scale of these
billion-dollar brands better than we have for many years.
Enhancing the consumer appeal of the brands and maintaining excellent consumer
value is our simple recipe to keep Folgers and Pringles delighting consumers and
delivering strong shareholder returns for many years to come.
[GRAPHICS] [GRAPHICS] [GRAPHICS] [GRAPHICS]
PRINGLES PRINTS FOLGERS AROMASEAL PRINGLES DIPPERS FOLGERS HOME CAFE
Pringles Prints, Folgers Pringles Dippers Folgers Home
our newest AromaSeal combines the Cafe is a joint
technology-driven package irresistible effort with
innovation in innovation gives taste of leading coffee
snacks, allows consumers fresh Pringles and a appliance
us to print aroma and taste stronger chip manufacturers to
right on the in every cup in for dipping. bring
chip. One an Dippers began affordable,
example, easier-to-carry shipping in convenient and
Pringles Prints package. This Western Europe personalized
with Trivial innovation in February custom-brewing
Pursuit helped Folgers 2004, and are into the home.
Junior(TM) reach an off to a very
questions, began all-time high strong start.
shipping in June market share.
2004.
17
MARKET DEVELOPMENT ORGANIZATION (MDO)
FISCAL YEAR 2004 RESULTS
The MDO is focused solely on winning the "First Moment of Truth" - when the
consumer is shopping in the store. Our MDO professionals are on the ground in
over 80 countries, and we have about 50 dedicated teams working directly with
customers around the world. Their challenge is to be the experts at
understanding local consumers and customers, and to use this knowledge to build
customized business plans for our brands.
This clear focus again delivered great results. In fiscal year 2004, P&G's
global volume growth was 17%, including the impact of the Wella acquisition.
Organic volume growth, excluding acquisition and divestiture impacts, was 10%
for the year, and each of P&G's market development regions delivered organic
volume growth of 6% or higher. Developing markets, which accounted for about 20%
of P&G's sales in fiscal 2004, grew volume by nearly 20% versus the previous
year.
The growth strength was also broad-based across P&G's biggest brands, countries
and customers. P&G grew volume at 9 of our top 10 customers, on all of our top
10 global brands, and in all of our top 10 countries. This established a solid
foundation to grow P&G's smaller brands and markets. In fact, the balance of our
top brands, countries and customers each grew volume at a double-digit rate -
truly outstanding performance.
WHAT'S WORKING
The MDO is developing new capabilities that are making us better and stronger
than ever before - allowing P&G to win the First Moment of Truth more often. We
are:
- - partnering with winning retailers to jointly create value through better
understanding shopper habits, providing solutions that meet the retailers'
marketing strategies and driving out non-value-added costs;
- - improving the availability of our products on store shelves with supply
system innovations that reduce out-of-stocks while reducing costs and
inventories for P&G and retailers;
- - reaching more of the world's consumers by broadening the distribution of
our brands through new channels in developed markets and increasing
penetration of smaller stores in developing markets;
- - ensuring that our brands are priced to provide excellent consumer value by
closely monitoring our pricing strategy versus all competitors, including
private labels, and acting quickly to keep our flagship brands priced
right;
- - improving the in-store presence of P&G brands through better packaging,
shelf layouts and unique customer merchandising events;
- - improving the impact and success rate of P&G initiatives through holistic
in-store marketing and local media relations programs.
After only five years in our new organization structure, we have made good
progress building our skills to better market to shoppers and jointly create
value with retailers. However, true to P&G's culture, we are never satisfied and
will keep building on this foundation to ensure the MDO is a sustainable
competitive advantage that will continue to get stronger.
[BAR CHART]
Top Ten Brands
(Volume Growth)
2002 3%
2003 8%
2004 9%
[BAR CHART]
Top Ten Countries
(Volume Growth)
2002 7%
2003 11%
2004 8%
[BAR CHART]
Top Ten Customers
(Volume Growth)
2002 12%
2003 13%
2004 8%
[PIE CHART]
Geographic Sales Split
(Fiscal Year 2004 Net Sales)
Developed Markets 79%
Developing Markets 21%
18 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Procter & Gamble has been built through the generations by the character of its
people. That character is reflected in our Purpose, Values and Principles and in
how well we live them as individuals and as a Company. High quality financial
reporting is one of our responsibilities - one that we execute with integrity.
High quality financial reporting is characterized by accuracy, objectivity and
transparency. Management is responsible for maintaining an effective system of
internal controls over financial reporting to deliver those characteristics in
all material respects. The Board of Directors, through its Audit Committee,
provides oversight. They have engaged Deloitte & Touche LLP to audit our
consolidated financial statements, on which they have issued an unqualified
opinion.
Our commitment to providing timely, accurate and understandable information to
investors encompasses:
Communicating expectations to employees. Key employee responsibilities are
reinforced through the Company's "Worldwide Business Conduct Manual," which sets
forth the Company's commitment to conduct its business affairs with high ethical
standards. Every one of P&G's employees - from senior management on down - is
held personally accountable for compliance. The Worldwide Business Conduct
Manual is available on our website at www.pg.com.
Maintaining a strong internal control environment. Our system of internal
controls includes written policies and procedures, segregation of duties and the
careful selection and development of employees. The system is designed to
provide reasonable assurance that transactions are executed as authorized and
appropriately recorded, that assets are safeguarded 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 monitor these internal controls through
control self-assessments by business unit management and an ongoing program of
internal audits around the world.
Executing financial stewardship. We maintain specific programs and activities 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 and effective controls 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, financial
performance and control assessments. The intent is to ensure we remain objective
in our assessments, constructively challenge the approach to business
opportunities, identify potential issues and ensure reward and recognition
systems are appropriately aligned with results.
Engaging our Disclosure Committee. We maintain disclosure controls and
procedures designed to ensure that information required to be disclosed is
recorded, processed, summarized and reported timely and accurately. Our
Disclosure Committee is a group of senior-level executives responsible for
evaluating disclosure implications of significant business activities and
events. The Committee reports its findings to the CEO and CFO, providing an
effective process to evaluate our external disclosure obligations.
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 significant accounting policies, financial reporting and
internal control matters with them and encourage their independent discussions
with our external auditors. Our corporate governance guidelines, as well as the
charter of the Audit Committee and certain other committees of our Board, are
available on our website at www.pg.com.
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. We present this information
proudly, with the expectation that those who use it will understand our Company,
recognize our commitment to performance with integrity and share our confidence
in P&G's future.
/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 19
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview 29
Results of Operations 32
Segment Results 35
Financial Condition 38
Significant Accounting Policies and Estimates 40
Other Information 42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 44
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Earnings 45
Balance Sheets 46
Shareholders' Equity 48
Cash Flows 49
Notes to Consolidated Financial Statements 50
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis The purpose of this discussion is to
provide an understanding of our financial results and condition by focusing on
changes in certain key items from year to year. Management's Discussion and
Analysis (MD&A) starts with an overview of the Company, followed by a review of
results of operations and financial condition. Lastly, we provide insight to our
significant accounting policies and estimates, and some other information you
may find useful.
Throughout MD&A, we refer to several measures used by management to evaluate
performance including unit volume growth, net outside sales and after-tax
profit. We also refer to organic sales growth (net sales growth excluding the
impact of acquisitions and divestitures and foreign exchange), free cash flow
and free cash flow productivity, which are not defined under accounting
principles generally accepted in the United States of America (U.S. GAAP). The
explanation of these non-GAAP measures on page 43 provides more details.
Management also uses certain market share estimates to evaluate our performance
relative to competition - although there are limitations on the availability and
comparability of this information. References to market share in MD&A are based
on a combination of vendor-reported consumption and market size data, as well as
internal estimates.
OVERVIEW
Our business is focused on providing branded products of superior quality and
value to improve the lives of the world's consumers. We believe this will lead
to leadership sales, profits and value creation, allowing employees,
shareholders and the communities in which we operate to prosper.
Procter & Gamble markets over 300 branded products in more than 160 countries.
Our products are sold primarily through mass merchandisers, grocery stores,
membership club stores and drug stores. We compete in five distinct business
segments: Fabric and Home Care, Beauty Care, Baby and Family Care, Health Care
and Snacks and Beverages - and we manage the business and report our results on
this basis. We have operations in over 80 countries through our Market
Development Organization, which leads country business teams to build our brands
in local markets and is organized along seven geographic areas: North America,
Western Europe, Northeast Asia, Latin America, Central and Eastern Europe/Middle
East/Africa, Greater China and ASEAN/Australasia/India.
The following charts provide the percentage of net sales and net earnings by
business segment for the fiscal year ended June 30, 2004. These exclude
information for Corporate, since it is not meaningful. For more information,
please refer to the section on Corporate results on page 37 and Note 12 on page
65.
20 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
2004 Net Sales by Business Segment
[PIE CHART]
Fabric and Home Care 27%
Beauty Care 33%
Baby and Family Care 20%
Health Care 13%
Snacks and Beverages 7%
2004 Net Earnings by Business Segment
[PIE CHART]
Fabric and Home Care 32%
Beauty Care 35%
Baby and Family Care 14%
Health Care 14%
Snacks and Beverages 5%
In May 2004, we announced a realignment of some of our business units and
associated management responsibilities. These changes are designed to streamline
business operations and support further growth of the Company. Beginning with
fiscal year 2004/2005, we will realign to three global business units: Beauty
Care; Health, Baby and Family Care; and Household Care, which will include the
current Fabric and Home Care business and the Snacks and Beverages business. Our
financial reporting will continue to include supplemental information on the
results of the current five business units. Each of the new Global Business
Units and our Market Development Organization will be headed by a vice-chairman
reporting to the chief executive officer. There will be no special charges
associated with the organization realignment. We completed the divestiture of
the Juice business in August 2004. For the fiscal year 2004/2005, results of the
Juice business will be included in Corporate. All historical information will
also be reflected in Corporate to provide segment results on a comparable basis.
Strategic Focus
We are focused on strategies that we believe are right for the long-term health
of the Company and that will increase returns for our shareholders.
Our long-term financial targets include:
- - Sales growth of 4% to 6% excluding the impact of changes in foreign
exchange rates from year-over-year comparisons. On average, we expect
approximately 2% of our growth to come from market growth; 1% to 3% of our
growth to come from the combination of market share growth, expansion to
new geographies and new business creation; and the remaining 1% to come
from smaller, tactical acquisitions to access markets or round out our
current business portfolios.
- - Earnings-per-share growth of 10% or better.
- - Free cash flow productivity greater than 90% (defined as the ratio of
operating cash flow less capital expenditures divided by net earnings).
In order to achieve these targets, we have focused Procter & Gamble's core
strengths of branding, innovation, go-to-market capability and scale against the
following growth areas:
- - Drive our core businesses of Baby Care, Fabric Care, Feminine Care and
Hair Care into stronger global leadership positions.
- - Grow our leading brands in our biggest markets and with our largest
customers.
- - Invest in faster-growing businesses with higher gross margins that are
less asset-intensive, primarily in the Health Care and Beauty Care
segments.
- - Build on opportunities in select developing markets and with lower-income
consumers.
Sustainability
To sustain consistent and reliable sales and earnings growth in line with
long-term financial targets, we have identified four key enablers:
- - Building a diversified portfolio consisting of foundation businesses and
higher growth businesses. Foundation businesses include many of our core
product categories - those in our Fabric and Home Care, Baby and Family
Care and Snacks and Beverages segments. These businesses provide a base
for steady growth, strong operating cash flows and an excellent training
ground for our future leaders. We are focused on expanding these
categories through innovative products, offering our brands in more parts
of the world and tailoring our products to meet the needs of more
consumers (including lower-income consumers). To complement the steady
growth of our foundation businesses, we are also focused on expanding our
portfolio of brands and products to businesses with higher expected growth
rates, particularly in the Health Care and Beauty Care segments. These
segments generally have higher gross margins and lower capital
requirements than the balance of the Company's portfolio. Over the past
several years, we have increased the size of our Health Care and Beauty
Care businesses and expect them to continue to provide a disproportionate
percentage of growth for the Company.
- - Investing in innovation and capability to reach more of the world's
consumers with quality, affordable products. This not only includes a
strong pipeline of initiatives on the base businesses, but also expansion
of our brands to more geographies where we currently
The Procter & Gamble Company and Subsidiaries 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
do not have a major market presence. In addition, we are investing in
innovation and capability to meet the needs of lower-income consumers, who
may find our products unaffordable for daily use.
- - Leveraging the Company's organizational structure to drive clear focus,
accountability and improved go-to-market capability. We have an
organizational structure that works together to leverage our knowledge and
scale at the global level with a deep understanding of the consumer and
customer at the local level. The Global Business Units (GBUs) leverage
their deep consumer understanding to develop the overall strategy for our
brands and are focused on delivering superior products, packaging and
marketing. Working closely with the GBUs, the Market Development
Organization (MDO) develops go-to-market plans at the local level,
leveraging their understanding of the local consumer and customer. The MDO
is focused on winning the "first moment of truth" - when a consumer stands
in front of the shelf and chooses a product from among many competitive
offerings. The GBU is focused on winning the "second moment of truth" -
when the consumer uses the product and evaluates how well the product
meets their expectations. Global Business Services (GBS) operates as the
"back office" for the GBU and MDO organizations, providing world-class
technology, processes and standard data tools to better understand the
business and better serve consumers and customers. Services are provided
by either GBS personnel or by partnering with highly efficient and
effective providers.
- - Focusing relentlessly to improve costs and generate cash. Each business
unit is evaluated on their ability to improve profit margins and generate
cash, for example, by increasing capacity utilization and meeting capital
spending targets.
Summary of 2004 Results
For the fiscal year ended June 30, 2004, our sales, earnings and free cash flow
grew above our long-term targets.
- - Every business segment and, within the MDO, every geographic region posted
volume growth.
- - We increased our overall market share, with share growth in categories
representing approximately 70% of the Company's net sales. We increased
market share in each of our core businesses of Baby Care, Fabric Care,
Feminine Care and Hair Care.
- - Net sales increased 19%, including the impact of the Wella acquisition
that was completed in September 2003. Organic sales increased 8%.
- - Net earnings increased 25% behind higher volume and the completion of the
Company's restructuring program, which reduced earnings by $538 million in
2003.
- - Operating cash flows were $9.36 billion. Free cash flow productivity was
113%.
Market Overview and Challenges
Our market environment is highly competitive, with both global and local
competitors. In many of the markets and industry segments in which we sell our
products, we compete against branded products, as well as retailer and
private-label brands. Additionally, many of the product segments in which we
compete are differentiated by price (referred to as premium, mid-tier and
value-tier products). Generally speaking, we compete with premium and mid-tier
products and are well positioned in the industry segments and markets in which
we operate - often holding a leadership or significant share position.
- - Our Fabric and Home Care business operates in a global market containing
numerous brands in each geography. We generally have the number one or
number two share position in the markets in which we compete, with
particular strength in North America and Western Europe. Fabric Care is
one of our core businesses and we are the global market leader with
approximately a 31% share. Three of our billion-dollar brands are part of
the Fabric and Home Care business: Tide, Ariel and Downy.
- - We compete in several categories of the Beauty Care market including
Retail and Professional Hair Care, Skin Care, Feminine Care, Cosmetics,
Fine Fragrances and Personal Cleansing. The Beauty Care markets in which
we compete comprise approximately $170 billion in global sales, resulting
in our having an overall share position of about 10%. Hair Care, one of
our core businesses, is the market leader with approximately a 20% share
of the global market. We are also the global share leader in the Feminine
Care category, another core business, with approximately a 35% share of
the market. Billion-dollar brands in Beauty Care include Pantene, Wella,
Olay, Always and Head & Shoulders.
