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 March 31, 2007
OR
|
o
|
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, an accelerated
filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
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
3,148,924,126 shares of Common Stock outstanding as of March 31,
2007.
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 and nine months ended March 31,
2007 and 2006, the Consolidated Balance Sheets as of March 31,
2007 and June 30,
2006, and the Consolidated Statements of Cash Flows for the nine
months ended
March 31, 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
|
Three
Months
Ended
|
Nine
Months
Ended
|
||||||||||||
|
March
31
|
March
31
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
NET
SALES
|
$
|
18,694
|
$
|
17,250
|
$
|
57,204
|
$
|
50,380
|
|||||
|
Cost
of
products sold
|
9,057
|
8,340
|
27,210
|
24,231
|
|||||||||
|
Selling,
general and
|
|||||||||||||
|
administrative
expense
|
5,991
|
5,559
|
17,945
|
15,849
|
|||||||||
|
OPERATING
INCOME
|
3,646
|
3,351
|
12,049
|
10,300
|
|||||||||
|
Interest
expense
|
279
|
301
|
976
|
819
|
|||||||||
|
Other
non-operating income, net
|
169
|
79
|
429
|
221
|
|||||||||
|
EARNINGS
BEFORE INCOME TAXES
|
3,536
|
3,129
|
11,502
|
9,702
|
|||||||||
|
Income
taxes
|
1,024
|
918
|
3,430
|
2,916
|
|||||||||
|
NET
EARNINGS
|
$
|
2,512
|
$
|
2,211
|
$
|
8,072
|
$
|
6,786
|
|||||
|
PER
COMMON
SHARE:
|
|||||||||||||
|
Basic
net
earnings
|
$
|
0.78
|
$
|
0.67
|
$
|
2.51
|
$
|
2.22
|
|||||
|
Diluted
net
earnings
|
$
|
0.74
|
$
|
0.63
|
$
|
2.37
|
$
|
2.10
|
|||||
|
Dividends
|
$
|
0.31
|
$
|
0.28
|
$
|
0.93
|
$
|
0.84
|
|||||
|
DILUTED
WEIGHTED AVERAGE
|
|||||||||||||
|
COMMON
SHARES
OUTSTANDING
|
3,397.3
|
3,510.5
|
3,405.7
|
3,235.4
|
|||||||||
|
See
accompanying Notes to Consolidated Financial Statements
|
|||||||||||||
THE
PROCTER
& GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
THE
PROCTER
& GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Nine
Months
Ended
|
|||||||
|
Amounts
in
millions
|
March
31
|
||||||
|
2007
|
2006
|
||||||
|
CASH
AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
$
|
6,693
|
$
|
6,389
|
|||
|
OPERATING
ACTIVITIES
|
|||||||
|
Net
earnings
|
8,072
|
6,786
|
|||||
|
Depreciation
and amortization
|
2,367
|
1,891
|
|||||
|
Share-based
compensation expense
|
482
|
400
|
|||||
|
Deferred
income
taxes
|
306
|
116
|
|||||
|
Changes
in:
|
|||||||
|
Accounts
receivable
|
(866
|
)
|
(250
|
)
|
|||
|
Inventories
|
(636
|
)
|
(161
|
)
|
|||
|
Accounts
payable, accrued and other liabilities
|
(233
|
)
|
(582
|
)
|
|||
|
Other
operating
assets and liabilities
|
38
|
(81
|
)
|
||||
|
Other
|
323
|
66
|
|||||
|
TOTAL
OPERATING ACTIVITIES
|
9,853
|
8,185
|
|||||
|
INVESTING
ACTIVITIES
|
|||||||
|
Capital
expenditures
|
(1,996
|
)
|
(1,666
|
)
|
|||
|
Proceeds
from
asset sales
|
257
|
352
|
|||||
|
Acquisitions
|
(167
|
)
|
216
|
||||
|
Change
in
investment securities
|
725
|
491
|
|||||
|
TOTAL
INVESTING ACTIVITIES
|
(1,181
|
)
|
(607
|
)
|
|||
|
FINANCING
ACTIVITIES
|
|||||||
|
Dividends
to
shareholders
|
(3,069
|
)
|
(2,645
|
)
|
|||
|
Change
in
short-term debt
|
9,074
|
(6,009
|
)
|
||||
|
Additions
to
long-term debt
|
1,403
|
17,136
|
|||||
|
Reductions
of
long-term debt
|
(16,088
|
)
|
(4,367
|
)
|
|||
|
Impact
of stock
options and other
|
1,213
|
1,119
|
|||||
|
Treasury
purchases
|
(4,061
|
)
|
(10,596
|
)
|
|||
|
TOTAL
FINANCING ACTIVITIES
|
(11,528
|
)
|
(5,362
|
)
|
|||
|
EFFECT
OF
EXCHANGE RATE CHANGES ON CASH
|
|||||||
|
AND
CASH
EQUIVALENTS
|
157
|
70
|
|||||
|
CHANGE
IN
CASH AND CASH EQUIVALENTS
|
(2,699
|
)
|
2,286
|
||||
|
CASH
AND CASH
EQUIVALENTS, END OF PERIOD
|
$
|
3,994
|
$
|
8,675
|
|||
|
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, 2006. The results of operations for the three-month
and
nine-month periods ended March 31, 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 March 31, 2007 and 2006 was $2,800
million and
$2,534 million, respectively. For the nine months ended March 31,
2007 and 2006,
total comprehensive income was $8,976 million and $7,118 million,
respectively.
