PG

Business Context and Reporting Period

This Form 10-Q covers The Procter & Gamble Company for the quarterly period ended December 31, 2001, and the six-month period ended on the same date. The company operates in five primary segments: Baby, Feminine & Family Care; Fabric & Home Care; Beauty Care; Health Care; and Food & Beverage. A significant event during this period was the acquisition of the Clairol business from Bristol-Myers Squibb on November 16, 2001, for approximately $4.975 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2% to $10.4 billion for the quarter and remained flat at $20.17 billion for the six-month period compared to the prior year. Unit volume grew 5% in the quarter, driven by double-digit growth in Health and Beauty Care.
• Profitability: Net earnings rose 9% to $1.30 billion for the quarter and 2% to $2.40 billion for the six-month period. Core net earnings (excluding restructuring and accounting changes) grew 5% to $1.99 per share for the six-month period.
• Margin Expansion: Gross margin improved to 48.7% from 46.8% in the prior year quarter, driven by lower manufacturing costs and restructuring benefits. Operating margin increased to 17.9% from 16.8%.
• Balance Sheet: Total assets increased significantly from $34.4 billion to $41.4 billion, primarily due to the Clairol acquisition. Goodwill increased by approximately $4 billion due to the acquisition. Short-term debt rose sharply to $6.76 billion to fund the acquisition, while long-term debt remained relatively stable.
• Cash Flow: Operating cash flow for the six months increased to $3.18 billion from $2.27 billion, aided by working capital management. Investing activities showed a net outflow of $5.48 billion, largely due to the $5.06 billion acquisition cost.

Guidance, Outlook, and Risks

• Restructuring Program: The company recorded $189 million in pre-tax restructuring charges for the quarter ($146 million after-tax) as part of the "Organization 2005" program. This included $82 million in cost of products sold and $121 million in marketing/administrative expenses. Approximately 2,000 employee separations were associated with these charges.
• Acquisition Integration: The Clairol acquisition is expected to provide significant synergies and minimal initial dilution. The company is currently finalizing the allocation of the purchase price, with less than 5% expected to be net assets and 15% identifiable intangibles.
• Accounting Changes: Effective July 1, 2001, the company adopted SFAS No. 142, discontinuing the amortization of goodwill and indefinite-lived intangible assets. This change positively impacted earnings by $55 million in the prior year comparison.
• Risks and Contingencies: The company reported no material off-balance sheet arrangements. A contingent purchase price provision exists regarding the prior acquisition of Dr. John's Spinbrush, which is expected to be settled in the current fiscal year without material impact. Pension plans show a combined underfunding of $1.1 billion, primarily outside the U.S.
• Outlook: Management confirmed previously issued guidance for the fiscal year 2002 in a December 11, 2001, Form 8-K filing.

Investor Verification Checklist

• Verify the final allocation of the $4.975 billion Clairol purchase price, specifically the valuation of goodwill versus identifiable intangible assets.
• Monitor the integration progress of Clairol to ensure anticipated synergies and cost savings are realized.
• Track the execution of the "Organization 2005" restructuring program and the associated cash outflows for employee separations.
• Review the settlement terms and final cost of the Dr. John's Spinbrush contingent purchase price provision.
• Assess the impact of foreign exchange rates on future net sales, which had a negative 1% impact in the current quarter.