- - In Baby and Family Care, we compete primarily in the Diapers, Baby Wipes,
Bath Tissue and Kitchen Towel categories. Baby Care is one of our core
businesses with a global share of approximately 36% of the market behind
the strength of Pampers, a $5 billion-dollar brand. The markets in which
we compete generally include two to three global companies, as well as
local competitors and retailer brands. Family Care is predominantly a
North American business with the Bounty and Charmin brands, each with
annual sales over one billion dollars.
- - Our Health Care business competes in several distinct product categories
including Oral Care, Pharmaceuticals, Over-the-counter (OTC)
Gastrointestinal and Respiratory Medications and Pet Health and Nutrition.
In Oral Care, there are four global competitors in the market, of which we
have the number two share position. Our Pharmaceuticals business has
almost 30% of the global bisphosphonates market for the treatment of
osteoporosis under the Actonel brand. Actonel, along with Crest and Iams,
each have annual sales over one billion dollars.
22 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - In Snacks and Beverages, we compete primarily in two industry categories:
Salted Snacks and Coffee. In Salted Snacks, we compete against both global
and local companies. One global company dominates the category. In Coffee,
we hold a leadership position of the brands sold predominantly through
grocery, mass merchandise and club membership stores in the United States
(U.S.). We recently completed the divestiture of our Juice business. Two
of our billion-dollar brands are in Snacks and Beverages - Pringles and
Folgers.
Forward-Looking Statements
We discuss expectations regarding our future performance and future events and
outcomes, such as our business outlook and long-term objectives, in our annual
and quarterly reports, press releases and other written and oral communications.
All statements, except for historical and present factual information, are
"forward-looking statements" within the meaning of the "safe harbor" provisions
of the Private Security Litigation Reform Act, and are based on currently
available competitive, financial and economic data and our business plans.
Forward-looking statements are inherently uncertain, and investors must
recognize that events could be significantly different from our expectations.
Ability to Achieve Business Plans. We are a consumer products company and rely
on continued demand for our products. To achieve our business plans, we must
develop and sell products that appeal to our consumers and customers. Our
continued success is dependent on leading-edge innovation (with respect to both
products and operations) and effective sales, advertising and marketing programs
in an increasingly fragmented media environment. Our ability to innovate and
execute in these areas will determine the extent to which we are able to grow
existing sales and volume profitably despite high levels of competitive
activity, especially with respect to the product categories and geographic
markets (including developing markets) in which we have chosen to focus. There
continues to be competitive product and pricing pressures in the environments in
which we operate, as well as challenges in maintaining profit margins. We must
manage each of these, as well as maintain mutually beneficial relationships with
our key customers, in order to effectively compete and achieve our business
plans. Since our long-term goals include a growth component tied to
acquisitions, we must manage and integrate key acquisitions, including the Wella
acquisition.
Cost Pressures. Our costs are not fixed but fluctuate, particularly due to
currency and interest rate fluctuations and the cost of labor and raw materials.
Therefore, our success is dependent, in part, on our continued ability to manage
these fluctuations through pricing actions, sourcing decisions and certain
hedging transactions. In the manufacturing and general overhead areas, we need
to maintain key manufacturing and supply arrangements, including sole supplier
and sole plant arrangements, and successfully implement, achieve and sustain
cost improvement plans, including our outsourcing projects.
Global Economic Conditions. Economic changes, terrorist activity and political
unrest may result in business interruption, inflation, deflation or decreased
demand for our products. Our success will depend in part on our ability to
manage continued global political and/or economic uncertainty, especially in our
significant geographical markets, as well as any political or economic
disruption due to terrorist activities.
Regulatory Environment. Changes in laws, regulations and the related
interpretations, including changes in laws that affect our products, as well as
changes in accounting standards, taxation requirements, competition laws and
environmental laws, may alter the environment in which we do business.
Accordingly, our ability to manage regulatory, tax and legal matters and to
resolve pending matters within current estimates may impact our results.
RESULTS OF OPERATIONS
Volume and Net Sales
Unit volume for the 2004 fiscal year increased 17%, with all business segments
and geographic regions achieving unit volume growth. Unit volume growth was led
by Beauty Care, up 37%, and Health Care, up 18%. Excluding the impact of
acquisitions and divestitures, primarily Wella, unit volume for the Company
increased 10%. This exceeded prior year results due to the volume growth on our
largest brands, double-digit gains from developing markets, incremental volume
from product initiatives and an overall increase in our market share position.
- - Unit volume in developing markets increased 19%, led by strong gains in
Greater China.
- - Each of our top 16 brands increased volume versus the prior year
(representing approximately 55% of total Company volume).
- - All 16 of our top countries increased volume (representing approximately
85% of total unit volume).
The Procter & Gamble Company and Subsidiaries 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
Sales reached a record level of $51.41 billion in 2004, an increase of 19%.
Organic sales increased 8%, well above our long-term target. Net sales increased
behind volume growth, including the addition of Wella, and a positive foreign
exchange impact of 4% due primarily to the strengthening of the Euro, British
pound and Canadian dollar. Product mix reduced sales growth by 1%, reflecting
higher growth in developing markets, including Greater China and Latin America,
which generally have an average unit sales price lower than the Company average.
Pricing adjustments reduced sales growth by 1% as we sharpened Family Care and
Coffee category pricing to remain competitive on shelf. We also took pricing
actions to improve consumer value and stimulate growth in selected product
categories, including Fabric Care and Feminine Care.
[BAR CHART]
Net Sales
(in billions of dollars)
2002 40.2
2003 43.4
2004 51.4
2004 Net Sales by Geography
[PIE CHART]
North America 50%
Western Europe 24%
Northeast Asia 5%
Developing Geographies 21%
Net sales in 2003 were $43.38 billion, 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. 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 deliver consistent consumer value, stimulate growth
and remain competitive in key categories, including Diapers, Tissue, Hair Care,
Feminine Care, Teeth Whitening and Coffee.
Operating Costs
Gross margin in 2004 was 51.2%, an increase of 220 basis points versus the
previous year. Charges for the restructuring program that was substantially
completed in 2003 accounted for 80 basis points of the improvement. Of the
remaining gross margin expansion, approximately 90 basis points was driven by
the scale benefit of increased volume and 40 basis points was due to the
addition of Wella, which has a higher gross margin than the balance of the
Company. Supply chain savings and favorable product mix benefits were offset by
the impact of higher commodity costs and pricing actions. In 2003, gross margin
was 49.0% which was an improvement of 120 basis points versus 2002. Lower
restructuring program charges accounted for 40 basis points of the improvement,
with the remainder due to lower material costs and the benefits of our supply
chain savings programs. Before-tax restructuring program charges included in
cost of products sold were $381 million in 2003 and $508 million in 2002.
[BAR CHART]
Gross Margin Progress
(% of sales)
2002 47.8%
2003 49.0%
2004 51.2%
Years ended June 30
-----------------------------------------------------------
Basis Basis
2004 2003 point change 2002 point change
---- ---- ------------ ---- ------------
Comparisons as a percentage of net sales
Gross margin 51.2% 49.0% 220 47.8% 120
Selling, general and administrative 32.1% 30.9% 120 31.2% (30)
Operating margin 19.1% 18.1% 100 16.6% 150
Earnings before income taxes 18.2% 17.4% 80 15.9% 150
Effective tax rate 30.7% 31.1% (40) 31.8% (70)
Net Earnings 12.6% 12.0% 60 10.8% 120
24 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selling, General and Administrative expense (SG&A) in 2004 was 32.1% of net
sales, an increase of 120 basis points compared to the previous year. The
majority of the basis point increase is due to Wella, reflecting a higher ratio
of SG&A expense to net sales than the base business. Restructuring program
charges in the base period, that accounted for an improvement of 90 basis
points, were more than offset by increases in marketing spending. Marketing
investments were made behind product launches including Prilosec OTC, Crest
Whitestrips Premium and the expansion of Olay Regenerist, as well as continued
support for the base business. The decrease in SG&A as a percentage of net sales
in 2003 versus 2002 was driven by lower restructuring program charges which more
than offset additional marketing investments behind new product launches and
expansions of existing brands, including Tide with Bleach, Swiffer Duster, Crest
Whitestrips and Olay Regenerist. SG&A included before-tax restructuring program
charges of $374 million in 2003 and $519 million in 2002.
[BAR CHART]
Selling, General and Administrative Expenses
(% of sales)
2002 31.2%
2003 30.9%
2004 32.1%
Non-Operating Items
Non-operating items include interest expense, divestiture gains and losses, as
well as interest and investment income.
Interest expense increased $68 million to $629 million in 2004, primarily due to
additional debt to support the acquisition of Wella. Interest expense was $561
million in 2003 and $603 million in 2002. The decline in interest expense in
2003 versus 2002 was driven by lower debt balances and interest rates. Going
forward, we expect interest expense to increase, reflecting both debt levels and
rates, as well as the interest associated with the guaranteed dividend payment
to Wella minority shareholders.
Other non-operating income was $152 million in 2004 compared to $238 million in
2003 and $308 million in 2002. Over the three year period, non-operating income
declined primarily due to lower gains from divestitures. During the
restructuring program, we divested non-strategic brands. As this activity has
declined, other non-operating income has trended lower. Next fiscal year,
non-operating income may increase, reflecting the divestiture of the Juice
business in August 2004.
The effective tax rate for 2004 declined 40 basis points driven primarily by the
country mix impact of foreign operations, as earnings increased
disproportionately in countries with lower overall tax rates. The country mix
impacts of foreign operations reduced the Company's effective tax rate to a
larger degree in 2004 and 2003 than in 2002. The tax rate is expected to decline
again in 2005, absent any legislative changes that affect current plans.
Net Earnings
Net earnings in 2004 increased 25% over the prior year. Earnings growth was
primarily driven by increased volume and the completion of the Company's
restructuring program. Improvements to earnings from gross margin expansion were
partially offset by increased marketing spending to support product initiatives
and base business growth. The acquisition of Wella had no material impact on
earnings.
Prior year results include $538 million of after-tax charges related to our
restructuring program, which represents approximately 10 percentage points of
the earnings growth. These charges covered enrollment reductions, manufacturing
consolidations and portfolio choices to scale back or discontinue
under-performing businesses and initiatives. The restructuring program was
substantially completed in 2003. Beginning this year, we are continuing to take
the necessary, on-going actions to maintain a competitive cost structure, but
such activities are part of normal operations.
In 2003, net earnings increased 19% compared to 2002, representing a 120 basis
point increase in earnings margin. 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 program costs and improved gross margin.
After-tax restructuring program charges were down $168 million compared to total
charges of $706 million in 2002.
The Procter & Gamble Company and Subsidiaries 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
Diluted net earnings per share were $2.32, an increase of 25%, and above our
long-term target. Diluted net earnings per share were $1.85 in 2003 and $1.54 in
2002, including restructuring program impacts of $0.19 and $0.26 per share,
respectively.
[BAR CHART]
DILUTED NET EARNINGS
(Per common share)
2002 1.54
2003 1.85
2004 2.32
Net Earnings Margins
The progressive increase in net earnings margin to 12.6% reflects the scale
benefits from higher volume and the completion of our restructuring program, as
well as improvements due to cost savings and the shift to businesses with a
higher margin than the Company average.
SEGMENT RESULTS
Product-based segment results reflect information on the same basis we use for
internal management reporting and performance evaluation. These segment results
exclude certain costs included in the Consolidated Financial Statements (e.g.,
interest expense, other financing costs, investing activities and certain
restructuring costs), which are reported in Corporate.
As described in Note 12 of the financial statements, we have investments in
certain companies where we do not control the financial and operating decisions
and, therefore, do not consolidate them ("unconsolidated entities"). Because
these investments are managed as integral parts of the Company's business units,
they are accounted for as if they were consolidated subsidiaries for management
and segment purposes.
This means we recognize 100% of each income statement component to before-tax
earnings and eliminate the minority interest to determine segment after-tax
earnings. Included in Corporate are entries to eliminate the individual revenue
and expense line items, adjusting the method of accounting to the equity method
as required by U.S. GAAP.
Fabric and Home Care
Fabric and Home Care unit volume was up 9% behind growth on established brands
such as Tide, Ariel, Gain and Ace and the success of initiatives including Mr.
Clean Magic Eraser, Mr. Clean AutoDry, Swiffer Duster, Gain Fabric Enhancer and
the expansion of Febreze. Both the Fabric Care and Home Care businesses continue
to grow or maintain market share on most key brands. Net sales increased 10%, to
$13.87 billion. Sales growth includes a positive 3% foreign exchange impact.
Pricing of negative 1% was primarily driven by actions to maintain competitive
shelf pricing in key geographies, including North America and Western Europe.
Mix reduced sales by 1% driven primarily by double-digit growth in developing
markets, including the continued success of initiatives such as Tide Clean White
in China and Downy One Rinse in Latin America. Products in developing markets
generally have a lower average sales rate per unit than the segment average.
Net earnings increased 7% to $2.20 billion. Net earnings margin was down
slightly compared to 2003 due to the mix effect of disproportionate growth
outside of the U.S. (as we expanded our business in certain geographies
including China, India and Eastern Europe) and marketing investments behind new
product initiatives. Startup costs for increased liquid detergent capacity in
North America to support new product initiative activity and investments in
supply chain optimization also contributed to the lower net earnings margin.
Net Sales Change Drivers Versus Year Ago
----------------------------------------------------------------------------
Volume
Excluding
Acquisitions & Foreign Total
Volume Divestitures Exchange Pricing Mix/Other Net Sales
------ -------------- -------- ------- --------- ---------
Fabric and Home Care 9% 9% 3% -1% -1% 10%
Beauty Care 37% 10% 4% -1% -% 40%
Baby and Family Care 6% 6% 4% -1% -1% 8%
Health Care 18% 17% 3% -% -% 21%
Snacks and Beverages 4% 4% 4% -1% 1% 8%
Total Company 17% 10% 4% -1% -1% 19%
26 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 2003, volume grew 9%. Net sales increased 8% to $12.56 billion compared to
$11.62 billion in 2002. Foreign exchange contributed a positive impact of 1% to
overall sales, driven primarily by the strength of the Euro. Sales were
negatively impacted by 1% due to pricing, 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. Net earnings were $2.06
billion, a 12% increase from $1.83 billion in 2002, driven primarily by volume
growth and lower manufacturing costs. The impact of volume growth and lower
manufacturing costs on earnings was partially offset by increased marketing
spending in support of new product launches and expansion of existing brands.
Beauty Care
Beauty Care unit volume increased 37%. Excluding the impact of the Wella
acquisition, unit volume increased 10% behind broad-based growth in the Hair
Care, Personal Beauty Care and Feminine Care businesses. Global Hair Care volume
increased double-digits, despite low single-digit growth in North America, with
particular progress on the Head & Shoulders, Pantene, Herbal Essences and
Rejoice brands. In Feminine Care, double-digit volume growth was driven by
Always/Alldays, Tampax Pearl in the U.S. and Naturella in Latin America. In
Personal Beauty Care, Olay and SK-II delivered double-digit volume growth, as
did the Fine Fragrances business. Net sales increased 40% to $17.12 billion.
Sales growth includes a positive foreign exchange impact of 4%, partially offset
by negative pricing of 1%. Pricing includes actions to support the Hair Care,
Colorants and Cosmetics businesses in North America and the Feminine Care
business in Western Europe. Overall Beauty Care market share increased, as sales
growth out-paced market growth in key categories including Skin Care, Feminine
Care and Hair Care products.
Net earnings increased 22% to $2.42 billion. Volume benefits, including the
addition of Wella, and lower material costs were partially offset by marketing
investments to support product initiatives and the base business. Earnings
margin decreased due to the impact of the higher SG&A expense ratio for Wella.
