filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
120K characters. Original on sec.gov · Markdown
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Unless otherwise noted, tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.
Our Critical Accounting Policies and Estimates
The critical accounting policies and estimates below should be read in conjunction with those outlined in our 2021 Form 10-K.
Total Marketplace Spending
We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year, as products are delivered, for the expected payout, which may occur after year end once reconciled and settled.
These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer and consumer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain advertising and other marketing activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax structure and transactions, including transfer pricing arrangements, available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.
Our Business Risks
This Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement. Such risks and uncertainties include, but are not limited
to: the risks associated with the deadly conflict in Ukraine; the impact of COVID-19; future demand for PepsiCo’s products; damage to PepsiCo’s reputation or brand image; product recalls or other issues or concerns with respect to product quality and safety; PepsiCo’s ability to compete effectively; PepsiCo’s ability to attract, develop and maintain a highly skilled and diverse workforce; water scarcity; changes in the retail landscape or in sales to any key customer; disruption of PepsiCo’s manufacturing operations or supply chain, including increased commodity, packaging, transportation, labor and other input costs; political or social conditions in the markets where PepsiCo’s products are made, manufactured, distributed or sold; PepsiCo’s ability to grow its business in developing and emerging markets; changes in economic conditions in the countries in which PepsiCo operates; future cyber incidents and other disruptions to our information systems; failure to successfully complete or manage strategic transactions; PepsiCo’s reliance on third-party service providers and enterprise-wide systems; climate change or measures to address climate change; strikes or work stoppages; failure to realize benefits from PepsiCo’s productivity initiatives; deterioration in estimates and underlying assumptions regarding future performance that can result in an impairment charge; fluctuations or other changes in exchange rates; any downgrade or potential downgrade of PepsiCo’s credit ratings; imposition or proposed imposition of new or increased taxes aimed at PepsiCo’s products; imposition of limitations on the marketing or sale of PepsiCo’s products; changes in laws and regulations related to the use or disposal of plastics or other packaging materials; failure to comply with personal data protection and privacy laws; increase in income tax rates, changes in income tax laws or disagreements with tax authorities; failure to adequately protect PepsiCo’s intellectual property rights or infringement on intellectual property rights of others; failure to comply with applicable laws and regulations; and potential liabilities and costs from litigation, claims, legal or regulatory proceedings, inquiries or investigations; and other risks and uncertainties including those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our 2021 Form 10-K and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” and “Item 1A. Risk Factors” of this Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
COVID-19
Our global operations continue to expose us to risks associated with the COVID-19 pandemic. Numerous measures have been implemented around the world to try to reduce the spread of the virus and these measures have impacted and will continue to impact us, our business partners and our customers. The COVID-19 pandemic, including these measures, may continue to result in changes in demand for our products, increases in employee and other operating costs or supply chain disruptions, any of which can impact our ability to operate our business. In addition, we may continue to experience business disruptions resulting from the temporary closures of our facilities or facilities of our business partners or the inability of a significant portion of our or our business partners’ workforce to work because of illness, absenteeism, quarantine, vaccine mandates, or travel or other governmental restrictions.
Even as governmental restrictions are relaxed and economies gradually, partially, or fully reopen in certain jurisdictions and markets, the ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, including changes in product and channel preferences that result in reduced sales or profit from the sale of our products. In addition, any reduced demand for our products or change in consumer purchasing and consumption patterns, as well as continued economic uncertainty, can adversely affect our customers’ and business partners’ financial condition, which has resulted and may continue to result in our recording additional charges for our inability to recover or collect any accounts receivable, owned or leased assets, including certain foodservice, vending and other equipment, or prepaid expenses.
While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to mitigate the negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by jurisdiction and market, including the duration and scope of the pandemic, the possible emergence and spread of new variants of the virus, the availability, administration and effectiveness of treatments and vaccines, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary.
Risks Associated with Commodities and Our Supply Chain
Many of the commodities used in the production and transportation of our products are purchased in the open market. The prices we pay for such items are subject to fluctuation, and we manage this risk through the use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, including swaps and futures. During the 12 and 36 weeks ended September 3, 2022, we continued to experience inflationary pressures on transportation and commodity costs, which we expect to continue for the remainder of 2022. A number of external factors, including the deadly conflict in Ukraine, the COVID-19 pandemic, adverse weather conditions, supply chain disruptions (including raw material shortages) and labor shortages, have impacted and may continue to impact transportation and commodity costs. When prices increase, we may or may not pass on such increases to our customers without suffering reduced volume, revenue, margins and operating results.
See Note 8 to our condensed consolidated financial statements in this Form 10-Q and Note 9 to our consolidated financial statements in our 2021 Form 10-K for further information on how we manage our exposure to commodity prices.
Risks Associated with Climate Change
Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased legal and regulatory requirements to reduce or mitigate the potential effects of climate change, including regulation of greenhouse gas emissions and potential carbon pricing programs. These new or increased legal or regulatory requirements could result in significant increased costs of compliance and additional investments in facilities and equipment. However, we are unable to predict the scope, nature and timing of any new or increased environmental laws and regulations and therefore cannot predict the ultimate impact of such laws and regulations on our business or financial results. We continue to monitor existing and proposed laws and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations.
Risks Associated with International Operations
In the 12 weeks ended September 3, 2022, our financial results outside of North America reflect the months of June, July and August. In the 36 weeks ended September 3, 2022, our financial results outside of North America reflect the months of January through August. In the 36 weeks ended September 3, 2022, our operations outside of the United States generated 43% of our consolidated net revenue, with Mexico, Russia, Canada, China, the United Kingdom and South Africa comprising approximately 22% of our consolidated net revenue. As a result, we are exposed to foreign exchange risk in the international markets in which our products are made, manufactured, distributed or sold. In each of the 12 and 36 weeks ended September 3, 2022, unfavorable foreign exchange reduced net revenue growth by 3 percentage points primarily due to declines in the Turkish lira, euro, Egyptian pound, South African rand and British
pound sterling, partially offset by an appreciation of the Russian ruble. Currency declines against the U.S. dollar which are not offset could adversely impact our future financial results.
In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Argentina, Brazil, China, Mexico, the Middle East, Russia, Turkey and Ukraine, and natural disasters, debt and credit issues and currency controls or fluctuations in certain of these international markets, continue to, and the threat or imposition of new or increased tariffs or sanctions or other impositions in or related to these international markets may, result in challenging operating environments. We continue to monitor the economic, operating and political environment in these markets closely, including risks of additional impairments or write-offs, and to identify actions to potentially mitigate any unfavorable impacts on our future results.
See Notes 1 and 3 to our condensed consolidated financial statements for a discussion of the Russia-Ukraine conflict charges, including impairment charges, recognized in the 12 and 36 weeks ended September 3, 2022.
See Note 8 to our condensed consolidated financial statements in this Form 10-Q for the fair values of our financial instruments as of September 3, 2022 and December 25, 2021 and Note 9 to our consolidated financial statements in our 2021 Form 10-K for a discussion of these items.
Risks Associated with the Deadly Conflict in Ukraine
In addition to the risks associated with international operations discussed above, we continue to face risks associated with the deadly conflict in Ukraine. The conflict has continued to result in worldwide geopolitical and macroeconomic uncertainty, and the majority of our operations in Ukraine remain suspended. We have suspended sales to our customers of Pepsi-Cola and certain of our other global beverage brands, our discretionary capital investments and advertising and promotional activities in Russia, which has negatively impacted and could continue to negatively impact our business. We continue to offer our other products in Russia. Our operations in Russia and Ukraine, respectively, accounted for 6% and 0.2% of our consolidated net revenue for the 12 weeks ended September 3, 2022, 4% and 0.3% of our consolidated net revenue for the 36 weeks ended September 3, 2022, 5% and 0.6% of our consolidated net revenue for the 12 weeks ended September 4, 2021 and 4% and 0.5% of our consolidated net revenue for both the 36 weeks ended September 4, 2021 and the year ended December 25, 2021. Our assets in Russia and Ukraine, respectively, were 5% and 0.1% of our consolidated assets as of September 3, 2022 and 5% and 0.3% of our consolidated assets as of December 25, 2021. Russia accounted for 30% and 35% of our accumulated currency translation adjustment loss as of September 3, 2022 and December 25, 2021, respectively.
