Proctor and Gamble 2006 Annual Report Download - page 36

The Procter &Gamble Company and Subsidiaries
34 Management’s Discussion and Analysis
Gillette GBU
As disclosed in Note 2 to the Consolidated Financial Statements, we
completed the acquisition of The Gillette Company on October 1, 2005.
This acquisition resulted in two new reportable segments for the
Company: Blades and Razors and Duracell and Braun. The Gillette oral
care and personal care businesses were subsumed within the Health
Care and Beauty reportable segments, respectively. Because the
acquisition was completed during the current fiscal year period, there are
no results for the two new reportable segments in our prior year period.
In order to provide our investors with more insight into the results of
the Blades and Razors and Duracell and Braun reportable segments,
we have previously provided supplemental pro forma net sales and
earnings data for these segments for each of the quarters in the year
ended June 30, 2005 (as presented in our Form 8-K released October 4,
2005). Management’s discussion of the current year results of these
two segments is in relation to such comparable prior year pro forma
net sales and earnings data. With respect to the earnings data, this
analysis is based on earnings before income taxes. The previously
disclosed Blades and Razors and Duracell and Braun pro forma
information reconciled “Profit from Operations,” the measure used by
Gillette in its historical filings, to Earnings before Income Taxes, the
comparable measure used by the Company. Gillette did not allocate
income tax expense to its reportable segments.
BLADES AND RAZORS
Change vs.
Comparable Prior
9 months ended Year Period
(in millions of dollars) June 30, 2006 Pro Forma
Net Sales $3,499 +1%
Earnings before income taxes $1,076 -13%
Sales for Blades and Razors since the acquisition closed on October 1,
2005 increased 1% to $3.50 billion versus the comparable prior year
period pro forma results, including a negative 1% foreign exchange
impact. Mid-single digit sales growth in North America behind the
launch of Fusion, coupled with double-digit growth in Latin America
and Central &Eastern Europe, was largely offset by declines in Western
Europe and Asia. Sales in Western Europe were negatively impacted
by a base period which included the launch of M3Power as well as a
current year period with significant retailer inventory reductions. In
several developing markets in Asia, sales declined as a result of
reduced distributor inventory levels following integration of Gillette
into existing P&G distributors. Global consumption in blades and
razors increased 5% during the year. Price increases contributed 2%
to sales growth. Earnings before income taxes declined 13% to $1.08
billion, including $294 million of acquisition-related charges that
negatively impacted earnings by 24% during the period. The acquisition-
related charges included $277 million of increased amortization
expense as a result of revaluing Gillette’s intangible assets to fair
market value. The balance of the charges were primarily due to
higher product costs from revaluing opening inventory balances at
fair value. Earnings were also impacted by an increase in the current
year marketing investment behind the launch of Fusion, offset by
synergy savings from current year cost reductions and base period
charges for severance and other exit charges associated with Gillette’s
Functional Excellence program, the European Manufacturing
Realignment program and other asset write-downs. Net earnings
were $781 million since the acquisition closed on October 1, 2005.
DURACELL AND BRAUN
Change vs.
Comparable Prior
9 months ended Year Period
(in millions of dollars) June 30, 2006 Pro Forma
Net Sales $2,924 0%
Earnings before income taxes $ 400 +9%
Sales for Duracell and Braun since the acquisition closed on October 1,
2005, were $2.92 billion, in line with the comparable prior year
period pro forma results, including a negative 2% foreign exchange
impact. In the Duracell business, market share growth in North
America and the impacts of price increases to compensate for rising
commodity costs were offset by sales declines in Western Europe due
to competitive activity. Braun sales increased in the low-single digits
globally as double-digit growth in Central &Eastern Europe/Middle
East/Africa and new product initiatives were largely offset by declines
in Western Europe due to strong competitive activity and in North
America due to a base period that included pipeline shipments for the
Braun Activator launch. Earnings before income taxes increased 9%
to $400 million, including acquisition-related charges of $60 million
that negatively impacted earnings by 16% in the period. The acquisition-
related charges primarily represented increased amortization expense
of $39 million as a result of revaluing Gillette’s intangible assets to fair
market value. The balance of the charges were primarily due to
increased product costs for revaluing opening inventory balances at
fair value. Current year earnings were favorably impacted by base
period charges for severance and other exit costs associated with
Gillette’s Functional Excellence program, including charges related to
the shutdown of a manufacturing facility, as well as current-year
synergy savings from cost reductions. Net earnings were $273 million
since the acquisition closed on October 1, 2005.
Corporate
Corporate includes certain operating and non-operating activities not
allocated to specific business units. These include: the incidental
businesses managed at the corporate level, financing and investing
activities, certain restructuring charges, other general corporate items
and the historical results of certain divested categories, including the
Juice business that was divested in August 2004 and certain Gillette
brands that were divested as required by the regulatory authorities in
relation to the Gillette acquisition. Corporate also includes reconciling
items to adjust the accounting policies used in the segments to U.S.
GAAP. The most significant reconciling items include income taxes (to
adjust from statutory rates that are reflected in the segments to the
overall Company effective tax rate), adjustments for unconsolidated
entities (to eliminate sales, cost of products sold and SG&A for entities
that are consolidated in the segments but accounted for using the
equity method for U.S. GAAP) and minority interest adjustments for
subsidiaries where we do not have 100% ownership. Because both
unconsolidated entities and less than 100% owned subsidiaries are
managed as integral parts of the Company, they are accounted for
similar to a wholly owned subsidiary for management and segment