THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Six Months Ended
Amounts in millions		December 31
		2007			2006
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		$	5,354		$	6,693
OPERATING ACTIVITIES
Net earnings			6,349			5,560
Depreciation and amortization			1,503			1,489
Share-based compensation expense			242			289
Deferred income taxes			325			201
Changes in:
Accounts receivable			(703	)		(1,668	)
Inventories			(589	)		(486	)
Accounts payable, accrued and other liabilities			(97	)		8
Other operating assets and liabilities			126			(110	)
Other			215			120
TOTAL OPERATING ACTIVITIES			7,371			5,403
INVESTING ACTIVITIES
Capital expenditures			(1,184	)		(1,239	)
Proceeds from asset sales			747			135
Acquisitions			24			(139	)
Change in investment securities			(502	)		620
TOTAL INVESTING ACTIVITIES			(915	)		(623	)
FINANCING ACTIVITIES
Dividends to shareholders			(2,267	)		(2,045	)
Change in short-term debt			1,163			9,873
Additions to long-term debt			5,038			7
Reductions of long-term debt			(6,129	)		(12,488	)
Impact of stock options and other			979			730
Treasury purchases			(5,481	)		(2,713	)
TOTAL FINANCING ACTIVITIES			(6,697	)		(6,636	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS			236			150
CHANGE IN CASH AND CASH EQUIVALENTS			(5	)		(1,706	)
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,349		$	4,987
See accompanying Notes to Consolidated Financial Statements

 

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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, 2007. The results of operations for  the three-month and six-month period ended December 31, 2007 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, 2007 and 2006 was $4,086 million and $3,513 million, respectively. For the six months ended December 31, 2007 and 2006, total comprehensive income was $8,199 million and $6,176 million, respectively.
   
   
3. Segment Information - Following is a summary of segment results. In May 2007, we announced a number of changes to our organization structure and certain of our key leadership positions. The changes became effective on July 1, 2007 and resulted in changes to our GBU and reporting segment structure. The businesses that previously comprised the Gillette GBU are now included within the Beauty and Household Care GBUs. The Braun business has been combined with the Blades and Razors business to form the Grooming reportable segment within the Beauty GBU. The Grooming reportable segment also includes all face and shave prep products which were previously reported within the Beauty reportable segment. Duracell was moved to our Household Care GBU and will be reported as part of our Fabric Care and Home Care reportable segment. Finally, our feminine care business, which previously was part of our Beauty GBU and reportable segment, is now part of our Health and Well-Being GBU and will be reported as part of the Health Care reportable segment. The following segment information reflects the new segment reporting structure.

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 GBU
Beauty		2007		$ 5,137		$ 1,120		$ 883		$ 9,736		$ 2,004		$ 1,572
		2006		4,656		1,027		804		8,980		1,862		1,438
Grooming		2007		2,161		596		429		4,176		1,210		880
		2006		1,976		530		386		3,821		1,057		771
Health & Well-Being GBU
Health Care		2007		3,772		1,056		715		7,331		2,036		1,363
		2006		3,407		960		648		6,743		1,838		1,241
Snacks, Coffee and Pet Care		2007		1,302		201		127		2,425		385		240
		2006		1,253		232		150		2,316		376		237
Household Care GBU
Fabric Care and Home Care		2007		6,074		1,306		882		11,978		2,662		1,798
		2006		5,511		1,234		834		10,863		2,459		1,665
Baby Care and Family Care		2007		3,374		652		418		6,794		1,330		848
		2006		3,119		548		341		6,218		1,148		724
Corporate		2007		(245)		(414)		(184)		(666)		(858)		(352)
		2006		(197)		(441)		(301)		(431)		(774)		(516)
Total		2007		21,575		4,517		3,270		41,774		8,769		6,349
		2006		19,725		4,090		2,862		38,510		7,966		5,560

 

4.

The Company acquired the Gillette Company in October 2005. At that time, 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. These costs are 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. As of December 31, 2007, the remaining liability was $515 million. Total integration plan charges against the assumed liability were $58 million for the three months ended December 31, 2007 and $126 million for the six months ended December 31, 2007. We expect such activities to be substantially complete by June 30, 2008.

