PROCTER & GAMBLE Co - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| x | True | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the Quarterly Period Ended September 30, 2022
OR
| o | False | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the transition period from to
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
| Ohio | OH | 1-434 | 31-0411980 | |||||||||||
| (State of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) | ||||||||||||
| One Procter & Gamble Plaza | Cincinnati | OH | ||||||||||||
| One Procter & Gamble Plaza, Cincinnati, Ohio | 45202 | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(513) 983-1100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, without Par Value | PG | NYSE | ||||||
| 1.125% Notes due 2023 | PG23A | NYSE | ||||||
| 0.500% Notes due 2024 | PG24A | NYSE | ||||||
| 0.625% Notes due 2024 | PG24B | NYSE | ||||||
| 1.375% Notes due 2025 | PG25 | NYSE | ||||||
| 0.110% Notes due 2026 | PG26D | NYSE | ||||||
| 4.875% EUR notes due May 2027 | PG27A | NYSE | ||||||
| 1.200% Notes due 2028 | PG28 | NYSE | ||||||
| 1.250% Notes due 2029 | PG29B | NYSE | ||||||
| 1.800% Notes due 2029 | PG29A | NYSE | ||||||
| 6.250% GBP notes due January 2030 | PG30 | NYSE | ||||||
| 0.350% Notes due 2030 | PG30C | NYSE | ||||||
| 0.230% Notes due 2031 | PG31A | NYSE | ||||||
| 5.250% GBP notes due January 2033 | PG33 | NYSE | ||||||
| 1.875% Notes due 2038 | PG38 | NYSE | ||||||
| 0.900% Notes due 2041 | PG41 | NYSE | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | ¨ | ||||||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | False | |||||||||||||||||||
| Emerging growth company | ¨ | False | |||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ False
There were 2,369,696,862 shares of Common Stock outstanding as of September 30, 2022.
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements | ||||
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| Three Months Ended September 30 | |||||||||||
| Amounts in millions except per share amounts | 2022 | 2021 | |||||||||
| NET SALES | $ | 20,612 | $ | 20,338 | |||||||
| Cost of products sold | 10,846 | 10,365 | |||||||||
| Selling, general and administrative expense | 4,827 | 4,950 | |||||||||
| OPERATING INCOME | 4,939 | 5,023 | |||||||||
| Interest expense | (123) | (109) | |||||||||
| Interest income | 42 | 11 | |||||||||
| Other non-operating income, net | 139 | 110 | |||||||||
| EARNINGS BEFORE INCOME TAXES | 4,997 | 5,035 | |||||||||
| Income taxes | 1,034 | 909 | |||||||||
| NET EARNINGS | 3,963 | 4,126 | |||||||||
| Less: Net earnings attributable to noncontrolling interests | 24 | 14 | |||||||||
| NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 3,939 | $ | 4,112 | |||||||
NET EARNINGS PER SHARE (1) | |||||||||||
| Basic | $ | 1.62 | $ | 1.66 | |||||||
| Diluted | $ | 1.57 | $ | 1.61 | |||||||
| DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 2,503.6 | 2,558.9 | |||||||||
(1)Basic net earnings per share and Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended September 30 | |||||||||||
| Amounts in millions | 2022 | 2021 | |||||||||
| NET EARNINGS | $ | 3,963 | $ | 4,126 | |||||||
| OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | |||||||||||
| Foreign currency translation | (712) | (465) | |||||||||
| Unrealized gains/(losses) on investment securities | (2) | 5 | |||||||||
| Unrealized gains on defined benefit retirement plans | 87 | 142 | |||||||||
| TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX | (627) | (318) | |||||||||
| TOTAL COMPREHENSIVE INCOME | 3,336 | 3,808 | |||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | 19 | 14 | |||||||||
| TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE | $ | 3,317 | $ | 3,794 | |||||||
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| Amounts in millions | September 30, 2022 | June 30, 2022 | |||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 6,710 | $ | 7,214 | |||||||||||||||||||
| Accounts receivable | 5,720 | 5,143 | |||||||||||||||||||||
| INVENTORIES | |||||||||||||||||||||||
| Materials and supplies | 2,235 | 2,168 | |||||||||||||||||||||
| Work in process | 898 | 856 | |||||||||||||||||||||
| Finished goods | 4,457 | 3,900 | |||||||||||||||||||||
| Total inventories | 7,590 | 6,924 | |||||||||||||||||||||
| Prepaid expenses and other current assets | 2,501 | 2,372 | |||||||||||||||||||||
| TOTAL CURRENT ASSETS | 22,521 | 21,653 | |||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT, NET | 20,593 | 21,195 | |||||||||||||||||||||
| GOODWILL | 38,761 | 39,700 | |||||||||||||||||||||
| TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET | 23,465 | 23,679 | |||||||||||||||||||||
| OTHER NONCURRENT ASSETS | 10,942 | 10,981 | |||||||||||||||||||||
| TOTAL ASSETS | $ | 116,282 | $ | 117,208 | |||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
| Accounts payable | $ | 14,845 | $ | 14,882 | |||||||||||||||||||
| Accrued and other liabilities | 10,056 | 9,554 | |||||||||||||||||||||
| Debt due within one year | 11,717 | 8,645 | |||||||||||||||||||||
| TOTAL CURRENT LIABILITIES | 36,618 | 33,081 | |||||||||||||||||||||
| LONG-TERM DEBT | 21,286 | 22,848 | |||||||||||||||||||||
| DEFERRED INCOME TAXES | 6,986 | 6,809 | |||||||||||||||||||||
| OTHER NONCURRENT LIABILITIES | 7,058 | 7,616 | |||||||||||||||||||||
| TOTAL LIABILITIES | 71,948 | 70,354 | |||||||||||||||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||
| Preferred stock | 834 | 843 | |||||||||||||||||||||
| Common stock – shares issued – | September 2022 | 4,009.2 | |||||||||||||||||||||
| June 2022 | 4,009.2 | 4,009 | 4,009 | ||||||||||||||||||||
| Additional paid-in capital | 65,955 | 65,795 | |||||||||||||||||||||
| Reserve for ESOP debt retirement | (870) | (916) | |||||||||||||||||||||
| Accumulated other comprehensive loss | (12,811) | (12,189) | |||||||||||||||||||||
| Treasury stock | (127,205) | (123,382) | |||||||||||||||||||||
| Retained earnings | 114,163 | 112,429 | |||||||||||||||||||||
| Noncontrolling interest | 259 | 265 | |||||||||||||||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 44,334 | 46,854 | |||||||||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 116,282 | $ | 117,208 | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumulated Other Comp-rehensive Loss | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity | |||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| BALANCE JUNE 30, 2022 | 2,393,877 | $4,009 | $843 | $65,795 | ($916) | ($12,189) | ($123,382) | $112,429 | $265 | $46,854 | ||||||||||||||||||||||
| Net earnings | 3,939 | 24 | 3,963 | |||||||||||||||||||||||||||||
| Other comprehensive loss | (622) | (5) | (627) | |||||||||||||||||||||||||||||
Dividends and dividend equivalents ($0.9133 per share): | ||||||||||||||||||||||||||||||||
| Common | (2,189) | (2,189) | ||||||||||||||||||||||||||||||
| Preferred | (71) | (71) | ||||||||||||||||||||||||||||||
| Treasury stock purchases | (28,189) | (4,000) | (4,000) | |||||||||||||||||||||||||||||
| Employee stock plans | 3,011 | 159 | 169 | 328 | ||||||||||||||||||||||||||||
| Preferred stock conversions | 998 | (9) | 1 | 8 | — | |||||||||||||||||||||||||||
| ESOP debt impacts | 46 | 55 | 101 | |||||||||||||||||||||||||||||
| Noncontrolling interest, net | — | (25) | (25) | |||||||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2022 | 2,369,697 | $4,009 | $834 | $65,955 | ($870) | ($12,811) | ($127,205) | $114,163 | $259 | $44,334 | ||||||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Dollars in millions; shares in thousands | Common Stock | Preferred Stock | Add-itional Paid-In Capital | Reserve for ESOP Debt Retirement | Accumulated Other Comp-rehensive Loss | Treasury Stock | Retained Earnings | Non-controlling Interest | Total Share-holders' Equity | |||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| BALANCE JUNE 30, 2021 | 2,429,706 | $4,009 | $870 | $64,848 | ($1,006) | ($13,744) | ($114,973) | $106,374 | $276 | $46,654 | ||||||||||||||||||||||
| Net earnings | 4,112 | 14 | 4,126 | |||||||||||||||||||||||||||||
| Other comprehensive loss | (318) | — | (318) | |||||||||||||||||||||||||||||
Dividends and dividend equivalents ($0.8698 per share): | ||||||||||||||||||||||||||||||||
| Common | (2,118) | (2,118) | ||||||||||||||||||||||||||||||
| Preferred | (70) | (70) | ||||||||||||||||||||||||||||||
| Treasury stock purchases | (19,353) | (2,750) | (2,750) | |||||||||||||||||||||||||||||
| Employee stock plans | 8,437 | 300 | 474 | 774 | ||||||||||||||||||||||||||||
| Preferred stock conversions | 1,158 | (11) | 2 | 9 | — | |||||||||||||||||||||||||||
| ESOP debt impacts | 42 | 63 | 105 | |||||||||||||||||||||||||||||
| Noncontrolling interest, net | (2) | 7 | 5 | |||||||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2021 | 2,419,948 | $4,009 | $859 | $65,148 | ($964) | ($14,062) | ($117,240) | $108,361 | $297 | $46,408 | ||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended September 30 | |||||||||||
| Amounts in millions | 2022 | 2021 | |||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | $ | 7,214 | $ | 10,288 | |||||||
| OPERATING ACTIVITIES | |||||||||||
| Net earnings | 3,963 | 4,126 | |||||||||
| Depreciation and amortization | 663 | 711 | |||||||||
| Share-based compensation expense | 105 | 116 | |||||||||
| Deferred income taxes | (130) | 57 | |||||||||
| Gain on sale of assets | (1) | (73) | |||||||||
| Changes in: | |||||||||||
| Accounts receivable | (740) | (1,012) | |||||||||
| Inventories | (893) | (409) | |||||||||
| Accounts payable, accrued and other liabilities | 1,495 | 1,261 | |||||||||
| Other operating assets and liabilities | (454) | (178) | |||||||||
| Other | 62 | 44 | |||||||||
| TOTAL OPERATING ACTIVITIES | 4,070 | 4,643 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (890) | (1,091) | |||||||||
| Proceeds from asset sales | 5 | 85 | |||||||||
| Acquisitions, net of cash acquired | (2) | — | |||||||||
| Proceeds from sales and maturities of short-term investments | 55 | — | |||||||||
| TOTAL INVESTING ACTIVITIES | (832) | (1,006) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Dividends to shareholders | (2,255) | (2,182) | |||||||||
| Additions to short-term debt with original maturities of more than three months | 2,975 | 1,792 | |||||||||
| Reductions in short-term debt with original maturities of more than three months | (265) | (1,422) | |||||||||
| Net additions to other short-term debt | 1,727 | 512 | |||||||||
| Reductions in long-term debt | (1,877) | (26) | |||||||||
| Treasury stock purchases | (4,000) | (2,750) | |||||||||
| Impact of stock options and other | 188 | 648 | |||||||||
| TOTAL FINANCING ACTIVITIES | (3,507) | (3,428) | |||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (235) | (127) | |||||||||
| CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (504) | 82 | |||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 6,710 | $ | 10,370 | |||||||
See accompanying Notes to Consolidated Financial Statements.
