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 December 31, 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 a large 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 3,289,109,964 shares of Common Stock outstanding as of December 31,
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 and six months ended
December 31, 2005 and 2004, the Consolidated Balance Sheets as of December 31,
2005 and June 30, 2005, and the Consolidated Statements of Cash Flows for the
six months ended December 31, 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 necessarily be indicative of annual results.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in millions except per share amounts
Three Months Ended Six Months Ended
December 31 December 31
---------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
NET SALES $ 18,337 $ 14,452 $ 33,130 $ 28,196
Cost of products sold 8,732 6,885 15,891 13,508
Selling, general and
administrative expense 5,713 4,585 10,290 8,917
-------------- -------------- -------------- --------------
OPERATING INCOME 3,892 2,982 6,949 5,771
Interest expense 299 200 518 381
Other non-operating income, net 68 55 142 237
-------------- -------------- -------------- --------------
EARNINGS BEFORE INCOME TAXES 3,661 2,837 6,573 5,627
Income taxes 1,115 862 1,998 1,710
-------------- -------------- -------------- --------------
NET EARNINGS $ 2,546 $ 1,975 $ 4,575 $ 3,917
============== ============== ============== ==============
PER COMMON SHARE:
Basic net earnings $ 0.76 $ 0.77 $ 1.57 $ 1.52
Diluted net earnings $ 0.72 $ 0.72 $ 1.48 $ 1.42
Dividends $ 0.28 $ 0.25 $ 0.56 $ 0.50
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 3,547.0 2,752.1 3,098.0 2,759.1
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions
December 31 June 30
ASSETS 2005 2005
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 7,816 $ 6,389
Investment securities 1,996 1,744
Accounts receivable 6,056 4,185
Inventories
Materials and supplies 1,598 1,424
Work in process 652 350
Finished goods 4,187 3,232
------------ ------------
Total inventories 6,437 5,006
Deferred income taxes 1,340 1,081
Prepaid expenses and other current assets 2,780 1,924
------------ ------------
TOTAL CURRENT ASSETS 26,425 20,329
PROPERTY, PLANT AND EQUIPMENT
Buildings 5,687 5,292
Machinery and equipment 24,221 20,397
Land 847 636
------------ ------------
30,755 26,325
Accumulated depreciation (12,530) (11,993)
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT 18,225 14,332
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 52,792 19,816
Trademarks and other intangible assets, net 35,701 4,347
------------ ------------
NET GOODWILL AND OTHER INTANGIBLE ASSETS 88,493 24,163
OTHER NON-CURRENT ASSETS 3,379 2,703
------------ ------------
TOTAL ASSETS $ 136,522 $ 61,527
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,904 $ 3,802
Accrued and other liabilities 9,496 7,531
Taxes payable 2,497 2,265
Debt due within one year 4,608 11,441
------------ ------------
TOTAL CURRENT LIABILITIES 20,505 25,039
LONG-TERM DEBT 31,394 12,887
DEFERRED INCOME TAXES 13,911 1,896
OTHER NON-CURRENT LIABILITIES 4,298 3,230
------------ ------------
TOTAL LIABILITIES 70,108 43,052
SHAREHOLDERS' EQUITY
Preferred stock 1,469 1,483
Common stock - shares issued - Dec 3 3,965.7 3,966
June 30 2,976.6 2,977
Additional paid-in capital 57,062 3,030
Reserve for ESOP debt retirement (1,273) (1,259)
Accumulated other comprehensive income (1,557) (1,566)
Treasury stock (27,002) (17,194)
Retained earnings 33,749 31,004
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 66,414 18,475
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 136,522 $ 61,527
============= =============
See accompanying Notes to Consolidated Financial Statements
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
Amounts in millions December 31
--------------------------
2005 2004
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 6,389 $ 4,232
OPERATING ACTIVITIES
Net earnings 4,575 3,917
Depreciation and amortization 1,158 928
Share-based compensation expense 208 218
Deferred income taxes 271 345
Changes in:
Accounts receivable (957) (387)
Inventories 73 (582)
Accounts payable, accrued and other liabilities (617) (490)
Other operating assets and liabilities (96) (171)
Other 131 185
----------- -----------
TOTAL OPERATING ACTIVITIES 4,746 3,963
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (1,029) (911)
Proceeds from asset sales 339 367
Acquisitions 249 (351)
Change in investment securities 39 (111)
----------- -----------
TOTAL INVESTING ACTIVITIES (402) (1,006)
----------- -----------
FINANCING ACTIVITIES
Dividends to shareholders (1,691) (1,335)
Change in short-term debt (5,468) 50
Additions to long-term debt 15,412 3,041
Reductions of long-term debt (2,602) (1,565)
Impact of stock options and other 510 217
Treasury purchases (9,032) (1,633)
----------- -----------
TOTAL FINANCING ACTIVITIES (2,871) (1,225)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (46) 437
CHANGE IN CASH AND CASH EQUIVALENTS 1,427 2,169
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,816 $ 6,401
=========== ===========
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 and six-month periods ended December 31, 2005 are not
necessarily indicative 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 December
31, 2005 and 2004 was $2,474 million and $2,938 million, respectively. For
the six months ended December 31, 2005 and 2004, total comprehensive income
was $4,584 million and $5,096 million, respectively.
3. Segment Information - Following is a summary of segment results. As noted
in footnote 4, the Company acquired The Gillette Company on October 1,
2005. Accordingly, results of the acquired Gillette businesses are only
included in segment results for the three months ended December 31, 2005.
SEGMENT INFORMATION
Amounts in millions
Three Months Ended December 31 Six Months Ended December 31
---------------------------------------- -----------------------------------------
Earnings Before Earnings Before
Net Sales Income Taxes Net Earnings Net Sales Income Taxes Net Earnings
---------------------------------------- -----------------------------------------
Beauty 2005 $ 5,370 $ 1,166 $ 848 $ 10,359 $ 2,244 $ 1,631
2004 5,022 1,139 794 9,677 2,122 1,468
--------------------------------------------------- -------------------------------------------
Health Care 2005 2,639 635 427 4,722 1,136 763
2004 2,043 458 302 3,887 818 547
Baby Care & Family Care 2005 3,036 521 330 6,035 1,031 650
2004 2,978 559 347 5,828 1,060 656
---------------------------------------- -----------------------------------------
Family Health 2005 5,675 1,156 757 10,757 2,167 1,413
2004 5,021 1,017 649 9,715 1,878 1,203
--------------------------------------------------- -------------------------------------------
Fabric Care & Home Care 2005 4,081 888 593 8,296 1,851 1,234
2004 3,784 814 550 7,594 1,691 1,135
Snacks & Coffee 2005 927 144 95 1,633 252 168
2004 846 183 120 1,586 303 198
---------------------------------------- -----------------------------------------
Household Care 2005 5,008 1,032 688 9,929 2,103 1,402
2004 4,630 997 670 9,180 1,994 1,333
--------------------------------------------------- -------------------------------------------
Blades & Razors 2005 1,153 375 272 1,153 375 272
2004 - - - - - -
Duracell & Braun 2005 1,279 243 165 1,279 243 165
2004 - - - - - -
---------------------------------------- -----------------------------------------
Gillette Business Unit 2005 2,432 618 437 2,432 618 437
2004 - - - - - -
--------------------------------------------------- -------------------------------------------
Corporate 2005 (148) (311) (184) (347) (559) (308)
2004 (221) (316) (138) (376) (367) (87)
--------------------------------------------------- -------------------------------------------
Total 2005 $ 18,337 $ 3,661 $ 2,546 $ 33,130 $ 6,573 $ 4,575
2004 14,452 2,837 1,975 28,196 5,627 3,917
--------------------------------------------------- -------------------------------------------
4. On October 1, 2005, we completed our acquisition of The Gillette Company.
Pursuant to the acquisition agreement, which provided for the exchange of
0.975 shares of The Procter & Gamble Company common stock, on a tax-free
basis, for each share of The Gillette Company, we issued 962 million shares
of The Procter & Gamble Company common stock. The value of these shares
was determined using the average of Company stock prices beginning two days
before and ending two days after January 28, 2005, the date the acquisition
was announced. We also issued 79 million stock options in exchange for
Gillette's outstanding stock options. Under the purchase method of
accounting, the total consideration was approximately $53.5 billion
including common stock, the fair value of vested stock options and
acquisition costs. The acquisition is reflected in our consolidated
financial statements beginning in the three months ended 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 The
Gillette Company during its most recent year ended December 31, 2004 were
$10.5 billion.