The Wella acquisition was accretive to Beauty Care earnings and had no material
impact on Company earnings after including the impacts of interest and
amortization expense, which are included in Corporate. Going forward, we will
continue to make progress on collaboration plans designed to deliver synergies
and margin progress. Some of these actions will result in additional one-time
charges next year largely to be reflected in Corporate as part of the Company's
ongoing effort to maintain a competitive cost structure. Excluding these
impacts, Wella is expected to be accretive to the Beauty Care segment and about
neutral to the Company in 2005.
In 2003, unit volume grew 15%. Excluding the impacts of the Clairol acquisition,
unit volume increased 8% led by growth in Hair Care. Net sales grew 14% to
$12.22 billion, as volume increases and a positive 3% impact from foreign
exchange were partially offset by a negative 2% impact from pricing and 2% from
mix. Pricing was driven by price reductions taken to expand our 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 net
sales were $10.72 billion and net earnings were $1.61 billion.
Baby and Family Care
Baby and Family Care unit volume increased 6% driven primarily by double-digit
growth in Baby Care, including gains in Western Europe and developing markets,
and low single-digit growth in Family Care. Family Care volume growth reflects a
difficult competitive environment marked by increased promotional spending,
particularly in North America. Net sales for the segment grew 8% to $10.72
billion including a positive foreign exchange impact of 4%. Sales were
negatively impacted by pricing of 1%, primarily due to increased competitive
promotional activity in North America Family Care. Mix reduced sales by 1% due
primarily to strong Baby Care growth in developing markets, where unit sales
prices are generally lower than the segment average.
Net earnings were $996 million, an increase of 13% compared to 2003. Baby Care
delivered profit growth from higher volume and product cost savings. Family Care
earnings declined slightly due to increases in commodity costs (both pulp and
natural gas) and increased spending for pricing. We announced North America
Family Care increased prices effective in July to partially recover increases in
commodity costs.
In 2003, Baby and Family Care delivered unit volume growth of 7%. Net sales grew
8% to $9.93 billion compared to $9.23 billion in 2002. Sales growth included a
3% positive foreign exchange impact and 1% positive mix impact, partially offset
by a 3% negative impact from pricing. Positive mix was driven by increased sales
of higher-priced, premium-tier diapers. 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 were $882
million, an increase of 20% compared to $738 million in 2002.
The Procter & Gamble Company and Subsidiaries 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings growth was primarily achieved through increased scale from volume
growth and lower product cost behind base business and restructuring savings.
Health Care
Health Care unit volume increased 18%. All categories grew volume, with
double-digit gains in the Pharmaceutical, Personal Health Care and Oral Care
businesses, as well as solid growth in Pet Health and Nutrition. Volume was
driven by initiatives, including the successful launch of Prilosec OTC and the
continued expansion of Actonel. Developing markets also delivered double-digit
volume gains, particularly in China behind Crest. Net sales increased 21% to
$6.99 billion. Foreign exchange increased sales 3%.
Net earnings increased 36% to $962 million. Earnings growth was primarily driven
by sales growth behind initiatives and margin expansion due to product mix,
manufacturing cost savings and lower overhead spending as a percentage of sales.
Product mix expanded margin as Pharmaceuticals, which has a higher margin than
the balance of the business, made up a larger percentage of segment sales.
Mix-driven margin expansion was negatively impacted by increased marketing
spending behind the strong initiative program and a growing base business. Each
category delivered double-digit earnings growth.
In 2003, unit volume increased 18% led by Oral Care and Pharmaceuticals. Net
sales for the year were $5.80 billion, an increase of 16% as compared to $4.98
billion in 2002. A favorable foreign exchange impact of 2% was more than offset
by a negative pricing impact of 2%, primarily driven by lower pricing on Crest
Whitestrips in response to a competitive entry, and a negative mix impact of 2%.
The negative product mix impact was primarily driven by growth in developing
markets and a shift in Actonel volume mix, which is sold under an alliance
agreement, to support the global Once-a-week dosage launch. Net earnings for
Health Care were $706 million, an increase of 35% compared to $521 million in
2002. The majority of the increase was driven by volume growth and the shift to
higher-margin Oral Care and Pharmaceuticals products, partially offset by
additional marketing investments to support product initiatives.
Snacks and Beverages
Snacks and Beverages unit volume increased 4%. Folgers and Pringles, each with
sales in excess of one billion dollars, grew volume by mid-single digits. Net
sales were $3.48 billion, an increase of 8%. Foreign exchange positively
impacted sales by 4%. Product mix increased sales by 1%, primarily driven by
faster growth of Folgers, which has a higher unit sales rate than the segment
average. Pricing reduced sales by 1% reflecting high promotional spending in the
Coffee category.
Net earnings were $363 million, an increase of 19%, as volume and base business
savings more than offset higher commodity costs.
In 2003, 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 previous year. Sales
growth included a positive 3% impact from foreign exchange and 1% impact from
mix, which were partially offset by a negative 2% impact from pricing. Net
earnings were $306 million compared to $303 million in 2002. Despite the impact
of the tornado and lower volume, net earnings increased due to reductions in
cost of products sold, reflecting the impact of both base business and
restructuring savings.
In August 2004, the Company divested the Juice business. The gain associated
with the divestiture will likely be offset by lost contribution within the
fiscal year. Effective July 1, 2004, the current and historical results of Juice
will be reflected in Corporate.
Corporate
Corporate includes amounts and activities not allocated to specific business
units. These include: the results of incidental businesses managed at the
corporate level, financing and investing activities, intangible asset
amortization, certain restructuring charges and other general corporate items.
In addition, Corporate generally includes the historical results of divested
businesses, including the Jif and Crisco businesses, which were spun off from
the former Food and Beverage segment.
Corporate net sales primarily reflect the adjustment to eliminate the sales of
unconsolidated entities included in business segment results. In 2002, Corporate
also includes the net sales of Jif and Crisco, which were spun off. Corporate
earnings improved in 2004, as the prior year included restructuring program
charges. This improvement was partially offset by higher interest and intangible
asset amortization charges associated with Wella, hedging impacts and current
year charges for projects to maintain a competitive cost structure. 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
increased financing of employee benefit plans and hedging impacts from a
stronger Euro, partially offset by decreased restructuring program costs.
28 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
We believe our financial condition continues to be of high quality, as evidenced
by our ability to generate substantial cash from operations and ready access to
capital markets at competitive rates. We do not anticipate material changes to
cash flow trends, although actual cash and debt balances will be influenced by a
variety of factors, including acquisitions and other investment opportunities.
For example, there is currently proposed legislation in the U.S. that could
precipitate a substantial short-term change in our cash repatriation patterns
under favorable conditions. Such an opportunity, and its implications, would
need to be addressed once the provisions of the law are finalized and enacted.
Operating cash flow provides the primary source of funds to finance operating
needs and capital expenditures. Excess operating cash is used first to fund
shareholder dividends. Other discretionary uses include share repurchase
activities and acquisitions. As necessary, we may supplement operating cash flow
with debt to fund these activities. The overall cash position of the Company
reflects our strong business results and a global cash management strategy that
takes into account liquidity management, economic factors and tax
considerations. This includes the potential tax on repatriating cash balances to
the U.S. versus other long-term offshore funding opportunities.
Operating Activities
In 2004, operating cash flow was $9.36 billion compared to $8.70 billion in
2003, representing an increase of 8%. Higher net earnings were the primary
driver of the increase in operating cash flow. Operating cash flow growth
trailed earnings growth due to an increase in accounts receivable, cash payments
for restructuring program charges accrued last fiscal year and a dividend
received from a joint venture in the base period.
The impacts of business growth on cash flow have been kept to a minimum as a
result of the Company's focus on cash management. Accounts receivable days sales
outstanding and inventory days on hand improved from June 30, 2003, excluding
the impact of Wella.
We view free cash flow as an important measure because it is one factor
impacting the amount of cash available for dividends and discretionary
investment. It is defined as cash from operating activities less capital
expenditures and is one of the measures used to evaluate senior management and
determine their at-risk compensation. In 2004, free cash flow was $7.34 billion
compared to $7.22 billion in 2003 and $6.06 billion in 2002. Free cash flow in
2004 reflects increased operating cash flow, partially offset by increased
capital expenditures, although spending was in line with our target of capital
spending at or below 4% of sales. Capital spending in 2003 was well below
historical levels and the long-term target.
Free cash flow productivity, defined as the ratio of free cash flow to net
earnings, was 113%, above the Company's long-term target of 90%. Free cash flow
productivity was 139% in 2003.
Free Cash Flow and Free Cash Flow Productivity (in billions and as % of net
earnings)
[BAR CHART]
Free Cash Flow and Free Cash Flow Productivity
(in billions and as % of net earnings)
Investing Activities
Acquisitions. Net cash used for acquisitions in 2004 was $7.48 billion. The
primary drivers were the acquisition of Wella and the purchase of the remaining
stake in our China venture with Hutchison Whampoa China Ltd. (Hutchison). The
initial Wella acquisition in September 2003 was approximately $5.10 billion for
an 81% interest, funded by a combination of debt and cash. In June 2004, the
Company and Wella completed a domination and profit transfer agreement, which
provided us full operating control and rights to 100% of future operating
results. In exchange, we must pay the remaining Wella shareholders a guaranteed
annual dividend payment. Alternatively, the Wella shareholders may elect to
tender the shares for a fixed price. The obligation associated with the
domination agreement is $1.11 billion and has been recognized as a current
liability. The portion of the acquisition related to the domination agreement
represents a non-cash transaction. Future payments related to the principal
portion of the annual dividend arrangement or acquisition of shares tendered
will be reflected as investing activities, consistent with the underlying
transaction.
The gross cash outlay for Hutchison was $2.00 billion, which also includes the
settlement of minority interest and certain other liabilities, for a net cost of
$1.85 billion. The acquisition was funded by debt. We also completed certain
smaller acquisitions with an aggregate cost of $384 million, including Glide
dental floss and Fabric Care brands in Western Europe, Latin America and the
Middle East. Net cash for acquisitions was $61 million in 2003 and $5.47 billion
in 2002, primarily for the Clairol acquisition.
The Procter & Gamble Company and Subsidiaries 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital Spending. Capital spending efficiency continues to be a critical
component of the Company's overall cash management strategy. Our goal is to
maintain capital spending at or below 4% of net sales. Total capital spending
was $2.02 billion in 2004 versus $1.48 billion in 2003 and $1.68 billion in
2002. Capital spending as a percentage of net sales was 3.9% in 2004, in line
with the Company's long-term target. Capital spending increased as a percent of
net sales in 2004 primarily in support of capacity expansion projects in the
Fabric and Home Care and the Baby and Family Care businesses. In 2003, capital
spending as a percent of net sales was 3.4%, a significant decline versus 2002,
which included considerable spending behind capacity additions. Over the past
several years, we have made systemic interventions to improve capital spending
efficiencies and asset utilization. While the Company's goal is to maintain
capital expenditures at or below 4% of sales on an ongoing basis, there may be
exceptional years when specific business circumstances, such as capacity
additions, may lead to higher spending.
[LINE GRAPH]
Capital Spending
(% of Net Sales)
Financing Activities
Dividend Payments. One of our first discretionary uses of cash is dividend
payments. Common share dividends grew 13% to $0.93 per share in 2004,
representing the 48th consecutive fiscal year of increased common share
dividends. Total dividend payments, to both common and preferred shareholders,
were $2.54 billion, $2.25 billion and $2.10 billion in 2004, 2003 and 2002,
respectively.
[BAR CHART]
Dividends
(per share)
Long-Term and Short-Term Debt. The Company maintains debt levels it considers
appropriate considering a number of factors, including cash flow expectations,
cash requirements for ongoing operations, investment plans (including
acquisitions and share repurchase activities) and the overall cost of capital.
Total debt increased in 2004 by $7.19 billion to $20.84 billion. The increase
was primarily due to the acquisitions of Wella and the Hutchison minority
interest, along with discretionary treasury share purchases. Debt due within one
year increased to $8.29 billion in 2004, reflecting the decision to finance
acquisition and share repurchase activity with commercial paper, given favorable
rates. Total debt in 2003 was $13.65 billion compared to $14.93 billion in 2002.
The decrease in 2003 was primarily due to the utilization of cash flow from
operations to pay down existing balances.
Long-term borrowing available under our current shelf registration statement was
$8.56 billion at June 30, 2004. The Company's Standard & Poor's (S&P) and
Moody's short-term credit ratings are A-1+ and P-1, respectively. Our S&P and
Moody's long-term credit ratings are AA- and Aa3, respectively.
Liquidity. As discussed previously, our primary source of liquidity is cash
generated from operations. We believe internally-generated cash flows adequately
support business operations, capital expenditures and shareholder dividends, as
well as a level of discretionary investments (e.g., acquisitions and share
repurchases). The Company is able to supplement its short-term liquidity, if
necessary, with broad access to capital markets and $2.00 billion in bank credit
facilities. Broad access to financing includes commercial paper programs in
multiple markets at favorable rates given our strong credit ratings (including
separate U.S. dollar, Canadian dollar and Euro multi-currency programs). We
maintain two bank credit facilities: a $1.00 billion, five-year facility which
matures in July 2007 and a $1.00 billion, five-year facility which matures in
July 2009. The Company has never drawn against either facility and has no plans
to do so in the foreseeable future.
The credit facilities available to us do not have cross-default or ratings
triggers, nor do they have material adverse events clauses, except at the time
of signing. While not considered material to the overall financial condition of
the Company, there is a covenant in the credit facilities stating the ratio of
net debt to earnings before interest expense, income taxes, depreciation and
amortization cannot exceed four at the time of a draw on the facility. As of
June 30, we are comfortably below this level, with a ratio of approximately 1.3.
30 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Treasury Purchases. During the past year, we substantially increased our level
of share repurchases. In 2004, treasury share purchases used $4.07 billion
compared to $1.24 billion in 2003 and $568 million in 2002. We purchase the
Company's common stock on the open market.While the actual level of annual
activity can vary, our intent generally is to purchase at least a sufficient
number of shares to mitigate the dilutive impact of options. Beyond that, we may
make additional discretionary purchases based on cash availability, market
trends and other factors. We believe this share repurchase activity represents
an alternative vehicle to provide value to shareholders. Lower share purchases
in 2003 and 2002 reflect the need to preserve capital ahead of the Wella and
Clairol acquisitions, respectively. Although no formal plan exists, we expect to
continue to repurchase shares, with the ultimate amount depending on cash flow
and alternate investment options.
Guarantees and Other Off-Balance Sheet Arrangements. We do not have guarantees
or other off-balance sheet financing arrangements, including variable interest
entities, that we believe could have a material impact on financial condition or
liquidity.
Contractual Commitments. The table below provides information on our contractual
commitments as of June 30, 2004.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements in accordance with U.S. GAAP, there are
certain accounting policies that are particularly important. These include
revenue recognition, income taxes, certain employee benefits and goodwill and
intangible assets. We believe these accounting policies, and others set forth in
Note 1 to the Consolidated Financial Statements, should be reviewed as they are
integral to understanding the results of operations and financial condition of
the Company. In some cases, these policies simply represent required accounting.
In others, they may represent a choice between acceptable accounting methods or
may require substantial judgment or estimation in their application.
Due to the nature of our 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 our results of operations or
financial condition in any given year.
The Company has discussed the selection of significant accounting policies and
the effect of estimates with the Audit Committee of the Company's Board of
Directors.
