PepsiCo, Inc. — Q1 2020 Form 10-Q
Reporting period: 12 weeks ended March 21, 2020; comparison is the 12 weeks ended March 23, 2019. Financial statements are unaudited and were reviewed by KPMG. Most international results reflect January and February.
Business context and results
PepsiCo reports seven divisions spanning beverages, foods and snacks. Food and snack businesses represented approximately 55% of consolidated revenue. COVID-19 had begun shifting demand toward at-home consumption and away from foodservice and other immediate-consumption channels.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $13.881 billion | $12.884 billion | +8% |
| Gross profit | $7.754 billion | $7.196 billion | +8% |
| Operating profit | $1.924 billion | $2.008 billion | -4% |
| Operating margin | 13.9% | 15.6% | -1.7 percentage points |
| Net income attributable to PepsiCo | $1.338 billion | $1.413 billion | -5% |
| Diluted EPS | $0.96 | $1.00 | -4% |
| Net cash used for operating activities | $749 million | $345 million | Greater outflow |
| Free cash flow (non-GAAP) | -$1.228 billion | -$785 million | Greater outflow |
Gross margin was approximately 55.9% in both periods, based on reported revenue and gross profit. The reported tax rate was 21.0%, compared with 23.9%. Excluding identified comparability items, diluted EPS was $1.07, up 10% on a constant-currency basis; this is a company-defined non-GAAP measure, not reported GAAP EPS.
Divisions and material changes
- Revenue increased across all divisions. Organic revenue growth was 8% overall; volume increased 6% and effective net pricing contributed 2%.
- FLNA and QFNA reported revenue growth of 7% each, with operating profit up 4% and 8%, respectively. Management attributed stronger demand partly to COVID-19-related pantry loading.
- PBNA revenue rose 7%, but operating profit fell 24%, principally reflecting COVID-related charges. The filing also describes increased beverage demand, including water and Gatorade, alongside pressure from away-from-home channels.
- Europe revenue increased 14%; SodaStream contributed 6 percentage points, including an extra month of sales from calendar alignment. Europe operating profit rose 28%.
- Operating profit increased 1% in LatAm, 26% in AMESA and 33% in APAC. Foreign exchange reduced revenue growth in LatAm and APAC; APAC beverage volume declined 2%.
- Reported operating profit included $143 million of COVID-19 charges: $68 million of expected-credit-loss allowances, $44 million of PBNA customer-payment write-downs, $26 million of inventory write-downs and product returns, and $5 million of other charges.
Consolidated operating profit was also pressured by an unfavorable mark-to-market commodity-derivative impact of $142 million, principally in corporate unallocated expenses. Excluding specified comparability items, operating profit was $2.123 billion versus $1.994 billion, up 6%.
Cash flow, debt and liquidity
- Operating cash outflow was $749 million, primarily reflecting unfavorable working-capital comparisons. Capital spending was $484 million; investing cash outflow was $925 million, including $445 million for other acquisitions and investments.
- Financing provided $7.462 billion, including $6.429 billion of long-term debt proceeds and $2.794 billion of net short-term borrowings. Cash dividends paid were $1.349 billion and share repurchases were $573 million.
- At March 21, cash and cash equivalents were $11.089 billion, short-term investments $158 million, and total current assets $24.268 billion. Total current liabilities were $22.078 billion.
- Short-term debt was $5.882 billion and long-term debt $35.361 billion, versus $2.920 billion and $29.148 billion, respectively, at year-end. The company reported $2.8 billion of commercial paper outstanding.
- PepsiCo issued $6.5 billion gross principal of senior notes, with maturities from 2025 to 2060; proceeds were intended for general corporate purposes, including commercial-paper repayment. Management said it believed available cash generation and financing sources would meet operating and investing needs and reported no material COVID-related liquidity deficiency to date.
- The company’s free cash flow was negative. It cautions that this non-GAAP measure is not cash available for discretionary spending because it excludes obligations such as debt service.
Outlook, commentary and risks
- The filing provides no quantified full-year revenue or earnings guidance. Management said it was reviewing net capital-spending plans in light of COVID-19 and could not reliably predict the pandemic’s ultimate effect.
- Management estimated COVID-related changes in consumer consumption patterns contributed approximately 2 percentage points to reported net revenue and organic revenue growth in the quarter. At-home demand supported some businesses, while reduced foodservice and away-from-home demand pressured beverages.
- The company reported no material disruption to operations or supply chain to date, but warned of potential demand changes, higher costs, workforce and facility interruptions, supply constraints, customer credit deterioration and restricted access to capital markets.
- COVID-related expected-credit-loss allowances reflected uncertainty, including exposure to foodservice and vending customers. Further credit losses, impairments or product-demand shifts remain possible.
- The 2019 Productivity Plan is expected to generate approximately $2.5 billion of pretax charges and $1.6 billion of cash expenditures through 2023. Through March 21, $546 million of charges and approximately $321 million of cash expenditures had been incurred. Management expected approximately $400 million of charges and $350 million of cash expenditures for the remainder of 2020.
- Shareholder-return plans: management expected approximately $7.5 billion of 2020 returns, including $5.5 billion in dividends and $2 billion in repurchases. The annualized dividend was raised 7% to $4.09 per share, effective with the expected June 2020 payment.
- Subsequent events: PepsiCo acquired Pioneer Foods on March 23 for approximately $1.2 billion, financed through bridge loans; it expected to repay those borrowings in Q2. It acquired Rockstar on April 24 for approximately $3.85 billion upfront plus contingent consideration. An agreement to acquire Be & Cheery for $705 million was expected to close in the second half of 2020, subject to conditions.
- The CARES Act was enacted after quarter-end. Management expected related payment deferrals but no material effect on financial results or liquidity. Litigation and other proceedings were disclosed; management did not expect their ultimate outcomes to have a material adverse effect.
Most important facts for investors to verify
- Whether COVID-19 demand shifts persist, reverse, or continue to affect foodservice and beverage-channel profitability.
- Whether the $143 million of pandemic-related charges, customer credit exposures and inventory risks increase in subsequent quarters.
- How operating cash flow and working capital recover, and how debt, commercial paper and acquisition financing affect liquidity and financing costs.
- Execution and cash costs of the productivity plan, planned capital spending, and the stated dividend and repurchase program.
- Integration, purchase accounting and returns from Pioneer Foods, Rockstar and any completed Be & Cheery transaction.
- Commodity and currency volatility, including derivative valuation effects; the filing reported $672 million of derivative liabilities with credit-risk-related contingent features, with no collateral requirement triggered as of March 21.