3. Segment
Information -
Following is a summary of segment results. As noted in Note 4,
the Company
acquired The Gillette Company on October 1, 2005. Accordingly,
results of the
acquired Gillette businesses are only included in segment results
since October
1, 2005.
SEGMENT
INFORMATION
|
Amounts
in
millions
|
|||||||||
|
|
Three
Months
Ended March 31
|
Nine
Months
Ended March 31
|
|||||||
|
|
|
Net
Sales
|
Earnings
Before Income Taxes
|
Net
Earnings
|
Net
Sales
|
Earnings
Before Income Taxes
|
Net
Earnings
|
||
|
|
|
|
|
|
|||||
|
Beauty
|
2007
|
$
5,620
|
$
1,112
|
$
805
|
$
17,107
|
$
3,644
|
$
2,685
|
||
|
|
2006
|
5,214
|
1,044
|
738
|
15,683
|
3,294
|
2,369
|
||
|
|
|
|
|
|
|||||
|
Health
Care
|
2007
|
2,189
|
529
|
347
|
6,771
|
1,772
|
1,204
|
||
|
|
2006
|
1,995
|
389
|
265
|
5,885
|
1,418
|
964
|
||
|
Beauty
and Health
|
2007
|
7,809
|
1,641
|
1,152
|
23,878
|
5,416
|
3,889
|
||
|
|
2006
|
7,209
|
1,433
|
1,003
|
21,568
|
4,712
|
3,333
|
||
|
|
|
|
|
|
|||||
|
Fabric
Care
and Home Care
|
2007
|
4,738
|
1,031
|
685
|
14,172
|
3,142
|
2,112
|
||
|
|
2006
|
4,221
|
846
|
567
|
12,796
|
2,760
|
1,845
|
||
|
|
|
|
|
|
|||||
|
Baby
Care and
Family Care
|
2007
|
3,268
|
606
|
382
|
9,486
|
1,754
|
1,106
|
||
|
|
2006
|
2,972
|
527
|
326
|
8,897
|
1,552
|
976
|
||
|
|
|
|
|
|
|||||
|
Snacks,
Coffee
and Pet Care
|
2007
|
1,090
|
191
|
116
|
3,406
|
567
|
353
|
||
|
|
2006
|
1,087
|
202
|
120
|
3,273
|
498
|
308
|
||
|
Household
Care
|
2007
|
9,096
|
1,828
|
1,183
|
27,064
|
5,463
|
3,571
|
||
|
|
2006
|
8,280
|
1,575
|
1,013
|
24,966
|
4,810
|
3,129
|
||
|
|
|
|
|
|
|||||
|
Blades
and
Razors
|
2007
|
1,284
|
405
|
294
|
3,865
|
1,272
|
932
|
||
|
|
2006
|
1,187
|
361
|
265
|
2,340
|
736
|
537
|
||
|
|
|
|
|
|
|||||
|
Duracell
and
Braun
|
2007
|
789
|
29
|
18
|
3,112
|
492
|
331
|
||
|
|
2006
|
763
|
76
|
54
|
2,042
|
319
|
219
|
||
|
Gillette
Business Unit
|
2007
|
2,073
|
434
|
312
|
6,977
|
1,764
|
1,263
|
||
|
|
2006
|
1,950
|
437
|
319
|
4,382
|
1,055
|
756
|
||
|
|
|
|
|
|
|||||
|
Corporate
|
2007
|
(284)
|
(367)
|
(135)
|
(715)
|
(1,141)
|
(651)
|
||
|
|
2006
|
(189)
|
(316)
|
(124)
|
(536)
|
(875)
|
(432)
|
||
|
Total
|
2007
|
$
18,694
|
$
3,536
|
$
2,512
|
$
57,204
|
$
11,502
|
$
8,072
|
||
|
|
2006
|
17,250
|
3,129
|
2,211
|
50,380
|
9,702
|
6,786
|
||
4. We
completed
our
acquisition of The Gillette Company on October 1, 2005. Accordingly,
the
operating results of the Gillette businesses are reported in
our financial
statements beginning October 1, 2005. The following table provides
pro forma
results of operations for the nine months ended March 31, 2006,
as if Gillette
had been acquired as of the beginning of the fiscal year presented.