Less Than 1-3 3-5 After 5
Total 1 Year Years Years Years
------- --------- ----- ----- -------
Recorded liabilities
Total debt $20,399 $8,229 $3,954 $1,935 $ 6,281
Capital leases 252 30 46 169 7
Wella domination and profit transfer agreement 1,106 1,106 - - -
Other
Interest payments relating to long-term debt 7,587 715 1,202 874 4,796
Operating leases 920 186 284 185 265
Minimum pension funding(1) 702 237 465 - -
Purchase obligations(2) 5,471 1,640 1,334 955 1,542
------- ------ ------ ------ -------
TOTAL CONTRACTUAL COMMITMENTS 36,437 12,143 7,285 4,118 12,891
======= ====== ====== ====== =======
(1) Represents future pension payments to comply with local funding
requirements. The projected payments beyond fiscal year 2007 are not
currently determinable.
(2) The amounts indicated in this line primarily reflect future contractual
payments under various take-or-pay arrangements entered into as part of the
normal course of business. Commitments made under take-or-pay obligations
represent future purchases in line with expected usage to obtain favorable
pricing. Approximately 60% relates to service contracts for information
technology, human resources management and facilities management activities
that were outsourced in recent years. While the amounts listed represent
contractual obligations, we do not believe it is likely that the full
contractual amount would be paid if the underlying contracts were canceled
prior to maturity. In such cases, we generally are able to negotiate new
contracts or cancellation penalties, resulting in a reduced payment. The
amounts do not include obligations related to other contractual purchase
obligations that are not take-or-pay arrangements. Such contractual purchase
obligations are primarily purchase orders at fair value that are part of
normal operations and are reflected in historical operating cash flow
trends. We do not believe such purchase obligations will adversely affect
our liquidity position.
The Procter & Gamble Company and Subsidiaries 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenue Recognition
Most of our revenue transactions represent sales of inventory, and we recognize
revenue when title, ownership and risk of loss 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. We
offer sales incentives through various programs, consisting primarily of
customer pricing allowances, merchandising funds and consumer coupons. The cost
of these programs is recorded as a reduction of sales. Given the nature of our
business, revenue recognition practices do not contain estimates that materially
affect results of operations.
Income Taxes
Our annual tax rate is determined based on our income, statutory tax rates and
the tax impacts of items treated differently for tax purposes than for financial
reporting purposes. Tax law requires items to be included in the tax return at
different times than the items reflected in the financial statements. As a
result, our annual tax rate reflected in our financial statements is different
than reported on our tax return (our cash tax rates). Some of these differences
are permanent, such as expenses that are not deductible in our tax return and
some differences are temporary, reversing over time, such as depreciation
expense. These temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent items that can be used as a tax
deduction or credit in future years for which we have already recorded the tax
benefit in our income statement. Deferred tax liabilities generally represent
tax expense recognized in our financial statements for which payment has been
deferred, or expenditures for which we have already taken a deduction in our tax
return but have not yet recognized in our financial statements.
Inherent in determining our annual tax rate are judgments regarding business
plans, planning opportunities and expectations about future outcomes.
Realization of certain deferred tax assets is dependent upon generating
sufficient taxable income in the appropriate jurisdiction prior to the
expiration of the carry-forward periods. Although realization is not assured,
management believes it is more likely than not the deferred tax assets, net of
valuation allowances, will be realized.
Changes in existing tax laws, tax rates and their related interpretations may
also affect our ability to successfully manage the impacts of regulatory matters
around the world. The Company establishes reserves for tax positions that
management believes are supportable, but are subject to successful challenge by
the applicable taxing authority. The Company reviews these in light of the
changing facts and circumstances, such as the progress of a tax audit, and will
adjust them when significant changes in risk warrant it. The Company has a
number of audits in process in various jurisdictions. Although the results of
these audits are uncertain, based on currently available information, the
Company believes that the ultimate outcome will not have a material adverse
effect on the Company's financial position, cash flow or earnings.
Our accounting represents management's best estimate of future events than can
be appropriately reflected in the accounting estimates. Certain changes or
future events, such as changes in tax legislation, geographic mix of earnings,
completion of tax audits or modification of cash repatriation plans could have
an impact on the Company's estimates and effective tax rate.
Employee Benefits
We sponsor 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. Our assumptions reflect our historical experiences and management's
best judgment regarding future expectations.
The expected return on plan assets assumption is important, since many of our
defined benefit plans and our primary OPEB plan are funded. The process for
setting the expected rates of return is described in Note 9 to the Consolidated
Financial Statements. For 2004, the average return on assets assumption for
pension plan assets is 7.4%. A change in the rate of return of 1% would impact
annual benefit expense by approximately $15 million after tax. For 2004, the
return on assets assumption for OPEB assets is 9.5%. A 1% change in the rate of
return would impact annual benefit expense by approximately $20 million after
tax.
Since pension and OPEB liabilities are measured on a discounted basis, the
discount rate is a significant assumption. 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 5.2% represents a weighted average of local rates in countries where
such plans exist. A 0.5% reduction in the discount rate would increase annual
benefit expense by approximately $25 million after tax. The rate on the OPEB
plan of 6.1% reflects the higher interest rates generally available in the U.S.,
which is where a majority of the plan participants receive benefits. A 0.5%
reduction in the discount rate would increase annual benefit expense by
approximately $5 million after tax.
32 The Procter & Gamble Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain defined contribution pension and OPEB benefits in the U.S. are funded by
the Employee Stock Ownership Plan (ESOP), as discussed in Note 9 to the
Consolidated Financial Statements.
We also have 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 expense 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 Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." The estimate of fair
value requires a number of assumptions, including estimated option life and
future volatility of the underlying stock price. Changes in these assumptions
could significantly impact the estimated fair value of the stock options, as
could a change in valuation methodology (e.g., from Black-Scholes to a different
binomial method).
Goodwill and Intangible Assets
The Company seeks to deliver value from innovation by building brands and
businesses. In many cases, brands are created internally, and the costs are
expensed as incurred. In other cases, brands and businesses may be acquired,
which generally results in intangible assets recognized in the financial
statements. These intangibles may represent indefinite-lived assets (e.g.,
certain trademarks or brands), definite-lived intangibles (e.g., patents) or
residual goodwill. Of these, only the costs of definite-lived intangibles are
amortized to expense over their estimated life. The classification of
intangibles and the determination of the appropriate life requires substantial
judgment. Our history demonstrates that many of the Company's brands have very
long lives and our objective is to generally maintain them indefinitely. For
accounting purposes, we evaluate a number of factors to determine whether an
indefinite life is appropriate, including the competitive environment, market
share, brand history, operating plan and the macroeconomic environment of the
country in which the brand is sold. If it is determined that an intangible does
not have an indefinite life, our policy is to amortize the balance over the
expected useful life, which generally ranges from 5 to 20 years.
We test goodwill and indefinite-lived intangible assets for impairment at least
annually, by reviewing the book value compared to the fair value at the
reporting unit level.
Considerable management judgment is necessary to evaluate the impact of
operating and macroeconomic changes and to estimate future cash flows.
Assumptions used in the Company's impairment evaluations, such as forecasted
growth rates and cost of capital, are consistent with internal projections and
operating plans. For intangible assets subject to amortization, we review 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
value of goodwill and intangible assets from recently-acquired businesses are
derived from the current macroeconomic environment and therefore, are more
susceptible to a short-term adverse economic change that could require an
impairment charge. The Company did not recognize any impairment charges for
goodwill, indefinite-lived intangible assets or intangible assets subject to
amortization during the years presented.
OTHER INFORMATION
Hedging and Derivative Financial Instruments
As a multinational company with diverse product offerings, we are exposed to
market risks such as changes in interest rates, currency exchange rates and
commodity prices. To manage the volatility related to these exposures, we
evaluate our exposures on a global basis to take advantage of the netting
opportunities that exist. For the remaining exposures, we enter into various
derivative transactions in accordance with the Company's hedging policies that
are designed to offset, in-part or in-whole, changes in the underlying exposures
being hedged. We do not hold or issue derivative financial instruments for
speculative trading purposes. Note 7 to the Consolidated Financial Statements
includes a detailed discussion of our 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 (exposures that tend to move in
tandem over time) 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, 2004. In cases where data
is unavailable in RiskMetrics(TM), a reasonable proxy is included.
Our market risk exposures relative to interest and currency rates, as discussed
below, have not changed materially versus the previous reporting period. In
addition, we are not aware of any facts or circumstances that would
significantly impact such exposures in the near-term.
The Procter & Gamble Company and Subsidiaries 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest Rate Exposure. Interest rate swaps are used to hedge exposures to
interest rate movement on underlying debt obligations. Certain rate swaps
denominated in foreign currencies are designated to hedge exposures to currency
exchange rate movements on the Company's investments in foreign operations.
These currency interest rate swaps are designated as hedges of the Company's
foreign net investments.
Based on our overall interest rate exposure as of and during the year ended June
30, 2004, including derivative and other instruments sensitive to interest
rates, we do not believe a near-term change in interest rates, at a 95%
confidence level based on historical interest rate movements, would materially
affect our financial statements.
Currency Rate Exposure. Because we manufacture and sell products in a number of
countries throughout the world, we are 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 our financial
position will be adversely affected by short-term changes in exchange rates.
Corporate policy prescribes the range of allowable hedging activity. We
primarily use forward exchange contracts and purchased options with maturities
of less than 18 months.
In addition, we enter into certain currency swaps with maturities of up to five
years to hedge our exposure to exchange rate movements on 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 our overall currency rate exposure as of and during the year ended June
30, 2004, including derivative and other instruments sensitive to currency
movements, we do not believe a near-term change in currency rates, at a 95%
confidence level based on historical currency rate movements, would materially
affect our financial statements.
Commodity Price Exposure. We use raw materials that are subject to price
volatility caused by weather, supply conditions, political and economic
variables and other unpredictable factors. In addition to fixed price contracts,
we use futures, options and swap contracts to manage the volatility related to
the above exposures. Commodity hedging activity is not considered material to
our financial statements.
Restructuring Program
In 1999, concurrent with a reorganization of our operations into product-based
Global Business Units, we initiated a multi-year restructuring program. Total
restructuring program charges were $538 million and $706 million after tax in
2003 and 2002, respectively. The program was substantially complete at the end
of June 2003 with a remaining reserve of $335 million. Substantially all of the
liability was settled through cash payments through June 30, 2004.
The Company continues to undertake projects to maintain a competitive cost
structure, including manufacturing consolidations and work force
rationalization, as part of its normal operations.
Non-GAAP Financial Measures
Our discussion of financial results includes several "non-GAAP" financial
measures. We believe these measures provide our investors with additional
information about our underlying results and trends, as well as insight to some
of the metrics used to evaluate management. When used in MD&A, we have provided
the comparable GAAP measure in the discussion. These measures include:
Organic Sales Growth. Organic sales growth measures sales growth excluding the
impacts of acquisitions, divestitures and foreign exchange from year-over-year
comparisons. The Company believes this provides investors with a more complete
understanding of underlying results and trends by providing sales growth on a
consistent basis.
Free Cash Flow. Free cash flow is defined as operating cash flow less capital
spending. The Company views free cash flow as an important measure because it is
one factor in determining the amount of cash available for dividends and
discretionary investment. Free cash flow is also one of the measures used to
evaluate senior management and is a factor in determining their at-risk
compensation.
Free Cash Flow Productivity. Free cash flow productivity is defined as the ratio
of free cash flow to net earnings. The Company's target is to generate free cash
flow at or above 90% of net earnings. Free cash flow productivity is one of the
measures used to evaluate senior management.
34 The Procter & Gamble Company and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[DELOITTE LOGO]
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 (the "Company") as of June 30, 2004 and 2003 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2004. 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 standards of the Public Company
Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 2004 and
2003 and the results of its operations and cash flows for each of the three
years in the period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP August 6, 2004
Cincinnati, Ohio
The Procter & Gamble Company and Subsidiaries 35
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June
-------------------------
Amounts in millions except per share amounts 2004 2003 2002
- -------------------------------------------- ------- ------- -------
Net Sales $51,407 $43,377 $40,238
Cost of products sold 25,076 22,141 20,989
Selling, general and administrative expense 16,504 l3,383 12,571
------- ------- -------
Operating Income 9,827 7,853 6,678
------- ------- -------
Interest expense 629 561 603
Other non-operating income, net 152 238 308
------- ------- -------
Earnings Before Income Taxes 9,350 7,530 6,383
------- ------- -------
Income taxes 2,869 2,344 2,031
------- ------- -------
NET EARNINGS $ 6,481 $ 5,186 4,352
------- ------- -------
BASIC NET EARNINGS PER COMMON SHARE(1) $ 2.46 $ 1.95 $ 1.63
DILUTED NET EARNINGS PER COMMON SHARE(1) $ 2.32 $ 1.85 $ 1.54
DIVIDENDS PER COMMON SHARE(1) $ 0.93 $ 0.82 $ 0.76
------- ------- -------
(1) Restated for two-for-one stock split effective May 21, 2004.
See accompanying Notes to Consolidated Financial Statements
36 The Procter & Gamble Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30
----------------
Amounts in millions 2004 2003
- ------------------- ------- -------
Current Assets
Cash and cash equivalents $ 5,469 $ 5,912
Investment securities 423 300
Accounts receivable 4,062 3,038
Inventories
Materials and supplies 1,191 1,095
Work in process 340 291
Finished goods 2,869 2,254
------- -------
Total Inventories 4,400 3,640
------- -------
Deferred income taxes 958 843
Prepaid expenses and other receivables 1,803 1,487
------- -------
TOTAL CURRENT ASSETS 17,115 15,220
------- -------
Property, Plant and Equipment
Buildings 5,206 4,729
Machinery and equipment 19,456 18,222
Land 642 591
------- -------
25,304 23,542
Accumulated depreciation (11,196) (10,438)
------- -------
NET PROPERTY, PLANT AND EQUIPMENT 14,108 13,104
------- -------
Goodwill and Other Intangible Assets
Goodwill 19,610 11,132
Trademarks and other intangible assets, net 4,290 2,375
------- -------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 23,900 13,507
------- -------
Other Non-Current Assets 1,925 1,875
------- -------
TOTAL ASSETS $57,048 $43,706
------- -------
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 2004 2003
- ------------------- ------- -------
Current Liabilities
Accounts payable $ 3,617 $ 2,795
Accrued and other liabilities 7,689 5,512
Taxes payable 2,554 1,879
Debt due within one year 8,287 2,172
------- -------
TOTAL CURRENT LIABILITIES 22,147 12,358
------- -------
Long-Term Debt 12,554 11,475
Deferred Income Taxes 2,261 1,396
Other Non-Current Liabilities 2,808 2,291
------- -------
TOTAL LIABILITIES 39,770 27,520
------- -------
Shareholders' Equity(1)
Convertible Class A preferred stock, stated value
$1 per share (600 shares authorized) 1,526 1,580
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:
2004 - 2,543.8, 2003 - 2,594.4) 2,544 2,594
Additional paid-in capital 2,425 1,634
Reserve for ESOP debt retirement (1,283) (1,308)
Accumulated other comprehensive income (1,545) (2,006)
Retained earnings 13,611 13,692
------- -------
TOTAL SHAREHOLDERS' EQUITY 17,278 16,186
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $57,048 $43,706
======= =======
(1) Restated for two-for-one stock split effective May 21, 2004.
