UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number 1-434
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-0411980
(State of incorporation) (I.R.S. Employer Identification No.)
One Procter & Gamble Plaza, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 983-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
There were 2,377,658,052 shares of Common Stock outstanding as of September 30,
2005.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Consolidated Statements of Earnings of The Procter & Gamble Company and
subsidiaries (the "Company", "we" or "our") for the three months ended September
30, 2005 and 2004, the Consolidated Balance Sheets as of September 30, 2005 and
June 30, 2005, and the Consolidated Statements of Cash Flows for the three
months ended September 30, 2005 and 2004 follow. In the opinion of management,
these unaudited consolidated financial statements contain all adjustments
necessary to present fairly the financial position, results of operations and
cash flows for the interim periods reported. However, such financial statements
may not be indicative necessarily of annual results.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in millions except per share amounts
Three Months Ended
September 30
-------------------------------------
2005 2004
---------------- ----------------
NET SALES $ 14,793 $ 13,744
Cost of products sold 7,159 6,623
Selling, general and
administrative expense 4,577 4,332
---------------- ----------------
OPERATING INCOME 3,057 2,789
Interest expense 219 181
Other non-operating income, net 74 182
---------------- ----------------
EARNINGS BEFORE INCOME TAXES 2,912 2,790
Income taxes 883 848
---------------- ----------------
NET EARNINGS $ 2,029 $ 1,942
================ ================
PER COMMON SHARE:
Basic net earnings $ 0.82 $ 0.75
Diluted net earnings $ 0.77 $ 0.70
Dividends $ 0.28 $ 0.25
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 2,649.7 2,766.1
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions
September 30 June 30
ASSETS 2005 2005
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 6,310 $ 6,389
Investment securities 1,749 1,744
Accounts receivable 4,690 4,185
Inventories
Materials and supplies 1,371 1,424
Work in process 384 350
Finished goods 3,406 3,232
------------ ------------
Total inventories 5,161 5,006
Deferred income taxes 849 1,081
Prepaid expenses and other current assets 1,805 1,924
------------ ------------
TOTAL CURRENT ASSETS 20,564 20,329
PROPERTY, PLANT AND EQUIPMENT
Buildings 5,318 5,292
Machinery and equipment 20,631 20,397
Land 625 636
------------ ------------
26,574 26,325
Accumulated depreciation (12,318) (11,993)
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT 14,256 14,332
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 19,793 19,816
Trademarks and other intangible assets, net 4,435 4,347
------------ ------------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 24,228 24,163
OTHER NON-CURRENT ASSETS 2,858 2,703
------------ ------------
TOTAL ASSETS $ 61,906 $ 61,527
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,423 $ 3,802
Accrued and other liabilities 6,247 7,531
Taxes payable 2,635 2,265
Debt due within one year 8,749 11,441
------------ ------------
TOTAL CURRENT LIABILITIES 21,054 25,039
LONG-TERM DEBT 21,046 12,887
DEFERRED INCOME TAXES 2,007 1,896
OTHER NON-CURRENT LIABILITIES 3,266 3,230
------------ ------------
TOTAL LIABILITIES 47,373 43,052
SHAREHOLDERS' EQUITY
Preferred stock 1,477 1,483
Common stock - shares issued - Sept 30 2,976.6 2,977
June 30 2,976.6 2,977
Additional paid-in capital 3,140 3,030
Reserve for ESOP debt retirement (1,269) (1,259)
Accumulated other comprehensive income (1,485) (1,566)
Treasury stock (22,558) (17,194)
Retained earnings 32,251 31,004
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,533 18,475
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 61,906 $ 61,527
============ ============
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
Amounts in millions September 30
-------------------
2005 2004
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 6,389 $ 4,232
OPERATING ACTIVITIES
Net earnings 2,029 1,942
Depreciation and amortization 448 480
Share based compensation expense 95 122
Deferred income taxes 284 145
Changes in:
Accounts receivable (539) (377)
Inventories (149) (326)
Accounts payable, accrued and other liabilities (243) 57
Other operating assets & liabilities 175 (112)
Other 71 (19)
-------- --------
TOTAL OPERATING ACTIVITIES 2,171 1,912
-------- --------
INVESTING ACTIVITIES
Capital expenditures (401) (413)
Proceeds from asset sales 26 366
Acquisitions (1,178) (335)
Change in investment securities (17) (216)
-------- --------
TOTAL INVESTING ACTIVITIES (1,570) (598)
-------- --------
FINANCING ACTIVITIES
Dividends to shareholders (727) (685)
Change in short-term debt (1,230) (2,429)
Additions to long-term debt 8,612 2,996
Reductions of long-term debt (1,858) (130)
Impact of stock options and other 142 105
Treasury purchases (5,555) (622)
-------- --------
TOTAL FINANCING ACTIVITIES (616) (765)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (64) 59
CHANGE IN CASH AND CASH EQUIVALENTS (79) 608
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,310 $ 4,840
======== ========
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. These statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2005 and Form 8-Ks
filed on September 23, 2005, and November 2, 2005 reflecting the Company's
historical results as conformed for the adoption of SFAS 123 (Revised
2004), "Share-Based Payment" (SFAS 123(R)) and the change in our method of
accounting for Treasury Stock. The results of operations for the
three-month period ended September 30, 2005 are not indicative necessarily
of annual results.
2. Comprehensive Income - Total comprehensive income is composed primarily of
net earnings, net currency translation gains and losses, impacts of net
investment and cash flow hedges and net unrealized gains and losses on
securities. Total comprehensive income for the three months ended September
30, 2005 and 2004 was $2,110 million and $2,159 million, respectively.