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. In the opinion of management, the accompanying unaudited Consolidated Financial Statements of The Procter & Gamble Company and subsidiaries (the "Company," "Procter & Gamble," "P&G," "we" or "our") contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.
2. New Accounting Pronouncements and Policies
In November 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance". This guidance requires annual disclosures for transactions with a government authority that are accounted for by applying a grant or contribution model. These amendments are effective for annual periods beginning after December 15, 2021, with early adoption permitted. We have completed our evaluation of significant transactions. The guidance has not had, and is not expected to have, a material impact on the Company's Consolidated Financial Statements.
In September 2022, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations". This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. We are currently assessing the impact of this guidance on our Consolidated Financial Statements.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our Consolidated Financial Statements.
3. Segment Information
Under U.S. GAAP, our operating segments are aggregated into five reportable segments: 1) Beauty, 2) Grooming, 3) Health Care, 4) Fabric & Home Care and 5) Baby, Feminine & Family Care. Our five reportable segments are comprised of:
•Beauty: Hair Care (Conditioners, Shampoos, Styling Aids, Treatments); Skin and Personal Care (Antiperspirants and Deodorants, Personal Cleansing, Skin Care);
•Grooming: Grooming (Appliances, Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Grooming);
•Health Care: Oral Care (Toothbrushes, Toothpaste, Other Oral Care); Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Pain Relief, Other Personal Health Care);
•Fabric & Home Care: Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents); Home Care (Air Care, Dish Care, P&G Professional, Surface Care); and
•Baby, Feminine & Family Care: Baby Care (Baby Wipes, Taped Diapers and Pants); Feminine Care (Adult Incontinence, Feminine Care); Family Care (Paper Towels, Tissues, Toilet Paper).
Amounts in millions of dollars unless otherwise specified.
Our operating segments are comprised of similar product categories. Operating segments that individually accounted for 5% or more of consolidated net sales are as follows:
% of Net sales by operating segment (1) | ||||||||
| Three Months Ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Fabric Care | 23% | 23% | ||||||
| Home Care | 12% | 11% | ||||||
| Skin and Personal Care | 10% | 10% | ||||||
| Baby Care | 10% | 10% | ||||||
| Hair Care | 9% | 10% | ||||||
| Family Care | 8% | 8% | ||||||
Grooming (2) | 8% | 7% | ||||||
| Oral Care | 8% | 8% | ||||||
| Feminine Care | 6% | 6% | ||||||
| Personal Health Care | 6% | 5% | ||||||
| Other | —% | 2% | ||||||
| Total | 100% | 100% | ||||||
(1)% of Net sales by operating segment excludes sales held in Corporate.
(2)Effective July 1, 2022, the Grooming Sector Business Unit completed the full integration of its Shave Care and Appliances categories to cohesively serve consumers' grooming needs. This transition included the integration of the management team, strategic decision-making, innovation plans, financial targets, budgets and internal management reporting. For the three months ended September 30, 2021, Appliances was presented in Other.
The following is a summary of reportable segment results:
| Three Months Ended September 30 | ||||||||||||||||||||
| Net Sales | Earnings/(Loss) Before Income Taxes | Net Earnings/(Loss) | ||||||||||||||||||
| Beauty | 2022 | $ | 3,961 | $ | 1,271 | $ | 1,011 | |||||||||||||
| 2021 | 3,964 | 1,242 | 991 | |||||||||||||||||
| Grooming | 2022 | 1,625 | 503 | 404 | ||||||||||||||||
| 2021 | 1,687 | 518 | 417 | |||||||||||||||||
| Health Care | 2022 | 2,757 | 800 | 617 | ||||||||||||||||
| 2021 | 2,676 | 695 | 529 | |||||||||||||||||
| Fabric & Home Care | 2022 | 7,082 | 1,543 | 1,172 | ||||||||||||||||
| 2021 | 7,009 | 1,546 | 1,191 | |||||||||||||||||
| Baby, Feminine & Family Care | 2022 | 4,934 | 1,055 | 805 | ||||||||||||||||
| 2021 | 4,864 | 1,075 | 826 | |||||||||||||||||
| Corporate | 2022 | 253 | (175) | (46) | ||||||||||||||||
| 2021 | 138 | (41) | 172 | |||||||||||||||||
| Total Company | 2022 | $ | 20,612 | $ | 4,997 | $ | 3,963 | |||||||||||||
| 2021 | 20,338 | 5,035 | 4,126 | |||||||||||||||||
Amounts in millions of dollars unless otherwise specified.
4. Goodwill and Other Intangible Assets
Goodwill is allocated by reportable segment as follows:
| Beauty | Grooming | Health Care | Fabric & Home Care | Baby, Feminine & Family Care | Total Company | ||||||||||||||||||||||||||||||
| Goodwill at June 30, 2022 | $ | 13,296 | $ | 12,571 | $ | 7,589 | $ | 1,808 | $ | 4,436 | $ | 39,700 | |||||||||||||||||||||||
| Acquisitions and divestitures | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Translation and other | (344) | (254) | (217) | (29) | (95) | (939) | |||||||||||||||||||||||||||||
| Goodwill at September 30, 2022 | $ | 12,952 | $ | 12,317 | $ | 7,372 | $ | 1,779 | $ | 4,341 | $ | 38,761 | |||||||||||||||||||||||
Goodwill decreased from June 30, 2022 primarily due to currency translation.
Identifiable intangible assets at September 30, 2022 were comprised of:
| Gross Carrying Amount | Accumulated Amortization | ||||||||||
| Intangible assets with determinable lives | $ | 8,890 | $ | (6,284) | |||||||
| Intangible assets with indefinite lives | 20,859 | — | |||||||||
| Total identifiable intangible assets | $ | 29,749 | $ | (6,284) | |||||||
Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives primarily consist of brands. The amortization expense of determinable-lived intangible assets for the three months ended September 30, 2022 and 2021 was $80 and $77, respectively.
Goodwill and indefinite-lived intangible assets are not amortized but are tested at least annually for impairment. We use the income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. If the resulting fair value is less than the asset's carrying value, that difference represents an impairment.
Most of our goodwill reporting units have fair value cushions that significantly exceed their underlying carrying values. In connection with the Grooming operating segment integration as described further in Note 3, we concluded that the Shave Care and Appliances categories are one reporting unit (Grooming) for goodwill impairment testing. Based on our impairment testing performed in the prior fiscal year, goodwill for the Grooming reporting unit has a fair value cushion of over 40%.
