filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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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 2022 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; 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 or effectively manage changes in our 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 continued 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 2022 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.
Risks Associated with Commodities and Our Supply Chain
During the 12 weeks ended March 25, 2023, we continued to experience significantly higher operating costs, including on transportation, labor and commodity (including energy) costs, which we expect to continue for the remainder of 2023. 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. A number of external factors, including the deadly conflict in Ukraine, the inflationary cost environment, adverse weather conditions, supply chain disruptions (including raw material shortages) and labor shortages, have impacted and may continue to impact transportation, labor and commodity availability 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 9 to our condensed consolidated financial statements in this Form 10-Q and Note 9 to our consolidated financial statements in our 2022 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, along with initiatives to meet our sustainability goals, could result in significant increased costs 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 March 25, 2023, our financial results outside of North America reflect the months of January and February. In the 12 weeks ended March 25, 2023, our operations outside of the United States generated 36% of our consolidated net revenue, with Mexico, Canada, China, Russia, the United Kingdom and Brazil comprising approximately 20% 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 the 12 weeks ended March 25, 2023, unfavorable foreign exchange reduced net revenue growth by 2.5 percentage points primarily due to declines in the Egyptian pound, Turkish lira, Canadian dollar and Chinese yuan, partially offset by an appreciation of the Mexican peso. 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, Pakistan, 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 4 to our consolidated financial statements in our 2022 Form 10-K for a discussion of the Russia-Ukraine conflict charges, including impairment charges. Also see Note 1 to our condensed consolidated financial statements in this Form 10-Q for charges taken as a result of the Russia-Ukraine conflict in the 12 weeks ended March 19, 2022.
See Note 9 to our condensed consolidated financial statements in this Form 10-Q for the fair values of our financial instruments as of March 25, 2023 and December 31, 2022 and Note 9 to our consolidated financial statements in our 2022 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 certain 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.
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 and other corporate banking services, 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 4 to our consolidated financial statements in our 2022 Form 10-K, for a discussion of the Russia-Ukraine conflict charges, including impairment charges. Also see Note 1 to our condensed consolidated financial statements in this Form 10-Q for charges taken as a result of the Russia-Ukraine conflict in the 12 weeks ended March 19, 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). 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.
OECD Global Minimum Tax
Numerous countries have agreed to a statement in support of the Organization for Economic Co-operation and Development (OECD) model rules that propose a global minimum tax rate of 15% and European Union member states have agreed to implement the global minimum tax. Certain countries, including European Union member states, are expected to enact legislation to be effective as early as 2024, with widespread implementation of a global minimum tax expected by 2025. As the legislation becomes effective in countries in which we do business, our taxes could increase and negatively impact our provision for income taxes. We will continue to monitor pending legislation and implementation by individual countries and evaluate the potential impact on our business in future periods.
Retail Landscape
Our industry continues to be affected by disruption of the retail landscape, including the continued 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. 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 2022 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. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Financial Results – Volume” included in our 2022 Form 10-K for further information on volume. Unit volume growth adjusts for the impacts of acquisitions and divestitures. Acquisitions and divestitures, when used in this report, reflect mergers and acquisitions activity, as well as divestitures and other structural changes, including changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees. Further, unit volume growth excludes 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 report all of our international operations on a monthly calendar basis. The 12 weeks ended March 25, 2023 and March 19, 2022 include volume outside of North America for the months of January and February.
Consolidated Net Revenue and Operating Profit
| 12 Weeks Ended | |||||||||||||||||||||||||||||||||||
| 3/25/2023 | 3/19/2022 | Change | |||||||||||||||||||||||||||||||||
| Net revenue | $ | 17,846 | $ | 16,200 | 10 | % | |||||||||||||||||||||||||||||
| Operating profit | $ | 2,629 | $ | 5,267 | (50) | % | |||||||||||||||||||||||||||||
| Operating margin | 14.7 | % | 32.5 | % | (17.8) |
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.