3. Segment Information - Following is a summary of segment results.
SEGMENT INFORMATION
Amounts in millions Three Months Ended September 30
------------------------------------------------
Earnings Before
Net Sales Income Taxes Net Earnings
------------------------------------------------
Beauty 2005 $ 4,989 $ 1,078 $ 783
2004 4,655 983 674
--------------------------------------------------------------
Health Care 2005 2,083 501 336
2004 1,844 360 245
Baby Care & Family Care 2005 2,999 510 320
2004 2,850 501 309
------------------------------------------------
Family Health 2005 5,082 1,011 656
2004 4,694 861 554
--------------------------------------------------------------
Fabric Care & Home Care 2005 4,215 963 641
2004 3,810 877 585
Snacks & Coffee 2005 706 108 73
2004 740 120 78
------------------------------------------------
Household Care 2005 4,921 1,071 714
2004 4,550 997 663
--------------------------------------------------------------
Corporate 2005 (199) (248) (124)
2004 (155) (51) 51
---------------------------------------------------------------
Total 2005 $ 14,793 $ 2,912 $ 2,029
2004 13,744 2,790 1,942
---------------------------------------------------------------
4. Goodwill and Other Intangible Assets - Goodwill as of September 30, 2005 is
allocated by reportable segment and global business unit as follows
(amounts in millions):
Three Months Ended
September 30, 2005
----------------------
Total Beauty, beginning of year $ 14,580
Acquistions & divestiture (19)
Translation & other 8
Goodwill, September 30, 2005 14,569
Health Care, beginning of year 3,378
Acquistions & divestiture --
Translation & other (2)
Goodwill, September 30, 2005 3,376
Baby Care & Family Care, beginning of year 955
Acquistions & divestiture (23)
Translation & other 12
Goodwill, September 30, 2005 944
Total Family Health, beginning of year 4,333
Acquistions & divestiture (23)
Translation & other 10
Goodwill, September 30, 2005 4,320
Fabric Care & Home Care, beginning of year 644
Acquistions & divestiture --
Translation & other --
Goodwill, September 30, 2005 644
Snacks & Coffee, beginning of year 259
Acquistions & divestiture --
Translation & other 1
Goodwill, September 30, 2005 260
Total Household Care, beginning of year 903
Acquistions & divestiture --
Translation & other 1
Goodwill, September 30, 2005 904
Goodwill, Net, beginning of year 19,816
Acquistions & divestiture (42)
Translation & other 19
Goodwill, September 30, 2005 $ 19,793
Identifiable intangible assets as of September 30, 2005 are comprised of
(amounts in millions):
Gross Carrying Accumulated
Amount Amortization
---------------------------------
Amortizable intangible assets with
determinable lives $ 2,257 $ 755
Intangible assets with indefinite lives 2,933 -
---------------------------------
Total identifiable intangible assets $ 5,190 $ 755
---------------------------------
Amortizable intangible assets consist principally of patents, technology
and trademarks. The non-amortizable intangible assets consist primarily of
certain trademarks.
The amortization of intangible assets for the three months ended September
30, 2005 was $49 million.
5. In December 2004, the Financial Accounting Standards Board (FASB) issued
(SFAS 123(R)). This Statement revises SFAS No. 123 by eliminating the
option to account for employee stock options under APB No. 25 and requires
companies to recognize the cost of employee services received in exchange
for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method). We adopted SFAS 123(R)
effective July 1, 2005 using the modified retrospective method. All prior
periods were adjusted to give effect to the fair-value-based method of
accounting for awards granted in fiscal years beginning on or after July 1,
1995. We provided revised Consolidated Financial Statements for the years
ended June 30, 2005, 2004 and 2003 reflecting the adoption of SFAS 123(R)
under the modified retrospective method in a Form 8-K dated November 2,
2005. The impact to the Company's net earnings of adopting SFAS 123(R) is
consistent with the pro forma disclosures provided in previous financial
statements. The impact of adopting SFAS 123(R) on Shareholders' Equity as
of September 30, 2005, June 30, 2005 and June 30, 2004 is shown in Note 8.
For the three months ended September 30, 2005 and 2004, we recognized total
share-based compensation of $95 million and $122 million, respectively, of
which $73 million and $82 million relate to additional compensation
recognized under SFAS 123(R) for stock options, and $22 million and $40
million relate to compensation for other share-based awards, primarily
restricted stock and restricted stock units. These amounts are reflected in
Cost of Products Sold and Selling, General and Administrative Expense and
have been allocated to the reportable segments.
The fair value of each grant issued since January 1, 2005 was estimated
using a binomial lattice-based model. The fair value of options granted
prior to January 1, 2005 was estimated using the Black-Scholes
option-pricing model. The utilization of the binomial lattice-based model
did not have a significant impact on the valuation of stock options as
compared to the Black-Scholes model. Assumptions utilized in the model are
evaluated and revised, as necessary, to reflect market conditions and
experience.
6. Postretirement Benefits - The Company offers various postretirement
benefits to its employees. Additional information about these benefits is
incorporated herein by reference to Note 8, Postretirement Benefits and
Employee Stock Ownership Plan, which appears on page 54-58 of the Annual
Report to Shareholders for the fiscal year ended June 30, 2005.
