PepsiCo, Inc. — Q1 2018 Form 10-Q
Reporting period: 12 weeks ended March 24, 2018; comparative period ended March 25, 2017. Interim statements are unaudited. Unless indicated otherwise, amounts are USD millions.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $12,562 | $12,049 | +4% |
| Gross profit | $6,907 | $6,759 | +2% |
| Operating profit | $1,807 | $1,863 | -3% |
| Operating margin | 14.4% | 15.5% | -1.1 percentage points |
| Net income attributable to PepsiCo | $1,343 | $1,318 | +2% |
| Diluted EPS | $0.94 | $0.91 | +3% |
| Net cash from operating activities | $(1,309) | $(193) | Greater cash use |
| Free cash flow | $(1,652) | $(498) | Greater cash use |
Gross margin was approximately 55.0%, versus 56.1% a year earlier. Total servings increased 1%; organic revenue growth was 2%, while favorable foreign exchange added 2 percentage points to reported revenue growth. The reported tax rate fell to 18.3% from 22.7%, primarily reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act (TCJ Act).
Balance sheet, liquidity and capital allocation
At March 24, 2018, cash and cash equivalents were $13.443 billion and short-term investments were $7.167 billion. Current assets were $33.047 billion against current liabilities of $25.885 billion. Total debt obligations were $43.531 billion: $11.600 billion short-term and $31.931 billion long-term. Short-term debt increased from $5.485 billion at year-end 2017; the company reported $5.1 billion of commercial paper outstanding.
Operating cash use included $1.4 billion of discretionary U.S. pension contributions and $17 million of international pension contributions. Investing activities provided $1.396 billion, mainly from net maturities and sales of investment securities. Financing activities provided $2.682 billion, including $4.291 billion of net short-term borrowings; dividends paid and common share repurchases totaled about $1.653 billion.
Management expected 2018 net capital spending of approximately $3.6 billion and total shareholder returns of approximately $7 billion—about $5 billion in dividends and $2 billion in share repurchases. The company announced a new $15 billion repurchase authorization beginning July 1, 2018, and a 15.2% increase in the annualized dividend to $3.71 per share, effective with the expected June 2018 payment.
Material changes and segment results
Revenue growth was led by Latin America (+14%), Europe Sub-Saharan Africa (+15%) and Asia, Middle East and North Africa (+7%); North America Beverages revenue declined 1%, and Quaker Foods North America was approximately flat. Operating profit was particularly weak in North America Beverages (-23%) and Quaker Foods North America (-5%); Latin America rose 42% and Europe Sub-Saharan Africa rose 23%. International reported growth benefited substantially from favorable currency translation.
Operating profit and margin faced higher commodity costs and operating expenses, as well as a bonus for certain U.S. employees associated with the TCJ Act. Management said these factors reduced operating profit performance by 4.5 percentage points and margin by 0.7 percentage points; commodity inflation also reduced operating profit performance by 4.5 percentage points. Planned cost reductions, revenue growth and favorable currency partly offset these pressures. North America Beverages also cited lower beverage volumes and commodity costs; a gain on an asset sale partly offset the impact.
Outlook, risks and unusual items
- Tax uncertainty: The company recorded $1 million of additional provisional transition-tax expense in Q1, following approximately $2.5 billion of provisional net tax expense in Q4 2017. After new IRS guidance issued in Q2, management expected an additional $700–$800 million of provisional transition-tax expense in Q2. Final TCJ Act amounts remained subject to estimation and interpretation and could differ materially. The company expected to pay the transition-tax liability over 2019–2026.
- Productivity plan: The multi-year plan was extended through 2019. Expected total pre-tax charges were approximately $1.305 billion, with about $985 million of cash expenditures; $237 million of charges and $346 million of cash expenditures were expected for the remainder of 2018.
- Portfolio changes: A Q1 agreement to refranchise bottling and snack distribution operations in the Czech Republic, Hungary and Slovakia was expected to close in 2018. A Thailand bottling refranchising completed in Q2 was expected to produce a pre-tax gain of approximately $145 million.
- Business and financing risks: Management highlighted commodity-price, foreign-exchange, interest-rate, consumer-demand, product-tax and regulatory risks; volatile markets and geopolitical conditions; supply and cybersecurity disruptions; changing retail channels; and possible credit-rating downgrades that could raise borrowing costs or limit commercial-paper access.
- Legal and controls: The company said pending litigation and proceedings were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, volume trends and segment operating performance continued after the quarter, particularly in North America Beverages.
- The final TCJ Act transition-tax liability and the Q2 charge following IRS guidance.
- Cash generation excluding the unusually large discretionary pension contributions, alongside debt, commercial-paper balances and planned shareholder returns.
- Actual productivity-plan charges and cash spending, and the timing and gains from the announced or completed refranchisings.
- Commodity inflation, foreign-exchange exposure and the company’s access to short-term and longer-term financing.