Purpose, Approach and Non-GAAP Measures
14 The Procter & Gamble Company
and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes. The MD&A is organized in the following sections:
•Economic Conditions and Uncertainties
•Cash Flow, Financial Condition and Liquidity
•Significant Accounting Policies and Estimates
Our organizational structure is comprised of Sector Business Units (SBUs), Enterprise Markets (EMs), Corporate Functions (CF) and Global Business Services (GBS).
The following provides additional detail on our reportable segments and the ten product categories and brand composition within each segment.
(Conditioner, Shampoo, Styling Aids, Head & Shoulders, Herbal Beauty
Care (Antiperspirant and Deodorant, Olay, Old Spice, Safeguard,
Razors, Pre- and Post-Shave Products, Braun, Gillette, Venus
(Toothbrushes, Toothpaste, Other Oral Care) Crest, Oral-B
Vitamins/Minerals/Supplements, Pain Relief, Other Pepto-Bismol, Vicks
(Fabric Enhancers, Laundry Additives, Ariel, Downy, Gain, Tide Fabric & Home Care 35%
Care, Dish Care, P&G Professional, Cascade, Dawn, Fairy,
Wipes, Taped Diapers and Pants) Luvs, Pampers Baby, Feminine &
(Adult Incontinence, Feminine Care) Always, Always Discreet, Family Care
Towels, Tissues, Toilet Paper) Bounty, Charmin, Puffs
(1) Percent of Net sales and Net earnings for the year ended June 30, 2022 (excluding results held in Corporate).
(2) The Grooming product category is comprised of the Shave Care and Appliances operating segments.
and analgesics behind our Vicks, Metamucil, Pepto-Bismol and Neurobion brands.
16 The Procter & Gamble Company
Charmin toilet paper brands. North America market shares are over 40% for Bounty and over 25% for Charmin.
Corporate Functions provides company-level strategy and portfolio analysis, corporate accounting, treasury, tax, external relations, governance, human resources, information technology and legal services.
Global Business Services provides scaled services in technology, process and data tools to enable the SBUs, the EMs and CF to better serve consumers and customers. The GBS organization is responsible for providing world-class services and solutions that drive value for P&G.
•Organic sales growth above market growth rates in the categories and geographies in which we compete;
•Core earnings per share (EPS) growth of mid-to-high single digits; and
•Adjusted free cash flow productivity of 90% or greater.
•Operating income decreased $0.2 billion, or 1% versus year ago to $17.8 billion, as the increase in net sales was more than offset by a decrease in operating margin.
•Cash flow from operating activities was $16.7 billion.
• Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was $13.8 billion.
• Adjusted free cash flow productivity, which is the ratio of adjusted free cash flow to net earnings, was 93%.
18 The Procter & Gamble Company
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.
COVID-19 Pandemic. Because we sell products that are essential to the daily lives of consumers, the pandemic has not had a materially negative impact to our consolidated net sales, net earnings and cash flows.
with Ukraine related assets held by other subsidiaries, account for less than 1% of net assets as of June 30, 2022.
For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part I, Item 1A of this Form 10-K.
geographic mix and foreign exchange impacts on sales outside the U.S.
For a detailed discussion of the fiscal 2021 year-over-year changes, please refer to the MD&A in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended June 30, 2021 .
20 The Procter & Gamble Company
Operating Costs Comparisons as a percentage of net sales; Years ended June 30
Gross margin decreased 380 basis points to 47.4% of net sales in fiscal 2022. The decrease in gross margin was due to:
•390 basis points of increased commodity costs,
These impacts were partially offset by a 180 basis-point increase due to higher pricing.
•Overhead costs as a percentage of net sales decreased 110 basis points due to the positive scale impacts of the net sales increase and productivity savings.
Productivity-driven cost savings delivered 70 basis points of benefit to SG&A as a percentage of net sales.
Operating margin decreased 140 basis points to 22.2% due to the decrease in gross margin partially offset by the decrease in SG&A as a percentage of net sales as discussed above.
•Interest income was $51 million in fiscal 2022, an increase of $6 million versus the prior year.