The conflict has resulted and could continue to result in volatile commodity markets, supply chain disruptions, increased risk of cyber incidents or other disruptions to our information systems, reputational risks, heightened risks to employee safety, business disruptions (including labor shortages), significant volatility of the Russian ruble, limitations on access to credit markets, including working capital facilities, reduced availability and increased costs for transportation, energy, packaging, raw materials and other input costs, environmental, health and safety risks related to securing and maintaining facilities, additional sanctions, export controls and other legislation or regulations (including restrictions on the transfer of funds to and from Russia). The ongoing conflict could result in the temporary or permanent loss of assets or additional impairment charges. We cannot predict how and the extent to which the conflict will continue to affect our employees, customers, operations or business partners or our ability to achieve certain of our sustainability goals. The conflict has adversely affected and could continue to adversely affect demand for our products and our global business. See Notes 1 and 3 to our condensed consolidated financial statements for a discussion of the Russia-Ukraine conflict charges, including impairment charges, recognized in the 12 and 36 weeks ended September 3, 2022.
The extent of the impact of these tragic events on our business remains uncertain and will continue to depend on numerous evolving factors that we are not able to accurately predict, including the duration and scope of the conflict, regional instability and ongoing and additional financial and economic sanctions, export controls and other legislation imposed by governments. We will continue to monitor and assess the situation as circumstances evolve and to identify actions to potentially mitigate any unfavorable impacts on our future results.
Imposition of Taxes and Regulations on our Products
Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased taxes or regulations on the manufacture, distribution or sale of our products or their packaging, ingredients or substances contained in, or attributes of, our products or their packaging, commodities used in the production of our products or their packaging or the recyclability or recoverability of our packaging. These taxes and regulations vary in scope and form. For example, some taxes apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener (e.g., sugar). In addition, COVID-19 has resulted in increased regulatory focus on labeling in certain jurisdictions, including in Mexico which enacted product labeling requirements and limitations on the marketing of certain of our products as a result of ingredients or substances contained in such products. Further, some regulations apply to all products using certain types of packaging (e.g., plastic), while others are designed to increase the sustainability of packaging, encourage waste reduction and increased recycling rates or facilitate the waste management process or restrict the sale of products in certain packaging.
We sell a wide variety of beverages and convenient foods in more than 200 countries and territories and the profile of the products we sell, the amount of revenue attributable to such products and the type of packaging used vary by jurisdiction. Because of this, we cannot predict the scope or form potential taxes, regulations or other limitations on our products or their packaging may take, and therefore cannot predict the impact of such taxes, regulations or limitations on our financial results. In addition, taxes, regulations and limitations may impact us and our competitors differently. We continue to monitor existing and proposed taxes and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such taxes, regulations or limitations, including advocating alternative measures with respect to the imposition, form and scope of any such taxes, regulations or limitations.
Retail Landscape
Our industry continues to be affected by disruption of the retail landscape, including the rapid growth in sales through e-commerce websites and mobile commerce applications, including through subscription services, the integration of physical and digital operations among retailers and the international expansion of hard discounters. We have seen and expect to continue to see a further shift to e-commerce, online-to-offline and other online purchasing by consumers, including as a result of the COVID-19 pandemic. We continue to monitor changes in the retail landscape and seek to identify actions we may take to build our global e-commerce and digital capabilities, such as expanding our direct-to-consumer business, and distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results.
Cautionary statements included above and in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” in our 2021 Form 10-K should be considered when evaluating our trends and future results.
Results of Operations – Consolidated Review
Consolidated Results
Volume
Physical or unit volume is one of the key metrics management uses internally to make operating and strategic decisions, including the preparation of our annual operating plan and the evaluation of our business performance. We believe volume provides additional information to facilitate the comparison of our historical operating performance and underlying trends and provides additional transparency on how we evaluate our business because it measures demand for our products at the consumer level. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Financial Results – Volume” included in our 2021 Form 10-K for further information on volume. Beginning in the first quarter of 2022, unit volume growth adjusts for the impacts of acquisitions, divestitures and other structural changes. Further, unit volume growth will exclude the impact of an additional week of results every five or six years (53rd reporting week), where applicable, including in our fourth quarter 2022 financial results.
We reported substantially all of our international volume on a monthly calendar basis prior to the fourth quarter of 2021, and beginning in the fourth quarter of 2021, all of our international operations report on a monthly calendar basis. The 12 weeks ended September 3, 2022 include volume outside of North America for the months of June, July and August. The 36 weeks ended September 3, 2022 include volume outside of North America for the months of January through August.
Consolidated Net Revenue and Operating Profit
| 12 Weeks Ended | 36 Weeks Ended | ||||||||||||||||||||||||||||||||||
| 9/3/2022 | 9/4/2021 | Change | 9/3/2022 | 9/4/2021 | Change | ||||||||||||||||||||||||||||||
| Net revenue | $ | 21,971 | $ | 20,189 | 9 | % | $ | 58,396 | $ | 54,226 | 8 | % | |||||||||||||||||||||||
| Operating profit | $ | 3,353 | $ | 3,159 | 6 | % | $ | 10,697 | $ | 8,600 | 24 | % | |||||||||||||||||||||||
| Operating margin | 15.3 | % | 15.6 | % | (0.3) | 18.3 | % | 15.9 | % | 2.4 |
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.
12 Weeks
Operating profit increased 6% and operating margin declined 0.3 percentage points. Operating profit growth was primarily driven by net revenue growth and productivity savings, partially offset by a 42-percentage-point impact of higher commodity costs, as well as certain operating cost increases.
Higher mark-to-market losses on commodity derivatives in corporate unallocated expenses reduced operating profit growth by 4 percentage points.
The operating margin decline primarily reflects the impact of higher mark-to-market losses on commodity derivatives.
36 Weeks
Operating profit increased 24% and operating margin improved 2.4 percentage points. Operating profit growth was primarily driven by a 39-percentage-point impact of the gain associated with the Juice Transaction, partially offset by a 16-percentage-point impact of the charges associated with the Russia-Ukraine conflict and a 5.5-percentage-point impact of the Brand Portfolio Impairment Charges.
Operating profit growth was also driven by net revenue growth and productivity savings, partially offset by certain operating cost increases and a 36-percentage-point impact of higher commodity costs.
The operating margin improvement primarily reflects the impact of the gain associated with the Juice Transaction, partially offset by the charges associated with the Russia-Ukraine conflict and the Brand Portfolio Impairment Charges.
Juice Transaction
In the 36 weeks ended September 3, 2022, we sold our Tropicana, Naked and other select juice brands to PAI Partners, while retaining a 39% noncontrolling interest in the Tropicana JV, operating across North America and Europe. These juice businesses delivered approximately $3 billion in net revenue in 2021. In the United States, PepsiCo acts as the exclusive distributor for Tropicana JV’s portfolio of brands for small-format and foodservice customers with chilled direct-store-delivery. See Note 11 to our condensed consolidated financial statements for further information.
Results of Operations – Division Review
While our financial results in North America are reported on a 12-week basis, substantially all of our international operations reported on a monthly calendar basis prior to the fourth quarter of 2021. Beginning in the fourth quarter of 2021, all of our international operations reported on a monthly calendar basis. This change did not have a material impact on our condensed consolidated financial statements. For our international operations, the months of June, July and August are reflected in our results for the 12 weeks ended September 3, 2022, and the months of January through August are reflected in our results for the 36 weeks ended September 3, 2022.
In the discussions of net revenue and operating profit below, “effective net pricing” reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries and “net pricing” reflects the year-over-year combined impact of list price changes, weight changes per package, discounts and allowances.
See “Our Business Risks,” “Non-GAAP Measures” and “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding measures not in accordance with GAAP.
