Proctor and Gamble 2005 Annual Report Download - page 34

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
30
Selling,฀General฀and฀Administrative฀expense฀(SG&A)฀in฀2005฀was฀
31.7%฀of฀net฀sales,฀an฀improvement฀of฀40฀basis฀points฀compared฀
to฀2004.฀The฀basis฀point฀reduction฀in฀SG&A฀was฀driven฀by฀lower฀
marketing฀spending฀as฀a฀percentage฀of฀net฀sales.฀Absolute฀spending฀
for฀marketing฀investments฀was฀up฀year-over-year,฀but฀decreased฀as฀
a฀percentage฀of฀net฀sales฀behind฀scale฀leverage฀and฀the฀mix฀impact฀
of฀developing฀market฀growth.฀Marketing฀spending฀as฀a฀percentage฀of฀
net฀sales฀is฀lower฀in฀developing฀markets฀than฀the฀Company฀average.฀
Marketing฀spending฀ increased฀ to฀ support฀ product฀ innovations฀
including฀Olay฀Anti-Aging,฀Olay฀Moisturinse,฀Olay฀Quench,฀Pantene฀฀
Pro-Health,฀Tide฀with฀a฀Touch฀of฀Downy,฀Tide฀Coldwater,฀Febreze฀Air฀
Effects,฀Pantene฀Color฀Expressions,฀Pampers฀Feel฀’n฀Learn,฀Kandoo฀
Toddler฀Wipes฀and฀Handsoap฀and฀the฀expansion฀of฀SK-II,฀Lenor฀and฀
Herbal฀Essences.฀
Overhead฀spending฀as฀a฀percentage฀of฀net฀sales฀was฀consistent฀with฀last฀
year.฀Scale฀efficiencies฀in฀the฀base฀business฀were฀offset฀by฀the฀mix฀impact฀
of฀two฀additional฀months฀of฀Wella฀in฀the฀current฀year฀and฀investments฀in฀
selling฀capability.฀Wella฀has฀a฀higher฀ratio฀of฀overhead฀spending฀to฀net฀
sales฀than฀the฀balance฀of฀the฀Company.
Minority฀interest฀expense฀as฀a฀percentage฀of฀net฀sales฀decreased฀
reflecting฀the฀Company’s฀purchase฀of฀the฀remaining฀stake฀in฀its฀China฀
venture,฀as฀well฀as฀the฀completion฀of฀the฀Domination฀and฀Profit฀Transfer฀
Agreement฀with฀Wella.฀Please฀see฀the฀discussion฀of฀these฀transactions฀in฀
Note฀2฀to฀the฀Consolidated฀Financial฀Statements.฀
SG&A฀in฀2004฀was฀32.1%฀of฀net฀sales,฀an฀increase฀of฀120฀basis฀points฀
compared฀to฀the฀previous฀year.฀The฀majority฀of฀the฀basis฀point฀increase฀
was฀due฀to฀Wella,฀reflecting฀a฀higher฀ratio฀of฀SG&A฀expense฀to฀net฀
sales฀than฀the฀base฀business.฀Reduced฀restructuring฀program฀charges฀
in฀the฀prior฀year,฀that฀accounted฀for฀an฀improvement฀of฀90฀basis฀points,฀
were฀more฀than฀offset฀by฀increases฀in฀marketing฀spending฀in฀2004.฀
Marketing฀investments฀were฀made฀behind฀product฀launches฀including฀
Prilosec฀OTC,฀Crest฀Whitestrips฀Premium฀and฀Olay฀Regenerist,฀as฀well฀as฀
continued฀support฀for฀the฀base฀business.