In order to obtain regulatory approval of the transaction, we were required
to divest certain overlapping businesses. We completed the divestitures of
the Spinbrush toothbrush business and Rembrandt, a Gillette oral care
product line during the three months ended December 31, 2005. We will also
divest Right Guard, a Gillette deodorant and will make Soft & Dri and Dry
Idea, Gillette deodorant brands, available for purchase by the Right Guard
buyer.
In connection with the Gillette acquisition, we also announced a share
buyback plan to acquire $18 to $22 billion of Company common stock in the
open market or from private transactions. We have now narrowed the
anticipated total repurchase to about $20 billion of Company common stock.
Through December 31, 2005, we repurchased $12.0 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.
We are in the process of obtaining independent appraisals for the purpose
of allocating the purchase price to the individual assets acquired and
liabilities assumed. This will result in potential adjustments to the
carrying value of Gillette's recorded assets and liabilities, the
establishment of certain additional intangible assets, revisions of the
useful lives of intangible assets, some of which will have indefinite lives
not subject to amortization, and the determination of any residual amount
that will be allocated to goodwill. The preliminary allocation of the
purchase price included in the current period balance sheet is based on the
best estimates of management and is subject to revision based on final
determination of asset fair values and useful lives. The related
depreciation and amortization expense from the acquired assets is also
subject to such revisions.
We are also in the process of completing our analysis of integration plans,
pursuant to which the Company will incur costs primarily related to the
elimination of selling, general and administrative overlap between the two
companies in areas like Global Business Services, corporate staff, and
go-to-market support. Our preliminary estimate of the exit costs for these
activities relating to the acquired Gillette business that have been
recognized as an assumed liability is $1.1 billion.
The following table presents the preliminary allocation of purchase price
related to the Gillette business as of the date of acquisition (amounts in
millions).
Current assets $ 5,145
Property, plant and equipment 3,825
Goodwill 33,151
Intangible assets 31,519
Other non-current assets 915
------------------------------------------------
Total assets acquired $ 74,555
------------------------------------------------
Current liabilities 5,028
Non-current liabilities 16,070
Total liabilities assumed 21,098
------------------------------------------------
Net assets acquired $ 53,457
------------------------------------------------
The majority of the goodwill has been preliminarily allocated to the
segments comprising the Gillette businesses (Blades & Razors, Duracell &
Braun, Health Care and Beauty) A portion of the goodwill has been
preliminarily allocated to the other segments on the basis that certain
cost synergies will benefit these businesses. See Note 5 for the
preliminary allocation of goodwill to the segments.
We have preliminarily estimated the fair value of Gillette's identifiable
intangible assets as $31,519 million. The preliminary allocation of
identifiable intangible assets is as follows (amounts in millions):
Average
Estimated Remaining
Fair Value Useful Life
---------- -----------
Asset Class:
Brand Intangibles - indefinite lived $ 23,589 Indefinite
Brand Intangibles - definite lived 2,932 16 years
Technology 3,735 14 years
Customer Relationships 1,263 24 years
--------
$ 31,519
The majority of this intangible valuation relates to brand intangibles. Our
preliminary assessment as to brand intangibles that have an indefinite life
and those that have a definite life was based on a number of factors,
including competitive environment, market share, brand history, product
life cycles, operating plan and the macroeconomic environment of the
countries in which the brands are sold. The indefinite-lived brand
intangibles include Gillette, Duracell, Oral B and Braun. The
definite-lived brand intangibles comprise of certain global brand sub-names
such as Mach 3 and Sensor in the blades and razors business and other
regional or local brands. The definite-lived brand intangibles have asset
lives ranging from 5 to 20 years. The technology intangibles are
concentrated in the blades and razors and oral care businesses. The
customer relationships intangibles have asset lives ranging from 20 to 30
years based on the very low historical and projected customer attrition
rates among major retailers and distributors.
The following table provides pro forma results of operations for the six
months ended December 31, 2005 and 2004 and for the three months ended
December 31, 2004 as if Gillette had been acquired as of the beginning of
each fiscal year presented. The pro forma results include certain purchase
accounting adjustments such as the estimated changes in depreciation and
amortization expense on acquired tangible and intangible assets. However,
pro forma results do not include any anticipated cost savings or other
effects of the planned integration of Gillette. 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 (amounts in millions).
Six Months Ended Three Months Ended
December 31 December 31
------------------ ------------------
2005 2004 2004
------------------ ------------------
Net Sales $ 35,913 $ 33,995 $ 17,560
Net Earnings 4,763 4,691 2,332
Diluted Net Earnings
per Common Share $ 1.33 $ 1.25 $ 0.62
5. Goodwill and Other Intangible Assets - Goodwill as of December 31, 2005 is
allocated by reportable segment and global business unit as follows
(amounts in millions):
Six Months Ended
December 31, 2005
-------------------------
Total Beauty, beginning of year $ 14,580
Acquisitions & divestiture 3,137
Translation & other (111)
Goodwill, December 31, 2005 17,606
Health Care, beginning of year 3,378
Acquisitions & divestiture 4,087
Translation & other (5)
Goodwill, December 31, 2005 7,460
Baby Care & Family Care, beginning of year 955
Acquisitions & divestiture 1,056
Translation & other 7
Goodwill, December 31, 2005 2,018
Total Family Health, beginning of year 4,333
Acquisitions & divestiture 5,143
Translation & other 2
Goodwill, December 31, 2005 9,478
Fabric Care & Home Care, beginning of year 644
Acquisitions & divestiture 1,383
Translation & other (2)
Goodwill, December 31, 2005 2,025
Snacks & Coffee, beginning of year 259
Acquisitions & divestiture 285
Translation & other (1)
Goodwill, December 31, 2005 543
Total Household Care, beginning of year 903
Acquisitions & divestiture 1,668
Translation & other (3)
Goodwill, December 31, 2005 2,568
Blades & Razors, beginning of year -
Acquisitions & divestiture 18,922
Translation & other -
Goodwill, December 31, 2005 18,922
Duracell & Braun, beginning of year -
Acquisitions & divestiture 4,218
Translation & other -
Goodwill, December 31, 2005 4,218
Total Gillette Business Unit, beginning of year -
Acquisitions & divestiture 23,140
Translation & other -
Goodwill, December 31, 2005 23,140
Goodwill, Net, beginning of year 19,816
Acquisitions & divestiture 33,088
Translation & other (112)
Goodwill, December 31, 2005 $ 52,792
The increase in goodwill from June 30, 2005 is primarily due to the
preliminary allocation of the purchase price relating to the acquisition of
The Gillette Company.
