PepsiCo, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. PepsiCo reported its unaudited third quarter and first 36 weeks of fiscal 2013, ended September 7, 2013, compared with periods ended September 8, 2012. Its businesses span foods and beverages across six reportable segments: FLNA, QFNA, LAF, PAB, Europe and AMEA. The interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | 12 weeks ended Sept. 7, 2013 | 36 weeks ended Sept. 7, 2013 |
|---|---|---|
| Net revenue | $16.909 billion, up 1.5% | $46.297 billion, up 2% |
| Operating profit | $2.780 billion, down 1% | $7.307 billion, up 6% |
| Operating margin | 16.4%, versus 16.8% | 15.8%, versus 15.1% |
| Net income attributable to PepsiCo | $1.913 billion, up 1% | $4.998 billion, up 11% |
| Diluted EPS | $1.23, up 1.5% | $3.20, up 12% |
| Operating cash flow | $6.662 billion for 36 weeks, versus $5.118 billion |
For the 36 weeks, cash capital spending was $1.497 billion; cash dividends paid were $2.558 billion and common share repurchases were $2.041 billion. Management’s non-GAAP operating cash flow was $5.216 billion, or $5.482 billion excluding specified items.
At September 7, cash and cash equivalents were $9.204 billion, short-term investments $355 million, short-term obligations $5.256 billion and long-term debt obligations $24.293 billion. Total liabilities were $54.412 billion and total equity was $22.402 billion. The filing reports current assets of $22.931 billion and current liabilities of $18.468 billion.
Changes versus the prior comparable period
- For the first 36 weeks, revenue grew 2%, while operating profit, net income attributable to PepsiCo and diluted EPS rose 6%, 11% and 12%, respectively. Management cited effective net pricing and cost reductions; the lower tax rate also supported net income.
- Third-quarter operating profit fell 1% and margin declined 0.4 percentage points. Management cited strategic investments, higher commodity costs and other operating cost increases, partly offset by pricing and cost reductions.
- Reported first-36-week results included a $137 million gain from refranchising Vietnam beverage operations and a $111 million after-tax charge from the Venezuelan bolivar devaluation. The prior-year comparison included $137 million of pretax Tingyi-related charges and substantially higher productivity-plan charges.
- Operating cash flow increased year over year, partly because the prior-year period included $1 billion of discretionary pension and retiree medical contributions, as well as working-capital improvements.
Segments, outlook and other material matters
- For 36 weeks, segment revenue increased at FLNA (4%), LAF (9%) and Europe (3%); QFNA was flat, while PAB and AMEA each declined 2% and 3%, respectively. Segment operating profit was stronger at FLNA, LAF, PAB and AMEA, while QFNA declined and Europe was approximately flat.
- Management expected 2013 net capital spending of approximately $3 billion, within its long-term target of no more than 5% of revenue. It planned total 2013 shareholder returns of approximately $6.4 billion: $3.4 billion in dividends and $3.0 billion in repurchases. A new $10 billion repurchase authorization runs from July 1, 2013 through June 30, 2016; the annualized dividend was raised 5.6% to $2.27 per share.
- The productivity plan was expected to generate approximately $910 million of pretax charges in total, including approximately $100 million of additional charges in the remainder of 2013 and the balance during 2014–2015. Management said it would continue exploring productivity opportunities.
- After the quarter, PepsiCo reached an IRS agreement resolving audits for tax years 2003–2009 and expected approximately $700 million of net cash tax payments in Q4 2013. The filing also said uncertain-tax-position reserves could be further affected in Q4.
- PepsiCo issued debt during 2013 and redeemed its outstanding 3.75% notes due 2014. It had $2.0 billion of commercial paper outstanding and revolving credit facilities totaling $5.85 billion. Management believed cash generation, credit facilities and debt-market access would meet operating and financing needs, while noting capital-market access was not assured.
- Key risks include foreign-exchange movements and currency restrictions, commodity inflation, challenging economic or political conditions in some international markets, and potential limits on capital-market access. Foreign operations generated 48% of 36-week revenue. PepsiCo said the Venezuela devaluation’s expected full-year revenue and operating-profit impact would not be material, although it recorded the charge noted above.
- Environmental-sanction appeals in Poland and Hungary remained pending. Management did not expect the disclosed proceedings to have a material adverse effect. The company reported effective disclosure controls and no material change in risk factors from its most recent annual report.
Important facts for investors to verify
- How much of the 36-week earnings growth reflects recurring operations versus the Vietnam gain, Venezuela charge, prior-year Tingyi charges, restructuring and mark-to-market items.
- Whether beverage volume trends, particularly North American carbonated soft drinks and water, stabilize; PAB reported lower revenue and volume.
- The timing and cash-flow impact of the approximately $700 million Q4 tax payment and any further uncertain-tax-position reserve changes.
- Execution, costs and expected savings from the productivity plan, and delivery of the stated capital-spending and shareholder-return plans.
- Exposure to currency, commodity and geopolitical risks, including Venezuela’s currency restrictions and foreign-exchange availability.