PROCTER & GAMBLE COMPANY 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2007
OR
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o |
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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)
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Ohio
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31-0411980 |
(State of Incorporation)
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(I.R.S. Employer Identification Number) |
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One Procter & Gamble Plaza, Cincinnati, Ohio
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45202 |
(Address of principal executive offices)
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(Zip Code) |
(513) 983-1100
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
There were 3,105,639,235 shares of Common Stock outstanding as of September 30, 2007.
TABLE OF CONTENTS
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, 2007 and 2006, the
Consolidated Balance Sheets as of September 30, 2007 and June 30, 2007, and the Consolidated
Statements of Cash Flows for the three months ended September 30, 2007 and 2006 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
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Three Months Ended |
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September 30 |
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Amounts in millions |
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2007 |
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2006 |
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NET SALES |
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$ |
20,199 |
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$ |
18,785 |
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Cost of products sold |
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9,519 |
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8,865 |
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Selling, general and
administrative expense |
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6,262 |
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5,866 |
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OPERATING INCOME |
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4,418 |
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4,054 |
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Interest expense |
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359 |
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358 |
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Other non-operating
income, net |
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193 |
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180 |
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EARNINGS BEFORE INCOME TAXES |
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4,252 |
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3,876 |
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Income taxes |
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1,173 |
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1,178 |
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NET EARNINGS |
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$ |
3,079 |
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$ |
2,698 |
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PER COMMON SHARE: |
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Basic net earnings |
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$ |
0.97 |
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$ |
0.84 |
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Diluted net earnings |
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$ |
0.92 |
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$ |
0.79 |
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Dividends |
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$ |
0.35 |
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$ |
0.31 |
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DILUTED WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING |
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3,354.2 |
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3,413.3 |
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See accompanying Notes to Consolidated Financial Statements
-1-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30 |
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June 30 |
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Amounts in Millions |
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2007 |
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2007 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
4,626 |
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$ |
5,354 |
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Investment securities |
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371 |
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202 |
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Accounts receivable |
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7,432 |
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6,629 |
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Inventories |
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Materials and supplies |
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1,711 |
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1,590 |
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Work in process |
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482 |
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|
444 |
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Finished goods |
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5,475 |
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4,785 |
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Total inventories |
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7,668 |
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6,819 |
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Deferred income taxes |
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1,925 |
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1,727 |
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Prepaid expenses and other current assets |
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3,160 |
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3,300 |
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TOTAL CURRENT ASSETS |
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25,182 |
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24,031 |
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PROPERTY, PLANT AND EQUIPMENT |
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Buildings |
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6,601 |
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6,380 |
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Machinery and equipment |
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28,251 |
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27,492 |
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Land |
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|
874 |
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849 |
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35,726 |
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34,721 |
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Accumulated depreciation |
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(15,914 |
) |
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(15,181 |
) |
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NET PROPERTY, PLANT AND EQUIPMENT |
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19,812 |
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19,540 |
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GOODWILL AND OTHER INTANGIBLE ASSETS |
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Goodwill |
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57,575 |
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56,552 |
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Trademarks and other intangible assets, net |
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33,993 |
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33,626 |
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NET GOODWILL AND OTHER INTANGIBLE ASSETS |
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91,568 |
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90,178 |
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OTHER NON-CURRENT ASSETS |
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5,141 |
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4,265 |
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TOTAL ASSETS |
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141,703 |
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$ |
138,014 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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|
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|
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Accounts payable |
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$ |
5,230 |
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|
$ |
5,710 |
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Accrued and other liabilities |
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|
|
|
|
|
|
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|
10,419 |
|
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9,586 |
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Taxes payable |
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|
|
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|
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1,627 |
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|
3,382 |
|
Debt due within one year |
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|
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|
|
|
|
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|
13,598 |
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|
12,039 |
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|
|
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|
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|
|
|
|
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|
TOTAL CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
30,874 |
|
|
|
30,717 |
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|
|
|
|
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|
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|
|
|
|
|
|
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|
LONG-TERM DEBT |
|
|
|
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|
|
|
|
|
|
22,172 |
|
|
|
23,375 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
DEFERRED INCOME TAXES |
|
|
|
|
|
|
|
|
|
|
11,653 |
|
|
|
12,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
OTHER NON-CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
9,445 |
|
|
|
5,147 |
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|
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|
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|
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TOTAL LIABILITIES |
|
|
|
|
|
|
|
|
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|
74,144 |
|
|
|
71,254 |
|
|
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SHAREHOLDERS EQUITY |
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Preferred stock |
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|
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|
1,392 |
|
|
|
1,406 |
|
Common stock shares issued |
|
Sept 30 |
|
|
3,994.0 |
|
|
|
3,994 |
|
|
|
|
|
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|
June 30 |
|
|
3,989.7 |
|
|
|
|
|
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|
3,990 |
|
Additional paid-in capital |
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|
|
|
|
|
|
59,368 |
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|
59,030 |
|
Reserve for ESOP debt retirement |
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|
|
|
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|
(1,314 |
) |
|
|
(1,308 |
) |
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
1,651 |
|
|
|
617 |
|
Treasury stock |
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|
|
|
|
|
|
|
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|
(41,039 |
) |
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|
(38,772 |
) |
Retained earnings |
|
|
|
|
|
|
|
|
|
|
43,507 |
|
|
|
41,797 |
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|
|
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TOTAL SHAREHOLDERS EQUITY |
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|
|
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|
|
67,559 |
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|
|
66,760 |
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|
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|
|
|
|
|
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|
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|
|
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
$ |
141,703 |
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|
$ |
138,014 |
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|
|
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|
|
|
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See accompanying Notes to Consolidated Financial Statements
-2-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
|
|
|
September 30 |
|
Amounts in millions |
|
2007 |
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|
2006 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
$ |
5,354 |
|
|
$ |
6,693 |
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net earnings |
|
|
3,079 |
|
|
|
2,698 |
|
Depreciation and amortization |
|
|
752 |
|
|
|
784 |
|
Share-based compensation expense |
|
|
106 |
|
|
|
158 |
|
Deferred income taxes |
|
|
213 |
|
|
|
156 |
|
Changes in: |
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|
|
|
|
|
|
Accounts receivable |
|
|
(595 |
) |
|
|
(909 |
) |
Inventories |
|
|
(665 |
) |
|
|
(506 |
) |
Accounts payable, accrued and other liabilities |
|
|
26 |
|
|
|
474 |
|
Other operating assets and liabilities |
|
|
196 |
|
|
|
102 |
|
Other |
|
|
118 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING ACTIVITIES |
|
|
3,230 |
|
|
|
2,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(540 |
) |
|
|
(570 |
) |
Proceeds from asset sales |
|
|
274 |
|
|
|
101 |
|
Acquisitions |
|
|
12 |
|
|
|
(72 |
) |
Change in investment securities |
|
|
(165 |
) |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTING ACTIVITIES |
|
|
(419 |
) |
|
|
(448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Dividends to shareholders |
|
|
(1,138 |
) |
|
|
(1,023 |
) |
Change in short-term debt |
|
|
1,295 |
|
|
|
(6 |
) |
Additions to long-term debt |
|
|
2,012 |
|
|
|
7 |
|
Reductions of long-term debt |
|
|
(3,692 |
) |
|
|
(551 |
) |
Impact of stock options and other |
|
|
477 |
|
|
|
418 |
|
Treasury purchases |
|
|
(2,598 |
) |
|
|
(1,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL FINANCING ACTIVITIES |
|
|
(3,644 |
) |
|
|
(2,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS |
|
|
105 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(728 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
4,626 |
|
|
$ |
6,718 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
-3-
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
|
These statements should be read in conjunction with the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2007. The results of operations for the
three-month period ended September 30, 2007 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 investment securities. Total
comprehensive income for the three months ended September 30, 2007 and 2006 was $4,113
million and $2,663 million, respectively. |
|
3. |
|
Segment Information Following is a summary of segment results. In May 2007, we
announced a number of changes to our organization structure and certain of our key
leadership positions. The changes became effective on July 1, 2007 and resulted in
changes to our GBU and reporting segment structure. The businesses that previously
comprised the Gillette GBU are now included within the Beauty and Household Care GBUs.