Identifiable intangible assets as of December 31, 2005 are comprised of
(amounts in millions):
Gross Carrying Accumulated
Amount Amortization
-------------------------------
Amortizable intangible assets with
determinable lives $ 10,242 $ 925
Intangible assets with indefinite lives 26,384 -
-------------------------------
Total identifiable intangible assets $ 36,626 $ 925
-------------------------------
Amortizable intangible assets consist principally of patents, technology
and trademarks. The non-amortizable intangible assets consist primarily of
trademarks.
The amortization of intangible assets for the three and six months ended
December 31, 2005 was $187 million and $236 million, respectively.
6. 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.
Total share-based compensation for the three months and six months ended
December 31, 2005 and 2004 can be found in the following table (amounts in
millions):
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- ----------------------------
2005 2004 2005 2004
------------- ------------ ------------ -------------
Share-Based Compensation
Stock Options $ 104 $ 88 $ 177 $ 170
Other Share-Based Awards 9 8 31 48
------------- ------------ ------------ -------------
Total Share-Based Compensation $ 113 $ 96 $ 208 $ 218
------------- ------------ ------------ -------------
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.
7. Postretirement Benefits - The Company offers various postretirement
benefits to its employees.
The components of net periodic benefit cost are as follows:
Amounts in millions
Pension Benefits Other Retiree Benefits
---------------------------------- ----------------------------------
Three Months Ended Three Months Ended
December 31 December 31
---------------------------------- ----------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Service Cost $ 73 $ 40 $ 24 $ 17
Interest Cost 106 60 46 37
Expected Return on Plan Assets (101) (46) (94) (84)
Amortization of Prior Service Cost and
Prior Transition Amount 2 2 (4) (6)
Recognized Net Actuarial Loss 18 8 - -
------------- ------------- ------------- -------------
Gross Benefit Cost 98 64 (28) (36)
Dividends on ESOP Preferred Stock - - (19) (18)
------------- ------------- ------------- -------------
Net Periodic Benefit Cost $ 98 $ 64 $ (47) $ (54)
============= ============= ============= =============
Pension Benefits Other Retiree Benefits
---------------------------------- ----------------------------------
Six Months Ended Six Months Ended
December 31 December 31
---------------------------------- ----------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Service Cost $ 120 $ 78 $ 48 $ 34
Interest Cost 167 118 85 73
Expected Return on Plan Assets (148) (89) (184) (167)
Amortization of Prior Service Cost and
Prior Transition Amount 4 3 (9) (11)
Recognized Net Actuarial Loss 37 16 1 -
------------- ------------- ------------- -------------
Gross Benefit Cost 180 126 (59) (71)
Dividends on ESOP Preferred Stock - - (38) (36)
------------- ------------- ------------- -------------
Net Periodic Benefit Cost $ 180 $ 126 $ (97) $ (107)
============= ============= ============= =============
In 2005, the expected return on plan assets is 7.3% and 9.3% for defined
benefit and other retiree benefit plans, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is organized in the following sections:
Overview
Results of Operations - Three Months Ended December 31, 2005
Results of Operations - Six Months Ended December 31, 2005
Business Segment Discussion (three and six months ended December 31, 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
are included in the Financial Statements and Management's Discussion and
Analysis for the three months ended December 31, 2005. In order to provide our
investors with more insight into the results of the Blades & Razors and Duracell
& Braun reporting segments, we have previously provided supplemental pro forma
net sales and earnings data for these segments for each of the quarters in the
Gillette Company's year ended June 30, 2005 (as presented in our Form 8-K
released October 4, 2005). Management's discussion of the current quarter
results of these two segments is in relation to such comparable prior year pro
forma net sales and earnings data.
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 four global business units: P&G Beauty, P&G Family Health,
P&G Household Care, and Gillette. Under U.S. Generally Accepted Accounting
Principles, we have seven reportable segments: Beauty, Health Care, Baby Care &
Family Care, Fabric Care & Home Care, Snacks & Coffee, Blades & Razors, and
Duracell & Braun. We have operations in over 80 countries through our Market
Development Organization, which leads country business teams to build our brands
in local markets and is organized along seven geographic areas: North America,
Western Europe, Northeast Asia, Latin America, Central and Eastern Europe/Middle
East/Africa, Greater China and ASEAN/Australasia/India.
The following table provides the percentage of net sales and net earnings by
business segment for the six months ended December 31, 2005 (excludes net sales
and net earnings in Corporate):
Net Sales Net Earnings
Beauty 31% 33%
Family Health: 32% 29%
Health Care 14% 16%
Baby Care and Family Care 18% 13%
Household Care: 30% 29%
Fabric Care and Home Care 25% 25%
Snacks and Coffee 5% 4%
Gillette Business Unit: 7% 9%
Blades and Razors 3% 6%
Duracell and Braun 4% 3%
------------------ ---- ----
Total 100% 100%
Note: Calculations above are based on only 3 months of Gillette results
(October - December)
The following table provides the percentage of net sales and net earnings by
business segment for the three months ended December 31, 2005 (excludes net
sales and net earnings in Corporate):
Net Sales Net Earnings
Beauty 29% 31%
Family Health: 31% 28%
Health Care 14% 16%
Baby Care and Family Care 17% 12%
Household Care: 27% 25%
Fabric and Home Care 22% 22%
Snacks and Coffee 5% 3%
Gillette Business Unit: 13% 16%
Blades and Razors 6% 10%
Duracell and Braun 7% 6%
------------------ ---- ----
Total 100% 100%
SUMMARY OF RESULTS. Following are highlights of results for the six months
ended December 31, 2005:
o Unit volume increased 17 percent. Organic volume, which excludes the
impact of acquisitions and divestitures, increased seven percent.
Growth was broad-based with every business unit and every geographic
region delivering organic volume increases.
o Net sales increased 17 percent to $33.13 billion. Organic sales, which
exclude the impacts of foreign exchange, acquisitions, and
divestitures, increased seven percent.
o Net earnings increased 17 percent to $4.58 billion behind strong
organic growth and the addition of the Gillette business, partially
offset by increased commodity costs and acquisition-related expenses.
o Diluted net earnings per share were $1.48, an increase of four percent
versus the comparable prior year period.
o Operating cash flow was $4.75 billion, an increase of 20 percent versus
the prior year period. Free cash flow productivity was 81 percent.