Net Revenue and Organic Revenue Growth
Organic revenue growth is a non-GAAP financial measure. For further information on this measure, see “Non-GAAP Measures.”
| 12 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||
| Impact of | Impact of | ||||||||||||||||||||||||||||||||||||||||
| Reported % Change, GAAP Measure | Foreign exchange translation | Acquisitions and divestitures | Organic % Change, Non-GAAP Measure**(a)** | Organic volume**(b)** | Effective net pricing | ||||||||||||||||||||||||||||||||||||
| FLNA | 20 | % | — | — | 20 | % | — | 20 | |||||||||||||||||||||||||||||||||
| QFNA | 15 | % | — | — | 16 | % | (4) | 20 | |||||||||||||||||||||||||||||||||
| PBNA | 4 | % | — | 9 | 13 | % | 1 | 12 | |||||||||||||||||||||||||||||||||
| LatAm | 20 | % | 2 | 1 | 22 | % | 5 | 17 | |||||||||||||||||||||||||||||||||
| Europe | 1 | % | 8 | 5.5 | 15 | % | (10) | 24 | |||||||||||||||||||||||||||||||||
| AMESA | 4 | % | 14 | — | 17 | % | (1) | 19 | |||||||||||||||||||||||||||||||||
| APAC | 3 | % | 5 | — | 8 | % | 3 | 5 | |||||||||||||||||||||||||||||||||
| Total | 9 | % | 3 | 4 | 16 | % | (1) | 17 |
| 36 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of | Impact of | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported % Change, GAAP Measure | Foreign exchange translation | Acquisitions and divestitures | Organic % Change, Non-GAAP Measure**(a)** | Organic volume**(b)** | Effective net pricing | ||||||||||||||||||||||||||||||||||||||||||||||||
| FLNA | 16 | % | — | — | 16 | % | 0.5 | 16 | |||||||||||||||||||||||||||||||||||||||||||||
| QFNA | 14 | % | — | — | 15 | % | (1) | 16 | |||||||||||||||||||||||||||||||||||||||||||||
| PBNA | 3 | % | — | 8 | 11 | % | 1.5 | 10 | |||||||||||||||||||||||||||||||||||||||||||||
| LatAm | 21 | % | 1 | 1 | 22 | % | 3.5 | 19 | |||||||||||||||||||||||||||||||||||||||||||||
| Europe | (3) | % | 10 | 4.5 | 12 | % | (7) | 18 | |||||||||||||||||||||||||||||||||||||||||||||
| AMESA | 7 | % | 9 | 4 | 20 | % | 7 | 13 | |||||||||||||||||||||||||||||||||||||||||||||
| APAC | 5 | % | 3 | 2.5 | 10 | % | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 8 | % | 3 | 4 | 14 | % | 1 | 14 |
(a)Amounts may not sum due to rounding.
(b)Excludes the impact of acquisitions, divestitures and other structural changes. In certain instances, the impact of organic volume growth on net revenue growth differs from the unit volume growth disclosed in the following divisional discussions due to the impacts of product mix, nonconsolidated joint venture volume, and, for our franchise-owned beverage businesses, temporary timing differences between bottler case sales and concentrate shipments and equivalents (CSE). We report net revenue from our franchise-owned beverage businesses based on CSE. The volume sold by our nonconsolidated joint ventures has no direct impact on our net revenue.
Operating Profit, Operating Profit Adjusted for Items Affecting Comparability and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
Operating profit adjusted for items affecting comparability and operating profit growth adjusted for items affecting comparability on a constant currency basis are both non-GAAP financial measures. For further information on these measures, see “Non-GAAP Measures” and “Items Affecting Comparability.”
Operating Profit and Operating Profit Adjusted for Items Affecting Comparability
| 12 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability**(a)** | |||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure**(b)** | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Gain associated with the Juice Transaction | Russia-Ukraine conflict charges | Brand Portfolio Impairment Charges | Core, Non-GAAP Measure**(b)** | ||||||||||||||||||||||||||||||||||||||||
| FLNA | $ | 1,588 | $ | — | $ | 4 | $ | — | $ | — | $ | — | $ | — | $ | 1,592 | |||||||||||||||||||||||||||||||
| QFNA | 122 | — | 1 | — | — | — | — | 123 | |||||||||||||||||||||||||||||||||||||||
| PBNA | 784 | — | 4 | 3 | 8 | — | 9 | 808 | |||||||||||||||||||||||||||||||||||||||
| LatAm | 463 | — | 3 | — | — | — | — | 466 | |||||||||||||||||||||||||||||||||||||||
| Europe | 564 | — | 21 | — | 6 | (4) | 1 | 588 | |||||||||||||||||||||||||||||||||||||||
| AMESA | 268 | — | — | 2 | — | — | — | 270 | |||||||||||||||||||||||||||||||||||||||
| APAC | 199 | — | 4 | — | — | — | — | 203 | |||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | (635) | 166 | 14 | — | — | — | — | (455) | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,353 | $ | 166 | $ | 51 | $ | 5 | $ | 14 | $ | (4) | $ | 10 | $ | 3,595 |
| 12 Weeks Ended 9/4/2021 | |||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability(a) | |||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure(b) | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges(c) | Core, Non-GAAP Measure(b) | |||||||||||||||||||||||||||||||||||||
| FLNA | $ | 1,357 | $ | — | $ | 2 | $ | — | $ | 1,359 | |||||||||||||||||||||||||||||||
| QFNA | 106 | — | 1 | — | 107 | ||||||||||||||||||||||||||||||||||||
| PBNA | 773 | — | 3 | — | 776 | ||||||||||||||||||||||||||||||||||||
| LatAm | 393 | — | 14 | — | 407 | ||||||||||||||||||||||||||||||||||||
| Europe | 439 | — | 20 | — | 459 | ||||||||||||||||||||||||||||||||||||
| AMESA | 312 | — | 5 | 1 | 318 | ||||||||||||||||||||||||||||||||||||
| APAC | 201 | — | 1 | — | 202 | ||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | (422) | 34 | 5 | (4) | (387) | ||||||||||||||||||||||||||||||||||||
| Total | $ | 3,159 | $ | 34 | $ | 51 | $ | (3) | $ | 3,241 |
| 36 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability**(a)** | |||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure**(b)** | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Gain associated with the Juice Transaction | Russia-Ukraine conflict charges | Brand Portfolio Impairment Charges | Core, Non-GAAP Measure**(b)** | ||||||||||||||||||||||||||||||||||||||||
| FLNA | $ | 4,332 | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | — | $ | 4,342 | |||||||||||||||||||||||||||||||
| QFNA | 416 | — | 1 | — | — | — | — | 417 | |||||||||||||||||||||||||||||||||||||||
| PBNA | 4,869 | — | 9 | 42 | (3,029) | — | 150 | 2,041 | |||||||||||||||||||||||||||||||||||||||
| LatAm | 1,206 | — | 17 | — | — | — | 83 | 1,306 | |||||||||||||||||||||||||||||||||||||||
| Europe | (369) | — | 40 | 13 | (292) | 1,402 | 242 | 1,036 | |||||||||||||||||||||||||||||||||||||||
| AMESA | 738 | — | 5 | 2 | — | — | — | 745 | |||||||||||||||||||||||||||||||||||||||
| APAC | 620 | — | 8 | — | — | — | — | 628 | |||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | (1,115) | (44) | 33 | 6 | — | — | — | (1,120) | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 10,697 | $ | (44) | $ | 123 | $ | 63 | $ | (3,321) | $ | 1,402 | $ | 475 | $ | 9,395 |
| 36 Weeks Ended 9/4/2021 | |||||||||||||||||||||||||||||
| Items Affecting Comparability(a) | |||||||||||||||||||||||||||||
| Reported, GAAP Measure(b) | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges(c) | Core, Non-GAAP Measure**(b)** | |||||||||||||||||||||||||
| FLNA | $ | 3,979 | $ | — | $ | 20 | $ | 2 | $ | 4,001 | |||||||||||||||||||
| QFNA | 384 | — | 1 | — | 385 | ||||||||||||||||||||||||
| PBNA | 1,948 | — | 8 | 2 | 1,958 | ||||||||||||||||||||||||
| LatAm | 967 | — | 22 | — | 989 | ||||||||||||||||||||||||
| Europe | 975 | — | 46 | — | 1,021 | ||||||||||||||||||||||||
| AMESA | 706 | — | 9 | 8 | 723 | ||||||||||||||||||||||||
| APAC | 601 | — | 2 | 3 | 606 | ||||||||||||||||||||||||
| Corporate unallocated expenses | (960) | (61) | 15 | (3) | (1,009) | ||||||||||||||||||||||||
| Total | $ | 8,600 | $ | (61) | $ | 123 | $ | 12 | $ | 8,674 |
(a)See “Items Affecting Comparability.”
(b)Includes the charges taken as a result of the COVID-19 pandemic. See Note 1 to our condensed consolidated financial statements for further information.
(c)The income amounts primarily relate to the change in the fair value of contingent consideration associated with our acquisition of Rockstar.
Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
| 12 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of Items Affecting Comparability**(a)** | Impact of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported % Change, GAAP Measure | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Gain associated with the Juice Transaction | Russia-Ukraine conflict charges | Brand Portfolio Impairment Charges | Core % Change, Non-GAAP Measure**(b)** | Foreign exchange translation | Core Constant Currency % Change, Non-GAAP Measure**(b)** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| FLNA | 17 | % | — | — | — | — | — | — | 17 | % | — | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| QFNA | 15 | % | — | — | — | — | — | — | 15 | % | — | 15 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| PBNA | 1 | % | — | — | — | 1 | — | 1 | 4 | % | — | 4 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| LatAm | 18 | % | — | (3) | — | — | — | — | 15 | % | 2 | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Europe | 28 | % | — | — | — | — | — | — | 28 | % | 10 | 38 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| AMESA | (14) | % | — | (1) | — | — | — | — | (15) | % | 10 | (5) | % | ||||||||||||||||||||||||||||||||||||||||||||||
| APAC | (1) | % | — | 2 | — | — | — | — | 1 | % | 5 | 6 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | 50 | % | (30) | (2) | (1) | — | — | — | 17 | % | — | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | 6 | % | 4 | — | — | — | — | — | 11 | % | 3 | 14 | % |
| 36 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of Items Affecting Comparability**(a)** | Impact of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported % Change, GAAP Measure | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Gain associated with the Juice Transaction | Russia-Ukraine conflict charges | Brand Portfolio Impairment Charges | Core % Change, Non-GAAP Measure**(b)** | Foreign exchange translation | Core Constant Currency % Change, Non-GAAP Measure**(b)** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FLNA | 9 | % | — | — | — | — | — | — | 9 | % | — | 9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| QFNA | 8 | % | — | — | — | — | — | — | 8 | % | — | 8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| PBNA | 150 | % | — | — | 2 | (156) | — | 8 | 4 | % | — | 4.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| LatAm | 25 | % | — | — | — | — | — | 8 | 32 | % | 1 | 33 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | (138) | % | — | (1) | 1 | (30) | 144 | 25 | 1 | % | 10 | 11 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| AMESA | 5 | % | — | (1) | (1) | — | — | — | 3 | % | 7 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| APAC | 3 | % | — | 1 | — | — | — | — | 4 | % | 3 | 7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | 16 | % | (2) | (2) | (1) | — | — | — | 11 | % | — | 11 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 24 | % | — | — | 1 | (39) | 16 | 5.5 | 8 | % | 2 | 11 | % |
(a)See “Items Affecting Comparability” for further information.
(b)Amounts may not sum due to rounding.
FLNA
12 Weeks
Net revenue grew 20%, primarily driven by effective net pricing.
Unit volume declined 2%, primarily reflecting a double-digit decline in our Sabra joint venture products and a mid-single-digit decline in variety packs, partially offset by low-single-digit growth in trademark Doritos and Cheetos and double-digit growth in trademark Popcorners.
Operating profit increased 17%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by certain operating cost increases, including strategic initiatives, and a 20-percentage-point impact of higher commodity costs, primarily cooking oil, potatoes and corn.
36 Weeks
Net revenue grew 16%, primarily driven by effective net pricing.
Unit volume declined 1%, primarily reflecting a double-digit decline in our Sabra joint venture products and a mid-single-digit decline in trademark Tostitos, partially offset by low-single-digit growth in trademark Doritos and double-digit growth in trademark Popcorners.
Operating profit increased 9%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by certain operating cost increases, including strategic initiatives, and a 16-percentage-point impact of higher commodity costs, primarily cooking oil, potatoes and packaging materials.
QFNA
12 Weeks
Net revenue grew 15%, primarily driven by effective net pricing, partially offset by a decrease in organic volume.
Unit volume declined 4%, primarily reflecting a mid-single-digit decline in oatmeal, a double-digit decline in pancake syrups and mixes, a high-single-digit decline in bars and a mid-single-digit decline in rice/pasta sides, partially offset by double-digit growth in lite snacks.
Operating profit grew 15%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by a 50-percentage-point impact of higher commodity costs, primarily grains and packaging materials, certain operating cost increases, including incremental transportation costs, the organic volume decline and higher advertising and marketing expenses.
36 Weeks
Net revenue grew 14%, primarily driven by effective net pricing, partially offset by a decrease in organic volume.
Unit volume declined 1%, primarily reflecting a double-digit decline in pancake syrups and mixes and a low-single-digit decline in oatmeal, partially offset by double-digit growth in rice/pasta sides.
Operating profit grew 8%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by a 31-percentage-point impact of higher commodity costs, primarily grains and packaging materials, certain operating cost increases, including incremental transportation costs, a 4-percentage-point impact of less favorable settlements of promotional spending accruals compared to the prior year and the organic volume decline.
PBNA
12 Weeks
Net revenue increased 4%, primarily driven by effective net pricing and an increase in organic volume. The Juice Transaction reduced net revenue growth by 9 percentage points.
Unit volume increased 1%, driven by a 4% increase in our non-carbonated beverage (NCB) volume, partially offset by a 2% decrease in carbonated soft drink (CSD) volume. The NCB volume increase primarily reflected a double-digit increase in Gatorade sports drinks and a high-single-digit increase in our juice and juice drinks portfolio (adjusted for the impact of the Juice Transaction), partially offset by a double-digit decrease in our energy portfolio and a low-single-digit decrease in our overall water portfolio.
Operating profit increased 1%, primarily reflecting the net revenue growth and productivity savings. These impacts were partially offset by certain operating cost increases, including incremental information technology and transportation costs, and a 40-percentage-point impact of higher commodity costs, primarily aluminum and resin. Additionally, operating profit growth was reduced by a 12-percentage-point impact of the loss of net revenue due to the Juice Transaction.
36 Weeks
Net revenue increased 3%, primarily driven by effective net pricing and an increase in organic volume. The Juice Transaction reduced net revenue growth by 8 percentage points.
Unit volume increased 1%, driven by a 4% increase in NCB volume, partially offset by a 1.5% decrease in CSD volume. The NCB volume increase primarily reflected a high-single-digit increase in Gatorade sports drinks and a low-single-digit increase in our overall water portfolio.
Operating profit increased 150%, primarily reflecting a 156-percentage-point impact of the gain of $3.0 billion associated with the Juice Transaction, partially offset by a 2-percentage-point impact of related transaction costs of $42 million. Operating profit growth was also driven by the net revenue growth and productivity savings, partially offset by certain operating cost increases, including incremental transportation and information technology costs, and a 39-percentage-point impact of higher commodity costs, primarily aluminum and resin. A current-year gain associated with the sale of an asset contributed 8 percentage points to operating profit growth. Additionally, operating profit growth was reduced by an 11-percentage-point impact of the loss of net revenue due to the Juice Transaction and a 3-percentage-point impact of certain costs associated with remediating a service disruption from a third-party payroll service provider.
As a result of our decision to terminate the agreement with Vital to distribute Bang energy drinks, we recorded impairment and other related charges which reduced operating profit growth by 8 percentage points.
LatAm
12 Weeks
Net revenue increased 20%, primarily reflecting effective net pricing and organic volume growth.
Convenient foods unit volume grew 3%, primarily reflecting mid-single-digit growth in Mexico, partially offset by a mid-single-digit decline in Brazil.
Beverage unit volume grew 7%, primarily reflecting high-single-digit growth in Mexico and double-digit growth in Argentina. Additionally, Brazil experienced mid-single-digit growth and Guatemala experienced low-single-digit growth.
Operating profit increased 18%, primarily reflecting the net revenue growth, productivity savings and a 3-percentage-point favorable impact of lower charges taken as a result of the COVID-19 pandemic. These impacts were partially offset by certain operating cost increases, a 39-percentage-point impact of higher commodity costs, primarily cooking oil and packaging materials, a 13-percentage-point unfavorable impact of certain indirect tax credits in Brazil compared to the prior year and higher advertising and marketing expenses.
36 Weeks
Net revenue increased 21%, primarily reflecting effective net pricing and organic volume growth.
Convenient foods unit volume grew 5%, primarily reflecting mid-single-digit growth in Mexico, partially offset by a low-single-digit decline in Brazil.
Beverage unit volume grew 8%, primarily reflecting double-digit growth in Argentina. Additionally, Mexico and Brazil experienced high-single-digit growth and Guatemala and Chile experienced mid-single-digit growth.
