PepsiCo, Inc. — Q1 2013 Form 10-Q
Reporting period: 12 weeks ended March 23, 2013; comparable period ended March 24, 2012. Interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Results for the quarter are not necessarily indicative of full-year results. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Net revenue | $12,581 | $12,428 | Up 1% reported; organic revenue growth was 4% |
| Operating profit | $1,658 | $1,722 | Down 4% |
| Operating margin | 13.2% | 13.9% | Down 0.7 percentage points |
| Net income attributable to PepsiCo | $1,075 | $1,127 | Down 5% |
| Diluted EPS | $0.69 | $0.71 | Down 3% |
| Operating cash flow | $702 | $(690) | Prior-period cash use included $1.1 billion of pension and retiree medical contributions |
| Capital spending | $303 | $316 | Management expected full-year 2013 net capital spending of about $3.0 billion |
- Cash and cash equivalents were $6,715 at quarter-end, versus $6,297 at December 29, 2012; short-term investments were $296. Cash, cash equivalents and short-term investments totaled approximately $7.0 billion.
- Current assets were $19,910 and current liabilities were $17,994. Short-term obligations were $6,175 and long-term debt obligations were $23,225.
- Net interest expense was $187, compared with $175. The reported effective tax rate was 26.3%, versus 26.7%.
- Management-defined operating cash flow was $407; its non-GAAP measure excluding specified items was $464, compared with $79 in the prior-year period.
- Cash dividends paid were $831 and common share repurchases were $626. The declared dividend was $0.5375 per share, versus $0.515 a year earlier.
Business performance and changes versus prior year
Reported revenue growth was modest, while organic growth was stronger; foreign exchange reduced revenue growth by approximately 0.5 percentage points, and acquisitions and divestitures also affected comparisons. Total servings increased 3%, compared with 2% in the prior-year period.
| Division | Revenue | Operating profit | Key reported trend |
|---|---|---|---|
| Frito-Lay North America | $3,123; up 4% | $828; up 6% | Volume growth and cost reductions supported results. |
| Quaker Foods North America | $634; up 2% | $180; down 4% | Volume growth was offset by unfavorable pricing and start-up costs at the Müller Quaker Dairy joint venture. |
| Latin America Foods | $1,367; up 11% | $216; up 18% | Pricing drove revenue growth; foreign exchange and higher commodities weighed on profit. |
| PepsiCo Americas Beverages | $4,420; down 1% | $565; up 8% | Beverage volume declined 3%, including a 6% decline in North American carbonated soft drinks; favorable pricing and lower commodity costs supported profit. |
| Europe | $1,942; up 5% | $88; up 10% | Pricing and volume growth supported results; higher commodities and strategic spending were offsets. |
| Asia, Middle East and Africa | $1,095; down 14% | $184; up 24% | Revenue comparison reflected the prior-year Tingyi transaction and deconsolidation; organic revenue grew 15%. |
Management said reported operating profit was pressured by items affecting comparability. Excluding those items, operating profit increased, supported by effective net pricing, cost reductions and volume growth, partly offset by strategic investments and higher advertising and marketing spending. Prior-year commodity hedge mark-to-market gains also made the reported comparison less favorable.
Outlook, commentary, risks and unusual items
- Capital returns: PepsiCo announced a new share repurchase authorization of up to $10 billion for July 1, 2013 through June 30, 2016. It also announced a 5.6% increase in the annualized dividend, to $2.27 per share effective with the June 2013 payment. Management expected to return approximately $6.4 billion to shareholders during 2013: $3.4 billion in dividends and $3.0 billion in repurchases.
- Capital spending and productivity: 2013 net capital spending was expected to be approximately $3.0 billion, within the company’s stated long-term target of no more than 5% of revenue. The multi-year Productivity Plan was expected to incur about $140 million of additional charges in the remainder of 2013, with remaining charges in 2014–2015. Management cited cost competitiveness and funding for brand-building and innovation as objectives.
- Venezuela: The February 2013 official exchange-rate devaluation from 4.3 to 6.3 bolivars per U.S. dollar resulted in a $111 million after-tax charge, or $0.07 per diluted share. Management expected the devaluation’s impact on 2013 revenue and operating profit to be immaterial, but noted currency restrictions and continued efforts to obtain U.S. dollars for operations.
- Other unusual and subsequent items: Mark-to-market commodity hedge losses were $16 million before tax in Q1 2013, versus gains of $84 million in Q1 2012. In April 2013, PepsiCo completed the sale of a controlling interest in its Vietnam bottling operations and anticipated an approximately $140 million after-tax gain in Q2.
- Risks and contingencies: Approximately 40% of quarterly revenue came from outside the U.S.; currency movements, political and economic conditions, commodity costs, interest rates and capital-market access were identified risks. Cash, cash equivalents and short-term investments held outside the U.S. were $6.3 billion and could incur tax costs if repatriated. The filing reported no material change to the risk factors in the prior 10-K. Management did not expect the disclosed legal proceedings to have a material adverse effect; a Polish environmental-sanctions matter was resolved in the company’s favor, while potential Russian penalties were expected to be below $100,000.
Most important facts for investors to verify
- How much underlying profit growth remains after separating the Venezuela charge, restructuring, hedge mark-to-market effects and other comparability items.
- Whether beverage volumes—particularly North American carbonated soft drinks—and Quaker Foods profitability improve in subsequent quarters.
- Whether reported and organic growth in AMEA remain strong after accounting for Tingyi-related comparison effects and divestitures.
- Execution and cash costs of the Productivity Plan, and whether expected savings support margins and investment.
- Debt maturities, short-term borrowing needs, access to capital markets, and the company’s ability to fund planned dividends and repurchases while maintaining liquidity.
- The realization and timing of the anticipated Vietnam transaction gain, and developments in Venezuelan currency access and related exposure.