PepsiCo, Inc. — Q2 2014 Form 10-Q
Business context and period: PepsiCo reported its unaudited 12- and 24-week periods ended June 14, 2014, compared with periods ended June 15, 2013. The company operates across foods and beverages in six reportable divisions. Interim results are not necessarily indicative of full-year results.
Financial performance
Amounts are in millions of dollars except per-share data, percentages and where noted.
| Metric | 12 weeks ended June 14, 2014 | 24 weeks ended June 14, 2014 | Comparable 2013 period |
|---|---|---|---|
| Net revenue | $16,894; +0.5% | $29,517; approximately flat | $16,807 and $29,388 |
| Operating profit | $2,896; +1% | $4,703; +4% | $2,869 and $4,527 |
| Operating margin | 17.1%; unchanged | 15.9%; up 0.5 percentage points | 17.1% and 15.4% |
| Net income attributable to PepsiCo | $1,978; down 2% | $3,194; up 3.5% | $2,010 and $3,085 |
| Diluted EPS | $1.29; up 1% | $2.08; up 5.5% | $1.28 and $1.97 |
| Cash dividends declared per share | $0.655 | $1.2225 | $0.5675 and $1.105 |
For the 24-week period, organic revenue growth was 4%, versus flat reported revenue; unfavorable foreign-exchange translation reduced reported revenue growth by 3 percentage points. Total servings grew 1%, compared with 4% in the prior-year periods.
Segment highlights, 24 weeks: FLNA operating profit rose 4%; Europe rose 18%, including a one-time gain on Russian agricultural assets; LAF rose 4%; QFNA fell 4.5%; PAB fell 10%; and AMEA fell 19%. Reported performance in PAB and AMEA was affected by restructuring and the prior-year Vietnam refranchising gain.
Cash flow, debt and liquidity
- Operating cash flow was $2.672 billion for 24 weeks, down from $3.015 billion. Management attributed the decline primarily to unfavorable working-capital comparisons, partly offset by lapping higher prior-year cash tax payments.
- Free cash flow, as defined by the company, was $1.793 billion, down 16%; free cash flow excluding specified items was $1.930 billion, down 18%. These are non-GAAP measures.
- Capital spending was $921 million. Cash and cash equivalents were $7.607 billion and short-term investments were $3.692 billion at June 14, 2014.
- Cash used in investing was $4.162 billion, primarily reflecting $3.498 billion of purchases of short-term investments with original maturities over three months and $921 million of capital spending. Cash decreased by $1.768 billion from year-end.
- Short-term obligations were $7.242 billion and long-term debt was $25.606 billion. The company also reported $4.3 billion of commercial paper outstanding. Total current assets were $25.795 billion versus current liabilities of $20.228 billion.
- PepsiCo issued $3.364 billion of long-term debt and repaid $1.655 billion during the period. Two new revolving credit agreements had no borrowings outstanding at period-end; commitments were increased after quarter-end.
- Financing included $1.752 billion of dividends paid and $2.199 billion of common-share repurchases. Management expected 2014 shareholder returns of approximately $8.7 billion: $5.0 billion in repurchases and $3.7 billion in dividends.
Material changes, outlook and risks
- Management cited effective pricing, planned cost reductions and volume growth as operating-profit drivers, partly offset by higher commodity costs and strategic investment. Commodity inflation reduced operating-profit growth by 4.5 percentage points for the 24-week period.
- Management expects 2014 net capital spending of approximately $3.0 billion, within its long-term target of no more than 5% of net revenue. The filing provides no clear full-year revenue or EPS guidance.
- The 2014 productivity plan is expected to generate approximately $990 million of pre-tax charges in total, with approximately $215 million of additional charges anticipated in the remainder of 2014 and the balance through 2018. The older 2012 plan is expected to generate approximately $60 million of additional charges in the remainder of 2014 and the balance in 2015.
- Venezuelan operations represented 2% of 24-week revenue and 4% of operating profit. PepsiCo continued using the 6.3 bolivars-per-dollar fixed rate for remeasurement, while noting substantial uncertainty about currency access and exchange mechanisms. Remeasurement at rates between 10 and 50 bolivars per dollar could result in an estimated after-tax charge of $170 million to $410 million. Venezuelan net monetary assets were approximately $470 million.
- Foreign currency reduced revenue growth by 3 percentage points for both the 12- and 24-week periods. Management also identified Russia, Ukraine, the Middle East and other markets as challenging operating environments. Russia generated 7% of revenue in each 24-week comparison period; Russian long-lived assets were $7.5 billion.
- Other stated risks include changing consumer demand, regulation and taxes, commodity and supply disruption, competition, emerging-market instability, foreign exchange, litigation, cybersecurity, credit-rating downgrades and execution of productivity and transformation initiatives. The company reported no material changes to the risk factors in its 2013 Form 10-K.
- Routine legal proceedings were not expected by management to have a material adverse effect. The interim financial statements were reviewed by the independent auditor, not audited. Management concluded disclosure controls were effective; it continued migrating financial systems and enhancing related control processes.
Important facts for investors to verify
- Whether working capital and cash generation improve after the 11% decline in operating cash flow and 18% decline in adjusted free cash flow.
- How much of reported earnings and operating-profit growth reflects recurring operations versus mark-to-market effects, restructuring charges, the prior-year Vietnam gain and the 2014 Russian asset-sale gain.
- Whether the Venezuela exchange-rate regime changes, and the potential impact on cash repatriation, asset values and earnings.
- Execution, cash costs and expected benefits of the productivity plans, alongside commodity inflation and weaker PAB, QFNA and AMEA results.
- Debt maturities, commercial-paper access, credit ratings and the effect of shareholder returns on financial flexibility; confirm the post-quarter increase in revolving credit commitments.