PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 36 weeks of fiscal 2020, ended September 5, 2020; comparisons are to the periods ended September 7, 2019. Amounts are in U.S. dollars unless noted.
Business context and results
PepsiCo sells beverages, foods and snacks through seven divisions. The company reported continued shifts in demand and sales channels amid COVID-19, including stronger at-home and online demand and weaker demand in some away-from-home markets. North American results cover 12-week periods; most international results reflect calendar months June–August for the quarter and January–August year to date.
| Metric | 12 weeks ended Sept. 5, 2020 | Prior-year 12 weeks | 36 weeks ended Sept. 5, 2020 | Prior-year 36 weeks |
|---|---|---|---|---|
| Net revenue | $18.091 billion (+5%) | $17.188 billion | $47.917 billion (+3%) | $46.521 billion |
| Organic revenue growth | 4% | — | 4% | — |
| Operating profit | $3.011 billion (+5.5%) | $2.855 billion | $7.254 billion (−4.5%) | $7.592 billion |
| Operating margin | 16.6% | 16.6% | 15.1% | 16.3% |
| Net income attributable to PepsiCo | $2.291 billion (+9%) | $2.100 billion | $5.275 billion (−5%) | $5.548 billion |
| Diluted EPS | $1.65 (+10%) | $1.49 | $3.79 (−4%) | $3.94 |
| Operating cash flow | Not reported by quarter | — | $6.123 billion | $5.063 billion |
| Free cash flow | Not reported by quarter | — | $4.075 billion | $3.167 billion |
Quarterly gross profit was $9.935 billion, with an approximately 54.9% gross margin, compared with $9.494 billion and approximately 55.2% a year earlier. For the 36-week period, gross profit was $26.546 billion and gross margin approximately 55.4%, versus $25.735 billion and approximately 55.3%.
Financial position and cash flows
- At September 5, cash and cash equivalents were $9.094 billion and short-term investments were $611 million. Current assets were $24.060 billion and current liabilities $26.009 billion.
- Short-term debt was $6.692 billion and long-term debt $37.879 billion, or approximately $44.6 billion combined, up from approximately $32.1 billion at December 28, 2019. The company reported $2.1 billion of commercial paper outstanding and no borrowings under its revolving credit facilities.
- Year-to-date investing cash outflow was $8.761 billion, including $6.373 billion for acquisitions and investments and $2.074 billion of capital spending. Financing cash inflow was $6.411 billion, reflecting debt issuance and short-term borrowings, offset in part by dividends, repurchases and debt payments.
- Dividends paid were $4.094 billion and share repurchases were $1.543 billion in the 36-week period. Cash, cash equivalents and restricted cash totaled $9.159 billion at period-end.
Material changes and unusual items
- Revenue grew in the quarter across most divisions, but LatAm revenue fell 13%, primarily due to foreign exchange; PBNA volume declined slightly. Year-to-date, operating profit fell 19% in PBNA, 30% in AMESA and 11% in LatAm, while QFNA and APAC operating profit rose 26% and 27%, respectively.
- Unfavorable foreign exchange reduced reported revenue growth by 2 percentage points in both the quarter and year-to-date period. Year-to-date currency translation losses were $1.136 billion in other comprehensive income.
- COVID-19-related charges were $147 million for the quarter and $668 million year to date, including employee costs, protection measures, credit-loss allowances and inventory/product-return costs. Management said pandemic charges reduced year-to-date operating profit performance by 8 percentage points.
- Acquisitions included Rockstar for approximately $3.85 billion upfront plus tax-related contingent consideration, Pioneer Foods for approximately $1.2 billion, and Be & Cheery for approximately $0.7 billion. Year-to-date inventory fair-value and merger/integration charges were $286 million. Purchase-price allocations remained preliminary.
- The 2019 Productivity Plan had incurred $632 million of its expected $2.5 billion in pre-tax charges through September 5, 2020; expected total cash expenditures are approximately $1.6 billion. The plan is expected to be completed by 2023.
Outlook, management commentary and risks
PepsiCo said its cash generation, financial condition and available financing sources should be adequate for operating, investing and financing needs, and it had not identified material COVID-related liquidity deficiencies. It reduced its 2020 net capital spending expectation to approximately $4 billion from approximately $5 billion. The company expected to return approximately $7.5 billion to shareholders in 2020: $5.5 billion in dividends and $2 billion in repurchases. The filing does not provide a specific full-year revenue or earnings forecast.
Management described substantial uncertainty from the pandemic, including changes in consumer demand and channel mix, employee absenteeism, operating-cost increases, customer credit risk and potential supply-chain disruption. Other stated risks include foreign-exchange and commodity volatility, regulatory or tax measures affecting products and packaging, cybersecurity, litigation, acquisition integration, and access to capital markets or credit-rating downgrades. The company reported no material operational or supply-chain disruption to date. Management believes pending litigation is not expected to have a material adverse effect. The independent accountant’s interim review found no material modifications necessary for GAAP conformity; it was a review, not an audit.
Important facts for investors to verify
- How much reported revenue and operating-profit performance reflects organic trends versus acquisitions, foreign exchange, COVID-19 costs and other comparability items.
- Whether pandemic-driven at-home demand persists and whether foodservice, vending and other away-from-home channels recover without additional credit losses or impairment charges.
- Debt levels, commercial-paper access, refinancing needs and the effect of the increased debt burden on interest expense and liquidity.
- Final purchase-price allocations and integration costs for Rockstar, Pioneer Foods and Be & Cheery; also monitor Rockstar’s contingent consideration, recorded at $874 million with estimated maximum payments of approximately $1.1 billion.
- Delivery of the revised capital-spending and shareholder-return plans, and remaining productivity-plan charges and cash costs.
- Potential further foreign-exchange effects, product/packaging regulation, tax changes and pandemic-related restrictions or supply interruptions.