 

5.	Goodwill and Other Intangible Assets - Goodwill as of December 31, 2007 is allocated by reportable segment and global business unit as follows (amounts in millions):

 

BEAUTY GBU	Six Months Ended December 31, 2007
Beauty, beginning of year	$	15,359
Acquisitions and divestitures		(50	)
Translation and other		785
Goodwill, December 31, 2007		16,094
Grooming, beginning of year		24,211
Acquisitions and divestitures		(178	)
Translation and other		790
Goodwill, December 31, 2007		24,823
HEALTH & WELL-BEING GBU
Health Care, beginning of year		8,482
Acquisitions and divestitures		(38	)
Translation and other		186
Goodwill, December 31, 2007		8,630
Snacks, Coffee and Pet Care, beginning of year		2,407
Acquisitions and divestitures		(3	)
Translation and other		20
Goodwill, December 31, 2007		2,424
HOUSEHOLD CARE GBU
Fabric Care and Home Care, beginning of year		4,470
Acquisitions and divestitures		(29	)
Translation and other		135
Goodwill, December 31, 2007		4,576
Baby Care and Family Care, beginning of year		1,623
Acquisitions and divestitures		(31	)
Translation and other		77
Goodwill, December 31, 2007		1,669
GOODWILL, Net, beginning of year		56,552
Acquisitions and divestitures		(329	)
Translation and other		1,993
Goodwill, December 31, 2007	$	58,216

 

The increase in goodwill from June 30, 2007 is primarily due to currency translation.

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Identifiable intangible assets as of December 31, 2007 are comprised of (amounts in millions):

 

		Gross Carrying Amount			Accumulated Amortization
Amortizable intangible assets with determinable lives		$	8,802		$	2,299
Intangible assets with indefinite lives			27,665			-
Total identifiable intangible assets		$	36,467		$	2,299

 

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, 2007 and 2006 was $155 million and $168 million, respectively. For the six months ended December 31, 2007 and 2006, the amortization expense of intangible assets was $312 million and $331 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, 2007 and 2006 are summarized in the following table (amounts in millions):

		Three Months Ended December 31						Six Months Ended December 31
		2007			2006			2007			2006
Share-Based Compensation
SFAS 123(R) Stock Options		$	131		$	129		$	229		$	259
Other Share-Based Awards			5			2			13			30
Total Share-Based Compensation		$	136		$	131		$	242		$	289

 

 Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

 

7.	Postretirement Benefits - The Company offers various postretirement benefits to its employees.

 

The components of net periodic benefit cost are as follows:

 

Amounts in millions		Pension Benefits								Other Retiree Benefits
		Three Months Ended								Three Months Ended
		December 31								December 31
		2007				2006				2007				2006
Service Cost		$	69			$	67			$	24			$	21
Interest Cost			136				118				56				51
Expected Return on Plan Assets			(139	)			(111	)			(107	)			(101	)
Amortization of Deferred Amounts			4				3				-				(6	)
Recognized Net Actuarial Loss			5				11				(3	)			-
Gross Benefit Cost			75				88				(30	)			(35	)
Dividends on ESOP Preferred Stock			-				-				(23	)			(21	)
Net Periodic Benefit Cost (Credit)		$	75			$	88			$	(53	)		$	(56	)

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Amounts in millions		Pension Benefits								Other Retiree Benefits
		Six Months Ended								Six Months Ended
		December 31								December 31
		2007				2006				2007				2006
Service Cost		$	135			$	133			$	47			$	41
Interest Cost			266				236				112				102
Expected Return on Plan Assets			(273	)			(221	)			(214	)			(203	)
Amortization of Deferred Amounts			7				6				-				(11	)
Recognized Net Actuarial Loss			12				22				(7	)			1
Gross Benefit Cost		$	147			$	176			$	(62	)		$	(70	)
Dividends on ESOP Preferred Stock			-				-				(46	)			(42	)
Net Periodic Benefit Cost (Credit)		$	147			$	176			$	(108	)		$	(112	)

For the year ending June 30, 2008, the expected return on plan assets is 7.4% and 9.3% for defined benefit and other retiree benefit plans, respectively.

8. New Accounting Standards

  

      On July 1, 2007, we adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 addresses the accounting and disclosure of uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for a position in accordance with FIN 48 and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.