The Braun business has been combined with the Blades & Razors business to form the
Grooming reportable segment within the Beauty GBU. The Grooming reportable segment
also includes all face and shave prep products which were previously reported within
the Beauty reportable segment. Duracell was moved to our Household Care GBU and will
be reported as part of our Fabric Care and Home Care reportable segment. Finally, our
feminine care business, which previously was part of our Beauty GBU and reportable
segment, is now part of our Health and Well-Being GBU and will be reported as part of
the Health Care reportable segment. The following segment information reflects the new
segment reporting structure. |
SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
Earnings Before |
|
|
Amounts in millions |
|
|
|
|
|
Net Sales |
|
Income Taxes |
|
Net Earnings |
|
|
|
|
|
|
|
Beauty GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beauty |
|
|
2007 |
|
|
$ |
4,599 |
|
|
$ |
884 |
|
|
$ |
689 |
|
|
|
|
2006 |
|
|
|
4,324 |
|
|
|
835 |
|
|
|
634 |
|
|
|
|
Grooming |
|
|
2007 |
|
|
|
2,015 |
|
|
|
614 |
|
|
|
451 |
|
|
|
|
2006 |
|
|
|
1,845 |
|
|
|
527 |
|
|
|
385 |
|
|
|
|
Health & Well-Being GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
|
2007 |
|
|
|
3,559 |
|
|
|
980 |
|
|
|
648 |
|
|
|
|
2006 |
|
|
|
3,336 |
|
|
|
878 |
|
|
|
593 |
|
|
|
|
Snacks, Coffee
and Pet Care |
|
|
2007 |
|
|
|
1,123 |
|
|
|
184 |
|
|
|
113 |
|
|
|
|
2006 |
|
|
|
1,063 |
|
|
|
144 |
|
|
|
87 |
|
|
|
|
Household Care GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabric Care &
Home Care |
|
|
2007 |
|
|
|
5,904 |
|
|
|
1,356 |
|
|
|
916 |
|
|
|
|
2006 |
|
|
|
5,352 |
|
|
|
1,225 |
|
|
|
831 |
|
|
|
|
Baby Care and
Family Care |
|
|
2007 |
|
|
|
3,420 |
|
|
|
678 |
|
|
|
430 |
|
|
|
|
2006 |
|
|
|
3,099 |
|
|
|
600 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
2007 |
|
|
|
(421 |
) |
|
|
(444 |
) |
|
|
(168 |
) |
|
|
|
2006 |
|
|
|
(234 |
) |
|
|
(333 |
) |
|
|
(215 |
) |
|
|
|
Total |
|
|
2007 |
|
|
|
20,199 |
|
|
|
4,252 |
|
|
|
3,079 |
|
|
|
|
2006 |
|
|
|
18,785 |
|
|
|
3,876 |
|
|
|
2,698 |
|
|
|
|
-4-
4. |
|
The Company acquired the Gillette Company in October 2005. At that time, we
recognized an assumed liability for Gillette exit costs of $1.23 billion, including
$854 million in separations related to approximately 5,500 people, $55 million in
employee relocation costs and $320 million in other exit costs. These costs are
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, as well as redundant manufacturing capacity. As of September 30,
2007, the remaining liability was $548 million. Total integration plan charges against
the assumed liability were $68 million for the three months ended September 30, 2007.
