PEPSICO, INC. 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
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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
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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-
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 24 weeks ended
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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
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
See Notes 1 and 3 to our condensed consolidated financial statements in this
Form 10-Q for a discussion of the
See Note 8 to our condensed consolidated financial statements in this Form 10-Q
for the fair values of our financial instruments as of
Risks Associated with the Deadly Conflict in
In addition to the risks associated with international operations discussed
above, we continue to face risks associated with the deadly conflict in
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geopolitical and macroeconomic uncertainty, and the majority of our operations
in
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, 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 regulations (including restrictions on the transfer of funds to and
from
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 and export controls 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
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,
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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
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