Based on our impairment testing performed in the prior fiscal year, the Gillette indefinite-lived intangible asset's fair value exceeded its carrying value by approximately 5% and is most susceptible to future impairment risk. Adverse changes in the business or in the macroeconomic environment, including foreign currency devaluation, increasing global inflation, market contraction from an economic recession and the Russia-Ukraine War, could reduce the underlying cash flows used to estimate the fair value of the Gillette indefinite-lived intangible asset and trigger a future impairment charge. The most significant assumptions utilized in the determination of the estimated fair value of the Gillette indefinite-lived intangible asset are the net sales growth rates (including residual growth rates), discount rate and royalty rates.
Net sales growth rates could be negatively impacted by reductions or changes in demand for our Grooming products, which may be caused by, among other things: changes in the use and frequency of grooming products, by shifts in demand away from one or more of our higher priced products to lower priced products or potential supply chain constraints. In addition, relative global and country/regional macroeconomic factors, including the Russia-Ukraine War, could result in additional and prolonged devaluation of other countries' currencies relative to the U.S. dollar. The residual growth rates represent the expected rate at which the Gillette brand is expected to grow beyond the shorter-term business planning period. The residual growth rates utilized in our fair value estimates are consistent with the brand operating plans and approximate expected long-term category market growth rates. The residual growth rate depends on overall market growth rates, the competitive environment, inflation, relative currency exchange rates and business activities that impact market share. As a result, the residual growth rate could be adversely impacted by a sustained deceleration in category growth, grooming habit changes, devaluation of currencies against the U.S. dollar or an increased competitive environment.
The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other country specific factors, such as further devaluation of currencies against the U.S. dollar. Spot rates as of the fair value measurement date are utilized in our fair value estimates for cash flows outside the U.S.
Amounts in millions of dollars unless otherwise specified.
The royalty rate used to determine the estimated fair value for the Gillette indefinite-lived intangible asset is driven by historical and estimated future profitability of the underlying Gillette business. The royalty rate may be impacted by significant adverse changes in long-term operating margins.
We performed a sensitivity analysis for the Gillette indefinite-lived intangible asset during our annual impairment testing from the prior year, utilizing reasonably possible changes in the assumptions for the discount rate, the short-term and residual growth rates and the royalty rates to demonstrate the potential impacts to estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to a 25 basis-point increase in the discount rate, a 25 basis-point decrease in our short-term and residual growth rates or a 50 basis-point decrease in our royalty rates, some of which would result in an impairment of the Gillette indefinite-lived intangible asset.
| Approximate Percent Change in Estimated Fair Value | |||||||||||||||||
| +25 bps Discount Rate | -25 bps Growth Rates | -50 bps Royalty Rate | |||||||||||||||
| Gillette indefinite-lived intangible asset | (6)% | (6)% | (3)% | ||||||||||||||
Gillette's business results in the fiscal year ended June 30, 2022 exceeded the assumptions in our impairment testing from the prior year. However, during the three months ended September 30, 2022, the relative currency exchange rates devalued against the U.S. dollar and the inputs to the cost of capital determination increased. These macroeconomic changes place increased pressure on the fair value of the Gillette indefinite-lived intangible asset. Based on our assessment, we determined it is more likely than not that the fair value of the Gillette indefinite-lived intangible asset continues to exceed its carrying value of $14.1 billion as of September 30, 2022. Therefore, we have concluded that no triggering event has occurred in the current quarter. We will perform our annual impairment testing for goodwill and indefinite-lived intangible assets during the three months ended December 31, 2022.
5. Earnings Per Share
Basic net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble less preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share are calculated by dividing Net earnings attributable to Procter & Gamble by the diluted weighted average number of common shares outstanding during the period. The diluted shares include the dilutive effect of stock options and other stock-based awards based on the treasury stock method and the assumed conversion of preferred stock.
Net earnings per share were calculated as follows:
| CONSOLIDATED AMOUNTS | Three Months Ended September 30 | ||||||||||
| 2022 | 2021 | ||||||||||
| Net earnings | $ | 3,963 | $ | 4,126 | |||||||
| Less: Net earnings attributable to noncontrolling interests | 24 | 14 | |||||||||
| Net earnings attributable to P&G (Diluted) | 3,939 | 4,112 | |||||||||
| Less: Preferred dividends | 71 | 70 | |||||||||
| Net earnings attributable to P&G available to common shareholders (Basic) | $ | 3,868 | $ | 4,042 | |||||||
| SHARES IN MILLIONS | |||||||||||
| Basic weighted average common shares outstanding | 2,385.5 | 2,428.1 | |||||||||
| Add: Effect of dilutive securities | |||||||||||
Convertible preferred shares (1) | 77.4 | 80.5 | |||||||||
Stock options and other unvested equity awards (2) | 40.7 | 50.3 | |||||||||
| Diluted weighted average common shares outstanding | 2,503.6 | 2,558.9 | |||||||||
NET EARNINGS PER SHARE (3) | |||||||||||
| Basic | $ | 1.62 | $ | 1.66 | |||||||
| Diluted | $ | 1.57 | $ | 1.61 | |||||||
(1)An overview of preferred shares can be found in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
(2)Excludes 18 million and 9 million for the three months ended September 30, 2022 and 2021, respectively, of weighted average stock options outstanding because the exercise price of these options was greater than their average market value or their effect was antidilutive.
(3)Net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
Amounts in millions of dollars unless otherwise specified.
6. Share-Based Compensation and Postretirement Benefits
The following table provides a summary of our share-based compensation expense and postretirement benefit impacts:
| Three Months Ended September 30 | |||||||||||
| 2022 | 2021 | ||||||||||
| Share-based compensation expense | $ | 105 | $ | 116 | |||||||
| Net periodic benefit cost for pension benefits | 43 | 48 | |||||||||
| Net periodic benefit credit for other retiree benefits | (132) | (103) | |||||||||
7. Risk Management Activities and Fair Value Measurements
As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. There have been no significant changes in our risk management policies or activities during the three months ended September 30, 2022.
The Company has not changed its valuation techniques used in measuring the fair value of any financial assets and liabilities during the period. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented. There were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis for the three months ended September 30, 2022.
Cash equivalents were $5.1 billion and $6.0 billion as of September 30, 2022 and June 30, 2022, respectively, and are classified as Level 1 within the fair value hierarchy. Other investments had a fair value of $93 and $140 as of September 30, 2022 and June 30, 2022, respectively, including equity securities of $66 and $113 as of September 30, 2022 and June 30, 2022, respectively, and are presented in Other noncurrent assets. Investments are measured at fair value and primarily classified as Level 1 and Level 2 within the fair value hierarchy. Level 1 are based on quoted market prices in active markets for identical assets, and Level 2 are based on quoted market prices for similar instruments. There are no material investment balances classified as Level 3 within the fair value hierarchy or using net asset value as a practical expedient. Unrealized gains on equity securities were $9 during the three months ended September 30, 2022. Unrealized losses on equity securities were $(29) during the three months ended September 30, 2021. These unrealized gains/(losses) are recognized in Other non-operating income, net.
The fair value of long-term debt was $21.8 billion and $25.7 billion as of September 30, 2022 and June 30, 2022, respectively. This includes the current portion of long-term debt instruments ($2.2 billion and $3.6 billion as of September 30, 2022 and June 30, 2022, respectively). Certain long-term debt (debt designated as a fair value hedge) is recorded at fair value. All other long-term debt is recorded at amortized cost but is measured at fair value for disclosure purposes. We consider our debt to be Level 2 in the fair value hierarchy. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Disclosures about Financial Instruments
The notional amounts and fair values of financial instruments used in hedging transactions as of September 30, 2022 and June 30, 2022 are as follows:
| Notional Amount | Fair Value Asset | Fair Value (Liability) | |||||||||||||||||||||||||||||||||
| September 30, 2022 | June 30, 2022 | September 30, 2022 | June 30, 2022 | September 30, 2022 | June 30, 2022 | ||||||||||||||||||||||||||||||
| DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS | |||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 3,743 | $ | 4,972 | $ | — | $ | 3 | $ | (435) | $ | (307) | |||||||||||||||||||||||
| DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS | |||||||||||||||||||||||||||||||||||
| Foreign currency interest rate contracts | $ | 11,877 | $ | 7,943 | $ | 877 | $ | 561 | $ | (9) | $ | (1) | |||||||||||||||||||||||
| TOTAL DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS | $ | 15,620 | $ | 12,915 | $ | 877 | $ | 564 | $ | (444) | $ | (308) | |||||||||||||||||||||||
| DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 4,108 | $ | 5,625 | $ | 4 | $ | 6 | $ | (96) | $ | (61) | |||||||||||||||||||||||
| TOTAL DERIVATIVES AT FAIR VALUE | $ | 19,728 | $ | 18,540 | $ | 881 | $ | 570 | $ | (540) | $ | (369) | |||||||||||||||||||||||
Amounts in millions of dollars unless otherwise specified.