See accompanying Notes to Consolidated Financial Statements
38 The Procter & Gamble Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Restated for two-for-one stock split effective May 21, 2004)
Common Additional Reserve for
Dollars in millions/ Shares Common Preferred Paid-in ESOP Debt
Shares in thousands Outstanding Stock Stock Capital Retirement
- ---------------------------------- ----------- ------ --------- ---------- -----------
Balance June 30, 2001 2,591,476 $2,591 $ 1,701 $ 762 $ (1,375)
Net earnings
Other comprehensive income:
Financial statement translation
Net investment hedges, net of
$238 tax
Other, net of tax benefits
Total comprehensive income
Dividends to shareholders:
Common
Preferred, net of tax benefits
Spin-off of Jif and Crisco
Treasury purchases (15,363) (15) 25(1,2)
Employee plan issuances 16,646 17 344
Preferred stock conversions 8,781 9 (67) 58
ESOP debt guarantee reduction 36
----------- ------ --------- ---------- -----------
Balance June 30, 2002 2,601,540 2,602 1,634 1,189 (1,339)
----------- ------ --------- ---------- -----------
Net earnings
Other comprehensive income:
Financial statement translation
Net investment hedges, net of
$251 tax
Other, net of tax benefits
Total comprehensive income
Dividends to shareholders:
Common
Preferred, net of tax benefits
Treasury purchases (28,276) (28) 20(1,2)
Employee plan issuances 14,312 14 377
Preferred stock conversions 6,819 6 (54) 48
ESOP debt guarantee reduction 31
----------- ------ --------- ---------- -----------
Balance June 30, 2003 2,594,395 2,594 1,580 1,634 (1,308)
----------- ------ --------- ---------- -----------
Net earnings
Other comprehensive income:
Financial statement translation
Net investment hedges, net of
$207 tax
Other, net of tax benefits
Total comprehensive income
Dividends to shareholders:
Common
Preferred, net of tax benefits
Treasury purchases (79,893) (80) 33(2)
Employee plan issuances 22,678 23 711
Preferred stock conversions 6,658 7 (54) 47
ESOP debt guarantee reduction 25
----------- ------ --------- ---------- -----------
Balance June 30, 2004 2,543,838 $2,544 $ 1,526 $ 2,425 $ (1,283)
----------- ------ --------- ---------- -----------
Accumulated
Other Total
Dollars in millions/ Comprehensive Retained Comprehensive
Shares in thousands Income Earnings Total Income
- ---------------------------------- ------------- -------- ------- -------------
Balance June 30, 2001 $ (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 (578) (568)
Employee plan issuances 361
Preferred stock conversions -
ESOP debt guarantee reduction 36
------------- -------- -------
Balance June 30, 2002 (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 benefits (125) (125)
Treasury purchases (1,228) (1,236)
Employee plan issuances 391
Preferred stock conversions -
ESOP debt guarantee reduction 31
------------- -------- -------
Balance June 30, 2003 (2,006) 13,692 16,186
------------- -------- -------
Net earnings 6,481 6,481 $ 6,481
Other comprehensive income:
Financial statement translation 750 750 750
Net investment hedges, net of
$207 tax (348) (348) (348)
Other, net of tax benefits 59 59 59
-------------
Total comprehensive income $ 6,942
-------------
Dividends to shareholders:
Common (2,408) (2,408)
Preferred, net of tax benefits (131) (131)
Treasury purchases (4,023) (4,070)
Employee plan issuances 734
Preferred stock conversions -
ESOP debt guarantee reduction 25
------------- -------- -------
Balance June 30, 2004 $ (1,545) $ 13,611 $17,278
------------- -------- -------
(1) Premium on equity put options totaled $6 and $18 for 2003 and 2002,
respectively.
(2) Includes impacts arising from stock split.
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 2004 2003 2002
- ------------------------------------------------------------ -------- -------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 5,912 $ 3,427 $ 2,306
Operating Activities
Net earnings 6,481 5,186 4,352
Depreciation and amortization 1,733 1,703 1,693
Deferred income taxes 415 63 389
Change in accounts receivable (159) 163 96
Change in inventories 56 (56) 159
Change in accounts payable, accrued and other liabilities 625 936 684
Change in other operating assets and liabilities (88) 178 (98)
Other 299 527 467
-------- -------- --------
TOTAL OPERATING ACTIVITIES 9,362 8,700 7,742
-------- -------- --------
Investing Activities
Capital expenditures (2,024) (1,482) (1,679)
Proceeds from asset sales 230 143 227
Acquisitions (7,476) (61) (5,471)
Change in investment securities (121) (107) 88
-------- -------- --------
TOTAL INVESTING ACTIVITIES (9,391) (1,507) (6,835)
-------- -------- --------
Financing Activities
Dividends to shareholders (2,539) (2,246) (2,095)
Change in short-term debt 4,911 (2,052) 1,394
Additions to long-term debt 1,963 1,230 1,690
Reductions of long-term debt (1,188) (1,060) (461)
Proceeds from the exercise of stock options 555 269 237
Treasury purchases (4,070) (1,236) (568)
-------- -------- --------
TOTAL FINANCING ACTIVITIES (368) (5,095) 197
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (46) 387 17
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (443) 2,485 1,121
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,469 $ 5,912 $ 3,427
-------- -------- --------
Supplemental Disclosure
Cash payments for:
Interest $ 630 $ 538 $ 629
Income taxes 1,634 1,703 941
Non-cash spin-off of Jif and Crisco businesses - - 150
-------- -------- --------
Acquisition of Businesses
Fair value of assets acquired, excluding cash $ 11,954 $ 61 $ 6,042
Fair value of liabilities assumed (4,478) - (571)
-------- -------- --------
ACQUISITIONS 7,476 61 5,471
-------- -------- --------
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
Nature of Operations
The Procter & Gamble Company's (the Company) business is focused on providing
consumer branded products of superior quality and value. The Company markets
approximately 300 consumer products in more than 160 countries around the world.
Our products are sold primarily through retail operations including mass
merchandisers, grocery stores, membership club stores and drug stores.
Basis of Presentation
The Consolidated Financial Statements include The Procter & Gamble Company and
its controlled subsidiaries. Intercompany transactions are eliminated in
consolidation. Investments in certain companies over which the Company exerts
significant influence, but does not control the financial and operating
decisions, are accounted for as equity method investments.
Use of Estimates
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (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 undertake in the future. Estimates are used in accounting for,
among other items, consumer and trade promotion accruals, pensions,
post-employment benefits, stock options, useful lives for depreciation and
amortization, future cash flows associated with impairment testing for goodwill
and long-lived assets, deferred tax assets, potential income tax assessments and
contingencies. Actual results may ultimately differ from estimates, although
management does not believe such changes would 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 title
to the product, ownership and risk of loss transfer 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 in 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.
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. Shipping and
handling costs invoiced to customers are included in net sales.
Selling, General and Administrative
Selling, general and administrative expense primarily includes marketing
expenses, including the cost of media, advertising and related costs; selling
expenses; research and development costs; administrative and other indirect
overhead costs; and other miscellaneous operating items.
Other Non-Operating Income, Net
Other non-operating income, net primarily includes interest and investment
income and gains and losses from divestitures.
Currency Translation
Financial statements of operating subsidiaries outside the United States of
America (U.S.) 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 financial statements in 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 from operating activities cash flows arising from
investing and financing activities, which are
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. Cash paid for acquisitions is classified
as investing activities.
Cash Equivalents
Highly liquid investments with maturities of three months or less when purchased
are considered cash equivalents and recorded at cost.
Investments
Investment securities consist of readily-marketable debt and equity securities.
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.
Other investments that are not controlled and over which the Company does not
have the ability to exercise significant influence are accounted under the cost
method.
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 cosmetics and
commodities are maintained on the last-in, first-out method. 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. Goodwill and
indefinite-lived intangibles are not amortized, but are evaluated annually for
impairment. The Company evaluates a number of factors to determine whether an
indefinite life is appropriate, including the competitive environment, market
share, brand history, operating plan and the macroeconomic environment of the
country in which the brand is sold. Due to the nature of the Company's business,
there are a number of brand intangibles that have been determined to have
indefinite lives. If it is determined that a brand intangible does not have an
indefinite life, the Company's policy is to amortize such assets over the
expected useful life, which generally ranges from 5 to 20 years. Patents,
technology and other intangibles with contractual terms are amortized over their
respective contractual lives. Other non-contractual intangible assets with
determinable lives are amortized over periods ranging from 5 to 20 years.
Where certain events or changes in operating conditions occur, lives on
intangible assets with determinable lives may be adjusted and an impairment
assessment may be performed on the recoverability of the carrying amounts. The
annual evaluation for impairment of goodwill and indefinite-lived intangibles is
based on valuation models that incorporate internal projections of expected
future cash flows and operating plans.
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 and
capitalized software (3 to 5-year lives) and manufacturing equipment (3 to
20-year lives). Buildings are depreciated over an estimated useful life of 40
years. Estimated useful lives are periodically reviewed and, where appropriate,
changes are made prospectively. Where certain events or changes in operating
conditions occur, asset lives may be adjusted and an impairment assessment may
be performed on the recoverability of the carrying amounts.
Fair Values of Financial Instruments
Certain financial instruments are required to be recorded at fair value. The
estimated fair values of such financial instruments, including certain debt
instruments, investment securities and 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. Other financial instruments, including cash equivalents, other
investments and short-term debt, are recorded at cost, which approximates fair
value. The fair valve of long-term debt is disclosed in Note 6.
Millions of dollars except per share amounts
42 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 expense has resulted.
Had compensation expense 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
---------------------------------------
2004(1) 2003 2002
--------- --------- ---------
Net Earnings
As reported $ 6,481 $ 5,186 $ 4,352
Pro forma adjustments (325) (398) (442)
PRO FORMA 6,156 4,788 3,910
--------- --------- ---------
Net Earnings Per Common Share
Basic
As reported $ 2.46 $ 1.95 $ 1.63
Pro forma adjustments (0.12) (0.15) (0.17)
PRO FORMA 2.34 1.80 1.46
--------- --------- ---------
Diluted
As reported 2.32 1.85 1.54
Pro forma adjustments (0.12) (0.15) (0.15)
PRO FORMA 2.20 1.70 1.39
--------- --------- ---------
(1) During the current year, the timing of the annual grant was moved from
September to February resulting in lower expense, as the associated pro
forma expense is amortized over the three-year vesting period.
Stock Split
In March 2004, the Company's Board of Directors approved a two-for-one stock
split effective for common and preferred shareholders of record as of May 21,
2004. The financial statements, notes and other references to share and per
share data have been restated to reflect the stock split for all periods
presented.
New Pronouncements and Reclassifications
No new accounting pronouncements issued or effective during the fiscal year have
had or are expected to have a material impact on the financial statements.
Certain reclassifications of prior years' amounts have been made to conform to
the current year presentation.
NOTE 2 RESTRUCTURING PROGRAM
In 1999, concurrent with a reorganization of its operations into product-based
Global Business Units, the Company initiated a multi-year restructuring program.
Costs included enrollment reductions, manufacturing consolidations and portfolio
choices to scale back or discontinue under-performing businesses and
initiatives. Total restructuring program charges were $751 in 2003, including
$351 in separations related to approximately 5,000 people, $190 in asset
write-downs and $87 in accelerated depreciation related to long-lived assets
that were taken out of service prior to the end of their normal service period.
Total restructuring program charges were $958 in 2002, including $393 in
separations related to approximately 7,400 people, $208 in asset write-downs and
$135 in accelerated depreciation.
At June 30, 2003, the program was substantially complete with a remaining
reserve of $335. Substantially all of this liability was settled through cash
payments by the end of 2004.
The Company continues to undertake projects to maintain a competitive cost
structure, including manufacturing streamlining and work force rationalization,
as part of its normal operations.
NOTE 3 ACQUISITIONS AND SPIN-OFF
Wella Acquisition
On September 2, 2003, the Company acquired a controlling interest in Wella AG
(Wella). Through a stock purchase agreement with the majority shareholders of
Wella and a tender offer made on the remaining shares, the Company acquired a
total of 81% of Wella's outstanding shares, including 99% of Wella's outstanding
voting class shares. In June 2004, the Company and Wella entered into a
Domination and Profit Transfer Agreement (the Domination Agreement) pursuant to
which the Company is entitled to exercise full operating control and receive
100% of the future earnings of Wella. As consideration for the Domination
Agreement, the Company will pay the holders of the remaining outstanding shares
of Wella a guaranteed perpetual annual dividend payment. Alternatively, the
remaining Wella shareholders may elect to tender their shares to the Company for
an agreed price. The fair value of the total guaranteed annual dividend payments
is $1.11 billion, which approximates the cost if all remaining shares were
tendered. Because the Domination Agreement transfers operational and economic
control of the remaining outstanding shares to the Company, it has been
accounted for as an acquisition of the remaining shares, with a liability
recorded equal to the fair value of the guaranteed payments. Because of the
tender feature, the liability is recorded as a current liability in the accrued
and other liabilities
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
line of the Consolidated Balance Sheets. Payments made under the guaranteed
annual dividend provisions will be allocated between interest expense and a
reduction of the liability, as appropriate. The total purchase price for Wella,
including acquisition costs, was $6.27 billion based on exchange rates at the
acquisition dates. It was funded with a combination of cash, debt and the
liability recorded under the Domination Agreement
The acquisition of Wella, with over $3 billion in annual net sales, gives the
Company access to the professional hair care category plus greater scale and
scope in hair care, hair colorants, cosmetics and fragrance products, while
providing potential for significant synergies. The operating results of the
Wella business are reported in the Company's Beauty Care business segment
beginning September 2, 2003.
The following table provides pro forma results of operations for the years ended
June 30, 2004, 2003 and 2002, as if Wella had been acquired as of the beginning
of each fiscal year presented. The pro forma results include certain
adjustments, including adjustments to convert Wella's historical financial
information from International Accounting Standards (IAS) into U.S. GAAP,
estimated interest impacts from funding of the acquisition and estimated
amortization of definite-lived intangible assets. However, pro forma results do
not include any anticipated cost savings or other effects of the integration of
Wella. Accordingly, such amounts are not necessarily indicative of the results
that would have occurred if the acquisition had occurred on the dates indicated
or that may result in the future.
Years ended June 30
-------------------------------
Pro forma results 2004 2003 2002
- -------------------- ------- ------- -------
Net Sales $51,958 $46,751 $43,070
Net Earnings 6,402 5,222 4,345
Diluted Net Earnings
per Common Share $ 2.29 $ 1.86 $ 1.54
------- ------- -------
The Company is in the process of finalizing independent appraisals for certain
assets to assist management in allocating the purchase price to the individual
assets acquired and liabilities assumed. This may result in adjustments to the
carrying values of Wella's recorded assets and liabilities, including the amount
of any residual value allocated to goodwill. The Company is also completing its
analysis of collaboration plans that may result in additional purchase price
allocation adjustments. The preliminary allocation of the purchase price
included in the current period balance sheet is based on the current best
estimates of management and is subject to revision based on final determination
of fair values and collaboration plans. The Company anticipates the valuations
and other studies will be completed prior to the anniversary date of the
acquisition. The preliminary allocation of the total purchase price of Wella
resulted in the following condensed balance sheet of assets acquired and
liabilities assumed.
Current assets $ 1,825
Property, plant and equipment 443
Goodwill 5,864
Intangible assets 1,709
Other non-current assets 225
-------
TOTAL ASSETS ACQUIRED 10,066
-------
Current liabilities 2,114
Non-current liabilities 1,679
-------
TOTAL LIABILITIES ASSUMED 3,793
-------
NET ASSETS ACQUIRED 6,273
-------
The Wella acquisition resulted in $5.86 billion in goodwill, all of which was
allocated to the Beauty Care segment, and $1.71 billion in total intangible
assets acquired with $1.15 billion allocated to trademarks with indefinite
lives. The remaining $556 of acquired intangibles have determinable useful lives
and were assigned to trademarks of $267, patents and technology of $10,
professional customer relationships of $214 and license and other intangible
assets of $65. Total intangible assets acquired with determinable lives have a
weighted-average life of 11 years (8 years for trademarks, 5 years for patents
and technology, 15 years for professional customer relationships and 23 years
for license and other intangible assets).
