The Procter & Gamble Company is an American consumer goods group with headquarters in Cincinnati, Ohio, which is represented in 70 countries.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2000 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 . There were 1,299,875,679 shares of Common Stock outstanding as of December 31, 2000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements The Consolidated Statements of Earnings of The Procter & Gamble Company and subsidiaries for the three and six months ended December 31, 2000 and 1999, the Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2000, and the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2000 and 1999 follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. However, such financial statements may not be necessarily indicative of annual results. Certain reclassifications of prior year's amounts have been made to conform with the current year's presentation. <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <CAPTION> Amounts in Millions Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> NET SALES $ 10,182 $ 10,588 $ 20,151 $ 20,507 Cost of products sold 5,417 5,563 10,724 10,769 Marketing, research, and administrative expenses 3,054 3,183 5,937 6,049 -------- -------- -------- -------- OPERATING INCOME 1,711 1,842 3,490 3,689 Interest expense 224 178 403 325 Other income, net 294 51 397 96 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 1,781 1,715 3,484 3,460 Income taxes 587 589 1,135 1,187 -------- -------- -------- -------- NET EARNINGS $ 1,194 $ 1,126 $ 2,349 $ 2,273 ======== ======== ======== ======== PER COMMON SHARE: Basic net earnings $ .89 $ 0.83 $ 1.76 $ 1.68 Diluted net earnings $ .84 $ 0.78 $ 1.66 $ 1.58 Dividends $ .35 $ 0.32 $ 0.70 $ .64 AVERAGE COMMON SHARES OUTSTANDING - DILUTED 1,411.0 1,434.8 1,410.0 1,434.8 </TABLE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <CAPTION> Amounts in Millions December 31 June 30 ASSETS 2000 2000 - ------ ----------- ----------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 3,407 $ 1,415 Investment securities 149 185 Accounts receivable 3,639 2,910 Inventories Materials and supplies 1,166 1,254 Work in process 399 394 Finished products 1,958 1,842 Deferred income taxes 183 309 Prepaid expenses and other current assets 1,975 1,837 ----------- ----------- TOTAL CURRENT ASSETS 12,876 10,146 PROPERTY, PLANT AND EQUIPMENT 23,471 23,221 ACCUMULATED DEPRECIATION (9,877) (9,529) ----------- ----------- TOTAL PROPERTY, PLANT AND EQUIPMENT 13,594 13,692 GOODWILL AND OTHER INTANGIBLE ASSETS 8,505 8,786 OTHER NON-CURRENT ASSETS 1,850 1,742 ----------- ----------- TOTAL ASSETS $ 36,825 $ 34,366 =========== =========== <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ <S> <C> <C> CURRENT LIABILITIES Accounts payable and accrued liabilities $ 6,780 $ 6,900 Debt due within one year 4,279 3,241 ----------- ----------- TOTAL CURRENT LIABILITIES 11,059 10,141 LONG-TERM DEBT 10,061 9,012 DEFERRED INCOME TAXES 620 625 OTHER NON-CURRENT LIABILITIES 2,069 2,301 ----------- ----------- TOTAL LIABILITIES 23,809 22,079 SHAREHOLDERS' EQUITY Preferred stock 1,721 1,737 Common stock-shares outstanding - Dec 31 1,299.9 1,300 June 30 1,305.9 1,306 Additional paid-in capital 1,919 1,794 Reserve for ESOP debt retirement (1,397) (1,418) Accumulated comprehensive income (1,972) (1,842) Retained earnings 11,445 10,710 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 13,016 12,287 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,825 $ 34,366 =========== =========== </TABLE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> Six Months Ended Amounts in Millions December 31 --------------------- 2000 1999 -------- --------- <S> <C> <C> CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,415 $ 2,294 OPERATING ACTIVITIES Net earnings 2,349 2,273 Depreciation and amortization 976 1,081 Deferred income tax expense 21 318 Change in: Accounts receivable (771) (548) Inventories (98) (360) Accounts payable and accruals (73) (845) Other operating assets & liabilities (140) (533) Other 1 119 -------- -------- TOTAL OPERATING ACTIVITIES 2,265 1,505 -------- -------- INVESTING ACTIVITIES Capital expenditures (1,251) (1,452) Proceeds from asset sales 473 109 Acquisitions (31) (3,082) Change in investment securities (3) 254 -------- -------- TOTAL INVESTING ACTIVITIES (812) (4,171) -------- -------- FINANCING ACTIVITIES Dividends to shareholders (974) (900) Change in short-term debt 795 1,816 Additions to long-term debt 1,346 2,534 Reduction of long-term debt (25) (269) Proceeds from stock options 61 109 Purchase of treasury shares (649) (876) -------- -------- TOTAL FINANCING ACTIVITIES 554 2,414 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (15) 2 CHANGE IN CASH AND CASH EQUIVALENTS 1,992 (250) -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,407 $ 2,044 ======== ======== </TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in Millions 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, 2000. The results of operations for the three-month and six-month periods ended December 31, 2000 are not indicative necessarily of the results for the full year. 2. Comprehensive Income - Total comprehensive income is comprised primarily of net earnings, net currency translation gains and losses and net unrealized gains and losses on securities and cash flow hedges. Total comprehensive income for the three months ended December 31, 2000 and 1999 was $1,175 and $983, respectively. For the six months ended December 31, 2000 and 1999, total comprehensive income was $2,219 and $2,223, respectively. 