The adoption of FIN 48 resulted in a decrease to retained earnings as of July 1, 2007 of $232 million, which was reflected as a cumulative effect of a change in accounting principle, with a corresponding increase to the net liability for unrecognized tax benefits. The impact primarily reflects the accrual of additional statutory interest and penalties as required by FIN 48, partially offset by adjustments to existing unrecognized tax benefits to comply with FIN 48 measurement principles. The implementation of FIN 48 also resulted in a reduction in our net tax liabilities for uncertain tax positions related to prior acquisitions accounted for under purchase accounting, resulting in an $80 million decrease to goodwill. Additionally, the Company historically classified unrecognized tax benefits in current taxes payable. As a result of the adoption of FIN 48, unrecognized tax benefits not expected to be paid in the next 12 months were reclassified to other non-current liabilities.

The total amount of unrecognized tax benefits at July 1, 2007 is $2,971 million, excluding any related accruals for interest and penalties.  Included in the total unrecognized tax benefits is $1,893 million that, if recognized, would impact the effective tax rate in future periods.  We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  Accrued interest and penalties as of July 1, 2007 were $589 million and $128 million, respectively, on an after tax basis.  At this time, we are not able to make a reasonable estimate of the amount of unrecognized tax benefits and related interests and penalties that are expected to be paid in the next 12 months.  On an ongoing basis, adjustments will be made to the liability for unrecognized tax benefits to reflect the impact of audit developments, tax law changes, statute expirations, as well as for the accrual of additional current year tax exposures and for interest and penalties on existing liabilities.

P&G files income tax returns in multiple federal, state and local US and foreign jurisdictions. The Company is subject to examination by the taxing authorities in these jurisdictions, with open tax years generally ranging from 1997 and forward. The Company has on-going audits in various stages of completion in several jurisdictions, one or more of which might conclude within the next 12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty at this time. Such settlements will involve some or all of the following: the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. It is possible that the amount of unrecognized benefit with respect to certain of our uncertain tax positions will significantly increase or decrease within the next twelve months related to the audits described above. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of unrecognized tax benefits or the impact on the effective tax rate related to these items.

 

The unrecognized tax benefits described above will be included in the Company's annual Form 10-K contractual obligations table to the extent the Company is able to make reliable estimates of the timing of cash settlements with the respective taxing authorities.  If not, the total amount of unrecognized tax benefits will be disclosed in a footnote to the contractual obligations table. At this time, the Company can not make a reliable estimate as to the timing of cash settlements.

 

In December 2007, the FASB issued SFAS 141 (Revised), Business Combinations (SFAS 141R) and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160).  SFAS 141R and SFAS 160 revise the method of accounting for a number of aspects of business combinations and non-controlling interests, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests), and post acquisition exit activities of acquired businesses.  SFAS 141R and SFAS 160 will be effective for the company during our fiscal year beginning July 1, 2009.

 

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on the consolidated financial statements.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The purpose of this discussion is to provide an understanding of P&G’s financial results and condition by focusing on changes in certain key measures from year to year.  Management's Discussion and Analysis (MD&A) is organized in the following sections:

·

Overview

·	Summary of Results

·	Forward-Looking Statements

·	Results of Operations – Three Months Ended December 31, 2007

·	Results of Operations – Six Months Ended December 31, 2007

·	Business Segment Discussion – Three Months Ended December 31, 2007

·	Business Segment Discussion – Six Months Ended December 31, 2007

·	Financial Condition

·	Reconciliation of Non-GAAP Measures

Throughout MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net outside sales and after-tax profit.  We also refer to financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, free cash flow and free cash flow productivity.  The explanation of these measures at the end of MD&A provides more details on the use and the derivation of these measures.  Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share information.  References to market share and market consumption in MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates.

OVERVIEW

P&G's business is focused on providing branded consumer goods products.  Our goal is to provide products of superior quality and value to improve the lives of the world's consumers.  We believe this will result in leadership sales, profits and value creation, allowing employees, shareholders and the communities in which we operate to prosper.

