PepsiCo, Inc. — Form 10-Q Summary
Business context and reporting period: PepsiCo sells beverages and convenient foods through seven divisions. This unaudited filing covers the 12 and 36 weeks ended September 3, 2022, compared with the corresponding 2021 periods. International results reflect monthly reporting. The interim statements were reviewed by KPMG; the filing says results for these periods are not necessarily indicative of full-year results.
Financial performance
| Metric | 12 weeks ended Sept. 3, 2022 | 36 weeks ended Sept. 3, 2022 |
|---|---|---|
| Net revenue | $21.971 billion; up 9% | $58.396 billion; up 8% |
| Organic revenue growth | 16% | 14% |
| Operating profit | $3.353 billion; up 6% | $10.697 billion; up 24% |
| Operating margin | 15.3%, down 0.3 percentage points | 18.3%, up 2.4 percentage points |
| Net income attributable to PepsiCo | $2.702 billion; up 21% | $8.392 billion; up 33% |
| Diluted EPS | $1.95; up 22% | $6.04; up 33% |
| Operating cash flow | $6.306 billion for 36 weeks, versus $6.634 billion | |
| Free cash flow | $3.978 billion for 36 weeks, versus $4.398 billion |
Gross profit was $11.663 billion for the 12 weeks and $31.240 billion for the 36 weeks. Gross margin was approximately 53.1% and 53.5%, respectively, versus approximately 53.5% and 54.0% in the prior-year periods. The filing attributes pressure mainly to higher commodity costs.
At September 3, 2022, cash and cash equivalents were $6.415 billion and short-term investments were $327 million. Current assets were $23.543 billion against current liabilities of $25.653 billion. Short- and long-term debt totaled $39.245 billion, compared with $40.334 billion at December 25, 2021. No commercial paper or borrowings under the revolving credit facilities were outstanding.
Material changes versus the prior comparable periods
- Revenue growth was driven predominantly by effective net pricing: 17 percentage points of quarterly organic growth and 14 points for the 36-week period. Organic volume was down 1% for the quarter and up 1% year to date.
- The 36-week operating-profit increase includes a $3.321 billion pre-tax gain from the sale of select juice brands. It was partly offset by $1.402 billion of Russia-Ukraine conflict charges and $475 million of brand portfolio impairment charges. Excluding items affecting comparability, operating profit was $9.395 billion versus $8.674 billion; core diluted EPS was $5.12, up 8% (11% on a constant-currency basis).
- Quarterly operating margin declined despite revenue growth, reflecting higher commodity costs and commodity-derivative mark-to-market losses. The 36-week margin improvement largely reflects the juice-sale gain and therefore is not a straightforward measure of underlying margin expansion.
- The reported tax rate fell to 14.9% for the quarter and 17.2% for the 36 weeks. A $198 million non-cash tax benefit from an IRS settlement affected both periods; the 36-week comparison also reflects the juice transaction and prior-year Tax Cuts and Jobs Act expense.
- Operating cash flow and free cash flow declined year over year, primarily due to unfavorable working-capital comparisons and higher net cash tax payments. Investing cash flow included $3.456 billion of juice-transaction proceeds; financing cash use included $4.586 billion of dividends and $1.156 billion of share repurchases.
Outlook, management commentary and risks
- The filing provides no clear full-year revenue or EPS guidance. Management expected transportation and commodity inflation to continue for the remainder of 2022 and noted that pricing may not fully offset cost increases without affecting volume, revenue or margins.
- PepsiCo expected approximately $7.7 billion of total shareholder returns in 2022: about $6.2 billion in dividends and $1.5 billion in repurchases. The annualized dividend was raised 7% to $4.60 per share. A share repurchase program authorizes up to $10 billion through February 2026.
- The expanded productivity plan is expected to generate approximately $3.15 billion of pre-tax charges through 2026, including about $2.4 billion in cash expenditures. Management expected approximately $200 million of charges and $75 million of cash expenditures for the remainder of 2022.
- The juice transaction brought approximately $3.5 billion in cash and a retained 39% interest in the Tropicana JV. Final purchase-price adjustments were expected in the fourth quarter of 2022. PepsiCo continues to distribute certain JV products in the United States.
- Russia-Ukraine developments remain a material uncertainty. Most Ukraine operations remained suspended; PepsiCo suspended sales of Pepsi-Cola and certain other global beverage brands, discretionary capital investment, and advertising and promotion in Russia, while continuing to sell other products there. The conflict has caused significant impairments and may lead to further asset losses, supply disruption, sanctions, currency volatility and cost increases.
- Other cited risks include COVID-19 effects, commodity and supply-chain inflation, foreign exchange, labor and transportation costs, climate and packaging regulation, changing retail channels, cybersecurity, and tax and regulatory matters. Management said it had not identified a material liquidity deficiency from the pandemic or conflict. It also believed pending litigation would not materially adversely affect financial condition, results or cash flows.
- Management reported effective disclosure controls. Ongoing ERP implementations materially affected internal-control processes, but the company said they had not adversely affected and were not expected to adversely affect internal control over financial reporting.
Most important facts for investors to verify
- How much underlying growth and profitability persist after removing the juice-sale gain, tax benefit, Russia-Ukraine charges, impairments and other comparability items.
- Whether pricing can continue to offset commodity, packaging, labor, transportation and other cost inflation without further volume or margin erosion.
- Further developments in Russia and Ukraine, including potential additional impairments, operating disruptions, sanctions and currency effects.
- Cash conversion and working-capital trends, alongside capital spending, dividends, repurchases and debt maturities.
- Completion and final purchase-price adjustments for the juice transaction, and the performance and value of PepsiCo’s retained Tropicana JV interest.
- Execution costs and expected savings from the productivity plan, plus any effects of ERP implementation on operations and controls.