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# PepsiCo, Inc. (PEP) — Business, Risks and Management's Discussion All amounts are in US dollars unless stated otherwise. PepsiCo's fiscal year ends on the last Saturday of December: fiscal 2025 ended December 27, 2025, and the third quarter of 2026 is the 12 weeks ended September 5, 2026. North American results are reported in 12-week quarters, while international operations report on calendar months (the third quarter covers June, July and August outside North America). ## Business *Source: Form 10-K for fiscal 2025 (fiscal year ended December 27, 2025), SEC accession 0000077476-26-000007.* PepsiCo makes, markets, distributes and sells beverages and convenient foods (snacks, cereals, dips and similar packaged foods) in more than 200 countries and territories. Its brands include Lay's, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker and SodaStream. It earns revenue in two ways. In some businesses it makes and sells finished product itself, through company-owned plants, bottlers and direct-store-delivery fleets. In others it sells concentrate to independent bottlers, who make and sell the finished drinks. Fiscal 2025 net revenue was $93.9 billion. Convenient foods accounted for 58% and beverages for 42%. In North America the split was 51% beverages and 49% foods, and internationally it was 31% and 69%. Company-owned bottling operations, mainly in North America and EMEA, produced 36% of consolidated revenue. The company notes that these finished-goods operations bring in more revenue but at lower margins than concentrate sales to bottlers. The United States produced $52.2 billion of 2025 revenue, about 56%. The next-largest markets were Mexico ($6.9 billion), Russia ($4.8 billion), Canada ($3.7 billion), China ($2.6 billion), the United Kingdom ($2.1 billion), Brazil ($1.8 billion) and South Africa ($1.8 billion). Walmart and its affiliates, including Sam's Club, accounted for about 14% of consolidated net revenue, with sales reported in every segment. PepsiCo employed about 306,000 people at the end of 2025, about 125,000 of them in the United States. It spent $839 million on research and development in 2025. The company reports six segments. Their 2025 net revenue and reported operating profit were: - **PepsiCo Foods North America (PFNA)**: $27.5 billion of revenue and $6.2 billion of operating profit. This is the convenient food business in the US and Canada (Lay's, Doritos, Cheetos, Tostitos, Quaker, Sabra, Siete and others). It is the most profitable segment by a wide margin. - **PepsiCo Beverages North America (PBNA)**: $28.2 billion of revenue and $1.1 billion of operating profit, which was cut by Rockstar impairments (core operating profit was $3.3 billion). PBNA sells concentrate, fountain syrups and finished goods, including Pepsi, Mountain Dew, Gatorade, Aquafina, Bubly and poppi. It also distributes some third-party brands: Dr Pepper, Crush and Schweppes for Keurig Dr Pepper, and Celsius, Alani Nu and Rockstar for Celsius Holdings. It is the exclusive small-format and foodservice distributor for Tropicana Brands Group (TBG). - **International Beverages Franchise (IB Franchise)**: $5.0 billion of revenue and $1.8 billion of operating profit. This segment sells concentrate to international bottlers and also includes SodaStream. - **Europe, Middle East and Africa (EMEA)**: $18.0 billion of revenue and $2.1 billion of operating profit. It includes convenient foods, company-owned beverage bottling and a dairy business in Russia (Agusha, Chudo, Domik v Derevne). - **Latin America Foods (LatAm Foods)**: $10.5 billion of revenue and $2.0 billion of operating profit, from convenient foods led by Sabritas, Gamesa and Lay's. - **Asia Pacific Foods**: $4.6 billion of revenue and $0.4 billion of operating profit, from convenient foods in China, Australia, New Zealand and India. PepsiCo reaches retail shelves through four routes: direct-store delivery (DSD) for fast-turning, promotion-driven products; customer warehouses, which cost less than DSD; third-party distributors, including foodservice and vending; and e-commerce. Trade incentives are a large cost. These include rebates, slotting and promotion payments to retailers, and "bottler funding" negotiated each year with independent bottlers. Sales are generally highest in the third quarter and lowest in the first. In US measured channels, PepsiCo had about 16% of liquid refreshment beverage retail sales in 2025, against about 20% for The Coca-Cola Company, its main beverage