Our products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores and drug stores.  We have also expanded our presence in "high frequency stores," the neighborhood stores which serve many consumers in developing markets.  We compete in multiple product categories and have three global business units (GBUs): Beauty; Health and Well-Being; and Household Care.  Under U.S. Generally Accepted Accounting Principles, the business units comprising the GBUs are aggregated into six reportable segments:  Beauty; Grooming; Health Care; Snacks, Coffee and Pet Care; Fabric Care and Home Care; and Baby Care and Family Care.  We have on-the-ground operations in over 80 countries through our Market Development Organization, which leads country business teams to build our brands in local markets and is organized along seven geographic areas comprised of three developed regions (North America, Western Europe and Northeast Asia) and four developing regions (Latin America, Central and Eastern Europe/Middle East/Africa, Greater China and ASEAN/Australasia/India).

The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended December 31, 2007 (excludes net sales and net earnings in Corporate):

            

		Net Sales				Net Earnings
Beauty GBU			34	%			37	%
Beauty			24	%			25	%
Grooming			10	%			12	%
Health and Well-Being GBU			23	%			25	%
Health Care			17	%			21	%
Snacks, Coffee and Pet Care			6	%			4	%
Household Care GBU			43	%			38	%
Fabric Care and Home Care			28	%			26	%
Baby Care and Family Care			15	%			12	%
Total			100	%			100	%

The following table provides the percentage of net sales and net earnings by reportable business segment for the six months ended December 31, 2007 (excludes net sales and net earnings in Corporate):

		Net Sales				Net Earnings
Beauty GBU			33	%			36	%
Beauty			23	%			23	%
Grooming			10	%			13	%
Health and Well-Being GBU			23	%			24	%
Health Care			17	%			20	%
Snacks, Coffee and Pet Care			6	%			4	%
Household Care GBU			44	%			40	%
Fabric Care and Home Care			28	%			27	%
Baby Care and Family Care			16	%			13	%
Total			100	%			100	%

 

SUMMARY OF RESULTS

Following are highlights of results for the six months ended December 31, 2007:

·	Net sales grew eight percent to $41.8 billion.  Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, increased five percent.

·	Unit volume increased five percent and organic volume grew six percent.  Every reportable segment and geographic region posted year-on-year organic volume growth.

·	Net earnings increased 14 percent to $6.3 billion.  Net earnings increased behind sales growth, higher operating profit, a lower tax rate and favorable foreign exchange.

·	Diluted net earnings per share were $1.90, an increase of 17 percent versus the comparable prior year period.

·	Operating cash flow was $7.4 billion, an increase of 36 percent versus the prior year period.  Free cash flow productivity was 97 percent for the fiscal year to date period.  Free cash flow productivity is defined as the ratio of operating cash flow less capital expenditures to net earnings.

FORWARD-LOOKING STATEMENTS

We discuss expectations regarding future performance, events and outcomes, such as our business outlook and objectives, in annual and quarterly reports, press releases and other written and oral communications.  All such statements, except for historical and present factual information, are "forward-looking statements," and are based on financial data and our business plans available only as of the time the statements are made, which may become out-of-date or incomplete.  We assume no obligation to update any forward-looking statements as a result of new information, future events or other factors.  Forward-looking statements are inherently uncertain, and investors must recognize that events could be significantly different from our expectations.

 

Ability to Achieve Business Plans.  We are a consumer products company and rely on continued demand for our brands and products.  To achieve business goals, we must develop and sell products that appeal to consumers and retail trade customers.  Our continued success is dependent on leading-edge innovation with respect to both products and operations and on the continued positive reputations of our brands.  This means we must be able to obtain patents and respond to technological advances and patents granted to competition.  Our success is also dependent on effective sales, advertising and marketing programs in an increasingly fragmented media environment.  Our ability to innovate and execute in these areas will determine the extent to which we are able to grow existing sales and volume profitably, especially with respect to the product categories and geographic markets (including developing markets) in which we have chosen to focus.  There are high levels of competitive activity in the environments in which we operate.  To address these challenges, we must respond to competitive factors, including pricing, promotional incentives and trade terms.  We must manage each of these factors, as well as maintain mutually beneficial relationships with our key customers, in order to effectively compete and achieve our business plans.  Since our goals include a growth component which can be affected by acquisitions and divestitures, we must manage and integrate key company transactions, such as the Gillette and Wella acquisitions, including achieving the cost and growth synergies for those transactions in accordance with stated goals, and the successful separation of the Company’s coffee business while continuing to deliver the Company’s goals.

