PepsiCo, Inc. — FY2020 Form 10-K
Business context and reporting period. PepsiCo is a global food and beverage company operating across seven divisions and more than 200 countries and territories. This filing covers the fiscal year ended December 26, 2020; the fourth quarter comprised 16 weeks. Results reflect substantial COVID-19 disruption and acquisitions completed during the year.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $70.372 billion | $67.161 billion | +5% |
| Organic revenue growth (non-GAAP) | 4% | ||
| Operating profit | $10.080 billion | $10.291 billion | -2% |
| Operating margin | 14.3% | 15.3% | -1.0 percentage point |
| Net income attributable to PepsiCo | $7.120 billion | $7.314 billion | -3% |
| Diluted EPS | $5.12 | $5.20 | -2% |
| Operating cash flow | $10.613 billion | $9.649 billion | +10% |
| Free cash flow (non-GAAP) | $6.428 billion | $5.587 billion | +15% |
Liquidity and debt. At year-end, cash and cash equivalents were $8.185 billion and short-term investments were $1.366 billion. Short-term debt was $3.780 billion and long-term debt was $40.370 billion. Total assets were $92.918 billion; total liabilities were $79.366 billion. Management said available cash generation and financing sources should be sufficient for operating, investing and financing needs, and reported no material liquidity deficiencies from COVID-19.
Margins and adjusted results. Gross profit was $38.575 billion. Core operating profit, excluding specified comparability items, was $10.531 billion versus $10.602 billion in 2019. Core diluted EPS was $5.52, essentially flat year over year; on a constant-currency basis, core EPS growth was 2%.
Material changes versus the prior year
- Revenue growth was driven by organic growth and acquisitions; foreign exchange was a headwind. Acquisitions and divestitures reduced the reported-to-organic growth comparison by 3 percentage points.
- Operating profit and margin declined despite higher revenue, primarily reflecting operating cost increases and COVID-related costs. The company recorded $774 million in COVID-related charges; management said these reduced operating profit performance by 7 percentage points.
- Results varied by division: Quaker Foods North America revenue and volume each grew 10%, while PepsiCo Beverages North America operating profit fell 11%. Latin America revenue declined 8%, mainly due to foreign exchange; AMESA and APAC reported acquisition-supported revenue growth.
- Operating cash flow improved, while investing cash outflows increased to $11.619 billion, principally reflecting acquisitions and capital spending. Capital spending was $4.240 billion.
- Long-term debt increased year over year, alongside $13.809 billion of long-term debt issuance. Cash dividends paid were $5.509 billion and share repurchases were $2.000 billion.
Outlook, management commentary, risks and unusual items
- Management’s strategic priorities are to improve growth and market share, strengthen cost management and productivity, invest in digital and e-commerce capabilities, and advance sustainability and social initiatives. The filing does not provide a clear numerical FY2021 revenue, earnings or cash-flow guidance target.
- Management expected approximately $500 million of pre-tax charges, including about $400 million in cash expenditures, in 2021 under its multi-year productivity plan. The overall plan is expected to incur approximately $2.5 billion in pre-tax charges through 2023.
- For 2021, PepsiCo announced an expected shareholder return of approximately $5.9 billion: about $5.8 billion in dividends and $100 million in share repurchases. It also announced a 5% increase in the annualized dividend to $4.30 per share, effective with the dividend expected in June 2021.
- COVID-19 continued to affect demand, sales channels, employee and operating costs, customers and supply chains. Management said the pandemic’s future financial impact remained uncertain and dependent on evolving conditions.
- Other key risks include commodity-cost volatility, foreign exchange exposure, changing consumer preferences, customer concentration, packaging and product regulation, water scarcity, climate change, cyber incidents, and litigation and tax exposures. Walmart and its affiliates accounted for approximately 14% of consolidated revenue.
- Notable items included acquisitions of Rockstar for approximately $3.85 billion upfront plus contingent consideration, Pioneer Foods for approximately $1.2 billion, and Be & Cheery for approximately $0.7 billion. Acquisition-related inventory fair-value and integration charges totaled $255 million. A $205 million pension settlement charge was also recorded.
- PepsiCo received notice that its Bang Energy distribution rights would terminate without cause effective October 24, 2023. The filing reports a $41 million impairment related to a coconut water brand.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded the 2020 acquisitions of Pioneer Foods and Be & Cheery.
Most important facts for investors to verify
- Whether organic growth, pricing and volume trends can offset ongoing COVID-19 effects, currency headwinds and operating-cost pressure.
- Whether the acquired businesses deliver expected growth and returns, and how contingent Rockstar tax consideration and acquisition integration costs develop.
- Debt maturities, interest costs, cash generation and the capacity to fund dividends, planned investment and productivity initiatives.
- Whether the $774 million of pandemic-related charges and other adjusted items are truly nonrecurring; compare GAAP results with the company’s non-GAAP measures.
- Exposure to Walmart, commodity prices, foreign exchange, regulatory changes and the scheduled loss of Bang Energy distribution rights.