PepsiCo, Inc. — Q1 2022 Form 10-Q
Business context and period: The filing covers the 12 weeks ended March 19, 2022, compared with the 12 weeks ended March 20, 2021. PepsiCo operates seven reportable divisions across beverages and convenient foods. International results include January and February 2022.
Financial performance
| Metric | Q1 2022 | Prior-year period |
|---|---|---|
| Net revenue | $16.2 billion, up 9% reported and 14% organic | $14.82 billion |
| Gross profit | $8.77 billion; gross margin about 54.1% | $8.15 billion; margin about 55.0% |
| Operating profit | $5.27 billion; operating margin 32.5% | $2.31 billion; margin 15.6% |
| Net income attributable to PepsiCo | $4.26 billion | $1.71 billion |
| Diluted EPS | $3.06 GAAP; $1.29 core, non-GAAP | $1.24 GAAP |
| Cash flow from operations | $(174) million | $(719) million |
| Free cash flow | $(693) million | $(1.19) billion |
| Cash and cash equivalents | $6.56 billion | $5.60 billion at Dec. 25, 2021 |
| Short- and long-term debt | $40.05 billion combined | $40.33 billion combined at Dec. 25, 2021 |
Q1 operating cash use reflected working-capital outflows, including receivables, inventory and payables. Investing cash flow was positive $2.96 billion, mainly from $3.46 billion in Juice Transaction proceeds. Financing cash use was $1.78 billion, including dividends, debt repayment and share repurchases.
Material changes and comparability
- PepsiCo sold Tropicana, Naked and certain other juice brands to PAI Partners for approximately $3.5 billion in cash and a 39% interest in the Tropicana JV. The sale generated a $3.32 billion pre-tax gain, or about $2.87 billion after tax ($2.06 per share), materially boosting reported operating profit, net income and EPS.
- Excluding specified comparability items, operating profit was $2.39 billion versus $2.26 billion, and core diluted EPS was $1.29 versus $1.21, up 6% reported and 7% on a constant-currency basis. These are non-GAAP measures.
- Organic revenue growth was driven by 3% organic volume growth and 10% effective net pricing. Foreign exchange reduced reported revenue growth by about 1 percentage point.
- Russia-Ukraine conflict charges totaled $241 million, and impairment charges on certain Russian juice and dairy brands totaled $241 million. The filing attributes a $0.17-per-share impact to conflict charges and $0.14 per share to the brand impairments.
- Commodity costs and other operating costs pressured divisional performance. Reported gross margin declined year over year despite higher revenue.
Outlook, risks and other notable items
- The filing does not provide a clear full-year revenue, earnings or EPS guidance figure in the supplied text. Management expects transportation and commodity-cost inflation to continue for the remainder of 2022 and says it may not be able to pass all cost increases to customers without affecting volume, revenue or margins.
- Management expects approximately $325 million of additional pre-tax charges and $275 million of cash expenditures for the 2019 Productivity Plan during the remainder of 2022. The expanded plan is expected to involve $3.15 billion in total pre-tax charges through 2026.
- PepsiCo announced a 7% increase in its annualized dividend to $4.60 per share, effective with the dividend expected in June 2022; it expected to return approximately $7.7 billion to shareholders in 2022. A $10 billion share-repurchase program runs through February 28, 2026.
- Management said available cash generation, financing sources and credit facilities should be adequate for operating, investing and financing needs, and reported no material liquidity deficiency from the Ukraine conflict or COVID-19 as of the filing. The company had $1.4 billion of commercial paper outstanding and a $2.9 billion mandatory transition-tax liability payable through 2026.
- Key uncertainties include the Ukraine conflict and related sanctions, possible further impairments, commodity and supply-chain inflation, foreign exchange volatility, COVID-19 effects, labor availability, changing consumer demand, regulation of products and packaging, and climate-related requirements. Russia and Ukraine represented 3% and 0.4% of revenue, respectively, in both comparative first-quarter periods.
- The interim financial statements were reviewed by KPMG, not audited. Management reported disclosure controls effective; ERP-system implementation materially affected internal control over financial reporting, but management said it had not adversely affected and was not expected to adversely affect those controls.
Investor verification priorities
- Separate the $3.32 billion Juice Transaction gain from recurring operating performance; compare GAAP results with the company’s reconciled non-GAAP measures.
- Assess whether pricing can offset continued commodity, freight, labor and other cost inflation without weakening volumes or margins.
- Track developments in Russia and Ukraine, including asset exposure, further impairments, sanctions, currency movements and operating restrictions.
- Monitor operating cash conversion and working capital, given negative operating and free cash flow in the quarter despite the transaction proceeds.
- Review debt maturities, commercial-paper access, the transition-tax payment schedule, and planned dividends and repurchases against cash generation.