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Procter & Gamble Company 10-Q 2007
10-Q - OND 2006


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
    x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                           For the Quarterly Period Ended December 31, 2006
 
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)
(513) 983-1100
Registrant's 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 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 3,155,383,803 shares of Common Stock outstanding as of December 31, 2006.
 




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 six months ended December 31, 2006 and 2005, the Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006, and the Consolidated Statements of Cash Flows for the six months ended December 31, 2006 and 2005 follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, such financial statements may not necessarily be indicative of annual results.


THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

Amounts in millions except per share amounts

   
Three Months Ended
 
Six Months Ended
 
Amounts in millions
 
December 31
 
December 31
 
   
2006
 
2005
 
2006
 
2005
 
                   
NET SALES
 
$
19,725
 
$
18,337
 
$
38,510
 
$
33,130
 
Cost of products sold
   
9,287
   
8,732
   
18,152
   
15,891
 
Selling, general and
                         
administrative expense
   
6,088
   
5,713
   
11,954
   
10,290
 
                           
OPERATING INCOME
   
4,350
   
3,892
   
8,404
   
6,949
 
Interest expense
   
339
   
299
   
697
   
518
 
Other non-operating income, net
   
79
   
68
   
259
   
142
 
                           
EARNINGS BEFORE INCOME TAXES
   
4,090
   
3,661
   
7,966
   
6,573
 
Income taxes
   
1,228
   
1,115
   
2,406
   
1,998
 
                           
NET EARNINGS
 
$
2,862
 
$
2,546
 
$
5,560
 
$
4,575
 
                           
PER COMMON SHARE:
                         
Basic net earnings
 
$
0.89
 
$
0.76
 
$
1.73
 
$
1.57
 
Diluted net earnings
 
$
0.84
 
$
0.72
 
$
1.63
 
$
1.48
 
Dividends
 
$
0.31
 
$
0.28
 
$
0.62
 
$
0.56
 
                           
DILUTED WEIGHTED AVERAGE
                         
COMMON SHARES OUTSTANDING
   
3,406.5
   
3,547.0
   
3,410.1
   
3,098.0
 
                           
                           
See accompanying Notes to Consolidated Financial Statements

- 1 -


THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

         
December 31
 
June 30
 
ASSETS
         
2006
 
2006
 
CURRENT ASSETS
                 
    Cash and cash equivalents
             
$
4,987
 
$
6,693
 
    Investment securities
               
521
   
1,133
 
    Accounts receivable
               
7,523
   
5,725
 
    Inventories
                         
        Materials and supplies
               
1,713
   
1,537
 
        Work in process
               
480
   
623
 
        Finished goods
               
4,690
   
4,131
 
    Total inventories
               
6,883
   
6,291
 
    Deferred income taxes
               
1,673
   
1,611
 
    Prepaid expenses and other current assets  
           
3,102
   
2,876
 
                           
TOTAL CURRENT ASSETS
               
24,689
   
24,329
 
                           
PROPERTY, PLANT AND EQUIPMENT
                         
    Buildings
               
6,086
   
5,871
 
    Machinery and equipment
               
26,555
   
25,140
 
    Land
               
754
   
870
 
                 
33,395
   
31,881
 
    Accumulated depreciation
               
(14,299
)
 
(13,111
)
                           
NET PROPERTY, PLANT AND EQUIPMENT
       
19,096
   
18,770
 
                           
GOODWILL AND OTHER INTANGIBLE ASSETS
                 
    Goodwill
               
56,224
   
55,306
 
    Trademarks and other intangible assets, net
         
33,581
   
33,721
 
                           
NET GOODWILL AND OTHER INTANGIBLE ASSETS
 
89,805
   
89,027
 
                           
OTHER NON-CURRENT ASSETS
               
3,710
   
3,569
 
                           
TOTAL ASSETS
               
137,300
 
$
135,695
 
                           
LIABILITIES AND SHAREHOLDERS' EQUITY
                 
CURRENT LIABILITIES
                         
    Accounts payable
             
$
4,490
 
$
4,910
 
    Accrued and other liabilities
               
10,628
   
9,587
 
    Taxes payable
               
3,643
   
3,360
 
    Debt due within one year
               
12,533
   
2,128
 
                           
TOTAL CURRENT LIABILITIES
               
31,294
   
19,985
 
                           
LONG-TERM DEBT
               
23,650
   
35,976
 
                           
DEFERRED INCOME TAXES
               
12,246
   
12,354
 
                           
OTHER NON-CURRENT LIABILITIES
               
4,746
   
4,472
 
                           
TOTAL LIABILITIES
               
71,936
   
72,787
 
                           
SHAREHOLDERS' EQUITY
                         
    Preferred stock
               
1,432
   
1,451
 
    Common stock - shares issued - 
Dec 31
   
3,984.1
   
3,984
       
 
   