Cost Pressures.  Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, cost of labor, foreign exchange and interest rates.  Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions.  We also must manage our debt and currency exposure, especially in volatile countries.  We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements.  We must implement, achieve and sustain cost improvement plans, including our outsourcing projects and those related to general overhead and workforce rationalization.

Global Economic Conditions.  Economic changes, terrorist activity and political unrest may result in business interruption, inflation, deflation or decreased demand for our products.  Our success will depend in part on our ability to manage continued global political and/or economic uncertainty, especially in our significant geographic markets, as well as any political or economic disruption due to terrorist and other hostile activities.

Regulatory Environment.  Changes in laws, regulations and the related interpretations may alter the environment in which we do business.  This includes changes in environmental, competitive and product-related laws, as well as changes in accounting standards and taxation requirements.  Accordingly, our ability to manage regulatory, tax and legal matters (including product liability, patent and intellectual property matters, as well as those related to the integration of Gillette and its subsidiaries) and to resolve pending matters within current estimates may impact our results.

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RESULTS OF OPERATIONS – Three Months Ended December 31, 2007

The following discussion provides a review of results for the three months ended December 31, 2007 versus the three months ended December 31, 2006.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES (Amounts in Millions Except Per Share Amounts) Consolidated Earnings Information
		Three Months Ended December 31
		2007				2006				% CHG
NET SALES		$	21,575			$	19,725				9	%
COST OF PRODUCTS SOLD			10,394				9,287				12	%
GROSS MARGIN			11,181				10,438				7	%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			6,467				6,088				6	%
OPERATING INCOME			4,714				4,350				8	%
TOTAL INTEREST EXPENSE			389				339
OTHER NON-OPERATING INCOME, NET			192				79
EARNINGS BEFORE INCOME TAXES			4,517				4,090				10	%
INCOME TAXES			1,247				1,228
NET EARNINGS			3,270				2,862				14	%
EFFECTIVE TAX RATE			27.6	%			30.0	%
PER COMMON SHARE:
BASIC NET EARNINGS		$	1.04			$	0.89				17	%
DILUTED NET EARNINGS		$	0.98			$	0.84				17	%
DIVIDENDS		$	0.35			$	0.31				13	%
AVERAGE DILUTED SHARES OUTSTANDING			3,341.5				3,406.5
COMPARISONS AS A % OF NET SALES										Basis Pt Chg
COST OF PRODUCTS SOLD			48.2	%			47.1	%			110
GROSS MARGIN			51.8	%			52.9	%			(110	)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			30.0	%			30.9	%			(90	)
OPERATING MARGIN			21.9	%			22.1	%			(20	)
EARNINGS BEFORE INCOME TAXES			20.9	%			20.7	%			20
NET EARNINGS			15.2	%			14.5	%			70

 

Net sales increased nine percent for the quarter to $21.6 billion.  Sales were up behind a five percent increase in unit volume and a five percent favorable foreign exchange impact.  These were partially offset by a negative one percent mix impact resulting from disproportionate double-digit volume growth in developing regions, where average selling price is below the company average.  Volume growth was broad-based across geographies with each geographic region posting year-on-year organic volume growth.  All reportable segments except Snacks, Coffee and Pet Care grew both total and organic volume, led by Fabric Care and Home Care, Baby Care and Family Care, and Grooming.  Volume grew primarily behind initiative activity on our key brands and continued developing region expansion.  Duracell, Febreze, Fusion, Head & Shoulders, Nice ‘N Easy, Pampers, Prilosec and Tide each delivered double-digit volume growth for the quarter.  Organic sales were up five percent for the quarter behind six percent organic volume growth.

 

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		Net Sales Change Drivers 2007 vs. 2006 (Three Months Ended Dec. 31)
		Volume with Acquisitions & Divestitures				Volume excluding Acquisitions & Divestitures				Foreign Exchange				Price				Mix/ Other				Net Sales Growth
Beauty GBU
Beauty			3	%			3	%			6	%			0	%			1	%			10	%
Grooming			7	%			8	%			7	%			0	%			-5	%			9	%
Health and Well-Being GBU
Health Care			5	%			5	%			6	%			0	%			0	%			11	%
Snacks, Coffee and Pet Care			0	%			0	%			3	%			1	%			0	%			4	%
Household Care GBU
Fabric Care and Home Care			7	%			7	%			5	%			0	%			-2	%			10	%
Baby Care and Family Care			2	%			8	%			5	%			0	%			1	%			8	%
Total Company			5	%			6	%			5	%			0	%			-1	%			9	%

Sales percentage changes are approximations based on quantitative formulas that are consistently applied.