China Venture
On June 18, 2004, the Company purchased the remaining 20% stake in its China
venture from its partner, Hutchison Whampoa China Ltd. (Hutchison), giving the
Company full ownership in its operations in China. The net purchase price was
$1.85 billion, which is the purchase price of $2.00 billion net of minority
interest and related obligations that were eliminated as a result of the
transaction. The acquisition was funded by debt. The fair value of the
incremental individual assets and liabilities acquired approximates current book
value. Accordingly, the purchase price was recorded as goodwill, which was
allocated to multiple business segments.
Millions of dollars except per share amounts
44 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Clairol Acquisition
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 year ended
June 30, 2002 as if Clairol had been acquired as of the beginning of the fiscal
year. Pro forma information for 2004 and 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
funding and amortization of definite-lived intangible assets. 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.
Year ended June 30
------------------
Pro forma results 2002
- ------------------------------------- -------
Net Sales $40,780
Net Earnings 4,406
Diluted Net Earnings per Common Share $ 1.56
-------
Jif and Crisco 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.
Other minor business purchases and intangible asset acquisitions totaled $384,
$61 and $446 in 2004, 2003 and 2002, respectively.
NOTE 4 GOODWILL AND INTANGIBLE ASSETS
The change in net carrying amount of goodwill for the years ended June 30, 2004
and 2003 was allocated by reportable business segment as follows:
2004 2003
------- -------
Fabric and Home Care, beginning of year $ 460 $ 451
Acquisitions 148 -
Translation and other 6 9
------- -------
END OF YEAR 614 460
------- -------
Baby and Family Care, beginning of year 884 830
Acquisitions 19 -
Translation and other 38 54
------- -------
END OF YEAR 941 884
------- -------
Beauty Care, beginning of year 6,600 6,542
Acquisitions 7,277 -
Translation and other 580 58
------- -------
END OF YEAR 14,457 6,600
------- -------
Health Care, beginning of year 2,908 2,866
Acquisitions 386 -
Translation and other 21 42
------- -------
END OF YEAR 3,315 2,908
------- -------
Snacks and Beverages, beginning of year 280 277
Translation and other 3 3
------- -------
END OF YEAR 283 280
------- -------
Goodwill, Net, beginning of year 11,132 10,966
Acquisitions 7,830 -
Translation and other 648 166
------- -------
END OF YEAR 19,610 11,132
------- -------
For the year ended June 30, 2004, goodwill increased primarily due to the
acquisition of Wella and the purchase of the remaining stake in the China
venture.
Identifiable intangible assets as of June 30, 2004 and 2003 were comprised of:
June 30, 2004 June 30, 2003
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Intangible Assets with
Determinable Lives
Trademarks $ 1,012 $ 155 $ 499 $ 85
Patents and technology 518 250 492 204
Other 554 165 316 140
-------------- ------------ -------------- ------------
2,084 570 1,307 429
-------------- ------------ -------------- ------------
Trademarks with
Indefinite Lives 2,945 169 1,666 169
-------------- ------------ -------------- ------------
5,029 739 2,973 598
-------------- ------------ -------------- ------------
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortization of intangible assets for the years ended June 30, 2004, 2003
and 2002 was $165, $100 and $97, respectively. Estimated amortization expense
over the next five years is as follows: 2005 - $171; 2006 - $169; 2007 - $119;
2008 - $106; and 2009 - $104. Such estimates do not reflect the impact of future
foreign exchange rate changes.
NOTE 5 SUPPLEMENTAL FINANCIAL INFORMATION
Selected components of current and non-current liabilities were as follows:
June 30
-----------------
2004 2003
------ ------
Accrued and Other Current Liabilities
Marketing and promotion $1,876 $1,802
Liability under Wella
Domination Agreement 1,106 -
Compensation expenses 1,049 804
Other 3,658 2,906
------ ------
7,689 5,512
------ ------
Other Non-Current Liabilities
Pension benefits $1,798 $1,301
Other postretirement benefits 142 181
Other 868 809
------ ------
2,808 2,291
------ ------
Selected Operating Expenses
Research and development costs are charged to earnings as incurred and were
$1,802 in 2004, $1,665 in 2003 and $1,601 in 2002. Advertising costs are charged
to earnings as incurred and were $5,504 in 2004, $4,373 in 2003 and $3,773 in
2002. Both of these are components of selling, general and administrative
expense.
NOTE 6 SHORT-TERM AND LONG-TERM DEBT
June 30
-----------------
2004 2003
------ ------
Short-Term Debt
USD commercial paper $6,059 $ 717
Non-USD commercial paper 149 147
Current portion of long-term debt 1,518 1,093
Other 561 215
------ ------
8,287 2,172
------ ------
The weighted average short-term interest rates were 1.5% and 3.6% as of June 30,
2004 and 2003, respectively. The rate decrease reflected an increase in
commercial paper within short-term debt.
June 30
----------------------
2004 2003
-------- --------
Long-Term Debt
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 1,827 1,725
1.50% JPY note due December, 2005 503 459
3.50% CHF note due February, 2006 240 222
5.40% EUR note due August, 2006 365 -
4.75% USD note due June, 2007 1,000 1,000
6.13% USD note due May, 2008 500 500
4.30% USD note due August, 2008 500 500
3.50% USD note due December, 2008 650 -
6.88% USD note due September, 2009 1,000 1,000
2.00% JPY note due June, 2010 458 417
9.36% ESOP debentures due 2007-2021(1) 1,000 1,000
4.85% USD note due December, 2015 700 -
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 906 827
5.25% GBP note due January, 2033 363 331
5.50% USD note due February, 2034 500 -
Debt assumed by acquiring non-cash capital leases 252 146
All other long-term debt 1,408 2,541
Current portion of long-term debt (1,518) (1,093)
-------- --------
12,554 11,475
-------- --------
(1) Debt issued by the ESOP is guaranteed by the Company and must be recorded
as debt of the Company as discussed in Note 9.
Long-term weighted average interest rates were 4.0% and 3.7% as of June 30, 2004
and 2003, respectively, and included the effects of related interest rate swaps
discussed in Note 7.
The fair value of the long-term debt was $13,168 and $12,396 at June 30, 2004
and 2003, respectively. Long-term debt maturities during the next five fiscal
years are as follows: 2005 - $1,518; 2006 - $2,625; 2007 - $1,433; 2008 - $972;
and 2009 - $1,150. The Company has no material obligations that are secured.
Millions of dollars except per share amounts
46 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Such derivative transactions, which
are executed in accordance with the Company's policies in areas such as
counterparty exposure and hedging practices, 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.
Interest Rate Management
The Company's policy is to manage interest cost using a mixture 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. Changes in the fair value of both the
hedging instruments and the underlying debt obligations are immediately
recognized in earnings 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 a net asset of $45 and $322 at June 30, 2004
and 2003, respectively. 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
5 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 and are therefore
accounted for as cash flow hedges. The fair value of these instruments at June
30, 2004 and June 30, 2003 was $47 and $27 in assets and $140 and $92 in
liabilities, respectively. The effective portion of the changes in fair value
for these instruments are reported in OCI and reclassified into 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.
Certain instruments used by the Company for foreign exchange risk do not meet
the requirements for hedge accounting treatment. In these cases, the change in
value of the instruments is designed to offset 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, 2004 and 2003 was $71 and $113 in assets and $26 and $26 in liabilities,
respectively. The gain or loss on these instruments is immediately recognized in
earnings. The net impact of such instruments, included in selling, general and
administrative expense, was $80, $264 and $50 of gains in 2004, 2003 and 2002,
respectively, which substantially offset foreign currency transaction losses of
the items being hedged.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Investment Hedging
The Company hedges certain net investment positions in major 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 $348 and $418 after-tax
loss in 2004 and 2003, respectively. Accumulated net balances were a $586
after-tax loss in 2004 and a $238 after-tax loss in 2003.
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 any of the
years presented.
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 assuming conversion of
preferred stock (see Note 9).
Net earnings and common share balances used to calculate basic and diluted net
earnings per share were as follows:
Years ended June 30
-------------------------------
2004 2003 2002
------- ------- -------
Net Earnings $ 6,481 $ 5,186 $ 4,352
Preferred dividends, net of tax benefit (131) (125) (124)
------- ------- -------
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS 6,350 5,061 4,228
------- ------- -------
Preferred dividends, net of tax benefit 131 125 124
Preferred dividend impact on funding of ESOP (4) (9) (12)
------- ------- -------
DILUTED NET EARNINGS 6,477 5,177 4,340
------- ------- -------
Years ended June 30
-----------------------------
Shares in millions 2004 2003 2002
- ------------------------------------------------- ------- ------- -------
Basic weighted average common shares outstanding 2,580.1 2,593.2 2,594.8
Effect of dilutive securities
Conversion of preferred shares(1) 164.0 170.2 177.6
Exercise of stock options(2) 46.0 39.2 37.5
------- ------- -------
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,790.1 2,802.6 2,809.9
------- ------- -------
(1) Despite being included currently in diluted net earnings per common share,
the actual conversion to common stock occurs pursuant to the repayment of
the ESOP debt through 2021.
(2) Approximately 38 million in 2004, 66 million in 2003 and 72 million in
2002 of the Company's outstanding 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, 2001 and 2003. Grants
issued since September 2002 are vested after three years and have a ten-year
life. Grants issued from July 1998 through August 2002 are vested after three
years and have a fifteen-year life, while grants issued prior to July 1998 are
vested after one year and have a ten-year life. The Company also makes other
minor grants to employees, for which vesting terms and option lives are not
substantially different.
Millions of dollars except per share amounts
48 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company has estimated
the fair value of each grant using the Black-Scholes option-pricing model.
Assumptions are evaluated and revised, as necessary, to reflect market
conditions and experience. The following assumptions were used:
Years ended June 30
----------------------
Options Granted 2004 2003 2002
- ---------------------- ---- ---- ----
Interest rate 3.8% 3.9% 5.4%
Dividend yield 1.8% 1.8% 2.2%
Expected volatility 20% 20% 20%
Expected life in years 8 8 12
The following table summarizes stock option activity during 2004, 2003 and 2002:
June 30
-------------------------------
Options in Thousands 2004 2003 2002
- -------------------------------------- -------------------------------
Outstanding, beginning of year 259,598 240,326 208,392
Granted 40,866 35,759 50,080
Jif and Crisco spin-off adjustment - - 1,622
Exercised (22,307) (13,904) (16,297)
Canceled (1,864) (2,583) (3,471)
------- ------- -------
OUTSTANDING, END OF YEAR 276,293 259,598 240,326
------- ------- -------
Exercisable 151,828 118,202 92,664
Available for grant 165,399 203,593 229,071
Average price
Outstanding, beginning of year $ 35.75 $ 33.34 $ 31.82
Granted 51.06 45.68 35.09
Exercised 24.88 19.35 14.53
Outstanding, end of year 38.85 35.75 33.34
Exercisable, end of year 35.39 35.44 28.50
Weighted average fair value of options
granted during the year 12.50 10.99 10.57
Stock options outstanding at June 30, 2004 were in the following exercise price
ranges:
Outstanding Options
-----------------------------------------------
Weighted Avg.
Number Remaining
Outstanding Weighted Avg. Contractual
Range of Prices (Thousands) Exercise Price Life in Years
- --------------- ----------- -------------- --------------
$16.43 to 30.11 36,863 $ 24.07 2.6
31.01 to 34.84 95,260 32.72 11.5
35.10 to 46.24 82,825 43.70 6.9
48.73 to 52.98 61,345 50.69 9.9
Stock options exercisable at June 30, 2004 were in the following exercise price
ranges:
Exercisable Options
-----------------------------
Number Weighted
Exercisable Average
Range of Prices (Thousands) Exercise Price
- --------------- ----------- --------------
$16.43 to 30.11 36,863 $ 24.07
31.01 to 34.84 48,426 31.06
35.10 to 46.24 43,624 42.36
48.73 to 52.98 22,915 49.49
The Company repurchases common shares to mitigate the dilutive impact of
options. Beyond that, the Company may make additional discretionary purchases
based on cash availability, market trends and other factors.
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 not material.
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 U.S., as well as employees
in certain other countries. These plans are fully funded.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the defined contribution plans, the Company generally makes contributions
to participants based on individual base salaries and years of service. In the
U.S., the contribution is set annually. Historically, the Company has
contributed approximately 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 a portion of the 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 reduces the Company's cash contribution required to fund
the U.S. defined contribution plan. Defined contribution expense, which
approximates the Company's cash contribution to the plan that is funded in the
subsequent year, was $274, $286 and $279 in 2004, 2003 and 2002, respectively.
Defined Benefit Retirement Plans and Other Retiree Benefits
Certain other employees, primarily outside the U.S., are covered by local
defined benefit pension plans 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 cost sharing with 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.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
signed into law on December 8, 2003. This Act introduces a Medicare
prescription-drug benefit beginning in 2006 as well as a federal subsidy to
sponsors of retiree health care plans that provide a benefit at least
"actuarially equivalent" to the Medicare benefit. Management has concluded that
the Company's plans are at least "actuarially equivalent" to the Medicare
benefit and, accordingly, has included the federal subsidy from the Act in the
normal year-end measurement process for other retiree benefit plans. The impact
is a reduction to the benefit obligation of $195 as of June 30, 2004. The impact
to net periodic pension cost and to benefits paid in future years is not
expected to be material.
Obligation and Funded Status. The Company uses a June 30 measurement date for
its defined benefit retirement plans and other retiree benefit plans. The
following provides a reconciliation of benefit obligations, plan assets and
funded status of these plans:
Years ended June 30
-------------------------------------------------
Pension Benefits Other Retiree Benefits
------------------- -------------------------
2004 2003 2004 2003
------- ------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year (1) $ 3,543 $ 2,970 $ 2,914 $ 2,135
Service cost 157 124 89 62
Interest cost 204 173 172 150
Participants' contributions 14 7 31 27
Amendments 50 (33) (258) (2)
Actuarial loss (gain) 5 138 (460) 645
Acquisitions 590 42 7 -
Curtailments and settlements (39) (29) (8) -
Special termination benefits 12 1 41 7
Currency translation 288 305 5 13
Benefit payments (208) (155) (133) (123)
------- ------- ---------- ----------
BENEFIT OBLIGATION AT END OF YEAR (1) 4,616 3,543 2,400 2,914
------- ------- ---------- ----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 1,558 $ 1,332 $ 2,277 $ 2,347
Actual return on plan assets 194 (36) 651 1
Acquisitions 185 1 - -
Employer contributions 412 337 18 25
Participants' contributions 14 7 31 27
Settlements (21) (27) - -
Currency translation 129 99 (1) -
Benefit payments (208) (155) (133) (123)
------- ------- ---------- ----------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 2,263 1,558 2,843 2,277
------- ------- ---------- ----------
FUNDED STATUS (2,353) (1,985) 443 (637)
------- ------- ---------- ----------
(1) For the pension benefit plans, the benefit obligation is the projected
benefit obligation. For other retiree benefit plans, the benefit
obligation is the accumulated postretirement benefit obligation.