Operating profit increased 25%, primarily reflecting the net revenue growth, productivity savings and a 4-percentage-point favorable impact of lower charges taken as a result of the COVID-19 pandemic. These impacts were partially offset by certain operating cost increases and a 40-percentage-point impact of higher commodity costs, primarily cooking oil and packaging materials. Additionally, impairment and other charges associated with our decision to sell or discontinue certain non-strategic brands reduced operating profit growth by 8 percentage points.
Europe
12 Weeks
Net revenue increased 1%, reflecting effective net pricing, partially offset by an organic volume decline, an 8-percentage-point impact of unfavorable foreign exchange and a 5-percentage-point impact of the Juice Transaction.
Convenient foods unit volume declined 5%, primarily reflecting double-digit declines in Russia and Ukraine, partially offset by double-digit growth in Spain, mid-single-digit growth in France and low-single-digit growth in Turkey. Additionally, the Netherlands experienced a low-single-digit decline and the United Kingdom experienced a mid-single-digit decline.
Beverage unit volume declined 8%, primarily reflecting double-digit declines in Russia, Ukraine and Turkey, partially offset by low-single-digit growth in the United Kingdom and France. Additionally, Germany experienced a mid-single-digit decline.
Operating profit increased 28%, primarily reflecting the effective net pricing, productivity savings and lower advertising and marketing expenses. These impacts were partially offset by a 72-percentage-point impact of higher commodity costs, primarily packaging materials, potatoes and raw milk, certain operating cost increases and the organic volume decline. The write-down of certain inventory items and related charges reduced operating profit growth by 8 percentage points. Additionally, adjustments of certain accruals in the United Kingdom contributed 7 percentage points to operating profit growth. Unfavorable foreign exchange reduced operating profit growth by 10 percentage points.
36 Weeks
Net revenue decreased 3%, reflecting a 10-percentage-point impact of unfavorable foreign exchange, an organic volume decline and a 4-percentage-point unfavorable impact of the Juice Transaction, partially offset by effective net pricing.
Convenient foods unit volume declined 4%, primarily reflecting double-digit declines in Russia and Ukraine and a high-single-digit decline in Poland, partially offset by mid-single-digit growth in Turkey. Additionally, the United Kingdom, France and the Netherlands each experienced a low-single-digit decline.
Beverage unit volume declined 6%, primarily reflecting double-digit declines in Russia, Ukraine and Germany, partially offset by low-single-digit growth in France and the United Kingdom. Additionally, Turkey experienced a mid-single-digit decline.
Operating profit decreased 138%, primarily reflecting a 144-percentage-point unfavorable impact of charges associated with the Russia-Ukraine conflict and a 25-percentage-point unfavorable impact of impairment of intangible assets related to the discontinuation or repositioning of certain juice and dairy brands in Russia, partially offset by a 30-percentage-point favorable impact of the gain associated with the Juice Transaction. Operating profit performance was also negatively impacted by a 74-percentage-point impact of higher commodity costs, primarily packaging materials, raw milk and potatoes, certain operating cost increases, the organic volume decline, a 4.5-percentage-point impact of payments to employees for a change in pension benefits and a 4-percentage-point impact of less favorable settlements of promotional spending accruals compared to the prior year. These impacts were partially offset by effective net pricing, productivity savings and lower advertising and marketing expenses. Unfavorable foreign exchange negatively impacted operating profit performance by 10 percentage points.
AMESA
12 Weeks
Net revenue increased 4%, primarily reflecting effective net pricing, partially offset by a net decline in organic volume. Unfavorable foreign exchange reduced net revenue growth by 14 percentage points.
Convenient foods unit volume declined 2%, primarily reflecting a high-single-digit decline in South Africa, partially offset by double-digit growth in the Middle East and Pakistan and mid-single-digit growth in India.
Beverage unit volume grew 11%, primarily reflecting double-digit growth in India. Additionally, the Middle East experienced high-single-digit growth, Pakistan experienced low-single-digit growth and Nigeria experienced mid-single-digit growth.
Operating profit declined 14%, primarily reflecting a 62-percentage-point impact of higher commodity costs, primarily grains and packaging materials, certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by the effective net pricing and productivity savings. Unfavorable foreign exchange negatively impacted operating profit performance by 10 percentage points.
36 Weeks
Net revenue increased 7%, primarily reflecting effective net pricing and organic volume growth, partially offset by a 4-percentage-point unfavorable impact of an extra month of net revenue in 2021 as we aligned Pioneer Foods’ reporting calendar with that of our AMESA division. Unfavorable foreign exchange reduced net revenue growth by 9 percentage points.
Convenient foods unit volume grew 5%, primarily reflecting double-digit growth in the Middle East, India and Pakistan. Additionally, South Africa grew slightly.
Beverage unit volume grew 17%, primarily reflecting double-digit growth in India. Additionally, the Middle East and Pakistan each experienced double-digit growth and Nigeria experienced low-single-digit growth.
Operating profit increased 5%, primarily reflecting the net revenue growth and productivity savings. These impacts were partially offset by a 53-percentage-point impact of higher commodity costs, primarily packaging materials and cooking oil, certain operating cost increases and higher advertising and marketing expenses. Unfavorable foreign exchange reduced operating profit growth by 7 percentage points.
APAC
12 Weeks
Net revenue increased 3%, primarily reflecting effective net pricing and organic volume growth. Unfavorable foreign exchange reduced net revenue growth by 5 percentage points.
Convenient foods unit volume grew 3%, primarily reflecting mid-single-digit growth in China, partially offset by a low-single-digit decline in Thailand, a slight decline in Australia and a mid-single-digit decline in Taiwan.
Beverage unit volume grew 9%, primarily reflecting double-digit growth in Vietnam and the Philippines. Additionally, China experienced low-single-digit growth and Thailand experienced mid-single-digit growth.
Operating profit decreased 1%, primarily reflecting a 24-percentage-point impact of higher commodity costs, primarily cooking oil and potatoes, certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by the net revenue growth and productivity savings. Unfavorable foreign exchange negatively impacted operating profit performance by 5 percentage points.
36 Weeks
Net revenue increased 5%, primarily reflecting effective net pricing and organic volume growth, partially offset by a 2.5-percentage-point unfavorable impact of an extra month of net revenue in 2021 as we aligned Be & Cheery’s reporting calendar with that of our APAC division. Unfavorable foreign exchange reduced net revenue growth by 3 percentage points.
Convenient foods unit volume grew 4%, primarily reflecting mid-single-digit growth in China and Australia and high-single-digit growth in Thailand, partially offset by a low-single-digit decline in Taiwan.
Beverage unit volume grew 9%, primarily reflecting double-digit growth in Vietnam and the Philippines. Additionally, China experienced high-single-digit growth and Thailand experienced mid-single-digit growth.
Operating profit increased 3%, primarily reflecting the net revenue growth and productivity savings, partially offset by a 16-percentage-point impact of higher commodity costs, primarily cooking oil and potatoes, certain operating cost increases, higher advertising and marketing expenses and a 3-percentage-point impact of unfavorable foreign exchange. Additionally, prior-year impairment charges associated with an equity method investment contributed 3 percentage points to operating profit growth.
Other Consolidated Results
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||||||||||||||||||
| 9/3/2022 | 9/4/2021 | Change | 9/3/2022 | 9/4/2021 | Change | |||||||||||||||||||||||||||||||||
| Other pension and retiree medical benefits income | $ | 36 | $ | 118 | $ | (82) | $ | 168 | $ | 364 | $ | (196) | ||||||||||||||||||||||||||
| Net interest expense and other | $ | (190) | $ | (232) | $ | 42 | $ | (666) | $ | (731) | $ | 65 | ||||||||||||||||||||||||||
| Tax rate | 14.9 | % | 26.3 | % | 17.2 | % | 23.0 | % | ||||||||||||||||||||||||||||||
| Net income attributable to PepsiCo (a) | $ | 2,702 | $ | 2,224 | 21 | % | $ | 8,392 | $ | 6,296 | 33 | % | ||||||||||||||||||||||||||
| Net income attributable to PepsiCo per common share – diluted (a) | $ | 1.95 | $ | 1.60 | 22 | % | $ | 6.04 | $ | 4.54 | 33 | % | ||||||||||||||||||||||||||
(a)For the 36 weeks ended September 3, 2022, the gain associated with the Juice Transaction contributed to both net income attributable to PepsiCo growth and net income attributable to PepsiCo per common share growth, partially offset by the impairment of intangible assets as a result of the Russia-Ukraine conflict. See Notes 3 and 11 to our condensed consolidated financial statements for further information.