June 30 
   
3,975.8
         
3,976
 
    Additional paid-in capital
               
58,554
   
57,856
 
    Reserve for ESOP debt retirement
               
(1,299
)
 
(1,288
)
    Accumulated other comprehensive income    
       
98
   
(518
)
    Treasury stock
               
(36,488
)
 
(34,235
)
    Retained earnings
               
39,083
   
35,666
 
                           
TOTAL SHAREHOLDERS' EQUITY
               
65,364
   
62,908
 
                           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
137,300
 
$
135,695
 
                           
See accompanying Notes to Consolidated Financial Statements       
   

- 2 -


THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended
 
Amounts in millions
 
December 31
 
   
2006
 
2005
 
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
$
6,693
 
$
6,389
 
               
OPERATING ACTIVITIES
             
    Net earnings
   
5,560
   
4,575
 
    Depreciation and amortization
   
1,489
   
1,158
 
    Share-based compensation expense
   
289
   
208
 
    Deferred income taxes
   
201
   
271
 
    Changes in:
             
        Accounts receivable
   
(1,668
)
 
(957
)
        Inventories
   
(486
)
 
73
 
        Accounts payable, accrued and other liabilities
   
8
   
(617
)
        Other operating assets and liabilities
   
(110
)
 
(96
)
    Other
   
120
   
131
 
               
TOTAL OPERATING ACTIVITIES
   
5,403
   
4,746
 
               
INVESTING ACTIVITIES
             
    Capital expenditures
   
(1,239
)
 
(1,029
)
    Proceeds from asset sales
   
135
   
339
 
    Acquisitions
   
(139
)
 
249
 
    Change in investment securities
   
620
   
39
 
               
TOTAL INVESTING ACTIVITIES
   
(623
)
 
(402
)
               
FINANCING ACTIVITIES
             
    Dividends to shareholders
   
(2,045
)
 
(1,691
)
    Change in short-term debt
   
9,873
   
(5,468
)
    Additions to long-term debt
   
7
   
15,412
 
    Reductions of long-term debt
   
(12,488
)
 
(2,602
)
    Impact of stock options and other
   
730
   
510
 
    Treasury purchases
   
(2,713
)
 
(9,032
)
               
TOTAL FINANCING ACTIVITIES
   
(6,636
)
 
(2,871
)
               
EFFECT OF EXCHANGE RATE CHANGES ON CASH
             
    AND CASH EQUIVALENTS
   
150
   
(46
)
               
CHANGE IN CASH AND CASH EQUIVALENTS
   
(1,706
)
 
1,427
 
               
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
4,987
 
$
7,816
 

- 3 -

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 six-month periods ended December 31, 2006 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 December 31, 2006 and 2005 was $3,513 million and $2,474 million, respectively. For the six months ended December 31, 2006 and 2005, total comprehensive income was $6,176 million and $4,584 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
December 31
 
Six Months Ended
December 31
 
 
Net Sales
Earnings Before Income Taxes
Net Earnings
 
Net Sales
Earnings Before Income Taxes
Net Earnings
 
 
 
 
 
       
    Beauty
2006
$ 5,884
$ 1,335
$ 1,008
 
$ 11,487
$ 2,532
$ 1,880
 
2005
5,427
1,169
848
 
10,469
2,250
1,631
 
 
 
 
 
       
    Health Care
2006
2,355
683
472
 
4,582
1,243
857
 
2005
2,204
569
387
 
3,890
1,029
699
Beauty and Health
2006
8,239
2,018
1,480
 
16,069
3,775
2,737
 
2005
7,631
1,738
1,235
 
14,359
3,279
2,330
 
 
 
 
 
       
    Fabric Care and Home Care
2006
4,682
1,004
673
 
9,434
2,111
1,427
 
2005
4,225
921
616
 
8,575
1,914
1,278
 
 
 
 
 
       
    Baby Care and Family Care
2006
3,119
548
341
 
6,218
1,148
724
 
2005
2,979
518
330
 
5,925
1,025
650
 
 
 
 
 
       
    Snacks, Coffee and Pet Care
2006
1,253
232
150
 
2,316
376
237
 
2005
1,218
177
112
 
2,186
296
188
Household Care
2006
9,054
1,784
1,164
 
17,968
3,635
2,388
 
2005
8,422
1,616
1,058
 
16,686
3,235
2,116
 
 
 