3. Segment Information - The basis for presenting segment results generally is consistent with overall Company reporting. The primary difference relates to partially-owned operations, which are presented as if owned 100% in the operating segments. The adjustment to ownership basis is included in Corporate, which also includes certain financing and investment activities, goodwill amortization, charges related to the Organization 2005 program, and other general corporate income and expense items. Additionally, for interim periods certain non-recurring tax impacts are reflected on a discrete basis for management and segment reporting purposes, but are eliminated in Corporate to arrive at the Company's effective tax rate for the quarter. <TABLE> <CAPTION> Three Months Ended Fabric & Beauty Health Food & December 31 Home Care Paper Care Care Beverage Corporate Total - ------------------ --------- ----- ------ ------ -------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Net Sales 2000 $ 2,929 $ 3,047 $ 1,858 $ 1,150 $ 1,178 $ 20 $ 10,182 1999 3,168 3,181 1,903 1,074 1,321 (59) 10,588 Earnings Before Income Taxes 2000 590 483 412 252 195 (151) 1,781 1999 653 498 420 202 219 (277) 1,715 Net Earnings 2000 390 295 286 164 124 (65) 1,194 1999 405 293 273 125 137 (107) 1,126 <CAPTION> Six Months Ended Fabric & Beauty Health Food & December 31 Home Care Paper Care Care Beverage Corporate Total - ------------------ --------- ----- ------ ------ -------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Net Sales 2000 $ 6,004 $ 6,086 $ 3,723 $ 2,140 $ 2,231 $ (33) $ 20,151 1999 6,328 6,193 3,722 1,874 2,530 (140) 20,507 Earnings Before Income Taxes 2000 1,326 996 796 369 317 (320) 3,484 1999 1,427 1,073 777 349 388 (554) 3,460 Net Earnings 2000 888 624 553 245 199 (160) 2,349 1999 890 637 498 215 243 (210) 2,273 </TABLE> Item 2. Management Discussion and Analysis RESULTS OF OPERATIONS - --------------------- The Company reported net earnings of $1.19 billion or $0.84 per share for the quarter ended December 31, 2000. Results included a $120 million after-tax charge related to the Organization 2005 restructuring program. Core net earnings, which exclude the Organization 2005 charges, were $1.31 billion for the quarter. Core net earnings per share were $0.93, a six percent increase versus the prior year. Net sales were $10.18 billion for the quarter. This is equal to year ago record levels, after adjusting for a four percent unfavorable currency impact, primarily the euro. Unit volume was down two percent against an all-time record quarter last year, when new brand introductions, strong initiative activity and marketing support, and geographic expansions of established brands fueled growth. Business segment after-tax earnings were up two percent as pricing and tax savings offset the impact of foreign exchange and increased product costs, driven by higher commodity-based prices. The sale of Clearasil added approximately $146 million after tax to the corporate segment, and was an important factor in delivering the six percent core net earnings per share growth. For the first six months, reported net earnings were $2.35 billion, or $1.66 per share. Results included a charge of $205 million after-tax related to the Organization 2005 program. Excluding Organization 2005 charges, core net earnings were $2.55 billion, while core net earnings per share grew three percent to $1.81. Worldwide sales were down two percent to $20.15 billion, including a four percent effect due to unfavorable exchange rates, on flat unit volume. Gross margin was 46.8 percent for the current quarter compared to 47.5 percent in the same quarter of the prior year, and 46.1 percent for the full fiscal year ended June 30, 2000. Included in cost of products sold is a before-tax charge of $81 million related to Organization 2005. Excluding Organization 2005 costs, gross margin was 47.6 percent, down from the year ago quarter as commodity-related cost increases and unfavorable exchange impacts were not fully offset by pricing actions. Operating margin was 16.8 percent for the quarter compared to 17.4 percent in the same quarter a year ago and 14.9 percent for the prior fiscal year. Excluding $154 million before tax in Organization 2005 charges, operating margin was 18.3 percent. The decline in operating margin was primarily driven by the gross margin decrease. For the six-month period, gross margin was 46.8 percent, comparable to the quarter results, and below the 47.5 percent reported in the same period a year ago. The following provides additional perspective on the Company's results by business segment: FABRIC AND HOME CARE - -------------------- The Company's largest segment, fabric and home care, began to show signs of share improvement, despite a continued difficult competitive environment. Net earnings were $390 million, down four percent against particularly strong growth in the prior year. Net sales were $2.93 billion, with a four percent volume decline exacerbated by a five percent unfavorable exchange impact. The unit volume trend reflects the strength of the year-ago base period, which included the initial shipments of Swiffer, Febreze and