The pro
forma results include certain purchase accounting adjustments
such as the
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 integration activities of
Gillette.
Accordingly, such amounts are not necessarily indicative of the
results if the
acquisition had occurred on the date indicated or that may result
in the future
(amounts in millions):
|
Nine
Months
Ended March 31, 2006
|
|
|
Net
Sales
|
$53,163
|
|
Net
Earnings
|
$6,968
|
|
Diluted
Net
Earnings per Common Share
|
$1.96
|
During
the three
months ended September 30, 2006, we completed the allocation of
the purchase
price to the individual assets acquired and liabilities assumed.
To assist
management in the allocation, we engaged valuation specialists
to prepare
independent appraisals. The following table presents the completed
allocation of
purchase price for the Gillette business as of the date of the
acquisition.
|
Amounts
in
millions
|
||||
|
Current
assets
|
$
|
5,681
|
||
|
Property,
plant and equipment
|
3,655
|
|||
|
Goodwill
|
35,298
|
|||
|
Intangible
assets
|
29,707
|
|||
|
Other
noncurrent assets
|
382
|
|||
|
Total
assets acquired
|
74,723
|
|||
|
Current
liabilities
|
5,346
|
|||
|
Noncurrent
liabilities
|
15,951
|
|||
|
Total
liabilities assumed
|
21,297
|
|||
|
Net
assets acquired
|
53,426
|
|||
The
Gillette
acquisition resulted in $35.30 billion in goodwill, allocated primarily
to the
segments comprising the Gillette businesses (Blades and Razors;
Duracell and
Braun; Health Care and Beauty). A
portion of the
goodwill has also been allocated to the other segments on the basis
that certain
cost synergies will benefit these businesses.
The
purchase price
allocation to the identifiable intangible assets included in these
financial
statements is as follows:
|
Dollar
amounts in millions
|
|
Weighted
average life
|
|||||
|
Intangible
Assets with Determinable Lives
|
|||||||
|
Brands
|
$
|
1,627
|
20
|
||||
|
Patents
and
technology
|
2,716
|
17
|
|||||
|
Customer
relationships
|
1,436
|
27
|
|||||
|
Brands
with Indefinite Lives
|
23,928
|
Indefinite
|
|||||
|
Total
intangible assets
|
$
|
29,707
|
|
||||
The
majority of the
intangible asset valuation relates to brands. Our assessment as
to brands that
have an indefinite life and those that have a definite life was
based on a
number of factors, including the competitive environment, market
share, brand
history, product life cycles, operating plan and macroeconomic
environment of
the countries in which the brands are sold. The indefinite-lived
brands include
Gillette, Venus, Duracell, Oral-B and Braun. The definite-lived
brands include
certain brand sub-names, such as MACH 3 and Sensor in the Gillette
Blades and
Razors business, and other regional or local brands. The definite-lived
brands
have asset lives ranging from 10 to 40 years. The patents and technology
intangibles are concentrated in the Blades and Razors and Oral
Care businesses
and have asset lives ranging from 5 to 20 years. The estimated
customer
relationship intangible asset useful lives ranging from 20 to 30
years reflect
the very low historical and projected customer attrition rates
among Gillette’s
major retailer and distributor customers.
We
also previously
completed 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, as well as
redundant
manufacturing capacity. 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. As of March 31, 2007, the remaining
liability was
$715 million. Total integration plan charges against the assumed
liability were
$84 million for the three months ended March 31, 2007 and $357
million for the
nine months ended March 31, 2007. We expect such activities to
be substantially
complete by June 30, 2008.
5.