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 Company's acquisition of
The Gillette Company, including the ability to achieve the cost and
growth synergies in accordance with the stated goals of the
transaction and (ii), the Domination and Profit Transfer Agreement
with Wella;
(3) the ability to manage and maintain key customer relationships;
(4) the ability to maintain key manufacturing and supply sources
(including sole supplier and plant manufacturing sources);
(5) the ability to successfully manage regulatory, tax and legal matters
(including product liability, patent, and other intellectual property
matters), and to resolve pending matters within current estimates;
(6) the ability to successfully implement, achieve and sustain cost
improvement plans in manufacturing and overhead areas, including the
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 DECEMBER 31, 2005
------------------------------------------------------------
The following discussion provides a review of results for the three months ended
December 31, 2005 versus the three months ended December 31, 2004.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
Three Months Ended
December 31
--------------------------------------------------
2005 2004 % CHG
--------------------------------------------------
NET SALES $ 18,337 $ 14,452 27 %
COST OF PRODUCTS SOLD 8,732 6,885 27 %
--------------------------------------------------
GROSS MARGIN 9,605 7,567 27 %
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 5,713 4,585 25 %
--------------------------------------------------
OPERATING INCOME 3,892 2,982 31 %
TOTAL INTEREST EXPENSE 299 200
OTHER NON-OPERATING INCOME, NET 68 55
--------------------------------------------------
EARNINGS BEFORE INCOME TAXES 3,661 2,837 29 %
INCOME TAXES 1,115 862
NET EARNINGS 2,546 1,975 29 %
==================================================
EFFECTIVE TAX RATE 30.5% 30.4 %
PER COMMON SHARE:
BASIC NET EARNINGS $ 0.76 $ 0.77 (1)%
DILUTED NET EARNINGS $ 0.72 $ 0.72 0 %
DIVIDENDS $ 0.28 $ 0.25
AVERAGE DILUTED SHARES OUTSTANDING 3,547.0 2,752.1
COMPARISONS AS A % OF NET SALES
------------------------------- Basis Pt Chg
COST OF PRODUCTS SOLD 47.6 % 47.6 % -
GROSS MARGIN 52.4 % 52.4 % -
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 31.2 % 31.7 % (50)
OPERATING MARGIN 21.2 % 20.6 % 60
EARNINGS BEFORE INCOME TAXES 20.0 % 19.6 % 40
NET EARNINGS 13.9 % 13.7 % 20
Unit volume increased 27 percent during the December quarter driven by the
addition of the Gillette business as well as organic volume growth. Organic
volume, which excludes the impact of acquisitions and divestitures from
year-over-year comparisons, increased six percent. Every business segment except
Snacks and Coffee, which was impacted by Hurricane Katrina, delivered mid-single
digit or higher organic volume growth. In addition, each of the Company's
geographic regions delivered organic growth, with developing regions growing
organic volume in the mid-teens.
Net sales for the quarter increased 27 percent to $18.34 billion. Organic sales,
which exclude acquisitions, divestitures and foreign exchange impacts, grew
eight percent. Foreign exchange had a negative two percent impact on sales
growth. Pricing and mix each had a positive one percent impact on sales growth.
Volume Net Sales
----------------------------- --------------------------------------
With Without
Acquisitions Acquisitions Total
& & Mix/ Total Impact
Divestitures Divestitures FX Price Other Impact Ex-FX
----------------------------- --------------------------------------
BEAUTY 9% 5% -2% 0% 0% 7% 9%
FAMILY HEALTH
HEALTH CARE 31% 8% -1% 1% -2% 29% 30%
BABY CARE AND FAMILY CARE 5% 5% -2% 1% -2% 2% 4%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 7% 7% -2% 2% 1% 8% 10%
SNACKS AND COFFEE 3% 3% -1% 9% -1% 10% 11%
GILLETTE BUSINESS UNIT
BLADES AND RAZORS N/A N/A N/A N/A N/A N/A N/A
DURACELL AND BRAUN N/A N/A N/A N/A N/A N/A N/A
TOTAL COMPANY 27% 6% -2% 1% 1% 27% 29%
Note: Sales percentage changes are approximations based on quantitative formulas that are consistently applied
* Figures include Gillette results for the October - December quarter only
Gross margin was 52.4 percent, flat versus the prior year period. The addition
of the Gillette business added approximately 75 basis points to gross margin due
to higher margins in the Blades and Razors segment, net of approximately 35
basis points of increased product costs from revaluing Gillette's opening
inventory balances to fair value as of the acquisition date. The gross margin
decline in our other businesses was caused primarily by higher commodity costs,
which hurt gross margin by about 150 basis points in the quarter. Scale
leverage, costs savings initiatives and pricing partially offset the increase in
commodity costs.
Total Selling, general, and administrative expenses (SG&A) increased 25%, or
$1.13 billion, during the quarter versus the prior year period. The addition of
Gillette drove approximately $1.0 billion of the total increase in the quarter,
including approximately $200 million of acquisition related expenses. The
acquisition related expenses were comprised of $135 million due to increased
intangible asset amortization resulting from revaluing intangible assets in the
opening balance sheet of the acquired Gillette business. The balance of the
acquisition related expenses was due to incremental integration and overhead
expenses such as legal and consulting fees. Total SG&A also increased due to
higher marketing and overhead spending on our base businesses (total company
excluding Gillette and acquisition related expenses), although both were lower
as a percentage of sales. Marketing spending increased in support of new
initiatives across key brands including Tide, Crest, Olay, Pantene, Naturella,
and LaCoste. SG&A decreased as percentage of sales by 50 basis points. Sales
growth and the mix benefits of adding the Gillette businesses more than offset
the impact of acquisition related expenses.
Interest expense for the quarter increased $99 million versus the prior year
period driven by the financing cost of the previously announced share repurchase
program associated with the Gillette acquisition. We repurchased $3.5 billion of
P&G stock during the quarter as part of this program. This brings the cumulative
value of shares purchased under the program to $12.0 billion.
Net earnings increased 29 percent to $2.55 billion. Earnings growth was driven
by organic growth, the addition of Gillette, and an improvement in SG&A as a
percentage of sales, partially offset by commodity-driven increases in product
costs. The contribution from Gillette was net of increased interest expense,
higher costs from revaluing Gillette's opening asset balances to fair value as
of the acquisition date and other one-time integration costs.
Diluted net earnings per share were $0.72, in-line with comparable prior year
period results. Earnings per share included an estimated $0.06-$0.07 cents per
share of dilution related to the Gillette acquisition. The dilution estimate
includes $0.03 of one-time charges, including costs from revaluing Gillette's
opening inventory balances to fair value as of the acquisition date.
RESULTS OF OPERATIONS - Six Months Ended December 31, 2005
The following discussion provides a review of results for the six months ended
December 31, 2005 versus the six months ended December 31, 2004.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
Six Months Ended
December 31
--------------------------------------------------
2005 2004 % CHG
--------------------------------------------------
NET SALES $ 33,130 $ 28,196 17%
COST OF PRODUCTS SOLD 15,891 13,508 18%
--------------------------------------------------
GROSS MARGIN 17,239 14,688 17%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 10,290 8,917 15%
--------------------------------------------------
OPERATING INCOME 6,949 5,771 20%
TOTAL INTEREST EXPENSE 518 381
OTHER NON-OPERATING INCOME, NET 142 237
--------------------------------------------------
EARNINGS BEFORE INCOME TAXES 6,573 5,627 17%
INCOME TAXES 1,998 1,710
NET EARNINGS $ 4,575 $ 3,917 17%
==================================================
EFFECTIVE TAX RATE 30.4 % 30.4 %
PER COMMON SHARE:
BASIC NET EARNINGS $ 1.57 $ 1.52 3 %
DILUTED NET EARNINGS $ 1.48 $ 1.42 4 %
DIVIDENDS $ 0.56 $ 0.50
AVERAGE DILUTED SHARES OUTSTANDING 3,098.0 2,759.1
COMPARISONS AS A % OF NET SALES
------------------------------- Basis Pt Chg
COST OF PRODUCTS SOLD 48.0 % 47.9 % 10
GROSS MARGIN 52.0 % 52.1 % (10)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 31.1 % 31.6 % (50)
OPERATING MARGIN 21.0 % 20.5 % 50
EARNINGS BEFORE INCOME TAXES 19.8 % 20.0 % (20)
NET EARNINGS 13.8 % 13.9 % (10)
Fiscal year to date, unit volume increased 17 percent. Organic volume, which
excludes the impact of acquisitions and divestitures, increased seven percent.
Growth was broad-based across businesses and geographies. Every business segment
except Snacks and Coffee, which was impacted by Hurricane Katrina, delivered
mid-single digit or higher organic volume growth. In addition, each of the
Company's regions delivered organic growth led by double-digit growth in
developing regions.