The components of net periodic benefit cost are as follows:
Amounts in millions
Pension Benefits Other Retiree Benefits
-------------------------------- --------------------------------
Three Months Ended Three Months Ended
September 30 September 30
-------------------------------- --------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Service Cost $ 47 $ 38 $ 24 $ 17
Interest Cost 61 58 39 36
Expected Return on Plan Assets (47) (43) (90) (83)
Amortization of Prior Service Cost and
Prior Transition Amount 2 1 (5) (5)
Recognized Net Actuarial Loss 19 8 1 -
------------- ------------ ------------ ------------
Gross Benefit Cost 82 62 (31) (35)
Dividends on ESOP Preferred Stock - - (19) (18)
------------- ------------ ------------ ------------
Net Periodic Benefit Cost $ 82 $ 62 $ (50) $ (53)
============ ============ ============ ============
In 2005, the expected return on plan assets is 7.1% and 9.5% for defined
benefit and other retiree benefit plans, respectively.
7. On October 1, 2005, we completed our acquisition of The Gillette Company.
Pursuant to the acquisition agreement, we exchanged 0.975 shares of The
Procter & Gamble Company common stock, on a tax-free basis, for each share
of The Gillette Company. Under the purchase method of accounting, the total
consideration was approximately $54 billion, determined using the average
Company stock prices beginning two days before and ending two days after
January 28, 2005, the date the acquisition was announced. The acquisition
will be reflected in our consolidated financial statements beginning in the
quarter ending December 31, 2005.
The Gillette Company is a leader in several global product categories
including blades and razors, oral care and batteries. Total sales for
Gillette during its most recent year ended December 31, 2004 were $10.5
billion.
In connection with this acquisition, we also announced a share buyback plan
under which we will acquire $18 to $22 billion of Company common stock in
the open market or from private transactions. Through September 30, 2005,
we repurchased $8.6 billion under this plan. The repurchases were financed
by borrowings under a $24 billion three-year credit facility with a
syndicate of banks. The facility was entered into on July 27, 2005 and
replaced a $3.4 billion bridge credit facility. Proceeds will be used for
general corporate purposes with the expectation that the majority of the
funds will be used as part of the share repurchase program. This facility
is initially secured by a pledge of certain of the Company shares acquired
under the share buyback plan. This credit facility carries a variable
interest rate.
8. Change in Method of Accounting for Treasury Stock - On July 1, 2005, we
elected to change our method of accounting for Treasury Stock. We
previously accounted for share repurchases as if the Treasury Stock was
constructively retired by reducing Common Stock and Retained Earnings
within Shareholders' Equity. Reissuances of repurchased shares were
accounted for by increasing Common Stock and Additional Paid-In Capital.
Our new method of accounting will present Treasury Stock as a separate
component of Shareholders' Equity. We believe that our new accounting
method is preferable as it more closely depicts the underlying intent of
the share repurchases in which the shares are not retired. In addition, we
believe that our new presentation of Shareholders' Equity provides greater
visibility of our share repurchase activity, including our share buyback
plan announced in connection with the Gillette acquition.
We adopted SFAS No. 154, "Accounting Changes and Error Corrections", on
July 1, 2005. Accordingly, we reflected this new accounting method
retrospectively by adjusting prior periods. This change is limited to
reclassifications within Shareholders' Equity and has no effect on our net
earnings, cash flows or total assets. The following tables summarize the
changes within Shareholders' Equity as of September 30, 2005, June 30, 2005
and June 30, 2004 from the change in our method of accounting for Treasury
Stock (the June 30, 2005 and 2004 tables also reflect changes to equity
from the adoption of FAS 123(R)):
Amounts in millions As Computed Effect of
Under Old Treasury Stock
As of September 30, 2005 Method Change As Reported
------------- ------------- -------------
Common Stock $ 2,378 $ 599 $ 2,977
Preferred Stock 1,477 -- 1,477
Additional Paid-In Capital 6,930 (3,790) 3,140
Reserve for ESOP Debt Retirement (1,269) -- (1,269)
Accumulated Other Comprehensive Income (1,485) -- (1,485)
Treasury Stock -- (22,558) (22,558)
Retained Earnings 6,502 25,749 32,251
------------- ------------- -------------
Total Shareholders' Equity $ 14,533 $ - $ 14,533
============= ============= =============
Amounts in millions Effect of
As Originally Treasury Stock Effect of
As of June 30, 2005 Reported Change SFAS 123(R) As Adjusted
------------- ------------- -------------- -------------
Common Stock $ 2,473 $ 504 -- $ 2,977
Preferred Stock 1,483 -- -- 1,483
Additional Paid-In Capital 3,142 (3,659) 3,547 3,030
Reserve for ESOP Debt Retirement (1,259) -- -- (1,259)
Accumulated Other Comprehensive Income (1,566) -- -- (1,566)
Treasury Stock -- (17,194) -- (17,194)
Retained Earnings 13,204 20,349 (2,549) 31,004
------------- ------------- -------------- -------------
Total Shareholders' Equity $ 17,477 $ - $ 998 $ 18,475
============= ============= ============== =============
Amounts in millions Effect of
As Originally Treasury Stock Effect of
As of June 30, 2004 Reported Change SFAS 123(R) As Adjusted
------------- ------------- -------------- -------------
Common Stock $ 2,544 $ 432 -- $ 2,976
Preferred Stock 1,526 -- -- 1,526
Additional Paid-In Capital 2,425 (3,098) 3,127 2,454
Reserve for ESOP Debt Retirement (1,283) -- -- (1,283)
Accumulated Other Comprehensive Income (1,545) -- -- (1,545)
Treasury Stock -- (12,925) -- (12,925)
Retained Earnings 13,611 15,591 (2,215) 26,987
------------- ------------- -------------- -------------
Total Shareholders' Equity $ 17,278 $ - $ 912 $ 18,190
============= ============= ============== =============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is organized in the following sections:
Overview
Results of Operations - Three Months Ended September 30, 2005
Business Segment Discussion - Three Months Ended September 30, 2005
Financial Condition
Throughout MD&A, we refer to several measures used by management to evaluate
performance including unit volume growth, net sales and after-tax profit. We
also refer to organic sales growth (net sales excluding the impacts of
acquisitions, divestitures and foreign exchange), free cash flow and free
cash flow productivity, which are not defined under accounting principles
generally accepted in the United States of America (U.S. GAAP). The explanation
of these measures at the end of MD&A provides more details.