We expect such activities to be substantially complete by June 30, 2008. |
-5-
5. |
|
Goodwill and Other Intangible Assets Goodwill as of September 30, 2007 is allocated
by reportable segment and global business unit as follows (amounts in millions): |
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2007 |
|
BEAUTY GBU |
|
|
|
|
Beauty, beginning of year |
|
$ |
15,359 |
|
Acquisitions and divestitures |
|
|
(22 |
) |
Translation and other |
|
|
451 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
15,788 |
|
|
|
|
|
|
Grooming, beginning of year |
|
|
24,211 |
|
Acquisitions and divestitures |
|
|
(60 |
) |
Translation and other |
|
|
448 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
24,599 |
|
|
|
|
|
|
HEALTH & WELL-BEING GBU |
|
|
|
|
Health Care, beginning of year |
|
|
8,482 |
|
Acquisitions and divestitures |
|
|
(13 |
) |
Translation and other |
|
|
101 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
8,570 |
|
|
|
|
|
|
Snacks, Coffee and Pet Care, beginning of year |
|
|
2,407 |
|
Acquisitions and divestitures |
|
|
(1 |
) |
Translation and other |
|
|
13 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
2,419 |
|
|
|
|
|
|
HOUSEHOLD CARE GBU |
|
|
|
|
Fabric Care and Home Care, beginning of year |
|
|
4,470 |
|
Acquisitions and divestitures |
|
|
(10 |
) |
Translation and other |
|
|
72 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
4,532 |
|
|
|
|
|
|
Baby Care and Family Care, beginning of year |
|
|
1,623 |
|
Acquisitions and divestitures |
|
|
(2 |
) |
Translation and other |
|
|
46 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
|
1,667 |
|
|
|
|
|
|
GOODWILL, NET, beginning of year |
|
|
56,552 |
|
Acquisitions and divestitures |
|
|
(108 |
) |
Translation and other |
|
|
1,131 |
|
|
|
|
|
Goodwill, September 30, 2007 |
|
$ |
57,575 |
|
|
|
The increase in goodwill from June 30, 2007 is primarily due to currency translation. |
-6-
|
|
Identifiable intangible assets as of September 30, 2007 are comprised of (amounts in
millions): |
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
Amortizable intangible assets with
determinable lives |
|
$ |
8,694 |
|
|
$ |
2,094 |
|
Intangible assets with indefinite
lives |
|
|
27,393 |
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets |
|
$ |
36,087 |
|
|
$ |
2,094 |
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets consist principally of brands, patents, technology, and
customer relationships. The non-amortizable intangible assets consist primarily of
brands. |
|
|
|
The amortization expense of intangible assets for the three months ended September 30,
2007 and 2006 was $157 million and $163 million, respectively. |
|
6. |
|
Pursuant to SFAS 123(R) Share-Based Payment, companies must 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). |
|
|
|
Total share-based compensation for the three months ended September 30, 2007 and 2006 are
summarized in the following table (amounts in millions): |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2007 |
|
|
|
2007 |
|
|
2006 |
|
Share-Based Compensation |
|
|
|
|
|
|
|
|
FAS123(R) Stock Options |
|
$ |
98 |
|
|
$ |
130 |
|
Other Share-Based Awards |
|
|
8 |
|
|
|
28 |
|
|
|
|
|
|
|
|
Total Share-Based Compensation |
|
$ |
106 |
|
|
$ |
158 |
|
|
|
|
|
|
|
|
|
|
Assumptions utilized in the model are evaluated and revised, as necessary, to reflect
market conditions and experience. |
-7-
7. |
|
Postretirement Benefits The Company offers various postretirement benefits to its
employees. |
|
|
|
The components of net periodic benefit cost are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Retiree Benefits |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
Amounts in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost |
|
$ |
66 |
|
|
$ |
66 |
|
|
$ |
23 |
|
|
$ |
20 |
|
Interest Cost |
|
|
130 |
|
|
|
118 |
|
|
|
56 |
|
|
|
51 |
|
Expected Return on Plan Assets |
|
|
(134 |
) |
|
|
(110 |
) |
|
|
(107 |
) |
|
|
(102 |
) |
Amortization of Deferred Amounts |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
(5 |
) |
Recognized Net Actuarial Loss |
|
|
7 |
|
|
|
11 |
|
|
|
(4 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Benefit Cost (Credit) |
|
|
72 |
|
|
|
88 |
|
|
|
(32 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on ESOP Preferred Stock |
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost (Credit) |
|
$ |
72 |
|
|
$ |
88 |
|
|
$ |
(55 |
) |
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ending June 30, 2008, the expected return on plan assets is 7.4% and 9.3%
for defined benefit and other retiree benefit plans, respectively. |
|
8. |
|
New Accounting Standards |
|
|
|
On July 1, 2007, we adopted FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 addresses the accounting and disclosure of uncertain tax
positions. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The difference between the tax benefit recognized in the
financial statements for a position in accordance with FIN 48 and the tax benefit claimed
in the tax return is referred to as an unrecognized tax benefit. |
|
|
|
The adoption of FIN 48 resulted in a decrease to retained earnings as of July 1, 2007 of
$232 million, which was reflected as a cumulative effect of a change in accounting
principle, with a corresponding increase to the net liability for unrecognized tax
benefits. The impact primarily reflects the accrual of additional statutory interest and
penalties as required by FIN 48, partially offset by adjustments to existing unrecognized
tax benefits to comply with FIN 48 measurement principles. The implementation of FIN 48
also resulted in a reduction in our net tax liabilities for uncertain tax positions
related to prior acquisitions accounted for under purchase accounting, resulting in an
$80 million decrease to goodwill. Additionally, the Company historically classified
unrecognized tax benefits in current taxes payable. As a result of the adoption of FIN
48, unrecognized tax benefits not expected to be paid in the next 12 months were
reclassified to other non-current liabilities. |
|
|
|
The total amount of unrecognized tax benefits at July 1, 2007 is $2,971 million,
excluding any related accruals for interest and penalties. Included in the total
unrecognized tax benefits is $1,893 million that, if recognized, would impact the
effective tax rate in future periods. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Accrued |
-8-
|
|
interest and penalties as of July 1, 2007 were $589 million and $128 million,
respectively, on an after tax basis. The amount of unrecognized tax benefits and related
interests and penalties that are expected to be paid in the next 12 months are not
material. |
|
|
P&G files income tax returns in multiple federal, state and local US and foreign
jurisdictions. The Company is subject to examination by the taxing authorities in these
jurisdictions, with open tax years generally ranging from 1997 and forward. The Company
has on-going audits in various stages of completion in several jurisdictions, one or more
of which might conclude within the next 12 months. Audit outcomes and the timing of
audit settlements are subject to significant uncertainty at this time. Such settlements
will involve some or all of the following: the payment of additional taxes, the
adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits.
It is possible that the amount of unrecognized benefit with respect to certain of our
uncertain tax positions will significantly increase or decrease within the next twelve
months related to the audits described above. At this time, we are not able to make a
reasonable estimate of the range of impact on the balance of unrecognized tax benefits or
the impact on the effective tax rate related to these items. |
|
|
|
The unrecognized tax benefits described above will be included in the Companys annual
Form 10-K contractual obligations table to the extent the Company is able to make
reliable estimates of the timing of cash settlements with the respective taxing
authorities. If not, the total amount of unrecognized tax benefits will be disclosed in
a footnote to the contractual obligations table. At this time, the Company can not make
a reliable estimate as to the timing of cash settlements. |
|
|
|
No other new accounting pronouncement issued or effective during the fiscal year had or
is expected to have a material impact on the consolidated financial statements. |
-9-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The purpose of this discussion is to provide an understanding of P&Gs financial results and
condition by focusing on changes in certain key measures from year to year. Managements
Discussion and Analysis (MD&A) is organized in the following sections:
|
|
|
Overview |
|
|
|
|
Summary of Results |
|
|
|
|
Forward-Looking Statements |
|
|
|
|
Results of Operations Three Months Ended September 30, 2007 |
|
|
|
|
Business Segment Discussion Three Months Ended September 30, 2007 |
|
|
|
|
Financial Condition |
|
|
|
|
Reconciliation of Non-GAAP Measures |
Throughout MD&A, we refer to measures used by management to evaluate performance, including unit
volume growth, net outside sales and after-tax profit. We also refer to organic sales growth, free
cash flow and free cash flow productivity. These financial measures 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 on the use and the
derivation of these measures. Management also uses certain market share and market consumption
estimates to evaluate performance relative to competition despite some limitations on the
availability and comparability of share information. References to market share and market
consumption in MD&A are based on a combination of vendor-reported consumption and market size data,
as well as internal estimates.
