PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Third quarter and 36 weeks ended September 5, 2015; comparative periods ended September 6, 2014. Figures are unaudited and in millions, except per-share amounts. The interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | 12 weeks 2015 | 12 weeks 2014 | 36 weeks 2015 | 36 weeks 2014 |
|---|---|---|---|---|
| Net revenue | $16,331 | $17,218 | $44,471 | $46,735 |
| Operating profit | $1,416 | $2,847 | $6,113 | $7,550 |
| Operating margin | 8.7% | 16.5% | 13.8% | 16.2% |
| Net income attributable to PepsiCo | $533 | $2,008 | $3,734 | $5,202 |
| Diluted EPS | $0.36 | $1.32 | $2.50 | $3.40 |
| Cash from operating activities | — | $6,775 | $6,693 |
- Reported revenue fell 5% in both periods. Foreign exchange reduced revenue growth by 12 percentage points in the quarter and 10 points year to date. Organic revenue growth was 7% and 6%, respectively.
- The quarter’s operating profit and earnings were heavily affected by a $1.359 billion Venezuela impairment. Excluding disclosed comparability items, diluted EPS was $1.35 versus $1.36 in the quarter and $3.50 versus $3.51 year to date; constant-currency growth was 14% and 12%, respectively. These are company-reported non-GAAP measures.
- Gross profit was $8.936 billion for the quarter and $24.467 billion year to date; corresponding gross margins were approximately 54.7% and 55.0%, versus 53.6% and 54.0% in the prior-year periods.
- Operating cash flow rose to $6.775 billion from $6.693 billion. Capital spending was $1.463 billion; company-reported free cash flow was $5.375 billion, or $5.587 billion excluding specified items.
- Cash and cash equivalents were $8.698 billion; short-term investments were $1.981 billion. Short-term obligations were $5.525 billion and long-term debt $26.318 billion, for total debt obligations of $31.843 billion, compared with $28.897 billion at December 27, 2014. Cash plus short-term investments totaled $10.679 billion.
- Cash dividends paid were $3.008 billion and common-share repurchases were $3.199 billion during the 36 weeks. Quarterly dividends declared were $0.7025 per share.
Material changes and segment performance
- At quarter-end, PepsiCo deconsolidated its wholly owned Venezuelan subsidiaries and ceased equity-method accounting for its Venezuelan beverage joint venture, moving both investments to the cost method. The impairment reduced their carrying values to estimated fair value and included approximately $111 million from reclassifying cumulative currency translation losses. Venezuela had contributed 2% of year-to-date revenue and 3% of operating profit before the impairment.
- Reported quarterly operating profit fell 50% and year-to-date profit fell 19%; the Venezuela impairment was the principal reported-period driver. Excluding comparability items, operating profit declined 2% in the quarter and was affected by operating costs, foreign exchange, commodity inflation and higher advertising, partly offset by pricing and cost reductions.
- For the quarter, North America Beverages revenue grew 4% and operating profit 14%; Frito-Lay North America revenue grew 1% and operating profit 6%. Latin America operating results included the Venezuela impairment. Europe Sub-Saharan Africa revenue fell 23% and operating profit 17%, substantially reflecting currency translation. Asia, Middle East and North Africa revenue fell 7% and operating profit 32%, including a $73 million write-off of a Tingyi-related call option.
- Other notable charges and items included a $65 million pre-tax impairment of the Muller Quaker Dairy joint-venture investment year to date, a $73 million Tingyi call-option write-off, and a $37 million pension-related settlement gain.
Outlook, risks and contingencies
- Management said cash generation, financial condition, revolving credit facilities and access to debt financing should be adequate for operating, investing and financing needs, while cautioning that capital-market access is not assured.
- PepsiCo expected 2015 net capital spending of approximately $3 billion. It expected to return approximately $9 billion to shareholders in 2015, through about $5 billion of repurchases and $4 billion of dividends. A new $12 billion repurchase authorization covers July 2015 through June 2018; the annualized dividend was raised 7% to $2.81 per share.
- Management expected Venezuela’s currency, import and operating restrictions to continue for the foreseeable future. From the fourth quarter, Venezuelan results would no longer be consolidated; revenue from inventory sales to those entities would be recorded only when cash is received, and dividends only upon receipt.
- Principal disclosed risks include foreign-exchange and currency-control exposure, commodity cost inflation, unstable economic and political conditions, supply disruption, competition, regulatory and tax changes, litigation, and potential credit-rating or financing-market deterioration. Foreign exchange reduced reported revenue growth by 12 points in the quarter; management also cited commodity inflation and operating cost pressure.
- The company continued multi-year productivity plans, with expected total pre-tax charges of approximately $990 million for the 2014 plan and $910 million for the 2012 plan over their respective program periods. No specific full-year earnings guidance is stated in the provided filing text.
- The filing states no material changes to previously disclosed risk factors. A Hungarian wastewater-related sanction was annulled, though the authority may reinstitute proceedings; management said routine legal matters were not expected to materially affect results, financial condition or cash flows.
Investor facts to verify
- How the Venezuela deconsolidation, impairment and cash-receipt accounting affect subsequent revenue, earnings and cash flows.
- Reported versus organic and constant-currency performance, including the scale and persistence of foreign-exchange pressure.
- Debt growth, interest costs, debt maturities and continued access to commercial paper and capital markets.
- Whether planned 2015 capital spending and shareholder returns are supported by operating cash generation.
- Underlying segment trends, especially beverage volume, Latin American pricing and costs, and Europe’s currency- and volume-related pressures.