PepsiCo, Inc. — Q2 2020 Form 10-Q
Reporting period: Second quarter and first 24 weeks of fiscal 2020, ended June 13, 2020. North American results cover 12-week periods; most international results reflect March–May for the quarter and January–May for the 24-week period. Amounts are in U.S. dollars.
Financial performance
| Metric | 12 weeks ended June 13, 2020 | 24 weeks ended June 13, 2020 |
|---|---|---|
| Net revenue | $15.945 billion, down 3% year over year; organic revenue approximately flat | $29.826 billion, up 2%; organic revenue up 3% |
| Gross profit | $8.857 billion; gross margin approximately 55.6%, versus 55.0% | $16.611 billion; gross margin approximately 55.7%, versus 55.4% |
| Operating profit and margin | $2.319 billion, down 15%; 14.5% margin, down 2.1 percentage points | $4.243 billion, down 10%; 14.2% margin, down 1.9 percentage points |
| Net income attributable to PepsiCo | $1.646 billion, down 19%; diluted EPS $1.18, down 18% | $2.984 billion, down 13%; diluted EPS $2.14, down 12% |
| Operating cash flow / free cash flow | For 24 weeks: $1.462 billion operating cash flow and $292 million free cash flow, versus $1.388 billion and $263 million, respectively, in the prior year. |
Quarterly reported results were pressured by pandemic-related costs, lower beverage demand, foreign exchange and acquisitions-related charges. For the 24 weeks, management reported adjusted operating profit growth of negative 4% on a constant-currency basis; adjusted diluted EPS growth on a constant-currency basis was negative 3%. These are non-GAAP measures.
Liquidity, debt and capital allocation
- At June 13, 2020, cash and cash equivalents were $8.927 billion; current assets were $23.189 billion and current liabilities were $23.827 billion.
- Short- and long-term debt totaled approximately $44.978 billion, versus $32.068 billion at December 28, 2019. Cash less reported debt was approximately $36.1 billion.
- First-half financing included $10.6 billion of long-term debt issuance and approximately $2.9 billion net proceeds from short-term borrowings. The company had $2.8 billion of commercial paper outstanding; neither revolving credit facility was drawn.
- Cash, cash equivalents and restricted cash rose to $8.989 billion from $5.570 billion at year-end. Investing cash outflow was $6.762 billion, primarily reflecting acquisitions and capital spending.
- Cash dividends paid were $2.677 billion and share repurchases were $1.137 billion during the 24 weeks. Management expected to return approximately $7.5 billion to shareholders in 2020: about $5.5 billion in dividends and $2 billion in repurchases. The annualized dividend was increased 7% to $4.09 per share.
Material changes and business developments
- Performance varied by division. In the quarter, Frito-Lay North America revenue grew 7% and Quaker Foods North America grew 23%, while PepsiCo Beverages North America declined 7%, Latin America declined 17%, and Europe declined 9%. Asia Pacific grew 10%; AMESA declined 1%.
- At-home demand supported North American food businesses, while reduced away-from-home and foodservice demand weighed on beverages and several international markets. Quarterly beverage volume at PBNA fell 10%.
- PepsiCo acquired Pioneer Foods for approximately $1.2 billion, Rockstar Energy Beverages for approximately $3.85 billion upfront plus contingent consideration, and Be & Cheery for approximately $0.7 billion. Rockstar’s contingent tax-related consideration was recorded at $864 million at period-end.
- Acquisition-related inventory fair-value and merger/integration charges were $243 million for the 24 weeks. COVID-19-related charges totaled $521 million pre-tax for the 24 weeks, including employee compensation, employee protection, credit-loss allowances, inventory write-downs and customer payments.
- Total assets rose to $89.525 billion from $78.547 billion, largely alongside acquisitions and increased cash and debt. Shareholders’ equity declined to $12.587 billion from $14.868 billion, including the effect of currency translation losses.
Outlook, risks and contingencies
- The filing does not provide a quantified full-year revenue or earnings forecast. Management said it believed operating, investing and financing needs could be met through cash generation, available credit and debt financing, and reported no material COVID-19-related liquidity deficiency to date.
- Management emphasized substantial uncertainty around COVID-19’s duration and effects on demand, consumer behavior, foodservice, operating costs, supply chains, customer credit and capital markets. It had not experienced a material supply-chain disruption but considered further disruption possible.
- Other stated risks include foreign exchange and political conditions, commodity costs, customer and channel shifts, regulation and taxes on products or packaging, cybersecurity, acquisitions integration, and potential credit-rating downgrades.
- The company expected approximately $2.5 billion of pre-tax charges and $1.6 billion of cash expenditures under its 2019 productivity plan through 2023. It had incurred $571 million of plan charges through June 13, 2020.
- The $3.3 billion mandatory transition-tax liability is payable through 2026. PepsiCo said additional Swiss tax reform provisions could affect future results, but the impact could not yet be reasonably estimated. Management believed pending litigation and proceedings would not have a material adverse effect.
Important facts for investors to verify
- Whether pandemic-driven shifts in at-home, foodservice and other channel demand persist, and how they affect volume, mix and margins.
- How much of reported profit pressure is recurring versus COVID-19 costs, acquisition charges, restructuring and other items excluded from company-defined non-GAAP measures.
- Debt repayment needs, commercial-paper access and liquidity after significant 2020 borrowing and acquisitions.
- Integration progress and final purchase accounting for Pioneer Foods, Rockstar and Be & Cheery, including Rockstar contingent payments and South Africa commitments.
- Whether management’s expected 2020 shareholder returns and productivity-plan costs remain achievable as the pandemic and operating outlook evolve.