OVERVIEW
P&Gs business is focused on providing branded consumer goods products. Our goal is to provide
products of superior quality and value to improve the lives of the worlds consumers. We believe
this will result in leadership sales, profits and value creation, allowing employees, shareholders
and the communities in which we operate to prosper.
Our products are sold in more than 180 countries primarily through mass merchandisers, grocery
stores, membership club stores and drug stores. We have also expanded our presence in high
frequency stores, the neighborhood stores which serve many consumers in developing markets. We
compete in multiple product categories and have three global business units (GBUs): Beauty; Health
and Well-Being; and Household Care. Under U.S. Generally Accepted Accounting Principles, the
business units comprising the GBUs are aggregated into six reportable segments: Beauty; Grooming;
Health Care; Snacks, Coffee and Pet Care; Fabric Care and Home Care; and Baby Care and Family
Care. We have on-the-ground 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 comprised of three developed regions (North America,
Western Europe and Northeast Asia) and four developing regions (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 for the three months ended September 30, 2007 (excludes net sales and net earnings in
Corporate):
-10-
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
Net Earnings |
Beauty GBU |
|
|
32 |
% |
|
|
35 |
% |
Beauty |
|
|
22 |
% |
|
|
21 |
% |
Grooming |
|
|
10 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
Health and Well-Being GBU |
|
|
22 |
% |
|
|
24 |
% |
Health Care |
|
|
17 |
% |
|
|
20 |
% |
Snacks, Coffee and Pet Care |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
Household Care GBU |
|
|
46 |
% |
|
|
41 |
% |
Fabric Care and Home Care |
|
|
29 |
% |
|
|
28 |
% |
Baby Care and Family Care |
|
|
17 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
SUMMARY OF RESULTS
Following are highlights of results for the three months ended September 30, 2007:
|
|
|
Net sales grew eight percent to $20.2 billion. Organic sales, which exclude the
impacts of acquisitions, divestitures and foreign exchange, increased five percent. |
|
|
|
|
Unit volume increased five percent. Every reportable segment and each of our
geographic regions delivered year-on-year volume growth. |
|
|
|
|
Net earnings increased 14 percent to $3.1 billion. Net earnings increased behind
sales growth, operating profit margin improvement and a one-time tax benefit. |
|
|
|
|
Diluted net earnings per share were $0.92, an increase of 16 percent versus the
comparable prior year period. This included a $0.02 per share, or two percent, benefit
from a one-time tax benefit incurred during the quarter. |
|
|
|
|
Operating cash flow was $3.2 billion, an increase of nine percent versus the prior
year period. Free cash flow productivity was 87 percent for the quarter, roughly
in-line with the year-ago period. Free cash flow productivity is defined as the ratio
of operating cash flow less capital expenditures to net earnings. |
FORWARD-LOOKING STATEMENTS
We discuss expectations regarding future performance, events and outcomes, such as our business
outlook and objectives, in annual and quarterly reports, press releases and other written and oral
communications. All such statements, except for historical and present factual information, are
forward-looking statements, and are based on financial data and our business plans available only
as of the time the statements are made, which may become out-of-date or incomplete. We assume no
obligation to update any forward-looking statements as a result of new information, future events
or other factors. Forward-looking statements are inherently uncertain, and investors must
recognize that events could be significantly different from our expectations.
Ability to Achieve Business Plans. We are a consumer products company and rely on
continued demand for our brands and products. To achieve business goals, we must develop and sell
products that appeal to consumers and retail trade customers. Our continued success is dependent
on leading-edge innovation with respect to both products and operations and on the continued
positive reputations of our brands. This means we must be able to obtain patents and respond to
technological advances and patents granted to competition. Our success is also dependent on
effective sales, advertising and marketing programs in an increasingly fragmented media
environment. Our ability to innovate and execute in these areas will determine the extent to which
we are able to grow existing sales and volume profitably, especially with respect to the product
categories and geographic markets (including developing markets) in which we have chosen to focus.
There are high levels of competitive activity in the environments in which we operate. To address
these challenges, we must respond to competitive factors, including pricing, promotional incentives
and trade terms. We must manage each of these factors, as
-11-
well as maintain mutually beneficial
relationships with our key customers, in order to effectively compete and achieve our business
plans. Since our goals include a growth component tied to acquisitions, we must manage
and integrate key acquisitions, such as the Gillette and Wella acquisitions, including achieving
the cost and growth synergies in accordance with stated goals.
Cost Pressures. Our costs are subject to fluctuations, particularly due to changes in
commodity prices, raw materials, cost of labor, foreign exchange and interest rates. Therefore,
our success is dependent, in part, on our continued ability to manage these fluctuations through
pricing actions, cost savings projects, sourcing decisions and certain hedging transactions. We
also must manage our debt and currency exposure, especially in volatile countries. We need to
maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing
plant arrangements. We must implement, achieve and sustain cost improvement plans, including our
outsourcing projects and those related to general overhead and workforce rationalization.
Global Economic Conditions. Economic changes, terrorist activity and political unrest may
result in business interruption, inflation, deflation or decreased demand for our products. Our
success will depend in part on our ability to manage continued global political and/or economic
uncertainty, especially in our significant geographic markets, as well as any political or economic
disruption due to terrorist and other hostile activities.
Regulatory Environment. Changes in laws, regulations and the related interpretations may
alter the environment in which we do business. This includes changes in environmental, competitive
and product-related laws, as well as changes in accounting standards and taxation requirements. Accordingly, our ability to manage regulatory, tax and legal matters (including product liability,
patent and intellectual property matters, as well as those related to the integration of Gillette
and its subsidiaries) and to resolve pending matters within current estimates may impact our
results.
