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 September 30, 1998 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 1,326,834,609 shares of Common Stock outstanding as of October 23, 1998. PART I. FINANCIAL INFORMATION Item 1. Financial Statements The Consolidated Statements of Earnings of The Procter & Gamble Company and subsidiaries for the three months ended September 30, 1998 and 1997, the Consolidated Balance Sheets as of September 30, 1998 and June 30, 1998, and the Consolidated Statements of Cash Flows for the three months ended September 30, 1998 and 1997 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. THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <TABLE> <CAPTION> Amounts in Millions Except Per Share Amounts Three Months Ended September 30 1998 1997 ------- -------- <S> <C> <C> NET SALES $ 9,510 $ 9,355 Cost of Products sold 5,182 5,208 Marketing, research, and administrative expenses 2,454 2,408 ------- ------- OPERATING INCOME 1,874 1,739 Interest Expense 157 121 Other Income, net 50 51 ------- ------- EARNINGS BEFORE INCOME TAXES 1,767 1,669 Income Taxes 600 582 ------- ------- NET EARNINGS $ 1,167 $ 1,087 ======= ======= PER COMMON SHARE: Basic net earnings $ 0.86 $ 0.79 Diluted net earnings $ 0.80 $ 0.73 Dividends $ 0.285 $ 0.253 AVERAGE COMMON SHARES OUTSTANDING 1,332.4 1,348.3 </TABLE> -2- THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> Amounts in Millions September 30 June 30 1998 1998 ------------ ---------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,540 $ 1,549 Investment securities 778 857 Accounts receivable 2,950 2,781 Inventories Materials and supplies 1,210 1,225 Work in process 373 343 Finished products 1,934 1,716 Deferred income taxes 733 595 Prepaid expenses and other current assets 1,798 1,511 ------------ ---------- TOTAL CURRENT ASSETS 12,316 10,577 PROPERTY, PLANT AND EQUIPMENT 20,661 20,152 LESS ACCUMULATED DEPRECIATION 8,317 7,972 ------------ ---------- TOTAL PROPERTY, PLANT AND EQUIPMENT 12,344 12,180 GOODWILL AND OTHER INTANGIBLE ASSETS 7,038 7,011 OTHER NON-CURRENT ASSETS 1,171 1,198 ------------ ---------- TOTAL ASSETS $ 32,869 $ 30,966 ============ ========== <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> CURRENT LIABILITIES Accounts payable and accrued liabilities $ 7,194 $ 6,969 Debt due within one year 3,277 2,281 ------------ ---------- TOTAL CURRENT LIABILITIES 10,471 9,250 LONG-TERM DEBT 6,354 5,765 DEFERRED INCOME TAXES 655 428 OTHER NON-CURRENT LIABILITIES 3,315 3,287 ------------ ---------- TOTAL LIABILITIES 20,795 18,730 SHAREHOLDERS' EQUITY Preferred stock 1,810 1,821 Common stock-shares outstanding - Sep 30 1,325.9 1,326 June 30 1,337.4 1,337 Additional paid-in capital 980 907 Reserve for ESOP debt retirement (1,611) (1,616) Accumulated Comprehensive Income (1,270) (1,357) Retained earnings 10,839 11,144 ------------ ---------- TOTAL SHAREHOLDERS' EQUITY 12,074 12,236 ------------ ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,869 $ 30,966 ============ ========== </TABLE> -3- THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Millions of Dollars Three Months Ended September 30 1998 1997 ------- ------- <S> <C> <C> CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,549 $ 2,350 OPERATING ACTIVITIES Net earnings 1,167 1,087 Depreciation and amortization 399 388 Deferred income taxes 81 (1) Change in: Accounts receivable (140) (98) Inventories (189) (246) Accounts Payables and Accruals 138 179 Other Operating Assets & Liabilities (270) (140) Other 5 3 ------- ------- TOTAL OPERATING ACTIVITIES 1,191 1,172 ------- ------- INVESTING ACTIVITIES Capital expenditures (440) (543) Proceeds from asset sales and retirements 137 128 Acquisitions 0 (1,956) Change in investment securities 70 163 ------- ------- TOTAL INVESTING ACTIVITIES (233) (2,208) ------- ------- FINANCING ACTIVITIES Dividends to shareholders (406) (367) Change in short-term debt 841 1,731 Additions to long-term debt 765 2 Reduction of long-term debt (105) (52) Proceeds from stock options 28 21 Purchase of treasury shares (1,078) (557) ------- ------- TOTAL FINANCING ACTIVITIES 45 778 ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (12) (33) ------- ------- CHANGE IN CASH AND CASH EQUIVALENTS 991 (291) ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,540 $ 2,059 ======= ======= </TABLE> -4- THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in Millions 1. Summary of Significant Accounting Policies - Accounting Changes - During the quarter ended September 30, 1998, the Company adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This statement revises the accounting for softwre development costs and requires the capitalization of certain costs which the Company has historically expensed. The adoption of this statement did not have a material impact on the Company's financial position, results of operations or cash flows. 