Effective July 1, 2005, Procter & Gamble adopted SFAS 123 (R) which requires
that all stock-based compensation, including grants of employee stock options,
be accounted for using a fair value-based method. We have elected to adopt SFAS
123 (R) using the modified retrospective method. As a result, we have revised
our historical results to include the effect of stock-based compensation.
Therefore, all financial data provided in this Form 10-Q filing, including prior
year data, have been revised to include the impact of stock option compensation
expense.
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.
On October 1, 2005, we completed the acquisition of The Gillette Company
("Gillette"), a leading consumer products company that had $10.5 billion of
sales in its most recent year ended December 31, 2004. The results of Gillette
will be included in our results starting with the quarter ending on December 31,
2005; accordingly, results for the three months ended September 30, 2005 do not
include any results related to Gillette.
Procter & Gamble markets approximately 300 consumer products in more than 160
countries. Our products are sold primarily through mass merchandisers, grocery
stores, membership club stores and drug stores. We compete in multiple product
categories and have three global business units: P&G Beauty, P&G Family Health
and P&G Household Care. Under U.S. Generally Accepted Accounting Principles, we
have five reportable segments: Beauty, Health Care, Baby Care & Family Care,
Fabric Care & Home Care, and Snacks & Coffee. We have operations in over 80
countries through our Market Development Organization, which leads country
business teams to build our brands in local markets and is organized along seven
geographic areas: North America, Western Europe, Northeast Asia, Latin America,
Central and Eastern Europe/Middle East/Africa, Greater China and
ASEAN/Australasia/India.
The following table provides the percentage of net sales and net earnings by
reportable business segment and global business unit for the three months ended
September 30, 2005 (excludes net sales and net earnings in Corporate):
NET SALES NET EARNINGS
BEAUTY 33% 36%
FAMILY HEALTH: 34% 31%
Health Care 14% 16%
Baby Care and Family Care 20% 15%
HOUSEHOLD CARE: 33% 33%
Fabric Care and Home Care 28% 30%
Snacks and Coffee 5% 3%
----------------- ---- ----
TOTAL 100% 100%
SUMMARY OF RESULTS. The following are highlights of the results for the quarter
ended September 30, 2005.
o Net sales increased eight percent and unit volume increased six percent.
Growth was broad-based with all regions growing volume and sales during
the period.
o Operating earnings increased 10 percent. Volume growth, pricing, and
scale leverage on overhead expenses were partially offset by higher
commodity costs and the impact of Hurricane Katrina.
o Net earnings grew four percent. Net earnings growth trailed operating
earnings growth as a result of the prior year impact of the sale of the
juice business and higher interest expenses associated with the
previously announced $18 to $22 billion share repurchase program related
to the Gillette acquisition.
o Diluted net earnings per share were $0.77, an increase of 10%, in-line
with operating earnings growth.
o Operating cash flow increased by 14 percent versus the comparable prior
year period. Free cash productivity was 87%, ahead of the prior year
period free cash productivity of 77%.
FORWARD LOOKING STATEMENTS. The markets in which the Company sells its products
are highly competitive and comprised of both global and local competitors. Going
forward, business and market uncertainties may affect results. Among the key
factors that could impact results and must be managed by the Company are:
(1) the ability to achieve business plans, including with respect to lower
income consumers and growing existing sales and volume profitably despite
high levels of competitive activity, especially with respect to the
product categories and geographical markets (including developing markets)
in which the Company has chosen to focus;
(2) the ability to successfully execute, manage and integrate key acquisitions
and mergers, including (i) the Domination and Profit Transfer Agreement
with Wella, and (ii) the Company's merger with The Gillette Company, and
to achieve the cost and growth synergies in accordance with the stated
goals of the Gillette transaction;
(3) the ability to manage and maintain key customer relationships;
(4) the ability to maintain key manufacturing and supply sources (including
sole supplier and plant manufacturing sources);
(5) the ability to successfully manage regulatory, tax and legal matters
(including product liability, patent, and other intellectual property
matters), and to resolve pending matters within current estimates;
(6) the ability to successfully implement, achieve and sustain cost
improvement plans in manufacturing and overhead areas, including the
Company's outsourcing projects;
(7) the ability to successfully manage currency (including currency issues in
volatile countries), debt (including debt related to the Company's
announced plan to repurchase shares of the Company's stock), interest rate
and certain commodity cost exposures;
(8) the ability to manage the continued global political and/or economic
uncertainty and disruptions, especially in the Company's significant
geographical markets, as well as any political and/or economic uncertainty
and disruptions due to terrorist activities;
(9) the ability to successfully manage competitive factors, including prices,
promotional incentives and trade terms for products;
(10) the ability to obtain patents and respond to technological advances
attained by competitors and patents granted to competitors;
(11) the ability to successfully manage increases in the prices of raw
materials used to make the Company's products;
(12) the ability to stay close to consumers in an era of increased media
fragmentation; and
(13) the ability to stay on the leading edge of innovation.