RESULTS OF OPERATIONS Three Months Ended September 30, 2007
The following discussion provides a review of results for the three months ended September 30,
2007 versus the three months ended September 30, 2006.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30 |
|
|
|
|
2007 |
|
2006 |
|
% CHG |
|
|
|
NET SALES |
|
$ |
20,199 |
|
|
$ |
18,785 |
|
|
|
8 |
% |
COST OF PRODUCTS SOLD |
|
|
9,519 |
|
|
|
8,865 |
|
|
|
7 |
% |
|
|
|
GROSS MARGIN |
|
|
10,680 |
|
|
|
9,920 |
|
|
|
8 |
% |
SELLING, GENERAL & ADMINISTRATIVE
EXPENSE |
|
|
6,262 |
|
|
|
5,866 |
|
|
|
7 |
% |
|
|
|
OPERATING INCOME |
|
|
4,418 |
|
|
|
4,054 |
|
|
|
9 |
% |
TOTAL INTEREST EXPENSE |
|
|
359 |
|
|
|
358 |
|
|
|
|
|
OTHER NON-OPERATING INCOME, NET |
|
|
193 |
|
|
|
180 |
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES |
|
|
4,252 |
|
|
|
3,876 |
|
|
|
10 |
% |
INCOME TAXES |
|
|
1,173 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
|
3,079 |
|
|
|
2,698 |
|
|
|
14 |
% |
|
|
|
|
EFFECTIVE TAX RATE |
|
|
27.6 |
% |
|
|
30.4 |
% |
|
|
|
|
-12-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30 |
|
|
|
|
2007 |
|
2006 |
|
% CHG |
|
|
|
|
|
PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET EARNINGS |
|
$ |
0.97 |
|
|
$ |
0.84 |
|
|
|
15 |
% |
DILUTED NET EARNINGS |
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
|
16 |
% |
DIVIDENDS |
|
$ |
0.35 |
|
|
$ |
0.31 |
|
|
|
13 |
% |
AVERAGE DILUTED SHARES OUTSTANDING |
|
|
3,354.2 |
|
|
|
3,413.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Pt Chg
|
COMPARISONS AS A % OF NET SALES |
|
|
|
|
|
|
|
|
|
|
|
|
COST OF PRODUCTS SOLD |
|
|
47.1 |
% |
|
|
47.2 |
% |
|
|
(10 |
) |
GROSS MARGIN |
|
|
52.9 |
% |
|
|
52.8 |
% |
|
|
10 |
|
SELLING, GENERAL & ADMINISTRATIVE
EXPENSE |
|
|
31.0 |
% |
|
|
31.2 |
% |
|
|
(20 |
) |
OPERATING MARGIN |
|
|
21.9 |
% |
|
|
21.6 |
% |
|
|
30 |
|
EARNINGS BEFORE INCOME TAXES |
|
|
21.1 |
% |
|
|
20.6 |
% |
|
|
50 |
|
NET EARNINGS |
|
|
15.2 |
% |
|
|
14.4 |
% |
|
|
80 |
|
Net sales for the quarter were up eight percent to $20.2 billion. Sales growth was broad-based
with all reportable segments delivering six percent or higher sales growth. Unit volume increased
five percent for the quarter led by high single-digit growth in Fabric Care and Home Care and in
Baby Care and Family Care. Each geographic region posted year-on-year volume growth, led by
double-digit growth in developing regions. Volume grew behind initiative activity, led by Tide,
Downy, Febreze, Fusion, Head & Shoulders, Boss, Dolce & Gabbana, Naturella, Pampers, Charmin and
Pringles, all of which posted high-single digit or higher volume growth to offset softness in Braun
and pet care. There was no net mix impact for the quarter as positive product mix resulting from a
continued shift towards premium products was offset by disproportionate growth in developing
regions, where average unit selling prices are below the Company average. Foreign exchange had a
positive three percent impact on sales growth. Organic sales increased five percent for the
quarter.
Net Sales Change Drivers 2007 vs. 2006 (Three Months Ended Sept. 30)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume with |
|
Volume excluding |
|
|
|
|
|
|
|
|
|
|
Acquisitions & |
|
Acquisitions & |
|
|
|
|
|
|
|
|
|
|
Divestitures |
|
Divestitures |
|
Foreign Exchange |
|
Price |
|
Mix/ Other |
|
Net Sales Growth |
|
Beauty GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beauty |
|
|
2 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
6 |
% |
Grooming |
|
|
5 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
|
-1 |
% |
|
|
9 |
% |
Health and Well-Being GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
|
4 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
-1 |
% |
|
|
7 |
% |
Snacks, Coffee and Pet Care |
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
0 |
% |
|
|
2 |
% |
|
|
6 |
% |
Household Care GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabric Care and Home Care |
|
|
8 |
% |
|
|
8 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
-1 |
% |
|
|
10 |
% |
Baby Care and Fabric Care |
|
|
8 |
% |
|
|
8 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
-1 |
% |
|
|
10 |
% |
|
Total Company |
|
|
5 |
% |
|
|
5 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
8 |
% |
|
Sales percentage changes are approximations based on quantitative formulas that are consistently
applied.
Gross margin was up 10-basis points for the quarter to 52.9% of net sales. Commodity cost
increases had a negative impact on gross margin of approximately 80-basis points but were more
than offset by scale leverage from volume growth and cost savings projects.
Total selling, general and administrative expenses (SG&A) increased seven percent to $6.3 billion.
SG&A as a percentage of net sales was down 20-basis points as lower overhead spending as a
percentage of net sales more than offset higher marketing spending as a percentage of net sales.
Overhead spending as a percentage of net sales was down primarily due to volume scale leverage,
overhead cost controls and Gillette synergy savings.
-13-
Interest expense for the quarter was roughly in-line with the year-ago period. Other
non-operating income was also roughly in-line with the prior year. The base period included a
gain on the sale of Pert in North America and Sure, while the current period includes a gain on
the sale of our adult incontinence business in Japan.
Net earnings increased 14 percent to $3.1 billion behind sales growth, operating profit margin
expansion and a reduction in our tax rate. Our tax rate was down from 30.4% to 27.6% due to a
reduction in our going rate from a shift in the mix of earnings to lower tax rate countries and a
one-time tax benefit resulting from a reduction in the German statutory tax rate, which reduced
our deferred tax liabilities related to acquired intangible assets. Diluted net earnings per
share were $0.92, up 16 percent versus the prior year. Diluted earnings per share included a
$0.02 per share, or two percent impact, from the one-time tax benefit.