The fair value of the interest rate derivative asset/(liability) directly offsets the cumulative amount of the fair value hedging adjustment included in the carrying amount of the underlying debt obligation. The carrying amount of the underlying debt obligation, which includes the unamortized discount or premium and the fair value adjustment, was $3.3 billion and $4.7 billion as of September 30, 2022 and June 30, 2022, respectively. In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The carrying value of those debt instruments designated as net investment hedges, which includes the adjustment for the foreign currency transaction gain or loss on those instruments, was $9.4 billion and $11.2 billion as of September 30, 2022 and June 30, 2022, respectively. The increase in the notional balance of derivative instruments designated as net investment hedges is partially offset by the decrease in debt designated as a net investment hedge due to maturities. The net increase in the total amount of instruments designated as net investment hedges is primarily driven by the Company's decision to leverage favorable interest rate spreads in the foreign currency swap market.
All derivative assets are presented in Prepaid expenses and other current assets or Other noncurrent assets. All derivative liabilities are presented in Accrued and other liabilities or Other noncurrent liabilities. Changes in the fair value of net investment hedges are recognized in the Foreign currency translation component of Other comprehensive income (OCI). All of the Company's derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy.
Before tax gains on our financial instruments in hedging relationships are categorized as follows:
| Amount of Gain Recognized in OCI on Derivatives | |||||||||||
| Three Months Ended September 30 | |||||||||||
| 2022 | 2021 | ||||||||||
DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS (1) (2) | |||||||||||
| Foreign exchange contracts | $ | 708 | $ | 208 | |||||||
(1)For the derivatives in net investment hedging relationships, the amount of gain excluded from effectiveness testing, which was recognized in earnings, was $46 and $15 for the three months ended September 30, 2022 and 2021, respectively.
(2)In addition to the foreign currency derivative contracts designated as net investment hedges, certain of our foreign currency denominated debt instruments are designated as net investment hedges. The amount of gain recognized in Accumulated other comprehensive income (AOCI) for such instruments was $698 and $303 for the three months ended September 30, 2022 and 2021, respectively.
| Amount of Loss Recognized in Earnings | |||||||||||
| Three Months Ended September 30 | |||||||||||
| 2022 | 2021 | ||||||||||
| DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS | |||||||||||
| Interest rate contracts | $ | (131) | $ | (36) | |||||||
| DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS | |||||||||||
| Foreign currency contracts | $ | (146) | $ | (24) | |||||||
The loss on the derivatives in fair value hedging relationships is fully offset by the mark-to-market impact of the related exposure. These are both recognized in Interest expense. The loss on derivatives not designated as hedging instruments is substantially offset by the currency mark-to-market of the related exposure. These are both recognized in Selling, general and administrative expense (SG&A).
Amounts in millions of dollars unless otherwise specified.
8. Accumulated Other Comprehensive Income/(Loss)
The table below presents the changes in Accumulated other comprehensive income/(loss) attributable to Procter & Gamble (AOCI), including the reclassifications out of AOCI by component:
| Investment Securities | Post-retirement Benefit Plans | Foreign Currency Translation | Total AOCI | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | 20 | $ | 27 | $ | (12,236) | $ | (12,189) | |||||||||||||||
OCI before reclassifications (1) | (2) | 82 | (712) | (632) | |||||||||||||||||||
Amounts reclassified to the Consolidated Statement of Earnings (2) | — | 5 | — | 5 | |||||||||||||||||||
| Net current period OCI | (2) | 87 | (712) | (627) | |||||||||||||||||||
| Less: OCI attributable to non-controlling interests | — | — | (5) | (5) | |||||||||||||||||||
| Balance at September 30, 2022 | $ | 18 | $ | 114 | $ | (12,943) | $ | (12,811) | |||||||||||||||
(1)Net of tax (benefit)/expense of $(1), $9 and $330 for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively. Income tax effects within foreign currency translation include impacts from items such as net investment hedge transactions.
(2)Net of tax expense of $0, $2 and $0 for gains/losses on investment securities, postretirement benefit plans and foreign currency translation, respectively.
The below provides additional details on amounts reclassified from AOCI into the Consolidated Statements of Earnings:
•Investment securities: amounts reclassified from AOCI into Other non-operating income, net.
•Postretirement benefits: amounts reclassified from AOCI into Other non-operating income, net and included in the computation of net periodic postretirement costs.
9. Commitments and Contingencies
Litigation
We are subject, from time to time, to certain legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising, contracts, environmental, patent and trademark matters, labor and employment matters and tax. While considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.
We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will materially affect our financial position, results of operations or cash flows.
Income Tax Uncertainties
The Company is present in approximately 70 countries and over 150 taxable jurisdictions and, at any point in time, has 40–50 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2010 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of an audit. Based on information currently available, we anticipate that over the next 12 month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued existing liabilities of approximately $12, including interest and penalties.
Additional information on the Commitments and Contingencies of the Company can be found in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Amounts in millions of dollars unless otherwise specified.
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||
Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors” and "Notes 4 and 9 to the Consolidated Financial Statements." These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, except to the extent required by law.
Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility; (2) the ability to successfully manage local, regional or global economic volatility, including reduced market growth rates, and to generate sufficient income and cash flow to allow the Company to effect the expected share repurchases and dividend payments; (3) the ability to manage disruptions in credit markets or to our banking partners or changes to our credit rating; (4) the ability to maintain key manufacturing and supply arrangements (including execution of supply chain optimizations and sole supplier and sole manufacturing plant arrangements) and to manage disruption of business due to various factors, including ones outside of our control, such as natural disasters, acts of war (including the Russia-Ukraine War) or terrorism or disease outbreaks; (5) the ability to successfully manage cost fluctuations and pressures, including prices of commodities and raw materials and costs of labor, transportation, energy, pension and healthcare; (6) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to changing consumer habits, evolving digital marketing and selling platform requirements and technological advances attained by, and patents granted to, competitors; (7) the ability to compete with our local and global competitors in new and existing sales channels, including by successfully responding to competitive factors such as prices, promotional incentives and trade terms for products; (8) the ability to manage and maintain key customer relationships; (9) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, ingredients, efficacy, packaging content, supply chain practices or similar matters that may arise; (10) the ability to successfully manage the financial, legal, reputational and operational risk associated with third-party relationships, such as our suppliers, contract manufacturers, distributors, contractors and external business partners; (11) the ability to rely on and maintain key company and third-party information and operational technology systems, networks and services and maintain the security and functionality of such systems, networks and services and the data contained therein; (12) the ability to successfully manage uncertainties related to changing political conditions and potential implications such as exchange rate fluctuations and market contraction; (13) the ability to successfully manage current and expanding regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, product and packaging composition, intellectual property, labor and employment, antitrust, privacy and data protection, tax, the environment, due diligence, risk oversight, accounting and financial reporting) and to resolve new and pending matters within current estimates; (14) the ability to manage changes in applicable tax laws and regulations; (15) the ability to successfully manage our ongoing acquisition, divestiture and joint venture activities, in each case to achieve the Company’s overall business strategy and financial objectives, without impacting the delivery of base business objectives; (16) the ability to successfully achieve productivity improvements and cost savings and manage ongoing organizational changes while successfully identifying, developing and retaining key employees, including in key growth markets where the availability of skilled or experienced employees may be limited; (17) the ability to successfully manage the demand, supply and operational challenges, as well as governmental responses or mandates, associated with a disease outbreak, including epidemics, pandemics or similar widespread public health concerns (including COVID-19); (18) the ability to manage the uncertainties, sanctions and economic effects from the war between Russia and Ukraine; and (19) the ability to successfully achieve our ambition of reducing our greenhouse gas emissions and delivering progress towards our environmental sustainability priorities. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from those projected herein is included in the section titled "Economic Conditions and Uncertainties" and the section titled "Risk Factors" (Part II, Item 1A) of this Form 10-Q.
Purpose, Approach and Non-GAAP Measures
The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The
MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes.
The MD&A is organized into the following sections:
•Overview
•Summary of Results – Three months ended September 30, 2022
•Economic Conditions and Uncertainties
•Results of Operations – Three months ended September 30, 2022
•Business Segment Discussion – Three months ended September 30, 2022
•Liquidity and Capital Resources
•Reconciliation of Measures Not Defined by U.S. GAAP
Throughout the MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales, net earnings, diluted net earnings per share and operating cash flow. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP) that include organic sales growth, core net earnings per share (Core EPS), adjusted free cash flow and adjusted free cash flow productivity. The explanation at the end of the MD&A provides the definition of these non-GAAP measures, details on the use and the derivation of these measures, as well as reconciliations to the most directly comparable U.S. GAAP measure.
