Note 7 - Pension and Retiree Medical Benefits
The components of net periodic benefit cost for pension and retiree medical plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
Pension
|
|
Retiree Medical
|
|
|
U.S.
|
|
International
|
|
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Service cost
|
$
|
100
|
|
|
$
|
88
|
|
|
$
|
17
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
Other pension and retiree medical benefits expense/(income):
|
|
|
|
|
|
Interest cost
|
100
|
|
|
125
|
|
|
16
|
|
|
17
|
|
|
6
|
|
|
8
|
|
|
Expected return on plan assets
|
(214
|
)
|
|
(206
|
)
|
|
(37
|
)
|
|
(33
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
Amortization of prior service cost/(credits)
|
3
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(4
|
)
|
|
Amortization of net losses/(gains)
|
45
|
|
|
37
|
|
|
10
|
|
|
5
|
|
|
(5
|
)
|
|
(6
|
)
|
|
Special termination benefits (a)
|
6
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total other pension and retiree medical benefits income
|
(60
|
)
|
|
(47
|
)
|
|
(11
|
)
|
|
(11
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
Total
|
$
|
40
|
|
|
$
|
41
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
|
|
|
(a)
|
Income amount represents adjustments for changes in estimates of previously recorded amounts.
|
We continue to monitor the impact of the COVID-19 pandemic and related global economic conditions and uncertainty on the net unfunded status of our pension and retiree medical plans. We also regularly evaluate opportunities to reduce risk and volatility associated with our pension and retiree medical plans. In the 12
weeks ended March 21, 2020, we made a discretionary contribution of $150 million to the PepsiCo Employees Retirement Plan A (Plan A) in the United States. In the 12 weeks ended March 23, 2019, we made discretionary contributions of $150 million to Plan A in the United States and $17 million to our international plans.
Note 8 - Debt Obligations
In the 12 weeks ended March 21, 2020, we issued the following senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
Maturity Date
|
|
Amount(a)
|
|
|
2.250
|
%
|
|
March 2025
|
|
$
|
1,500
|
|
|
2.625
|
%
|
|
March 2027
|
|
$
|
500
|
|
|
2.750
|
%
|
|
March 2030
|
|
$
|
1,500
|
|
|
3.500
|
%
|
|
March 2040
|
|
$
|
750
|
|
|
3.625
|
%
|
|
March 2050
|
|
$
|
1,500
|
|
|
3.875
|
%
|
|
March 2060
|
|
$
|
750
|
|
|
|
|
|
(a)
|
Represents gross proceeds from issuances of long-term debt excluding debt issuance costs, discounts and premiums.
|
The net proceeds from the issuances of the above notes will be used for general corporate purposes, including the repayment of commercial paper.
In the 12 weeks ended March 21, 2020, there were no maturities or prepayments of senior notes.
As of March 21, 2020, we had $2.8 billion of commercial paper outstanding.
On March 12, 2020, one of our international consolidated subsidiaries borrowed 21.7 billion South African rand, or approximately $1.3 billion, from our two unsecured bridge loan facilities (Bridge Loan Facilities) to fund our acquisition of Pioneer Food Group Ltd. (Pioneer Foods). These borrowings are subject to a weighted-average initial annual interest rate of 7.5%, which resets every month, have maturity dates within one year and can be prepaid at any time. No further borrowings under these Bridge Loan Facilities are permitted. On April 14, 2020, we repaid 6.6 billion South African rand, or approximately $360 million, with no gain or loss recorded, and we have initiated repayment of the remaining outstanding borrowings and therefore expect these Bridge Loan Facilities to be fully repaid in the second quarter of 2020.
Note 9 - Financial Instruments
We are exposed to market risks arising from adverse changes in:
|
|
|
|
•
|
commodity prices, affecting the cost of our raw materials and energy;
|
|
|
|
|
•
|
foreign exchange rates and currency restrictions; and
|
There have been no material changes during the 12 weeks ended March 21, 2020 with respect to our risk management policies or strategies and valuation techniques used in measuring the fair value of the financial assets or liabilities disclosed in Note 9 to our consolidated financial statements in our 2019 Form 10-K.
Certain of our agreements with our counterparties require us to post full collateral on derivative instruments in a net liability position if our credit rating is at A2 (Moody’s Investors Service, Inc.) or A (S&P Global Ratings), and we have been placed on credit watch for possible downgrade or if our credit rating falls below these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of March 21, 2020 was $672 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of March 21, 2020.
The notional amounts of our financial instruments used to hedge the above risks as of March 21, 2020 and December 28, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts(a)
|
|
|
3/21/2020
|
|
|
12/28/2019
|
|
|
Commodity
|
$
|
1.2
|
|
|
$
|
1.1
|
|
|
Foreign exchange
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
Interest rate
|
$
|
5.0
|
|
|
$
|
5.0
|
|
|
Net investment (b)
|
$
|
2.4
|
|
|
$
|
2.5
|
|
|
|
|
|
(b)
|
The total notional of our net investment hedge consists of non-derivative debt instruments.
|
As of March 21, 2020, approximately 14% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 9% as of December 28, 2019.
Fair Value Measurements
The fair values of our financial assets and liabilities as of March 21, 2020 and December 28, 2019 are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/21/2020
|
|
12/28/2019
|
|
|
Fair Value Hierarchy Levels
|
|
Assets(a)
|
|
Liabilities(a)
|
|
Assets(a)
|
|
Liabilities(a)
|
|
Short-term investments (b)
|
1
|
|
$
|
158
|
|
|
$
|
—
|
|
|
$
|
229
|
|
|
$
|
—
|
|
|
Prepaid forward contracts (c)
|
2
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
Deferred compensation (d)
|
2
|
|
$
|
—
|
|
|
$
|
379
|
|
|
$
|
—
|
|
|
$
|
468
|
|
|
Derivatives designated as fair value hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Interest rate (e)
|
2
|
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (f)
|
2
|
|
$
|
53
|
|
|
$
|
13
|
|
|
$
|
5
|
|
|
$
|
32
|
|
|
Interest rate (f)
|
2
|
|
—
|
|
|
613
|
|
|
—
|
|
|
390
|
|
|
Commodity (g)
|
1
|
|
—
|
|
|
31
|
|
|
2
|
|
|
5
|
|
|
Commodity (h)
|
2
|
|
—
|
|
|
30
|
|
|
2
|
|
|
5
|
|
|
|
|
|
$
|
53
|
|
|
$
|
687
|
|
|
$
|
9
|
|
|
$
|
432
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (f)
|
2
|
|
$
|
8
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Commodity (g)
|
1
|
|
1
|
|
|
111
|
|
|
23
|
|
|
7
|
|
|
Commodity (h)
|
2
|
|
5
|
|
|
40
|
|
|
6
|
|
|
24
|
|
|
|
|
|
$
|
14
|
|
|
$
|
152
|
|
|
$
|
32
|
|
|
$
|
33
|
|
|
Total derivatives at fair value (i)
|
|
|
$
|
74
|
|
|
$
|
840
|
|
|
$
|
41
|
|
|
$
|
470
|
|
|
Total
|
|
|
$
|
245
|
|
|
$
|
1,219
|
|
|
$
|
287
|
|
|
$
|
938
|
|
|
|
|
|
(a)
|
Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities.
|
|
|
|
|
(b)
|
Based on the price of index funds. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.
|
|
|
|
|
(c)
|
Based primarily on the price of our common stock.
|
|
|
|
|
(d)
|
Based on the fair value of investments corresponding to employees’ investment elections.