BUSINESS SEGMENT DISCUSSION Three Months Ended September 30, 2007
The following discussion provides a review of results by business segment. Analyses of the
results for the three months ended September 30, 2007 are provided compared to the same three
month period ended September 30, 2006. The primary financial measures used to evaluate segment
performance are net sales and net earnings. The table below provides supplemental information on
net sales and net earnings by business segment for the three months ended September 30, 2007
versus the comparable prior year period (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
Versus |
|
|
Earnings Before |
|
|
Versus |
|
|
|
|
|
|
Versus |
|
|
|
Net Sales |
|
|
Year Ago |
|
|
Income Taxes |
|
|
Year Ago |
|
|
Net Earnings |
|
|
Year Ago |
|
|
|
|
Beauty GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beauty |
|
$ |
4,599 |
|
|
|
6 |
% |
|
$ |
884 |
|
|
|
6 |
% |
|
$ |
689 |
|
|
|
9 |
% |
Grooming |
|
|
2,015 |
|
|
|
9 |
% |
|
|
614 |
|
|
|
17 |
% |
|
|
451 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health and Well-Being GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
|
3,559 |
|
|
|
7 |
% |
|
|
980 |
|
|
|
12 |
% |
|
|
648 |
|
|
|
9 |
% |
Snacks, Coffee and Pet Care |
|
|
1,123 |
|
|
|
6 |
% |
|
|
184 |
|
|
|
28 |
% |
|
|
113 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Household Care GBU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabric Care and Home Care |
|
|
5,904 |
|
|
|
10 |
% |
|
|
1,356 |
|
|
|
11 |
% |
|
|
916 |
|
|
|
10 |
% |
Baby Care and Family Care |
|
|
3,420 |
|
|
|
10 |
% |
|
|
678 |
|
|
|
13 |
% |
|
|
430 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Business Segments |
|
|
20,620 |
|
|
|
8 |
% |
|
|
4,696 |
|
|
|
12 |
% |
|
|
3,247 |
|
|
|
11 |
% |
Corporate |
|
|
(421 |
) |
|
|
N/A |
|
|
|
(444 |
) |
|
|
N/A |
|
|
|
(168 |
) |
|
|
N/A |
|
|
Total Company |
|
|
20,199 |
|
|
|
8 |
% |
|
|
4,252 |
|
|
|
10 |
% |
|
|
3,079 |
|
|
|
14 |
% |
|
BEAUTY GBU
Beauty
Beauty net sales increased six percent during the quarter to $4.6 billion. Sales increased behind
two percent volume growth, a one percent positive product mix impact from disproportionate growth
in prestige fragrances and three points of favorable foreign exchange. Prestige Fragrances volume
was up high-single digits behind growth on Dolce & Gabbana, Hugo Boss and Lacoste. In skin care,
volume was up low-single digits as high-single digit growth in developing regions more than offset
lower developed market volumes from the impact of a base period in North America that included the
launch of Olay Definity. Olay market share in the US increased more than one point versus the
year-ago period. Hair care volume was also up low-single digits as high-single digit growth in
developing regions more than offset a low-single digit volume decline in developed regions due to
the timing of promotion and initiative activity in North America. Hair care market share in the
-14-
U.S. increased by nearly two points during the quarter. The SK-II brand continues to recover
from prior period business disruptions in Asia and had a negative impact of roughly one percent on
Beauty sales. Net earnings in Beauty increased nine percent to $689 million primarily behind
higher sales growth. Before-tax profit margin was roughly in-line with the year-ago period as
volume scale leverage and cost savings projects in manufacturing and overheads offset the impact of
higher commodity costs and increased marketing investment.
Grooming
Grooming net sales increased nine percent to $2.0 billion during the quarter. Sales were up behind
five percent volume growth, a positive one percent pricing impact and a four percent favorable
foreign exchange impact. These were partially offset by a negative one percent mix impact as
positive product mix from growth on the premium-priced Fusion brand was more than offset by
disproportionate growth in developing regions, where average selling prices are below the segment
average. Blades and razors volume increased high-single digits behind growth in developing regions
exceeding 20%. In developed regions, blades and razors volume was down due to a base period that
included significant pipeline shipments related to the Fusion launch in Western Europe and Japan.
Fusion delivered double-digit volume growth in every geographic region where it has launched.
Market share in the U.S. was up four points on Fusion and two points on Venus behind the Venus
Breeze launch. Braun volume was down mid-single digits for the quarter primarily due to lower home
appliances shipments resulting from shipment constraints in Western Europe and a de-emphasis of the
home appliances business in the U.S. Net earnings in Grooming were up 17% for the quarter to $451
million behind sales growth and a 150-basis point earnings margin expansion. Earnings margin
improved behind lower overhead spending from volume scale leverage and Gillette synergies,
partially offset by higher marketing investment levels as a percentage of net sales.
HEALTH AND WELL-BEING GBU
Health Care
Health Care net sales increased seven percent during the quarter to $3.6 billion behind a four
percent increase in volume. Pricing added one percent and foreign exchange had a positive three
percent impact on net sales. Disproportionate growth in developing regions on feminine care and
oral care resulted in a negative one percent mix impact. Feminine care volume increased mid-single
digits behind double-digit growth in developing regions. Oral care volume was up low-single digits
behind high-single digit growth in developing regions. Oral care volume in developed regions grew
slightly over a base period that included the launch of Crest Pro Health paste in North America.
Crest toothpaste market share in the U.S. increased more than one point versus the year-ago period
behind continued growth on Pro Health. Volume in pharmaceuticals and personal health was in-line
with the year-ago period as the impact of adding the Swiss Precision Diagnostics business was
offset by lower bas business shipments on the remaining categories. Net earnings in Health Care
were up nine percent to $648 million behind sales growth and gross margin improvement. Gross
margin was up behind volume scale leverage, pricing and lower product costs. SG&A was roughly
in-line with the year-ago period as higher marketing spending was offset by lower overheads as a
percentage of net sales.
Snacks, Coffee and Pet Care
Snacks, Coffee and Pet Care net sales increased six percent to $1.1 billion during the quarter.
Volume increased two percent while product mix from the launch of premium-priced coffee products
and favorable foreign exchange each had a positive two percent impact. Snacks volume was up
double-digits behind the launch of Rice Infusion in Western Europe. Coffee volume increased
mid-single digits behind the launch of Folgers Black Silk, Folgers House Blend and Dunkin Donuts
coffee. In pet care, volume was down due to continued negative impacts from the voluntary wet pet
food recall in the U.S. last fiscal year. Net earnings in Snacks, Coffee and Pet Care increased
30% to $113 million as a result of sales growth, an insurance recovery related to Hurricane Katrina
and lower overhead and marketing spending as a percentage of net sales.
-15-
HOUSEHOLD CARE GBU
Fabric Care and Home Care
Fabric Care and Home Care net sales increased 10 percent to $5.9 billion. Volume was up eight
percent and favorable foreign exchange added three percent to sales growth. This was partially
offset by a negative one percent mix impact primarily from disproportionate growth in developing
regions and on large pack sizes in fabric care. Fabric care volume increased high-single digits
behind the initial wave of the liquid laundry detergent compaction launch in North America and the
launch of Tide Pure Essentials. Home care volume was up double-digits for the quarter behind the
Dawn restage in North America, the launch of Febreze candles and continued expansion of
auto-dishwashing products in Western Europe. Batteries volume was up mid-single digits behind
double-digit volume growth in developing regions. Net earnings in Fabric Care and Home Care
increased 10 percent to $916 million. Earnings margin was in-line with the year-ago level as a
slight reduction in gross margin was offset by an improvement SG&A. Gross margin was down slightly
as volume scale leverage and manufacturing cost savings projects largely offset higher commodity
costs. SG&A improved as a percentage of net sales as higher marketing spending was more than
offset by lower overheads as a percentage of net sales.