competitor. Coca-Cola has a significant carbonated soft drink share advantage in many markets outside the US. Recent acquisitions explain part of today's portfolio. PepsiCo bought Siete, a Mexican-American foods brand, in January 2025 for $1.2 billion in cash (now in PFNA). It bought poppi, a prebiotic soda maker, in May 2025 for $1.95 billion in cash plus contingent consideration then valued at $0.2 billion (now in PBNA). In December 2024 it bought the remaining 50% of Sabra for $241 million. In August 2025, under the Celsius transaction, PepsiCo exchanged the US and Canadian Rockstar brand ($0.5 billion) and cash for Series B convertible preferred shares of Celsius Holdings, valued at $585 million. ## Risk factors *Source: Form 10-K for fiscal 2025, SEC accession 0000077476-26-000007 (Item 1A and the "Our Business Risks" section of Item 7). The Q3 2026 Form 10-Q (accession 0000077476-26-000048) reports no material changes to these risk factors.* The 10-K's risk factors condense to the following substantive exposures: - **Changing demand and consumer health trends.** Demand depends on keeping up with consumer preferences. The company names increasing use of weight-loss drugs such as GLP-1 medications, more food bought away from home, switching to private label under affordability pressure, and changes to benefit programs such as SNAP. It also names concerns about "ultra-processed" foods, artificial colors and ingredients, and AI shopping agents that may choose competitors' products. Such concerns can lead consumers to cut back or publicly boycott its products. - **Ingredient taxes and marketing limits.** Taxes keep rising on sugar-sweetened beverages, and increasingly on snacks high in sugar, sodium or saturated fat. For example, Mexico raised its flat tax on sweetened beverages from about $0.09 (1.64 pesos) to about $0.17 (3.08 pesos) per liter from January 1, 2026. Texas has passed a law requiring warning labels on products with certain ingredients, including artificial colors, from January 1, 2027. Several jurisdictions, including the United States, are considering color-coded front-of-pack labeling and restrictions on "ultra-processed" foods. - **Input costs, tariffs and supply disruption.** Commodity, packaging (including recycled PET), transport and labor costs are volatile. US tariffs on China, the EU, Canada, Mexico and other countries, and retaliation by those countries, have raised input costs. Higher costs may not be fully recoverable through pricing without losing volume. In 2025, higher commodity costs cut consolidated operating profit growth by 5 percentage points and EMEA's by 22 points. - **Competition and retail concentration.** Coca-Cola is the main beverage competitor. The company also names private label, micro-brands, hard discounters and the shift to e-commerce. Retailers and buying groups are cutting shelf space and promoting their own brands, and losing or cutting back any key customer would hurt results; Walmart alone accounts for about 14% of revenue. - **International, Russia and currency exposure.** Operations outside the US produced 44% of 2025 revenue. At year-end 2025, Russia accounted for 5% of revenue, 5% of assets, 20% of cash and 39% of the accumulated currency translation loss. The company also names Argentina, Brazil, China, Mexico, the Middle East (including Egypt), Turkey and Ukraine as difficult markets. Risks include currency controls, sanctions, highly inflationary accounting (Argentina, Egypt, Turkey) and possible expropriation of assets. - **Impairment of acquired brands.** Brand impairments have already hit results: PepsiCo recorded $1.9 billion of pre-tax charges in 2025, mostly for Rockstar plus Be & Cheery. At the end of 2025 the estimated fair value of the SodaStream reporting unit "narrowly exceeded" its carrying value, so further goodwill impairment is possible if results or the cost of capital move against it. - **Execution of productivity and restructuring.** Margin plans rely on the 2019 Multi-Year Productivity Plan, which has been extended through 2030 with about $6.15 billion of expected pre-tax charges. They also rely on shared-services and ERP migrations and on the priorities announced in 2025 to restore North American competitiveness. These programs risk disruption, employee attrition and savings that fall short. - **Packaging and plastics regulation.** Extended producer responsibility laws in several US states, plastic taxes, recycled-content mandates, tethered-cap rules, PFAS restrictions and deposit schemes all raise costs and capital needs. The company also faces plastic-pollution lawsuits from New York State, Baltimore, Los Angeles County and the US Virgin Islands. - **Tax.