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. Total comprehensive income for the three months ended September 30, 1998 and 1997 was $1,254 and $915, respectively. 3. Segment Information <TABLE> <CAPTION> For the three Europe, months ended North Middle East Latin September 30 America and Africa Asia America Corporate Total ------- ----------- ---- ------- --------- ----- <S> <C> <C> <C> <C> <C> <C> Net Sales 1998 4,752 3,121 810 674 153 9,510 1997 4,682 2,998 876 596 203 9,355 Earnings Before Income Taxes 1998 1,181 527 140 95 (176) 1,767 1997 1,058 477 127 80 (73) 1,669 Net Earnings 1998 747 347 95 74 (96) 1,167 1997 671 320 86 61 (51) 1,087 </TABLE> -5- Item 2. Management Discussion and Analysis RESULTS OF OPERATIONS - --------------------- Basic net earnings for the July-September quarter of fiscal year 1999 were $ .86 per share, a nine percent increase over the same quarter of the prior year. Worldwide net earnings for the quarter were $1.17 billion, a seven percent increase. The difference between the earnings per share and the net earnings increases was primarily due to the Company's share repurchase program. Worldwide net sales for the quarter were $9.5 billion, a two percent increase over the same quarter of the prior year. Weaker currencies, primarily in Asia and Latin America, reduced sales by three percent. Unit volume was flat, with the difference in sales and volume growth caused primarily by price increases and favorable product mix. Gross margin was 45.5 percent for the current quarter compared to 44.3 percent in the same quarter of the prior year and 43.3 percent for the full fiscal year ended June 30, 1998. Gross margin was positively impacted this quarter by improved pricing, product mix, and lower manufacturing expenses. Operating margin was 19.7 percent for the quarter compared to 18.6 percent in the same quarter a year ago and 16.3 percent for the prior fiscal year, largely reflecting the improvement in gross margin. NORTH AMERICA - ------------- Net sales in North America were up one percent versus the same quarter in the prior year on a one percent unit volume decline. Sales growth was driven by improved pricing in laundry and cleaning and paper products. The region achieved an 11 percent net earnings increase due primarily to improved pricing in laundry and paper products. The decline in volume was due to the prior year divestiture of Duncan Hines and increased competition in the hair care and oral care markets. Importantly, the laundry & cleaning business benefited from strength in fabric care behind the launch of Febreze, and the paper business achieved gains behind growth in diapers. In addition, excluding the impact of the divestiture of Duncan Hines, food & beverage unit volume grew behind a broad recovery in coffee driven by lower commodity costs. -6- EUROPE, MIDDLE EAST, AND AFRICA - ------------------------------- Net sales for Europe, Middle East, and Africa increased four percent on a two percent decline in unit volume. Sales outpaced volume behind increased pricing, primarily in laundry and paper products. The region's net earnings grew eight percent, primarily behind pricing-driven improvements in gross margins and cost reduction efforts. The region's unit volume was negatively impacted by Central and Eastern Europe, as a result of the economic crisis in Russia. Volumes were also soft in laundry & cleaning, due to increased competitive initiatives. Food & beverage achieved strong volume gains behind the strength of Pringles in Western Europe and the launch of Sunny Delight in the United Kingdom. The paper products business was up slightly behind continued growth in Bounty and Baby Wipes. ASIA - ---- Net sales in Asia fell seven percent versus the same quarter of the prior year, on two percent unit volume growth, due to the effects of unfavorable exchange rates. Net earnings increased 11 percent versus the same quarter last year, as improved pricing, cost reduction and the favorable settlement of a patent litigation dispute offset the continuing impact of economic difficulties in the region. The region grew volume behind the prior year acquisition of the Ssangyong Paper Company in Korea and improvement in the base business in Japan, which advanced despite the country's economic difficulties, and increased market share behind product initiatives, primarily in beauty care and laundry and cleaning. Volume continues to be ngatively impacted by the recession and lower consumption in much of the region. LATIN AMERICA - ------------- Latin America net sales were up 13 percent, on 15 percent unit volume growth, as increased pricing largely offset the effects of unfavorable