For the first six months of the fiscal year, net sales increased 17 percent to
$33.13 billion driven by the addition of the Gillette business as well as growth
on the base P&G businesses. Organic sales, which exclude the impact of
acquisitions and divestitures, increased seven percent. Favorable product mix,
resulting largely from the addition of the Gillette business offset the mix
impact of disproportionate growth in developing regions where average selling
price is lower than the global average. Pricing activity in Health Care, Baby
and Family Care, Fabric and Home Care, and Snacks and Coffee had a positive one
percent impact on sales growth. Foreign exchange was neutral during the period.
Volume Net Sales
----------------------------- --------------------------------------
With Without
Acquisitions Acquisitions Total
& & Mix/ Total Impact
Divestitures Divestitures FX Price Other Impact Ex-FX
----------------------------- --------------------------------------
BEAUTY 8% 6% -1% 0% 0% 7% 8%
FAMILY HEALTH
HEALTH CARE 21% 10% 0% 1% -1% 21% 21%
BABY CARE AND FAMILY CARE 5% 6% 0% 1% -2% 4% 4%
HOUSEHOLD CARE
FABRIC CARE AND HOME CARE 7% 7% 0% 2% 0% 9% 9%
SNACKS AND COFFEE -1% -1% -1% 7% -2% 3% 4%
GILLETTE BUSINESS UNIT
BLADES AND RAZORS N/A N/A N/A N/A N/A N/A N/A
DURACELL AND BRAUN N/A N/A N/A N/A N/A N/A N/A
TOTAL COMPANY 17% 7% 0% 1% 0% 18% 18%
Note: Sales percentage changes are approximations based on quantitative formulas that are consistently applied
* Figures include Gillette results for the October - December quarter only
Gross margin was 52.0 percent fiscal year to date, a 10 basis point decrease
versus the comparable base period. Adding the Gillette business added
approximately 40 basis points to gross margin due to higher margins in the
Blades and Razors segment, net of approximately 20 basis points of increased
product costs from revaluing Gillette's opening inventory balances to fair value
as of the acquisition date. Gross margin on the Company's base businesses
declined by approximately 50 basis points driven by higher commodity costs,
which negatively impacted gross margin by about 130 basis points. Scale benefits
of volume growth, price increases and cost savings programs partially offset the
increase in commodity costs.
Total Selling, general, and administrative expenses (SG&A) increased 15%, or
$1.37 billion, fiscal year to date versus the prior year period. The addition of
Gillette drove approximately $1.0 billion of the total increase in the period,
including approximately $200 million of acquisition related expenses. The
acquisition related expenses were comprised of $135 million due to increased
intangible asset amortization resulting from revaluing intangible assets in the
opening balance sheet of the acquired Gillette business. The balance of the
acquisition related expenses was due to incremental integration and overhead
expenses such as legal and consulting fees. Total SG&A also increased due to
higher marketing and overhead spending on our base businesses (total company
excluding Gillette and acquisition related expenses), although both were lower
as a percentage of sales. SG&A decreased as percentage of sales by 50 basis
points. Sales growth and the mix benefits of adding the Gillette businesses more
than offset the impact of acquisition related expenses.
Interest expense increased fiscal year to date by $137 million versus the prior
year period driven by the financing cost of the previously announced share
repurchase program associated with the Gillette acquisition. The Company
repurchased $9.0 billion of P&G stock fiscal year to date under this program,
bringing cumulative repurchases under the program to $12.0 billion since January
2005.
Net earnings increased 17 percent to $4.58 billion behind organic growth, the
impact of adding the Gillette business, and improved SG&A as a percentage of
sales, partially offset by increased commodity costs.
Diluted net earnings per share increased four percent to $1.48 compared during
the period.
BUSINESS SEGMENT DISCUSSION
---------------------------
The following discussion provides a review of results by business segment. An
analysis of the results for the three and six months ended December 31, 2005 is
provided compared to the same three and six month periods ended December 31,
2004. The primary financial measures used to evaluate segment performance are
net sales and net earnings. The table below provides supplemental information on
net earnings by business segment for the three and six months ended December 31,
2005 versus the comparable prior year period:
Three Months Ended December 31, 2005
--------------------------------------------------------------------------
Earnings
% Change Before % Change % Change
Net Versus Income Versus Net Versus
Sales Year Ago Taxes Year Ago Earnings Year Ago
--------------------------------------------------------------------------
BEAUTY $ 5,370 7% $1,166 2% $848 7%
HEALTH CARE 2,639 29% 635 39% 427 41%
BABY CARE AND FAMILY CARE 3,036 2% 521 -7% 330 -5%
--------------------------------------------------------------------------
FAMILY HEALTH 5,675 13% 1,156 14% 757 16%
FABRIC CARE AND HOME CARE 4,081 8% 888 9% 593 8%
SNACKS AND COFFEE 927 10% 144 -21% 95 -20%
--------------------------------------------------------------------------
HOUSEHOLD CARE 5,008 8% 1,032 3% 688 3%
BLADES AND RAZORS 1,153 N/A 375 N/A 272 N/A
DURACELL AND BRAUN 1,279 N/A 243 N/A 165 N/A
--------------------------------------------------------------------------
GILLETTE BUSINESS UNIT 2,432 N/A 618 N/A 437 N/A
TOTAL BUSINESS SEGMENT 18,485 26% 3,972 26% 2,730 29%
CORPORATE (148) N/A (311) N/A (184) N/A
--------------------------------------------------------------------------
TOTAL COMPANY 18,337 27% 3,661 29% 2,546 29%
Six Months Ended December 31, 2005
--------------------------------------------------------------------------
Earnings
% Change Before % Change % Change
Net Versus Income Versus Net Versus
Sales Year Ago Taxes Year Ago Earnings Year Ago
--------------------------------------------------------------------------
BEAUTY $10,359 7% $2,244 6% $1,631 11%
HEALTH CARE 4,722 21% 1,136 39% 763 40%
BABY CARE AND FAMILY CARE 6,035 4% 1,031 -3% 650 -1%
--------------------------------------------------------------------------
FAMILY HEALTH 10,757 11% 2,167 15% 1,413 17%
FABRIC CARE AND HOME CARE 8,296 9% 1,851 9% 1,234 9%
SNACKS AND COFFEE 1,633 3% 252 -17% 168 -15%
--------------------------------------------------------------------------
HOUSEHOLD CARE 9,929 8% 2,103 5% 1,402 5%
BLADES AND RAZORS 1,153 N/A 375 N/A 272 N/A
DURACELL AND BRAUN 1,279 N/A 243 N/A 165 N/A
--------------------------------------------------------------------------
GILLETTE BUSINESS UNIT 2,432 N/A 618 N/A 437 N/A
TOTAL BUSINESS SEGMENT 33,477 17% 7,132 19% 4,883 22%
CORPORATE (347) N/A (559) N/A (308) N/A
--------------------------------------------------------------------------
TOTAL COMPANY 33,130 17% 6,573 17% 4,575 17%
* Figures include Gillette results for the October - December quarter only
BEAUTY
------
Beauty volume increased nine percent during the quarter, including the addition
of Gillette Personal Care. Organic volume, which excludes the impact of
acquisitions and divestitures, increased five percent. Skin Care delivered
double digit volume growth behind product innovations including Olay Regenerist
and Total Effects Cleansing. The Feminine Care business delivered volume growth
in the upper-single digits behind Always softness innovations, scent line
extensions, Naturella expansion, and continued growth of Tampax Pearl. Retail
Hair Care volume was up mid-single digits. Growth in developing regions and in
hair colorants behind innovations on Koleston, Wellaton, and Nice n' Easy was
partially offset by a volume decrease in developed regions resulting primarily
from the discontinuation of minor shampoo brands in the US. Cosmetics volume
declined in the mid-single digits versus a base period that included pipeline
shipments ahead of a major initiative launch. Net sales increased seven percent
to $5.37 billion, including a negative two percent foreign exchange impact. Net
earnings increased seven percent to $848 million. Volume growth was partially
offset by higher commodity costs and increased marketing investments to support
initiative programs, primarily in developing regions.