|
|
|
|
|
(e)
|
Based on LIBOR forward rates. The carrying amount of hedged fixed-rate debt was $2.2 billion as of March 21, 2020 and December 28, 2019, and classified on our balance sheet within short-term and long-term debt obligations. As of March 21, 2020 and December 28, 2019, the cumulative amount of fair value hedging adjustments to hedged fixed-rate debt was a $6 million gain and a $5 million loss, respectively. As of March 21, 2020 and December 28, 2019, the cumulative amount of fair value hedging adjustments on discontinued hedges was a
|
$42 million loss and a $49 million loss, respectively, which is being amortized over the remaining life of the related debt obligations.
|
|
|
|
(f)
|
Based on recently reported market transactions of spot and forward rates.
|
|
|
|
|
(g)
|
Based on quoted contract prices on futures exchange markets.
|
|
|
|
|
(h)
|
Based on recently reported market transactions of swap arrangements.
|
|
|
|
|
(i)
|
Derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of March 21, 2020 and December 28, 2019 were not material. Collateral received or posted against our asset or liability positions was not material. Collateral posted of $201 million and $58 million as of March 21, 2020 and December 28, 2019, respectively, is classified as restricted cash.
|
The carrying amounts of our cash and cash equivalents approximate fair value due to their short-term maturity. The fair value of our debt obligations as of March 21, 2020 and December 28, 2019 was $43 billion and $34 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.
Losses/(gains) on our hedging instruments are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
Fair Value/Non-
designated Hedges
|
|
Cash Flow and Net Investment Hedges
|
|
|
Losses/(Gains)
Recognized in
Income Statement(a)
|
|
Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
|
|
Losses/(Gains)
Reclassified from
Accumulated Other
Comprehensive Loss
into Income Statement(b)
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Foreign exchange
|
$
|
(11
|
)
|
|
$
|
(3
|
)
|
|
$
|
(51
|
)
|
|
$
|
31
|
|
|
$
|
4
|
|
|
$
|
(5
|
)
|
|
Interest rate
|
(11
|
)
|
|
(28
|
)
|
|
223
|
|
|
(7
|
)
|
|
150
|
|
|
(11
|
)
|
|
Commodity
|
166
|
|
|
(42
|
)
|
|
64
|
|
|
(4
|
)
|
|
3
|
|
|
1
|
|
|
Net investment
|
—
|
|
|
—
|
|
|
(84
|
)
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
144
|
|
|
$
|
(73
|
)
|
|
$
|
152
|
|
|
$
|
10
|
|
|
$
|
157
|
|
|
$
|
(15
|
)
|
|
|
|
|
(a)
|
Foreign exchange derivative losses/gains are primarily included in selling, general and administrative expenses. Interest rate derivative losses/gains are primarily from fair value hedges and are included in net interest expense and other. These losses/gains are substantially offset by decreases/increases in the value of the underlying debt, which are also included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
|
|
|
|
|
(b)
|
Foreign exchange derivative losses/gains are included in cost of sales. Interest rate derivative losses/gains are included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
|
Based on current market conditions, we expect to reclassify net losses of $46 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.
Note 10 - Net Income Attributable to PepsiCo per Common Share
The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
3/21/2020
|
|
3/23/2019
|
|
|
Income
|
|
Shares(a)
|
|
Income
|
|
Shares(a)
|
|
Basic net income attributable to PepsiCo per common share
|
$
|
0.96
|
|
|
|
|
$
|
1.01
|
|
|
|
|
Net income available for PepsiCo common shareholders
|
$
|
1,338
|
|
|
1,390
|
|
|
$
|
1,413
|
|
|
1,406
|
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, RSUs, PSUs and other (b)
|
—
|
|
|
6
|
|
|
—
|
|
|
7
|
|
|
Diluted
|
$
|
1,338
|
|
|
1,396
|
|
|
$
|
1,413
|
|
|
1,413
|
|
|
Diluted net income attributable to PepsiCo per common share
|
$
|
0.96
|
|
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
(a)
|
Weighted-average common shares outstanding (in millions).
|
|
|
|
|
(b)
|
The dilutive effect of these securities is calculated using the treasury stock method.
|
Out-of-the-money options excluded from the calculation of diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Out-of-the-money options (a)
|
—
|
|
|
1.2
|
|
|
Average exercise price per option
|
$
|
—
|
|
|
$
|
115.98
|
|
Note 11 - Accumulated Other Comprehensive Loss Attributable to PepsiCo
The changes in the balances of each component of accumulated other comprehensive loss attributable to PepsiCo are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment
|
|
Cash Flow Hedges
|
|
Pension and Retiree Medical
|
|
Other
|
|
Accumulated Other Comprehensive Loss Attributable to PepsiCo
|
|
Balance as of December 28, 2019 (a)
|
$
|
(11,290
|
)
|
|
$
|
(3
|
)
|
|
$
|
(2,988
|
)
|
|
$
|
(19
|
)
|
|
$
|
(14,300
|
)
|
|
Other comprehensive (loss)/income before reclassifications (b)
|
(735
|
)
|
|
(236
|
)
|
|
21
|
|
|
1
|
|
|
(949
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
157
|
|
|
50
|
|
|
—
|
|
|
207
|
|
|
Net other comprehensive (loss)/income
|
(735
|
)
|
|
(79
|
)
|
|
71
|
|
|
1
|
|
|
(742
|
)
|
|
Tax amounts
|
(19
|
)
|
|
18
|
|
|
(14
|
)
|
|
—
|
|
|
(15
|
)
|
|
Balance as of March 21, 2020 (a)
|
$
|
(12,044
|
)
|
|
$
|
(64
|
)
|
|
$
|
(2,931
|
)
|
|
$
|
(18
|
)
|
|
$
|
(15,057
|
)
|
|
|
|
|
(a)
|
Pension and retiree medical amounts are net of taxes of $1,370 million as of December 28, 2019 and $1,356 million as of March 21, 2020.
|
|
|
|
|
(b)
|
Currency translation adjustment primarily reflects depreciation of the Russian ruble, Canadian dollar and Mexican peso.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment
|
|
Cash Flow Hedges
|
|
Pension and Retiree Medical
|
|
Other
|
|
Accumulated Other Comprehensive Loss Attributable to PepsiCo
|
|
Balance as of December 29, 2018 (a)
|
$
|
(11,918
|
)
|
|
$
|
87
|
|
|
$
|
(3,271
|
)
|
|
$
|
(17
|
)
|
|
$
|
(15,119
|
)
|
|
Other comprehensive (loss)/income before reclassifications (b)
|
475
|
|
|
(20
|
)
|
|
(16
|
)
|
|
—
|
|
|
439
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
(15
|
)
|
|
34
|
|
|
—
|
|
|
19
|
|
|
Net other comprehensive (loss)/income
|
475
|
|
|
(35
|
)
|
|
18
|
|
|
—
|
|
|
458
|
|
|
Tax amounts
|
(2
|
)
|
|
8
|
|
|
(1
|
)
|
|
—
|
|
|
5
|
|
|
Balance as of March 23, 2019 (a)
|
$
|
(11,445
|
)
|
|
$
|
60
|
|
|
$
|
(3,254
|
)
|
|
$
|
(17
|
)
|
|
$
|
(14,656
|
)
|
|
|
|
|
(a)
|
Pension and retiree medical amounts are net of taxes of $1,466 million as of December 29, 2018 and $1,465 million as of March 23, 2019.
|
|
|
|
|
(b)
|
Currency translation adjustment primarily reflects appreciation of the Russian ruble, Mexican peso and Pound sterling.
|
The reclassifications from accumulated other comprehensive loss to the income statement are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Affected Line Item in the Income Statement
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
4
|
|
|
$
|
(5
|
)
|
|
Cost of sales
|
|
Interest rate derivatives
|
150
|
|
|
(11
|
)
|
|
Net interest expense and other
|
|
Commodity contracts
|
3
|
|
|
1
|
|
|
Cost of sales
|
|
Net losses/(gains) before tax
|
157
|
|
|
(15
|
)
|
|
|
|
Tax amounts
|
(39
|
)
|
|
4
|
|
|
|
|
Net losses/(gains) after tax
|
$
|
118
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
Pension and retiree medical items:
|
|
|
|
|
|
|
Amortization of prior service credits
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Other pension and retiree medical benefits income
|
|
Amortization of net losses
|
50
|
|
|
36
|
|
|
Other pension and retiree medical benefits income
|
|
Net losses before tax
|
50
|
|
|
34
|
|
|
|
|
Tax amounts
|
(11
|
)
|
|
(7
|
)
|
|
|
|
Net losses after tax
|
$
|
39
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
Total net losses reclassified, net of tax
|
$
|
157
|
|
|
$
|
16
|
|
|
|
Note 12 - Acquisitions and Divestitures
Acquisition of Pioneer Food Group Ltd.