If the Company's assumptions and estimates are incorrect or do not come to
fruition, or if the Company does not achieve all of these key factors, then the
Company's actual results could vary materially from the forward-looking
statements made herein, as that term is defined in the Private Securities
Litigation Reform Act of 1995.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005
-------------------------------------------------------------
The following discussion provides a review of results for the three months ended
September 30, 2005 versus the three months ended September 30, 2004.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
Three Months Ended
September 30
-----------------------------------
2005 2004 % CHG
-----------------------------------
NET SALES $ 14,793 $ 13,744 8 %
COST OF PRODUCTS SOLD 7,159 6,623 8 %
-------------------------
GROSS MARGIN 7,634 7,121 7 %
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 4,577 4,332 6 %
-------------------------
OPERATING INCOME 3,057 2,789 10 %
TOTAL INTEREST EXPENSE 219 181
OTHER NON-OPERATING INCOME, NET 74 182
-------------------------
EARNINGS BEFORE INCOME TAXES 2,912 2,790 4 %
INCOME TAXES 883 848
NET EARNINGS $ 2,029 $ 1,942 4 %
=========================
EFFECTIVE TAX RATE 30.3 % 30.4 %
PER COMMON SHARE:
BASIC NET EARNINGS $ 0.82 $ 0.75 9 %
DILUTED NET EARNINGS $ 0.77 $ 0.70 10 %
DIVIDENDS $ 0.28 $ 0.25
AVERAGE DILUTED SHARES OUTSTANDING 2,649.7 2,766.1
COMPARISONS AS A % OF NET SALES
-------------------------------
GROSS MARGIN 51.6 % 51.8 % (20)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 30.9 % 31.5 % (60)
OPERATING MARGIN 20.7 % 20.3 % 40
EARNINGS BEFORE INCOME TAXES 19.7 % 20.3 % (60)
NET EARNINGS 13.7 % 14.1 % (40)
Unit volume for the July - September quarter grew six percent. Each of the
Company's geographic regions grew volume during the period, led by developing
markets with growth in the mid-teens. Beauty, family health, and household care
each delivered volume growth of six percent or greater. This growth reflects
progress on key brands and countries with all of the Company's top 10 brands and
countries growing versus the prior year period. Growth came largely behind new
product innovations across P&G's portfolio of brands such as Tide Coldwater,
Tide with Febreze, Dawn Bleach Alternative, Naturella expansion in Central and
Eastern Europe, Pampers Feel and Learn, and Charmin Mega-Roll. Organic volume,
which excludes the impacts of acquisitions and divestitures - primarily the
divestiture of the juice business during the prior year period - increased seven
percent.
Net sales for the quarter increased eight percent to $14.79 billion. Pricing
contributed one percent to sales growth behind actions taken in various
businesses and geographies that partially recovered the impact of higher
commodity costs. Favorable foreign exchange rates also contributed one percent
of sales growth. Organic sales, which exclude the impacts of acquisitions,
divestitures, and foreign exchange, also increased eight percent.
Volume
------------------------------
With
Acquisitions Without Total
& Acquisitions Mix/ Total Impact
Divestitures & Divestitures FX Price Other Impact Ex-FX
-------------- --------------- ------- ------- --------- --------- ---------
BEAUTY 7% 7% 1% 0% -1% 7% 6%
FAMILY HEALTH
HEALTH CARE 11% 11% 1% 1% 0% 13% 12%
BABY CARE AND FAMILY CARE 5% 6% 1% 1% -2% 5% 4%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 8% 8% 1% 2% 0% 11% 10%
SNACKS AND COFFEE -7% -7% 0% 5% -3% -5% -5%
TOTAL COMPANY 6% 7% 1% 1% 0% 8% 7%
NOTE: Sales percentage changes are approximations based on quantitative formulas that are consistently applied.
Gross margin decreased 20 basis points versus the prior year. Higher commodity
costs reduced gross margins by over 100 basis points. Fixed cost leverage from
volume growth, cost savings efforts and pricing did not fully offset the
commodity cost impact.
Selling, general, and administrative expenses (SG&A) increased six percent for
the quarter, but decreased as a percentage of net sales by 60 basis points. This
was primarily due to sales growth that outpaced the increase in SG&A spending.
The increase in spending was due primarily to higher marketing support spending
and higher overhead expenses, although both decreased as a percentage of sales.
Beauty increased marketing spending to support new product launches and
initiatives such as Lacoste Essentials, Always Cottony Soft, Naturella expansion
in Central and Eastern Europe, Pantene Color Expressions, and Olay Quench Hand &
Body Lotion. Baby care increased marketing spending primarily in North America
behind direct-to-consumer marketing investments.
Operating earnings increased 10 percent for the quarter to $3.06 billion.
Operating earnings growth was due primarily to strong top-line growth, pricing,
and scale leverage on overhead expenses. These benefits were partially offset by
higher commodity prices and costs associated with Hurricane Katrina. Hurricane
Katrina had a negative impact of approximately two percent on the Company's
operating earnings growth due primarily to the disruption of the coffee
business, write-offs of damaged inventory and physical assets, and clean-up and
repair costs.
Net earnings increased four percent to $2.03 billion in the current period. Net
earnings growth trailed operating earnings growth primarily due to the prior
year impact of the sale of the juice business and higher interest expenses in
the current period. Interest expenses for the quarter increased $38 million
versus the prior year period driven by the financing cost of the previously
announced $18 to $22 billion share repurchase program associated with the
Gillette acquisition. The Company repurchased $5.55 billion of P&G stock during
the quarter under the share repurchase program, bringing cumulative repurchases
under the program to $8.57 billion since January 2005. Interest expenses were
partially offset by favorable currency mix on our total debt.