Baby Care and Family Care
Baby Care and Family Care net sales increased 10 percent to $3.4 billion behind eight percent
volume growth and a three percent favorable foreign exchange impact, partially offset by a negative
one percent mix impact from disproportionate growth on large pack sizes and on the lower-priced
Basic product tier. Volume growth was balanced across the segment with high-single digit growth in
both baby care and family care. Baby care volume in developed regions was up mid-single digits
behind growth on Pampers Baby Stages of Development and on the Baby Dry caterpillar flex
initiative. In developing regions, baby care volume was up double-digits, led by growth on Pampers
across regions. Family care volume was up behind the Charmin product restage and continued growth
on the Basic product tier. Net earnings in Baby Care and Family Care were up 12 percent to $430
million behind sales growth and a 50-basis point improvement in before-tax profit margin. Gross
margin declined from the impact of higher pulp and commodity costs, but was more than offset by
lower SG&A as a percentage of sales resulting from lower overhead and marketing as a percentage of
net sales.
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 brands and categories, including certain Gillette
brands that were divested as required by the regulatory authorities in relation to 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.
Since both unconsolidated entities and less than 100% 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% of each income statement
component through before-tax earnings in the segments, with eliminations for unconsolidated
entities in Corporate. In determining segment net earnings, we apply the statutory tax rates
(with adjustments to arrive at the Companys effective tax rate in Corporate) and eliminate the
share of earnings applicable to other ownership interests, in a manner similar to minority
interest.
-16-
Net earnings in Corporate increased $47 million versus the year-ago period. The increase was
driven primarily by the aforementioned one-time tax benefit resulting from a change in the
statutory tax rate in Germany, partially offset by higher restructuring spending.
FINANCIAL CONDITION
Operating Activities
Cash generated from operating activities was $3.2 billion, an increase of nine percent versus the
comparable prior year period. Net earnings, adjusted for non-cash items (primarily depreciation,
amortization, share based compensation and deferred income taxes) provided $4.2 billion of
operating cash. This was partially offset by an increase in working capital driven by higher
inventory and accounts receivable levels.
Investing Activities
Investing activities in the current year used $419 million, compared to the prior year period cash
use of $448 million. Capital expenditures were $540 million, or 2.7 percent of net sales for the
quarter. Proceeds from asset sales generated $274 million in cash from the sale of our adult
incontinence business in Japan and cash received during the current quarter for minor Beauty
divestitures that closed last fiscal year.
Financing Activities
Total cash used by financing activities was $3.6 billion versus $2.5 billion in the comparable
prior year period. We repurchased $2.6 billion of treasury shares under a previously announced
share buyback program that started in July 2007. We reduced our debt position by $385 million
during the quarter. In the prior year period, we repurchased $1.4 billion of treasury shares
funded in part by increases in our debt position of $550 million during the period.
As of September 30, 2007 the Companys current liabilities exceeded current assets by $5.7
billion, driven by our short-term debt position. The Company anticipates being able to support
its short-term liquidity through cash generated from operations. The Company also has very strong
long- and short-term debt ratings which will enable it to continue to refinance this debt at
favorable rates in commercial paper and bond markets. In addition, the Company has agreements
with a diverse group of creditworthy financial institutions that, if needed, would provide
sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF 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 July-September quarter:
-17-
|
|
|
|
|
|
|
Total Company |
Total Sales Growth |
|
|
8 |
% |
Less: Foreign Exchange Impact |
|
|
(3 |
)% |
Less: Acquisition/Divestiture Impact |
|
|
0 |
% |
|
|
|
|
|
Organic Sales Growth |
|
|
5 |
% |
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 Companys 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 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
Capital |
|
Free |
|
Net |
|
Free Cash Flow |
|
|
Cash Flow |
|
Spending |
|
Cash Flow |
|
Earnings |
|
Productivity |
Jul Sept 07
|
|
$ |
3,230 |
|
|
$ |
(540 |
) |
|
$ |
2,690 |
|
|
$ |
3,079 |
|
|
|
87 |
% |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Companys exposure to market risk since June
30, 2007. Additional information can be found in the section entitled Other Information,
which appears on page 47, and Note 6, Risk Management Activities, which appears on pages
59-60 of the Annual Report to Shareholders for the fiscal year ended June 30, 2007 which
can be found by reference to Exhibit 13 of the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2007.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
The Companys Chairman of the Board and Chief Executive Officer, A. G. Lafley, and the Companys
Chief Financial Officer, Clayton C. Daley, Jr., performed an evaluation of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this
report. Messrs. Lafley and Daley have concluded that the Companys disclosure controls and
procedures were effective to ensure that information required to be disclosed in reports we file
or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms, and (2)
accumulated and communicated to our management, including Messrs. Lafley and Daley, to allow
their timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the
Companys fiscal quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Environmental
Matter
In August 2007, The Procter & Gamble Manufacturing Company, a subsidiary of the Company,
received and subsequently accepted an offer of settlement from the Sacramento
Metropolitan Air Quality Management District to resolve notices of violation alleging
noncompliance with certain air emission permit requirements at the subsidiarys
Sacramento, California plant. The subsidiary paid $42,720 to settle one notice and
$60,660 to settle two other notices. These issues were resolved through the Districts
Mutual Settlement Program and no judicial proceeding was involved.
Item 1A. Risk Factors.
For a discussion of the Companys risk factors, please refer to Part 1, Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate dollar value of |
|
|
|
|
|
|
Shares Purchased |
|
shares that may yet be |
|
|
Total Number |
|
|
|
as Part of Publicly |
|
purchased under our share |
|
|
of Shares |
|
Average Price Paid per |
|
Announced Plans or |
|
repurchase program |
Period |
|
Purchased (1) |
|
Share (2) |
|
Programs (3) |
|
($ in Billions) (3) |
7/1/07 7/31/07
|
|
17,387,196
|
|
$62.27
|
|
13,745,477
|
|
29.1 |
8/1/07 8/31/07
|
|
17,930,714
|
|
$64.20
|
|
17,880,820
|
|
28.0 |
9/1/07 9/30/07
|
|
8,706,358
|
|
$66.48
|
|
8,702,575
|
|
27.4 |
|
|
|
(1) |
|
The number of shares purchased other than through a publicly announced repurchase plan were 3,695,396. All transactions were made in the open
market. This includes 70,821 shares acquired by the Company under various compensation and benefit plans and 3,624,575 shares acquired by the
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 cashless exercises through an independent, third party broker and does not repurchase
stock in connection with cashless exercise. |
|
(2) |
|
Average price paid per share is calculated on a settlement basis and excludes commission. |
|
(3) |
|
On August 3, 2007, the Company announced a share repurchase plan authorized by the Companys Board of Directors. Pursuant to the share
repurchase plan, the Company announced its intention to acquire in open market and/or private transactions $24 to $30 billion of Company common
stock over the next three fiscal years to be financed with cash generated from operations and by issuing a combination of long-term and short-term
debt. Certain purchases accounted for in Column 4 of this table were made prior to the announcement of the program but are considered purchases
against the program. The numbers listed in Column 5 include commissions paid to brokers to execute the transactions. |
-19-
Item 4. Submission of Matters to a Vote of Security Holders.