On March 23, 2020, we acquired all of the outstanding shares of Pioneer Foods, a food and beverage company in South Africa with exports to countries across the globe, for 110.00 South African rand per share in cash. The total consideration transferred was approximately $1.2 billion (or $1.2 billion, net of cash and cash equivalents acquired), and was funded by the Bridge Loan Facilities entered into by one of our international consolidated subsidiaries. See Note 8 for further information.
We will account for the transaction as a business combination in the second quarter of 2020. We will recognize and measure the identifiable assets acquired and liabilities assumed at their estimated fair values on the date of acquisition, primarily in our AMESA segment. The assets acquired and liabilities assumed in Pioneer Foods as of the acquisition date, which primarily include goodwill and other intangible assets and property, plant and equipment, will be based on preliminary estimates that are subject to revisions and may result in adjustments to preliminary values as valuations are finalized. We expect to finalize these amounts as soon as possible, but no later than the second quarter of 2021.
Acquisition of Rockstar Energy Beverages (Rockstar)
On April 24, 2020, we acquired Rockstar, a manufacturer, distributor and marketer of energy beverages and related products, for an upfront cash payment of approximately $3.85 billion and contingent consideration related to future tax benefits associated with the acquisition of approximately $0.7 billion. The contingent consideration will be paid over up to 15 years, with an option to accelerate, and is measured based on discounted future cash flows with estimated maximum payments of approximately $1.1 billion using current tax rates. The purchase price will also be adjusted for net working capital amounts as of the acquisition date compared to targeted amounts set forth in the acquisition agreement.
We will account for the transaction as a business combination in the second quarter of 2020. We will recognize and measure the identifiable assets acquired and liabilities assumed at their estimated fair values on the date of acquisition, primarily in our PBNA segment. The assets acquired and liabilities assumed in Rockstar as of the acquisition date, which primarily include goodwill and other intangible assets, and the contingent consideration liability will be based on preliminary estimates that are subject to revisions and may result in adjustments to preliminary values as valuations are finalized. We expect to finalize these amounts as soon as possible, but no later than the second quarter of 2021.
In addition to our acquisition of Rockstar, as part of our overall energy strategy, we entered into an agreement with Vital Pharmaceuticals, Inc. for us and our bottlers to exclusively distribute Bang Energy drinks in the United States.
Acquisition of Hangzhou Haomusi Food Co., Ltd. (Be & Cheery)
On February 21, 2020, we entered into an agreement to acquire all of the outstanding shares of Be & Cheery, one of the largest online snacks companies in China, from Haoxiangni Health Food Co., Ltd. for $705 million. The purchase price will be adjusted for net working capital and net debt amounts as of the acquisition date compared to targeted amounts set forth in the acquisition agreement. The transaction is subject to certain regulatory approvals and other customary closing conditions and will be recorded in our APAC segment. The transaction is expected to close in the second half of 2020.
Acquisition of SodaStream International Ltd.
On December 5, 2018, we acquired all of the outstanding shares of SodaStream, a manufacturer and distributor of sparkling water makers, for $144.00 per share in cash, in a transaction valued at approximately $3.3 billion. The total consideration transferred was $3.3 billion (or $3.2 billion, net of cash and cash equivalents acquired). The purchase price allocation was finalized in the fourth quarter of 2019. See Note 14 to our consolidated financial statements in our 2019 Form 10-K for further information.
Inventory Fair Value Adjustments and Merger and Integration Charges
In the 12 weeks ended March 21, 2020, we recorded merger and integration charges of $25 million ($22 million after-tax or $0.02 per share), including $23 million in our FLNA segment related to our acquisition of BFY Brands and $2 million in our AMESA segment related to our acquisition of Pioneer Foods. These charges primarily relate to contract termination and employee-related costs and are recorded in selling, general and administrative expenses.
In the 12 weeks ended March 23, 2019, we recorded inventory fair value adjustments and merger and integration charges of $15 million ($0.01 per share) in our Europe segment, primarily related to fair value adjustments to the acquired inventory included in SodaStream’s balance sheet at acquisition date recorded in cost of sales.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Unless otherwise noted, tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.
Our Critical Accounting Policies
The critical accounting policies below should be read in conjunction with those outlined in our 2019 Form 10-K.
Total Marketplace Spending
We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year, as products are delivered, for the expected payout, which may occur after year-end once reconciled and settled.
These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer and consumer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain advertising and other marketing activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning strategies and transactions, including transfer pricing arrangements, available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.
Our Business Risks
This Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement. Such risks and uncertainties include, but are not limited to: the impact of the spread of COVID-19; future demand for PepsiCo’s products, as a result of changes in consumer preferences or otherwise; changes in laws related
to the use or disposal of plastics or other packaging of PepsiCo’s products; changes in, or failure to comply with, applicable laws and regulations; imposition or proposed imposition of new or increased taxes aimed at PepsiCo’s products; imposition of labeling or warning requirements on PepsiCo’s products; PepsiCo’s ability to compete effectively; failure to realize anticipated benefits from PepsiCo’s productivity or reinvestment initiatives or operating model; political conditions, civil unrest or other developments and risks in the markets where PepsiCo’s products are made, manufactured, distributed or sold; PepsiCo’s ability to grow its business in developing and emerging markets; uncertain or unfavorable economic conditions in the countries in which PepsiCo operates; the ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption; increased costs, disruption of supply or shortages of raw materials and other supplies; water scarcity; business disruptions; product contamination or tampering or issues or concerns with respect to product quality, safety and integrity; damage to PepsiCo’s reputation or brand image; failure to successfully complete, integrate or manage acquisitions and joint ventures into PepsiCo’s existing operations or to complete or manage divestitures or refranchisings; changes in estimates and underlying assumptions regarding future performance that can result in an impairment charge; increase in income tax rates, changes in income tax laws, including as a result of enactment and implementation of the TRAF, or disagreements with tax authorities; PepsiCo’s ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; loss of, or a significant reduction in sales to, any key customer; disruption to the retail landscape, including rapid growth in e-commerce channel and hard discounters; any downgrade or potential downgrade of PepsiCo’s credit ratings; PepsiCo’s ability to implement shared services or utilize information technology systems and networks effectively; fluctuations or other changes in exchange rates; climate change or legal, regulatory or market measures to address climate change; failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages; failure to adequately protect our intellectual property rights or infringement of intellectual property rights of others; potential liabilities and costs from litigation, claims, legal or regulatory proceedings, inquiries or investigations; and other factors that may adversely affect the price of PepsiCo’s publicly traded securities and financial performance including those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our 2019 Form 10-K and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” and “Item 1A. Risk Factors” of this Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
COVID-19
Our global operations expose us to risks associated with the COVID-19 pandemic, which has resulted in challenging operating environments. COVID-19 has spread across the globe to almost all of the countries in which our products are made, manufactured, distributed or sold. Authorities in many of these markets have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place orders, and business shutdowns. These measures have impacted and will further impact us, our customers (including our foodservice customers), consumers, employees, bottlers, contract manufacturers, distributors, joint venture partners, suppliers and other third parties with whom we do business. There is considerable uncertainty regarding how these measures and future measures in response to the pandemic will impact our business, including whether they will result in further changes in demand for our products, further increases in operating costs (whether as a result of changes to our supply chain or increases in employee costs or otherwise), how they will further impact our supply chain and whether they will result in further reduced availability of air or other commercial transport, port closures or border restrictions, each or all of which can impact our ability to make, manufacture, distribute and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our customers (including our foodservice customers),
consumers, employees, bottlers, contract manufacturers, distributors, joint venture partners, suppliers and other third parties to do the same, may impact the availability of our and their employees, many of whom are not able to perform their job functions remotely. We have implemented safety protocols at our facilities and have been working and will continue to work closely with our business partners on contingency planning in an effort to maintain supply. To date, we have not experienced a material disruption to our operations or supply chain, although we can reasonably envision that possibility.
