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, 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 1,327,749,063 shares of Common Stock outstanding as of January 22,
1999.
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, 1998 and 1997, the
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998, and the
Consolidated Statements of Cash Flows for the six months ended December 31, 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 Six Months Ended
December 31 December 31
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
NET SALES $ 9,934 $ 9,641 $19,444 $18,996
Cost of products sold 5,375 5,322 10,557 10,530
Marketing, research, and
administrative expenses 2,722 2,631 5,176 5,039
------- ------- ------- -------
OPERATING INCOME 1,837 1,688 3,711 3,427
Interest expense 166 141 323 262
Other income, net 60 47 110 98
------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES 1,731 1,594 3,498 3,263
Income taxes 589 548 1,189 1,130
------- ------- ------- -------
NET EARNINGS $ 1,142 $ 1,046 $ 2,309 $ 2,133
======= ======= ======= =======
PER COMMON SHARE:
Basic net earnings $ 0.84 $ 0.76 $ 1.70 $ 1.55
Diluted net earnings $ 0.78 $ 0.71 $ 1.58 $ 1.44
Dividends $ 0.285 $ 0.253 $ 0.570 $ 0.506
AVERAGE COMMON SHARES
OUTSTANDING 1,330.1 1,346.0
</TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in Millions
December 31 June 30
ASSETS 1998 1998
------ ----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,094 $ 1,549
Investment securities 702 857
Accounts receivable 3,284 2,781
Inventories
Materials and supplies 1,237 1,225
Work in process 391 343
Finished products 1,799 1,716
Deferred income taxes 768 595
Prepaid expenses and other current assets 1,711 1,511
--------- ---------
TOTAL CURRENT ASSETS 11,986 10,577
PROPERTY, PLANT AND EQUIPMENT 21,544 20,152
LESS ACCUMULATED DEPRECIATION 8,705 7,972
--------- ---------
TOTAL PROPERTY, PLANT AND EQUIPMENT 12,839 12,180
GOODWILL AND OTHER INTANGIBLE ASSETS 7,123 7,011
OTHER NON-CURRENT ASSETS 1,203 1,198
--------- ---------
TOTAL ASSETS $ 33,151 $ 30,966
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 7,371 $ 6,969
Debt due within one year 2,965 2,281
--------- ---------
TOTAL CURRENT LIABILITIES 10,336 9,250
LONG-TERM DEBT 6,408 5,765
DEFERRED INCOME TAXES 660 428
OTHER NON-CURRENT LIABILITIES 2,922 3,287
--------- ---------
TOTAL LIABILITIES 20,326 18,730
SHAREHOLDERS' EQUITY
Preferred stock 1,803 1,821
Common stock-shares outstanding - Dec 31 1,326.4 1,326
June 30 1,337.4 1,337
Additional paid-in capital 1,061 907
Reserve for ESOP debt retirement (1,611) (1,616)
Accumulated comprehensive income (1,117) (1,357)
Retained earnings 11,363 11,144
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 12,825 12,236
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,151 $ 30,966
========= =========
</TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Amounts in Millions Six Months Ended
December 31
1998 1997
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,549 $ 2,350
OPERATING ACTIVITIES
Net earnings 2,309 2,133
Depreciation and amortization 841 774
Deferred income taxes 58 51
Change in:
Accounts receivable (441) (215)
Inventories (69) (212)
Accounts Payables and Accruals 207 (395)
Other Operating Assets & Liabilities (651) (270)
Other (269) (31)
------------ ------------
TOTAL OPERATING ACTIVITIES 1,985 1,835
------------ ------------
INVESTING ACTIVITIES
Capital expenditures (1,130) (1,071)
Proceeds from asset sales and retirements 436 141
Acquisitions (107) (2,379)
Change in investment securities 173 (257)
------------ ------------
TOTAL INVESTING ACTIVITIES (628) (3,566)
------------ ------------
FINANCING ACTIVITIES
Dividends to shareholders (814) (732)
Change in short-term debt 631 2,004
Additions to long-term debt 842 503
Reduction of long-term debt (264) (110)
Proceeds from stock options 85 54
Purchase of treasury shares (1,292) (960)
------------ ------------
TOTAL FINANCING ACTIVITIES (812) 759
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 0 (73)
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS 545 (1,045)
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,094 $ 1,305
============ ============
</TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Millions
1. 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 December 31, 1998 and 1997 was $1,295 and $734, respectively.