12 Weeks
Other pension and retiree medical benefits income decreased $82 million, primarily due to higher settlement charges, higher interest cost due to an increase in discount rates and lower expected return on assets compared to the prior year, partially offset by lower amortization of experience loss resulting from plan changes.
Net interest expense and other decreased $42 million, primarily due to higher interest rates on average cash balances and lower average debt balances, partially offset by losses on the market value of investments used to economically hedge a portion of our deferred compensation liability.
The reported tax rate decreased 11.4 percentage points, primarily reflecting an adjustment to reserves for uncertain tax positions as a result of our agreement with the IRS to settle one of the issues assessed in the 2014 through 2016 tax audit.
36 Weeks
Other pension and retiree medical benefits income decreased $196 million, primarily due to higher settlement charges compared to the prior year.
Net interest expense and other decreased $65 million, primarily due to higher interest rates on average cash balances, lower average debt balances and lower interest rates on average debt balances, partially offset by losses on the market value of investments used to economically hedge a portion of our deferred compensation liability and lower average cash balances.
The reported tax rate decreased 5.8 percentage points, primarily reflecting the impact of the Juice Transaction and an adjustment to reserves for uncertain tax positions as a result of our agreement with the IRS to settle one of the issues assessed in the 2014 through 2016 tax audit.
Non-GAAP Measures
Certain financial measures contained in this Form 10-Q adjust for the impact of specified items and are not in accordance with GAAP. We use non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance and as a factor in determining compensation for certain employees. We believe presenting non-GAAP financial measures in this Form 10-Q provides additional information to facilitate comparison of our historical operating results and trends in our underlying operating results and provides additional transparency on how we evaluate our business. We also believe presenting these measures in this Form 10-Q allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.
We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Examples of items for which we may make adjustments include: amounts related to mark-to-market gains or losses (non-cash); charges related to restructuring plans; charges associated with mergers, acquisitions, divestitures and other structural changes; gains associated with divestitures; asset impairment charges (non-cash); pension and retiree medical-related amounts (including all settlement and curtailment gains and losses); charges or adjustments related to the enactment of new laws, rules or regulations, such as tax law changes; amounts related to the resolution of tax positions; tax benefits related to reorganizations of our operations; debt redemptions, cash tender or exchange offers; and remeasurements of net monetary assets. Prior to the fourth quarter of 2021, certain immaterial pension and retiree medical-related settlement and curtailment gains and losses were not considered items affecting comparability. Pension and retiree medical-related service cost, interest cost, expected return on plan assets, and other net periodic pension costs will continue to be reflected in our core results. See below and “Items Affecting Comparability” for a description of adjustments to our GAAP financial measures in this Form 10-Q.
Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.
The following non-GAAP financial measures contained in this Form 10-Q are discussed below:
Cost of sales, gross profit, selling, general and administrative expenses, gain associated with the Juice Transaction, impairment of intangible assets, other pension and retiree medical benefits income, provision for income taxes, net income attributable to noncontrolling interests and net income attributable to PepsiCo, each adjusted for items affecting comparability, operating profit and net income attributable to PepsiCo per common share – diluted, each adjusted for items affecting comparability and the corresponding constant currency growth rates
These measures exclude the net impact of mark-to-market gains and losses on centrally managed commodity derivatives that do not qualify for hedge accounting, restructuring and impairment charges related to our 2019 Productivity Plan, charges associated with our acquisitions and divestitures, the gain associated with the Juice Transaction, Russia-Ukraine conflict charges, Brand Portfolio Impairment Charges, the impact of settlement and curtailment gains and losses related to pension and retiree medical plans, the tax benefit related to the IRS audit and the tax expense related to the TCJ Act (see “Items Affecting Comparability” for a detailed description of each of these items). We also evaluate performance on operating profit and net income attributable to PepsiCo per common share – diluted, each adjusted for items affecting comparability on a constant currency basis, which measure our financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current-year U.S. dollar results by the current-year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior-year average foreign exchange rates. We believe these measures provide useful information in evaluating the results of our business because they exclude items that we believe are not indicative of our ongoing performance or that we believe impact comparability with the prior year.
Organic revenue growth
We define organic revenue growth as a measure that adjusts for the impacts of foreign exchange translation, acquisitions, divestitures and other structural changes, and where applicable, the impact of the 53rd reporting week, including in our fourth quarter 2022 financial results. We believe organic revenue
growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior year.
See “Net Revenue and Organic Revenue Growth” in “Results of Operations – Division Review” for further information.
Free cash flow
We define free cash flow as net cash provided by operating activities less capital spending, plus sales of property, plant and equipment. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Free cash flow is used by us primarily for acquisitions and financing activities, including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure.
See “Free Cash Flow” in “Our Liquidity and Capital Resources” for further information.
Items Affecting Comparability
Our reported financial results in this Form 10-Q are impacted by the following items in each of the following periods:
| 12 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | Gross profit | Selling, general and administrative expenses | Gain associated with the Juice Transaction | Impairment of intangible assets | Operating profit | Other pension and retiree medical benefits income | Provision for income taxes**(a)** | Net income attributable to PepsiCo | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | $ | 10,308 | $ | 11,663 | $ | 8,295 | $ | 14 | $ | 1 | $ | 3,353 | $ | 36 | $ | 475 | $ | 2,702 | |||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | (54) | 54 | (112) | — | — | 166 | — | 40 | 126 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (1) | 1 | (50) | — | — | 51 | — | 11 | 40 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | (5) | — | — | 5 | — | 2 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain associated with the Juice Transaction | — | — | — | (14) | — | 14 | — | 3 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Russia-Ukraine conflict charges | (1) | 1 | 5 | — | — | (4) | — | 1 | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Brand Portfolio Impairment Charges | (10) | 10 | 1 | — | (1) | 10 | — | 2 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and retiree medical-related impact | — | — | — | — | — | — | 59 | 13 | 46 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit related to the IRS audit | — | — | — | — | — | — | — | 284 | (284) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax expense related to the TCJ Act | — | — | — | — | — | — | — | (86) | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 10,242 | $ | 11,729 | $ | 8,134 | $ | — | $ | — | $ | 3,595 | $ | 95 | $ | 745 | $ | 2,733 |
| 12 Weeks Ended 9/4/2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | Gross profit | Selling, general and administrative expenses | Operating profit | Other pension and retiree medical benefits income | Provision for income taxes(a) | Net income attributable to PepsiCo | |||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | $ | 9,394 | $ | 10,795 | $ | 7,636 | $ | 3,159 | $ | 118 | $ | 802 | $ | 2,224 | |||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | (15) | 15 | (19) | 34 | — | 8 | 26 | ||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (9) | 9 | (42) | 51 | 1 | 7 | 45 | ||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | 3 | (3) | — | (1) | (2) | ||||||||||||||||||||||||||||||||||||||||
| Tax expense related to the TCJ Act | — | — | — | — | — | (190) | 190 | ||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 9,370 | $ | 10,819 | $ | 7,578 | $ | 3,241 | $ | 119 | $ | 626 | $ | 2,483 |
| 36 Weeks Ended 9/3/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | Gross profit | Selling, general and administrative expenses | Gain associated with the Juice Transaction | Impairment of intangible assets | Operating profit | Other pension and retiree medical benefits income | Provision for income taxes**(a)** | Net income attributable to noncontrolling interests | Net income attributable to PepsiCo | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | $ | 27,156 | $ | 31,240 | $ | 22,262 | $ | (3,321) | $ | 1,602 | $ | 10,697 | $ | 168 | $ | 1,756 | $ | 51 | $ | 8,392 | |||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | 1 | (1) | 43 | — | — | (44) | — | (11) | — | (33) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (6) | 6 | (117) | — | — | 123 | 3 | 25 | 1 | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | (63) | — | — | 63 | 6 | 12 | — | 57 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain associated with the Juice Transaction | — | — | — | 3,321 | — | (3,321) | — | (452) | — | (2,869) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Russia-Ukraine conflict charges | (134) | 134 | (70) | — | (1,198) | 1,402 | — | 239 | — | 1,163 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Brand Portfolio Impairment Charges | (18) | 18 | (53) | — | (404) | 475 | — | 111 | — | 364 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and retiree medical-related impact | — | — | — | — | — | — | 174 | 39 | — | 135 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit related to the IRS audit | — | — | — | — | — | — | — | 284 | — | (284) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax expense related to the TCJ Act | — | — | — | — | — | — | — | (86) | — | 86 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 26,999 | $ | 31,397 | $ | 22,002 | $ | — | $ | — | $ | 9,395 | $ | 351 | $ | 1,917 | $ | 52 | $ | 7,111 |
| 36 Weeks Ended 9/4/2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | Gross profit | Selling, general and administrative expenses | Operating profit | Other pension and retiree medical benefits income | Provision for income taxes(a) | Net income attributable to PepsiCo | |||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | $ | 24,945 | $ | 29,281 | $ | 20,681 | $ | 8,600 | $ | 364 | $ | 1,895 | $ | 6,296 | |||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | 21 | (21) | 40 | (61) | — | (13) | (48) | ||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (13) | 13 | (110) | 123 | 6 | 20 | 109 | ||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | (1) | 1 | (11) | 12 | — | — | 12 | ||||||||||||||||||||||||||||||||||||||||
| Tax expense related to the TCJ Act | — | — | — | — | — | (190) | 190 | ||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 24,952 | $ | 29,274 | $ | 20,600 | $ | 8,674 | $ | 370 | $ | 1,712 | $ | 6,559 |
(a)Provision for income taxes is the expected tax charge/benefit on the underlying item based on the tax laws and income tax rates applicable to the underlying item in its corresponding tax jurisdiction.