Public concern regarding the risk of contracting COVID-19 impacts demand from consumers, including due to consumers not leaving their homes or otherwise shopping in a different manner than they historically have or because some of our consumers have lower discretionary income due to unemployment or reduced or limited work as a result of measures taken in response to the pandemic. As we sell a wide variety of beverages, foods and snacks in more than 200 countries and territories, the profile of the products we sell and the amount of revenue attributable to such products varies by jurisdiction and changes in demand as a result of COVID-19 will vary in scope and timing across these markets. In addition, changes in consumer purchasing and consumption patterns may increase demand for our products in one quarter, resulting in decreased consumer demand for our products in subsequent quarters, or in one sales channel resulting in potentially reduced profit from sales of our products. For example, to date, we have seen a shift in product and channel preferences, including an increase in at-home consumption and a decrease in immediate consumption and away-from-home channels, such as convenience and gas and foodservice, which negatively impacts our beverage businesses. Any reduced demand for our products or change in consumer purchasing and consumption patterns, as well as continued economic uncertainty, can adversely affect our customers’ and business partners’ financial condition, resulting in an inability to pay for our products, reduced or canceled orders of our products, closing of restaurants, stores, entertainment or sports complexes or other venues in which our products are sold, or our business partners’ inability to supply us with ingredients or other items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers’ or business partners’ financial condition may also result in our recording additional impairment charges for our inability to recover or collect any accounts receivable, owned or leased assets, including certain foodservice and vending and other equipment, or prepaid expenses. In addition, economic uncertainty associated with the COVID-19 pandemic has resulted in volatility in the global capital and credit markets which can impair our ability to access these markets on terms commercially acceptable to us, or at all.
While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict and which all will vary by market, including the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary.
Coronavirus Aid, Relief, and Economic Security Act
Subsequent to the end of our first quarter, the CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that we expect to defer to future periods. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results. Refer to the COVID-19 discussion above for further information.
See Note 5 to our condensed consolidated financial statements for further information.
Risks Associated with International Operations
In the 12 weeks ended March 21, 2020, substantially all of our financial results outside of North America reflect the months of January and February. In the 12 weeks ended March 21, 2020, our operations outside of the United States generated 35% of our consolidated net revenue, with Mexico, Canada, Russia, China, the United Kingdom and Brazil comprising approximately 19% of our consolidated net revenue. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. In the 12 weeks ended March 21, 2020, unfavorable foreign exchange had a net nominal impact on net revenue growth primarily due to declines in the Brazilian real and euro, offset by appreciation in the Russian ruble. Currency declines against the U.S. dollar which are not offset could adversely impact our future financial results.
In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Argentina, Brazil, China, Mexico, the Middle East, Russia and Turkey and currency controls or fluctuations in certain of these international markets, continue to, and the threat or imposition of tariffs in or related to these international markets may, result in challenging operating environments.
We continue to monitor the economic and political developments related to the United Kingdom’s withdrawal from the European Union, including how the United Kingdom will interact with other European Union countries following its departure, as well as the economic, operating and political environment in Russia and the potential impact for the Europe segment and our other businesses.
See Note 9 to our condensed consolidated financial statements in this Form 10-Q for the fair values of our financial instruments as of March 21, 2020 and December 28, 2019 and Note 9 to our consolidated financial statements in our 2019 Form 10-K for a discussion of these items. Cautionary statements included above and in “Item 1A. Risk Factors” in this Form 10-Q, and in “Item 1A. Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” in our 2019 Form 10-K should be considered when evaluating our trends and future results.
Imposition of Taxes and Regulations on our Products
Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased taxes or regulations on the manufacture, distribution or sale of our products or their packaging, ingredients or substances contained in, or attributes of, our products or their packaging, commodities used in the production of our products or their packaging or the recyclability or recoverability of our packaging. These taxes and regulations vary in scope and form. For example, some taxes apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener (e.g., sugar). In addition, some regulations apply to all products using certain types of packaging (e.g., plastic), while others are designed to increase the sustainability of packaging, encourage waste reduction and increased recycling rates or facilitate the waste management process or restrict the sale of products in certain packaging.
We sell a wide variety of beverages, foods and snacks in more than 200 countries and territories and the profile of the products we sell, the amount of revenue attributable to such products and the type of packaging used varies by jurisdiction. Because of this, we cannot predict the scope or form potential taxes, regulations or other limitations on our products or their packaging may take, and therefore cannot predict the impact of such taxes, regulations or limitations on our financial results. In addition, taxes, regulations and limitations may impact us and our competitors differently. We continue to monitor existing and proposed taxes and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such taxes, regulations or limitations, including advocating alternative measures with respect to the imposition, form and scope of any such taxes, regulations or limitations.
Tax Cuts and Jobs Act
During the fourth quarter of 2017, the TCJ Act was enacted in the United States. The related provisional measurement period allowed by the SEC ended in the fourth quarter of 2018. While our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by the IRS impacted our recorded amounts after December 29, 2018. For further information on the impact of the TCJ Act, see Note 5 to our condensed consolidated financial statements and “Our Liquidity and Capital Resources” in this Form 10-Q, as well as Note 5 to our consolidated financial statements in our 2019 Form 10-K.
Other Tax Matters
On May 19, 2019, a public referendum held in Switzerland passed the TRAF, effective January 1, 2020. There were no income tax adjustments recorded in the 12 weeks ended March 21, 2020 related to the TRAF. Enactment of additional TRAF provisions subsequent to March 21, 2020 is expected to result in adjustments to our financial statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results.
See Note 5 to our condensed consolidated financial statements for further information.
Retail Landscape
Additionally, our industry continues to be affected by disruption of the retail landscape, including the rapid growth in sales through e-commerce websites and mobile commerce applications, including through subscription services, the integration of physical and digital operations among retailers and the international expansion of hard discounters. We continue to monitor changes in the retail landscape, including as a result of the impact of the COVID-19 pandemic, and seek to identify actions we may take to build our global e-commerce and digital capabilities, distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results.
Results of Operations – Consolidated Review
Consolidated Results
Volume
Volume is one of the key metrics management uses internally to make operating and strategic decisions, including the preparation of our annual operating plan and the evaluation of our business performance. We believe volume provides additional information to facilitate the comparison of our historical operating performance and underlying trends, and provides additional transparency on how we evaluate our business because it measures demand for our products at the consumer level. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Financial Results – Volume” included in our 2019 Form 10-K for further information on volume.