For the six months ended December 31, 1998 and 1997, total comprehensive
income was $2,549 and $1,649 respectively.
2. Segment Information
<TABLE>
<CAPTION>
Three Months Europe,
Ended North Middle East Latin
December 31 America and Africa Asia America Corporate Total
------------- ------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
1998 $ 4,927 $ 3,131 $ 949 $ 741 $ 186 $ 9,934
1997 4,832 3,044 906 689 170 9,641
Earnings Before
Income Taxes
1998 1,148 493 126 110 (146) 1,731
1997 1,035 432 124 102 (99) 1,594
Net Earnings
1998 752 324 85 88 (107) 1,142
1997 670 290 84 81 (79) 1,046
<CAPTION>
Six Months Europe,
Ended North Middle East Latin
December 31 America and Africa Asia America Corporate Total
------------- ------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
1998 $ 9,679 $ 6,252 $ 1,759 $ 1,415 $ 339 $ 19,444
1997 9,514 6,041 1,782 1,285 374 18,996
Earnings Before
Income Taxes
1998 2,329 1,019 266 206 (322) 3,498
1997 2,092 909 252 182 (172) 3,263
Net Earnings
1998 1,498 671 181 162 (203) 2,309
1997 1,342 610 169 143 (131) 2,133
</TABLE>
Item 2. Management Discussion and Analysis
RESULTS OF OPERATIONS
- ---------------------
Basic net earnings for the three months ended December 31, 1998 were $ .84 per
share, an 11 percent increase over the same quarter of the prior year. Worldwide
net earnings for the quarter were $1.14 billion, a nine 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 $9.9 billion, a three percent increase
over the same quarter of the prior year. Weaker currencies, primarily in Asia
and Latin America, reduced sales by one percent. Unit volume was flat, with the
difference in sales and volume growth caused by favorable pricing and mix
effects.
Basic net earnings for the six months ended December 31, 1998 were $1.70 per
share, a 10 percent increase versus a year ago. Net earnings for the same period
were $2.31 billion, an eight percent increase over the prior year. Worldwide
sales for the six-month period grew two percent to $19.4 billion, ahead of flat
unit volume, due largely to favorable pricing impacts.
Unfavorable exchange rates reduced sales by two percent year-to-date.
Gross margin was 45.9 percent for the quarter ended December 31, 1998 compared
to 44.8 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 18.5 percent for the quarter compared to 17.5 percent in
the same quarter a year ago and 16.3 percent for the prior fiscal year. The
improvement in operating margin reflected pricing-driven improvements in gross
margin, which were partially offset by higher marketing, research and
administrative expenditures behind product innovations, and the negative impact
of unfavorable exchange rates.
NORTH AMERICA
- -------------
Net sales in North America for the quarter ended December 31, 1998 were up two
percent versus the same quarter in the prior year on a one percent unit volume
increase. Sales growth was primarily driven by improved pricing in Laundry and
Cleaning, Beauty Care, and Paper. The region achieved a 12 percent net earnings
increase due primarily to pricing and cost improvements.
The pace of the business in North America is improving, with volume up three
percent excluding the sale of Duncan Hines. The Region's overall unit volume
improvement was driven by Laundry and Cleaning, which enjoyed continued success
from improved market shares across all laundry brands and from the launch of
Febreze in the fabric care category, and Paper, behind additional tissue
capacity. In addition, strong coffee results partially offset unit volume losses
resulting from the prior year divestiture of Duncan Hines in the Food and
Beverage business.
For the six months ended December 31, 1998, net sales were up two percent on
flat unit volume. Net earnings increased 12 percent.