Goodwill
and Other Intangible Assets - Goodwill as of March 31, 2007 is
allocated by
reportable segment and global business unit as follows (amounts
in
millions):
|
|
Nine
Months Ended March 31, 2007
|
|||
|
Beauty,
beginning of year
|
$
|
17,870
|
||
|
Acquisitions
and divestitures
|
78
|
|||
|
Translation
and other
|
381
|
|||
|
Goodwill,
March 31, 2007
|
18,329
|
|||
|
Health
Care, beginning of year
|
6,090
|
|||
|
Acquisitions
and divestitures
|
(1
|
)
|
||
|
Translation
and other
|
64
|
|||
|
Goodwill,
March 31, 2007
|
6,153
|
|||
| Total Beauty & Health Care, beginning of year |
23,960
|
|||
|
Acquisitions
and divestitures
|
77
|
|||
|
Translation
and other
|
445
|
|||
|
Goodwill,
March 31, 2007
|
24,482
|
|||
|
Baby
Care and Family Care, beginning of year
|
1,563
|
|||
|
Acquisitions
and divestitures
|
7
|
|||
|
Translation
and other
|
37
|
|||
|
Goodwill,
March 31, 2007
|
1,607
|
|||
|
Fabric
Care and Home Care, beginning of year
|
1,850
|
|||
|
Acquisitions
and divestitures
|
12
|
|||
|
Translation
and other
|
29
|
|||
|
Goodwill,
March 31, 2007
|
1,891
|
|||
|
Snacks,
Coffee and Pet Care, beginning of year
|
2,396
|
|||
|
Acquisitions
and divestitures
|
5
|
|||
|
Translation
and other
|
5
|
|||
|
Goodwill,
March 31, 2007
|
2,406
|
|||
| Total Household Care, beginning of year |
5,809
|
|||
|
Acquisitions
and divestitures
|
24
|
|||
|
Translation
and other
|
71
|
|||
|
Goodwill,
March 31, 2007
|
5,904
|
|||
|
Blades
and Razors, beginning of year
|
21,539
|
|||
|
Acquisitions
and divestitures
|
200
|
|||
|
Translation
and other
|
236
|
|||
|
Goodwill,
March 31, 2007
|
21,975
|
|||
|
Duracell
and Braun, beginning of year
|
3,998
|
|||
|
Acquisitions
and divestitures
|
68
|
|||
|
Translation
and other
|
44
|
|||
|
Goodwill,
March 31, 2007
|
4,110
|
|||
| Total Gillette Business Unit, beginning of year |
25,537
|
|||
|
Acquisitions
and divestitures
|
268
|
|||
|
Translation
and other
|
280
|
|||
|
Goodwill,
March 31, 2007
|
26,085
|
|||
| Goodwill, Net, beginning of year |
55,306
|
|||
|
Acquisitions
and divestitures
|
369
|
|||
|
Translation
and other
|
796
|
|||
|
Goodwill,
March 31, 2007
|
$
|
56,471
|
||
The
increase in
goodwill from June 30, 2006 is primarily due to the currency translation
and the
finalization of the purchase price allocation relating to the acquisition
of The
Gillette Company.
Identifiable
intangible assets as of March 31, 2007 are comprised of (amounts
in
millions):
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||
|
Amortizable
intangible assets with determinable lives
|
$
|
8,353
|
$
|
1,746
|
|||
|
Intangible
assets with indefinite lives
|
26,856
|
-
|
|||||
|
Total
identifiable intangible assets
|
$
|
35,209
|
$
|
1,746
|
|||
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 March 31,
2007 and 2006
was $153 million and $161 million, respectively. For the nine months
ended March
31, 2007 and 2006, the amortization expense of intangible assets
was $484
million and $397 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 and nine months ended March 31,
2007 and 2006
are summarized in the following table (amounts in millions):
|
Three
Months
Ended
March
31
|
Nine
Months
Ended
March
31
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Share-Based
Compensation
|
|||||||||||||
|
Stock
Options
|
$
|
180
|
$
|
178
|
$
|
439
|
$
|
355
|
|||||
|
Other
Share-Based Awards
|
13
|
14
|
43
|
45
|
|||||||||
|
Total
Share-Based Compensation
|
$
|
193
|
$
|
192
|
$
|
482
|
$
|
400
|
|||||
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.