exchange rates. Earnings for the region were up 21 percent, reflecting effective balance sheet management in the face of the peso devaluation in Mexico Unit volume growth for the quarter was led by Mexico, which benefited from the prior year acquisition of the Loreto y Pena paper business and growth in its base business. Importantly, the region's laundry and cleaning business strengthened behind accelerated product innovation. -7- FINANCIAL CONDITION - ------------------- Total debt increased $1.6 billion since June 30, 1998. The incremental debt was used to finance working capital, ongoing operations and the previously announced accelerated share repurchase program. In September, 1998, the Company announced plans for Organization 2005, a realignment of the organizational structure, work processes, and culture to accelerate growth and innovation. Details regarding the nature, timing, and implications related to the design change are currently being determined. Financial impacts are not yet known. -8- PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders: At the Company's Special Meeting of Shareholders held on October 13, 1998, the following action was taken: A proposal by the Board of Directors to amend the Company's Regulations to allow the location of the Annual Meeting of Shareholders to be held at a location other than the principal office of the Company. The shareholders cast 1,100,073,509 votes in favor of this proposal and 65,335,705 votes against. There were 9,757,738 abstentions. At the Company's 1998 Annual Meeting of Shareholders held on October 13, 1998, the following actions were taken: The following Directors were elected for terms of office expiring in 2001: VOTES FOR VOTES WITHHELD ABSTENTIONS* BROKER NON-VOTES* ------------- -------------- ----------- --------- Joseph T. Gorman 1,156,054,167 13,521,723 N/A N/A Lynn M. Martin 1,154,893,570 14,682,320 N/A N/A John E. Pepper 1,155,631,102 13,944,788 N/A N/A Ralph Snyderman 1,156,286,884 13,289,006 N/A N/A Robert D. Storey 1,152,276,365 17,299,525 N/A N/A * Pursuant to the terms of the Notice of Annual Meeting and Proxy Statements, proxies received were voted, unless authority was withheld, in favor of the election of the five nominees named. A proposal by the Board of Directors to ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors to conduct the annual audit of the financial statements of the Company and its subsidiaries for the fiscal year ending June 30, 1999, was approved by the shareholders. The shareholders cast 1,159,979,878 votes in favor of this proposal and 6,045,514 votes against. There were 3,550,498 abstentions. A shareholder resolution proposed by Evelyn Y. Davis was defeated by the shareholders. The proposal sought to reinstate the system of electing all Directors annually, in place of the system of classifying Directors into three classes with overlapping three-year terms which was approved by the shareholders in 1985. The Board opposed the resolution. The shareholders cast 364,480,347 votes in favor of the resolution and 636,041,628 against. There were 11,654,229 abstentions and 157,399,686 broker non-votes. A shareholder resolution proposed by the Sisters of the Holy Names of Washington, in conjunction with ten co-sponsoring organizations, was defeated by the shareholders. The proposal requested the Company to report on the steps it would take to eliminate the use of chlorine in paper and pulp products. The Board opposed the resolution. The shareholders cast 85,092,309 votes in favor of the resolution and 904,058,153 against. There were 23,025,342 absentions and 157,400,086 broker non-votes. -9- A shareholder resolution proposed by In Defense of Animals was defeated by the shareholders. The proposal requested the Company stop immediately all animal tests not explicitly required by law for over-the-counter cosmetics and non-medical household products. The Board opposed the resolution. The shareholders cast 38,817,612 votes in favor of the resolution and 927,020,632 against. There were 46,337,959 absentions and 157,399,686 broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3-1) Amended Articles of Incorporation (Incorporated by reference to the Company's 8-K filed on October 15, 1997). (3-2) Regulations (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the quarter ended September 30, 1998 and through the date of this report. -10- 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: November 5, 1998 -11- EXHIBIT INDEX Exhibit No. Page No. (3-1) Amended Articles of Incorporation (Incorporated by reference to the Company's 8-K filed on October 15, 1997). (3-2) Regulations 13 (11) Computation of Earnings per Share 20 (12) Computation of Ratio of Earnings to Fixed Charges 21 (27) Financial Data Schedule 22 -12-