** The OECD 15% global minimum tax raises PepsiCo's tax provision. Audits by tax authorities may settle differently from what the company has reserved. - **Cyber, data privacy and third-party providers.** The company names ransomware and AI-enabled threats, compromises through the software supply chain, outages during the ERP migration, and evolving privacy laws (the California Consumer Privacy Act, GDPR and China's Personal Information Protection Law). - **Credit ratings.** A downgrade would raise borrowing costs and could limit the Tier 1 commercial paper access the company relies on. - **Water scarcity, product recalls and talent.** Water is needed both in manufacturing and in growing raw materials. Recalls can be costly; the 2024 Quaker bars and cereals recall cost $184 million that year. The company also cites the need to keep skilled staff and to manage leadership succession. ## Management's discussion — fiscal 2025 *Source: Form 10-K for fiscal 2025, SEC accession 0000077476-26-000007 (Item 7). Strategy context from PepsiCo's December 8, 2025 announcement, Form 8-K accession 0000077476-25-000059 (Exhibit 99.1).* **Results.** In 2025, sales grew but reported profit fell, mainly because of brand impairments and restructuring. - **Revenue.** Net revenue rose 2% to $93.9 billion. Organic revenue, a non-GAAP measure, also rose 2%: effective net pricing added 4 points and organic volume subtracted 2. - **Operating profit.** Reported operating profit fell 11% to $11.5 billion, and operating margin narrowed from 14.0% to 12.2%. The main causes were operating cost increases, Rockstar impairment charges, lower volume, a 5-point drag from commodity costs and higher acquisition-related charges. - **Earnings.** Net income attributable to PepsiCo fell 14% to $8.24 billion, and diluted EPS fell from $6.95 to $6.00. - **Items excluded from core results.** These were $1.95 billion of impairment and other charges, $964 million of restructuring charges and $453 million of acquisition and divestiture charges (mostly poppi). - **Core results.** Core operating profit, a non-GAAP measure, rose 1.5% to $14.9 billion. Core EPS was $8.14, against $8.16 in 2024. - **Below operating profit.** Net interest expense rose $202 million because of higher average debt. The tax rate was 19.0%, against 19.4% in 2024. **Segments.** The two North American segments lost ground while the international businesses grew: - **PFNA**: revenue rose slightly, helped only by acquisitions and pricing. Unit volume fell 2%, including a 3% drop in savory snacks, and operating profit fell 7%. - **PBNA**: revenue rose 1.5% on pricing while unit volume fell 3%. Operating profit fell 53%, mainly because of the Rockstar impairment. Higher commodity costs took 5 points off PBNA's profit growth, driven by a 6-point impact from tariffs. - **IB Franchise**: revenue rose 2%. Operating profit rose 21%, helped by the absence of a 2024 indirect tax reserve. - **EMEA**: revenue rose 8% and operating profit rose 7%, although higher dairy, potato and cooking-oil costs took 22 points off profit growth. - **LatAm Foods**: revenue was roughly flat after a 5-point foreign exchange headwind, and operating profit fell 2%. - **Asia Pacific Foods**: revenue rose 2% on 4% volume growth, led by India, Thailand and Australia. Operating profit fell 2% after a Be & Cheery impairment. **Strategy.** Management's priorities, in its own words, are: - reigniting the North America business by combining operations where it makes sense and putting the savings into brand investment; - increasing the scale of the international business; - growing away-from-home channels. The company is reformulating core brands to cut sugar, sodium and saturated fat and to remove artificial colors and flavors from Lay's, Cheetos and Doritos. It is also adding functional products such as Pepsi Prebiotic Cola. In North America it is evaluating an integrated model for its food and beverage supply chains and go-to-market systems. The plan PepsiCo announced on December 8, 2025, after engagement with Elliott Investment Management, centers on PFNA. It combines sharper value on affordable price tiers, simpler-ingredient and higher-protein innovation, and cost cuts. By the time of the announcement, three manufacturing plants had been closed in 2025. **Cash and capital.** - **Operating and free cash flow.