Management also uses certain market share and market consumption estimates to evaluate performance relative to competition, despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in the MD&A are based on a combination of vendor purchased traditional brick-and-mortar and online data in key markets as well as internal estimates. All market share references represent the percentage of sales of our products in dollar terms on a constant currency basis relative to all product sales in the category. The Company measures fiscal year to date market shares through the most recent period for which market share data is available, which typically reflects a lag time of one or two months as compared to the end of the reporting period. Management also uses unit volume growth to evaluate and explain drivers of changes in net sales. Organic volume growth reflects year-over-year changes in unit volume excluding the impacts of acquisitions and divestitures and certain one-time items, if applicable, and is used to explain changes in organic sales.
OVERVIEW
P&G is a global leader in the fast-moving consumer goods industry, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in approximately 180 countries and territories, primarily through mass merchandisers, e-commerce (including social commerce) channels, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, specialty beauty stores (including airport duty-free stores), high-frequency stores, pharmacies, electronics stores and professional channels. We also sell direct to individual consumers. We have on-the-ground operations in approximately 70 countries.
Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We believe we are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.
The table below lists our reportable segments, including the product categories and brand composition within each segment.
| Reportable Segments | Product Categories (Sub-Categories) | Major Brands | ||||||
| Beauty | Hair Care (Conditioners, Shampoos, Styling Aids, Treatments) | Head & Shoulders, Herbal Essences, Pantene, Rejoice | ||||||
Skin and Personal Care (Antiperspirants and Deodorants, Personal Cleansing, Skin Care) | Olay, Old Spice, Safeguard, Secret, SK-II | |||||||
Grooming (1) | Grooming (Appliances, Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Grooming) | Braun, Gillette, Venus | ||||||
| Health Care | Oral Care (Toothbrushes, Toothpastes, Other Oral Care) | Crest, Oral-B | ||||||
Personal Health Care (Gastrointestinal, Pain Relief, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care) | Metamucil, Neurobion, Pepto-Bismol, Vicks | |||||||
| Fabric & Home Care | Fabric Care (Fabric Enhancers, Laundry Additives, Laundry Detergents) | Ariel, Downy, Gain, Tide | ||||||
Home Care (Air Care, Dish Care, P&G Professional, Surface Care) | Cascade, Dawn, Fairy, Febreze, Mr. Clean, Swiffer | |||||||
| Baby, Feminine & Family Care | Baby Care (Baby Wipes, Taped Diapers and Pants) | Luvs, Pampers | ||||||
Feminine Care (Adult Incontinence, Feminine Care) | Always, Always Discreet, Tampax | |||||||
Family Care (Paper Towels, Tissues, Toilet Paper) | Bounty, Charmin, Puffs | |||||||
(1)Effective July 1, 2022, the Grooming Sector Business Unit completed the full integration of its Shave Care and Appliances categories to cohesively serve consumers' grooming needs. This transition included the integration of the management team, strategic decision-making, innovation plans, financial targets, budgets and internal management reporting.
The following table provides the percentage of net sales and net earnings by reportable business segment (excluding Corporate) for the three months ended September 30, 2022:
| Three Months Ended September 30, 2022 | |||||||||||
| Net Sales | Net Earnings | ||||||||||
| Beauty | 19% | 25% | |||||||||
| Grooming | 8% | 10% | |||||||||
| Health Care | 14% | 16% | |||||||||
| Fabric & Home Care | 35% | 29% | |||||||||
| Baby, Feminine & Family Care | 24% | 20% | |||||||||
| Total Company | 100% | 100% | |||||||||
SUMMARY OF RESULTS
The following are highlights of results for the three months ended September 30, 2022 versus the three months ended September 30, 2021:
•Net sales increased 1% to $20.6 billion. Growth was driven by low single-digit increases in Health Care, Fabric & Home Care and Baby, Feminine & Family Care, partially offset by a mid-single-digit decrease in Grooming. Net Sales in Beauty were unchanged. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 7%. Organic sales increased high single digits in Health Care and Fabric & Home Care and increased mid-single digits in Beauty, Grooming and Baby, Feminine & Family Care.
•Net earnings were $4.0 billion, a decrease of $163 million, or 4%, versus the prior year period due to a decrease in operating margin, partially offset by the increase in net sales.
•Net earnings attributable to Procter & Gamble were $3.9 billion, a decrease of $173 million, or 4%, versus the prior year.
•Diluted net earnings per share (EPS) decreased 2% to $1.57 due primarily to the decrease in net earnings, partially offset by a reduction in the weighted average shares outstanding.
•Operating cash flow was $4.1 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was $3.4 billion. Adjusted free cash flow productivity was 86%.
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions. Our products are sold in numerous countries across North America, Europe, Latin America, Asia and Africa, with more than half our sales generated outside the United States. As such, we are exposed to and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. Current macroeconomic factors remain very dynamic, and any causes of market size contraction, such as COVID-19 related disruptions or lockdowns, greater political unrest or instability in the Middle East, Central and Eastern Europe (including the ongoing Russia-Ukraine War), certain Latin American markets and the Korean peninsula could reduce our sales or erode our operating margin and consequently reduce our net earnings and cash flows.
Changes in Costs. Our costs are subject to fluctuations, particularly due to changes in commodity and input material prices, transportation costs, broader inflationary impacts and our own productivity efforts. We have significant exposures to certain commodities and input materials, in particular certain oil-derived materials like resins and paper-based materials like pulp. Volatility in the market price of these commodities and input materials has a direct impact on our costs. Disruptions in our manufacturing, supply and distribution operations, including due to COVID-19 related lockdowns, energy shortages, port congestions, labor constraints and freight container and truck shortages have impacted our costs and could do so in the future. If we are unable to manage these impacts 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, net earnings and cash flows. Net sales could also be adversely impacted following pricing actions if there is a negative impact on the consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including supply chain optimization and general overhead and workforce optimization. If we are not successful in executing and sustaining these changes, there could be a negative impact on our gross margin, operating margin, net earnings and cash flows.
Foreign Exchange. We 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. Historically, weakening of certain foreign currencies versus the U.S. dollar have resulted in significant foreign exchange impacts leading to lower net sales, net earnings and cash flows. Certain countries experiencing significant exchange rate fluctuations such as Argentina, Brazil, United Kingdom, Japan, Russia and Turkey have had, and could continue to have, a significant impact on our net sales, net earnings and cash flows. Increased pricing in response to certain fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on the consumption of our products, which would negatively affect our net sales, gross margin, operating margin, net earnings and cash flows.
Government Policies. Our net earnings and cash flows could be affected by changes in U.S. or foreign government legislative, regulatory or enforcement policies. On August 16, 2022, the "Inflation Reduction Act" (H.R. 5376) was signed into law in the United States. We do not currently expect the Inflation Reduction Act to have a material impact on the Company's Consolidated Financial Statements. Our net earnings and cash flows could be affected by any future legislative or regulatory changes in U.S. or non-U.S. tax policy, or any significant change in global tax policy adopted under the current work being led by the OECD for the G20 focused on "Addressing the Challenges of the Digitalization of the Economy". Our net sales, gross margin,
operating margin, net earnings and cash flows may also be impacted by changes in U.S. and foreign government policies related to environmental and climate change matters. Additionally, we attempt to carefully manage our debt, currency and other exposures in certain countries with currency exchange, import authorization and pricing controls, such as Argentina, Egypt, Nigeria and Pakistan. Further, our net sales, gross margin, operating margin, net earnings and cash flows could be affected by changes to international trade agreements in North America and elsewhere. Changes in government policies in these areas might cause an increase or decrease in our net sales, gross margin, operating margin, net earnings and cash flows.
Russia-Ukraine War. The war between Russia and Ukraine has negatively impacted our operations in both countries. Our Ukraine business includes two manufacturing sites. We have approximately 500 employees including both manufacturing and non-manufacturing personnel. Our operations in Ukraine accounted for less than 1% of consolidated net sales and net earnings in fiscal 2022. Additionally, net assets of our Ukraine subsidiary, along with Ukraine related assets held by other subsidiaries, account for less than 1% of net assets as of September 30, 2022.
Our Russia business includes two manufacturing sites with a net book value of approximately $300 million as of September 30, 2022. We have approximately 1,800 employees, including both manufacturing and non-manufacturing personnel. In fiscal 2022, our operations in Russia accounted for less than 2% of consolidated net sales and less than 1% of net earnings. Additionally, net assets of our Russia subsidiaries, along with Russia related assets held by other subsidiaries, account for less than 2% of net assets as of September 30, 2022. Beginning in March 2022, the Company reduced its product portfolio, discontinued new capital investments and suspended media, advertising and promotional activity in Russia.
Future impacts to the Company are difficult to predict due to the high level of uncertainty related to the war’s duration, evolution and resolution. Within Ukraine, there is a possibility of physical damage and destruction of our two manufacturing facilities. We may not be able to operate our manufacturing sites and source raw materials from our suppliers or ship finished products to our customers. Ultimately, these could result in impairments of our manufacturing plants and fixed assets or write-downs of other operating assets and working capital.
Within Russia, we may not be able to continue our reduced operations at current levels due to sanctions and counter-sanctions, monetary, currency or payment controls, legislative restrictions or policies, restrictions on access to financial institutions and supply and transportation challenges. Our suppliers, distributors and retail customers are also impacted by the war and their ability to successfully maintain their operations could also impact our operations or negatively impact the sales of our products.