Additional information about these benefits is incorporated herein
by reference
to Note 9, Postretirement Benefits and Employee Stock Ownership
Plan, which
appears on pages 55-59 of the Annual Report to Shareholders for
the fiscal year
ended June 30, 2006, which can be found by reference to Exhibit
13 of the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2006.
The
components of
net periodic benefit cost are as follows:
|
Amounts
in
millions
|
Pension
Benefits
|
Other
Retiree
Benefits
|
|||||||||||
|
Nine
Months
Ended
|
Nine
Months
Ended
|
||||||||||||
|
March
31
|
March
31
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Service
Cost
|
$
|
200
|
$
|
196
|
$
|
61
|
$
|
73
|
|||||
|
Interest
Cost
|
352
|
273
|
154
|
131
|
|||||||||
|
Expected
Return on Plan Assets
|
(328
|
)
|
(250
|
)
|
(305
|
)
|
(278
|
)
|
|||||
|
Amortization
of Deferred Amounts
|
9
|
6
|
(17
|
)
|
(14
|
)
|
|||||||
|
Curtailment
Gain
|
(154
|
)
|
-
|
-
|
-
|
||||||||
|
Recognized
Net Actuarial Loss
|
34
|
56
|
2
|
2
|
|||||||||
|
Gross
Benefit Cost (Credit)
|
113
|
281
|
(105
|
)
|
(86
|
)
|
|||||||
|
Dividends
on
ESOP Preferred Stock
|
-
|
-
|
(62
|
)
|
(57
|
)
|
|||||||
|
Net
Periodic Benefit Cost (Credit)
|
$
|
113
|
$
|
281
|
$
|
(167
|
)
|
$
|
(143
|
)
|
|||
For
the year ending
June 30, 2007, the expected return on plan assets is 7.2% and 9.3%
for defined
benefit and other retiree benefit plans, respectively.
The
curtailment
gain of $154 million reflects the impact of harmonizing Gillette
U.S.
postretirement income benefits with P&G’s benefit structure. Pursuant to
plan revisions during the quarter, Gillette’s U.S. defined benefit pension plans
will be frozen, effective January 1, 2008, at which time, Gillette
employees in
the U.S. will move into the P&G defined contribution Profit Sharing Trust
and Employee Stock Ownership Plan.
8.
New
Accounting Standards
In
July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes.”
FIN 48 addresses the accounting and disclosure of uncertain tax
positions. We
will adopt FIN 48 on July 1, 2007. We are evaluating the impact,
if any, that
FIN 48 will have on our financial statements.
In
September 2006,
the FASB issued SFAS 157, “Fair Value Measurements,” which established a
framework for measuring fair value and will be effective beginning
July 1, 2008.
We are evaluating the impact, if any, that SFAS 157 will have on
our financial
statements.
In
September 2006,
the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.” SFAS 158 requires companies to recognize the
over-funded and under-funded status of defined benefit pension
and other
postretirement plans as assets or liabilities on their balance
sheets and to
recognize changes in that funded status, in the year in which changes
occur,
through other comprehensive income in shareholders’ equity. Based upon our
funded status at fiscal year-end June 30, 2006, the estimated impact
of adopting
SFAS 158 would be a $565 million after tax reduction to net assets
and equity,
related primarily to unrecognized actuarial losses and prior service
costs. This
estimated impact may not be reflective of the actual impact, which
will be based
on the fair value of plan assets and projected benefit obligations
upon adoption
of SFAS 158 as of June 30, 2007.
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.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
purpose of this
discussion is to provide an understanding of P&G’s financial results and
condition by focusing on changes in certain key measures from
year to year.
Management's Discussion and Analysis (MD&A) is organized in the following
sections:
· Overview
· Summary
of
Results
· Forward-Looking
Statements
· Results
of
Operations - Three Months Ended March 31, 2007
· Results
of
Operations - Nine Months Ended March 31, 2007
· Business
Segment
Discussion - Three and Nine Months Ended March 31, 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 sales and net earnings. We
also refer to
organic sales growth (net sales growth excluding the impacts
of acquisitions,
divestitures and foreign exchange), 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.
On
October 1, 2005,
we completed the acquisition of The Gillette Company for $53.43
billion.
Gillette is a leading consumer products company that had $10.48
billion of sales
in its most recent pre-acquisition year ended December 31,
2004. In
order to provide
our investors with more insight into the results of the Blades
and Razors and
the Duracell and Braun reporting segments, we have previously
provided
supplemental pro forma net sales and earnings data for these
segments for the
quarter ended September 30, 2005 (as presented in our Form
8-K released November
22, 2005). Management’s discussion of the current year to date results of these
two reportable segments is in relation to the comparable prior
year results,
including pro forma net sales and earnings data for the July
- September 2005
period and reported results for the October 2005 - March 2006
period. Results of
Gillette’s personal care and oral care businesses were subsumed within
the
Beauty and the Health Care reportable segments, respectively.