** Operating cash flow was $12.1 billion in 2025, against $12.5 billion in 2024; higher restructuring and acquisition-related payments weighed on it. Capital spending fell to $4.4 billion from $5.3 billion, so free cash flow, a non-GAAP measure, rose 9% to $8.2 billion. - **Investing.** The year's $6.9 billion investing outflow included the poppi and Siete acquisitions described above. - **Shareholder returns and debt.** Dividends and buybacks returned $8.6 billion to shareholders. PepsiCo issued $8.2 billion of long-term debt and repaid $4.1 billion. - **2026 capital-return plans.** The 10-K reports the February 2026 dividend increase to $5.92 a year and a new $10 billion buyback authorization. Planned 2026 cash returns are weighted heavily toward dividends: about $7.9 billion, against about $1.0 billion of repurchases. - **Final transition tax payment.** A final payment of $965 million under the Tax Cuts and Jobs Act was due in 2026. ## Current quarter — third quarter of 2026 *Source: Form 10-Q for the 12 and 36 weeks ended September 5, 2026, SEC accession 0000077476-26-000048. Guidance and management commentary from the Q3 2026 earnings release, Form 8-K accession 0000077476-26-000050 (Exhibit 99.1), dated October 8, 2026.* **Headline results.** Third-quarter net revenue rose 5.6% to $25.27 billion. The increase breaks down as follows: - 3.1% organic growth, with both pricing and volume contributing; - a 1.7-point net benefit from acquisitions and divestitures, all of it in PBNA and reflecting acquisitions made in 2025; - a 0.7-point benefit from foreign exchange. Operating profit rose 19% to $4.26 billion, and operating margin widened from 14.9% to 16.9%. Core operating profit rose only 3%, to $4.28 billion, and core operating margin narrowed by 35 basis points to 16.9%. The gap comes from items excluded from core results: - a swing in acquisition-related items, from $221 million of charges a year earlier to a $96 million credit this quarter, mainly from lowering the fair value of the poppi contingent consideration; - $79 million of mark-to-market gains on commodity hedges. Core profit growth came from productivity savings, pricing and a 4-point benefit from US tariff refunds. In the 36 weeks to September 5, 2026, the US Supreme Court ruled many tariffs imposed under the International Emergency Economic Powers Act invalid. PepsiCo then claimed refunds of the eligible tariffs and has received substantially all of them. Higher operating costs and more advertising spending partly offset these gains. Diluted EPS rose 17% to $2.23. That figure absorbed a $144 million pre-tax pension settlement charge ($0.08 per share) caused by lump-sum payouts. Core EPS rose 2% to $2.34, and 1.5% on a constant-currency basis. The tax rate was 21.4%, unchanged from a year earlier. For the 36 weeks: - revenue rose 6.7% to $68.9 billion; - operating profit rose 45% to $11.5 billion, largely because the 2025 Rockstar and Be & Cheery impairments did not recur; - EPS rose to $6.10 from $4.15, and core EPS rose 5% to $6.15; - the year-to-date tax rate rose to 21.6% from 20.8%. The 10-Q attributes the increase to the absence of the prior year's release of federal interest accruals, and notes that the OECD minimum tax took wider effect in 2026, adding to the tax provision. **Segments in the quarter.** North America and the international businesses moved in different directions: - **PFNA**: revenue was $6.50 billion, slightly lower. Volume grew slightly, with savory snacks up 1%, but net pricing was lower. Operating profit fell 13% to $1.33 billion, and core operating profit fell 12%. Causes were higher operating costs, lower net pricing, 4 points of higher commodity costs, and gains on asset sales a year earlier that did not recur. - **PBNA**: revenue rose 5% to $7.71 billion, driven by acquisitions; organic revenue was flat, with volume down 3% and pricing up 3%. Unit volume fell 2%: noncarbonated drinks fell 3% and carbonated soft drinks 2%. Reported operating profit jumped 45% to $1.06 billion. The main drivers were the poppi contingent-consideration credit, a 23-point net benefit from tariffs (including refunds) after higher commodity costs, and productivity savings. Core operating profit rose 4%. - **IB Franchise**: revenue rose 8% (7% organic) on 5% volume growth led by India. Operating profit rose 29%. - **EMEA**: revenue rose 8% (9% organic) on pricing. Operating profit rose 25%. - **LatAm Foods**: revenue rose 14%, with 8 points from currency; organic growth was 6% and volume rose 3%. Operating profit rose 47%, helped by the absence of a 2025 tax-audit settlement and by Brazilian indirect tax credits. - **Asia Pacific Foods**: revenue rose 10% (9% organic) on 11% volume growth led by India. Operating profit rose 15%. Russia accounted for 6% of third-quarter revenue and 20% of consolidated cash. At September 5 it also accounted for 42% of the accumulated currency translation loss. **poppi contingent consideration.