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||||||||||||||||||
| 9/3/2022 | 9/4/2021 | Change | 9/3/2022 | 9/4/2021 | Change | |||||||||||||||||||||||||||||||||
| Net income attributable to PepsiCo per common share – diluted, GAAP measure | $ | 1.95 | $ | 1.60 | 22 | % | $ | 6.04 | $ | 4.54 | 33 | % | ||||||||||||||||||||||||||
| Mark-to-market net impact | 0.09 | 0.02 | (0.02) | (0.03) | ||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | 0.03 | 0.03 | 0.07 | 0.08 | ||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | 0.04 | 0.01 | ||||||||||||||||||||||||||||||||||
| Gain associated with the Juice Transaction | 0.01 | — | (2.07) | — | ||||||||||||||||||||||||||||||||||
| Russia-Ukraine conflict charges | — | — | 0.84 | — | ||||||||||||||||||||||||||||||||||
| Brand Portfolio Impairment Charges | 0.01 | — | 0.26 | — | ||||||||||||||||||||||||||||||||||
| Pension and retiree medical-related impact | 0.03 | — | 0.10 | — | ||||||||||||||||||||||||||||||||||
| Tax benefit related to the IRS audit | (0.20) | — | (0.20) | — | ||||||||||||||||||||||||||||||||||
| Tax expense related to the TCJ Act | 0.06 | 0.14 | 0.06 | 0.14 | ||||||||||||||||||||||||||||||||||
| Core net income attributable to PepsiCo per common share – diluted, non-GAAP measure | $ | 1.97 | (a) | $ | 1.79 | 10 | % | $ | 5.12 | $ | 4.73 | (a) | 8 | % | ||||||||||||||||||||||||
| Impact of foreign exchange translation | 3 | 2 | ||||||||||||||||||||||||||||||||||||
| Growth in core net income attributable to PepsiCo per common share – diluted, on a constant currency basis, non-GAAP measure | 14 | % | (a) | 11 | % | (a) |
(a)Does not sum due to rounding.
Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.
Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
To build on the successful implementation of the 2019 Productivity Plan, in the second quarter of 2021, we expanded and extended the program through the end of 2026 to take advantage of additional opportunities within the initiatives of the 2019 Productivity Plan. As a result, we expect to incur pre-tax charges of approximately $3.15 billion, including cash expenditures of approximately $2.4 billion. Plan to date through September 3, 2022, we have incurred pre-tax charges of $1.2 billion, including cash expenditures of $911 million. For the remainder of 2022, we expect to incur pre-tax charges of approximately $200 million, and cash expenditures of approximately $75 million. These charges will be funded primarily through cash from operations. We expect to incur the majority of the remaining pre-tax charges and cash expenditures in our 2023 through 2024 financial results, with the balance to be incurred through 2026. Charges include severance and other employee costs, asset impairments and other costs.
See Note 2 to our condensed consolidated financial statements in this Form 10-Q, as well as Note 3 to our consolidated financial statements in our 2021 Form 10-K, for further information related to our 2019 Productivity Plan.
We regularly evaluate productivity initiatives beyond the productivity plan and other initiatives discussed above and in Note 2 to our condensed consolidated financial statements.
Acquisition and Divestiture-Related Charges
Acquisition and divestiture-related charges primarily include merger and integration charges and costs associated with divestitures. Merger and integration charges include changes in fair value of contingent consideration, liabilities to support socioeconomic programs in South Africa, employee-related costs, contract termination costs and other integration costs. Divestiture-related charges reflect transaction expenses, including consulting, advisory and other professional fees.
See Note 11 to our condensed consolidated financial statements for further information.
Gain Associated with the Juice Transaction
We recognized a gain associated with the Juice Transaction in our PBNA and Europe divisions. See Note 11 to our condensed consolidated financial statements for further information.
Russia-Ukraine Conflict Charges
In connection with the deadly conflict in Ukraine, we recognized charges related to indefinite-lived intangible assets and property, plant and equipment impairment, allowance for expected credit losses, inventory write-downs and other costs. See Notes 1 and 3 to our condensed consolidated financial statements for further information.
Brand Portfolio Impairment Charges
We recognized intangible assets and property, plant and equipment impairment and other charges as a result of management’s decision to reposition or discontinue the sale/distribution of certain brands. See Notes 1 and 3 to our condensed consolidated financial statements for further information.
Pension and Retiree Medical-Related Impact
Pension and retiree medical-related impact includes settlement charges related to lump sum distributions exceeding the total of annual service and interest cost, partially offset by curtailment gains resulting from the Juice Transaction. See Notes 6 and 11 to our condensed consolidated financial statements for further information.
Tax Benefit Related to the IRS Audit
We recognized a non-cash tax benefit resulting from our agreement with the IRS to settle one of the issues assessed in the 2014 through 2016 tax audit. The agreement covers tax years 2014 through 2019.
See Note 4 to our condensed consolidated financial statements for further information.
Tax Expense Related to the TCJ Act
Tax expense related to the TCJ Act reflects adjustments to the mandatory transition tax liability under the TCJ Act.
See Note 4 to our condensed consolidated financial statements for further information.
Our Liquidity and Capital Resources
We believe that our cash generating capability and financial condition, together with our revolving credit facilities, working capital lines and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs, including with respect to our net capital spending plans. Our primary sources of liquidity include cash from operations, pre-tax cash proceeds of approximately $3.5 billion from the Juice Transaction, proceeds obtained from issuances of commercial paper and long-term debt, and cash and cash equivalents. These sources of cash are available to fund cash outflows that have both a short- and long-term component, including debt repayments and related interest payments; payments for acquisitions; operating leases; purchase, marketing, and other contractual commitments, including capital expenditures and the transition tax liability under the TCJ Act. In addition, these sources of cash fund other cash outflows including anticipated dividend payments and share repurchases. We do not have guarantees or off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our liquidity. See “Our Business Risks” and Notes 7 and 11 to our condensed consolidated financial statements included in this Form 10-Q and “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” and Note 8 to our consolidated financial statements included in our 2021 Form 10-K for further information.
Our sources and uses of cash were not materially adversely impacted by the Russia-Ukraine conflict in the 36 weeks ended September 3, 2022 and, to date, we have not identified any material liquidity deficiencies as a result of the conflict. Based on the information currently available to us, we do not expect the impact of the Russia-Ukraine conflict to have a material impact on our future liquidity. We will continue to monitor and assess the impact the Russia-Ukraine conflict may have on our business and financial results. See “Our Business Risks,” Note 1 to our condensed consolidated financial statements and “Item 1A. Risk Factors” for further information related to the impact of the Russia-Ukraine conflict on our business and financial results.