Non-Operating฀Items฀
Non-operating฀items฀primarily฀include฀interest฀expense,฀divestiture฀
gains฀and฀losses฀and฀interest฀and฀investment฀income.฀Interest฀expense฀
increased฀33%฀to฀$834฀million฀in฀2005฀due฀to฀higher฀debt฀balances฀
to฀finance฀share฀repurchases,฀as฀well฀as฀an฀increase฀in฀interest฀rates฀
versus฀the฀prior฀year.฀In฀2004,฀interest฀expense฀increased฀$68฀million฀to฀
$629฀million,฀primarily฀due฀to฀additional฀debt฀to฀support฀the฀acquisition฀฀
of฀Wella.฀฀
Other฀non-operating฀income฀was฀$346฀million฀in฀2005฀compared฀
to฀$152฀million฀in฀2004฀and฀$238฀million฀in฀2003.฀The฀increase฀in฀
2005฀was฀driven฀primarily฀by฀the฀before-tax฀gain฀on฀the฀sale฀of฀the฀
Juice฀business.฀The฀sale฀of฀the฀Juice฀business฀was฀essentially฀neutral฀to฀
overall฀earnings,฀as฀the฀non-operating฀gain฀from฀the฀sale฀was฀largely฀
offset฀by฀the฀loss฀of฀operating฀income.฀In฀2004,฀other฀non-operating฀
income฀declined฀primarily฀due฀to฀higher฀gains฀from฀divestitures฀in฀the฀
base฀period.฀
The฀effective฀income฀tax฀rate฀was฀30.5%฀in฀2005฀compared฀with฀
30.7%฀in฀2004฀and฀31.1%฀in฀2003.฀The฀fiscal฀2005฀effective฀tax฀rate฀
includes฀a฀280฀basis฀point฀impact฀for฀estimated฀taxes฀in฀anticipation฀
of฀repatriating฀approximately฀$7.2฀billion฀in฀special฀dividends฀from฀
the฀Company’s฀non-U.S.฀subsidiaries,฀pursuant฀to฀the฀American฀Jobs฀
Creation฀Act฀of฀2004฀(see฀Note฀9฀to฀Consolidated฀Financial฀Statements).฀
This฀charge฀was฀largely฀offset฀by฀a฀230฀basis฀point฀impact฀from฀the฀
reversal฀of฀tax฀provisions฀resulting฀from฀the฀successful฀resolution฀of฀tax฀
audits฀in฀certain฀countries.฀The฀effective฀tax฀rate฀also฀benefited฀from฀the฀
overall฀country฀mix฀of฀taxable฀income.฀฀฀
Net฀Earnings฀
In฀2005,฀net฀earnings฀increased฀12%฀to฀$7.26฀billion.฀Earnings฀grew฀
primarily฀behind฀volume฀and฀cost฀reduction฀efforts,฀which฀more฀than฀
offset฀the฀effects฀of฀higher฀commodity฀costs฀and฀increased฀marketing฀
spending฀in฀support฀of฀product฀innovations฀and฀the฀base฀business.฀Net฀
earnings฀margin฀increased฀20฀basis฀points฀to฀12.8%฀reflecting฀the฀scale฀
benefits฀from฀higher฀volume฀and฀improvements฀due฀to฀cost฀savings.฀
Net฀earnings฀in฀2004฀increased฀25%฀over฀the฀prior฀year.฀Earnings฀growth฀
was฀primarily฀driven฀by฀increased฀volume฀and฀the฀completion฀of฀the฀
Company’s฀Organization฀2005฀Restructuring฀Program.฀Improvements฀to฀
earnings฀from฀gross฀margin฀expansion฀were฀partially฀offset฀by฀increased฀
marketing฀spending฀to฀support฀product฀initiatives฀and฀base฀business฀
growth.฀The฀acquisition฀of฀Wella฀had฀no฀material฀impact฀on฀earnings฀in฀
2004.฀2003฀results฀include฀$538฀million฀of฀after-tax฀charges฀related฀to฀the฀
Company’s฀Organization฀2005฀Restructuring฀Program,฀which฀represents฀
approximately฀10%฀of฀the฀2004฀earnings฀growth.฀These฀charges฀covered฀
enrollment฀reductions,฀manufacturing฀consolidations฀and฀portfolio฀choices฀
to฀scale฀back฀or฀discontinue฀under-performing฀businesses฀and฀initiatives.฀
The฀restructuring฀program฀was฀substantially฀completed฀in฀2003.฀
Selling, General and Administrative Expense
(% of sales)
2003 2004 2005
32.1
30.9 31%
32%
33%
31.7