** PepsiCo owes a further $300 million to the former owners of poppi only if performance milestones are met by the third quarter of 2027. The fair value of that liability is estimated from forecasts of net revenue and margin. It fell to $12 million at September 5, 2026, from $278 million at year-end 2025. The decreases, $105 million in the quarter and $266 million year to date, were recorded as reductions in selling, general and administrative expenses, which raised PBNA's reported profit. **Celsius investment.** PepsiCo's Celsius convertible preferred shares were carried at $1.48 billion at September 5, 2026. Year to date they have had $328 million of unrealized losses, recorded in other comprehensive income rather than earnings. **Cash flow, balance sheet and financing.** - **Cash flow.** Operating cash flow for the 36 weeks rose to $7.95 billion from $5.47 billion, on better operating profit and working capital. Free cash flow, a non-GAAP measure, rose to $5.86 billion from $3.24 billion. Dividends and buybacks returned $6.7 billion year to date. In the quarter the company bought back 1.9 million shares at an average $140.08, leaving $9.25 billion under the 2026 authorization. - **New debt.** PepsiCo issued €2.5 billion of euro notes in February 2026. It designated them as hedges of its net investment in foreign operations. - **Maturities and commercial paper.** During the 36 weeks, $1.6 billion of dollar notes and €0.5 billion of euro notes matured. Commercial paper outstanding was $4.8 billion at September 5. - **Debt and equity at quarter-end.** Short-term debt was $9.22 billion, long-term debt $42.66 billion and total equity $22.49 billion. - **Credit facilities.** Nothing was drawn on the two $5.0 billion revolving credit facilities renewed in May 2026. - **Transition tax.** The final $965 million transition-tax payment has been made. **Restructuring.** The 2019 Productivity Plan has cost $4.0 billion pre-tax to date, including $3.1 billion in cash. For the rest of 2026 the company expects about $500 million of pre-tax charges and about $250 million of cash spending. The plan still assumes about $6.15 billion in total by 2030. **Litigation.** On July 21, 2026, the court in the Baltimore plastic-pollution case dismissed the last remaining claim, for public nuisance. The plaintiffs appealed all claims on August 18, 2026. The New York State, Los Angeles and US Virgin Islands matters are still pending. **Outlook.** With third-quarter results on October 8, 2026, PepsiCo raised its expected 2026 net revenue growth to about 6%, helped by currency and the 2025 acquisitions. At the same time it cut core EPS growth to 2.5% to 3.5%, from the low end of 5% to 7%. Management said further structural cost reductions are being identified. The savings are meant to fund investment in growth and to offset rising input cost inflation. The 10-Q also warns that further lump-sum pension payouts in the fourth quarter would trigger more settlement charges. ## Subsequent events *Source: Form 10-Q for the period ended September 5, 2026, SEC accession 0000077476-26-000048 (Note 7, Debt Obligations; Note 8, Financial Instruments).* The 10-Q discloses the following events after the September 5, 2026 quarter end: - **Note maturity.** $1.1 billion of US dollar-denominated senior notes matured and were repaid. - **Conversion and hedge of an investment.** PepsiCo converted an available-for-sale debt investment (shown as "Other" Level 3 available-for-sale securities, carried at $300 million at September 5, 2026) into common shares of its issuer, under the investment agreement. The filing does not name the issuer. PepsiCo then entered into a forward sale contract with a notional amount of $253 million to hedge the market-price exposure on those shares. It expects pre-tax income of $50 million from this, to be recognized in corporate unallocated expenses in the fourth quarter of 2026. The company says it now hedges price risk on certain equity investments with forward contracts and other derivative or non-derivative instruments. The 10-Q reports no acquisition, divestiture or new borrowing after the quarter end, and the October 8, 2026 earnings release announces none.