PEPSICO : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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. 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.

                                       25

--------------------------------------------------------------------------------

Table of Contents

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

                                       26

--------------------------------------------------------------------------------

Table of Contents

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 continued to result in challenging operating environments and has
affected almost all of the more than 200 countries and territories in which our
products are made, manufactured, distributed or sold. Authorities in many of
these markets have implemented numerous and varying measures to stall the spread
and ameliorate the impact of COVID-19, including travel bans and restrictions,
quarantines, curfews, shelter in place and safer-at-home orders, business
shutdowns and closures, and have also implemented multi-step policies with the
goal of re-opening these markets. These measures have impacted and will continue
to 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. The
countries and territories in which our products are made, manufactured,
distributed or sold are in varying stages of restrictions and re-opening to
address the COVID-19 pandemic. Certain jurisdictions have begun re-opening only
to return to restrictions in the face of increases in new COVID-19 cases. There
is considerable uncertainty regarding how current and future health and safety
measures implemented 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, operating 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. To date, we have
incurred increased costs as a result of COVID-19, including increased employee
costs, such as expanded benefits and frontline incentives, and other operating
costs, such as costs associated with the provision of personal protective
equipment, allowances for credit losses, upfront payment write-offs and
inventory write-offs, which have negatively impacted our profitability. In
addition, measures that impact our ability to access our offices, plants,
warehouses, distribution centers or other facilities (some of which are
currently closed), or that impact the ability of our customers (including our
foodservice customers), consumers, bottlers, contract manufacturers,
distributors, joint venture partners, suppliers and other third parties to do
the same, may continue to impact the availability of our and their employees,
many of whom are not able to perform their job functions remotely. We continue
to implement safety protocols at our facilities

                                       27

--------------------------------------------------------------------------------

Table of Contents

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 leaving their
homes less often than they did prior to the start of the pandemic or otherwise
shopping and consuming food and beverage products 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. Changes in consumer demand as a result of
COVID-19 continues to vary in scope and timing by jurisdiction as we sell a wide
variety of beverages, foods and snacks and the amount of revenue attributable to
such products varies across these markets. Even as government restrictions are
lifted and economies gradually reopen in certain of these markets, the ongoing
economic impacts and health concerns associated with the pandemic may continue
to affect consumer behavior, spending levels and shopping and consumption
preferences. 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. We continue to see shifts in product and channel preferences as
markets move through varying stages of restrictions and re-opening at different
times, including changes in at-home consumption, in immediate consumption and
away-from-home channels, such as convenience and gas and foodservice. In
addition, we continue to see a rapid increase in demand in the e-commerce and
online-to-offline channels and any failure to capitalize on this demand could
adversely affect our ability to maintain and grow sales or category share and
erode our competitive position.
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, which can
result in an inability to pay for our products, reduced or canceled orders of
our products, continued or additional 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, continued 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 continue to depend on numerous evolving
factors that we are not able to accurately predict and which 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.

                                       28

--------------------------------------------------------------------------------

Table of Contents

Coronavirus Aid, Relief, and Economic Security Act
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 are deferring 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 and Note 5 to our condensed consolidated
financial statements for further information.
Risks Associated with International Operations
In the 12 weeks ended June 13, 2020, substantially all of our financial results
outside of North America reflect the months of March, April and May. In the 24
weeks ended June 13, 2020 substantially all of our financial results outside of
North America reflect the months of January through May. In the 24 weeks ended
June 13, 2020, our operations outside of the United States generated 39% of our
consolidated net revenue, with Brazil, Canada, China, Mexico, Russia and the
United Kingdom, comprising approximately 20% of our consolidated net revenue. As
a result, we are exposed to foreign exchange risk in the international markets
in which our products are made, manufactured, distributed or sold. In the 12 and
24 weeks ended June 13, 2020, unfavorable foreign exchange negatively impacted
net revenue performance by 4 percentage points and 2 percentage points,
respectively, primarily due to declines in the Mexican peso, Brazilian real and
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 June 13, 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

                                       29

--------------------------------------------------------------------------------

Table of Contents

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 vary 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
24 weeks ended June 13, 2020 related to the TRAF. Enactment of additional TRAF
provisions subsequent to June 13, 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 in this Form 10-Q,
as well as Note 5 to our consolidated financial statements in our 2019 Form 10-K
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 have seen and expect to continue
to see a further shift to e-commerce, online-to-offline, and other online
purchasing by consumers as a result of the COVID-19 pandemic. We continue to
monitor changes in the retail landscape and seek to identify actions we may take
to build our global e-commerce and digital capabilities, such as expanding our
direct-to-consumer business, and 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

                                       30

--------------------------------------------------------------------------------

Table of Contents

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 June 13, 2020 include beverage volume outside of North America for the months of March, April and May. The 24 weeks ended June 13, 2020 include beverage volume outside of North America for the months of January through May. 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 and 24 weeks ended June 13, 2020, total servings increased 1% and 3.5%, respectively, which reflects the impact of the revised guidelines on our prior-year servings. Consolidated Net Revenue and Operating Profit

© Edgar Online, source Glimpses