Beauty volume increased eight percent fiscal year to date, including three
months of results of Gillette Personal Care. Organic volume, which excludes
acquisitions and divestitures, increased six percent, led by double digit
organic growth in developing regions. Volume growth was driven by initiative
activity on Pantene, Head & Shoulders, Rejoice, Olay, Always, and Naturella. Net
sales increased seven percent to $10.36 billion including a negative one percent
foreign exchange impact. Net earnings increased 11 percent to $1.63 billion.
Volume growth was partially offset by higher commodity costs and increased
marketing investments to support initiative programs, primarily in developing
regions.
FAMILY HEALTH
-------------
Health Care delivered 31 percent volume growth in the quarter, including the
addition of Gillette Oral Care. Organic volume, which excludes acquisitions and
divestitures, increased eight percent. Volume increases on our base business
were driven by Pharmaceuticals and Personal Health behind continued growth on
Actonel and Prilosec OTC. Oral Care also grew behind Crest, which delivered
double-digit organic volume growth, net of the impact of the Spinbrush
divestiture required in order to obtain regulatory approval of the Gillette
acquisition. Growth on Crest was driven by share increases in North America and
continued strength in developing markets. Net sales increased 29 percent to
$2.64 billion behind organic volume growth as well as the addition of Gillette
Oral Care. Pricing had a positive one percent impact on sales growth from prior
period increases on Actonel and Prilosec OTC. Foreign exchange had a negative
one percent impact on sales growth. Product mix reduced sales by two percent due
primarily to the impact of adding Gillette Oral Care, which has a lower average
selling price than the balance of the segment, and the impact of
disproportionate growth in developing regions, where average selling prices are
lower than the balance of the segment. Net earnings increased 41 percent to $427
million behind volume growth, including the addition of Gillette Oral Care, and
margin expansion on P&G's base business. Margins expanded primarily due to scale
benefits of volume growth, favorable product mix and pricing.
Fiscal year to date, Health Care volume increased 21 percent, including three
months of Gillette Oral Care results. Organic volume, which excludes the impact
of acquisitions and divestitures, increased 10 percent behind double digit
growth in Pharmaceuticals and Personal Health and upper-single digit organic
growth in Oral Care. Net sales grew 21 percent to $4.72 billion. Pricing on
Actonel and Prilosec OTC had a positive one percent impact on sales. This was
offset by a negative one percent mix impact due to adding Gillette Oral Care,
which has a lower average selling price than the segment average, and the impact
of disproportionate growth in developing regions, where average selling prices
are lower than the balance of the segment. Organic sales, which exclude the
impact of acquisitions and divestitures, increased 11 percent. Net earnings
increased 40 percent to $763 million behind organic volume growth, the addition
of Gillette Oral Care, and margin expansion on the base P&G business. Margins
expanded primarily due to scale benefits of volume growth, favorable product mix
and pricing.
Baby Care and Family Care delivered volume growth of five percent during the
quarter. Volume increased behind product initiatives such as Pampers Full Motion
in Western Europe and Bounty and Charmin "Basic," as well as double digit growth
in developing markets. Baby Care volume declined in developed regions due to
high levels of competitive pricing activity in North America. Net sales
increased two percent to $3.04 billion, including a negative two percent foreign
exchange impact. Pricing added one percent to sales growth, but was offset by a
negative two percent product mix impact from growth in developing markets and
Bounty and Charmin "Basic," both of which have lower relative sales prices than
the segment average. Net earnings declined five percent to $330 million versus
the base period. Earnings in the quarter were negatively impacted by the
increase in energy costs that followed the hurricanes last September and reduced
volume in North America Baby Care, both of which also contributed to the decline
in the segment's earnings margin.
Baby Care and Family Care volume increased five percent fiscal year to date.
Organic volume, which excludes the impact of acquisitions and divestitures,
increased six percent. Volume increased in both Baby Care and Family Care behind
product initiatives and double digit growth in developing regions. Net sales
increased four percent to $6.04 billion. Pricing had a positive one percent
impact on sales but was offset by a negative two percent mix impact due to
growth in mid-tier Basic products and disproportionate growth in developing
regions. Net earnings declined one percent to $650 million as volume growth and
pricing were offset by increased energy costs and unfavorable product mix.
HOUSEHOLD CARE
--------------
Fabric Care and Home Care delivered volume growth of seven percent for the
quarter. Volume was driven by innovations such as Tide with Febreze, Tide
Coldwater, Ariel Ion Power Gels, Cascade Action Packs, Febreze Air Effects and
the expansion of Bold in Japan coupled with very strong customer support behind
key initiatives. Fabric Care grew volume in the upper-single digits behind
double digit global growth on Tide. Net sales increased eight percent to $4.08
billion, including a negative two percent foreign exchange impact. Pricing in
the Fabric Care and Home Care businesses added two points to sales growth.
Favorable product mix, primarily due to disproportionate growth on Tide, added
an additional one point to sales growth. Net earnings increased eight percent to
$593 million. Earnings growth reflects top line progress, as well as cost
savings and pricing to mitigate commodity price increases.
Fiscal year to date, Fabric Care and Home Care volume increased seven percent
behind innovations on Tide, Ariel, Dawn, Febreze, Downy, and Cascade. Net sales
increased nine percent to $8.30 billion. Pricing, primarily in North America and
Latin America, added two points to sales growth. Net earnings increased nine
percent to $1.23 billion. Volume growth, pricing, and cost savings programs more
than offset increased commodity costs.
Snacks and Coffee results were impacted by Hurricane Katrina, which occurred in
August 2005. The business experienced significant disruption and damages to our
manufacturing facilities in New Orleans. Beginning in December, these facilities
were fully operational. Snacks and Coffee volume grew three percent in the
quarter, as a mid-single digit decline in Coffee volume partially offset growth
in other businesses. Snacks volume was up mid-single digits. Sales were $927
million, an increase of 10 percent. Pricing actions taken in the prior year in
response to rising coffee prices added 9 percent to sales, which was partially
offset by 1 percent each from negative product mix and foreign exchange.
Earnings declined 20% to $95 million, as sales growth was offset by increased
costs related to Hurricane Katrina and negative product mix.
Fiscal year to date, Snacks and Coffee volume declined one percent. Lower Coffee
shipments following the hurricane more than offset growth in other businesses.
Snacks volume was up mid-single digits in the period. Net sales increased three
percent to $1.63 billion, including a negative one percent foreign exchange
impact. Pricing in Coffee added seven percent to sales. The mix effect of lower
Coffee shipments had a negative two percent impact on sales. Earnings declined
15 percent to $168 million as sales growth was offset by negative product mix
and increased costs, primarily related to Hurricane Katrina.
ACQUIRED GILLETTE REPORTED SEGMENTS
-----------------------------------
As disclosed in note 4 to the consolidated financial statements, we completed
the acquisition of The Gillette Company on October 1, 2005. This acquisition
resulted in two new reportable segments for the Company: Blades and Razors and
Duracell and Braun. The Gillette Oral Care and Personal Care businesses were
subsumed within the Health Care and Beauty reportable segments, respectively.