 
 
       
    Blades and Razors
2006
1,282
417
301
 
2,581
867
638
 
2005
1,153
375
272
 
1,153
375
272
 
 
 
 
 
       
    Duracell and Braun
2006
1,347
312
218
 
2,323
463
313
 
2005
1,279
243
165
 
1,279
243
165
Gillette Business Unit
2006
2,629
729
519
 
4,904
1,330
951
 
2005
2,432
618
437
 
2,432
618
437
 
 
 
 
 
       
Corporate
2006
(197)
(441)
(301)
 
(431)
(774)
(516)
 
2005
(148)
(311)
(184)
 
(347)
(559)
(308)
Total
2006
$ 19,725
$ 4,090
$ 2,862
 
$ 38,510
$ 7,966
$ 5,560
 
2005
18,337
3,661
2,546
 
33,130
6,573
4,575
 
- 4 -

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 six months ended December 31, 2005, 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):

 
Six Months Ended
December 31, 2005
Net Sales
$35,913
Net Earnings
$4,757
Diluted Net Earnings per Common Share
$1.33


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.


- 5 -

 
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 December 31, 2006, the remaining liability was $797 million. Total integration plan charges against the assumed liability were $181 million for the three months ended December 31, 2006 and $273 million for the six months ended December 31, 2006. We expect such activities to be substantially complete by June 30, 2008.



- 6 -

 
5.   Goodwill and Other Intangible Assets - Goodwill as of December 31, 2006 is allocated by reportable segment and global business unit as follows (amounts in millions):

Six Months Ended
December 31, 2006
Beauty, beginning of year
 
$
17,870
 
        Acquisitions and divestitures
   
58
 
        Translation and other
   
269
 
    Goodwill, December 31, 2006
   
18,197
 
Health Care, beginning of year
   
6,090
 
        Acquisitions and divestitures
   
(1
)
        Translation and other
   
45
 
    Goodwill, December 31, 2006
   
6,134
 
Total Beauty & Health Care, beginning of year
   
23,960
 
        Acquisitions and divestitures
   
57
 
        Translation and other
   
314
 
    Goodwill, December 31, 2006
   
24,331
 
Baby Care and Family Care, beginning of year
   
1,563
 
        Acquisitions and divestitures
   
7
 
        Translation and other
   
31
 
    Goodwill, December 31, 2006
   
1,601
 
Fabric Care and Home Care, beginning of year
   
1,850
 
        Acquisitions and divestitures
   
12
 
T      Translation and other
   
22
 
    Goodwill, December 31, 2006
   
1,884
 
Snacks, Coffee and Pet Care, beginning of year
   
2,396
 
        Acquisitions and divestitures
   
5
 
        Translation and other
   
4
 
    Goodwill, December 31, 2006
   
2,405
 
Total Household Care, beginning of year
   
5,809
 
        Acquisitions and divestitures
   
24
 
        Translation and other
   
57
 
    Goodwill, December 31, 2006
   
5,890
 
Blades and Razors, beginning of year
   
21,539
 
        Acquisitions and divestitures
   
200
 
        Translation and other
   
167
 
    Goodwill, December 31, 2006
   
21,906
 
Duracell and Braun, beginning of year
   
3,998
 
        Acquisitions and divestitures
   
68
 
        Translation and other
   
31
 
    Goodwill, December 31, 2006
   
4,097
 
Total Gillette Business Unit, beginning of year
   
25,537
 
        Acquisitions and divestitures
   
268
 
        Translation and other
   
198
 
    Goodwill, December 31, 2006
   
26,003
 
Goodwill, Net, beginning of year
   
55,306
 
        Acquisitions and divestitures
   
349
 
        Translation and other
   
569
 
    Goodwill, December 31, 2006
 
$
56,224
 
 
- 7 -

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 December 31, 2006 are comprised of (amounts in millions):


 
Gross Carrying Amount
 
Accumulated Amortization
Amortizable intangible assets with determinable lives
$
8,364
 
$
1,617
Intangible assets with indefinite lives
 
26,834
   
-
Total identifiable intangible assets
$
35,198
 
$
1,617

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 December 31, 2006 and 2005 was $168 million and $187 million, respectively.  For the six months ended December 31, 2006 and 2005, the amortization expense of intangible assets was $331 million and $236 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 six months ended December 31, 2006 and 2005 are summarized in the following table (amounts in millions):

   
Three Months Ended
December 31
 
Six Months Ended
December 31
 
   
2006
 
2005
 
2006
 
2005
 
Share-Based Compensation