Gross margin was down 110-basis points for the quarter to 51.8% of net sales.  Commodity and energy cost increases had a negative impact on gross margin of over 150-basis points.  These were partially offset by scale leverage from volume growth and cost savings projects.

Total selling, general and administrative expenses (SG&A) increased six percent to $6.5 billion.  SG&A as a percentage of net sales was down 90-basis points as lower overhead spending as a percentage of net sales more than offset higher marketing spending as a percentage of net sales.  Overhead spending as a percentage of net sales was down primarily due to scale leverage, overhead cost controls and Gillette synergy savings.

Interest expense for the quarter was up $50 million versus the year-ago period due to a higher interest rate driven by the geographic mix of our short-term borrowings.  Other non-operating income increased $113 million versus the prior year period primarily due to the gain on the sale of our Western European family care business, which closed on October 1, 2007.

Net earnings increased 14 percent for the quarter to $3.3 billion behind sales growth, higher operating profit, a lower tax rate and favorable foreign exchange.  Our tax rate declined from 30.0% to 27.6% primarily due to the favorable settlement of tax audits and a more favorable geographic mix of earnings.  Diluted net earnings per share were $0.98, up 17 percent versus the prior year.  Diluted net earnings per share growth exceeded net earnings growth due to share repurchase activity.

RESULTS OF OPERATIONS – Six Months Ended December 31, 2007

The following discussion provides a review of results for the six months ended December 31, 2007 versus the six months ended December 31, 2006.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES (Amounts in Millions Except Per Share Amounts) Consolidated Earnings Information
		Six Months Ended December 31
		2007				2006				% CHG
NET SALES		$	41,774			$	38,510				8	%
COST OF PRODUCTS SOLD			19,913				18,152				10	%
GROSS MARGIN			21,861				20,358				7	%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			12,729				11,954				6	%
OPERATING INCOME			9,132				8,404				9	%
TOTAL INTEREST EXPENSE			748				697
OTHER NON-OPERATING INCOME, NET			385				259
EARNINGS BEFORE INCOME TAXES			8,769				7,966				10	%
INCOME TAXES			2,420				2,406
NET EARNINGS			6,349				5,560				14	%
EFFECTIVE TAX RATE			27.6	%			30.2	%
PER COMMON SHARE:
BASIC NET EARNINGS		$	2.02			$	1.73				17	%
DILUTED NET EARNINGS		$	1.90			$	1.63				17	%
DIVIDENDS		$	0.70			$	0.62				13	%
AVERAGE DILUTED SHARES OUTSTANDING			3,348.2				3,410.1
COMPARISONS AS A % OF NET SALES										Basis Pt Chg
COST OF PRODUCTS SOLD			47.7	%			47.1	%			60
GROSS MARGIN			52.3	%			52.9	%			(60	)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			30.5	%			31.0	%			(50	)
OPERATING MARGIN			21.9	%			21.8	%			10
EARNINGS BEFORE INCOME TAXES			21.0	%			20.7	%			30
NET EARNINGS			15.2	%			14.4	%			80

Net sales for fiscal year to date period were up eight percent to $41.8 billion behind five percent volume growth and a favorable four percent foreign exchange impact.  This was partially offset by a negative one percent mix impact primarily due to disproportionate double-digit growth in developing regions.  Volume growth was broad-based across segments and geographic regions.  Each reportable segment and geographic region as well as 15 of our top 16 countries delivered year-on-year organic volume growth for the fiscal year to date period.   Volume grew behind initiative activity, led by Tide, Downy, Febreze, Fusion, Head & Shoulders, Hugo Boss, Dolce & Gabbana, Naturella, Pampers, Charmin and Pringles, all of which posted high-single digit or higher volume growth to offset declines on Braun, Actonel and in pet care.  Organic sales increased five percent for the fiscal year to date period behind six percent organic volume growth.