Diluted net earnings per share were $0.77, an increase of 10%, in-line with
operating earnings growth. The impact of accelerated share repurchases, net of
associated interest and Gillette acquisition expenses was neutral on earnings
per share for the quarter.
BUSINESS SEGMENT DISCUSSION
---------------------------
The following discussion provides a review of results by business segment. An
analysis of the results for the three months ended September 30, 2005 are
compared to the same period ended September 30, 2004.
The table below provides supplemental information on net earnings by business
segment for the three months ended September 30, 2005 versus the comparable
prior year period:
Three Months Ended September 30, 2005
% Change Earnings % Change % Change
Versus Before Versus Versus
Net Sales Year Ago Income Taxes Year Ago Net Earnings Year Ago
----------------------------------------------------------------------------------
BEAUTY $ 4,989 7% $ 1,078 10% 783 16%
FAMILY HEALTH
HEALTH CARE 2,083 13% 501 39% 336 37%
BABY CARE AND FAMILY CARE 2,999 5% 510 2% 320 4%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 4,215 11% 963 10% 641 10%
SNACKS AND COFFEE 706 -5% 108 -10% 73 -6%
TOTAL BUSINESS SEGMENT 14,992 8% 3,160 11% 2,153 14%
CORPORATE (199) n/a (248) n/a (124) n/a
----------------------------------------------------------------------------------
TOTAL COMPANY 14,793 8% 2,912 4% 2,029 4%
BEAUTY
------
Beauty unit volume increased seven percent, led by growth in developing markets.
Growth was broad-based across hair care, skin care, and feminine care. The hair
care business was led by double-digit volume growth in developing markets and
globally on Pantene, Head & Shoulders and Rejoice. North America hair care
volume declined versus the prior year period primarily due to the
discontinuation of several minor brands. However, market share in US hair care
was flat overall and up on Pantene, Herbal Essences, and Aussie. Skin care
volume grew in upper single-digits led by double-digit growth on the Olay brand.
Feminine care delivered volume growth in the upper single-digits behind double-
digit growth on Always and Naturella. Net sales in beauty increased seven
percent to $4.99 billion. Foreign exchange added one percent of sales growth.
Mix reduced sales by one percent as a result of faster growth in developing
markets, where unit sales price is generally lower than the global business unit
average. Net earnings increased 16 percent to $783 million. Earnings growth was
driven by top-line growth, scale benefits, and savings from the Wella
integration. These were partially offset with increased marketing spending
behind new product launches such as Lacoste Essentials, Always Cottony Soft,
Naturella expansion in Central and Eastern Europe, Pantene Color Expressions and
Olay Quench Hand & Body lotion.
FAMILY HEALTH
-------------
Health care delivered double-digit volume, sales and earnings growth. Unit
volume increased 11 percent behind double-digit growth in pharmaceuticals &
personal health, and high single-digit growth in oral care. Pharmaceuticals &
personal health grew primarily behind double-digit volume increase on Actonel
and Prilosec OTC. Prilosec OTC volume more than doubled versus the prior year
level, largely driven by accelerated sales ahead of a mid-September price
increase as well as share growth versus the prior year. Given this advanced
shipping effect, we expect shipment growth in the quarter ending December 31,
2005 to moderate versus shipment levels in the current quarter ended September
30, 2005. In addition, Prilosec OTC volume was suppressed in the base period by
shipment allocation. Oral care volume grew in high single-digits led by double-
digit growth in developing markets. Health care net sales increased 13 percent
to $2.08 billion. Pricing actions in the prior fiscal year on pharmaceuticals &
personal health and pet health & nutrition added one percent to sales growth.
Foreign exchange also contributed one point of sales growth. Net earnings
increased 37 percent to $336 million. The net earnings increase resulted from
volume growth, product mix benefits, and a favorable base period comparison.
Baby care and family care unit volume increased five percent with balanced
growth in both businesses. Volume growth was driven behind initiatives such as
Pampers Feel and Learn and Charmin Mega-Roll. Net sales increased five percent
to $3.00 billion including a positive foreign exchange impact of one percent.
Pricing added one percent to sales growth behind the carryover impact of prior
fiscal year increases in family care. Additionally, recent price increases in
North America baby care more than offset competitive merchandising spending in
Western Europe baby care. Mix reduced sales by two percent primarily due to
growth in mid-tier products such as Bounty Basic and in developing markets,
where unit sales price is generally lower than the global business unit average.
Earnings increased four percent to $320 million driven primarily by volume
growth. The benefits of cost savings efforts and pricing were largely offset by
higher pulp and natural gas prices and increases in direct-to-consumer marketing
investments in baby care.
HOUSEHOLD CARE
--------------
Fabric care and home care volume increased eight percent behind growth on Tide,
Ariel, Downy, and Dawn. Growth was driven by new initiatives that began shipping
this quarter, such as Tide with Febreze and Dawn Direct Foam, as well as the
incremental benefit of prior year initiatives such as Tide Coldwater, Tide with
a Touch of Downy, Ariel Ion Power Gel, Dawn Bleach Alternative, and Downy Simple
Pleasures. Net sales increased 11 percent to $4.21 billion including a one
percent increase from foreign exchange rates. The benefit of prior price
increases, primarily in North America and Latin America, helped to offset higher
commodity costs and increased sales by two percent. Net earnings increased 10
percent to $641 million behind the impacts of volume growth, pricing, ongoing
savings programs, and foreign exchange gains from developing market currencies.
These benefits were partially offset by rising commodity prices.
Snacks and coffee results were impacted by Hurricane Katrina. The business
experienced business disruption and damages to our manufacturing facilities in
New Orleans. Unit volume declined seven percent primarily due to reduced coffee
shipments in September. Net sales declined by five percent to $706 million.