We report substantially all of our international beverage volume on a monthly calendar basis. The 12 weeks ended March 21, 2020 include beverage volume outside of North America for the months of January and February.
Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration (FDA) recommended guidelines for single-serving sizes of food and beverage products. The FDA revised the guidelines on recommended serving size for beverage products, effective January 1, 2020. Previously, FDA guidelines recommended a serving size of 8 fluid ounces for all beverages. The revised guidelines recommend a serving size of 8 fluid ounces for beverages that consist of milk, fruit juices, nectars and fruit drinks and 12 fluid ounces for other beverages. No changes were recommended to the serving size of food products. For the 12 weeks ended March 21, 2020, total servings increased 6%, which reflects the impact of the revised guidelines on our prior-year servings.
Consolidated Net Revenue and Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Change
|
|
Net revenue
|
$
|
13,881
|
|
|
$
|
12,884
|
|
|
8
|
%
|
|
Operating profit
|
$
|
1,924
|
|
|
$
|
2,008
|
|
|
(4
|
)%
|
|
Operating profit margin
|
13.9
|
%
|
|
15.6
|
%
|
|
(1.7
|
)
|
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.
We estimate that changes in consumer consumption patterns arising from the COVID-19 pandemic contributed approximately 2 percentage points to net revenue and organic revenue growth. This estimate of the COVID-19 impact to reported net revenue and organic revenue growth is based on our internal analysis of expected revenue performance as reflected in our internal records before and after when we believe, based on information currently available to us, the primary markets in each segment appear to have experienced changes in consumer patterns in response to the spread of COVID-19.
Operating profit decreased 4% and operating profit margin decreased 1.7 percentage points. Operating profit performance was primarily driven by a 10-percentage-point impact of an unfavorable mark-to-market net impact on commodity derivatives, primarily related to fuel-related derivatives, included in corporate unallocated expenses (see “Items Affecting Comparability”). Net revenue growth and productivity savings positively contributed to operating profit performance and were partially offset by certain operating cost increases and higher advertising and marketing expenses. Additionally, certain charges taken in connection with COVID-19 negatively impacted operating profit performance by 7 percentage points.
Results of Operations – Division Review
As previously disclosed in our 2019 Form 10-K, our historical segment reporting presented in this report has been retrospectively revised to reflect the new organizational structure. These changes did not impact our consolidated financial results.
While our financial results in North America are reported on a 12-week basis, substantially all of our international operations report on a monthly calendar basis for which the months of January and February are reflected in our results for the 12 weeks ended March 21, 2020.
See “Non-GAAP Measures” and “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding measures not in accordance with GAAP.
In the discussions of net revenue and operating profit below, “effective net pricing” reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries, and “net pricing” reflects the year-over-year combined impact of list price changes, weight changes per package, discounts and allowances. Additionally, “acquisitions and divestitures” reflect all mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees.
Net Revenue and Organic Revenue Growth
Organic revenue growth is a non-GAAP financial measure. For further information on this measure see “Non-GAAP Measures.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/21/2020
|
|
|
|
|
Impact of
|
|
|
Impact of
|
|
|
Reported
% Change, GAAP Measure
|
|
Foreign exchange translation
|
|
Acquisitions and divestitures
|
|
Organic
% Change, Non-GAAP Measure(a)
|
|
Volume(b)
|
|
Effective net pricing
|
|
FLNA
|
7
|
%
|
|
—
|
|
|
—
|
|
|
7
|
%
|
|
5
|
|
2
|
|
|
QFNA
|
7
|
%
|
|
—
|
|
|
—
|
|
|
7
|
%
|
|
8
|
|
(2
|
)
|
|
PBNA
|
7
|
%
|
|
—
|
|
|
(1
|
)
|
|
6
|
%
|
|
7
|
|
(0.5
|
)
|
|
LatAm
|
6
|
%
|
|
2
|
|
|
—
|
|
|
8
|
%
|
|
3
|
|
5
|
|
|
Europe
|
14
|
%
|
|
—
|
|
|
—
|
|
|
14
|
%
|
|
10
|
|
3
|
|
|
AMESA
|
9
|
%
|
|
(1.5
|
)
|
|
6
|
|
|
14
|
%
|
|
10
|
|
3
|
|
|
APAC
|
6
|
%
|
|
2
|
|
|
—
|
|
|
7
|
%
|
|
1
|
|
7
|
|
|
Total
|
8
|
%
|
|
—
|
|
|
—
|
|
|
8
|
%
|
|
6
|
|
2
|
|
|
|
|
|
(a)
|
Amounts may not sum due to rounding.
|
|
|
|
|
(b)
|
Excludes the impact of acquisitions and divestitures. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between bottler case sales and concentrate shipments and equivalents (CSE), as well as the mix of beverage volume sold by our company-owned and franchise-owned bottlers. Our net revenue excludes nonconsolidated joint venture volume, and, for our franchise-owned beverage businesses, is based on CSE.
|
Operating Profit, Operating Profit Adjusted for Items Affecting Comparability and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
Operating profit adjusted for items affecting comparability and operating profit growth adjusted for items affecting comparability on a constant currency basis are both non-GAAP financial measures. For further information on these measures see “Non-GAAP Measures” and “Items Affecting Comparability.”
Operating Profit and Operating Profit Adjusted for Items Affecting Comparability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/21/2020
|
|
|
|
|
Items Affecting Comparability(a)
|
|
|
|
|
Reported, GAAP Measure
|
|
Mark-to-market net impact
|
|
Restructuring and impairment charges
|
|
Merger and integration charges
|
|
Core,
Non-GAAP Measure
|
|
FLNA (b)
|
$
|
1,202
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
23
|
|
|
$
|
1,230
|
|
|
QFNA (b)
|
150
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
151
|
|
|
PBNA (b)
|
297
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
300
|
|
|
LatAm
|
231
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
236
|
|
|
Europe (b)
|
146
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
154
|
|
|
AMESA
|
134
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
138
|
|
|
APAC (b)
|
142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142
|
|
|
Corporate unallocated expenses
|
(378
|
)
|
|
142
|
|
|
8
|
|
|
—
|
|
|
(228
|
)
|
|
Total
|
$
|
1,924
|
|
|
$
|
142
|
|
|
$
|
32
|
|
|
$
|
25
|
|
|
$
|
2,123
|
|
|
|
|
|
(a)
|
See “Items Affecting Comparability.”
|
|
|
|
|
(b)
|
In the 12 weeks ended March 21, 2020, reported and core operating profit includes $143 million of certain charges taken as a result of the COVID-19 pandemic, including $68 million of incremental allowances for expected credit losses ($21 million in FLNA, $2 million in QFNA, $41 million in PBNA and $4 million in Europe), $44 million of write-downs against upfront payments to customers in PBNA, $26 million of inventory write-downs and product returns ($3 million in FLNA, $22 million in PBNA and $1 million in APAC) and $5 million of certain other charges ($3 million in FLNA, $1 million in PBNA and $1 million in APAC).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/23/2019
|
|
|
|
|
Items Affecting Comparability(a)
|
|
|
|
|
Reported,
GAAP Measure
|
|
Mark-to-market net impact
|
|
Restructuring and impairment charges
|
|
Inventory fair value adjustments and merger and integration charges
|
|
Core,
Non-GAAP Measure
|
|
FLNA
|
$
|
1,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,159
|
|
|
QFNA
|
138
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
138
|
|
|
PBNA
|
389
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
395
|
|
|
LatAm
|
230
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
230
|
|
|
Europe
|
115
|
|
|
—
|
|
|
6
|
|
|
15
|
|
|
136
|
|
|
AMESA
|
105
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
113
|
|
|
APAC
|
106
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
109
|
|
|
Corporate unallocated expenses
|
(234
|
)
|
|
(60
|
)
|
|
8
|
|
|
—
|
|
|
(286
|
)
|
|
Total
|
$
|
2,008
|
|
|
$
|
(60
|
)
|
|
$
|
31
|
|
|
$
|
15
|
|
|
$
|
1,994
|
|
|
|
|
|
(a)
|
See “Items Affecting Comparability.”