OVERVIEW
P&G's
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 world's 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
and Health; Household Care; and Gillette GBU. Under U.S. Generally
Accepted
Accounting Principles, the business units comprising the GBUs
are aggregated
into seven reportable segments: Beauty; Health Care; Fabric
Care and Home Care;
Baby Care and Family Care; Snacks, Coffee and Pet Care; Blades
and Razors; and
Duracell and Braun. 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 March 31, 2007 (excludes
net sales and net
earnings in Corporate):
|
Net
Sales
|
Net
Earnings
|
||
|
Beauty
and Health
|
41%
|
43%
|
|
|
Beauty
|
30%
|
30%
|
|
|
Health
Care
|
11%
|
13%
|
|
|
Household
Care
|
48%
|
45%
|
|
|
Fabric
Care and
Home Care
|
25%
|
26%
|
|
|
Baby
Care and
Family Care
|
17%
|
15%
|
|
|
Snacks,
Coffee
and Pet Care
|
6%
|
4%
|
|
|
Gillette
GBU
|
11%
|
12%
|
|
|
Blades
and
Razors
|
7%
|
11%
|
|
|
Duracell
and
Braun
|
4%
|
1%
|
|
|
Total
|
100%
|
100%
|
The
following table
provides the percentage of net sales and net earnings by reportable
business
segment for the nine months ended March 31, 2007 (excludes
net sales and net
earnings in Corporate):
|
Net
Sales
|
Net
Earnings
|
||
|
Beauty
and Health
|
42%
|
45%
|
|
|
Beauty
|
30%
|
31%
|
|
|
Health
Care
|
12%
|
14%
|
|
|
Household
Care
|
46%
|
40%
|
|
|
Fabric
Care and
Home Care
|
24%
|
24%
|
|
|
Baby
Care and
Family Care
|
16%
|
12%
|
|
|
Snacks,
Coffee
and Pet Care
|
6%
|
4%
|
|
|
Gillette
GBU
|
12%
|
15%
|
|
|
Blades
and
Razors
|
7%
|
11%
|
|
|
Duracell
and
Braun
|
5%
|
4%
|
|
|
Total
|
100%
|
100%
|
SUMMARY
OF RESULTS
Following
are
highlights of results for the nine months ended March 31, 2007:
· Net
sales grew 14
percent to $57.20 billion. Organic sales, which exclude the
impacts of
acquisitions, divestitures and foreign exchange, increased
six
percent.
· Unit
volume
increased 11 percent fiscal year to date including an additional
three months of
Gillette results in the current fiscal year period. Organic
volume, which
excludes the impacts of acquisitions and divestitures, was
up five percent with
every reportable segment delivering year-on-year organic volume
growth.
· Net
earnings
increased 19 percent to $8.07 billion. Net earnings increased
behind sales
growth, the addition of Gillette and operating profit margin
improvement.
· Diluted
net
earnings per share were $2.37, an increase of 13 percent versus
the comparable
prior year period.
· Operating
cash flow
was $9.85 billion, an increase of 20 percent versus the prior
year period. Free
cash flow productivity was 97 percent. 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. 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 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 work force 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 March 31, 2007
The
following
discussion provides a review of results for the three months
ended March 31,
2007 versus the three months ended March 31, 2006.