Operating profit decreased 50% and operating margin decreased 17.8 percentage points. Operating profit performance was primarily driven by a 73-percentage-point unfavorable impact of the gain associated with the Juice Transaction in the prior year, certain operating cost increases, a 33-percentage-point impact of higher commodity costs, a decrease in organic volume and a 4-percentage-point impact of higher mark-to-market losses on commodity derivatives. These impacts were partially offset by effective net pricing, productivity savings, and a 5-percentage-point impact each of the charges associated with the Russia-Ukraine conflict and the impairment of intangible assets related to the repositioning or discontinuation of certain juice and dairy brands in Russia. The operating margin decline primarily reflects the gain associated with the Juice Transaction in the prior year.
Other Consolidated Results
| 12 Weeks Ended | ||||||||||||||||||||||||||||||||||||||
| 3/25/2023 | 3/19/2022 | Change | ||||||||||||||||||||||||||||||||||||
| Other pension and retiree medical benefits income | $ | 61 | $ | 134 | $ | (73) | ||||||||||||||||||||||||||||||||
| Net interest expense and other | $ | (200) | $ | (240) | $ | 40 | ||||||||||||||||||||||||||||||||
| Tax rate | 21.9 | % | 17.2 | % | ||||||||||||||||||||||||||||||||||
| Net income attributable to PepsiCo (a) | $ | 1,932 | $ | 4,261 | (55) | % | ||||||||||||||||||||||||||||||||
| Net income attributable to PepsiCo per common share – diluted (a) | $ | 1.40 | $ | 3.06 | (54) | % | ||||||||||||||||||||||||||||||||
(a)For the 12 weeks ended March 19, 2022, the gain associated with the Juice Transaction contributed to both net income attributable to PepsiCo and net income attributable to PepsiCo per common share. See Note 12 to our condensed consolidated financial statements for further information.
Other pension and retiree medical benefits income decreased $73 million, primarily due to higher interest cost and recognition of fixed income losses on plan assets, partially offset by lower amortization of net losses on pension obligations and higher rate on expected return on plan assets, all driven primarily by higher interest rates.
Net interest expense and other decreased $40 million, primarily due to higher interest rates on average cash balances and gains on the market value of investments used to economically hedge a portion of our deferred compensation liability, partially offset by higher interest rates on debt.
The reported tax rate increased 4.7 percentage points, primarily reflecting the prior-year impact of the Juice Transaction.
Results of Operations – Division Review
While our financial results in North America are reported on a 12-week basis, all of our international operations are reported on a monthly calendar basis for which the months of January and February are reflected in our results for the 12 weeks ended March 25, 2023 and March 19, 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.
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 3/25/2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | 15 | % | — | — | 16 | % | — | 16 | |||||||||||||||||||||||||||||||||||||||||||||
| QFNA | 9 | % | 1 | — | 10 | % | (5) | 15 | |||||||||||||||||||||||||||||||||||||||||||||
| PBNA | 8 | % | — | 3 | 12 | % | (3) | 15 | |||||||||||||||||||||||||||||||||||||||||||||
| LatAm | 21 | % | (6) | 1 | 16 | % | 1 | 15 | |||||||||||||||||||||||||||||||||||||||||||||
| Europe | 5 | % | 5 | 4 | 14 | % | (9) | 23 | |||||||||||||||||||||||||||||||||||||||||||||
| AMESA | 2 | % | 28 | — | 29 | % | (2) | 31 | |||||||||||||||||||||||||||||||||||||||||||||
| APAC | (1) | % | 6 | — | 4 | % | 2 | 2.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 10 | % | 2.5 | 2 | 14 | % | (2) | 16 |
(a)Amounts may not sum due to rounding.
