Proctor and Gamble 2005 Annual Report Download - page 40

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
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These฀credit฀facilities฀do฀not฀have฀cross-default฀or฀ratings฀triggers,฀nor฀
do฀they฀have฀material฀adverse฀events฀clauses,฀except฀at฀the฀time฀of฀
signing.฀While฀not฀considered฀material฀to฀the฀overall฀financial฀condition฀
of฀the฀Company,฀there฀is฀a฀covenant฀in฀the฀credit฀facilities฀stating฀the฀
ratio฀of฀net฀debt฀to฀earnings฀before฀interest฀expense,฀income฀taxes,฀
depreciation฀and฀amortization฀cannot฀exceed฀four฀at฀the฀time฀of฀a฀draw฀
on฀the฀facility.฀As฀of฀June฀30,฀2005,฀we฀are฀comfortably฀below฀this฀level,฀
with฀a฀ratio฀of฀approximately฀1.2.
Additionally,฀we฀secured฀a฀$3.40฀billion฀bridge฀facility฀to฀fund฀the฀share฀
buyback฀plan฀announced฀concurrently฀with฀the฀Company’s฀planned฀
acquisition฀of฀The฀Gillette฀Company.฀As฀discussed฀in฀Note฀2฀to฀the฀
Consolidated฀Financial฀Statements,฀we฀entered฀into฀an฀agreement฀to฀
acquire฀The฀Gillette฀Company฀on฀January฀27,฀2005.฀In฀connection฀with฀
this฀transaction,฀we฀also฀announced฀a฀share฀buyback฀plan฀under฀which฀
we฀will฀acquire฀up฀to฀$22฀billion฀of฀Company฀common฀shares.฀As฀of฀
June฀30,฀2005,฀$3.00฀billion฀in฀shares฀were฀acquired฀under฀this฀plan,฀
financed฀by฀the฀bridge฀facility.
฀
On฀July฀27,฀2005,฀we฀signed฀a฀$24฀billion฀three-year฀credit฀facility฀with฀
a฀syndicate฀of฀banks฀to฀replace฀the฀current฀$3.40฀billion฀bridge฀facility.฀฀
The฀credit฀facility฀will฀be฀available฀for฀general฀corporate฀purposes฀with฀
the฀expectation฀that฀the฀majority฀of฀the฀funds฀will฀be฀used฀to฀fund฀the฀
share฀repurchase฀program.฀We฀expect฀the฀share฀buyback฀program฀to฀
be฀largely฀complete฀by฀June฀30,฀2006.฀As฀part฀of฀the฀share฀repurchase฀
program,฀we฀may฀also฀purchase฀shares฀of฀The฀Gillette฀Company฀prior฀
to฀the฀close฀to฀facilitate฀completion฀of฀the฀transaction฀(dependent฀on฀
market฀conditions฀and฀regulatory฀approval).฀We฀do฀not฀anticipate฀any฀
significant฀impacts฀to฀the฀Company’s฀overall฀liquidity฀as฀a฀result฀of฀
the฀acquisition฀or฀share฀buyback฀program.฀This฀credit฀facility฀carries฀a฀
variable฀interest฀rate.฀Interest฀on฀the฀facility฀will฀be฀managed฀within฀our฀
overall฀interest฀rate฀management฀policies฀described฀in฀Note฀6฀to฀the฀
Consolidated฀Financial฀Statements.
In฀addition฀to฀these฀credit฀facilities,฀long-term฀borrowing฀available฀
under฀our฀current฀shelf฀registration฀statement฀was฀$7.01฀billion฀at฀฀
June฀30,฀2005.฀
The฀Company’s฀Moody’s฀and฀Standard฀&฀Poor’s฀(S&P)฀short-term฀credit฀
ratings฀are฀P-1฀and฀A-1+,฀respectively.฀Our฀Moody’s฀and฀S&P฀long-term฀
credit฀ratings฀are฀Aa3฀and฀AA-฀with฀a฀negative฀outlook,฀respectively.฀฀
These฀ratings฀were฀recently฀confirmed฀following฀the฀Company’s฀
announcement฀of฀the฀agreement฀to฀acquire฀Gillette฀and฀the฀stock฀
buyback฀plan.
