Proctor and Gamble 2008 Annual Report Download - page 51

Management’sDiscussionandAnalysis TheProcter&GambleCompany 49

Corporateincludescertainoperatingandnon-operatingactivitiesnot
allocatedtospecicbusinessunits.Theseinclude:theincidental
businessesmanagedatthecorporatelevel;nancingandinvesting
activities;othergeneralcorporateitems;thehistoricalresultsofcertain
divestedbrandsandcategories,includingcertainGillettebrandsthat
weredivestedasrequiredbyregulatoryauthoritiesinrelationtothe
Gilletteacquisition;andcertainrestructuring-typeactivitiestomaintain
acompetitivecoststructure,includingmanufacturingandworkforce
rationalization.Corporatealsoincludesreconcilingitemstoadjust
theaccountingpoliciesusedinthesegmentstoU.S.GAAP.Themost
signicantreconcilingitemsincludeincometaxes(toadjustfromstatu-
toryratesthatarereected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.Since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purposes.Thismeansour
segmentresultsrecognize100%ofeachincomestatementcomponent
throughbefore-taxearningsinthesegments,witheliminationsfor
unconsolidatedentitiesinCorporate.Indeterminingsegmentafter-
taxnetearnings,weapplythestatutorytaxrates(withadjustmentsto
arriveattheCompany’seffectivetaxrateinCorporate)andeliminate
theshareofearningsapplicabletootherownershipinterests,ina
mannersimilartominorityinterest.
Corporatenetsalesprimarilyreecttheadjustmenttoeliminatethe
salesofunconsolidatedentitiesincludedinbusinessunitresults.Net
salesdecreased$462millionprimarilydrivenbyhigheradjustments
toeliminatetheimpactofjointventurenetsalesforunconsolidated
entitiesthatarereectedassalesinthebusinesssegments.These
adjustmentsincreasedduetosalesgrowthofexistingunconsolidated
entitiesandtheadditionoftheSwissPrecisionDiagnosticsbusiness.
In2008,netearningsinCorporateincreased$464million.Theincrease
wasdrivenprimarilybyalowertaxrateresultingfromthenetbenets
ofadjustmentstoreservesforuncertaintaxpositions.
Corporatesegmentnetearningsdeclined$235millionin2007primarily
duetohigherinterestexpensesandhigherGilletteintegrationcosts.
Interestexpensewasup$185millionprimarilyduetothenancing
costsassociatedwiththedebtissuedtofundthesharerepurchase
programannouncedinconjunctionwiththeGilletteacquisition.

Webelieveournancialconditioncontinuestobeofhighquality,as
evidencedbyourabilitytogeneratesubstantialcashfromoperations
andreadyaccesstocapitalmarketsatcompetitiverates.
Operatingcashowprovidestheprimarysourceoffundstonance
operatingneedsandcapitalexpenditures.Excessoperatingcashis
usedrsttofundshareholderdividends.Otherdiscretionaryuses
includesharerepurchasesand“tack-on”acquisitionstocomplement
ourportfolioofbrandsandgeographies.Asnecessary,wemay
supplementoperatingcashowwithdebttofundtheseactivities.
TheoverallcashpositionoftheCompanyreectsourstrongbusiness
resultsandaglobalcashmanagementstrategythattakesintoaccount
liquiditymanagement,economicfactorsandtaxconsiderations.

Operatingcashowwas$15.8billionin2008,anincreaseof18%
overtheprioryear.Bothoperatingcashowandtheincreasein
operatingcashowovertheprioryearresultedprimarilyfromhigher
netearningsandnon-cashcharges(depreciationandamortization,
stock-basedcompensationanddeferredincometaxes).Workingcapital
balancesincreasedprimarilytosupportbusinessgrowthresultingina
netuseofcash.Inventorydaysonhandincreasedby8daysprimarily
duetoforeignexchangeandhighermaterialcosts,partiallyoffsetby
accountsreceivableandaccountspayableimpacts.Accountspayable
dayswereup4daysduetohighermaterialvaluesandincreased
capitalexpendituresinthefourthquarter.Accountsreceivabledays
weredown2daysprimarilyduetotheharmonizationofGillettetrade
terms,whichhistoricallycarriedlongerpaymenttermsthanP&G.
Operatingcashowin2007increased18%to$13.4billion.Operating
cashowincreasedasaresultofhighernetearnings,includingthe
benetofanadditionalthreemonthsofGillettein2007.Netearnings,
adjustedfornon-cashitems(primarilydepreciationandamortization,
share-basedcompensationanddeferredincometaxes)waspartially
offsetbycashusedtofundworkingcapital.Workingcapitalincreased
in2007primarilytosupportbusinessgrowth.
Free Cash Flow. Weviewfreecashowasanimportantmeasure
becauseitisonefactorimpactingtheamountofcashavailablefor
dividendsanddiscretionaryinvestment.Itisdenedasoperatingcash
owlesscapitalexpendituresandisoneofthemeasuresusedto
evaluateseniormanagementanddeterminetheirat-riskcompensation.
In2008,freecashowwas$12.8billion,comparedto$10.5billion
in2007.Freecashowincreasedprimarilyasaresultofhigher
operatingcashow.Capitalexpendituresincreasedfrom$2.9billion
in2007to$3.0billionin2008representing3.6%ofnetsales.Free
cashowproductivity,denedastheratiooffreecashowtonet
earnings,was106%in2008,aheadoftheCompany’s90%target.
In2007,freecashowwas$10.5billion,comparedto$8.7billion
in2006asaresultofhigheroperatingcashow.Freecashow
productivitywas101%in2007.
Target90%
100%

101%
06
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07

(%ofnetearnings)