EUROPE, MIDDLE EAST, AND AFRICA
- -------------------------------
Net sales for Europe, Middle East, and Africa for the three months ended
December 31, 1998 increased three percent over the same quarter in the prior
year on a four percent decline in unit volume. Sales outpaced volume behind
improved pricing, primarily in laundry and paper products, and favorable
exchange effects in Western Europe. The Region's results were negatively
impacted by the economic crisis and currency devaluation in Russia. Despite the
impact of Russia and Central and Eastern Europe, the Region's net earnings grew
12 percent, primarily behind improved pricing.
Volume softness was largely attributable to the economic crisis in Russia and
continued competitive pressures in laundry & cleaning, primarily related to
laundry tablet initiatives in Western Europe. However, a number of new brand
expansions in the Region are beginning to produce positive results. Food &
beverage achieved considerable volume gains behind the strength of Pringles, as
well as the successful launch of Sunny Delight in the United Kingdom. In paper,
Bounty continues to exceed objectives in Germany and has now assumed market
leadership.
For the six months ended December 31, 1998, sales were up three percent while
unit volume declined three percent. Net earnings increased 10 percent.
ASIA
- ----
Net sales in Asia for the three months ended December 31, 1998 increased five
percent versus the same quarter of the prior year, on five percent unit volume
growth, as positive pricing offset the effects of unfavorable exchange rates.
Net earnings increased two percent versus the same quarter last year, as sales
increases were partially offset by increased investment in new initiatives and
economic conditions in the ASEAN region.
The region grew volume behind the strengthening of the business in Japan and
China and the prior year acquisition of the Ssangyong Paper Company in Korea.
Importantly, Japan was able to build market share in a difficult economy through
laundry and cleaning initiatives and Pringles. China's unit volume grew behind
the national expansion of Vidal Sassoon, improved Whisper Ultra, and advance
buying in anticipation of a consumption tax increase. Volume in the remainder of
Asia continues to be negatively impacted by the recession and market
contraction.
For the six months ended December 31, 1998, sales decreased one percent and unit
volume increased four percent. Sales did not keep pace with unit volume growth
due to the effects of unfavorable exchange rates. Net earnings increased seven
percent.
LATIN AMERICA
- -------------
Latin America net sales for the three months ended December 31, 1998 were up
seven percent versus the same quarter of the prior year, on five percent unit
volume growth, as improved pricing more than offset the effects of unfavorable
exchange rates. Earnings for the Region were up nine percent, as the improvement
in sales and pricing exceeded the investment in product upgrades and new
initiatives.
Unit volume growth for the quarter was led by the strengthening of the business
in Mexico and the prior year buy-out of a paper joint venture in Chile and
Argentina.
For the six months ended December 31, 1998, sales increased 10 percent on a
nine percent increase in unit volume. Net earnings increased 14 percent.
FINANCIAL CONDITION
- -------------------
Total debt increased $1.3 billion since June 30, 1998. The incremental debt was
used primarily to finance the previously announced share repurchase program.
YEAR 2000 UPDATE
- ----------------
As outlined in the 10-K for the year ended June 30, 1998, the Company has
developed plans to address the possible exposures related to the impact on its
computer systems of the Year 2000. These plans have not changed materially in
terms of scope or estimated costs to complete, and are progressing according to
previously identified time schedules.
Implementation of required changes to critical systems is expected to be
completed during fiscal 1999. Testing and certification of critical systems,
which includes review of documented remediation work and test results by
technical experts, key users, and a central project team, is expected to be
successfully completed by December 31, 1999. Critical systems compliance has
progressed as follows:
% of Applications Year 2000 Compliant
-------------------------------------
Actual Planned
December 1998 June 1999
------------- ---------
Critical plant-based manufacturing,
operating, and control systems 95% 100%
All other critical systems 97% 100%
Incremental costs, which include contractor costs to modify existing systems and
costs of internal resources dedicated to achieving Year 2000 compliance, are
charged to expense as incurred. Costs are expected to total approximately $100
million, of which 60% has been spent to date.