|
Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/21/2020
|
|
|
|
|
Impact of Items Affecting Comparability(a)
|
|
|
|
Impact of
|
|
|
|
|
Reported % Change, GAAP Measure
|
|
Mark-to-market net impact
|
|
Restructuring and impairment charges
|
|
Inventory fair value adjustments and merger and integration charges
|
|
Core
% Change, Non-GAAP Measure(b)
|
|
Foreign exchange
translation
|
|
Core Constant Currency
% Change, Non-GAAP Measure(b)
|
|
FLNA
|
4
|
%
|
|
—
|
|
|
—
|
|
|
2
|
|
|
6
|
%
|
|
—
|
|
|
6
|
%
|
|
QFNA
|
8
|
%
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
9
|
%
|
|
—
|
|
|
9
|
%
|
|
PBNA
|
(24
|
)%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24
|
)%
|
|
—
|
|
|
(24
|
)%
|
|
LatAm
|
1
|
%
|
|
—
|
|
|
2
|
|
|
—
|
|
|
3
|
%
|
|
—
|
|
|
3
|
%
|
|
Europe
|
28
|
%
|
|
—
|
|
|
1
|
|
|
(15
|
)
|
|
13
|
%
|
|
—
|
|
|
13
|
%
|
|
AMESA
|
26
|
%
|
|
—
|
|
|
(8
|
)
|
|
3
|
|
|
21
|
%
|
|
(1
|
)
|
|
20
|
%
|
|
APAC
|
33
|
%
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
31
|
%
|
|
1
|
|
|
32
|
%
|
|
Corporate unallocated expenses
|
61
|
%
|
|
(82
|
)
|
|
—
|
|
|
—
|
|
|
(20
|
)%
|
|
—
|
|
|
(20
|
)%
|
|
Total
|
(4
|
)%
|
|
10
|
|
|
—
|
|
|
0.5
|
|
|
6
|
%
|
|
—
|
|
|
6
|
%
|
|
|
|
|
(a)
|
See “Items Affecting Comparability” for further information.
|
|
|
|
|
(b)
|
Amounts may not sum due to rounding.
|
FLNA
Net revenue grew 7% and volume grew 5%. The net revenue growth was primarily driven by the volume growth and effective net pricing. The volume growth primarily reflects double-digit growth in trademark Cheetos and Tostitos, and in variety packs, partially offset by a high-single-digit decline in trademark Santitas. The COVID-19 pandemic drove an increase in consumer demand, which had a positive impact on both net revenue and volume growth.
Operating profit increased 4%, primarily reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases, including a 2-percentage-point impact of certain charges taken as a result of the COVID-19 pandemic. Merger and integration charges related to our acquisition of BFY Brands reduced operating profit growth by 2 percentage points.
QFNA
Net revenue grew 7% and volume grew 8%. The net revenue growth reflects the volume growth, partially offset by unfavorable net pricing and mix. The volume growth was broad-based across our product portfolio, and was primarily driven by double-digit growth in oatmeal, ready-to-eat cereals and trademark Roni. The COVID-19 pandemic drove an increase in consumer demand, which had a positive impact on both net revenue and volume growth.
Operating profit grew 8%, reflecting the volume growth and productivity savings, partially offset by certain operating cost increases, unfavorable net pricing and higher advertising and marketing expenses.
PBNA
Net revenue grew 7%, driven by an increase in volume, partially offset by unfavorable net pricing. Volume increased 6%, driven by a 14% increase in non-carbonated beverage (NCB) volume and a slight increase in carbonated soft drink volume. The NCB volume increase primarily reflected double-digit increases in both our overall water portfolio and Gatorade sports drinks and a mid-single-digit increase in Lipton ready-to-drink teas. The COVID-19 pandemic drove an increase in consumer demand, which had a positive impact on both net revenue and volume growth. In addition, acquisitions contributed 1 percentage point to the net revenue growth.
Operating profit decreased 24%, primarily reflecting a 27-percentage-point impact of certain charges taken as a result of the COVID-19 pandemic. The positive impact of the COVID-19 pandemic on consumer demand partially offset the decline in operating profit performance. In addition, operating cost increases, including incremental information technology costs, as well as higher advertising and marketing expenses were partially offset by the volume growth and productivity savings.
LatAm
Net revenue increased 6%, reflecting effective net pricing and volume growth, partially offset by a 2-percentage-point impact of unfavorable foreign exchange.
Snacks volume grew 2.5%, reflecting mid-single-digit growth in Mexico, partially offset by a low-single-digit decline in Brazil.
Beverage volume grew 5%, reflecting double-digit growth in Chile and mid-single-digit growth in Mexico, partially offset by a mid-single-digit decline in Colombia and a low-single-digit decline in Honduras. Additionally, Brazil and Guatemala each experienced low-single-digit growth and Argentina experienced mid-single-digit growth.
Operating profit increased 1%, reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases, higher advertising and marketing expenses and a 3-percentage-point impact of higher commodity costs. Additionally, the impact of a prior-year insurance settlement recovery related to the 2017 earthquake in Mexico reduced operating profit growth by 14 percentage points. Higher restructuring charges reduced operating profit by 2 percentage points.
Europe
Net revenue increased 14%, reflecting volume growth and effective net pricing. SodaStream contributed 6 percentage points to net revenue growth, which included the benefit of an extra month of sales as we aligned SodaStream’s reporting calendar with that of the Europe division. Since being acquired in the fourth quarter of 2018, SodaStream had been reporting on a one-month lag.
Snacks volume grew 5%, reflecting high-single-digit growth in the United Kingdom and France, double-digit growth in Turkey and mid-single-digit growth in Poland, partially offset by a low-single-digit decline
in Russia. Additionally, the Netherlands experienced slight growth and Spain experienced low-single-digit growth.
Beverage volume grew 13%, reflecting double-digit growth in France, Germany and Turkey, partially offset by a low-single-digit decline in Russia. Additionally, Poland experienced mid-single-digit growth and the United Kingdom experienced high-single-digit growth.
Operating profit increased 28%, reflecting the net revenue growth, productivity savings, a 15-percentage-point impact of the prior-year inventory fair value adjustments and merger and integration charges associated with our SodaStream acquisition and an 8-percentage-point impact of lower commodity costs, largely due to transaction-related foreign exchange. These impacts were partially offset by certain operating cost increases, higher advertising and marketing expenses and a 14-percentage-point impact of a prior-year insurance settlement recovery in Russia.
AMESA
Net revenue increased 9%, reflecting volume growth and effective net pricing, partially offset by a 6-percentage-point impact of a prior-year refranchising of a portion of our beverage business in India.
Snacks volume grew 13%, reflecting double-digit growth in India and Pakistan. Additionally, the Middle East experienced double-digit growth and South Africa experienced mid-single-digit growth.
Beverage volume grew 11%, reflecting double-digit growth in India and Nigeria. Additionally, Pakistan and the Middle East each experienced high-single-digit growth.
Operating profit increased 26%, reflecting the net revenue growth, productivity savings and a 5-percentage-point impact of the prior-year refranchising of a portion of our beverage business in India. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses. Lower restructuring and impairment charges contributed 8 percentage points to operating profit growth.
