P&G 2009 Annual Report â€“ AnnualReports.com - Procter & Gamble

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48 The Procter & Gamble Company Management’s Discussion and Analysis rate movements on our investments in foreign operations. These currency interest rate swaps are designated as hedges of the Company’s foreign net investments. Based on our overall interest rate exposure as of and during the year ended June 30, 2009, including derivative and other instruments sensitive to interest rates, we believe a near-term change in interest rates, at a 95% confidence level based on historical interest rate movements, would not materially affect our financial statements. Currency Rate Exposure on Financial Instruments. Because we manufacture and sell products in a number of countries throughout the world, we are exposed to the impact on revenue and expenses of movements in currency exchange rates. The primary purpose of our currency hedging activities is to reduce the risk that our financial position will be adversely affected by short-term changes in exchange rates. Corporate policy prescribes the range of allowable hedging activity. We primarily use forward contracts with maturities of less than 18 months. In addition, we enter into certain currency swaps with maturities of up to five years to hedge our exposure to exchange rate movements on intercompany financing transactions. Based on our overall currency rate exposure as of and during the year ended June 30, 2009, we believe, at a 95% confidence level based on historical currency rate movements, the impact of a near-term change in currency rates on derivative and other instruments would not materially affect our financial statements. Commodity Price Exposure on Financial Instruments. We use raw materials that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. In addition to fixed price contracts, we use futures, options and swap contracts to manage the volatility related to the above exposures. Based on our overall commodity price exposure as of and during the year ended June 30, 2009, we believe, at a 95% confidence level based on historical commodity price movements, the impact of a near-term change in commodity prices on derivative and other instruments would not materially affect our financial statements. Measures Not Defined By U.S. GAAP Our discussion of financial results includes several “non-GAAP” financial measures. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight to some of the metrics used to evaluate management. When used in MD&A, we have provided the comparable GAAP measure in the discussion. These measures include: Organic Sales Growth. Organic sales growth measures sales growth excluding the impacts of foreign exchange, acquisitions and divestitures from year-over-year comparisons. We believe this provides investors with a more complete understanding of underlying results and trends by providing sales growth on a consistent basis. The following tables provide a numerical reconciliation of organic sales growth to reported net sales growth: FY 2009 Net Sales Growth Foreign Exchange Impact Acquisition/ Divestiture Impact Organic Sales Growth Beauty -4% 4% 1% 1% Grooming -9% 6% 1% -2% Health Care -7% 5% 1% -1% Snacks and Pet Care -3% 4% 0% 1% Fabric Care and Home Care -2% 5% 0% 3% Baby Care and Family Care 1% 4% 2% 7% TOTAL P&G -3% 4% 1% 2% FY 2008 Net Sales Growth Foreign Exchange Impact Acquisition/ Divestiture Impact Organic Sales Growth Beauty 9% -6% 1% 4% Grooming 11% -7% 0% 4% Health Care 9% -5% -1% 3% Snacks and Pet Care 7% -4% 0% 3% Fabric Care and Home Care 11% -5% 0% 6% Baby Care and Family Care 9% -4% 3% 8% TOTAL P&G 9% -5% 1% 5% Free Cash Flow. Free cash flow is defined as operating cash flow less capital spending. We view free cash flow as an important measure because it is one factor in determining the amount of cash available for dividends and discretionary investment. Free cash flow is also one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation. Free Cash Flow Productivity. Free cash flow productivity is defined as the ratio of free cash flow to net earnings. Our target is to generate free cash flow at or above 90% of net earnings. Free cash flow productivity is one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation. The following table provides a numerical reconciliation of free cash flow: Operating Cash Flow Capital Spending Free Cash Flow Net Earnings Free Cash Flow Productivity 2009 $14,919 $(3,238) $11,681 $13,436 87% 2008 $ 15,008 $ (3,046) $ 11,962 $ 12,075 99% 2007 $ 13,410 $ (2,945) $ 10,465 $ 10,340 101% 2006 $ 11,372 $ (2,667) $ 8,705 $ 8,684 100% 2005 $ 8,561 $ (2,181) $ 6,380 $ 6,923 92% 2004 $ 9,216 $ (2,024) $ 7,192 $ 6,156 117% 2003 $ 8,455 $ (1,482) $ 6,973 $ 4,788 146% 2002 $ 7,672 $ (1,679) $ 5,993 $ 3,910 153% Total Free Cash Flow Since 2001 $ 69,351 Average Free Cash Flow Productivity 112%
Consolidated Statements of Earnings The Procter & Gamble Company 49 Amounts in millions except per share amounts; Years ended June 30 2009 2008 2007 NET SALES $79,029 $81,748 $74,832 Cost of products sold 38,898 39,536 35,659 Selling, general and administrative expense 24,008 25,575 24,170 OPERATING INCOME 16,123 16,637 15,003 Interest expense 1,358 1,467 1,304 Other non-operating income, net 560 462 565 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 15,325 15,632 14,264 Income taxes on continuing operations 4,032 3,834 4,201 NET EARNINGS FROM CONTINUING OPERATIONS 11,293 11,798 10,063 NET EARNINGS FROM DISCONTINUED OPERATIONS 2,143 277 277 NET EARNINGS $13,436 $12,075 $10,340 BASIC NET EARNINGS PER COMMON SHARE: Earnings from continuing operations $ 3.76 $ 3.77 $ 3.13 Earnings from discontinued operations 0.73 0.09 0.09 BASIC NET EARNINGS PER COMMON SHARE 4.49 3.86 3.22 DILUTED NET EARNINGS PER COMMON SHARE: Earnings from continuing operations 3.58 3.56 2.96 Earnings from discontinued operations 0.68 0.08 0.08 DILUTED NET EARNINGS PER COMMON SHARE 4.26 3.64 3.04 DIVIDENDS PER COMMON SHARE $ 1.64 $ 1.45 $ 1.28 See accompanying Notes to Consolidated Financial Statements.
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P&G 2009 Annual Report â€“ AnnualReports.com - Procter & Gamble

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