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 the Company's 8-K filed on October 15, 1997)
(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
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the quarter
ended December 31, 1998 and through the date of this report.
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 5, 1999
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 (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 11
(12) Computation of Ratio of Earnings to Fixed Charges 12
(27) Financial Data Schedule 13
EXHIBIT (11)
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
---------------------------------------------
Computation of Earnings Per Share
Amounts in Millions Except Per Share Amounts
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC NET EARNINGS PER SHARE
Net earnings $ 1,142 $ 1,046 $ 2,309 $ 2,133
Deduct preferred stock dividends 29 26 54 52
------- ------- ------- -------
Net earnings applicable to common stock $ 1,113 $ 1,020 $ 2,255 $ 2,081
======= ======= ======= =======
Average number of common shares outstanding 1,330.1 1,346.0 1,330.1 1,346.0
======= ======= ======= =======
Basic net earnings per share $ 0.84 $ 0.76 $ 1.70 $ 1.55
======= ======= ======= =======
DILUTED NET EARNINGS PER SHARE
Net earnings $ 1,142 $ 1,046 $ 2,309 $ 2,133
Deduct differential - preferred
vs. common dividends 6 6 11 13
------- ------- ------- -------
Net earnings applicable to common stock $ 1,136 $ 1,040 $ 2,298 $ 2,120
======= ======= ======= =======
Average number of common shares outstanding 1,330.1 1,346.0 1,330.1 1,346.0
Add potential effect of:
Exercise of options 23.5 24.0 23.5 24.0
Conversion of preferred stock 97.8 100.3 97.8 100.3
------- ------- ------- -------
Average number of common shares
outstanding, assuming dilution 1,451.4 1,470.3 1,451.4 1,470.3
======= ======= ======= =======
Diluted earnings per share $ 0.78 $ 0.71 $ 1.58 $ 1.44
======= ======= ======= =======
</TABLE>
EXHIBIT (12)
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
---------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
Six Months Ended
Years Ended June 30 December 31
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS, AS DEFINED
Earnings from operations before income taxes
after eliminating undistributed earnings
of equity method investees $ 3,307 $ 4,022 $ 4,695 $ 5,274 $ 5,704 $ 3,304 $ 3,524
Fixed charges, excluding capitalized interest 569 571 576 534 639 312 370
------- ------- ------- ------- ------- ------- -------
TOTAL EARNINGS, AS DEFINED $ 3,876 $ 4,593 $ 5,271 $ 5,808 $ 6,343 $ 3,616 $ 3,894
======= ======= ======= ======= ======= ======= =======
FIXED CHARGES, AS DEFINED
Interest expense including capitalized interest $ 501 $ 511 $ 493 $ 457 $ 548 $ 262 $ 323
1/3 of rental expense 87 83 92 77 91 50 47
------- ------- ------- ------- ------- ------- -------
TOTAL FIXED CHARGES, AS DEFINED $ 588 $ 594 $ 585 $ 534 $ 639 $ 312 $ 370
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 6.6 7.7 9.0 10.9 9.9 11.6 10.5
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000080424
<NAME> THE PROCTER & GAMBLE COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,094
<SECURITIES> 702
<RECEIVABLES> 3,284
<ALLOWANCES> 0
<INVENTORY> 3,427
<CURRENT-ASSETS> 11,986
<PP&E> 21,544
<DEPRECIATION> 8,705
<TOTAL-ASSETS> 33,151
<CURRENT-LIABILITIES> 10,336
<BONDS> 6,408
0
1,803
<COMMON> 1,326
<OTHER-SE> 9,696
<TOTAL-LIABILITY-AND-EQUITY> 33,151
<SALES> 19,444
<TOTAL-REVENUES> 19,444
<CGS> 10,557
<TOTAL-COSTS> 5,176
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 3,498
<INCOME-TAX> 1,189
<INCOME-CONTINUING> 2,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,309
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.58
</TABLE>