At the Companys 2007 Annual Meeting of Shareholders held on October 9, 2007, the following actions were taken:
The following Directors were elected for terms of office expiring in 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
|
Votes For |
|
Votes Withheld |
|
Abstentions* |
|
Non-Votes* |
Rajat K. Gupta |
|
|
2,596,342,443 |
|
|
|
67,126,838 |
|
|
|
N/A |
|
|
|
N/A |
|
A. G. Lafley |
|
|
2,596,837,384 |
|
|
|
66,631,897 |
|
|
|
N/A |
|
|
|
N/A |
|
Lynn M. Martin |
|
|
2,595,736,826 |
|
|
|
67,732,455 |
|
|
|
N/A |
|
|
|
N/A |
|
Johnathan A. Rodgers |
|
|
2,587,134,053 |
|
|
|
76,335,228 |
|
|
|
N/A |
|
|
|
N/A |
|
John F. Smith, Jr. |
|
|
2,601,332,793 |
|
|
|
62,136,488 |
|
|
|
N/A |
|
|
|
N/A |
|
Ralph Snyderman |
|
|
2,604,750,047 |
|
|
|
58,719,234 |
|
|
|
N/A |
|
|
|
N/A |
|
Margaret C. Whitman |
|
|
2,607,132,323 |
|
|
|
56,336,958 |
|
|
|
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 seven
nominees named. |
In addition, the following Directors continued to serve as Directors after the meeting:
Bruce L. Byrnes
Scott D. Cook
Charles R. Lee
W. James McNerney, Jr.
Ernesto Zedillo
A proposal by the Board of Directors to ratify the appointment of Deloitte & Touche LLP
as the Companys 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, 2008, was approved by the shareholders. The shareholders cast
2,609,051,396 votes in favor of this proposal and 26,049,138 votes against. There were
28,368,747 abstentions.
A shareholder resolution proposed by Mrs. Evelyn Y. Davis was defeated by the
shareholders. The proposal requested that the Board of Directors take the necessary
steps to award no new stock options. The Board opposed the resolution. The shareholders
cast 81,497,637 votes in favor of the resolution and 2,046,486,408 against. There were
41,993,765 abstentions and 493,491,471 broker non-votes.
A shareholder resolution proposed by The Free Enterprise Action Fund was defeated by the
shareholders. The proposal requested that the Board of Directors report on company
policies intended to promote free enterprise, improve the general business environment
and to prevent anti-business activists from harming shareholder value. The Board opposed
the resolution. The shareholders cast 94,056,423 votes in favor of the resolution and
1,853,046,023 against. There were 222,875,364 abstentions and 493,491,471 broker
non-votes.
A shareholder resolution proposed by People for the Ethical Treatment of Animals was
defeated by the shareholders. The proposal requested that the Board of Directors report
on the feasibility of
-20-
phasing out Iams funding for and use of laboratory tests on animals and replacing these
tests with methods offered by PetSci, LLC. The Board opposed the resolution. The
shareholders cast 76,836,000 votes in favor of the resolution and 1,778,800,507 against.
There were 314,341,303 abstentions and 493,491,471 broker non-votes.
Although these actions occurred following the first quarter, the Company is voluntarily
including this information here.
-21-
Item 6. Exhibits
Exhibit
|
|
|
3-1
|
|
Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the
Companys Form 10-Q for the quarter ended September 30, 2005). |
|
|
|
3-2
|
|
Regulations (as amended by shareholders at the annual meeting on October 10, 2006)
(Incorporated by reference to Exhibit (3-2) of the Companys Form 10-Q for the quarter
ended September 30, 2006). |
|
|
|
10-1
|
|
Summary of the Companys Short Term Achievement Reward Program, and related
correspondence and terms and conditions.* |
|
|
|
10-2
|
|
The Procter & Gamble 2001 Stock and Incentive Compensation Plan (as amended on August
14, 2007) which was adopted by shareholders at the annual meeting on October 9, 2001,
and related correspondence and terms and conditions.* |
|
|
|
10-3
|
|
The Procter & Gamble 2003 Non-Employee Directors Stock Plan (as adjusted for the
stock split effective May 21, 2004) which was adopted by the shareholders at the annual
meeting on October 14, 2003, and related correspondence and terms and conditions.* |
|
|
|
10-4
|
|
The Gillette Company 2004 Long-Term Incentive Plan.* |
|
|
|
10-5
|
|
Amended Revolving Credit Agreement among Procter & Gamble International
S.a.r.l and a syndicate of banks led by Citigroup. |
|
|
|
11
|
|
Computation of Earnings per Share. |
|
|
|
12
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-15(a) Certification Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certifications Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certifications Chief Financial Officer |
|
|
|
* |
|
Compensatory plan or arrangement |
-22-
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
|
October 31, 2007 |
|
/s/ VALARIE L. SHEPPARD |
Date |
|
(Valarie L. Sheppard) |
|
|
Vice President and Comptroller |
|
-23-
EXHIBIT INDEX
Exhibit
|
|
|
3-1
|
|
Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the
Companys Form 10-Q for the quarter ended September 30, 2005). |
|
|
|
3-2
|
|
Regulations (as amended by shareholders at the annual meeting on October 10, 2006)
(Incorporated by reference to Exhibit (3-2) of the Companys Form 10-Q for the quarter
ended September 30, 2006). |
|
|
|
10-1
|
|
Summary of the Companys Short Term Achievement Reward Program, and related
correspondence and terms and conditions. |
|
|
|
10-2
|
|
The Procter & Gamble 2001 Stock and Incentive Compensation Plan (as amended on August
14, 2007) which was adopted by shareholders at the annual meeting on October 9, 2001,
and related correspondence and terms and conditions. |
|
|
|
10-3
|
|
The Procter & Gamble 2003 Non-Employee Directors Stock Plan (as adjusted for the
stock split effective May 21, 2004) which was adopted by the shareholders at the annual
meeting on October 14, 2003, and related correspondence and
terms and conditions. |
|
|
|
10-4
|
|
The Gillette Company 2004 Long-Term Incentive Plan. |
|
|
|
10-5
|
|
Amended Revolving Credit Agreement among Procter & Gamble International
S.a.r.l and a syndicate of banks led by Citigroup. |
|
|
|
11
|
|
Computation of Earnings per Share. |
|
|
|
12
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-15(a) Certification Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certifications Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certifications Chief Financial Officer |