Proctor and Gamble 2000 Annual Report Download - page 15

FINANCIAL REVIEW
The Procter & Gamble Company and Subsidiaries
13
RESULTS OF OPERATIONS
The Company’s results reflected strong sales growth,
with earnings impacted by higher spending on product
initiatives and Organization 2005 costs.
The Company introduced several new brands, expanded
strong established brands into new markets, acquired
new businesses and introduced significant product
upgrades on major brands. The increased innovation
resulted in significant investments at a time when
commodity costs also increased, currency had a negative
impact, the Company incurred additional costs to tran-
sition into its new global organizational structure and
competition reacted strongly to business initiatives.
Net earnings were $3.54 billion or $2.47 per share
compared to $3.76 billion or $2.59 per share in 1999.
Results included charges of $688 million after tax for
current year costs of the Organization 2005 program.
Organization 2005 is the Company’s multi-year program
designed to realign the organization into global product-
based segments from a geographic structure and change
the work processes and culture.
For the fiscal year, core net earnings, which exclude
Organization 2005 costs, increased 2% to $4.23 billion.
Core net earnings per share were $2.95, an increase of
4% from the prior year. Volume and sales progress drove
core earnings growth, but were partially offset by higher
spending, primarily behind new product initiatives.
Worldwide net sales for the current year were $39.95 bil-
lion, an increase of 5% versus last year. Excluding a
negative 2% exchange rate impact, net sales increased
7% on 4% unit volume growth. This growth reflects
strong product initiative activity, the acquisition of the
Iams pet health and nutrition business and progress on
flagship brands, largely in fabric and home care.
Worldwide gross margin was 46.1%, compared to 44.8%
in the prior year. Gross margin includes $496 million in
charges related to the Organization 2005 program.
These charges consisted primarily of accelerated depre-
ciation, asset write-downs and employee separation
costs. Excluding these charges, gross margin increased
to 47.4%, reflecting the impact of high-performance,
premium-priced initiatives and effective cost manage-
ment in the face of rising material costs.
Worldwide marketing, research and administrative
expense was $12.48 billion versus $10.85 billion in the
prior year. The increase to 31.2% of net sales from 28.4%
was primarily due to increased spending on product
initiatives. Organization 2005 costs increased marketing,
research and administrative expense by $318 million,
primarily due to employee separation expenses.
Excluding these charges, marketing, research and admin-
istrative expense increased 13% over 1999.
Operating income declined by 5%. Excluding the charges
for Organization 2005, operating income improved 1% as
business results were supplemented by lower employee
benefit costs reflected in the Corporate segment.
Interest expense increased 11% to $722 million on
increased debt, primarily due to acquisitions and share
repurchases. Other income, net, which consists primarily
of interest and investment income, contributed $304 mil-
lion in the current year compared to $235 million in the
prior year, including impacts of the Company’s ongoing
minor brand divestiture program.
The Company’s effective tax rate for the year was 36.0%,
compared to 35.5% in the prior year. This change reflects
a reduction in the core earnings rate, more than offset by
the impact of tax rate effects from the Organization 2005
program. Excluding Organization 2005 costs and related
tax effects, the effective tax rate was 33.4% compared
to 34.4% in the prior year.
Net earnings margin was 8.9% versus 9.9% in the prior
year. Excluding the Organization 2005 charges, core
net earnings margin was 10.6%, down from 10.9% last
year, reflecting the strong top-line growth offset by
increased spending.
The Company’s action plan for the next year focuses on
balancing top-line and bottom-line progress: growing
big brands in core categories, investing smartly in
commercialization of innovation, driving out costs and
improving cash flow.