(b)Excludes the impact of acquisitions and divestitures. In certain instances, the impact of organic volume on net revenue growth differs from the unit volume change 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 3/25/2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability**(a)** | |||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Impairment and other charges/credits**(b)** | Core, Non-GAAP Measure | ||||||||||||||||||||||||||||||||||||||||||
| FLNA | $ | 1,599 | $ | — | $ | 7 | $ | — | $ | — | $ | 1,606 | |||||||||||||||||||||||||||||||||||
| QFNA | 188 | — | — | — | — | 188 | |||||||||||||||||||||||||||||||||||||||||
| PBNA | 483 | — | 5 | 2 | — | 490 | |||||||||||||||||||||||||||||||||||||||||
| LatAm | 364 | — | 5 | — | — | 369 | |||||||||||||||||||||||||||||||||||||||||
| Europe | 71 | — | 89 | — | — | 160 | |||||||||||||||||||||||||||||||||||||||||
| AMESA | 168 | — | 5 | — | (13) | 160 | |||||||||||||||||||||||||||||||||||||||||
| APAC | 227 | — | 1 | — | — | 228 | |||||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | (471) | 71 | 1 | — | — | (399) | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,629 | $ | 71 | $ | 113 | $ | 2 | $ | (13) | $ | 2,802 |
| 12 Weeks Ended 3/19/2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability(a) | |||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | Mark-to-market net impact | Restructuring and impairment charges | Acquisition and divestiture-related charges | Gain associated with the Juice Transaction | Impairment and other charges/credits | Core, Non-GAAP Measure | |||||||||||||||||||||||||||||||||||||||||
| FLNA | $ | 1,296 | $ | — | $ | 3 | $ | — | $ | — | $ | — | $ | 1,299 | |||||||||||||||||||||||||||||||||
| QFNA | 159 | — | — | — | — | — | 159 | ||||||||||||||||||||||||||||||||||||||||
| PBNA | 3,434 | — | 3 | 37 | (3,024) | — | 450 | ||||||||||||||||||||||||||||||||||||||||
| LatAm | 323 | — | 6 | — | — | — | 329 | ||||||||||||||||||||||||||||||||||||||||
| Europe | (136) | — | 7 | 10 | (298) | 482 | 65 | ||||||||||||||||||||||||||||||||||||||||
| AMESA | 180 | — | 2 | — | — | — | 182 | ||||||||||||||||||||||||||||||||||||||||
| APAC | 215 | — | 1 | — | — | — | 216 | ||||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | (204) | (112) | 5 | 3 | — | — | (308) | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 5,267 | $ | (112) | $ | 27 | $ | 50 | $ | (3,322) | $ | 482 | $ | 2,392 |
(a)See “Items Affecting Comparability.”
(b)The income amount reflects adjustments to the charges recorded in the prior year related to the sale of a non-strategic brand.
Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
| 12 Weeks Ended 3/25/2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | Impairment and other charges/credits | Core % Change, Non-GAAP Measure**(b)** | Foreign exchange translation | Core Constant Currency % Change, Non-GAAP Measure**(b)** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FLNA | 23 | % | — | — | — | — | — | 24 | % | — | 24 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| QFNA | 18 | % | — | — | — | — | — | 18 | % | — | 19 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| PBNA | (86) | % | — | — | (1) | 96 | — | 9 | % | 1 | 10 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| LatAm | 13 | % | — | (1) | — | — | — | 12 | % | (6) | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | n/m | — | n/m | n/m | n/m | n/m | 148 | % | 11 | 159 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AMESA | (6) | % | — | 2 | — | — | (7) | (12) | % | 23 | 11 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| APAC | 5.5 | % | — | 1 | (1) | — | — | 5.5 | % | 6 | 11 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate unallocated expenses | 132 | % | (105) | 3 | 1 | — | — | 30 | % | — | 30 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | (50) | % | 4 | 2 | (1) | 73 | (11) | 17 | % | 2 | 19 | % |
(a)See “Items Affecting Comparability” for further information.
(b)Amounts may not sum due to rounding.
n/m - Not meaningful due to the impact of impairment and other charges in 2022.
FLNA
Net revenue grew 15%, primarily driven by effective net pricing.