Treasury฀Purchases.฀During฀the฀past฀year,฀we฀substantially฀increased฀our฀
level฀of฀share฀repurchases.฀Total฀share฀repurchases฀in฀2005฀were฀$5.03฀
billion,฀of฀which฀$3.00฀billion฀were฀made฀as฀part฀of฀our฀aforementioned฀
share฀repurchase฀plan.฀As฀discussed฀previously,฀we฀expect฀to฀largely฀
complete฀the฀share฀purchases฀under฀this฀plan฀by฀June฀30,฀2006.฀In฀
2004,฀treasury฀share฀purchases฀totaled฀$4.07฀billion฀compared฀to฀$1.24฀
billion฀in฀2003.฀Lower฀share฀purchases฀in฀2003฀reflected฀the฀need฀to฀
preserve฀capital฀ahead฀of฀the฀Wella฀acquisition.฀
Guarantees฀and฀Other฀Off-Balance฀Sheet฀Arrangements.฀We฀do฀not฀have฀
guarantees฀or฀other฀off-balance฀sheet฀financing฀arrangements,฀including฀
variable฀interest฀entities,฀that฀we฀believe฀could฀have฀a฀material฀impact฀
on฀financial฀condition฀or฀liquidity.
Contractual฀Commitments.฀The฀table฀below฀provides฀information฀on฀our฀
contractual฀commitments฀as฀of฀June฀30,฀2005฀(in฀millions).
฀
฀ ฀ Less฀Than฀ 1–3฀ 3–5฀ After฀5
฀ Total฀ 1฀Year฀ ฀Years฀ Years฀ Years
Recorded฀liabilities
Total฀debt฀ $23,927฀ $11,414฀ $2,009฀ $2,763฀ $7,741
Capital฀leases฀ 327฀ 50฀ 232฀ 36฀ 9
Wella฀Domination฀and฀Profit฀Transfer฀Agreement฀ ฀ 1,087฀1,087฀ –฀ –฀ –
Other
Interest฀payments฀relating฀to฀long-term฀debt฀ 8,929฀ 794฀ 1,281฀ 1,029฀ 5,825
Operating฀leases฀ 977฀ 215฀ 288฀ 215฀ 259
Minimum฀pension฀funding1฀ 643฀ 241฀ 402฀ –฀ –
Purchase฀obligations2฀ 6,739฀ 2,663฀ 1,665฀ 1,178฀ 1,233
     
1฀ Represents฀future฀pension฀payments฀to฀comply฀with฀local฀funding฀requirements.฀The฀projected฀payments฀beyond฀fiscal฀year฀2008฀are฀not฀currently฀determinable.
2฀ Primarily฀reflects฀future฀contractual฀payments฀under฀various฀take-or-pay฀arrangements฀entered฀into฀as฀part฀of฀the฀normal฀course฀of฀business.฀Commitments฀made฀under฀take-or-pay฀obligations฀
represent฀future฀purchases฀in฀line฀with฀expected฀usage฀to฀obtain฀favorable฀pricing.฀Approximately฀70%฀relates฀to฀service฀contracts฀for฀information฀technology,฀human฀resources฀management฀
and฀facilities฀management฀activities฀that฀were฀outsourced฀in฀recent฀years.฀While฀the฀amounts฀listed฀represent฀contractual฀obligations,฀we฀do฀not฀believe฀it฀is฀likely฀that฀the฀full฀contractual฀
amount฀would฀be฀paid฀if฀the฀underlying฀contracts฀were฀canceled฀prior฀to฀maturity.฀In฀such฀cases,฀we฀generally฀are฀able฀to฀negotiate฀new฀contracts฀or฀cancellation฀penalties,฀resulting฀in฀a฀reduced฀
payment.฀The฀amounts฀do฀not฀include฀obligations฀related฀to฀other฀contractual฀purchase฀obligations฀that฀are฀not฀take-or-pay฀arrangements.฀Such฀contractual฀purchase฀obligations฀are฀primarily฀
purchase฀orders฀at฀fair฀value฀that฀are฀part฀of฀normal฀operations฀and฀are฀reflected฀in฀historical฀operating฀cash฀flow฀trends.฀We฀do฀not฀believe฀such฀purchase฀obligations฀will฀adversely฀affect฀our฀
liquidity฀position.