More broadly, there could be additional negative impacts to our net sales, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
For a more complete discussion of the risks we encounter in our business, please refer to Risk Factors in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended June 30, 2022.
RESULTS OF OPERATIONS – Three Months Ended September 30, 2022
The following discussion provides a review of results for the three months ended September 30, 2022 versus the three months ended September 30, 2021.
| Three Months Ended September 30 | |||||||||||||||||
| Amounts in millions, except per share amounts | 2022 | 2021 | % Chg | ||||||||||||||
| Net sales | $20,612 | $20,338 | 1% | ||||||||||||||
| Operating income | 4,939 | 5,023 | (2)% | ||||||||||||||
| Net earnings | 3,963 | 4,126 | (4)% | ||||||||||||||
| Net earnings attributable to Procter & Gamble | 3,939 | 4,112 | (4)% | ||||||||||||||
| Diluted net earnings per common share | 1.57 | 1.61 | (2)% | ||||||||||||||
| Three Months Ended September 30 | |||||||||||||||||
| COMPARISONS AS A PERCENTAGE OF NET SALES | 2022 | 2021 | Basis Pt Chg | ||||||||||||||
| Gross margin | 47.4% | 49.0% | (160) | ||||||||||||||
| Selling, general & administrative expense | 23.4% | 24.3% | (90) | ||||||||||||||
| Operating income | 24.0% | 24.7% | (70) | ||||||||||||||
| Earnings before income taxes | 24.2% | 24.8% | (60) | ||||||||||||||
| Net earnings | 19.2% | 20.3% | (110) | ||||||||||||||
| Net earnings attributable to Procter & Gamble | 19.1% | 20.2% | (110) | ||||||||||||||
Net Sales
Net sales for the quarter increased 1% to $20.6 billion. The increase in net sales was due to higher pricing of 9% and favorable mix of 1%, partially offset by unfavorable foreign exchange of 6% and a decrease in unit volume of 3%. Favorable mix was driven by the growth of the Skin & Personal Care and Personal Health Care businesses (both of which have higher than Company-average selling prices). Organic sales increased 7% on a 3% decrease in organic volume.
Net Sales increased low single digits in Health Care, Fabric & Home Care and Baby, Feminine & Family Care and decreased mid-single digits in Grooming. Net Sales in Beauty were unchanged. On a regional basis, volume decreased high single digits in Europe and decreased low single digits in North America and Greater China. These volume decreases were partially offset by a high single-digit increase in Latin America and low single-digit increases in Asia Pacific and IMEA.
Net Sales Change Drivers 2022 vs. 2021 (Three Months Ended September 30, 2022) (1) | |||||||||||||||||||||||||||||||||||||||||
| Volume with Acquisitions & Divestitures | Volume Excluding Acquisitions & Divestitures | Foreign Exchange | Price | Mix | Other (2) | Net Sales Growth | |||||||||||||||||||||||||||||||||||
| Beauty | (1)% | (1)% | (6)% | 7% | (2)% | 2% | —% | ||||||||||||||||||||||||||||||||||
| Grooming | —% | 1% | (8)% | 8% | (4)% | —% | (4)% | ||||||||||||||||||||||||||||||||||
| Health Care | (2)% | (2)% | (5)% | 6% | 4% | —% | 3% | ||||||||||||||||||||||||||||||||||
| Fabric & Home Care | (4)% | (4)% | (6)% | 11% | 1% | (1)% | 1% | ||||||||||||||||||||||||||||||||||
| Baby, Feminine & Family Care | (3)% | (3)% | (5)% | 8% | 1% | —% | 1% | ||||||||||||||||||||||||||||||||||
| Total Company | (3)% | (3)% | (6)% | 9% | 1% | —% | 1% | ||||||||||||||||||||||||||||||||||
(1)Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
(2)Other includes the sales mix impact from acquisitions and divestitures and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin decreased 160 basis points to 47.4% of net sales for the quarter. The decrease in gross margin was due to:
•510 basis points of increased commodity and input material costs,
•a 120 basis-point decline from unfavorable product mix, primarily due to the disproportionate slowdown of SK-II, Appliances and Fabric Enhancers products, all of which have higher than company-average gross margins,
•40 basis points of increased transportation costs,
•30 basis points of product and packaging investments,
•a 30 basis-point decline from unfavorable foreign exchange impacts and
•a 10 basis-point decline from decreased cost leverage.
These impacts were partially offset by
•a 470 basis-point increase due to higher pricing and
•110 basis points of manufacturing productivity savings.
Total SG&A spending decreased 2% to $4.8 billion due to decreased marketing spending partially offset by increased overhead costs and other operating costs. SG&A as a percentage of net sales decreased 90 basis points to 23.4% due primarily to a decrease in marketing spending as a percentage of sales, partially offset by an increase in overhead and other operating costs as a percentage of sales. Marketing spending as a percentage of net sales decreased 200 basis points due to the positive scale impacts of the net sales increase, increased savings in promotion-related and agency costs and lower media spending. Overhead costs as a percentage of net sales increased 30 basis points due to inflation and other cost increases, partially offset by the positive scale impacts of the net sales increase. Other operating expenses as a percentage of net sales increased 80 basis points due to a prior period gain on the sale of real estate and higher foreign exchange transactional charges. Productivity-driven cost savings delivered 120 basis points of benefit to SG&A as a percentage of net sales.
Non-Operating Expenses and Income
Interest expense was $123 million for the quarter, a $14 million increase versus the prior year period. Interest income was $42 million for the quarter, a $31 million increase versus the prior year period due to higher interest rates. Other non-operating income was $139 million, an increase of $29 million primarily due to a prior period unrealized loss on equity investments.
Income Taxes
For the three months ended September 30, 2022, the effective tax rate increased 260 basis points to 20.7% due to:
•a 130 basis-point increase from lower excess tax benefits of share-based compensation (a 60 basis-point benefit in the current period versus a 190 basis-point benefit in the prior year period),
•a 70 basis-point increase from discrete impacts related to uncertain tax positions (a 20 basis-point unfavorable impact in the current period versus a 50 basis-point favorable impact in the prior year period), and
•a 60 basis-point increase from unfavorable impacts from the geographic mix of current year earnings.
Net Earnings
Operating income decreased $84 million, or 2%, to $4.9 billion for the quarter, as the increase in net sales was more than fully offset by the decrease in operating margin, the components of which are described above. Net earnings decreased $163 million, or 4%, to $4.0 billion as the decrease in operating income and an increase in effective tax rate were partially offset by an increase in other non-operating income. Foreign exchange had a negative impact of approximately $381 million on net earnings for the quarter, including both transactional and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Net earnings attributable to Procter & Gamble decreased $173 million, or 4%, to $3.9 billion for the quarter. Diluted net earnings per share decreased 2% to $1.57 versus the prior year period due to the decrease in net earnings, partially offset by a reduction in the weighted average number of shares outstanding.
BUSINESS SEGMENT DISCUSSION – Three Months Ended September 30, 2022
The following discussion provides a review of results by reportable business segment. Analysis of the results for the three month period ended September 30, 2022 is provided based on a comparison to the three month period ended September 30, 2021. The primary financial measures used to evaluate segment performance are net sales and net earnings. The table below provides supplemental information on net sales, earnings before income taxes and net earnings by reportable business segment for the three months ended September 30, 2022 versus the comparable prior year period (dollar amounts in millions):
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Net Sales | % Change Versus Year Ago | Earnings/(Loss) Before Income Taxes | % Change Versus Year Ago | Net Earnings/(Loss) | % Change Versus Year Ago | ||||||||||||||||||||||||||||||
| Beauty | $ | 3,961 | — | % | $ | 1,271 | 2 | % | $ | 1,011 | 2 | % | |||||||||||||||||||||||
| Grooming | 1,625 | (4) | % | 503 | (3) | % | 404 | (3) | % | ||||||||||||||||||||||||||
| Health Care | 2,757 | 3 | % | 800 | 15 | % | 617 | 17 | % | ||||||||||||||||||||||||||
| Fabric & Home Care | 7,082 | 1 | % | 1,543 | — | % | 1,172 | (2) | % | ||||||||||||||||||||||||||
| Baby, Feminine & Family Care | 4,934 | 1 | % | 1,055 | (2) | % | 805 | (3) | % | ||||||||||||||||||||||||||
| Corporate | 253 | N/A | (175) | N/A | (46) | N/A | |||||||||||||||||||||||||||||
| Total Company | $ | 20,612 | 1 | % | $ | 4,997 | (1) | % | $ | 3,963 | (4) | % | |||||||||||||||||||||||
Beauty
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Beauty net sales were unchanged at $4.0 billion, as the positive impact from higher pricing of 7% and from acquisitions of 2% was fully offset by unfavorable foreign exchange of 6%, unfavorable mix of 2% (due primarily to the decline of SK-II brand, which has higher than segment-average selling prices) and a decrease in unit volume of 1%. Excluding the impact of acquisitions and foreign exchange, organic sales increased 4%. Global market share of the Beauty segment increased 0.5 points.