APAC
Net revenue increased 6%, reflecting effective net pricing and net volume growth, partially offset by a 2-percentage-point impact of unfavorable foreign exchange.
Snacks volume grew 3.5%, reflecting double-digit growth in Indonesia and mid-single-digit growth in Australia, partially offset by a low-single-digit decline in China and a slight decline in Taiwan. Additionally, Thailand experienced low-single-digit growth.
Beverage volume declined 2%, reflecting a mid-single-digit decline in China, partially offset by double-digit growth in the Philippines, mid-single-digit growth in Vietnam and low-single-digit growth in Thailand.
Operating profit increased 33%, reflecting the net revenue growth, productivity savings and a 3-percentage- point impact of lower commodity costs, partially offset by certain operating cost increases. Lower restructuring and impairment charges contributed 3 percentage points to operating profit growth.
Other Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Change
|
|
Other pension and retiree medical benefits income
|
$
|
77
|
|
|
$
|
64
|
|
|
$
|
13
|
|
|
Net interest expense and other
|
$
|
(290
|
)
|
|
$
|
(204
|
)
|
|
$
|
(86
|
)
|
|
Tax rate
|
21.0
|
%
|
|
23.9
|
%
|
|
|
|
Net income attributable to PepsiCo
|
$
|
1,338
|
|
|
$
|
1,413
|
|
|
(5
|
)%
|
|
Net income attributable to PepsiCo per common share – diluted
|
$
|
0.96
|
|
|
$
|
1.00
|
|
|
(4
|
)%
|
|
Mark-to-market net impact
|
0.08
|
|
|
(0.03
|
)
|
|
|
|
Restructuring and impairment charges
|
0.02
|
|
|
0.02
|
|
|
|
|
Inventory fair value adjustments and merger and integration charges
|
0.02
|
|
|
0.01
|
|
|
|
|
Net tax related to the TCJ Act
|
—
|
|
|
(0.02
|
)
|
|
|
|
Net income attributable to PepsiCo per common share – diluted, excluding above items (a)
|
$
|
1.07
|
|
(b)
|
$
|
0.97
|
|
(b)
|
10
|
%
|
|
Impact of foreign exchange translation
|
|
|
|
|
—
|
|
|
Growth in net income attributable to PepsiCo per common share – diluted, excluding above items, on a constant currency basis (a)
|
|
|
|
|
10
|
%
|
|
|
|
|
(a)
|
See “Non-GAAP Measures.”
|
|
|
|
|
(b)
|
Does not sum due to rounding.
|
Other pension and retiree medical benefits income increased $13 million, reflecting the recognition of fixed income gains on plan assets and the impact of approved plan contributions, partially offset by the decrease in discount rates.
Net interest expense and other increased $86 million, reflecting losses on the market value of investments used to economically hedge a portion of our deferred compensation liability, as well as lower interest income due to lower interest rates on average cash balances. These impacts were partially offset by lower interest expense due to lower interest rates on average debt balances.
The reported tax rate decreased 2.9 percentage points, primarily reflecting the prior-year increase in reserves for uncertain tax positions in foreign jurisdictions. This impact was partially offset by the prior-year net tax related to the TCJ Act, which increased the current-year reported tax rate by 1.5 percentage points.
Net income attributable to PepsiCo decreased 5% and net income attributable to PepsiCo per common share decreased 4%. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted net income attributable to PepsiCo performance by 14 percentage points and net income attributable to PepsiCo per common share performance by 15 percentage points.
Non-GAAP Measures
Certain financial measures contained in this Form 10-Q adjust for the impact of specified items and are not in accordance with U.S. GAAP. We use non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance and as a factor in determining compensation for certain employees. We believe presenting non-GAAP financial measures in this Form 10-Q provides additional information to facilitate comparison of our historical operating results and trends in our underlying operating results, and provides additional transparency on how we evaluate our business. We also believe presenting these measures in this Form 10-Q allows investors to view our performance using the same measures that we use in evaluating our financial and business performance and trends.
We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Examples of items for which we may make adjustments include: amounts related to mark-to-market gains or losses (non-cash); charges related to restructuring plans; amounts associated with mergers, acquisitions, divestitures and other structural changes; pension and retiree medical related items; charges or adjustments related to the enactment of new laws, rules or regulations, such as significant tax law changes; amounts related to the resolution of tax positions; tax benefits related to reorganizations of our operations; debt redemptions, cash tender or exchange offers; asset impairments (non-cash); and remeasurements of net monetary assets. See below and “Items Affecting Comparability” for a description of adjustments to our U.S. GAAP financial measures in this Form 10-Q.
Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.
The following non-GAAP financial measures contained in this Form 10-Q are discussed below:
Cost of sales, gross profit, selling, general and administrative expenses, other pension and retiree medical benefits income, provision for income taxes and net income attributable to PepsiCo, each adjusted for items affecting comparability, operating profit, adjusted for items affecting comparability and net income attributable to PepsiCo per common share – diluted, adjusted for items affecting comparability, and the corresponding constant currency growth rates
These measures exclude the net impact of mark-to-market gains and losses on centrally managed commodity derivatives that do not qualify for hedge accounting, restructuring and impairment charges related to our 2019 Productivity Plan, inventory fair value adjustments and merger and integration charges associated with our acquisitions and net tax related to the TCJ Act (see “Items Affecting Comparability” for a detailed description of each of these items). We also evaluate performance on operating profit, adjusted for items affecting comparability and net income attributable to PepsiCo per common share – diluted, adjusted for items affecting comparability, each on a constant currency basis, which measure our financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current-year U.S. dollar results by the current-year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior-year average foreign exchange rates. We believe these measures provide useful information in evaluating the results of our business because they exclude items that we believe are not indicative of our ongoing performance.
Organic revenue growth
We define organic revenue growth as net revenue growth adjusted for the impact of foreign exchange translation, as well as the impact from acquisitions, divestitures and other structural changes. We believe organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior year.
See “Net Revenue and Organic Revenue Growth” in “Results of Operations – Division Review” for further information.
Free cash flow
We define free cash flow as net cash used for operating activities less capital spending, plus sales of property, plant and equipment. Since net capital spending is essential to our product innovation initiatives and
maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Free cash flow is used by us primarily for financing activities, including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure.
See “Free Cash Flow” in “Our Liquidity and Capital Resources” for further information.
