PepsiCo, Inc. — Q3 2017 Form 10-Q
Business context and period: PepsiCo reported unaudited results for the 12 and 36 weeks ended September 9, 2017, compared with the corresponding periods ended September 3, 2016. The company operates six divisions across beverages, foods and snacks. International reporting periods are not fully aligned with North America’s 12-week quarters.
Key financial results
| Metric | 12 weeks ended Sep. 9, 2017 | Change | 36 weeks ended Sep. 9, 2017 | Change |
|---|---|---|---|---|
| Net revenue | $16.24 billion | +1% | $44.00 billion | +2% |
| Operating profit | $2.99 billion | +6% | $7.92 billion | +7% |
| Operating margin | 18.4% | +0.8 percentage points | 18.0% | +0.9 percentage points |
| Net income attributable to PepsiCo | $2.14 billion | +8% | $5.57 billion | +13% |
| Diluted EPS | $1.49 | +9% | $3.87 | +14% |
| Net cash from operations | Not presented for the 12-week period | — | $6.06 billion | Down 11% |
| Free cash flow (company-defined, non-GAAP) | Not presented for the 12-week period | — | $4.67 billion | Down 12% |
Gross profit was $8.87 billion for the quarter and $24.29 billion for the 36-week period. Cash, cash equivalents and short-term investments totaled $18.28 billion at September 9, 2017. Current assets were $30.20 billion and current liabilities $22.36 billion. Short- and long-term debt obligations totaled $39.17 billion, versus $36.95 billion at December 31, 2016; commercial paper outstanding was $3.8 billion. No borrowings were outstanding under the revolving credit agreements.
Cash dividends declared were $0.805 per share for the quarter and $2.3625 per share year to date. The company paid $3.32 billion of dividends and repurchased $1.46 billion of common stock during the 36 weeks.
Changes versus the prior comparable period
- Consolidated servings volume was flat in both the 12- and 36-week periods. Quarter organic revenue growth was 2%; year-to-date organic growth was also 2%.
- Quarter operating-profit growth reflected pricing, planned cost reductions and prior-year investment comparisons, partly offset by higher operating and commodity costs. Commodity inflation reduced quarterly operating-profit growth by 6 percentage points.
- North America Beverages was a weak spot: quarterly revenue fell 3%, volume fell 5.5%, and operating profit fell 10%. Frito-Lay North America revenue increased 3% and operating profit 5%.
- Year-to-date operating profit benefited from a $95 million gain on the sale of PepsiCo’s Britvic stake and from comparison with the prior-year $373 million Tingyi-related impairment. These and other comparability items materially affect reported growth; the company’s adjusted measures are non-GAAP.
- Operating cash flow declined from $6.82 billion to $6.06 billion, which management attributed in part to unfavorable working-capital timing, including vendor payments, customer trade-spend settlements and marketing spending.
Outlook, commentary and risks
- Management expected 2017 net capital spending of approximately $3 billion, within its long-term target of no more than 5% of net revenue. It expected to return approximately $6.5 billion to shareholders in 2017, including about $2.0 billion in repurchases and $4.5 billion in dividends. The annualized dividend was raised 7% to $3.22 per share effective with the June 2017 payment.
- The 2014 Productivity Plan was expected to incur approximately $990 million of cumulative pre-tax charges, including about $705 million of cash expenditures. The filing estimated $87 million of charges and $54 million of cash expenditures in the fourth quarter of 2017, followed by $95 million and $133 million, respectively, in 2018.
- Management cited foreign-exchange exposure, commodity inflation, changing consumer demand, possible product taxes and labeling restrictions, geopolitical and economic conditions, supply disruption, cybersecurity, litigation, and credit-market access among the risks to future results. Foreign exchange reduced reported revenue growth by 1 percentage point in both the quarter and year-to-date periods. Recent hurricanes and earthquakes had not materially affected third-quarter results, but the company was still assessing potential impacts.
- PepsiCo said its cash-generating capacity and financing sources should meet operating, investing and financing needs, while warning that capital-market volatility or credit-rating downgrades could raise borrowing costs or limit access. The company held $17.5 billion of cash, cash equivalents and short-term investments in consolidated subsidiaries outside the United States; repatriation could incur tax liabilities.
- The company’s Venezuelan subsidiaries remained deconsolidated and fully impaired under the cost-method accounting adopted in 2015; conditions leading to that treatment continued. Management said ordinary-course legal matters were not expected to have a material adverse effect. The interim financial statements were reviewed, not audited, by the independent accounting firm.
Important facts for investors to verify
- How much of reported earnings growth reflects underlying operations versus the Britvic gain, prior-year Tingyi impairment, restructuring and derivative mark-to-market items.
- Whether North America Beverages can stabilize volumes, and whether commodity inflation and foreign-exchange pressure—particularly in AMENA and Latin America—persist.
- Whether working-capital timing reverses and operating cash flow recovers, while supporting the planned capital spending, dividends, repurchases and debt obligations.
- Progress and remaining cash costs under the productivity plan, and the effects of proposed product taxes, currency restrictions and other regulatory or geopolitical developments.
- The filing provides no clear full-year revenue or EPS guidance in the text presented; verify any broader company outlook in other company disclosures.