Proctor and Gamble 2015 Annual Report Download - page 28

The Procter & Gamble Company 26
ECONOMIC CONDITIONS AND UNCERTAINTIES
e discuss expectations regarding future performance, events
and outcomes, such as our business outlook and objectives, in
annual and quarterly reports, press releases and other written
and oral communications. All such statements, except for
historical and present factual information, are forward-
looking statements and are based on financial data and our
business plans available only as of the time the statements are
made, which may become out-of-date or incomplete. e
assume no obligation to update any forward-looking
statements as a result of new information, future events or other
factors. Forward-looking statements are inherently uncertain
and investors must recognize that events could be significantly
different from our expectations. For more information on risks
that could impact our results, refer to Item 1A Risk Factors in
this 10-K.
lol conomc ontons Current macroeconomic
factors remain dynamic, and any causes of market size
contraction, such as greater political unrest in the Middle East
and Eastern Europe, further economic instability in the
European Union, political instability in certain Latin American
markets and economic slowdowns in Japan and China, could
reduce our sales or erode our operating margin, in either case
reducing our earnings.
nes n osts Our costs are subject to fluctuations,
particularly due to changes in commodity prices and our own
productivity efforts. e have significant exposures to certain
commodities, in particular certain oil-derived materials like
resins, and volatility in the market price of these commodity
input materials has a direct impact on our costs. If we are
unable to manage commodity fluctuations through pricing
actions, cost savings projects and sourcing decisions as well
as through consistent productivity improvements, it may
adversely impact our gross margin, operating margin and net
earnings. Sales could also be adversely impacted following
pricing actions if there is a negative impact on consumption of
our products. e strive to implement, achieve and sustain cost
improvement plans, including outsourcing projects, supply
chain optimization and general overhead and workforce
optimization. As discussed later in this MD&A, we initiated
certain non-manufacturing overhead reduction projects along
with manufacturing and other supply chain cost improvements
projects in 2012. If we are not successful in executing these
changes, there could be a negative impact on our operating
margin and net earnings.
oen cne e have both translation and transaction
exposure to the fluctuation of exchange rates. Translation
exposures relate to exchange rate impacts of measuring income
statements of foreign subsidiaries that do not use the U.S. dollar
as their functional currency. Transaction exposures relate to
1) the impact from input costs that are denominated in a
currency other than the local reporting currency and 2) the
revaluation of transaction-related working capital balances
denominated in currencies other than the functional currency.
In 2015 and 2014, the U.S. dollar has strengthened versus a
number of foreign currencies leading to lower sales and
earnings from these foreign exchange impacts. Certain
countries experiencing significant exchange rate fluctuations,
like Russia, Ukraine, Japan and Switzerland, have had, and
could have, an additional significant impact on our sales, costs
and earnings. Increased pricing in response to these
fluctuations in foreign currency exchange rates may offset
portions of the currency impacts, but could also have a negative
impact on consumption of our products, which would affect
our sales.
ovenment olces Our net earnings could be affected by
changes in U.S. or foreign government tax policies. For
example, the U.S. is considering corporate tax reform that may
significantly impact the corporate tax rate and change the U.S.
tax treatment of international earnings. Additionally, we
attempt to carefully manage our debt and currency exposure
in certain countries with currency exchange, import
authorization and pricing controls, such as Argentina, China,
Egypt, Greece, India, Nigeria, Ukraine and enezuela.
Changes in government policies in these areas might cause an
increase or decrease in our sales, operating margin and net
earnings. During fiscal 2015, the Company deconsolidated its
enezuelan subsidiaries due to evolving conditions that have
resulted in an other-than-temporary lack of exchangeability
between the enezuelan bolivar and U.S. dollar and have
restricted our ability to pay dividends and satisfy certain other
obligations denominated in U.S. dollars.
RESULTS OF OPERATIONS
The key metrics included in our discussion of our consolidated
results of operations include net sales, gross margin, SG&A,
other non-operating items and income taxes. The primary
factors driving year-over-year changes in net sales include
overall market growth in the categories in which we compete,
product initiatives, the level of initiatives and other activities
by competitors, geographic expansion and acquisition and
divestiture activity, all of which drive changes in our
underlying unit volume as well as pricing actions (which can
also indirectly impact volume), changes in product and
geographic mix and foreign currency impacts on sales outside
the U.S.
Most of our cost of products sold and SG&Aare to some extent
variable in nature. Accordingly, our discussion of these
operating costs focuses primarily on relative margins rather
than the absolute year-over-year changes in total costs. The
primary drivers of changes in gross margin are input costs
(energy and other commodities), pricing impacts, geographic
mix (for example, gross margins in developed markets are
generally higher than in developing markets for similar
products), product mix (for example, the eauty, Hair and
Personal Care segment has higher gross margins than the
Company average), foreign exchange rate fluctuations (in
situations where certain input costs may be tied to a different
functional currency than the underlying sales), the impacts of
manufacturing savings projects and to a lesser extent scale
impacts (for costs that are fixed or less variable in nature). The
primary drivers of SG&A are marketing-related costs and non-
manufacturing overhead costs. Marketing-related costs are
primarily variable in nature, although we do achieve some level
of scale benefit over time due to overall growth and other