Procter & Gamble Co. 10-Q Summary
Reporting period: Three and six months ended December 31, 2022, representing fiscal 2023 second-quarter and year-to-date results. The filing was submitted January 19, 2023. P&G is a global branded consumer packaged goods company operating through Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Key financial metrics
| Metric | Three months ended Dec. 31, 2022 | Year-over-year change | Six months ended Dec. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $20.8 billion | (1)% | $41.4 billion | Flat |
| Operating income | $4.8 billion | (7)% | $9.7 billion | (5)% |
| Net earnings | $4.0 billion | (7)% | $7.9 billion | (5)% |
| Net earnings attributable to P&G | $3.9 billion | (7)% | $7.9 billion | (6)% |
| Diluted EPS | $1.59 | (4)% | $3.16 | (3)% |
| Operating margin | 23.0% | (170) bps | 23.5% | (120) bps |
| Gross margin | 47.5% | (160) bps | 47.5% | (160) bps |
Six-month organic sales increased 6%, excluding foreign exchange and acquisitions or divestitures. Pricing increased sales by 9%, while volume declined 4%, foreign exchange reduced sales by 6%, and mix contributed 1%. Foreign exchange reduced six-month net earnings by approximately $786 million and second-quarter net earnings by approximately $405 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was $7.6 billion, down from $9.8 billion in the prior-year period.
- Capital expenditures were $1.6 billion, producing adjusted free cash flow of $6.3 billion and adjusted free cash flow productivity of 79%.
- Cash and cash equivalents were $6.9 billion at December 31, 2022, compared with $7.2 billion at June 30, 2022.
- Current liabilities exceeded current assets by $16.9 billion. Current debt was $14.3 billion and long-term debt was $20.6 billion at December 31, 2022.
- Financing activities used $6.5 billion, including $6.0 billion of share repurchases and $4.5 billion of dividends. Net debt increases generated $3.6 billion.
- Management expects operating cash flow, debt-market access, strong debt ratings and available financial-institution arrangements to support short-term liquidity and refinancing needs.
Material changes versus the prior comparable period
- Sales performance reflected substantial pricing actions, but lower volumes and unfavorable foreign exchange offset the pricing benefit on reported sales.
- Gross margin contracted primarily because of higher commodity and input costs, unfavorable mix, transportation costs, capacity start-up costs and foreign exchange. Pricing and productivity savings partially offset these pressures.
- Second-quarter SG&A declined 1%, while SG&A as a percentage of sales increased 10 basis points. Six-month SG&A declined 2%, and its ratio to sales improved 40 basis points, mainly from lower marketing spending.
- Interest expense increased to $171 million in the quarter and $294 million year to date because of higher short-term debt and interest rates.
- Share count declined, partially offsetting the earnings decline in diluted EPS. P&G repurchased approximately 14.4 million shares during the quarter for $2.0 billion and reported a fiscal 2023 share-repurchase expectation of $6 billion to $8 billion.
Segment performance
| Segment | Six-month sales | Sales change | Six-month net earnings change |
|---|---|---|---|
| Beauty | $7.8 billion | (2)% | (1)% |
| Grooming | $3.3 billion | (7)% | (10)% |
| Health Care | $5.8 billion | 3% | 6% |
| Fabric & Home Care | $14.1 billion | 1% | 1% |
| Baby, Feminine & Family Care | $10.0 billion | Flat | (5)% |
Health Care and Fabric & Home Care delivered the strongest reported sales trends. Grooming was weakest, reflecting volume declines, unfavorable foreign exchange and unfavorable mix, particularly from Appliances. Segment results continued to experience cost inflation despite pricing actions.
Outlook, commentary and risks
- The filing does not provide a specific updated consolidated earnings or sales guidance range. Management reported that fiscal 2023 share repurchases are expected to total $6 billion to $8 billion.
- Management expects to fund liquidity needs largely through operating cash flow and continued access to commercial paper and bond markets.
- Principal risks include commodity, labor, transportation and energy inflation; supply-chain disruption; foreign exchange volatility; reduced consumer demand from pricing; competitive pressure; changing consumer habits; cyber and technology risks; regulatory and tax changes; and geopolitical instability.
- The Russia-Ukraine war has reduced P&G’s Russian product portfolio and halted new capital investment and media, advertising and promotional activity in Russia. Ukraine operations represented less than 1% of fiscal 2022 consolidated sales and earnings; Russia represented less than 2% of sales and less than 1% of earnings.
- Potential future effects include sanctions, operational interruptions, facility damage, asset impairments, working-capital write-downs and further currency devaluation.
- Gillette’s indefinite-lived intangible asset had an estimated fair-value cushion of approximately 5% and was identified as particularly susceptible to impairment from weaker growth, higher discount rates, lower royalty rates, currency devaluation or adverse macroeconomic conditions.
- Management states that existing litigation and environmental matters are not expected to materially affect financial position, results or cash flows. Tax audits are ongoing in approximately 40–50 jurisdictions; approximately $140 million of accrued uncertain tax positions could be resolved over the next 12 months.
Important facts for investors to verify
- Whether pricing actions can offset continued volume declines without further weakening market share or margins.
- The durability of organic sales growth and the extent to which reported results remain affected by foreign exchange.
- Commodity, transportation and labor-cost trends and the pace of productivity savings.
- Refinancing requirements associated with $14.3 billion of current debt and the effect of higher interest rates on interest expense.
- Progress toward the stated $6 billion to $8 billion fiscal 2023 share-repurchase objective and its funding mix.
- Potential impairment exposure related to Gillette and other acquired brands, particularly under adverse currency or macroeconomic scenarios.
- Developments in Russia and Ukraine, including sanctions, supply-chain constraints and possible asset impairments.