•Hair Care net sales decreased low single digits. Negative impacts of a decrease in unit volume and unfavorable foreign exchange were partially offset by higher pricing (in all regions). The volume decrease was driven primarily by declines in Europe (due to portfolio reduction in Russia), Greater China (related to market contraction) and North America (due to market contraction and increased pricing). Organic sales increased mid-single digits driven by a double-digit growth in Latin America and Europe, a high single-digit growth in IMEA and a mid-single-digit growth in North America, partially offset by a mid-single-digit decline in Greater China. Global market share of the Hair Care category decreased a point.
•Skin and Personal Care net sales increased low single digits. Positive impacts of a volume increase, higher pricing and a benefit from acquisitions were partially offset by unfavorable foreign exchange and unfavorable mix (due to the decline of SK-II brand, which has higher than category-average selling prices). Volume increase was primarily driven by growth in North America (due to innovation) and Latin America, partially offset by a decline in Greater China (due to pandemic-related lockdowns) and Asia Pacific. Organic sales increased mid-single digits as a mid-teens increase in North America
was partially offset by a low single-digit decrease in Greater China. Global market share of the Skin and Personal Care category increased more than a point.
Net earnings increased 2% to $1.0 billion due to a 50 basis-point increase in net earnings margin. Net earnings margin increased due to a reduction in SG&A as a percentage of net sales, partially offset by a decrease in gross margin. The gross margin reduction was driven by increased commodity and input material costs, transportation costs and negative product mix due to the decline of the super-premium SK-II brand, partially offset by increased pricing. SG&A as a percentage of net sales decreased primarily due to a decrease in marketing spending.
Grooming
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Grooming net sales decreased 4% to $1.6 billion driven by unfavorable foreign exchange of 8% and unfavorable mix of 4% (due to decline of Appliances, which have higher than segment-average selling prices), partially offset by higher pricing of 8% (driven by Europe, North America, Latin America and Asia Pacific). Unit volume was unchanged as increases in Asia Pacific, Europe and IMEA were fully offset by a decline in North America (as a result of increased pricing) and a minor divestiture. Grooming organic sales increased 5% on a 1% increase in organic volume. Organic sales increased more than 20% in Asia Pacific, high teens in Latin America, mid-teens in IMEA and low single digits in Europe. This was partially offset by a low single-digit decline in North America. Global market share of the Grooming segment increased 0.7 points.
Net earnings decreased 3% to $404 million due to the decrease in net sales. Net earnings margin was unchanged as a decrease in SG&A as a percentage of net sales was mostly offset by a higher effective tax rate. The gross margin remained unchanged as increases due to higher pricing and manufacturing cost savings were fully offset by decreases due to commodity and input material cost increases, unfavorable foreign exchange and negative geographic mix caused by the disproportionate volume growth of Latin America and Asia Pacific (which have lower than segment-average gross margins). SG&A as a percentage of net sales decreased as increased efficiencies in marketing spending were partially offset by the negative scale impacts of the net sales decrease. The higher effective tax rate was driven by a higher proportion of net sales in North America, which has higher than Company-average tax rates.
Health Care
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Health Care net sales increased 3% to $2.8 billion driven by higher pricing of 6% and favorable mix of 4% (due to volume growth in North America and the Personal Health Care category, both of which have higher than segment-average selling prices), partially offset by unfavorable foreign exchange of 5% and a decrease in unit volume of 2%. Organic sales increased 8%. Global market share of the Health Care segment decreased 0.7 points.
•Oral Care net sales decreased low single digits. Negative impacts of a volume decline and unfavorable foreign exchange were partially offset by increased pricing and favorable product mix (driven by the growth of power brush and premium paste products, both of which have higher than category-average selling prices). Volume decline was primarily driven by North America (due to market contraction and increased pricing), Europe (due to portfolio reduction in Russia and increased pricing), Greater China (due to market contraction) and IMEA, partially offset by growth in Latin America. Organic sales increased low single digits driven by an increase of about 20% in Latin America and low single digits in North America, partially offset by low single-digit decreases in Europe and Greater China. Global market share of the Oral Care category decreased slightly.
•Personal Health Care net sales increased double digits. Positive impacts of a volume increase, higher pricing (driven primarily by North America and Latin America) and favorable mix (due to the disproportionate volume growth of North America and respiratory products, both of which have higher than category-average selling prices) were partially offset by unfavorable foreign exchange. Volume increase was driven by growth in North America and Europe (both due to a stronger respiratory season), partially offset by a decline in IMEA (versus a base period impacted by pandemic-related consumption increases in certain markets). Organic sales increased high teens driven by growth in all regions led by a more than 20% growth in North America, about 20% growth in Europe and double-digit growth in Latin America. Global market share of the Personal Health Care category decreased more than half a point.
Net earnings increased 17% to $617 million due to the increase in net sales and a 260 basis-point increase in net earnings margin. Net earnings margin increased due primarily to a decrease in SG&A as a percentage of net sales and a slight increase in gross margin. The increase in gross margin was driven by increased pricing and favorable mix (caused by the disproportionate growth of respiratory products that have higher than segment-average gross margins), mostly offset by increased commodity and input material costs. SG&A as a percentage of net sales decreased due to the positive scale impacts of the net sales increase and higher efficiencies in marketing spending.
Fabric & Home Care
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Fabric & Home Care net sales increased 1% to $7.1 billion driven by higher pricing of 11% and favorable mix of 1% (due to a disproportionate volume decline in Europe, which has lower than segment-average selling prices), partially offset by unfavorable foreign exchange of 6% and a decrease in unit volume of 4%. Organic sales increased 8%. Global market share of the Fabric & Home Care segment was unchanged.
•Fabric Care net sales increased low single digits. Positive impacts of higher pricing (driven primarily by North America, Europe and Latin America) and favorable mix (due to a volume decline in Europe, which has lower than category-average selling prices) were partially offset by unfavorable foreign exchange and a decrease in unit volume. The volume decrease was primarily driven by declines in Europe (due to portfolio reduction in Russia and increased pricing) and North America (due to market contraction) partially offset by growth in Asia Pacific, Latin America and IMEA. Organic sales increased high single digits driven by a more than 30% growth in Latin America, more than 20% growth in IMEA, mid-teens growth in Asia Pacific, mid-single digit growth in North America and low single-digit growth in Europe. Global market share of the Fabric Care category decreased less than a point.
•Home Care net sales were unchanged. Positive impacts of higher pricing (driven primarily by Europe and North America) and favorable mix (due to a volume decline in Europe, which has lower than category-average selling prices) were fully offset by unfavorable foreign exchange and a decrease in unit volume. The volume decrease was driven by declines in Europe and North America, both due to market contraction versus a high base period of increased consumption of cleaning products. Organic sales increased high single digits driven by about 40% growth in Latin America, double-digit growth in Europe and mid-single-digit growth in North America. Global market share of the Home Care category increased a point.
Net earnings decreased 2% to $1.2 billion as the increase in net sales was more than offset by a 50 basis-point reduction in net earnings margin. Net earnings margin decreased due primarily to a reduction in gross margin, partially offset by a reduction in SG&A as a percentage of net sales. The gross margin decrease was driven by an increase in commodity and input material costs, transportation costs, unfavorable foreign exchange and negative product mix (due to decline of fabric enhancers that have higher than segment-average gross margins), partially offset by increased pricing. SG&A as a percentage of net sales decreased due to the positive scale benefits of the net sales increase and increased efficiencies in marketing spending.
Baby, Feminine & Family Care
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Baby, Feminine & Family Care net sales increased 1% to $4.9 billion driven by higher pricing of 8% and favorable product and geographic mix of 1%, partially offset by unfavorable foreign exchange of 5% and a decrease in unit volume of 3%. Organic sales increased 6%. Global market share of the Baby, Feminine & Family Care segment was unchanged.
•Baby Care net sales decreased low single digits. Negative impacts of a decrease in unit volume and unfavorable foreign exchange were partially offset by higher pricing (driven primarily by Europe, North America and Latin America) and favorable product mix (due to a higher proportion of pants, which have higher than category-average selling prices). The volume decrease was driven by declines in Europe (due primarily to portfolio reduction in Russia), North America and Greater China (due to market contraction), partially offset by growth in Latin America and IMEA. Organic sales increased mid-single digits driven by more than 30% growth in Latin America, low teens growth in IMEA, mid-single-digit growth in North America and low single-digit growth in Europe, partially offset by high single-digit decline in Greater China. Global market share of the Baby Care category increased more than half a point.