Millions of dollars except per share amounts
50 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30
-----------------------------------------------
Pension Benefits Other Retiree Benefits
------------------- -----------------------
2004 2003 2004 2003
------- ------- --------- ---------
CALCULATION OF NET AMOUNT RECOGNIZED
Funded status at end of year $(2,353) $(1,985) $ 443 $ (637)
Unrecognized net actuarial loss (gain) 902 930 (344) 435
Unrecognized transition amount 12 13 - -
Unrecognized prior service cost 38 (9) (259) (2)
------- ------- --------- ---------
NET AMOUNT RECOGNIZED (1,401) (1,051) (160) (204)
------- ------- --------- ---------
CLASSIFICATION OF NET AMOUNT RECOGNIZED
Prepaid benefit cost $ 253 $ 173 $ 1 $ 2
Accrued benefit cost (1,872) (1,407) (161) (206)
Intangible asset 75 31 - -
Accumulated other comprehensive income 143 152 - -
------- ------- --------- ---------
NET AMOUNT RECOGNIZED (1,401) (1,051) (160) (204)
------- ------- --------- ---------
The underfunding of pension benefits is primarily a function of the different
funding incentives that exist outside of the U.S. In certain countries where the
Company has major operations, there are no legal requirements or financial
incentives provided to companies to pre-fund pension obligations. In these
instances, benefit payments are typically paid directly from the Company's cash
as they become due, rather than through the creation of a separate pension fund.
The accumulated benefit obligation for all defined benefit retirement plans was
$3,822 and $2,850 at June 30, 2004 and June 30, 2003, respectively. Plans with
accumulated benefit obligations in excess of plan assets and plans with
projected benefit obligations in excess of plan assets as of June 30, consist of
the following:
Years ended June 30
------------------------------------------------------------
Accumulated Benefit Projected Benefit
Obligation Exceeds Fair Obligation Exceeds Fair
Value of Plan Assets Value of Plan Assets
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Projected benefit obligation $ 2,809 $ 2,945 $ 4,059 $ 3,179
Accumulated benefit obligation 2,396 2,310 3,320 2,492
Fair value of plan assets 638 979 1,676 1,186
------------ ------------ ------------ ------------
Net Periodic Benefit Cost. Components of the net periodic benefit cost were as
follows:
Years ended June 30
-----------------------------------------------------
Pension Benefits Other Retiree Benefits
------------------------- -----------------------
2004 2003 2002 2004 2003 2002
----- ----- ----- ----- ---- ----
Service cost $ 157 $ 124 $ 114 $ 89 $ 62 $ 49
Interest cost 204 173 153 172 150 116
Expected return on plan assets (153) (127) (133) (329) (333) (320)
Amortization of deferred amounts 3 4 7 (1) (1) (1)
Curtailment and settlement loss (gain) - 5 1 - - (1)
Recognized net actuarial loss (gain) 28 13 9 1 (27) (64)
----- ----- ----- ----- ---- ----
GROSS BENEFIT COST 239 192 151 (68) (149) (221)
----- ----- ----- ----- ---- ----
Dividends on ESOP preferred stock - - - (73) (74) (76)
----- ----- ----- ----- ---- ----
NET PERIODIC BENEFIT COST 239 192 151 (141) (223) (297)
----- ----- ----- ----- ---- ----
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions. The Company determines its actuarial assumptions on an annual
basis. These assumptions are weighted to reflect each country that may have an
impact on the cost of providing retirement benefits. The weighted-average
assumptions for the defined benefit and other retiree benefit calculations, as
well as assumed health care cost trend rates, for the years ended June 30, are
as follows:
Years ended June 30
----------------------------------
Other
Pension Benefits Retiree Benefits
---------------- ----------------
Actuarial assumptions 2004 2003 2004 2003
- --------------------- ---- ---- ---- ----
Assumptions used to determine
benefit obligations(1)
Discount rate 5.2% 5.1% 6.1% 5.8%
Rate of compensation increase 3.1% 3.1% - -
--- --- ---- ----
Assumptions used to determine net
periodic pension cost(2)
Discount rate 5.1% 5.6% 5.8% 7.0%
Expected return on plan assets 7.4% 7.7% 9.5% 9.5%
Rate of compensation increase 3.0% 3.5% - -
--- --- ---- ----
Assumed health care cost trend rates
Health care cost trend rates assumed for
next year(3) - - 9.7% 11.4%
Rate that the health care trend rate is
assumed to decline to (ultimate trend rate) - - 5.1% 5.0%
Year that the rate reaches the ultimate
trend rate - - 2010 2010
--- --- ---- ----
(1) Determined as of end of year.
(2) Determined as of beginning of year.
(3) Rate is applied to current plan costs net of Medicare; estimate initial rate
for "gross eligible charges" (charges inclusive of Medicare) is 7.7% for
2004 and 8.8% for 2003.
Several factors are considered in developing the estimate for the long-term
expected rate of return on plan assets. For the defined benefit plans, these
include historical rates of return of broad equity and bond indices and
projected long-term rates of return from pension investment consultants. The
expected long-term rates of return for plan assets are 8%-9% for equities and
5%-6% bonds. The rate of return on other retiree benefit plan assets, comprised
primarily of Company stock, is based on the long-term projected return of 9.5%
and reflects the historical pattern of favorable returns on the Company's stock
relative to broader market indices (e.g., S&P 500).
Assumed health care cost trend rates could have a significant effect on the
amounts reported for the other retiree benefit 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 service and interest cost components $ 51 $ (46)
Effect on postretirement benefit obligation 323 (268)
---- -----
Plan Assets. The Company's target asset allocation for the year ending June 30,
2005 and actual asset allocation by asset category as of June 30, 2004, and
2003, are as follows:
Target Allocation
--------------------------------
Other Retiree
Pension Benefits Benefits
---------------- -------------
Asset Category 2005 2005
- -------------- ---------------- -------------
Equity securities(1) 64% 99%
Debt securities 32% 1%
Real estate 4% -%
--- ---
TOTAL 100% 100%
--- ---
Plan Asset Allocation at June 30
--------------------------------
Pension Benefits Other Retiree Benefits
---------------- ----------------------
Asset Category 2004 2003 2004 2003
- -------------- ---- ---- ---- ----
Equity securities(1) 64% 62% 99% 99%
Debt securities 32% 35% 1% 1%
Real estate 4% 3% -% -%
--- --- --- ---
TOTAL 100% 100% 100% 100%
--- --- --- ---
(1) Equity securities for other retiree plan assets include Company stock, net
of Series B ESOP debt (See Note 6), of $2,744 and $2,182, as of June 30,
2004 and 2003, respectively.
Millions of dollars except per share amounts
52 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's investment objective for defined benefit plan assets is to meet
the plans' benefit obligations, while minimizing the potential for future
required Company plan contributions. The investment strategies focus on asset
class diversification, liquidity to meet benefit payments and an appropriate
balance of long-term investment return and risk. Target ranges for asset
allocations are determined by matching the actuarial projections of the plans'
future liabilities and benefit payments with expected long-term rates of return
on the assets, taking into account investment return volatility and correlations
across asset classes. Plan assets are diversified across several investment
managers and are generally invested in liquid funds that are selected to track
broad market equity and bond indices. Investment risk is carefully controlled
with plan assets rebalanced to target allocations on a periodic basis and
continual monitoring of investment managers performance relative to the
investment guidelines established with each investment manager.
Cash Flows. Management's best estimate of its cash requirements for the defined
benefit plans and other retiree benefit plans for the year ending June 30, 2005
is $237 and $20, respectively. For the defined benefit plans, this is comprised
of expected benefit payments of $71, which are paid directly to participants of
unfunded plans from employer assets, as well as expected contributions to funded
plans of $166. For other retiree benefit plans, this is comprised of expected
contributions that will be used directly for benefit payments. Expected
contributions are dependent on many variables, including the variability of the
market value of the assets as compared to the obligation and other market or
regulatory conditions. In addition, the Company takes into consideration its
business investment opportunities and resulting cash requirements. Accordingly,
actual funding may differ greatly from current estimates.
Total benefit payments expected to be paid to participants, which include
payments funded from the Company's assets, as discussed above, as well as
payments paid from the plans are as follows:
Years ended June 30
---------------------------------
Other Retiree
Pension Benefit Benefit
--------------- -------------
EXPECTED BENEFIT PAYMENTS
2005 $ 191 $ 144
2006 177 152
2007 193 166
2008 207 176
2009 207 185
2010 - 2014 1,180 1,058
Employee Stock Ownership Plan
The Company maintains the ESOP to provide funding for certain employee benefits
discussed in the preceding paragraphs.
The ESOP borrowed $1.00 billion 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 U.S. Principal and interest
requirements were paid by the Trust from dividends on the preferred shares and
from advances from the Company. The final payment for the original borrowing of
$1.00 billion was made in 2004 and the remaining debt of the ESOP consists of
amounts owed to the Company. Each share is convertible at the option of the
holder into one share of the Company's common stock. The dividend for the
current year was $0.93 per share. The liquidation value is $6.82 per share.
In 1991, the ESOP borrowed an additional $1.00 billion. 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 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 dividend for the
current year was $1.02 per share. The liquidation value is $12.96 per share.
As permitted by Statement of Position (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 as debt (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.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As required by SOP 76-3, the preferred shares of the ESOP are allocated based on
debt service requirements, net of advances made by the Company to the Trust. The
number of preferred shares outstanding at June 30, was as follows:
June 30
------------------------------
Shares in Thousands 2004 2003 2002
- ------------------- ---- ---- ----
Allocated 62,511 64,492 66,191
Unallocated 28,296 31,534 35,374
------ ------ -------
TOTAL SERIES A 90,807 96,026 101,565
------ ------ -------
Allocated 21,399 20,648 19,738
Unallocated 48,528 50,718 52,908
------ ------ ------
TOTAL SERIES B 69,927 71,366 72,646
------ ------ ------
For purposes of calculating diluted net earnings per common share, the preferred
shares held by the ESOP are considered converted from inception. 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 amount of taxes payable for the current year and for the impact of
deferred tax liabilities and assets, which represent 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 are adjusted for changes in such rates in the
period of change. Earnings before income taxes consisted of the following:
Years ended June 30
--------------------------------
2004 2003 2002
---- ---- ----
United States $6,023 $ 4,920 $ 4,411
International 3,327 2,610 1,972
------ ------- -------
9,350 7,530 6,383
------ ------- -------
The income tax provision consisted of the following:
Years ended June 30
--------------------------------
2004 2003 2002
---- ---- ----
CURRENT TAX EXPENSE
U.S. Federal $1,508 $ 1,595 $ 975
International 830 588 551
U.S. State and Local 116 98 116
------ ------- -----
2,454 2,281 1,642
------ ------- -----
DEFERRED TAX EXPENSE
U.S. Federal 348 125 571
International and other 67 (62) (182)
415 63 389
------ ------- -----
2,869 2,344 2,031
------ ------- -----
The Company's effective income tax rate was 30.7%, 31.1% and 31.8% in 2004, 2003
and 2002, 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 2004 than the previous fiscal years: 4.1% in 2004,
3.8% in 2003 and 3.1% in 2002. The Company's higher effective tax rate in 2002
also reflected the impact of restructuring costs. Taxes impacted shareholders'
equity with credits of $351 and $361 for the years ended June 30, 2004 and 2003,
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 $16.75 billion
at June 30, 2004, 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.
Millions of dollars except per share amounts
54 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities were comprised of the following:
June 30
-------
2004 2003
---- ----
DEFERRED TAX ASSETS
Unrealized loss on financial instruments $ 381 $ 287
Loss and other carryforwards 365 311
Advance payments 226 182
Other postretirement benefits 95 93
Other 1,169 820
Valuation allowances (342) (158)
------ ------
1,894 1,535
------ ------
DEFERRED TAX LIABILITIES
Fixed assets (1,350) (1,175)
Goodwill and intangible assets (1,281) (410)
Other (352) (287)
------ ------
(2,983) (1,872)
------ ------
Net operating loss carryforwards were $1,398 and $1,222 at June 30, 2004 and
June 30, 2003, respectively. If unused, $299 will expire between 2005 and 2014.
The remainder, totaling $1,099 at June 30, 2004, 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. 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 and customers.
The total amount of guarantees issued under such arrangements is not material.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing arrangements, including
variable interest entities, under FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," that have a material impact on the financial
statements.
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.
Operating Leases
The Company leases certain property and equipment for varying periods under
operating leases. Future minimum rental commitments under noncancellable
operating leases are as follows: 2005 - $186; 2006 - $150; 2007 - $134; 2008 -
$99; 2009 - $86; and $265 thereafter.
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 $36 and $34 at June 30, 2004 and 2003,
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.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 SEGMENT INFORMATION
The Company is 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 retail and professional hair care, skin care,
feminine care, cosmetics, fine fragrances and personal cleansing.
- - Baby and Family Care includes diapers, baby wipes, bath tissue and kitchen
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. In August 2004, the Company divested the juice business.
Effective July 1, 2004, the Company realigned its businesses and associated
management responsibilities to three business units: Beauty Care; Health, Baby
and Family Care; and Household Care, which will include the current Fabric and
Home Care business as well as the Snacks and Beverages business.
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 recording of fixed assets at historical exchange rates in certain
high inflation economies; and the treatment of unconsolidated investees.
Unconsolidated investees are managed as integral parts of the Company's business
units for management and segment reporting purposes. Accordingly, these
partially owned operations are reflected as consolidated subsidiaries in segment
results, with 100% recognition of the individual income statement line items
through before-tax earnings, while after-tax earnings are adjusted to reflect
only the Company's ownership percentage. Entries to eliminate the individual
revenues and expenses, adjusting the method of accounting to the equity method
as required by U.S. GAAP, are included in Corporate.
Corporate includes certain operating and non-operating activities that are not
reflected in the operating results used internally to measure and evaluate the
operating segments, 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, 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 assets primarily include cash, investment
securities, goodwill and other non-current intangible assets.
The Company had net sales in the U.S. of $23,688, $21,853 and $21,198 for the
years ended June 30, 2004, 2003 and 2002, respectively. Assets in the U.S.
totaled $23,687 and $23,424 as of June 30, 2004 and 2003, respectively.
The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 17%, 18% and 17% of consolidated net sales in 2004, 2003 and 2002,
respectively. These sales occurred primarily in the U.S.
Millions of dollars except per share amounts
56 The Procter & Gamble Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fabric and Beauty Baby and Health Snacks and
Home Care Care Family Care Care Beverages Corporate Total
--------- ---- ----------- ---- --------- --------- -----
Net Sales 2004 $ 13,868 $17,122 $ 10,718 $6,991 $ 3,482 $ (774) $51,407
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
---- ---------- ------- ----------- ------ ---------- --------- -------
Before-Tax Earnings 2004 3,287 3,662 1,623 1,448 557 (1,227) 9,350
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
---- ---------- ------- ----------- ------ ---------- --------- -------
Net Earnings 2004 2,203 2,422 996 962 363 (465) 6,481
2003 2,059 1,984 882 706 306 (751) 5,186
2002 1,831 1,610 738 521 303 (651) 4,352
---- ---------- ------- ----------- ------ ---------- --------- -------
Depreciation and Amortization 2004 331 393 550 153 119 187 1,733
2003 332 345 558 156 125 187 1,703
2002 326 339 503 163 121 241 1,693
---- ---------- ------- ----------- ------ ---------- --------- -------
Total Assets 2004 5,512 7,869 7,229 2,639 1,831 31,968 57,048
2003 5,174 5,389 6,974 2,642 2,040 21,487 43,706
---- ---------- ------- ----------- ------ ---------- --------- -------
Capital Expenditures 2004 538 433 714 164 134 41 2,024
2003 357 343 548 144 125 (35) 1,482
2002 368 354 702 158 125 (28) 1,679
---- ---------- ------- ----------- ------ ---------- --------- -------
NOTE 13 QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
-------------------------------------------------------------
Sept 30 Dec 31 Mar 31 Jun 30 Total Year
-------- ------- ------- ------- ----------
Net Sales 2003-2004 $ 12,195 $13,221 $13,029 $12,962 $51,407
2002-2003 10,796 11,005 10,656 10,920 43,377
-------- ------- ------- ------- -------
Operating Income 2003-2004 2,643 2,742 2,303 2,139 9,827
2002-2003 2,179 2,248 1,957 1,469 7,853
-------- ------- ------- ------- -------
Net Earnings 2003-2004 1,761 1,818 1,528 1,374 6,481
2002-2003 1,464 1,494 1,273 955 5,186
-------- ------- ------- ------- -------
Diluted Net Earnings Per Common Share (1) 2003-2004 $ 0.63 $ 0.65 $ 0.55 $ 0.50 $ 2.32
2002-2003 0.52 0.53 0.46 0.34 1.85
-------- ------- ------- ------- -------
(1) Restated for two-for-one stock split effective May 21, 2004.
