Formed in 1837 by William Procter and James Gamble as a small family-operated soap and candle company, Procter & Gamble Co. is now a leading consumer products company with over $83 billion in revenues. Headquartered in Cincinnati, Ohio, the firm's products are sold in more than 180 countries. P&G's product range covers laundry detergents, toothpaste, baby diapers, paper towels, beauty and health products, shampoos, snacks, coffee, and pet food. The firm is better known by its brands: Charmin, Pampers, Bounty, Tide, Downy, Cascade, Olay, Tampax, Crest, Head and Shoulders, Pringles, Folgers, and more. The maintenance of these brands, along with innovative packaging and effective distribution through the retail supply chain, is critical to the success of the company's operations. Product innovation and marketing, along with streamlined production and distribution, have contributed to growth, but the firm has also purchased brands through acquisition of other companies. In fiscal 2006, the firm acquired Gillette for $53.4 billion, adding Gillette's shaving and grooming products to its range along with Duracell batteries. The branded consumer products business is very competitive, and P&G battles the likes of Unilever, Avon, Clorox, Kimberly-Clark, L'Oreal, Energizer, and Colgate. Like these companies, continual innovation is essential to the firm's continuing profitability, so the firm maintains an extensive research and development operation, including marketing research, and spends considerable amounts on advertising and promoting its brands. Learn more about the firm by going to its Web site at www.pg.com. Go to the Investor page, download the firm's annual report, and read the management letter and the Manage- ment Discussion and Analysis. Also look at the firm's 10-K in its EDGAR filing with the SEC. Though always having a gloss, management communications are helpful in under- standing the strategy and how the management is executing on that strategy. The stress on brand innovation and research is evident in P&G's management letters. After understanding the company, go to the financial statements, which, along with the footnotes to the statements, are our main focus for financial statement analysis. Survey the management certification on its financial reporting and internal controls. Make sure the au- ditor's letter does not contain anything unusual. Make a list of the footnote headings so you are reminded of where to go for more detail. Now you are ready for analysis. We will be engaged with P&G through a series of mini- cases, beginning with this chapter and continuing through Chapter 12. At each stage we will add another aspect to the analysis so that, by the end of Chapter 12, you will have a thorough analysis that prepares you to value the firm. At this point, you are required to reformulate the income statements and balance sheets to ready them for analysis. Exhibit 9.15 presents the published income statements for 2006-2008, along with statement of shareholders' equity for the three years and balancs sheets for 2005-2008. Additional information provided after the statements will aid you. As advertising and research and development (R&D) are so important to P&G, make sure you include these as line items in the reformulated statements. If you are adept at spreadsheet analysis, you might put the reformulated statements into a spreadsheet that can then be used to apply the financial statement analysis in later EXHIBIT 9.15 Comparative Financial Statements for Fiscal Year 2008 chapters. You could also build annual reports for years after 2008 into the spreadsheet, as they become available, so that you continue to track the firm as it evolves. The BYOAP feature on the Web site will guide you in this tasic. After carrying out the reformulations, compare the statements to those for General Mills in Exhibits 9.5 and 9.11. Though devoted primarily to packaged food products, General Milis is a similar brand marketing company. Do the statements reveal the same sort of busi- ness organization? How do they differ? Now compare the statements to those for Nike (in Exhibits 9.3 and 9.9) and Dell (in Exhibits 9.4 and 9.10). What are the differences, and what do they tell you about how the respective firms run their businesses? A. Calculate the return on common equity (ROCE) for each year 2006-2008. B. Calculate the return on net operating assets (RNOA) for each year 2006-2008. C. What was the operating profit margin from sales for each year? D. Calculate expense ratios (as a percentage of sales) for advertising and R&D for each year. Do you see trends? E. Calculate sales growth rates for 2007 and 2008 and also growth rates for operating income from sales. F. Calculate growth rates for net operating assets for 2006-2008. Do you see a trend? Is there any one balance sheet item that particularly affects the growth? G. Calculate P&G's financial leverage ratio at the end of 2008. H. Why were translation gains so large in 2008? I. Where in the financial statements do you see how much P&G paid for the Gillette acquisition? J. Why did goodwill increase so much in 2006? Real World Connection This case continues with Minicases M11.1, M12.1, M14.1 and M15.1. Consolidated Statements of Earnings (amounts in milions except per share amounts; Years ended June 30) 2008 2007 2006 for Procter & Net sales $83,503 $76,476 $68,222 Gamble Co. Cost of products sold 40,655 36,666 33.125 The financial statements should be Seling, general, and administrative expense 25,725 24.340 21,848 read with the Operating income 17,083 15,450 13,249 accompanying footnotes Interest expense 1,457 1.304 1,119 Other nonoperating income, net 462 564 283 Earnings before income taxes 16,078 14,710 Income taxes 4,003 4.370 Net earnings $12,075 Basic net earnings per common share $ 3.85 Diluted net earnings per common share Dividends per common share $ 3.64 $1.45 $10,340 $ 3.22 $3.04 $ 1.28 12,413 3,729 $ 8,604 $2.79 $ 2.54 $1.15