PepsiCo, Inc. — Q3 2023 Form 10-Q
Reporting period: 12 weeks ended September 9, 2023; year-to-date (YTD) covers 36 weeks. Prior-year comparisons are to periods ended September 3, 2022. Amounts are U.S. dollars unless noted.
Financial performance
| Metric | Q3, 12 weeks | YTD, 36 weeks |
|---|---|---|
| Net revenue | $23.453 billion, up 7% | $63.621 billion, up 9% |
| Gross profit / gross margin | $12.778 billion / 54.5% | $34.837 billion / 54.8% |
| Operating profit / margin | $4.015 billion / 17.1%; up 20% in profit | $10.303 billion / 16.2%; down 4% in profit |
| Net income attributable to PepsiCo | $3.092 billion, up 14% | $7.772 billion, down 7% |
| Diluted EPS | $2.24, up 15% | $5.62, down 7% |
| Operating cash flow | Not separately presented for the quarter | $7.630 billion, versus $6.306 billion |
| Free cash flow (non-GAAP) | Not separately presented for the quarter | $5.224 billion, versus $3.978 billion |
Gross margin percentages are calculated from reported revenue and gross profit. YTD comparisons are substantially affected by the prior-year $3.3 billion Juice Transaction gain and prior-year impairment charges. Excluding specified comparability items, management reported YTD core diluted EPS of $5.83, up 14% (16% on a constant-currency basis); these are non-GAAP measures.
Business trends and changes versus prior year
- Revenue growth was driven mainly by effective net pricing. Consolidated organic revenue grew 9% in Q3 and 12% YTD, while organic volume declined 2.5% and 3%, respectively.
- Q3 operating profit growth reflected pricing and productivity savings, partly offset by higher operating costs, commodity inflation, lower organic volume, and increased advertising and marketing. Net mark-to-market commodity derivative gains also benefited corporate results.
- For the 36 weeks, operating profit and margin fell partly because the prior year included the Juice Transaction gain. Higher commodity costs, lower organic volume, and higher marketing costs also weighed on results; pricing and productivity savings provided offsets.
- YTD reported EPS declined despite stronger underlying core EPS, principally reflecting the absence of the prior-year Juice Transaction gain. Prior-year Russia-Ukraine-related and brand impairment charges also affect comparability.
- Q3 division revenue growth was strongest in LatAm (21%, including favorable currency) and FLNA (7%); AMESA revenue fell 6%, primarily from unfavorable foreign exchange. PBNA revenue rose 8% while unit volume fell 6%. YTD PBNA unit volume fell 4.5%; FLNA volume was slightly higher, while QFNA, LatAm, Europe, and AMESA reported declines.
Financial position, cash flow and capital allocation
- At September 9, 2023, cash and cash equivalents were $10.017 billion and short-term investments were $266 million. Current assets were $28.649 billion versus current liabilities of $32.660 billion.
- Total debt obligations were $44.774 billion: $8.937 billion short-term and $35.837 billion long-term, compared with $39.071 billion at December 31, 2022. PepsiCo reported $5.1 billion of commercial paper outstanding. Approximately 13% of total debt, after related interest-rate derivatives, was variable-rate, versus 1% at year-end 2022.
- YTD cash from operations increased to $7.630 billion; capital spending was $2.537 billion. Cash dividends paid were $4.941 billion and share repurchases were $751 million. Cash, cash equivalents and restricted cash totaled $10.131 billion at period-end.
- Management said cash generation, financing access and revolving facilities should be adequate for operating, investing and financing needs. No borrowings were outstanding under the new $4.2 billion five-year and $4.2 billion 364-day revolving credit facilities at period-end.
- PepsiCo expected approximately $7.7 billion of shareholder returns in 2023: $6.7 billion in dividends and $1.0 billion in repurchases. Its annualized dividend increased 10% to $5.06 per share, effective with the June 2023 payment.
Outlook, risks and unusual items
- Management expected significantly higher transportation, labor and commodity costs to continue for the remainder of 2023; passing on cost increases could pressure volume, revenue, margins and results.
- The 2019 Productivity Plan was extended through 2028. Expected cumulative pretax charges are approximately $3.65 billion, including about $2.9 billion of cash costs. PepsiCo had incurred $1.7 billion through September 9, 2023 and expected approximately $200 million of charges and cash expenditures for the remainder of 2023.
- YTD results included $113 million of pretax impairment charges related to PepsiCo’s 39% investment in Tropicana Brands Group (TBG). The prior-year period included the Juice Transaction gain of $3.3 billion.
- Risks highlighted include the Ukraine conflict and possible further asset impairments; inflation, commodity availability and supply-chain disruption; foreign-exchange volatility; changing consumer demand and retail channels; climate and packaging regulation; taxes on products; cybersecurity; and legal, regulatory and tax matters. Foreign exchange reduced consolidated revenue growth by 2 percentage points both Q3 and YTD.
- The Tax Cuts and Jobs Act transition-tax liability was $2.3 billion, payable through 2026. Management stated that litigation and proceedings were not expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
- The interim financial statements were reviewed by KPMG, not audited. Management reported effective disclosure controls; ongoing ERP implementations materially affected internal-control processes but had not adversely affected, and were not expected to adversely affect, internal control over financial reporting.
Important facts for investors to verify
- Whether pricing can continue to offset inflation without further volume declines, particularly in PBNA and select food and beverage categories.
- How much of reported and core earnings growth reflects recurring operations versus currency, derivative marks, productivity savings, and other adjustments.
- Debt, commercial-paper and refinancing needs, including the increase in short-term debt and the transition-tax payment schedule.
- Progress and remaining cash costs under the productivity plan, and any further TBG or Russia-related impairments.
- Delivery of the stated 2023 shareholder-return expectations and cash-flow outlook amid elevated costs and investment needs.