Unit volume declined slightly, primarily driven by a high-single-digit decline in dips, a mid-single-digit decline in trademark Tostitos and a double-digit decline in our Sabra joint venture products, partially offset by double-digit growth in trademark Chester’s and Fritos.
Operating profit increased 23%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by certain operating cost increases, including strategic initiatives, a 15-percentage-point impact of higher commodity costs, primarily cooking oil, potatoes and ingredients, and higher advertising and marketing expenses.
QFNA
Net revenue grew 9%, primarily driven by effective net pricing, partially offset by a decrease in organic volume.
Unit volume declined 5%, primarily reflecting double-digit declines in oatmeal and rice/pasta sides.
Operating profit grew 18%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by certain operating cost increases, a 17-percentage-point impact of higher commodity costs, primarily grains, higher advertising and marketing expenses and the decrease in organic volume.
PBNA
Net revenue increased 8%, primarily driven by effective net pricing, partially offset by a decrease in organic volume. The Juice Transaction reduced net revenue growth by 3 percentage points.
Unit volume decreased 2%, driven by a 4% decrease in non-carbonated beverage (NCB) volume and a 1% decrease in carbonated soft drink volume. The NCB volume decrease primarily reflected a high-single-digit decrease in Gatorade sports drinks and mid-single-digit decreases in our overall water portfolio and our Lipton ready-to-drink tea portfolio, partially offset by a double-digit increase in our juice and juice drinks portfolio (adjusted for the impact of the Juice Transaction).
Operating profit decreased 86%, primarily reflecting a 96-percentage-point impact of the prior-year gain of $3.0 billion associated with the Juice Transaction. Operating profit also decreased due to certain operating cost increases, including information technology costs, a 45-percentage-point impact of higher commodity costs, including energy, sweeteners and packaging materials, the decrease in organic volume, and higher advertising and marketing expenses. Additionally, net unfavorable insurance adjustments and the loss in net revenue due to the Juice Transaction negatively impacted operating profit performance by 8 percentage points and 6 percentage points, respectively. These impacts were partially offset by the effective net pricing and productivity savings. Certain costs associated with remediating a service disruption from a third-party payroll service provider in the prior year positively contributed 7 percentage points to operating profit performance.
LatAm
Net revenue increased 21%, primarily reflecting effective net pricing and a 6-percentage-point impact of favorable foreign exchange.
Convenient foods unit volume grew 1%, primarily reflecting mid-single-digit growth in Mexico and low-single-digit growth in Brazil.
Beverage unit volume grew 5%, primarily reflecting double-digit growth in Brazil and Peru, high-single-digit growth in Mexico and Guatemala and mid-single-digit growth in Colombia, partially offset by a mid-single-digit decline in Argentina. Additionally, Chile experienced mid-single-digit growth.
Operating profit increased 13%, primarily reflecting the net revenue growth and productivity savings. These impacts were partially offset by certain operating cost increases, an 18-percentage-point impact of higher commodity costs, primarily cooking oil and grains, higher advertising and marketing expenses and a 3-percentage-point unfavorable impact of certain indirect tax credits in Brazil compared to the prior year. Favorable foreign exchange contributed 6 percentage points to operating profit growth.
Europe
Net revenue increased 5%, reflecting effective net pricing, partially offset by an organic volume decline, a 5-percentage-point impact of unfavorable foreign exchange and a 2-percentage-point unfavorable impact of the Juice Transaction.
Convenient foods unit volume declined 5%, primarily reflecting a double-digit decline in Ukraine and high-single-digit declines in Russia and the United Kingdom, partially offset by high-single-digit growth in France and slight growth in Turkey. Additionally, the Netherlands declined slightly.
Beverage unit volume declined 11%, primarily reflecting double-digit declines in Russia, Germany and Ukraine, partially offset by low-single-digit growth in Turkey. Additionally, the United Kingdom and France experienced mid-single-digit declines.