Coffee price increases taken last fiscal year in response to higher bean costs
added five percent to sales growth. Mix effects reduced sales by three percent.
Net earnings were $73 million, down six percent driven primarily by the business
disruption and other damages associated with Hurricane Katrina.
CORPORATE
---------
Corporate includes certain operating and non-operating activities not allocated
to specific business units. These include incidental businesses managed at the
corporate level, financing and investing activities, certain restructuring
charges and other general corporate items. Eliminations to adjust management
reporting principles to United States Generally Accepted Accounting Principles
(U.S. GAAP) are held in Corporate. In addition, Corporate includes the
historical results of divested businesses, including the juice business, which
was divested in August of 2004.
For the quarter, net sales were impacted by the divestiture of the juice
business, which recorded roughly one month of sales in the corporate segment
during the base period. Net earnings in corporate were reduced primarily as a
result of the base period gain on the sale of the juice business of $79 million
and increased interest expenses. The increase in interest expenses was driven by
the financing cost of the share repurchase program related to Gillette partially
offset by favorable currency mix on our debt.
FINANCIAL CONDITION
-------------------
OPERATING ACTIVITIES
--------------------
Cash generated from operating activities for the three months ended September
30, 2005 was $2.17 billion compared to $1.91 billion in the prior year period,
an increase of 14%. The increase in cash from operating activities was driven by
earnings growth adjusted for non-cash items (depreciation, amortization, stock
based compensation and deferred income taxes). Deferred income tax expense
increased $139 million driven primarily by the settlement of deferred tax
liabilities on foreign exchange movements related to bonds which matured during
the quarter. These were partially offset by a net increase in working capital
due primarily to business growth.
INVESTING ACTIVITIES
--------------------
Investing activities in the current year used $1.57 billion compared to $598
million in the prior year. The increase was driven primarily by the settlement
of a major portion of the Wella domination liability, which increased our total
ownership in Wella to over 95%. Capital expenditures were $401 million, or three
percent of net sales. Proceeds from asset sales decreased by $340 million due to
the sale of the juice business, which was sold during the base period.
FINANCING ACTIVITIES
--------------------
Financing activities used net cash of $616 million in the current year compared
to a use of cash of $765 million in the base period. During the quarter, the
Company repurchased $5.55 billion of P&G stock as part of the repurchase program
associated with the Gillette acquisition. This brings cumulative share
repurchases under the plan to $8.57 billion. The cash used for the repurchase
program was funded by debt, which had a net increase of $5.52 billion in the
quarter.
NON-GAAP MEASURES
-----------------
Our discussion of financial results includes several measures not defined by
U.S. GAAP. We believe these measures provide our investors with additional
information about the underlying results and trends of the Company, as well as
insight to some of the metrics used to evaluate management. When used in the
MD&A, we have provided the comparable GAAP measure in the discussion.
ORGANIC SALES GROWTH. Organic sales growth is a non-GAAP measure of sales growth
excluding the impacts of acquisitions, divestitures and foreign exchange from
year-over-year comparisons. We believe this provides investors with a more
complete understanding of underlying sales trends by providing sales growth on a
consistent basis. The reconciliation of reported sales growth to organic sales
growth:
Total Sales Growth 8%
Less: Foreign Exchange Impact 1%
Less: Acquisition/Divestiture Impact -1%
---
Organic Sales Growth 8%
OTHER MEASURES
--------------
FREE CASH FLOW. Free cash flow is defined as operating cash flow less capital
spending. We view free cash flow as an important measure because it is one
factor in determining the amount of cash available for dividends and
discretionary investment. Free cash flow is also one of the measures used to
evaluate senior management and is a factor in determining their at-risk
compensation.
FREE CASH FLOW PRODUCTIVITY. Free cash flow productivity is defined as the ratio
of free cash flow to net earnings. The Company's long-term target is to generate
free cash at or above 90 percent of net earnings. Free cash flow is also one of
the measures used to evaluate senior management.
The reconciliation of free cash flow and free cash flow productivity is provided
below:
Operating Capital Free Net Free Cash
($MM) Cash Flow Spending Cash Flow Earnings Flow Productivity
--------------------------------------------------------------------------------
Jul-Sep'04 1,912 413 1,499 1,942 77%
Jul-Sep'05 2,171 401 1,770 2,029 87%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's exposure to market risk
since June 30, 2005. See Item 7A in the Company's Annual Report on Form 10-K for
the year ended June 30, 2005.
Item 4. Controls and Procedures
The Company's Chairman of the Board, President and Chief Executive, A.G. Lafley,
and the Company's Chief Financial Officer, Clayton C. Daley, Jr., have evaluated
the Company's internal controls and disclosure controls systems as of the end of
the period covered by this report.
Messrs. Lafley and Daley have concluded that the Company's disclosure controls
systems are functioning effectively to provide reasonable assurance that the
Company can meet its disclosure obligations. The Company's disclosure controls
system is based upon a global chain of financial, staff and general business
reporting lines that converge in the world-wide headquarters of the Company in
Cincinnati, Ohio. The reporting process is designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
with the Commission is recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms. Consistent with the
SEC's suggestion, the Company has a Disclosure Committee consisting of key
Company personnel designed to review the accuracy and completeness of all
disclosures made by the Company.