•Feminine Care net sales increased mid-single digits. Positive impacts of higher pricing (driven primarily by North America and Europe) and favorable mix (due to volume decline in Europe, which has lower than category-average selling prices) were partially offset by unfavorable foreign exchange and a decrease in unit volume. The volume decrease was driven by declines in Europe (due to portfolio reduction in Russia), North America (due to supply constraints) and IMEA (due to increased pricing in certain markets), partially offset by growth in Latin America. Organic sales increased double digits driven by growth in all regions led by a more than 30% increase in Latin America, mid-teens increase in Europe and double-digit increases in North America and Asia Pacific. Global market share of the Feminine Care category increased half a point.
•Net sales in Family Care, which is predominantly a North America business, increased low single digits driven by higher pricing, partially offset by a decrease in unit volume (due to market contraction and increased competitive activity). Organic sales also increased low single digits. North America share of the Family Care category decreased more than a point.
Net earnings decreased 3% to $805 million as the increase in net sales was more than offset by a 70 basis-point decrease in net earnings margin. Net earnings margin decreased primarily due to a decrease in gross margin, partially offset by lower SG&A as
a percentage of net sales. Gross margin decreased primarily due to an increase in commodity and input material costs and transportation costs, partially offset by increased pricing. SG&A as a percentage of net sales decreased due to the positive scale benefits of the net sales increase and increased efficiencies in marketing spending.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include but are not limited to incidental businesses managed at the corporate level, gains and losses related to certain divested brands or businesses, impacts from various financing and investing activities, impacts related to employee benefits, asset impairments and restructuring activities including manufacturing and workforce optimization. Corporate also includes reconciling items to adjust the accounting policies used within the reportable segments to U.S. GAAP. The most notable ongoing reconciling item is income taxes, which adjusts the blended statutory rates that are reflected in the reportable segments to the overall Company effective tax rate.
Corporate net sales improved by $115 million to $253 million, due to an increase in sales of incidental businesses managed at the corporate level. Corporate net earnings decreased $218 million to a loss of $46 million as the benefit of the net sales growth was more than offset by higher foreign exchange transactional charges, lower current period tax benefits (primarily lower excess tax benefits of share-based compensation), prior period gain on the sale of real estate and increased commodity costs tied to the aforementioned incidental businesses.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
We generated $4.1 billion of cash from operating activities fiscal year to date, a decrease of $573 million versus the prior year period. Net earnings, adjusted for non-cash items (depreciation and amortization, share-based compensation expense, deferred income taxes and gain on sale of assets), generated $4.6 billion of operating cash flow. Working capital and other impacts used $530 million of cash in the period. Accounts receivable increased, using $740 million of cash, driven by sales growth across regions. Days sales outstanding increased by two days. Total inventories increased, consuming $893 million of cash driven by increased safety stock levels to strengthen supply chain sufficiency amidst business growth and increased commodity costs. Days on hand increased by four days. Accounts payable, accrued and other net operating assets and liabilities increased, generating $1.0 billion of cash, driven by higher trade payables from an increase in supply chain activities and current year tax accruals in excess of estimated payments. This is partially offset by the payment of prior fiscal year-end incentive compensation and other salary-related accruals. Days payable outstanding increased by one day.
Investing Activities
Investing activities used $832 million of cash fiscal year to date primarily driven by capital expenditures.
Financing Activities
Financing activities used $3.5 billion of net cash fiscal year to date. We used $4.0 billion for treasury stock purchases and $2.3 billion for dividends. We generated $2.6 billion from net debt increases and $188 million from the exercise of stock options and other impacts.
As of September 30, 2022, our current liabilities exceeded current assets by $14.1 billion. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation S-K Item 10(e), the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measure. Management believes that these non-GAAP measures provide useful perspective on underlying business trends and provide a supplemental measure of period-to-period financial results. Disclosing these non-GAAP financial measures allows investors and management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance. Management uses these non-GAAP measures in making operating decisions, allocating financial resources and for business strategy purposes. Certain of these measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures do not represent a comprehensive basis of accounting. Therefore, our non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies.
Organic sales growth: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions and divestitures and foreign exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. This measure is used in assessing achievement of management goals for at-risk compensation.
Adjusted free cash flow: Adjusted free cash flow is defined as operating cash flow less capital spending and transitional tax payments resulting from the U.S. Tax Act beginning in 2019. Adjusted free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends, share repurchases, acquisitions and other discretionary investments.
Adjusted free cash flow productivity: Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. This measure is also used in assessing the achievement of management goals for at-risk compensation.
Core EPS: Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share excluding items that are not judged to be part of the Company's sustainable results or trends. For the three months ended September 30, 2022 and September 30, 2021, there were no adjustments to or reconciling items for diluted net earnings per share. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time. This measure is also used when evaluating senior management in determining their at-risk compensation.
Organic sales growth:
| Three Months Ended September 30, 2022 | Net Sales Growth | Foreign Exchange Impact | Acquisition & Divestiture Impact/Other (1) | Organic Sales Growth | |||||||||||||||||||
| Beauty | —% | 6% | (2)% | 4% | |||||||||||||||||||
| Grooming | (4)% | 8% | 1% | 5% | |||||||||||||||||||
| Health Care | 3% | 5% | —% | 8% | |||||||||||||||||||
| Fabric & Home Care | 1% | 6% | 1% | 8% | |||||||||||||||||||
| Baby, Feminine & Family Care | 1% | 5% | —% | 6% | |||||||||||||||||||
| Total Company | 1% | 6% | —% | 7% | |||||||||||||||||||
(1)Acquisitions & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.
Adjusted free cash flow (dollar amounts in millions):
| Three Months Ended September 30, 2022 | ||||||||||||||||||||
| Operating Cash Flow | Capital Spending | U.S. Tax Act Payments | Adjusted Free Cash Flow | |||||||||||||||||
| $4,070 | $(890) | $225 | $3,405 | |||||||||||||||||
Adjusted free cash flow productivity (dollar amounts in millions):
| Three Months Ended September 30, 2022 | ||||||||||||||
| Adjusted Free Cash Flow | Net Earnings | Adjusted Free Cash Flow Productivity | ||||||||||||
| $3,405 | $3,963 | 86% | ||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
There have been no material changes in the Company’s exposure to market risk since June 30, 2022. Additional information can be found in Note 9 - Risk Management Activities and Fair Value Measurements of the Consolidated Financial Statements.
| Item 4. | Controls and Procedures | ||||
Evaluation of Disclosure Controls and Procedures
The Company’s Chairman of the Board, President and Chief Executive Officer, Jon R. Moeller, and the Company’s Chief Financial Officer, Andre Schulten, performed an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Messrs. Moeller and Schulten have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including Messrs. Moeller and Schulten, to allow their timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings | ||||
The Company is subject, from time to time, to certain legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters and tax. In addition, SEC regulations require that we disclose certain environmental proceedings arising under Federal, State or local law when a governmental authority is a party and such proceeding involves potential monetary sanctions that the Company reasonably believes will exceed a certain threshold ($1 million or more).
There are no relevant matters to disclose under this Item for this period.
| Item 1A. | Risk Factors | ||||
For information on risk factors, please refer to "Risk Factors" in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended June 30, 2022.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) | Approximate Dollar Value of Shares That May Yet Be Purchased Under Our Share Repurchase Program | |||||||||||||||||||
| 7/01/2022 - 7/31/2022 | 6,223,741 | $144.15 | 4,865,898 | (3) | |||||||||||||||||||
| 8/01/2022 - 8/31/2022 | 11,296,995 | $146.06 | 11,296,995 | (3) | |||||||||||||||||||
| 9/01/2022 - 9/30/2022 | 12,025,751 | $137.21 | 12,025,751 | (3) | |||||||||||||||||||
| Total | 29,546,487 | $142.06 | 28,188,644 | ||||||||||||||||||||
(1)All transactions are reported on a trade date basis and were made in the open market with large financial institutions. This table excludes shares withheld from employees to satisfy tax withholding requirements on option exercises and other equity-based transactions. The Company administers cashless exercises through an independent third party and does not repurchase stock in connection with cashless exercises.
(2)Average price paid per share for open market transactions excludes commission.
(3)On October 19, 2022, the Company stated that in fiscal year 2023 the Company expects to reduce outstanding shares through direct share repurchases at a value of $6 to $8 billion, notwithstanding any purchases under the Company's compensation and benefit plans. Purchases may be made in the open market and/or private transactions and purchases may be increased, decreased or discontinued at any time without prior notice. The share repurchases are authorized pursuant to a resolution issued by the Company's Board of Directors and are expected to be financed by a combination of operating cash flows and issuance of debt.
| Item 6. | Exhibits | ||||
101.SCH (1) | Inline XBRL Taxonomy Extension Schema Document | |||||||
101.CAL (1) | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.DEF (1) | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
101.LAB (1) | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE (1) | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | |||||||
| + | Filed herewith | ||||
(1) | Pursuant to Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 or 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE PROCTER & GAMBLE COMPANY | ||||||||||||||
| October 19, 2022 | /s/ MATTHEW W. JANZARUK | |||||||||||||
| Date | (Matthew W. Janzaruk) | |||||||||||||
| Senior Vice President - Chief Accounting Officer (Principal Accounting Officer) | ||||||||||||||