Millions of dollars except per share amounts
The Procter & Gamble Company and Subsidiaries 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL SUMMARY (UNAUDITED)
2004 2003 2002 2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Net Sales $ 51,407 $ 43,377 $ 40,238 $39,244 $39,951 $38,125 $37,154 $35,764 $ 35,284
Operating Income 9,827 7,853 6,678 4,736 5,954 6,253 6,055 5,488 4,815
Net Earnings 6,481 5,186 4,352 2,922 3,542 3,763 3,780 3,415 3,046
Net Earnings Margin 12.6% 12.0% 10.8% 7.4% 8.9% 9.9% 10.2% 9.5% 8.6%
-------- -------- -------- ------- ------- ------- ------- ------- --------
Basic Net Earnings Per Common Share (1) $2.46 $1.95 $ 1.63 $ 1.08 $ 1.30 $ 1.38 $ 1.37 $ 1.22 $ 1.07
Diluted Net Earnings Per Common Share (1) 2.32 1.85 1.54 1.03 1.23 1.29 1.28 1.14 1.00
Dividends Per Common Share (1) 0.93 0.82 0.76 0.70 0.64 0.57 0.51 0.45 0.40
-------- -------- -------- ------- ------- ------- ------- ------- --------
Restructuring Program Charges (2) $ - $ 751 $ 958 $ 1,850 $ 814 $ 481 $ - $ - $ -
Research and Development Expense 1,802 1,665 1,601 1,769 1,899 1,726 1,546 1,469 1,399
Advertising Expense 5,504 4,373 3,773 3,612 3,793 3,639 3,801 3,574 3,374
Total Assets 57,048 43,706 40,776 34,387 34,366 32,192 31,042 27,598 27,762
Capital Expenditures 2,024 1,482 1,679 2,486 3,018 2,828 2,559 2,129 2,179
Long-Term Debt 12,554 11,475 11,201 9,792 9,012 6,265 5,774 4,159 4,678
Shareholders' Equity 17,278 16,186 13,706 12,010 12,287 12,058 12,236 12,046 11,722
-------- -------- -------- ------- ------- ------- ------- ------- --------
(1) Restated for two-for-one stock split effective May 21, 2004.
(2) 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
58 The Procter & Gamble Company and Subsidiaries
DIRECTORS
NORMAN R. AUGUSTINE
Retired Chairman and Chief Executive Officer, Lockheed Martin Corporation and
Chairman of the Executive Committee, Lockheed Martin (aerospace, electronics,
telecommunications and information management). Director since 1989. Also a
Director of Lockheed Martin Corporation, Black and Decker Corporation and
ConocoPhillips. Age 69. Chairman of the Compensation Committee and member of the
Executive and Innovation and Technology Committees.
BRUCE L. BYRNES
Vice Chairman of the Board - Global Household Care. Director since 2002. Also a
Director of Cincinnati Bell Inc. Age 56.
R. KERRY CLARK
Vice Chairman of the Board - Global Health, Baby and Family Care. Director since
2002. Also a Director of Textron Inc. Age 52.
SCOTT D. COOK
Chairman of the Executive Committee of the Board, Intuit Inc. (a software and
web services firm). Director since 2000. Also a Director of Intuit Inc. and eBay
Inc. Age 52. Member of the Compensation and Innovation and Technology
Committees.
DOMENICO DESOLE
Retired President and Chief Executive Officer and Chairman of the Management
Board, Gucci Group N.V. (multibrand luxury goods company). Director since 2001.
Also a Director of Bausch & Lomb, Gap, Inc. and Telecom Italia. Age 60. Member
of the Audit and Governance and Nominating 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. Also a Director of Alcoa
Inc., National City Corporation and Imperial Chemical Industries plc. Age 66.
Chairman of the Finance Committee and member of the Compensation and Executive
Committees.
A.G. LAFLEY
Chairman of the Board, President and Chief Executive. Director since 2000. Also
a Director of General Electric Company and General Motors Corporation. Age 57.
Chairman of the Executive Committee.
CHARLES R. LEE
Retired Chairman of the Board and Co-Chief Executive Officer, Verizon
Communications (telecommunication services). Director since 1994. Also a
Director of The DIRECTV Group, Marathon Oil Corporation, United Technologies
Corporation and US Steel Corporation. Age 64. Chairman of the Governance and
Nominating Committee and member of the Audit and Compensation Committees.
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 for Deloitte's internal human resources and
minority advancement matters. Director since 1994. Also a Director of
CORPORATE OFFICERS
A.G. LAFLEY
Chairman of the Board, President and Chief Executive
BRUCE L. BYRNES
Vice Chairman of the Board - Global Household Care
R. KERRY CLARK
Vice Chairman of the Board - Global Health, Baby and Family Care
SUSAN E. ARNOLD
Vice Chairman - Global Beauty Care
ROBERT A. MCDONALD
Vice Chairman - Global Operations
WERNER GEISSLER
Group President - Central and Eastern Europe, Middle East and Africa
HEINER GURTLER
Group President - Global Prestige and Professional Care
DIMITRI PANAYOTOPOULOS
Group President - Global Fabric Care
PAUL POLMAN
Group President - Western Europe
ROBERT A. STEELE
Group President - North America
JEFFREY P. ANSELL
President - Global Pet Health and Nutrition
CHARLES V. BERGH
President - ASEAN, Australasia and India
RAVI CHATURVEDI
President - Northeast Asia
MARK A. COLLAR
President - Global Pharmaceuticals
PAOLO DE CESARE
President - Global Skin Care and Global Personal Cleansing
CHRISTOPHER DE LAPUENTE
President - Global Hair Care
CARSTEN FISCHER
President - Professional Care
FABRIZIO FREDA
President - Global Snacks
MICHAEL J. GRIFFITH
President on Special Assignment(1)
DEBORAH A. HENRETTA
President - Global Baby and Adult Care
MICHAEL E. KEHOE
President - Global Oral Care
MARK D. KETCHUM
President on Special Assignment(2)
(1) Retires January 2, 2005 after more than 23 years of service.
(2) Retires November 1, 2004 after more than 33 years of service.
The Procter & Gamble Company and Subsidiaries 59
SBC Communications, Inc., Ryder System, Inc., Dreyfus Funds and Constellation
Energy Group. Age 64. Member of the Finance and Public Policy Committees.
W. JAMES MCNERNEY, JR.
Chairman of the Board and Chief Executive Officer, 3M Company (diversified
technology). Director since 2003. Also a Director of 3M Company and The Boeing
Company. Age 55. Member of the Audit, Finance and Governance and Nominating
Committees.
JOHNATHAN A. RODGERS
President and Chief Executive Officer, TV One, LLC (media and communications).
Director since 2001. Age 58. Member of the Innovation and Technology and Public
Policy Committees.
JOHN F. SMITH, JR.
Chairman of the Board, Delta Air Lines, Inc. and retired Chairman of the Board
and CEO, General Motors Corporation (automobile and related businesses).
Director since 1995. Also a Director of Delta Air Lines, Inc. and Swiss
Reinsurance Company. Age 66. Chairman of the Audit Committee and member of the
Governance and Nominating and Public Policy Committees.
RALPH SNYDERMAN, M.D.
Chancellor Emeritus, James B. Duke Professor of Medicine at Duke University.
Director since 1995. Also a Director of Axonyx Inc. and Cardiome Pharma
Corporation. Age 64. Chairman of the Innovation and Technology Committee and
member of the Finance Committee.
ROBERT D. STOREY
Retired partner in the law firm of Thompson Hine, L.L.P., Cleveland, Ohio.
Director since 1988. Also a Director of Verizon Communications. Age 68. Chairman
of the Public Policy Committee and member of the Finance Committee.
MARGARET C. WHITMAN
President and Chief Executive Officer, eBay Inc. (a global online marketplace
for the sale of goods and services). Director since 2003. Also a Director of
eBay Inc. and Gap, Inc. Age 48. Member of the Compensation 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. Also a Director of Alcoa Inc. and Union
Pacific Corporation. Age 52. Member of the Finance 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
HARTWIG LANGER
President - Prestige Products
JORGE S. MESQUITA
President - Global Home Care
JORGE P. MONTOYA
President on Special Assignment(3)
MARTIN J. NUECHTERN
President on Special Assignment(4)
LAURENT L. PHILIPPE
President - Greater China
CHARLES E. PIERCE
President - Global Family Care
MARC S. PRITCHARD
President - Global Cosmetics and Hair Colorants
MARTIN RIANT
President - Global Feminine Care and Global Deodorants/Old Spice
JORGE A. URIBE
President - Latin America
RICHARD L. ANTOINE
Global Human Resources Officer
G. GILBERT CLOYD
Chief Technology Officer
CLAYTON C. DALEY, JR.
Chief Financial Officer
STEPHEN N. DAVID
Chief Business-to-Business Officer(5)
R. KEITH HARRISON, JR.
Global Product Supply Officer
JAMES J. JOHNSON
Chief Legal Officer and Secretary
MARIANO MARTIN
Global Customer Business Development Officer
CHARLOTTE R. OTTO
Global External Relations Officer
FILIPPO PASSERINI
Chief Information and Global Services Officer
RICHARD G. PEASE
Senior Vice President - Human Resources, Global Household Care
NABIL Y. SAKKAB
Senior Vice President - Research and Development, Global Fabric and Home Care
JAMES R. STENGEL
Global Marketing Officer
JOHN P. GOODWIN
Treasurer
JOHN K. JENSEN
Vice President and Comptroller
(3) Retires October 1, 2004 after more than 33 years of service.
(4) Retires June 30, 2005 after more than 26 years of service.
(5) Retires January 2, 2005 after more than 34 years of service.
60 The Procter & Gamble Company and Subsidiaries
SHAREHOLDER INFORMATION
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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
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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, National, Amsterdam, Paris, Basle, Geneva, Lausanne, Zurich,
Frankfurt, Brussels
SHAREHOLDERS OF COMMON STOCK
There were approximately 1,426,000 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 July 30, 2004.
FORM 10-K
Shareholders may obtain a copy of the Company's 2004 report to the Securities
and Exchange Commission on Form 10-K by going to P&G's investor Web site at
www.pg.com/investing 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 12,
2004. 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.
PG.COM/INVESTING
You can access your Shareholder Investment Program account, including your
account balance and transactions, 24 hours a day at pg.com/investing. And pg.com
is your connection to stock purchase information, transaction forms, information
about the 2004 stock split, 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 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 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 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
(Restated for two-for-one stock split effective May 21,2004)
Price Range Dividends
------------------------------------------------------- ------------------------
2003 - 2004 2003 - 2004 2002 - 2003 2003 - 2002 2003 - 2004 2002 - 2003
Quarter Ended HIGH LOW High Low
- ------------- ----------- ----------- ----------- ----------- ----------- -----------
September 30 $46.72 $43.26 $ 46.75 $37.04 $ 0.228 $0.205
December 31 49.97 46.41 46.18 41.00 0.228 0.205
March 31 53.61 48.89 45.00 39.79 0.228 0.205
June 30 56.34 51.64 46.27 43.80 0.250 0.205
Design. Landor Associates
P&G AT A GLANCE
Net Sales
by Segment(1)
(in
Global Business Unit Product Lines Key Brands billions)
- --------------------------------------------------------------------------------------------------------------------------
Fabric and Home Care Laundry detergent, fabric Tide, Ariel, Downy, Lenor, Dawn, Fairy, $ 13.9
conditioners, dish care, Joy, Gain, Ace Laundry and Bleach, Swiffer,
household cleaners, Dash, Bold, Cascade, Mr. Clean/Proper,
fabric refreshers, bleach Febreze, Bounce, Cheer, Era, Bonux, Dreft,
and care for special Daz, Flash, Vizir, Salvo, Viakal, Maestro
fabrics Limpio, Rindex, Myth, Alomatik
- ----------------------------------------------------------------------------------------------------------------------
Beauty Care Hair care/hair color, Pantene, Olay, Head & Shoulders, Clairol's 17.1
skin care and cleansing, Herbal Essences, Nice `n Easy, Natural
cosmetics, fragrances and Instincts and Hydrience, Cover Girl, SK-II,
antiperspirants/deodorants Max Factor, Hugo Boss, Safeguard, Rejoice,
Secret, Old Spice, Zest, Vidal Sassoon,
Pert, Ivory, Lacoste, Aussie, Infusium 23,
Camay, Noxzema, Infasil, Joy Parfum,
Valentino, Sure, Wash&Go, Wella, Koleston,
Wellaflex, Shockwaves, Rochas, Escada, Gucci
Feminine protection pads, Always, Whisper, Tampax, Lines Feminine
tampons and pantiliners Care, Naturella, Evax, Ausonia, Orkid
- ----------------------------------------------------------------------------------------------------------------------
Baby and Family Care Baby diapers, baby and Pampers, Luvs, Kandoo, Dodot 10.7
toddler wipes, baby bibs,
baby change and bed mats
Paper towels, toilet Charmin, Bounty, Puffs, Tempo
tissue and facial tissue
- ----------------------------------------------------------------------------------------------------------------------
Health Care Oral care, pet health and Crest, Iams, Eukanuba, Actonel, Vicks, 7.0
nutrition, Asacol, Prilosec OTC, Metamucil, Fixodent,
pharmaceuticals and PUR, Scope, Macrobid, Pepto-Bismol,
personal health care Didronel, ThermaCare, Blend-a-med
- ----------------------------------------------------------------------------------------------------------------------
Snacks and Beverages Snacks and beverages Pringles, Folgers, Millstone 3.5
- ----------------------------------------------------------------------------------------------------------------------
Fabric and Home Care 27%
Beauty Care 33%
Baby and Family Care 20%
Health Care 13%
Snacks and Beverages 7%
RECOGNITION
P&G is the only company to appear on all seven Fortune magazine company lists in
2003, including:
- - Best Companies to Work For
- - Most Admired
- - Best Companies for Minorities
- - MBA's Top Employers
P&G ranks among the top companies for Executive Women (National Association for
Female Executives), African Americans (Family Digest magazine) and Best
Corporate Citizens (Business Ethics magazine).
[GRAPHICS]
RISING TIDE - LESSONS FROM 165 YEARS OF BRAND BUILDING AT P&G
combines the history of P&G with case studies on topics like the invention of
Tide and the start of P&G's business in Eastern Europe. For a 30% discount,
shareholders can order the book through HBS Press at www.hbspress.org or call
1-888-500-1016. Mention promotional code LPEMIP4.
(1) Offset by $0.8 billion of net sales generated by companies for which P&G
exerts significant influence but does not consolidate, and other miscellaneous
activities.
P&G 2004 Annual Report
[LOGO] TOUCHING LIVES, IMPROVING LIFE. P&G
(C) 2004 Procter & Gamble
0038-7122