Dryel, as well as the impact of inventory builds in advance of last quarter's North America laundry price increase. Recent pricing actions in Western Europe and laundry product improvements in North America are designed to improve the value equation with consumers to support achievement of our future growth objectives. For the first six months of the fiscal year, unit volume was down two percent. Sales fell five percent while earnings were equal to year-ago levels. PAPER - ----- The paper segment posted a one percent growth in net earnings as pricing and a disciplined focus on controllable costs countered exchange impacts and higher raw material prices. Net earnings for the quarter were $295 million. Excluding a five percent unfavorable exchange impact, net sales grew one percent to $3.05 billion. Pricing benefits, primarily in North America tissues and towel and baby care, mitigated a slight decrease in unit volume. Growth in Latin America volume, primarily in baby care, was offset by a decline in North America, following particularly strong results in the prior year. This segment continues to face competitive challenges and is focused on the best approaches to deliver a winning consumer value equation in the future. For the first half of the year, unit volume was flat while net sales and net earnings were down two percent. BEAUTY CARE - ----------- Beauty care also delivered net earnings growth, as the segment continues to focus on premium products. Net earnings grew five percent to $286 million. The business supported continued investment in business-building initiatives by managing costs, primarily lower taxes. Share progress on key brands was not directly reflected in top-line results due to trade inventory adjustments, primarily related to the Pantene relaunch. Net sales were $1.86 billion, down two percent driven entirely by a five percent negative impact of currency. Excluding exchange, the net sales growth in the face of a two percent decline in unit volume reflects the benefit of pricing as the business extends its hair and skin care product lines. Notable progress was achieved in the hair care business in Latin America, and earnings progress in China following challenges in the prior year. On a year-to-date basis, unit volume was down one percent while sales were flat. Net earnings grew 11 percent driven by higher value initiatives. HEALTH CARE - ----------- On top of record results in the year ago quarter, the health care segment again delivered excellent growth, reflecting strong execution of initiative plans. Net earnings grew 31 percent to $164 million. Disciplined focus on costs complemented top-line growth, particularly in Iams, North America pharmaceuticals, and oral care. Net sales were up seven percent to $1.15 billion, including a three percent negative impact from weaker currencies. Excluding this effect, the double-digit sales growth was driven by an 11 percent increase in unit volume. Iams continues to exceed expectations, as the expansion into new retail channels has delivered substantial growth, while it continues to be number one in pet specialty outlets. For the first six months of the year, unit volume increased 21 percent with net sales and net earnings up 14 percent. FOOD AND BEVERAGE - ----------------- The food and beverage segment remained below the record level of a year ago, reflecting the continued impacts of the competitive environment and transition impacts of a re-sizing initiative on Pringles. Net earnings were $124 million, down nine percent, due to lower volume versus record shipments in the year ago quarter. Net sales were $1.18 billion, down 11 percent due to a seven percent decline in unit volume and a three percent impact of unfavorable exchange rates. Year-to-date, unit volume reflected a nine percent decline while net sales declined 12 percent. Net earnings were 18 percent below a year ago. FINANCIAL CONDITION - ------------------- Total debt increased $2.1 billion since June 30, 2000, as the Company increased its foreign currency debt exposure to obtain favorable interest rates and to fund the Company's ongoing share repurchase program. For the six-month period ended December 31, 2000, cash generated from operating activities totaled $2.3 billion, up from $1.5 billion in the same period in the prior year. The increase resulted primarily from improvements in working capital. Acquisitions were down $3.1 billion versus the year ago period, which included the Iams Company and Recovery Engineering. Capital spending declined $201 million versus the year ago period, reflecting slowing spending patterns while continuing Organization 2005-related capital projects. FISCAL YEAR AND THIRD QUARTER ESTIMATES - --------------------------------------- The Company confirmed that it is comfortable with the high end of the current range of analysts' estimates for core net earnings per share growth for the year. Based on current trends and expectations, the Company now expects unit volume to be about flat for the year, and net sales, excluding exchange effects, to be up two to four percent. Unit volume for January - March is forecasted to be flat or down two percent versus a strong prior year base period. Net sales excluding exchange effects are expected to grow in the low single digits. Double-digit earnings per share growth is expected for the quarter, with core net earnings per share