Proctor and Gamble 2007 Annual Report Download - page 38

The Procter & Gamble Company
36 Management’s Discussion and Analysis
SG&A as a percentage of net sales was 31.8% in 2007, an improvement
of 20-basis points versus 2006. Overhead expenses as a percentage
of net sales were down due to volume scale leverage, overhead cost
control and synergies from the Gillette integration. Marketing spending
as a percentage of net sales in 2007 was roughly in line with prior-year
levels despite media purchasing synergies generated by the Gillette
acquisition and a continued focus on marketing return-on-investment
(ROI) programs.
SG&A in 2006 increased 19%, or $3.4 billion. The addition of Gillette
drove approximately $3.1 billion of the increase, including approximately
$570 million of acquisition-related expenses. The acquisition-related
expenses included $352 million of intangible asset amortization resulting
from revaluing intangible assets in the opening balance sheet of the
acquired Gillette business. The balance of the acquisition-related
expenses was due to incremental integration and overhead expenses
such as legal and consulting fees, as well as costs related to the
elimination of selling, general and administrative overlap between the
two companies. SG&A as a percentage of net sales was 32.0% in
2006, down 40-basis points versus 2005. Overhead and marketing
spending both increased on our base businesses, but were down as a
percentage of net sales due to scale leverage from organic sales growth,
a focus on cost control and initial synergy savings, including media
purchasing synergies generated by the Gillette acquisition.
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Non-operating items primarily include interest expense, divestiture
gains and interest and investment income. Interest expense increased
17% in 2007 to $1.3 billion. In 2006, interest expense increased 34%
to $1.1 billion. The increases in both 2007 and 2006 were primarily
due to the nancing costs associated with the debt issued to fund the
publicly announced share repurchase program in conjunction with
the acquisition of Gillette in October 2005. The repurchase program
was completed in July 2006 with cumulative repurchases since the
inception of the program of $20.1 billion. We repurchased $19.8 billion
of P&G shares under the program through 2006 and the remaining
$0.3 billion in 2007.
Other non-operating income increased $281 million in 2007 to
$564 million primarily due to higher divestiture gains in the current
year. Divestiture gains in 2007 included the gain on the sale of Pert in
North America, Sure and several minor non-strategic Beauty brands.
Divestiture gains in 2006 included the gain on the sale of Spinbrush.
Other non-operating income in 2006 was down 18% versus 2005 to
$283 million primarily due to the gain on the sale of our Juice
business in 2005.
Our effective tax rate in 2007 was 29.7%, down 30-basis points versus
2006 primarily due to a more favorable country mix impact in the
current period, partially offset by higher levels of reserve releases in
the base period. The effective income tax rate in 2006 was down 60-
basis points versus 2005 to 30.0% primarily due to an accrual in 2005
for estimated taxes in anticipation of repatriating special dividends
from the Company’s non-U.S. subsidiaries, pursuant to the American
Jobs Creation Act of 2004 (see Note 10 to Consolidated Financial
Statements), which increased the 2005 tax rate by 280-basis points.
The year-on-year impact of this accrual was partially offset by a less
favorable country mix impact in 2006 and the impact of reserve
reversals related to tax uncertainties, which were lower in 2006 than
in 2005. Adjustments for tax uncertainties are based on specic facts
and circumstances in individual tax jurisdictions, including progress on
tax audits, legal developments and closing of statutes of limitation.
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Net earnings in 2007 increased 19% to $10.3 billion behind sales
growth, including the additional three months of Gillette results, and
earnings margin expansion. Net earnings margin expanded 80-basis
points primarily behind gross margin improvement. In 2006, net
earnings increased 25% to $8.7 billion behind the addition of Gillette,
sales growth on our base business and earnings margin expansion.
Diluted net earnings per share in 2007 increased 15% to $3.04
primarily behind earnings growth, partially offset by the impact of a
net increase in the weighted average shares outstanding in 2007
versus 2006 resulting from the incremental shares issued in
conjunction with the Gillette acquisition on October 1, 2005.
The Gillette acquisition had a negative impact on our earnings per
share in 2007 and 2006 as a result of the increase in P&G common
shares outstanding following the acquisition. When we acquired
Gillette in October 2005, we exchanged 0.975 common shares of
P&G stock for each share of Gillette stock. This increased the number
of P&G common shares outstanding by 962 million shares. The
negative impact of the incremental shares was partially offset by the
addition of Gillette’s earnings, cost and revenue synergies and by our
share repurchase activity. In 2007, the dilutive impact of Gillette was
approximately $0.10 – $0.12 per share versus $0.20 – $0.23 per share
in 2006. This improvement, driven primarily by improved Gillette
business unit results, higher Gillette synergies and the completion of
our share repurchase program, contributed approximately 4% to our
earnings per share growth in 2007.
Diluted net earnings per share in 2006 were $2.64, an increase of 4%
versus the prior year. The impact of the Gillette acquisition reduced
our earnings per share growth in 2006 by approximately 8% – 9%.
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