Procter & Gamble Co. — Fiscal Q1 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2022, P&G’s fiscal first quarter, compared with the three months ended September 30, 2021. P&G sells branded consumer packaged goods in approximately 180 countries and territories through five reportable segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $20.612 billion | $20.338 billion | Up 1% |
| Operating income | $4.939 billion | $5.023 billion | Down 2% |
| Net earnings | $3.963 billion | $4.126 billion | Down 4% |
| Net earnings attributable to P&G | $3.939 billion | $4.112 billion | Down 4% |
| Diluted EPS | $1.57 | $1.61 | Down 2% |
| Operating cash flow | $4.070 billion | $4.643 billion | Down $573 million |
| Adjusted free cash flow | $3.405 billion | Not clearly provided in filing text | 86% productivity in Q1 FY2022 |
Net sales growth reflected 9% higher pricing and 1% favorable mix, offset by a 6% foreign-exchange headwind and 3% lower unit volume. Organic sales increased 7% despite a 3% decline in organic volume.
Gross margin declined 160 basis points to 47.4% of sales. Operating margin declined 70 basis points to 24.0%, and net earnings margin declined 110 basis points to 19.2%. The gross-margin pressure primarily reflected higher commodity and input costs, unfavorable mix, transportation costs, product and packaging investments, and foreign exchange, partly offset by pricing and productivity savings.
At September 30, 2022, cash and cash equivalents were $6.710 billion. Current assets were $22.521 billion, compared with current liabilities of $36.618 billion. Debt due within one year was $11.717 billion and long-term debt was $21.286 billion. P&G stated that it expects to support short-term liquidity and operating needs primarily through operating cash flow and access to commercial paper and bond markets.
Material changes versus the prior comparable period
- Health Care sales increased 3% and net earnings increased 17%, led by Personal Health Care.
- Beauty sales were unchanged and net earnings increased 2%.
- Grooming sales decreased 4% and net earnings decreased 3%, primarily reflecting foreign exchange and unfavorable mix.
- Fabric & Home Care sales increased 1%, while net earnings decreased 2% as margin pressure offset sales growth.
- Baby, Feminine & Family Care sales increased 1%, while net earnings decreased 3% because of lower margins.
- Foreign exchange reduced net earnings by approximately $381 million.
- Accounts receivable increased $577 million and inventories increased $666 million from June 30, 2022, consuming cash. Inventory increases reflected higher safety-stock levels and commodity costs.
- Financing activities used $3.507 billion, including $4.000 billion of treasury-stock purchases and $2.255 billion of dividends, partly offset by net debt increases.
- Shareholders’ equity declined to $44.334 billion from $46.854 billion, primarily reflecting share repurchases, dividends, and accumulated foreign-currency losses.
Guidance, outlook, risks and unusual items
On October 19, 2022, P&G stated that it expected fiscal-year 2023 direct share repurchases of $6 billion to $8 billion, in addition to purchases under compensation and benefit plans. The filing does not provide a full fiscal-year sales, earnings, or EPS guidance range.
Management highlighted continuing exposure to inflation in commodities, transportation, labor and energy; foreign-exchange volatility; supply-chain disruption; market contraction and consumer trade-down; competitive activity; changing consumer demand; and the Russia-Ukraine War. P&G reduced its Russian product portfolio, discontinued new capital investments, and suspended media, advertising, and promotional activity in Russia beginning in March 2022. Ukraine and Russia represented less than 1% and less than 2% of fiscal 2022 consolidated net sales, respectively.
The Gillette indefinite-lived intangible asset had an estimated fair value cushion of approximately 5% at the prior-year impairment testing date. Management determined that no impairment triggering event had occurred by September 30, 2022, but identified foreign-currency devaluation and higher cost of capital as increased pressures. Annual impairment testing was scheduled for the quarter ending December 31, 2022.
Litigation and environmental matters were not expected by management and counsel to materially affect financial position, results of operations, or cash flows. Tax audits are ongoing across multiple jurisdictions; approximately $12 million of existing liabilities, including interest and penalties, could relate to audits potentially completed during the following 12 months.
The Inflation Reduction Act was not expected to have a material impact on the consolidated financial statements. The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing can continue to offset commodity, transportation, labor, and other inflationary costs without further reducing unit volume.
- The magnitude and duration of foreign-exchange pressure, including the reported $381 million quarterly net-earnings impact.
- Progress toward the announced $6 billion to $8 billion fiscal-year 2023 share-repurchase plan and its effect on leverage and liquidity.
- Inventory and receivables trends, working-capital requirements, and refinancing needs for the $11.717 billion of debt due within one year.
- Results of the December 31, 2022 annual impairment testing, particularly for the Gillette indefinite-lived intangible asset.
- Further operational, asset-impairment, sanctions, supply-chain, and market consequences from the Russia-Ukraine War.
- The filing’s non-GAAP measures, including organic sales growth and adjusted free cash flow, against reported GAAP results.