Procter & Gamble Co. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended March 31, 2023, compared with the corresponding 2022 periods. The filing is for fiscal Q3 2023, although the request metadata references “2022 Q3.” The financial statements are unaudited.
Business context
P&G is a global consumer packaged-goods company selling branded products in approximately 180 countries and territories through retail, e-commerce, professional and other channels. Reportable segments are Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Key financial metrics
| Metric | Three months ended March 31, 2023 | Year-over-year change | Nine months ended March 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $20.068 billion | 4% | $61.453 billion | 1% |
| Operating income | $4.248 billion | 6% | $13.972 billion | (2%) |
| Net earnings | $3.424 billion | 2% | $11.346 billion | (3%) |
| Net earnings attributable to P&G | $3.397 billion | 1% | $11.269 billion | (4%) |
| Diluted EPS | $1.37 | 3% | $4.53 | (1%) |
| Gross margin | 48.2% | +150 bps | 47.7% | (60 bps) |
| Operating margin | 21.2% | +40 bps | 22.7% | (70 bps) |
| Net earnings margin | 17.1% | (30 bps) | 18.5% | (80 bps) |
| Operating cash flow | Not separately provided for the quarter | — | $11.507 billion | $(1.503) billion |
| Adjusted free cash flow | Not separately provided for the quarter | — | $9.404 billion | Not clearly provided for the comparable period |
- Quarterly sales growth reflected 10% higher pricing and 1% favorable mix, offset partly by 4% unfavorable foreign exchange and 3% lower unit volume. Organic sales increased 7%.
- Nine-month sales growth reflected 10% higher pricing and 1% favorable mix, offset by 6% unfavorable foreign exchange and 4% lower unit volume. Organic sales increased 7%.
- Quarterly SG&A increased 8% to $5.416 billion and reached 27.0% of sales, up 100 basis points. Nine-month SG&A increased 2% to $15.334 billion and was 25.0% of sales.
- Interest expense increased to $222 million for the quarter and $516 million year to date, primarily because of higher interest rates and increased short-term debt.
- Cash and cash equivalents were $7.596 billion at March 31, 2023, versus $7.214 billion at June 30, 2022.
- Debt due within one year was $13.717 billion and long-term debt was $22.874 billion at March 31, 2023; reported debt totaled approximately $36.6 billion before considering other debt classifications.
- Year-to-date capital expenditures were $2.328 billion, dividends were $6.710 billion, and treasury-stock purchases were $7.353 billion.
Material changes versus the prior comparable periods
- Quarterly performance improved despite lower volume: sales increased 4%, operating income increased 6%, and diluted EPS increased 3%.
- Year-to-date profitability weakened: operating income declined 2%, net earnings declined 3%, and diluted EPS declined 1%, primarily because higher pricing and productivity savings did not fully offset commodity, input, foreign-exchange and other cost pressures.
- Foreign exchange reduced net earnings by approximately $309 million in the quarter and approximately $1.1 billion year to date.
- Quarterly gross margin benefited from pricing and manufacturing productivity, while year-to-date gross margin declined because of commodity and input costs, unfavorable mix, foreign exchange and transportation costs.
- Working capital used cash year to date: receivables used $301 million and inventories used $503 million, with inventory days on hand increasing by four days.
- Segment results were strongest in Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. Year-to-date Grooming sales declined 4% and net earnings declined 6%; Beauty sales were unchanged and net earnings declined 2%.
- Goodwill increased to $40.718 billion, primarily from acquisitions and currency translation. The $14.1 billion Gillette indefinite-lived intangible asset remains particularly sensitive to impairment assumptions.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear updated full-year sales or EPS guidance figure.
- On April 21, 2023, P&G stated that it expected fiscal 2023 direct share repurchases of $7.4 billion to $8.0 billion, financed through operating cash flow and debt issuance. Repurchases may be changed or discontinued without notice.
- Management expects to fund short-term liquidity and operating needs largely through operating cash flow and notes strong short- and long-term debt ratings and access to commercial paper and bond markets.
- Key risks include commodity, labor, transportation and energy inflation; foreign-exchange volatility; pricing-related volume declines; supply-chain disruption; economic contraction; competition; changing consumer behavior; cybersecurity and technology risks; regulatory and tax changes; and the Russia-Ukraine War.
- P&G reduced its product portfolio in Russia, discontinued new capital investments, and suspended media, advertising and promotional activity there. Russia represented less than 2% of fiscal 2022 consolidated sales and less than 1% of net earnings; the Russian manufacturing assets had a net book value of approximately $200 million at March 31, 2023.
- Ukraine operations represented less than 1% of fiscal 2022 consolidated sales and net earnings. The company identified risks of facility damage, supply interruptions and potential asset impairments.
- Management stated that existing litigation and environmental matters are not expected to materially affect financial position, results of operations or cash flows. Tax audits could address uncertain tax positions with approximately $30 million of existing liabilities over the next 12 months.
- No material changes in market-risk exposure or internal controls were reported.
Investor verification priorities
- Verify whether pricing actions can stabilize organic sales while reversing the 4% year-to-date unit-volume decline.
- Monitor commodity, input, transportation and labor costs against pricing and productivity savings, particularly the year-to-date margin contraction.
- Assess the refinancing and liquidity impact of approximately $13.7 billion of debt due within one year and higher interest expense.
- Track cash conversion, inventory levels and the sustainability of dividends and planned $7.4 billion to $8.0 billion share repurchases.
- Review foreign-exchange exposure and developments in Russia and Ukraine, including potential asset impairments.
- Evaluate the sensitivity of the $14.1 billion Gillette indefinite-lived intangible asset to discount rates, growth assumptions, royalty rates and further business deterioration.