PepsiCo, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. PepsiCo reported results for the 12 and 24 weeks ended June 12, 2021, compared with the periods ended June 13, 2020. The company operates across seven divisions spanning beverages, foods and snacks. International reporting periods differ from North America’s. The interim financial statements are unaudited; KPMG conducted a review and reported no material modifications needed for GAAP conformity.
Key financial results
| Metric | 12 weeks | 24 weeks |
|---|---|---|
| Net revenue | $19.217 billion, up 21% | $34.037 billion, up 14% |
| Organic revenue growth (non-GAAP) | 13% | 8% |
| Gross profit | $10.337 billion; gross margin 53.8% | $18.486 billion; gross margin 54.3% |
| Operating profit | $3.129 billion, up 35%; operating margin 16.3% | $5.441 billion, up 28%; operating margin 16.0% |
| Net income attributable to PepsiCo | $2.358 billion, up 43% | $4.072 billion, up 36% |
| Diluted EPS | $1.70, up 44% | $2.94, up 37% |
| Operating cash flow | $2.340 billion, versus $1.462 billion in the prior-year 24 weeks | |
| Free cash flow (non-GAAP) | $1.057 billion, versus $292 million |
Reported earnings benefited from lower COVID-related charges versus 2020; those reductions contributed 16 percentage points to 12-week and 11 points to 24-week net income growth. Six-month operating-profit growth also benefited from lower acquisition-related charges and higher mark-to-market gains on commodity derivatives. Higher commodity costs, operating costs and advertising and marketing spending partly offset growth. Foreign exchange contributed to revenue growth; management cited a 3-point contribution for the 12 weeks and 2 points for the 24 weeks.
Liquidity, debt and capital allocation
- At June 12, cash and cash equivalents were $5.449 billion and short-term investments were $328 million. Total current assets were $21.597 billion against current liabilities of $23.623 billion.
- Short-term debt was $4.264 billion and long-term debt was $38.034 billion. No commercial paper or borrowings under the revolving credit facilities were outstanding.
- Operating cash flow less capital spending, plus property and equipment sales, produced free cash flow of $1.057 billion. Capital spending was $1.305 billion.
- Cash dividends paid in the first 24 weeks were $2.842 billion; long-term debt repayments were $1.696 billion. The company expected to return approximately $5.9 billion to shareholders in 2021, including about $5.8 billion in dividends and $106 million in repurchases. It said share repurchases had ended for the year.
- New revolving credit agreements provide up to $3.75 billion each under a five-year facility and a 364-day facility, subject to terms. Management said available liquidity was adequate and COVID-19 had not materially adversely affected liquidity to date.
Material changes and operating trends
- Revenue and operating profit rose substantially year over year, reflecting reopening and recovery effects, pricing, volume, productivity savings, foreign exchange and acquisitions. The prior-year comparison included unusually high pandemic-related demand in some businesses and significant acquisition and COVID-related costs.
- Growth was uneven by division. For the 12 weeks, PBNA revenue rose 24% and operating profit 104%; FLNA revenue rose 7%. QFNA revenue fell 13% and operating profit fell 34%, with management citing normalization after a prior-year pandemic demand surge. AMESA and APAC reported strong revenue growth, substantially affected by acquisitions and calendar alignment.
- For the 24 weeks, QFNA revenue declined 6%, while PBNA revenue increased 15%. Acquisition and foreign-exchange effects materially influenced reported growth in AMESA and APAC.
- Cash from operations improved year over year, primarily on stronger operating results and working-capital comparisons, partly offset by higher tax payments and pension contributions. Investing cash use fell markedly versus 2020, when acquisitions required substantial cash.
Outlook, management commentary and risks
- The filing does not provide a clear full-year revenue or EPS guidance figure. Management said results for the interim periods are not necessarily indicative of full-year results.
- PepsiCo expanded and extended its 2019 Productivity Plan through 2026. Estimated total pretax charges increased to approximately $3.15 billion, including about $2.4 billion of cash expenditures, from the prior estimate of $2.5 billion and $1.6 billion, respectively. The company expected approximately $400 million of pretax charges and $300 million of cash expenditures for the remainder of 2021; most remaining charges and cash expenditures were expected in 2022 and 2023.
- COVID-19 remained a source of uncertainty for demand, channel mix, employee and supply-chain costs, customer creditworthiness and logistics. Management noted shifts between at-home and away-from-home consumption and continued growth in e-commerce.
- Other principal risks include commodity and foreign-exchange volatility, international political and economic conditions, supply-chain disruption, changing retail channels, regulation and taxes on products or packaging, cyber and privacy risks, competition, and the ability to realize productivity-plan benefits.
- The company had a $2.9 billion mandatory transition-tax liability payable through 2026 and $4.2 billion in non-cancelable purchasing commitments. It reported $1.2 billion of accounts payable to suppliers participating in voluntary supply-chain finance arrangements, with no material liquidity impact stated.
- PepsiCo said litigation and regulatory matters were not expected to have a material adverse effect. Subsequent to quarter-end, it received a final IRS assessment related to 2014–2016 audits and stated that existing reserves were adequate.
Important facts for investors to verify
- How much reported growth reflects durable organic volume and pricing versus pandemic comparisons, foreign exchange, acquisitions and calendar alignment.
- Whether higher commodity, transportation and other operating costs continue to pressure margins, and whether productivity savings offset them.
- Progress and cash costs under the expanded productivity plan, including the revised $3.15 billion pretax estimate.
- Cash conversion, working-capital movements, pension contributions, debt maturities and planned shareholder distributions.
- Developments in COVID-related demand and channel mix, international currency and political exposures, and the IRS assessment.