Because the acquisition was completed in the current period, there are no
results for these segments in our prior year period.
In order to provide our investors with more insight into the results of the
Blades & Razors and Duracell & Braun reporting segments, we have previously
provided supplemental pro forma net sales and earnings data for these segments
for each of the quarters in the Gillette Company's year ended June 30, 2005 (as
presented in our Form 8-K released October 4, 2005). Management's discussion of
the current quarter results of these two segments is in relation to such
comparable prior year pro forma net sales and earnings data. With respect to the
earnings data, this analysis is based on Earnings before Income Taxes. The
previously disclosed Blades & Razors and Duracell & Braun pro forma information
reconciled "Profit from Operations," the measure used by Gillette in its
historical filings, to Earnings before Income Taxes, the comparable measure used
by the Company. Gillette did not allocate income tax expense to its reporting
segments.
Blades and Razors sales increased six percent to $1.15 billion over the pro
forma prior year quarter. Positive pricing of two percent offset a negative two
percent foreign exchange impact. Sales growth was driven by M3Power, Venus
Vibrance, and Venus Disposables as well as continued consumer trade-up in
developing markets. Earnings before income taxes increased 11 percent to $375
million versus previously published pro forma prior year results. Earnings
increased behind sales, a more profitable product mix of replacement blades
versus razors, price increases and lower overhead and manufacturing expenses,
primarily as a result of savings realized from Gillette's Functional Excellence
program. Earnings growth was also favorably impacted by base period charges for
severance and other exit charges associated with Gillette's Functional
Excellence program, the European Manufacturing Realignment program, and other
asset write-downs. These earnings drivers were partially offset by
acquisition-related expenses in the current period of $116 million (before-tax),
including increased amortization expense from revaluing acquired fixed and
intangible assets and increased product costs from revaluing opening inventory
balances at fair value. Reported net earnings for the segment were $272 million.
Duracell and Braun delivered one percent sales growth to $1.28 billion during
the quarter. Volume growth was offset by a negative two percent impact from
foreign exchange. A price increase on Duracell had a positive impact on segment
sales, but was more than offset by a year-on-year increase in total promotion
expenses in the segment; the net impact of pricing on segment sales was negative
one percent. Duracell pricing in the U.S. continues to trend upwards following
the list price increase taken in August 2005 and the roll-out across trade
accounts. Duracell sales increased behind share growth, while Braun sales were
driven by new product initiatives such as 360 Complete, Tassimo, and Contour.
Earnings before income taxes increased 46 percent to $243 million versus
previously published pro forma prior year results. Earnings growth was driven
primarily by volume as well as lower overhead and manufacturing costs, primarily
resulting from the Functional Excellence program. Earnings growth was also
favorably impacted by base period charges for severance and other exit charges
associated with Gillette's Functional Excellence program as well as other asset
write-downs. These earnings drivers were partially offset by acquisition-related
expenses in the current period of $43 million (before tax), including increased
amortization expense from revaluing acquired fixed and intangible assets and
increased product costs from revaluing opening inventory balances at fair value.
Reported net earnings for the segment were $165 million.
We expect earnings before income taxes growth indices to moderate in the second
half of the fiscal year versus the quarter ended December 31, 2005. This is
primarily due to the lapping of the Functional Excellence program benefits
coupled with increased investments behind the Fusion blade system launch.
CORPORATE
---------
Corporate includes certain operating and non-operating activities not allocated
to specific business units. These include: the incidental businesses managed at
the corporate level, financing and investing activities, certain restructuring
charges, other general corporate items and the historical results of certain
divested categories, including the juice business that was divested in August of
2004 and the Gillette brands (primarily Rembrandt and Right Guard) that will be
divested as required by the Gillette acquisition. Corporate also includes
reconciling items to adjust the accounting policies used in the segments to U.S.
GAAP. The most significant reconciling items include income taxes (to adjust
from statutory rates that are reflected in the segments to the overall Company
effective tax rate), adjustments for unconsolidated entities (to eliminate
sales, cost of products sold and SG&A for entities that are consolidated in the
segments but accounted for using the equity method for U.S. GAAP) and minority
interest adjustments for subsidiaries where we do not have 100% ownership.
Because both unconsolidated entities and less than 100 percent owned
subsidiaries are managed as integral parts of the Company, they are accounted
for similar to a wholly-owned subsidiary for management and segment purposes.
This means our segment results recognize 100 percent of each income statement
component through before-tax earnings in the segments, with eliminations in
Corporate. In determining segment net earnings, we apply the statutory tax rates
(with adjustments to arrive at the Company's effective tax rate in Corporate)
and eliminate the share of earnings applicable to other ownership interests, in
a manner similar to minority interest.
The decline in net earnings for the quarter and year to date is primarily driven
by the impact of the base period gain on the sale of the juice business and a
current period increase in net interest expense due to the financing cost of the
share repurchase program announced in connection with the Gillette acquisitions.
FINANCIAL CONDITION
-------------------
Operating Activities
--------------------
Cash generated from operating activities for the six months ended December 31,
2005 was $4.75 billion versus $3.96 billion in the comparable prior period.
Strong earnings, adjusted for non-cash items (primarily depreciation,
amortization, stock-based compensation, and deferred income taxes) generated
$6.46 billion. This was partially offset by an increase in working capital
items, primarily accounts receivable and accounts payable.
Accounts receivable increased to support business growth. Days sales in
receivables were flat versus the comparable prior year period. Accounts payable,
accrued, and other liabilities days were down largely due to our continued
efforts to accelerate payments to suppliers in order to maximize payment
discounts. Inventory days on hand were down marginally resulting in a slight
improvement to cash flow.
Investing Activities
--------------------
Investing activities in the current year decreased cash by $402 million,
compared to the prior year period when investing activities reduced cash by
$1.01 billion. Acquisitions provided a net source of cash. A cash balance of
$1.60 billion received in the Gillette acquisition, representing Gillette's cash
balances at the acquisition date, was partially offset by cash used for other
acquisitions, including settlement of a major portion of the Wella domination
liability. Capital expenditures as a percentage of sales were 3.1 percent,
in-line with the comparable prior year period.
Financing Activities
--------------------
Total cash used by financing activities was $2.87 billion versus $1.23 billion
in the comparable base period. Our net debt position increased by $7.34 billion,
primarily to fund the share repurchase program associated with the acquisition
of Gillette. This was offset by $9.03 billion of treasury purchases during the
period.
NON-GAAP MEASURES
-----------------
Our discussion of financial results includes several measures not defined by
U.S. GAAP. We believe these measures provide our investors with additional
information about the underlying results and trends of the Company, as well as
insight to some of the metrics used to evaluate management. When used in MD&A,
we have provided the comparable GAAP measure in the discussion.
ORGANIC SALES GROWTH. Organic sales growth is a non-GAAP measure of sales growth
excluding the impacts of acquisitions, divestitures and foreign exchange from
year-over-year comparisons. We believe this provides investors with a more
complete understanding of underlying sales trends by providing sales growth on a
consistent basis. The reconciliation of reported sales growth to organic sales
for the October - December 2005 quarter:
Total
P&G
-----
Total Sales Growth 27%
Foreign Exchange Impact 2%
Acquisition/Divestiture Impact -21%
-----
Organic Sales Growth 8%
The reconciliation of reported sales growth to organic sales for the fiscal
year to date period ended December 31, 2005:
Total
P&G
-----
Total Sales Growth 17%
Foreign Exchange Impact 0%
Acquisition/Divestiture Impact -10%
-----
Organic Sales Growth 7%
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 '05 2,171 401 1,770 2,029 87%
Oct - Dec '05 2,575 628 1,947 2,546 76%
--------------------------------------------------------------------------------
Jul - Dec '05 4,746 1,029 3,717 4,575 81%
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 Officer, A.