in the range of $0.72 - $0.74. ORGANIZATION 2005 UPDATE - ------------------------ On June 9, 1999, the Company announced an Organization 2005 restructuring program that is an integral part of the broader 2005 initiative, which includes a realignment of the organization structure, work processes and culture designed to accelerate growth by streamlining management decision-making, manufacturing and other work processes. These changes are intended to increase the Company's ability to innovate and bring initiatives to global markets more quickly. In order to implement the program's structural changes and achieve the benefits of faster growth, the Company will make a number of structural changes to both its administrative and manufacturing operations. Charges related to Organization 2005 consist primarily of costs related to the consolidation of manufacturing facilities (including accelerated depreciation, asset write-downs and contract termination costs) and employee separation costs. During the quarter ended December 31, 2000, the Company recorded expenses totaling $152 million before tax related to Organization 2005, as detailed in the following table: <TABLE> <CAPTION> Organization 2005 July-December, 2000 Charges (before tax) ---------------------------------------------------------- For the July-December Period ---------------------------- Prior Current Beginning Quarter Quarter Charged Ending Reserves Charges New Total Cash Against Reserves at 6/30/00 Jul-Sep 00 Charges Charges Spent Assets 12/31/00 ---------- ---------- ------- ------- ----- ------ -------- <S> <C> <C> <C> <C> <C> <C> <C> Employee separations $88 $32 $26 $58 $(37) $- $109 Asset write-downs -- 1 14 15 - (15) - Accelerated depreciation -- 52 66 118 - (118) - Other -- 22 46 68 (68) - - --- --- --- --- ----- ----- ---- 88 107 152 259 (105) (133) 109 </TABLE> During October-December, 2000, Organization 2005 costs charged against the Company's cost of products sold amounted to $81 million, while charges included in marketing, research and administrative expenses and other expenses amounted to $71 million. Charges related to Organization 2005 are included in Corporate in the Company's segment disclosures. The underlying plant closures and consolidations will impact all regions and product segments. Planned plant closures and consolidations will not all be executed immediately due to either capacity or logistics constraints. Employee separation charges in October-December, 2000 are associated with severance packages for approximately 440 people, representing primarily administrative employees in North America, Asia, and Europe. The predominantly voluntary packages are formula-driven, based on salary levels and past service. Severance costs related to voluntary separations are charged to earnings when the employee accepts the offer in accordance with P&G policy for such programs. On average, net enrollment is expected to decline by approximately 85% of total separations, as some terminations will be partially offset through increased enrollment at remaining sites. Of total separations expected through fiscal 2001, approximately half will take place in manufacturing with the balance in administrative functions. Separation costs related to manufacturing employees are included in cost of products sold, while those for administrative employees are reported in marketing, research and administrative expenses. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period due to manufacturing consolidations, technology standardization and closures that will occur primarily over the next two years as a result of the Organization 2005 program. The Company has changed the estimated useful lives of such assets, resulting in an acceleration of depreciation. Approximately 70% of the $66 million of accelerated depreciation recorded in the October-December, 2000 quarter is concentrated in the paper segment and reflects the standardization of manufacturing and other work processes being undertaken in that segment. Most of the remaining balance is concentrated in the fabric and home care, food and beverage and beauty care segments. Charges for other costs related to Organization 2005 amounted to $46 million during the October-December, 2000 quarter, and consisted primarily of costs associated with relocation, training and other Organization 2005-related expenses. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). (11) Computation of Earnings per Share. (12) Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K The Company filed Current Reports on Form 8-K containing information pursuant to Item 5 ("Other Events") dated October 31, 2000, relating to the announcement of earnings for the July-September 2000 quarter; dated November 20, 2000, relating to Bristol-Myers Squibb's announcement of its intention to sell its hair care business; and dated December 12, 2000, relating to confirmation of previously issued guidance for the October-December 2000 quarter and fiscal year 2001. 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 D. R. Walker - -------------------------------------- D. R. Walker Vice President and Comptroller (Principal Accounting Officer) Date: February 1, 2001 EXHIBIT INDEX Exhibit No. Page No. (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). (11) Computation of Earnings per Share 12 (12) Computation of Ratio of Earnings to Fixed Charges 13