|
THE
PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts
in Millions Except Per Share Amounts)
Consolidated
Earnings Information
|
||||||||||
|
Three
Months Ended
March
31
|
||||||||||
|
2007
|
2006
|
%
CHG
|
||||||||
|
NET
SALES
|
$
|
18,694
|
$
|
17,250
|
8
|
%
|
||||
|
COST
OF PRODUCTS SOLD
|
9,057
|
8,340
|
9
|
%
|
||||||
|
GROSS
MARGIN
|
9,637
|
8,910
|
8
|
%
|
||||||
|
SELLING,
GENERAL & ADMINISTRATIVE
EXPENSE
|
5,991
|
5,559
|
8
|
%
|
||||||
|
OPERATING
INCOME
|
3,646
|
3,351
|
9
|
%
|
||||||
|
TOTAL
INTEREST EXPENSE
|
279
|
301
|
||||||||
|
OTHER
NON-OPERATING INCOME, NET
|
169
|
79
|
||||||||
|
EARNINGS
BEFORE INCOME TAXES
|
3,536
|
3,129
|
13
|
%
|
||||||
|
INCOME
TAXES
|
1,024
|
918
|
||||||||
|
NET
EARNINGS
|
2,512
|
2,211
|
14
|
%
|
||||||
|
EFFECTIVE
TAX
RATE
|
29.0
|
%
|
29.3
|
%
|
||||||
|
PER
COMMON SHARE:
|
||||||||||
|
BASIC
NET EARNINGS
|
$
|
0.78
|
$
|
0.67
|
16
|
%
|
||||
|
DILUTED
NET EARNINGS
|
$
|
0.74
|
$
|
0.63
|
17
|
%
|
||||
|
DIVIDENDS
|
$
|
0.31
|
$
|
0.28
|
11
|
%
|
||||
|
AVERAGE
DILUTED SHARES
OUTSTANDING
|
3,397.3
|
3,510.5
|
||||||||
|
COMPARISONS
AS A % OF NET SALES
|
||||||||||
|
COST
OF PRODUCTS SOLD
|
48.4
|
%
|
48.3
|
%
|
10
|
|||||
|
GROSS
MARGIN
|
51.6
|
%
|
51.7
|
%
|
(10
|
)
|
||||
|
S SELLING,
GENERAL & ADMINISTRATIVE
EXPENSE
|
32.0
|
%
|
32.2
|
%
|
(20
|
)
|
||||
|
OPERATING
MARGIN
|
19.5
|
%
|
19.4
|
%
|
10
|
|||||
|
EARNINGS
BEFORE INCOME TAXES
|
18.9
|
%
|
18.1
|
%
|
80
|
|||||
|
NET
EARNINGS
|
13.4
|
%
|
12.8
|
%
|
60
|
|||||
Net
sales for the
quarter were up eight percent to $18.69 billion. All reportable
segments except
the Snacks, Coffee and Pet Care segment grew sales in the quarter,
led by
double-digit growth in Fabric Care and Home Care, Health Care
and Baby Care and
Family Care. Volume increased six percent with each geographic
region delivering
year-on-year growth, led by double-digit growth in developing
regions.
Organic volume also increased six percent behind high single-digit
growth in
Fabric Care and Home Care and Baby Care and Family Care, with
declining volume
in Snacks, Coffee and Pet Care. Tide, Ariel, Downy, Charmin,
Head &
Shoulders, Olay, Always and Prilosec OTC each posted double-digit
volume growth
in the quarter. Price increases across most of our reportable
segments
contributed one percent to sales growth but were offset by
a negative one
percent mix impact from a less premium product mix across several
segments and
disproportionate growth in developing regions, where selling
prices are below
the Company average. Foreign exchange added an additional two
percent to sales
growth. Organic sales increased six percent during the quarter.
|
Net
Sales Change Drivers 2007 vs. 2006 (Three Months
Ended March
31)
|
|||||||
|
Volume
with
Acquisitions & Divestitures
|
Volume
excluding Acquisitions & Divestitures
|
Foreign
Exchange
|
Price
|
Mix/
Other
|
Net
Sales
Growth
|
Net
Sales
Growth ex-FX
|
|
|
Beauty
and Health
|
|||||||
|
Beauty
|
3%
|
4%
|
3%
|
1%
|
1%
|
8%
|
5%
|
|
Health
Care
|
6%
|
6%
|
2%
|
1%
|
1%
|
10%
|
8%
|
|
Household
Care
|
|||||||
|
Fabric
Care and Home Care
|
10%
|
9%
|
2%
|
0%
|
0%
|
12%
|
10%
|
|
Baby
Care and Family Care
|
8%
|
8%
|
3%
|
1%
|
(2)%
|
10%
|
7%
|
|
Snacks,
Coffee and Pet Care
|
(2)%
|
(2)%
|
1%
|
3%
|
(2)%
|
0%
|
(1)%
|
|
Gillette
GBU
|
|||||||
|
Blades
and Razors
|
4%
|
4%
|
4%
|
2%
|
(2)%
|
8%
|
4%
|
|
Duracell
and Braun
|
0%
|
3%
|
3%
|
2%
|
(2)%
|
3%
|
0%
|
|
Total
Company
|
6%
|
6%
|
2%
|
1%
|
(1)%
|
8%
|
6%
|
Sales percentage changes are approximations based on quantitative
formulas that
are consistently applied.