Our sources and uses of cash were not materially adversely impacted by COVID-19 in the 36 weeks ended September 3, 2022 and, to date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of the COVID-19 pandemic to have a material impact on our future liquidity. We will continue to monitor and assess the impact the COVID-19 pandemic may have on our business and financial results. See “Our Business Risks” and Note 1 to our condensed consolidated financial statements in this Form 10-Q and “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” and Note 1 to our consolidated financial statements included in our 2021 Form 10-K for further information related to the impact of the COVID-19 pandemic on our business and financial results.
As of September 3, 2022, cash, cash equivalents and short-term investments in our consolidated subsidiaries subject to currency controls or currency exchange restrictions were not material.
The TCJ Act imposed a one-time mandatory transition tax on undistributed international earnings. As of September 3, 2022, our mandatory transition tax liability was $2.6 billion, which must be paid through 2026 under the provisions of the TCJ Act. See “Our Liquidity and Capital Resources,” “Our Critical Accounting Policies” and Note 5 to our consolidated financial statements included in our 2021 Form 10-K for further discussion of the TCJ Act.
As part of our evolving market practices, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Our current payment terms with a majority of our suppliers generally range from 60 to 90 days, which we deem to be commercially reasonable. We will continue to monitor economic conditions and market practice working with our suppliers to adjust as necessary. We also maintain voluntary supply chain finance agreements with several participating global financial institutions. Under these agreements, our suppliers, at their sole discretion, may elect to sell their accounts receivable with PepsiCo to these participating global financial institutions. Supplier participation in these financing arrangements is voluntary. Our suppliers negotiate their financing agreements directly with the respective global financial institutions and we are not a party to these agreements. These financing arrangements allow participating suppliers to leverage PepsiCo’s creditworthiness in establishing credit spreads and associated costs, which generally provides our suppliers with more favorable terms than they would be able to secure on their own. Neither PepsiCo nor any of its subsidiaries provide any guarantees to any third party in connection with these financing arrangements. We have no economic interest in our suppliers’ decision to participate in these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. All outstanding amounts related to suppliers participating in such financing arrangements are recorded within accounts payable and other current liabilities in our condensed consolidated balance sheet. We were informed by the participating financial institutions that as of September 3, 2022 and December 25, 2021, $1.4 billion and $1.5 billion, respectively, of our accounts payable to suppliers who participate in these financing arrangements are outstanding. These supply chain finance arrangements did not have a material impact on our liquidity or capital resources in the periods presented and we do not expect such arrangements to have a material impact on our liquidity or capital resources for the foreseeable future.
Operating Activities
During the 36 weeks ended September 3, 2022, net cash provided by operating activities was $6.3 billion, compared to net cash provided by operating activities of $6.6 billion in the prior-year period. The decrease in operating cash flow primarily reflects unfavorable working capital comparisons and higher net cash tax payments, partially offset by favorable operating profit performance and lower pre-tax pension and retiree medical plan contributions in the current year.
Investing Activities
During the 36 weeks ended September 3, 2022, net cash provided by investing activities was $0.3 billion, primarily reflecting proceeds associated with the Juice Transaction of $3.5 billion, partially offset by net capital spending of $2.3 billion and our investment in Celsius convertible preferred stock and agreement to distribute Celsius energy drinks of $0.7 billion.
We regularly review our plans with respect to net capital spending, including in light of the ongoing uncertainty caused by the Russia-Ukraine conflict and by the COVID-19 pandemic on our business, and believe that we have sufficient liquidity to meet our net capital spending needs.
Financing Activities
During the 36 weeks ended September 3, 2022, net cash used for financing activities was $5.6 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments of $4.6 billion and share repurchases of $1.2 billion, payments of long-term debt borrowings of $1.7 billion and debt redemptions of $1.6 billion, partially offset by proceeds from issuances of long-term debt of $3.4 billion.
We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 10, 2022, we announced a share repurchase program providing for the repurchase of up to $10.0 billion of PepsiCo common stock which commenced on February 11, 2022 and will expire on February 28, 2026. In addition, on February 10, 2022, we announced a 7% increase in our annualized dividend to $4.60 per share from $4.30 per share, effective with the dividend paid in June 2022. We expect to return a total of approximately $7.7 billion to shareholders in 2022, comprising dividends of approximately $6.2 billion and share repurchases of approximately $1.5 billion.
Free Cash Flow
The table below reconciles net cash provided by operating activities, as reflected on our cash flow statement, to our free cash flow. Free cash flow is a non-GAAP financial measure. For further information on free cash flow, see “Non-GAAP Measures.”
| 36 Weeks Ended | |||||||||||||||||
| 9/3/2022 | 9/4/2021 | ||||||||||||||||
| Net cash provided by operating activities, GAAP measure | $ | 6,306 | $ | 6,634 | |||||||||||||
| Capital spending | (2,556) | (2,276) | |||||||||||||||
| Sales of property, plant and equipment | 228 | 40 | |||||||||||||||
| Free cash flow, non-GAAP measure | $ | 3,978 | $ | 4,398 | |||||||||||||
We use free cash flow primarily for acquisitions and financing activities, including debt repayments, dividends and share repurchases. We expect to continue to return free cash flow to our shareholders primarily through dividends while maintaining Tier 1 commercial paper access, which we believe will facilitate appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. See “Our Business Risks” included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our 2021 Form 10-K, for certain factors that may impact our credit ratings or our operating cash flows.
Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether or not as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. See Note 7 to our condensed consolidated financial statements and “Our Business Risks” included in this Form 10-Q, as well as “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” included in our 2021 Form 10-K for further information.
Material Changes in Line Items in Our Condensed Consolidated Financial Statements
Material changes in line items in our condensed consolidated statement of income are discussed in “Results of Operations – Division Review” and “Items Affecting Comparability.”
Material changes in line items in our condensed consolidated statement of cash flows are discussed in “Our Liquidity and Capital Resources.”
Material changes in line items in our condensed consolidated balance sheet are discussed below:
Total Assets
As of September 3, 2022, total assets were $94.5 billion, compared to $92.4 billion as of December 25, 2021. The increase in total assets is primarily driven by the following line items:
| Change**(a)** | Reference | ||||||||||
| Cash and cash equivalents | $ | 0.8 | Statement of Cash Flows | ||||||||
| Accounts and notes receivable, less allowance | $ | 2.1 | (b) | ||||||||
| Inventories | $ | 0.7 | (c) | ||||||||
| Assets held for sale | $ | (1.8) | (d) | ||||||||
| Other indefinite-lived intangible assets | $ | (1.3) | Note 3 | ||||||||
| Investments in noncontrolled affiliates | $ | 0.9 | Note 11 | ||||||||
| Other assets | $ | 0.5 | (e) |
Total Liabilities
As of September 3, 2022, total liabilities were $75.3 billion, compared to $76.2 billion as of December 25, 2021. The decrease in total liabilities is primarily driven by the following line items:
| Change**(a)** | Reference | ||||||||||
| Short-term debt obligations | $ | (1.2) | (f) | ||||||||
| Accounts payable and other current liabilities | $ | 1.4 | (g) | ||||||||
| Liabilities held for sale | $ | (0.8) | (d) |
(a)In billions.
(b)Primarily reflects favorable operating performance.
(c)Primarily reflects commodity inflation.
(d)Reflects closing of the Juice Transaction. See Note 11 to our condensed consolidated financial statements included in this Form 10-Q and Note 13 to our consolidated financial statements included in our 2021 Form 10-K for further information.
(e)Primarily reflects our investment in Celsius convertible preferred stock. See Note 8 to our condensed consolidated financial statements for further information.
(f)Primarily reflects debt payments and redemptions, partially offset by debt maturing within a year.
(g)Primarily reflects increased promotional, advertising and marketing spend in the current year.
Total Equity
Refer to our condensed consolidated statement of equity, and Notes 6 and 10 to our condensed consolidated financial statements for material changes in equity line items.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
PepsiCo, Inc.:
Results of Review of Interim Financial Information
We have reviewed the Condensed Consolidated Balance Sheet of PepsiCo, Inc. and subsidiaries (the Company) as of September 3, 2022, the related Condensed Consolidated Statements of Income, Comprehensive Income, and Equity for the twelve and thirty-six weeks ended September 3, 2022 and September 4, 2021, the related Condensed Consolidated Statement of Cash Flows for the thirty-six weeks ended September 3, 2022 and September 4, 2021, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheet of the Company as of December 25, 2021, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the year then ended (not presented herein); and in our report dated February 9, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of December 25, 2021, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
New York, New York
October 11, 2022
Previous: Item 1. Condensed Consolidated Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.