The effective tax rate decreased 70 basis points to 17.8% in 2022 due to:
•a 45 basis-point decrease from higher excess tax benefits of share-based compensation (a 200 basis-point benefit in the current year versus a 155 basis-point benefit in the prior year),
•a 30 basis-point decrease from discrete impacts related to uncertain tax positions (35 basis-point favorable impact in the current year versus a 5 basis-point favorable impact in the prior year), and
•a 15 basis-point decrease from higher current year deductions for foreign-derived intangible income versus prior year.
These decreases were partially offset by a 20 basis-point increase due to unfavorable geographic mix impacts of current year earnings.
exchange impacts reduced net earnings by approximately $274 million in fiscal 2022 due to a weakening of certain currencies against the U.S. dollar. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars.
Net earnings attributable to Procter & Gamble increased $0.4 billion, or 3%, to $14.7 billion.
(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.
22 The Procter & Gamble Company
Restructuring Program to Deliver Productivity and Cost Savings
The Company has historically had an ongoing restructuring program with annual spending in the range of $250 to $500 million. Savings generated from the Company's
restructuring program are difficult to estimate, given the nature of the activities, the timing of the execution and the degree of reinvestment. In fiscal 2022, the Company incurred before tax restructuring costs within the range of our historical annual ongoing level of $250 to $500 million.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and to readily access capital markets at competitive rates.
Net cash provided by operating activities $ 16,723 $ 18,371 Net cash provided/(used) by investing activities (4,424) (2,834) Net cash used in financing activities
•An increase in accounts receivable used $694 million of cash primarily due to sales growth. The number of days
sales outstanding increased approximately 1 day versus prior year.
Investment Securities. Investments provided net cash of $3 million in 2022 primarily from the sale of other investments and used cash of $55 million in 2021 primarily from the purchase of investment securities.
Treasury Purchases. Total share repurchases were $10.0 billion in 2022 and $11.0 billion in 2021.
Impact of Stock Options and Other. The exercise of stock options and other financing activities generated $2.0 billion and $1.6 billion of cash in 2022 and 2021, respectively.
On June 30, 2022, our short-term credit ratings were P-1 (Moody's) and A-1+ (Standard & Poor's), while our long-term credit ratings were Aa3 (Moody's) and AA- (Standard & Poor's), all with a stable outlook.
Guarantees and Other Off-Balance Sheet Arrangements
The following table provides information on the amount and payable date of our contractual commitments as of June 30, 2022.
(1)Represents the U.S. federal tax liability associated with the repatriation provisions of the U.S. Tax Act.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Company's Board of Directors.
28 The Procter & Gamble Company
governmental taxing authorities can be impacted by the local economic and fiscal environment.
basis over the average remaining service period of the employees expected to receive benefits.
30 The Procter & Gamble Company
Approximate Percent Change in Estimated Fair Value
See Note 4 to the Consolidated Financial Statements for additional discussion on goodwill and intangible asset impairment testing results.
Hedging and Derivative Financial Instruments
Our market risk exposures relative to interest rates, currency rates and commodity prices, as discussed below, have not changed materially versus the previous reporting period. In addition, we are not aware of any facts or circumstances that would significantly impact such exposures in the near term.
our investments in foreign operations. These currency interest rate swaps are designated as hedges of the Company's foreign net investments.
As of and during the years ended June 30, 2022, and June 30, 2021, we did not have any financial commodity hedging activity.
Measures Not Defined By U.S. GAAP
The following tables provide a numerical reconciliation of organic sales growth to reported net sales growth:
The following table provides a numerical reconciliation of adjusted free cash flow ($ millions):
(1) Adjustments to Operating Cash Flow include transitional tax payments resulting from the U.S. Tax Act of $225 in 2022 and 2021.
32 The Procter & Gamble Company
The Company's long-term target is to generate annual adjusted free cash flow productivity at or above 90 percent.
The following table provides a numerical reconciliation of adjusted free cash flow productivity ($ millions):
(1) Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
CHANGE IN CURRENT YEAR REPORTED (GAAP) VERSUS NON-GAAP (CORE)(1)
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