Operating profit improvement primarily reflects the favorable impact of prior-year charges associated with the Russia-Ukraine conflict and impairment of intangible assets related to the repositioning or discontinuation of certain juice and dairy brands in Russia (brand portfolio impairment charges), the effective net pricing, productivity savings and a 39-percentage-point favorable impact of higher payments to employees for a change in pension benefits in the prior year. These impacts were partially offset by the unfavorable impact of the prior-year gain associated with the Juice Transaction and higher restructuring and impairment charges. Additionally, operating profit improvement was negatively impacted by certain operating cost increases, a 238-percentage-point impact of higher commodity costs, primarily cooking oil, sweeteners and ingredients, the organic volume decline and higher advertising and marketing expenses. Unfavorable foreign exchange negatively impacted operating profit improvement by 11 percentage points.
AMESA
Net revenue increased 2%, primarily reflecting effective net pricing, partially offset by an organic volume decline. Unfavorable foreign exchange reduced net revenue growth by 28 percentage points, primarily due to weakening of the Egyptian pound.
Convenient foods unit volume declined 8%, primarily reflecting a double-digit decline in South Africa, partially offset by double-digit growth in the Middle East. Additionally, India and Pakistan each experienced a low-single-digit decline.
Beverage unit volume grew 15%, primarily reflecting double-digit growth in India, partially offset by a low-single-digit decline in Nigeria. Additionally, the Middle East experienced high-single-digit growth and Pakistan experienced double-digit growth.
Operating profit decreased 6%, primarily reflecting a 77-percentage-point impact of higher commodity costs, primarily cooking oil and packaging materials, certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by the effective net pricing, productivity savings and a 7-percentage-point favorable impact of adjustments to the charges recorded in the prior year related to the sale of a non-strategic brand. Unfavorable foreign exchange negatively impacted operating profit performance by 23 percentage points, primarily due to weakening of the Egyptian pound.
APAC
Net revenue decreased 1%, reflecting a 6-percentage-point impact of unfavorable foreign exchange, partially offset by effective net pricing and organic volume growth.
Convenient foods unit volume grew 4%, primarily reflecting high-single-digit growth in China, partially offset by a double-digit decline in Thailand and a mid-single-digit decline in Australia.
Beverage unit volume grew 2%, primarily reflecting double-digit growth in Vietnam and low-single-digit growth in China, partially offset by a double-digit decline in the Philippines and a slight decline in Thailand.
Operating profit increased 5.5%, primarily reflecting the effective net pricing and productivity savings. These impacts were partially offset by a 12-percentage-point impact of higher commodity costs, primarily
cooking oil and potatoes, and certain operating cost increases. Unfavorable foreign exchange reduced operating profit growth by 6 percentage points.
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 acquisitions and divestitures; 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. 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, impairment and other charges/credits comprised of Russia-Ukraine conflict charges and brand portfolio impairment charges, and the impact of settlement and curtailment gains and losses related to pension and retiree medical plans (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 and divestitures 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 from 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 3/25/2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 noncontrolling interests | Net income attributable to PepsiCo | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported, GAAP Measure | $ | 7,988 | $ | 9,858 | $ | 7,229 | $ | 2,629 | $ | 61 | $ | 546 | $ | 12 | $ | 1,932 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | (14) | 14 | (57) | 71 | — | 17 | — | 54 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (3) | 3 | (110) | 113 | (1) | 14 | 1 | 97 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | (2) | 2 | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment and other charges/credits | 4 | (4) | 9 | (13) | — | — | — | (13) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 7,975 | $ | 9,871 | $ | 7,069 | $ | 2,802 | $ | 60 | $ | 578 | $ | 13 | $ | 2,071 |