		Net Sales Change Drivers 2007 vs. 2006 (Six Months Ended Dec. 31)
		Volume with Acquisitions & Divestitures				Volume excluding Acquisitions & Divestitures				Foreign Exchange				Price				Mix/ Other				Net Sales Growth
Beauty GBU
Beauty			2	%			3	%			5	%			0	%			1	%			8	%
Grooming			6	%			7	%			6	%			1	%			-4	%			9	%
Health and Well-Being GBU
Health Care			5	%			4	%			5	%			0	%			-1	%			9	%
Snacks, Coffee and Pet Care			1	%			1	%			3	%			0	%			1	%			5	%
Household Care GBU
Fabric Care and Home Care			8	%			8	%			4	%			0	%			-2	%			10	%
Baby Care and Family Care			5	%			9	%			4	%			0	%			0	%			9	%
Total Company			5	%			6	%			4	%			0	%			-1	%			8	%

Sales percentage changes are approximations based on quantitative formulas that are consistently applied.

 

Gross margin was down 60-basis points fiscal year to date to 52.3% of net sales.  Commodity and energy cost increases had a negative impact on gross margin of over 120-basis points.   These were largely offset by scale leverage from volume growth and cost savings projects.

Total selling, general and administrative expenses (SG&A) increased six percent to $12.7 billion for the fiscal year to date period.  SG&A as a percentage of net sales was down 50-basis points primarily behind lower overhead spending as a percentage of net sales.  Overhead spending as a percentage of net sales was down primarily due to scale leverage, overhead cost controls and Gillette synergy savings.  Marketing spending as a percentage of net sales increased slightly versus the year ago period to support initiative activity on key brands.

Interest expense for the fiscal year to date period was up $51 million versus the year-ago period due to a higher interest rate driven by the geographic mix of our short-term borrowings.  Other non-operating income increased $126 million primarily due to higher current year divestiture gains, including a gain on the sale of our Western European family care business and our Japanese adult incontinence business.  The base period included gains on the sale of Pert in North America and Sure.

Net earnings increased 14 percent to $6.3 billion behind sales growth, higher operating profit, a lower tax rate and favorable foreign exchange.  Our tax rate declined from 30.2% to 27.6% due to a one-time tax benefit resulting from a reduction in the German statutory tax rate, which reduced our deferred tax liabilities related to acquired intangible assets, the favorable settlement of tax audits and a more favorable geographic mix of earnings.  Diluted net earnings per share were up 17 percent versus the prior year to $1.90 per share.

 

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BUSINESS SEGMENT DISCUSSION– Three and Six Months Ended December 31, 2007

The following discussion provides a review of results by business segment.  Analyses of the results for the three and six months ended December 31, 2007 are provided compared to the same three and six month period ended December 31, 2006.  The primary financial measures used to evaluate segment performance are net sales and net earnings.  The table below provides supplemental information on net sales and net earnings by business segment for the three and six months ended December 31, 2007 versus the comparable prior year period (Amounts in millions):

 

		Three Months Ended December 31, 2007
		Net Sales				% Change Versus Year Ago				Earnings Before Income Taxes				% Change Versus Year Ago				Net Earnings			% Change Versus Year Ago
Beauty GBU
Beauty		$	5,137				10	%		$	1,120				9	%		$	883			10	%
Grooming			2,161				9	%			596				12	%			429			11	%
Health and Well-Being GBU
Health Care			3,772				11	%			1,056				10	%			715			10	%
Snacks, Coffee and Pet Care			1,302				4	%			201				-13	%			127			-15	%
Household Care GBU
Fabric Care and Home Care			6,074				10	%			1,306				6	%			882			6	%
Baby Care and Family Care			3,374				8	%			652				19	%			418			23	%
Total Business Segments			21,820				10	%			4,931				9	%			3,454			9	%
Corporate			(245	)			N/A				(414	)			N/A				(184	)		N/A
Total Company			21,575				9	%			4,517				10	%			3,270			14	%

 

 

		Six Months Ended December 31, 2007
		Net Sales				% Change Versus Year Ago				Earnings Before Income Taxes				% Change Versus Year Ago				Net Earnings			% Change Versus Year Ago
Beauty GBU
Beauty		$	9,736				8	%		$	2,004				8	%		$	1,572			9	%
Grooming			4,176				9	%			1,210				14	%			880			14	%
Health and Well-Being GBU
Health Care			7,331				9	%			2,036				11	%			1,363			10	%
Snacks, Coffee and Pet Care			2,425				5	%			385				2	%			240			1