PepsiCo, Inc. — Q2 2022 Form 10-Q
Business context and period. PepsiCo reported results for the 12 and 24 weeks ended June 11, 2022, compared with the corresponding 2021 periods. The company operates across beverages and convenient foods in seven divisions. International results are reported on a monthly calendar basis. The interim financial statements are unaudited and should be read with the 2021 Form 10-K.
Key financial results
| Metric | 12 weeks ended June 11, 2022 | 24 weeks ended June 11, 2022 |
|---|---|---|
| Net revenue | $20.225 billion, up 5% | $36.425 billion, up 7% |
| Operating profit (GAAP) | $2.077 billion, down 34%; 10.3% margin versus 16.3% | $7.344 billion, up 35%; 20.2% margin versus 16.0% |
| Net income attributable to PepsiCo | $1.429 billion, down 39% | $5.690 billion, up 40% |
| Diluted EPS (GAAP) | $1.03, down 39% | $4.09, up 39% |
| Operating cash flow | Not separately presented for the 12-week period | $1.881 billion, versus $2.340 billion |
| Free cash flow (non-GAAP) | Not separately presented for the 12-week period | $604 million, versus $1.057 billion |
Underlying performance. Management’s adjusted “core” operating profit was $3.408 billion for the 12 weeks, up 8%, and $5.800 billion for the 24 weeks, up 7%. Core diluted EPS was $1.86 for the quarter, up 8%, and $3.15 for the half-year, up 7%; first-half growth was 9% on a constant-currency basis. These are non-GAAP measures and exclude specified unusual items.
For the 12 weeks, organic revenue growth was 13%, comprising 1% organic volume growth and 12% effective net pricing. For the 24 weeks, organic revenue growth was also 13%, comprising 2.5% volume growth and 11% effective net pricing. Foreign exchange reduced reported revenue growth by 3 percentage points in the quarter and 2 points for the 24 weeks.
Financial position and capital allocation
- At June 11, cash and cash equivalents were $5.405 billion and short-term investments were $287 million. Current liabilities were $27.223 billion.
- Short-term debt was $6.032 billion and long-term debt was $33.247 billion, totaling approximately $39.3 billion. Total debt was approximately $40.3 billion at December 25, 2021. The company had $2.8 billion of commercial paper outstanding and no borrowings under its revolving credit facilities.
- First-half financing uses included $2.997 billion of cash dividends, $699 million of share repurchases, $1.652 billion of long-term debt payments and $1.550 billion of debt redemptions.
- PepsiCo expects to return approximately $7.7 billion to shareholders in 2022: about $6.2 billion in dividends and $1.5 billion in share repurchases. It raised the annualized dividend 7% to $4.60 per share and authorized a $10 billion repurchase program through February 2026.
Material changes and unusual items
- The sale of Tropicana, Naked and other select juice brands to PAI Partners generated approximately $3.5 billion in cash and a $3.335 billion pre-tax gain for the 24 weeks. PepsiCo retained a 39% interest in the Tropicana joint venture. The gain materially boosted first-half GAAP operating profit and earnings; the divested businesses generated approximately $3 billion of 2021 revenue.
- Russia-Ukraine-related charges totaled $1.406 billion pre-tax for the 24 weeks, including $1.198 billion of intangible-asset impairments. These charges were a principal reason Europe reported an operating loss. Q2 charges were $1.165 billion.
- Brand portfolio impairment and related charges were $465 million for the 24 weeks, including charges tied to Bang Energy distribution rights and certain Latin American and Russian brands. PepsiCo decided to terminate its Bang Energy distribution agreement.
- Q2 GAAP operating profit fell despite revenue growth, largely reflecting Russia-Ukraine and brand impairment charges. First-half GAAP operating profit growth, conversely, primarily reflected the juice-sale gain. Higher commodity costs and other operating costs weighed on results across multiple divisions.
- A $131 million pre-tax pension settlement charge was recognized in the 24 weeks. First-half operating cash flow and free cash flow declined, with management citing unfavorable working-capital comparisons and higher net cash tax payments.
Outlook, commentary and risks
Management said transportation and commodity inflation had continued and was expected to persist through the remainder of 2022; passing cost increases through to customers could affect volume, revenue and margins. The filing does not provide a clear consolidated full-year revenue or EPS guidance figure in the supplied text. Management stated it believes operating cash generation, available financing and revolving facilities are adequate for operating, investment and financing needs, and reported no material liquidity deficiency from COVID-19 or the conflict as of the filing.
PepsiCo expects approximately $200 million of pre-tax productivity-plan charges and $175 million of cash expenditures during the remainder of 2022. The expanded plan is expected to total approximately $3.15 billion in pre-tax charges through 2026; $1.1 billion had been incurred through June 11, 2022.
Key risks include the ongoing Ukraine conflict, sanctions and possible further impairments; commodity, packaging, transportation and labor inflation; supply-chain disruption; foreign-exchange volatility; COVID-19 effects; changing consumer demand and retail channels; regulatory or tax changes affecting products and packaging; and potential credit-rating changes. Russia and Ukraine represented 4% and 0.2%, respectively, of consolidated revenue for the 12 weeks. The majority of PepsiCo’s operations in Ukraine remained suspended; it was in the process of suspending sales of Pepsi-Cola and certain other global beverage brands in Russia, while continuing to offer other products there.
The company reported effective disclosure controls. Ongoing ERP implementations materially affected internal control over financial reporting, but management said they had not adversely affected and were not expected to adversely affect those controls. KPMG’s interim review reported no material modifications needed for GAAP conformity; this was a review, not an audit opinion on the interim statements.
Important facts for investors to verify
- Assess earnings and margins excluding the $3.335 billion juice-sale gain and the Russia-Ukraine and brand impairment charges; reconcile management’s non-GAAP measures to GAAP.
- Monitor whether pricing can continue to offset inflation without weakening volumes, and track working capital and free cash flow conversion.
- Follow developments in Russia and Ukraine, including sales restrictions, sanctions, currency movements and potential additional asset impairments.
- Review debt maturities, commercial-paper access, variable-rate exposure and the company’s ability to fund dividends, repurchases and capital spending.
- Track the expected costs and benefits of the productivity plan and the impact of divestitures and Bang Energy distribution termination on ongoing revenue and profit.