PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 24 weeks of fiscal 2023, ended June 17, 2023. North American results cover 12-week periods; international results use calendar months. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | 12 weeks ended June 17, 2023 | Change vs. prior year | 24 weeks ended June 17, 2023 | Change vs. prior year |
|---|---|---|---|---|
| Net revenue | $22.32 billion | +10% | $40.17 billion | +10% |
| Gross profit | $12.20 billion | From $10.81 billion | $22.06 billion | From $19.58 billion |
| Gross margin | 54.7% | From 53.5% | 54.9% | From 53.7% |
| Operating profit | $3.66 billion | +76% | $6.29 billion | -14% |
| Operating margin | 16.4% | From 10.3% | 15.7% | From 20.2% |
| Net income attributable to PepsiCo | $2.75 billion | +92% | $4.68 billion | -18% |
| Diluted EPS | $1.99 | +93% | $3.38 | -17% |
Quarterly organic revenue growth, a non-GAAP measure, was 13%, comprising a 15% contribution from effective net pricing and a 2.5% decline in organic volume. For the 24-week period, organic revenue grew 14%, with 16% from pricing and a 2% volume decline. Unfavorable foreign exchange reduced revenue growth by 2.5 percentage points in both periods.
For comparison, adjusted “core” diluted EPS was $2.09 for the quarter, up 12%, and $3.59 for the 24 weeks, up 14% (non-GAAP). The prior-year comparisons include large unusual items: a $3.3 billion pretax gain from the Juice Transaction in the first 24 weeks of 2022, and substantial Russia-Ukraine-related impairments in 2022. These items materially distort reported year-over-year profit comparisons.
- Segment trends: Frito-Lay North America revenue rose 14% in the quarter, while unit volume increased 1%. PepsiCo Beverages North America revenue rose 10%, but unit volume fell 4.5%. Quaker Foods North America unit volume declined 5%. AMESA revenue fell 8%, largely due to currency translation; Europe revenue rose 13%, primarily on pricing.
- Cash flow: Operating cash flow was $2.02 billion for the first 24 weeks, versus $1.88 billion. Capital spending was $1.51 billion; reported free cash flow was $628 million, versus $604 million. Cash dividends paid were $3.20 billion.
- Liquidity and debt: Cash and cash equivalents were $6.12 billion and short-term investments were $338 million at June 17. Short-term debt was $7.61 billion and long-term debt was $36.01 billion, totaling $43.62 billion. Short-term debt had increased $4.2 billion from year-end, primarily reflecting commercial paper issuance; $3.6 billion of commercial paper was outstanding. Two revolving credit facilities, each with $4.2 billion of capacity, had no borrowings outstanding.
Material changes and unusual items
- Quarterly operating profit increased 76%, but this comparison benefited substantially from the prior-year Russia-Ukraine impairment charges and brand impairments. Current-year results included $113 million of pretax impairment charges related to the Tropicana Brands Group (TBG) investment.
- First-half operating profit fell 14%, primarily reflecting the absence of the prior-year $3.3 billion Juice Transaction gain, higher commodity and other operating costs, lower organic volume, and increased advertising and marketing spending. Pricing and productivity savings partly offset these pressures.
- First-half net income also reflected the prior-year transaction gain: 2022 included a $3.3 billion pretax gain from selling select juice brands while retaining a 39% interest in TBG.
- The 2019 Productivity Plan, extended through 2028, is expected to incur about $3.65 billion of total pretax charges, including about $2.9 billion of cash expenditures. PepsiCo reported approximately $1.7 billion of charges through June 17, 2023, and expects about $325 million of additional pretax charges and $350 million of cash expenditures for the rest of 2023.
Outlook, risks and other disclosures
The provided filing text does not give a clear full-year revenue or EPS guidance figure. Management said transportation, labor and commodity costs remained significantly elevated and were expected to continue for the remainder of 2023. PepsiCo expects to return approximately $7.7 billion to shareholders during 2023, including about $6.7 billion in dividends and $1.0 billion in share repurchases. The annualized dividend was increased 10% to $5.06 per share, effective with the June 2023 payment.
Key risks cited include inflation and commodity cost volatility, supply-chain and labor disruptions, foreign exchange and currency restrictions, the continuing Russia-Ukraine conflict, potential further impairments, climate-related regulation, product taxes and packaging rules, changing retail channels, cyber incidents, and litigation or regulatory matters. PepsiCo said the conflict had not materially affected liquidity to date, though its duration and effects remain uncertain. Management believes pending litigation is not expected to have a material adverse effect on financial condition, results or cash flows.
Management concluded disclosure controls were effective. ERP system implementations materially affected internal control processes, but management said they had not adversely affected and were not expected to adversely affect internal control over financial reporting. The independent accountant’s interim review found no material modifications were needed for the financial statements to conform with U.S. GAAP; this was a review, not an audit.
Important facts for investors to verify
- Whether pricing can continue to offset declining volumes without further pressure on demand or margins.
- How elevated commodity, labor, transportation and other costs affect margins through the remainder of 2023.
- Underlying earnings trends after separating prior-year transaction gains and impairment charges from current results.
- Further performance, valuation and impairment risk relating to the TBG investment and operations exposed to the Russia-Ukraine conflict.
- Debt and commercial paper levels, cash generation, planned shareholder returns, and execution and cash costs of the productivity plan.