| 12 Weeks Ended 3/19/2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 7,433 | $ | 8,767 | $ | 6,580 | $ | (3,322) | $ | 242 | $ | 5,267 | $ | 134 | $ | 888 | $ | 4,261 | |||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark-to-market net impact | 33 | (33) | 79 | — | — | (112) | — | (26) | (86) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | (5) | 5 | (22) | — | — | 27 | — | 6 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | — | (50) | — | — | 50 | 6 | 9 | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain associated with the Juice Transaction | — | — | — | 3,322 | — | (3,322) | — | (452) | (2,870) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment and other charges/credits | (140) | 140 | (100) | — | (242) | 482 | — | 48 | 434 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and retiree medical-related impact | — | — | — | — | — | — | (16) | (4) | (12) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Core, Non-GAAP Measure | $ | 7,321 | $ | 8,879 | $ | 6,487 | $ | — | $ | — | $ | 2,392 | $ | 124 | $ | 469 | $ | 1,795 |
(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 | ||||||||||||||||||||||||||||||||||||||
| 3/25/2023 | 3/19/2022 | Change | ||||||||||||||||||||||||||||||||||||
| Net income attributable to PepsiCo per common share – diluted, GAAP measure | $ | 1.40 | $ | 3.06 | (54) | % | ||||||||||||||||||||||||||||||||
| Mark-to-market net impact | 0.04 | (0.06) | ||||||||||||||||||||||||||||||||||||
| Restructuring and impairment charges | 0.07 | 0.02 | ||||||||||||||||||||||||||||||||||||
| Acquisition and divestiture-related charges | — | 0.03 | ||||||||||||||||||||||||||||||||||||
| Gain associated with the Juice Transaction | — | (2.06) | ||||||||||||||||||||||||||||||||||||
| Impairment and other charges/credits | (0.01) | 0.31 | ||||||||||||||||||||||||||||||||||||
| Pension and retiree medical-related impact | — | (0.01) | ||||||||||||||||||||||||||||||||||||
| Core net income attributable to PepsiCo per common share – diluted, non-GAAP measure | $ | 1.50 | $ | 1.29 | 16 | % | ||||||||||||||||||||||||||||||||
| Impact of foreign exchange translation | 2 | |||||||||||||||||||||||||||||||||||||
| Growth in core net income attributable to PepsiCo per common share – diluted, on a constant currency basis, non-GAAP measure | 18 | % |
Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products 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
The 2019 Productivity Plan, publicly announced on February 15, 2019, will leverage new technology and business models to further simplify, harmonize and automate processes; re-engineer our go-to-market and information systems, including deploying the right automation for each market; and simplify our organization and optimize our manufacturing and supply chain footprint. To build on the successful implementation of the 2019 Productivity Plan, in 2022, we expanded and extended the plan through the
end of 2028 to take advantage of additional opportunities within the initiatives described above. As a result, we expect to incur pre-tax charges of approximately $3.65 billion, including cash expenditures of approximately $2.9 billion. Plan to date through March 25, 2023, we have incurred pre-tax charges of $1.6 billion, including cash expenditures of $1.1 billion. For the remainder of 2023, we expect to incur pre-tax charges of approximately $475 million, and cash expenditures of approximately $500 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 2028. Charges include severance and other employee costs, asset impairments and other costs.
See Note 3 to our condensed consolidated financial statements in this Form 10-Q, as well as Note 3 to our consolidated financial statements in our 2022 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 3 to our condensed consolidated financial statements.
Acquisition and Divestiture-Related Charges
Acquisition and divestiture-related charges include merger and integration charges and costs associated with divestitures. Divestiture-related charges reflect transaction expenses, including consulting, advisory and other professional fees. See Note 12 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 12 to our condensed consolidated financial statements for further information.
Impairment and Other Charges/Credits
We recognized Russia-Ukraine conflict charges and brand portfolio impairment charges as described below.
Russia-Ukraine Conflict Charges
In connection with the deadly conflict in Ukraine, we recognized charges related to property, plant and equipment impairment, allowance for expected credit losses, inventory write-downs and other costs. See Note 1 to our condensed consolidated financial statements for further information.
Brand Portfolio Impairment Charges
We recognized asset impairment charges as a result of management’s decision to reposition or discontinue certain brands. We also recognized adjustments to the charges recorded in the prior year related to the sale of a non-strategic brand. See Notes 1 and 4 to our condensed consolidated financial statements for further information.
