PepsiCo, Inc. — Q2 2018 Form 10-Q
Reporting period: Second quarter ended June 16, 2018 (12 weeks); year-to-date period was 24 weeks. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | 12 weeks ended June 16, 2018 | Change vs. 2017 | 24 weeks ended June 16, 2018 | Change vs. 2017 |
|---|---|---|---|---|
| Net revenue | $16.09 billion | +2% | $28.65 billion | +3% |
| Operating profit | $3.03 billion | +4% | $4.84 billion | +1% |
| Operating margin | 18.8% | +0.2 percentage points | 16.9% | -0.4 percentage points |
| Net income attributable to PepsiCo | $1.82 billion | -14% | $3.16 billion | -8% |
| Diluted EPS | $1.28 | -13% | $2.21 | -7% |
For the 24-week period, gross profit was $15.73 billion and gross margin was approximately 54.9%, compared with $15.41 billion and approximately 55.5% in 2017. Total servings increased 1% in both the quarter and year-to-date period. Management reported adjusted diluted EPS growth, excluding specified items, of 8% for the quarter and 6% year to date; corresponding constant-currency growth was 7% and 4%.
Cash flow, debt and liquidity
- Year-to-date cash from operations was $1.09 billion, down from $2.25 billion; free cash flow, as defined by the company, was $185 million versus $1.40 billion.
- Operating cash flow was significantly affected by $1.4 billion of discretionary U.S. pension contributions. Investing activities provided $3.83 billion, mainly reflecting maturities and sales of debt securities.
- At June 16, cash and cash equivalents were $13.86 billion and short-term investments were $4.27 billion. Current assets were $30.37 billion and current liabilities were $24.56 billion.
- Short-term debt was $9.96 billion and long-term debt was $30.64 billion. PepsiCo reported $5.4 billion of commercial paper outstanding; approximately 45% of total debt was at variable rates after hedging. No amounts were drawn under its revolving credit agreements.
- Year-to-date financing included $2.50 billion of long-term debt repayments, $4.09 billion of net short-term borrowings, $2.31 billion of dividends paid and $984 million of common-stock repurchases.
Material changes and segment performance
- Quarterly revenue growth was led by ESSA (+11%) and FLNA (+4%); QFNA declined 5%, NAB declined 1%, and Latin America increased 1%. AMENA declined 2% as reported, while organic revenue grew 6%.
- Quarterly operating profit increased at FLNA (+5%) and Latin America (+18%), was flat at QFNA, and declined at NAB (-16%) and ESSA (-11%). AMENA operating profit rose 61%, substantially reflecting refranchising effects.
- For the 24 weeks, reported operating profit growth was held back by higher commodity and other operating costs, the prior-year Britvic sale gain, and a bonus for certain U.S. employees. Higher commodity costs reduced operating-profit growth by 4 percentage points year to date.
- Foreign exchange added 1 percentage point to reported revenue growth in both periods. PepsiCo said non-U.S. operations generated 41% of year-to-date revenue.
Outlook, commentary and notable items
- Management said cash generation, revolving facilities and access to debt markets should be adequate for operating, investing and financing needs, while cautioning that capital-market volatility could limit access or raise costs.
- For 2018, PepsiCo expected net capital spending of approximately $3.6 billion and total shareholder returns of approximately $7 billion: about $2 billion in repurchases and $5 billion in dividends. The annualized dividend was raised 15.2% to $3.71 per share. A new $15 billion repurchase authorization began July 1, 2018.
- The productivity plan, extended through 2019, was expected to generate approximately $1.3 billion of cumulative pre-tax charges and $985 million of cash expenditures. PepsiCo anticipated $205 million of additional charges and $258 million of cash expenditures in the remainder of 2018.
- Reported earnings included a $777 million provisional tax expense related to the Tax Cuts and Jobs Act and a $314 million non-cash tax benefit from resolution of IRS audits for 2012–2013. Tax Act amounts remained provisional and could change materially; the company expected to finalize related adjustments by year-end 2018.
- Other notable items included a $144 million pre-tax gain from refranchising the Thailand beverage business and $44 million of year-to-date restructuring charges. A transaction to refranchise beverage bottling and snack distribution operations in the Czech Republic, Hungary and Slovakia was expected to close in 2018.
- Key risks cited include changing consumer preferences, product-related taxes and regulation, commodity costs and supply, foreign exchange, economic and political conditions, retail-channel shifts, cybersecurity, execution of productivity initiatives, and litigation. Management said pending litigation was not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue and volume trends—particularly weakness in North American beverages and Quaker Foods—improve or persist.
- How much reported earnings and cash flow are affected by provisional Tax Act accounting, IRS audit adjustments and the large pension contribution.
- Whether higher commodity, transportation and other operating costs continue to pressure margins.
- Progress on the $3.6 billion capital-spending plan, productivity savings and expected 2018 shareholder returns, alongside debt and commercial-paper levels.
- Final Tax Act liability and payment estimates, and completion of the planned Central European refranchising transaction.