PepsiCo, Inc. — Q2 2012 Form 10-Q
Reporting period: Second quarter (12 weeks) and first half (24 weeks) ended June 16, 2012. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. PepsiCo reports six segments: FLNA, QFNA, LAF, PAB, Europe and AMEA.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2011 periods.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net revenue | $16,458 | $16,827 | $28,886 | $28,764 |
| Operating profit | $2,377 | $2,754 | $4,099 | $4,480 |
| Operating margin | 14.4% | 16.4% | 14.2% | 15.6% |
| Net income attributable to PepsiCo | $1,488 | $1,885 | $2,615 | $3,028 |
| Diluted EPS | $0.94 | $1.17 | $1.65 | $1.89 |
| Net cash from operating activities | — | — | $1,247 | $2,353 |
- Q2 revenue fell 2%; first-half revenue was nearly flat. First-half organic revenue growth, a company-defined non-GAAP measure, was 5%; total servings increased 2% in both periods.
- Operating profit declined 14% in Q2 and 9% in the first half. Management cited commodity inflation of approximately $350 million in Q2 and $700 million year to date, partly offset by effective net pricing.
- GAAP diluted EPS declined 20% in Q2 and 12% year to date. Excluding listed comparability items, management reported diluted EPS of $1.12 for Q2 and $1.81 for the first half, each down 7% from the comparable period.
- First-half management operating cash flow was $388 million; excluding specified items, PepsiCo reported $1,393 million. This is a company-defined non-GAAP measure, not a substitute for GAAP operating cash flow.
Segments and material changes
- First-half segment revenue changes: FLNA +3.5%, QFNA -1%, LAF +9%, PAB -3.5%, Europe +1%, and AMEA -1%. Organic revenue growth was strongest in LAF (15%) and AMEA (11%); QFNA was down 0.5%.
- First-half reported operating profit rose 14% in Europe and 2% in LAF, but fell 11% in FLNA, 11% in QFNA, 11% in PAB and 29% in AMEA. AMEA’s decline included the Tingyi-related charge; excluding comparability items, AMEA operating profit increased 5%.
- PAB revenue was affected by the prior-year divestiture of the Mexico beverage business. Currency depreciation reduced first-half consolidated revenue growth by 2.5 percentage points; approximately 45% of first-half revenue came from outside the U.S.
- Q2 net income also reflected a higher tax rate (30.8% versus 26.0%) and higher net interest expense ($208 million versus $179 million). For the first half, the tax rate was 29.1% versus 26.3%, and net interest expense was $383 million versus $342 million.
Cash, debt and liquidity
- At June 16, 2012, cash and cash equivalents were $3,863 million and short-term investments were $330 million. Current assets were $18,033 million against current liabilities of $18,269 million.
- Short-term obligations were $7,038 million and long-term debt obligations were $21,294 million. PepsiCo reported $3.3 billion of commercial paper outstanding and a fair value of debt of approximately $31 billion.
- First-half investing cash outflow was $1,138 million, including $901 million of capital spending and $298 million of Tingyi-related payments. Financing cash outflow was $292 million. Cash declined $204 million to $3,863 million.
- Cash dividends paid were $1,626 million and common-share repurchases were $1,206 million in the first half. The company anticipated dividends and share repurchases totaling more than $6 billion in 2012.
- PepsiCo said operating cash generation, revolving credit facilities and other financing sources should meet its needs, while noting that market volatility could limit access to financing. It held $3.2 billion of cash, cash equivalents and short-term investments outside the U.S.; Venezuelan currency restrictions limited its ability to remit funds from that country.
Outlook, risks and unusual items
- No full-year revenue or EPS guidance is stated in the supplied filing text. PepsiCo expected to substantially complete its Productivity Plan by the end of 2012, with incremental initiatives continuing through 2015.
- The Productivity Plan was expected to generate approximately $910 million of pre-tax charges in total. The filing anticipated approximately $315 million of additional charges during the remainder of 2012 and approximately $102 million in 2013–2015; related cash expenditures were also expected to continue into 2015.
- The March 2012 Tingyi transaction transferred PepsiCo’s China company-owned and joint-venture bottling operations to Tingyi’s beverage subsidiary. PepsiCo received a 5% indirect interest and an option to increase it to 20% by 2015. The transaction was associated with a $137 million operating-profit charge and a reported $163 million reduction to net income attributable to PepsiCo, or $0.10 per diluted share, as presented in the filing.
- Other first-half comparability items included $110 million of Productivity Plan restructuring and impairment charges and $5 million of merger and integration charges. Commodity hedge mark-to-market results were volatile: Q2 included a $79 million operating-profit loss, while the first-half result was a $5 million gain.
- Principal stated risks include foreign-exchange exposure, European economic and currency conditions, commodity and energy costs, and access to capital markets. Management said it could not assure that currency declines would be offset. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- Disclosure controls were assessed as effective. PepsiCo continued financial-systems implementation and Wimm-Bill-Dann integration, and said these efforts prompted continued enhancement of internal-control design and documentation.
Important facts for investors to verify
- How much of reported profit and EPS weakness reflects underlying operations versus Tingyi, restructuring, hedge mark-to-market and other comparability items.
- Whether pricing and volume can offset continued commodity inflation, particularly in PAB and FLNA, and whether QFNA’s volume and profit trends improve.
- The pace and cash cost of the Productivity Plan, including whether expected savings and reinvestment in brands and innovation are realized.
- Liquidity and refinancing needs given commercial paper outstanding, substantial shareholder distributions, and possible limits on market access; also monitor Venezuelan cash restrictions and foreign-currency exposure.
- Whether the Tingyi bottling transition, China beverage volumes and the option to increase PepsiCo’s interest develop as expected.