Pension and Retiree Medical-Related Impact
Pension and retiree medical-related impact relates to curtailment gains resulting from the Juice Transaction.
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, 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 8 and 12 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 2022 Form 10-K for further information.
Our sources and uses of cash were not materially adversely impacted by the Russia-Ukraine conflict in the 12 weeks ended March 25, 2023 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” included in our 2022 Form 10-K for further information related to the impact of the Russia-Ukraine conflict on our business and financial results.
As of March 25, 2023, 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 March 25, 2023, 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 2022 Form 10-K for further discussion of the TCJ Act.
Supply chain financing 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. See Note 13 to our condensed consolidated financial statements for further discussion of supply chain financing arrangements.
Operating Activities
During the 12 weeks ended March 25, 2023, net cash used for operating activities was $0.4 billion, compared to net cash used for operating activities of $0.2 billion in the prior-year period. The decrease in operating cash flow primarily reflects unfavorable working capital comparisons, partially offset by favorable operating profit performance in the current year.
Investing Activities
During the 12 weeks ended March 25, 2023, net cash used for investing activities was $0.5 billion, primarily reflecting net capital spending of $0.6 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 on our business, and believe that we have sufficient liquidity to meet our net capital spending needs.
Financing Activities
During the 12 weeks ended March 25, 2023, net cash provided by financing activities was $0.8 billion, primarily reflecting proceeds from issuances of long-term debt of $3.0 billion and net proceeds of short-term borrowings of $0.9 billion, partially offset by the return of operating cash flow to our shareholders through dividend payments of $1.6 billion and share repurchases of $0.2 billion and payments of long-term debt borrowings of $1.3 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 9, 2023, we announced a 10% increase in our annualized dividend to $5.06 per share from $4.60 per share, effective with the dividend expected to be paid in June 2023. We expect to return a total of approximately $7.7 billion to shareholders in 2023, comprising dividends of approximately $6.7 billion and share repurchases of approximately $1.0 billion.
Free Cash Flow
The table below reconciles net cash used for 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.”
| 12 Weeks Ended | |||||||||||||||||
| 3/25/2023 | 3/19/2022 | ||||||||||||||||
| Net cash used for operating activities, GAAP measure | $ | (392) | $ | (174) | |||||||||||||
| Capital spending | (581) | (522) | |||||||||||||||
| Sales of property, plant and equipment | 19 | 3 | |||||||||||||||
| Free cash flow, non-GAAP measure | $ | (954) | $ | (693) | |||||||||||||
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 2022 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 8 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 2022 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 – Consolidated Review,” “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 March 25, 2023, total assets were $93.0 billion, compared to $92.2 billion as of December 31, 2022. In the 12-weeks ended March 25, 2023, there were no material changes in these line items.
Total Liabilities
As of March 25, 2023 total liabilities were $75.9 billion, compared to $74.9 billion as of December 31, 2022. The increase in total liabilities is primarily driven by the following line items:
| Change**(a)** | Reference | ||||||||||
| Short-term debt obligations | $ | 0.9 | (b) | ||||||||
| Accounts payable and other current liabilities | $ | (1.8) | (c) | ||||||||
| Long-term debt obligations | $ | 1.8 | (d) |
(a)In billions.
(b)Primarily reflects issuances of commercial paper. See Note 8 to our condensed consolidated financial statements for further information.
(c)Primarily reflects payments of 2022 production and capital expenditure payables across a number of our divisions.
(d)Primarily reflects issuances of long-term debt, partially offset by debt maturities. See Note 8 to our condensed consolidated financial statements for further information.
Total Equity
Refer to our condensed consolidated statement of equity and Notes 9 and 11 to our condensed consolidated financial statements.
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 March 25, 2023, the related Condensed Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the twelve weeks ended March 25, 2023 and March 19, 2022, 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 31, 2022, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the fiscal year then ended (not presented herein); and in our report dated February 8, 2023, 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 31, 2022, 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
April 24, 2023
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