In connection with the evaluation described above, no changes in the Company's
internal control over financial reporting occurred during the Company's first
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In October 2005, The Procter & Gamble Paper Products Company, a subsidiary of
the Company, received an offer of settlement from the Ventura County Air
Pollution Control District to settle alleged non-compliance with air rules
standards concerning the subsidiary's Oxnard, California plant. As a result of
this offer, the Company anticipates negotiating a settlement to resolve these
issues. No judicial proceeding is pending. The Company's liability is estimated
not to exceed $406,000.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate dollar
Total Number of value of shares that
Shares Purchased as may yet be purchased
Part of Publicly under our share
Total Number of Average Price Paid Announced Plans or repurchase program
Period Shares Purchased(1) per Share(2) Programs(3) ($ in Billions)(3)
--------------------------------------------------------------------------------------------------------
7/1/05-7/31/05 16,266,380 $54.90 12,552,408 18.3
8/1/05-8/31/05 44,075,287 $54.56 44,039,700 15.9
9/1/05-9/30/05 43,851,798 $56.06 43,850,200 13.4
(1) All share repurchases were made in open-market transactions. The number of
shares purchased other than through a publicly announced repurchase plan
were 3,751,157 for the quarter, including those purchased by P&G's Profit
Sharing Trust. This table excludes shares withheld from employees to
satisfy minimum tax withholding requirements on option exercises and other
equity-based transactions. The Company administers employee cashless
exercises through an independent, third party broker and does not
repurchase stock in connection with cashless exercises.
(2) Average price paid per share is calculated on a settlement basis and
excludes commission.
(3) On January 28, 2005 the Company announced a share buyback plan in
connection with its planned acquisition of The Gillette Company. Pursuant
to the plan, the Board of Directors authorized the Company and its
subsidiaries to acquire in open market and/or private transactions $18 to
$22 billion of shares of Company common stock to be financed by issuing a
combination of long-term and short-term debt. The share repurchases are
expected to be largely completed by June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders:
At the Company's 2005 Annual Meeting of Shareholders held on October 11, 2005,
the following actions were taken:
The following Directors were elected for terms of office expiring in 2008:
Broker
Votes Non-
Votes For Withheld Abstentions* Votes*
--------------------------------------------------------------------------------
BRUCE L. BYRNES 2,299,014,851 39,766,334 N/A N/A
SCOTT D. COOK 2,307,794,743 30,986,442 N/A N/A
CHARLES R. LEE 2,280,419,589 58,361,596 N/A N/A
W. JAMES MCNERNEY, JR. 2,305,731,180 33,050,005 N/A N/A
ERNESTO ZEDILLO 2,306,443,283 32,337,902 N/A N/A
* Pursuant to the terms of the Notice of Annual Meeting and Proxy Statements,
proxies received were voted, unless authority was withheld, in favor of the
election of the five nominees named.
In addition, the following Directors continued to serve as Directors after the
meeting:
Norman R. Augustine
R. Kerry Clark
Joseph T. Gorman
A. G. Lafley
Lynn M. Martin
Johnathan A. Rodgers
John F. Smith, Jr.
Ralph Snyderman
Robert D. Storey
Margaret C. Whitman
A proposal by the Board of Directors to ratify the appointment of Deloitte &
Touche LLP as the Company's independent registered public accounting firm to
conduct the annual audit of the financial statements of the Company and its
subsidiaries for the fiscal year ending June 30, 2006, was approved by the
shareholders. The shareholders cast 2,275,288,282 votes in favor of this
proposal and 42,037,800 votes against. There were 21,455,103 abstentions.
A proposal by the Board of Directors to approve an amendment to the Amended
Articles of Incorporation and Code of Regulations to eliminate the Executive
Committee of the Board was approved by the shareholders. The shareholders cast
2,299,147,779 votes in favor of this proposal and 12,874,560 votes against.
There were 26,758,846 abstentions.
A proposal by the Board of Directors to approve an amendment to the Code of
Regulations to provide for the annual election of Directors was approved by the
shareholders. The shareholders cast 2,277,105,529 votes in favor of this
proposal and 37,632,055 votes against. There were 24,043,601 abstentions.
A shareholder resolution proposed by the People for the Ethical Treatment of
Animals was defeated by the shareholders. The proposal requested that the Board
report to shareholders on the Company's success and failure in achieving the
objectives detailed in the Iams Company's Research Policy. The Board opposed the
resolution. The shareholders cast 113,983,232 votes in favor of the resolution
and 1,573,383,713 against. There were 182,422,692 abstentions and 468,991,548
broker non-votes.
A shareholder resolution proposed by Mark Klein, M.D. was defeated by the
shareholders. The proposal requested that the Company hire an investment bank to
explore the sale of the Company. The Board opposed the resolution. The
shareholders cast 33,665,692 votes in favor of the resolution and 1,799,274,270
against. There were 36,858,496 abstentions and 468,982,727 broker non-votes.
A shareholder resolution proposed by the Laborers' Local Union and District
Counsil Pension Fund was defeated by the shareholders. The proposal requested
that the Company provide a report disclosing the Company's political
contributions. The Board opposed the resolution. The shareholders cast
154,505,994 votes in favor of the resolution and 1,540,395,250 against. There
were 174,878,842 abstentions and 469,001,099 broker non-votes.
Although these actions occurred following the first quarter, the Company is
voluntarily including this information here.
Item 6. Exhibits
Exhibits
(3-1) Amended Articles of Incorporation.
(3-2) Regulations.
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(18) Deloitte & Touche Preferability Letter.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PROCTER & GAMBLE COMPANY
/S/VALARIE L. SHEPPARD
------------------------------
(Valarie L. Sheppard)
Vice President and Comptroller
November 2, 2005
------------------------------
Date
EXHIBIT INDEX
Exhibit No.
(3-1) Amended Articles of Incorporation.
(3-2) Regulations.
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(18) Deloitte & Touche Preferability Letter.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.