Gross
margin was
down 10-basis points in the quarter to 51.6% of net sales.
Commodity cost
increases had a negative impact on gross margin of approximately
50-basis points
but were more than offset by scale leverage from volume growth,
price increases
and cost savings projects. A number of one-time items during
the quarter,
including net charges related to the integration of Gillette,
supply chain
restructuring projects and the impacts of a pet food recall,
reduced gross
margin versus the prior year period by approximately 50-basis
points.
Total
selling,
general and administrative expenses (SG&A) increased eight percent, or $432
million, during the quarter. Total SG&A as a percentage of net sales was
down 20-basis points, primarily behind overhead spending during
the quarter,
partially offset by the impact of a favorable legal settlement
in the year-ago
period. Overhead spending as a percentage of net sales was
down primarily due to
volume scale leverage, overhead cost controls and Gillette
synergy savings.
Interest
expense
for the quarter decreased by $22 million versus the year-ago
period primarily
due to lower gross debt. Other non-operating income was up
$90 million
year-on-year. The increase was primarily due to the gains on
certain minor
Beauty brand divestitures which closed during the quarter.
Net
earnings
increased 14 percent to $2.51 billion behind sales growth and
profit margin
expansion. Diluted net earnings per share were $0.74, up 17
percent versus the
prior year. Earnings per share growth exceeded net earnings
growth due to share
repurchases, primarily under the $20.1 billion share buyback
program in
connection with the Gillette acquisition, which was completed
in July
2006.
RESULTS
OF OPERATIONS - Nine Months Ended March 31, 2007
The
following
discussion provides a review of results for the nine months
ended March 31, 2007
versus the nine months ended March 31, 2006.
|
THE
PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts
in Millions Except Per Share Amounts)
Consolidated
Earnings Information
|
||||||||||
|
Nine
Months Ended March 31
|
||||||||||
|
2007
|
2006
|
%
CHG
|
||||||||
|
NET
SALES
|
$
|
57,204
|
$
|
50,380
|
14
|
%
|
||||
|
COST
OF
PRODUCTS SOLD
|
27,210
|
24,231
|
12
|
%
|
||||||
|
GROSS
MARGIN
|
29,994
|
26,149
|
15
|
%
|
||||||
|
SELLING,
GENERAL & ADMINISTRATIVE EXPENSE
|
17,945
|
15,849
|
13
|
%
|
||||||
|
OPERATING
INCOME
|
12,049
|
10,300
|
17
|
%
|
||||||
|
TOTAL
INTEREST
EXPENSE
|
976
|
819
|
||||||||
|
OTHER
NON-OPERATING INCOME, NET
|
429
|
221
|
||||||||
|
EARNINGS
BEFORE INCOME TAXES
|
11,502
|
9,702
|
19
|
%
|
||||||
|
INCOME
TAXES
|
3,430
|
2,916
|
||||||||
|
NET
EARNINGS
|
8,072
|
6,786
|
19
|
%
|
||||||
|
EFFECTIVE
TAX
RATE
|
29.8
|
%
|
30.1
|
%
|
||||||
|
PER
COMMON SHARE:
|
||||||||||
|
BASIC
NET
EARNINGS
|
$
|
2.51
|
$
|
2.22
|
13
|
%
|
||||
|
DILUTED
NET
EARNINGS
|
$
|
2.37
|
$
|
2.10
|
13
|
%
|
||||
|
DIVIDENDS
|
$
|
0.93
|
$
|
0.84
|
11
|
%
|
||||
|
AVERAGE
DILUTED
SHARES OUTSTANDING
|
3,405.7
|
3,235.4
|
||||||||
|
COMPARISONS
AS A % OF NET SALES
|
||||||||||
|
COST
OF
PRODUCTS SOLD
|
47.6
|
%
|
48.1
|
%
|
(50
|
)
|
||||
|
GROSS
MARGIN
|
52.4
|
%
|
51.9
|
%
|
50
|
|||||
|
SELLING,
GENERAL &
ADMINISTRATIVE EXPENSE
|
31.4
|
%
|
31.5
|
%
|
(10
|
)
|
||||
|
OPERATING
MARGIN
|
21.1
|
%
|
20.4
|
%
|
70
|
|||||
|
EARNINGS
BEFORE
INCOME TAXES
|
20.1
|
%
|
||||||||