Items Affecting Comparability
Our reported financial results in this Form 10-Q are impacted by the following items in each of the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/21/2020
|
|
|
Cost of sales
|
|
Gross profit
|
|
Selling, general and administrative expenses
|
|
Operating profit
|
|
Other pension and retiree medical benefits income
|
|
Provision for income taxes(a)
|
|
Net income attributable to PepsiCo
|
|
Reported, GAAP Measure
|
$
|
6,127
|
|
|
$
|
7,754
|
|
|
$
|
5,830
|
|
|
$
|
1,924
|
|
|
$
|
77
|
|
|
$
|
360
|
|
|
$
|
1,338
|
|
|
Items Affecting Comparability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market net impact
|
(38
|
)
|
|
38
|
|
|
(104
|
)
|
|
142
|
|
|
—
|
|
|
35
|
|
|
107
|
|
|
Restructuring and impairment charges
|
(2
|
)
|
|
2
|
|
|
(30
|
)
|
|
32
|
|
|
6
|
|
|
6
|
|
|
32
|
|
|
Merger and integration charges
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
25
|
|
|
—
|
|
|
3
|
|
|
22
|
|
|
Core, Non-GAAP Measure
|
$
|
6,087
|
|
|
$
|
7,794
|
|
|
$
|
5,671
|
|
|
$
|
2,123
|
|
|
$
|
83
|
|
|
$
|
404
|
|
|
$
|
1,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended 3/23/2019
|
|
|
Cost of sales
|
|
Gross profit
|
|
Selling, general and administrative expenses
|
|
Operating profit
|
|
Other pension and retiree medical benefits income
|
|
Provision for income taxes(a)
|
|
Net income attributable to PepsiCo
|
|
Reported, GAAP Measure
|
$
|
5,688
|
|
|
$
|
7,196
|
|
|
$
|
5,188
|
|
|
$
|
2,008
|
|
|
$
|
64
|
|
|
$
|
446
|
|
|
$
|
1,413
|
|
|
Items Affecting Comparability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market net impact
|
19
|
|
|
(19
|
)
|
|
41
|
|
|
(60
|
)
|
|
—
|
|
|
(14
|
)
|
|
(46
|
)
|
|
Restructuring and impairment charges
|
(8
|
)
|
|
8
|
|
|
(23
|
)
|
|
31
|
|
|
(5
|
)
|
|
3
|
|
|
23
|
|
|
Inventory fair value adjustments and merger and integration charges
|
(14
|
)
|
|
14
|
|
|
(1
|
)
|
|
15
|
|
|
—
|
|
|
2
|
|
|
13
|
|
|
Net tax related to the TCJ Act
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
Core, Non-GAAP Measure
|
$
|
5,685
|
|
|
$
|
7,199
|
|
|
$
|
5,205
|
|
|
$
|
1,994
|
|
|
$
|
59
|
|
|
$
|
466
|
|
|
$
|
1,374
|
|
|
|
|
|
(a)
|
Provision for income taxes is the expected tax charge/benefit on the underlying item based on the tax laws and income tax rates applicable to the underlying item in its corresponding tax jurisdiction.
|
Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.
Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
In connection with our 2019 Productivity Plan, we expect to incur pre-tax charges of approximately $2.5 billion, of which we have incurred $546 million plan to date through March 21, 2020 and cash expenditures of approximately $1.6 billion, of which we have incurred approximately $321 million plan to date through March 21, 2020. We expect to incur pre-tax charges of approximately $400 million and cash expenditures of approximately $350 million for the remainder of 2020, with the balance to be reflected in our 2021 through 2023 financial results. These charges will be funded primarily through cash from operations. We expect to incur the majority of the remaining pre-tax charges and cash expenditures in our 2020 and 2021 results.
See Note 3 to our condensed consolidated financial statements in this Form 10-Q, as well as Note 3 to our consolidated financial statements in our 2019 Form 10-K for further information related to our 2019 Productivity Plan.
We regularly evaluate productivity initiatives beyond the productivity plan and other initiatives discussed above and in Note 3 to our condensed consolidated financial statements.
Inventory Fair Value Adjustments and Merger and Integration Charges
In the 12 weeks ended March 21, 2020, we recorded merger and integration charges of $25 million ($22 million after-tax or $0.02 per share), including $23 million in our FLNA segment related to our acquisition of BFY Brands and $2 million in our AMESA segment related to our acquisition of Pioneer Foods. These charges primarily relate to contract termination and employee-related costs.
In the 12 weeks ended March 23, 2019, we recorded inventory fair value adjustments and merger and integration charges of $15 million ($0.01 per share) in our Europe segment, primarily related to fair value adjustments to the acquired inventory included in SodaStream’s balance sheet at acquisition date.
Net Tax Related to the TCJ Act
During the fourth quarter of 2017, the TCJ Act was enacted in the United States. We recognized tax benefits of $29 million ($0.02 per share) in the 12 weeks ended March 23, 2019 related to the TCJ Act.
See Note 5 to our condensed consolidated financial statements for further information.
Our Liquidity and Capital Resources
We believe that our cash generating capability and financial condition, together with our revolving credit facilities, bridge loan facilities, working capital lines and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs. Our primary sources of cash available to fund cash outflows, such as our anticipated share repurchases, dividend payments, debt repayments, payments for acquisitions and the transition tax liability under the TCJ Act, include cash from operations, proceeds obtained from issuances of commercial paper, bridge loan facilities and long-term debt, and cash and cash equivalents. Our sources and uses of cash were not materially impacted by COVID-19 in the 12 weeks ended March 21, 2020 and, to date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of COVID-19 to have a material impact on our liquidity. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. See “Item 1A. Risk Factors,” “Our Business Risks” and Note 8 to our condensed consolidated financial statements included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” as well as Note 8 to our consolidated financial statements included in our 2019 Form 10-K for further information.
As of March 21, 2020, cash, cash equivalents and short-term investments in our consolidated subsidiaries subject to currency controls or currency exchange restrictions were not material.
The TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings. As of March 21, 2020, our mandatory transition tax liability was $3.3 billion, which must be paid through 2026 under the provisions of the TCJ Act. See Note 5 to our condensed consolidated financial statements for further discussion of the TCJ Act.
The CARES Act was enacted during our second quarter of 2020 and includes several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that we expect to defer to future periods. We do not currently expect this legislation to have a material detrimental impact on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results.
Operating Activities
During the 12 weeks ended March 21, 2020, net cash used for operating activities was $0.7 billion, compared to net cash used for operating activities of $0.3 billion in the prior-year period. The operating cash flow performance primarily reflects unfavorable working capital comparisons to 2019.
Investing Activities
During the 12 weeks ended March 21, 2020, net cash used for investing activities was $0.9 billion, primarily reflecting net capital spending of $0.5 billion and acquisitions of $0.5 billion.
In light of the potential impact of the COVID-19 pandemic on our business, we are currently reviewing our plans with respect to net capital spending.
Financing Activities
During the 12 weeks ended March 21, 2020, net cash provided by financing activities was $7.5 billion, primarily reflecting proceeds from issuances of long-term debt of $6.4 billion and net proceeds of short-term borrowings of $3.0 billion, partially offset by the return of operating cash flow to our shareholders through dividend payments and share repurchases of $1.9 billion.
We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 13, 2018, we announced the 2018 share repurchase program providing for the repurchase of up to $15.0 billion of PepsiCo common stock which commenced on July 1, 2018 and will expire on June 30, 2021. On February 13, 2020, we announced a 7% increase in our annualized dividend to $4.09 per share from $3.82 per share, effective with the dividend expected to be paid in June 2020. We expect to return a total of approximately $7.5 billion to shareholders in 2020 through share repurchases of approximately $2 billion and dividends of approximately $5.5 billion. See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a description of our share repurchase program.
Free Cash Flow
The table below reconciles net cash used for operating activities, as reflected on our cash flow statement, to our free cash flow. Free cash flow is a non-GAAP financial measure. For further information on free cash flow see “Non-GAAP Measures.”
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
3/21/2020
|
|
|
3/23/2019
|
|
|
Net cash used for operating activities, GAAP measure
|
$
|
(749
|
)
|
|
$
|
(345
|
)
|
|
Capital spending
|
(484
|
)
|
|
(442
|
)
|
|
Sales of property, plant and equipment
|
5
|
|
|
2
|
|
|
Free cash flow, non-GAAP measure
|
$
|
(1,228
|
)
|
|
$
|
(785
|
)
|
We use free cash flow primarily for financing activities, including debt repayments, dividends and share repurchases. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases while maintaining Tier 1 commercial paper access, which we believe will facilitate appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. See “Our Business Risks” included in this Form 10-Q and “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our 2019 Form 10-K, for certain factors that may impact our credit ratings or our operating cash flows.
Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether or not as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. See Note 8 to our condensed consolidated financial statements, “Item 1A. Risk Factors” and “Our Business Risks” included in this Form 10-Q, as well as “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks” included in our 2019 Form 10-K for further information.