PepsiCo, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. PepsiCo reported results for the 12 and 36 weeks ended September 4, 2021, compared with the corresponding 2020 periods. The company operates across seven divisions in beverages, food and snacks. Figures below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | 12 weeks ended Sept. 4, 2021 | Change vs. 2020 | 36 weeks ended Sept. 4, 2021 | Change vs. 2020 |
|---|---|---|---|---|
| Net revenue | $20.189 billion | +12% | $54.226 billion | +13% |
| Gross profit | $10.795 billion | +$860 million | $29.281 billion | +$2.735 billion |
| Operating profit | $3.159 billion | +5% | $8.600 billion | +19% |
| Net income attributable to PepsiCo | $2.224 billion | -3% | $6.296 billion | +19% |
| Diluted EPS | $1.60 | -3% | $4.54 | +20% |
| Operating margin | 15.6% | Down 1.0 percentage point | 15.9% | Up 0.8 percentage point |
Gross margin was approximately 53.5% for the quarter and 54.0% for the 36-week period, versus approximately 54.9% and 55.4%, respectively, in 2020. The quarterly tax rate rose to 26.3% from 18.6%, principally reflecting a $112 million non-cash tax expense from remeasuring uncertain tax positions following an IRS assessment, as well as prior-year Swiss tax benefits. The 36-week tax rate was 23.0%, compared with 20.8%.
Cash flow and liquidity. For 36 weeks, operating cash flow was $6.634 billion, up from $6.123 billion. Capital spending was $2.276 billion; reported free cash flow, a non-GAAP measure, was $4.398 billion versus $4.075 billion. Investing activities used $1.030 billion and financing activities used $7.221 billion. Cash, cash equivalents and restricted cash ended the period at $6.607 billion; the balance sheet reported $6.506 billion of cash and cash equivalents and $344 million of short-term investments.
At September 4, 2021, short- and long-term debt obligations totaled $41.257 billion, versus $44.150 billion at December 26, 2020. Current liabilities of $25.077 billion exceeded current assets of $23.710 billion. PepsiCo said its cash-generation capability, credit facilities and other financing sources should be adequate for operating, investing and financing needs; it reported no borrowings under its revolving credit agreements and no commercial paper outstanding. The $2.9 billion mandatory transition tax liability is payable through 2026.
Changes and operating drivers
- Revenue growth reflected organic volume and effective pricing, with favorable foreign exchange contributing about 2 percentage points to reported growth in both periods. Acquisitions contributed to reported growth, especially in AMESA and APAC over 36 weeks.
- Quarterly operating profit growth was supported by revenue growth and productivity savings, but pressured by higher commodity and transportation costs. Management attributed a 14-percentage-point impact on quarterly operating profit growth to higher commodity costs. For 36 weeks, higher commodity costs had a 10-percentage-point impact.
- Quarterly net income and diluted EPS declined despite higher revenue and operating profit, primarily amid the higher tax rate and other period-specific effects. For 36 weeks, lower prior-year acquisition/divestiture and COVID-related charges supported year-over-year operating profit and earnings growth; adjusted or “core” measures are non-GAAP.
- Performance varied by division. QFNA revenue and volume weakened against prior-year pandemic-related demand; its 36-week revenue declined 3.5% and operating profit declined 22%. PBNA, LatAm, AMESA and APAC reported revenue growth, while Europe’s quarterly operating profit fell 8% amid cost inflation.
- Dividends paid in the 36-week period were $4.328 billion. PepsiCo increased its annualized dividend 5% to $4.30 per share beginning with the June 2021 payment. It expected approximately $5.9 billion of total shareholder returns in 2021, including about $5.8 billion in dividends and $106 million in repurchases; it did not expect further repurchases for the balance of 2021.
Outlook, risks and unusual items
- The filing does not provide a clear full-year revenue or EPS guidance figure. Management expected higher-than-anticipated transportation and commodity costs to continue through the remainder of 2021 and noted that passing costs through to customers could affect volume, revenue and margins.
- PepsiCo expanded and extended its 2019 Productivity Plan through 2026. Estimated total pre-tax charges increased to approximately $3.15 billion, including approximately $2.4 billion of cash expenditures, from prior estimates of $2.5 billion and $1.6 billion, respectively. The company expected about $150 million of charges and cash expenditures for the rest of 2021.
- The agreement to sell Tropicana, Naked and other selected juice businesses was expected to generate approximately $3.3 billion in pre-tax cash proceeds, while PepsiCo retained a 39% interest in a new joint venture. Closing was expected in late 2021 or early 2022, subject to customary conditions and approvals. The businesses generated approximately $3 billion of 2020 revenue.
- COVID-19 continued to create uncertainty around demand, consumer channels, labor, supply chains and costs; the filing specifically cited the delta variant and evolving restrictions. Management said COVID-19 had not materially adversely affected liquidity during the period and did not expect a material liquidity impact based on information then available.
- Other stated risks include commodity and raw-material inflation, supply-chain disruption and labor shortages, foreign exchange and geopolitical volatility, changing retail channels, regulation or taxation of products and packaging, cybersecurity, and legal or tax matters. Management said there were no material changes to the risk factors in the 2020 Form 10-K and believed pending proceedings would not materially adversely affect results, financial condition or cash flows.
- Unusual items include the $112 million non-cash tax expense from the IRS review; a $69 million pre-tax gain on sale of a short-term investment during the 36-week period; and the revised productivity-plan estimate. The independent accountant’s interim review reported no material modifications needed for GAAP conformity; it was a review, not an audit.
Investor verification points
- Track whether pricing and productivity savings offset continuing commodity, transportation and labor-cost inflation without materially weakening volume or margins.
- Separate organic growth from acquisition, foreign-exchange and prior-year comparison effects, particularly in AMESA and APAC.
- Monitor QFNA demand trends and whether the post-pandemic channel and product mix changes persist.
- Verify the timing, approvals, final proceeds and balance-sheet effects of the juice transaction, including the retained 39% interest.
- Assess cash conversion, capital spending, dividend commitments, debt maturities and payment of the transition tax liability.
- Compare actual restructuring charges and cash expenditures with the expanded $3.15 billion plan estimate and management’s remaining-period expectations.