G. Lafley, and the Company's Chief Financial Officer, Clayton Daley, Jr., are
responsible for evaluating the effectiveness of our disclosure controls systems.
Messrs. Lafley and Daley have evaluated and 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.
On October 1, 2005, the Company completed its acquisition of The Gillette
Company ("Gillette"), at which time Gillette became a subsidiary of the Company.
The Company considers the transaction material to the results of its operations,
financial position, and cash flows from the date of the acquisition through
December 31, 2005, and believes that the internal controls and procedures of
Gillette have a material effect on the Company's internal control over financial
reporting. See Note 4 to our Consolidated Financial Statements included in Item
1 for discussion of the acquisition and related financial data.
The Company is now in the process of integrating the Gillette operations. The
Company has extended its Section 404 compliance program under the Sarbanes-Oxley
Act of 2002 and the applicable rules and regulations under such Act to include
Gillette. The Company will report on its assessment of its combined operations
within the time period provided by the Act and the applicable Securities
Exchange Commission rules and regulations concerning business combinations.
Except for the Gillette acquisition, Messrs. Lafley and Daley have concluded
that there has been no change in the Company's internal control over financial
reporting for the quarter ended December 31, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 2. 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),(4)
-----------------------------------------------------------------------------------------------------------
10/1/05-10/31/05 39,187,635 $56.59 39,160,912 9.2
11/1/05-11/30/05 13,603,137 $56.98 13,370,271 8.4
12/1/05-12/31/05 9,679,434 $55.85 8,475,474 8.0
(1) This category includes 1,463,549 shares acquired by the Company under
various compensation and benefit plans, including The Gillette Company
Global Employee Stock Ownership Program and The Procter & Gamble 2001 Stock
and Incentive Compensation Plan. 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 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. We have now narrowed the anticipated total
repurchase pursuant to this authority to about $20 billion of Company
common stock. The share repurchases are expected to be largely completed
by mid-calendar year 2006.
(4) The share value in this category is now measured against the revised target
as described in footnote 3 to this table, which remains within the
authority of the previously announced buyback plan.
Item 6. Exhibits
Exhibits
(3-1) Amended Articles of Incorporation (Incorporated by reference to
Exhibit (3-1) of the Company's Form 10-Q for the quarter ended
September 30, 2005).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Form 10-Q for the quarter ended September 30, 2005).
(10-1) The Procter & Gamble Company Executive Deferred Compensation Plan*
(10-2) The Gillette Company 1971 Stock Option Plan*
(10-3) The Gillette Company 2004 Long-Term Incentive Plan*
(10-4) Amended and Restated Employment Agreement, dated December 23,
2004, between The Gillette Company and James M. Kilts
(Incorporated by reference to Exhibit 10-G of the Annual Report
on Form 10-K filed by The Gillette Company for the year ended
December 31, 2004, Commission File No. 1-922)*
(10-5) Amendment No. 1 to the Amended and Restated Employment
Agreement dated as of December 23, 2004, entered into as of
January 27, 2005, between The Gillette Company and James M.
Kilts (Incorporated by reference to Exhibit 10.2 of the Form
8-K filed by The Gillette Company on January 28, 2005,
Commission File No. 1-922)*
(10-6) Stock Option Agreement, dated January 19, 2001, between The
Gillette Company and James M. Kilts, filed as Exhibit A to the
Amended and Restated Employment Agreement between The Gillette
Company and James M. Kilts (Incorporated by reference to
Exhibit 10-G of the Annual Report on Form 10-K filed by The
Gillette Company for the year ended December 31, 2004,
Commission File No. 1-922)*
(10-7) The Gillette Company Executive Life Insurance Program
(Incorporated by reference to Exhibit 10(d) of the Annual
Report on Form 10-K filed by The Gillette Company for the year
ended December 31, 2000, Commission File No. 1-922)
(10-8) The Gillette Company Personal Financial Planning Reimbursement
Program (Incorporated by reference to Exhibit 10(o) of the
Annual Report on Form 10-K filed by The Gillette Company for
the year ended December 31, 2004, Commission File No. 1-922)*
(10-9) The Gillette Company Senior Executive Financial Planning
Program (Incorporated by reference to Exhibit 10(p) of the
Annual Report on Form 10-K filed by The Gillette Company for
the year ended December 31, 2004, Commission File No.
1-922)*
(10-10) The Gillette Company Estate Preservation Plan*
(10-11) The Gillette Company Deferred Compensation Plan (Incorporated
by reference to Exhibit 10(t) of the Annual Report on Form 10-K
filed by The Gillette Company for the year ended December 31,
2004, Commission File No. 1-922)*
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.
* Compensatory plan or arrangement
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
January 30, 2006
-------------------------------
Date
EXHIBIT INDEX
Exhibit No.
(3-1) Amended Articles of Incorporation (Incorporated by reference to
Exhibit (3-1) of the Company's Form 10-Q for the quarter ended
September 30, 2005).
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Form 10-Q for the quarter ended September 30, 2005).
(10-1) The Procter & Gamble Company Executive Deferred Compensation Plan*
(10-2) The Gillette Company 1971 Stock Option Plan*
(10-3) The Gillette Company 2004 Long-Term Incentive Plan*
(10-4) Amended and Restated Employment Agreement, dated December 23,
2004, between The Gillette Company and James M. Kilts
(Incorporated by reference to Exhibit 10-G of the Annual Report
on Form 10-K filed by The Gillette Company for the year ended
December 31, 2004, Commission File No. 1-922)*
(10-5) Amendment No. 1 to the Amended and Restated Employment
Agreement dated as of December 23, 2004, entered into as of
January 27, 2005, between The Gillette Company and James M.
Kilts (Incorporated by reference to Exhibit 10.2 of the Form
8-K filed by The Gillette Company on January 28, 2005,
Commission File No. 1-922)*
(10-6) Stock Option Agreement, dated January 19, 2001, between The
Gillette Company and James M. Kilts, filed as Exhibit A to the
Amended and Restated Employment Agreement between The Gillette
Company and James M. Kilts (Incorporated by reference to
Exhibit 10-G of the Annual Report on Form 10-K filed by The
Gillette Company for the year ended December 31, 2004,
Commission File No. 1-922)*
(10-7) The Gillette Company Executive Life Insurance Program
(Incorporated by reference to Exhibit 10(d) of the Annual
Report on Form 10-K filed by The Gillette Company for the year
ended December 31, 2000, Commission File No. 1-922)
(10-8) The Gillette Company Personal Financial Planning Reimbursement
Program (Incorporated by reference to Exhibit 10(o) of the
Annual Report on Form 10-K filed by The Gillette Company for
the year ended December 31, 2004, Commission File No. 1-922)*
(10-9) The Gillette Company Senior Executive Financial Planning
Program (Incorporated by reference to Exhibit 10(p) of the
Annual Report on Form 10-K filed by The Gillette Company for
the year ended December 31, 2004, Commission File No.
1-922)*
(10-10) The Gillette Company Estate Preservation Plan*
(10-11) The Gillette Company Deferred Compensation Plan (Incorporated
by reference to Exhibit 10(t) of the Annual Report on Form 10-K
filed by The Gillette Company for the year ended December 31,
2004, Commission File No. 1-922)*
(11) Computation of Earnings per Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
(32) Section 1350 Certifications.