PepsiCo, Inc. — Q3 2016 Form 10-Q
Business context and period: The unaudited quarter covers the 12 weeks ended September 3, 2016; year-to-date figures cover 36 weeks. PepsiCo reports six divisions. Most international operations follow calendar months, so their Q3 results cover June through August. The interim financial statements received a review, not an audit.
Financial performance
| Metric | 12 weeks ended Sep. 3, 2016 | 36 weeks ended Sep. 3, 2016 |
|---|---|---|
| Net revenue | $16.027 billion, down 2% | $43.284 billion, down 3% |
| Organic revenue growth | 4% | 4% |
| Gross profit | $8.743 billion | $24.019 billion |
| Operating profit / margin | $2.821 billion / 17.6% | $7.404 billion / 17.1% |
| Net income attributable to PepsiCo | $1.992 billion | $4.928 billion |
| Diluted EPS | $1.37; adjusted $1.40 | $3.39; adjusted $3.65 |
| Operating cash flow | Not separately reported for the quarter | $6.595 billion |
| Free cash flow | Not separately reported for the quarter | $5.088 billion |
Adjusted EPS excludes specified items; adjusted EPS growth was 4% for both periods, or 7% on a constant-currency basis. The reported 12-week operating profit rose 99% and diluted EPS rose 282%, largely because the prior-year quarter included a $1.359 billion Venezuela impairment. For the 36 weeks, operating profit rose 21% and diluted EPS 35%; prior-year Venezuela charges contributed substantially to those increases. Current-period 36-week results include a $373 million impairment of PepsiCo’s indirect interest in Tingyi-Asahi Beverages (TAB).
Cash, liquidity and debt: Cash and cash equivalents were $10.256 billion and short-term investments $4.524 billion at September 3, 2016. Current assets were $27.099 billion versus current liabilities of $20.589 billion. Short-term obligations were $6.284 billion and long-term debt $29.322 billion. The company had $2.9 billion of commercial paper outstanding and no borrowings under its revolving credit facilities. Year-to-date capital spending was $1.566 billion; dividends paid were $3.144 billion and common share repurchases were $2.079 billion.
Changes versus comparable periods
- Revenue declined as foreign exchange and the Venezuela deconsolidation outweighed growth in volume and pricing. Foreign exchange reduced reported revenue growth by 3 percentage points for the quarter and 4 points year to date; Venezuela deconsolidation reduced it by 3 and 2.5 points, respectively.
- Total servings grew 3% in the quarter and 2.5% year to date, versus 1% in each comparable 2015 period, with the company noting adjustments for structural changes.
- North America results were generally stronger: year-to-date revenue grew 3% at Frito-Lay North America and 2% at North America Beverages. Latin America reported revenue fell 24% year to date, heavily affected by Venezuela and currency; Europe Sub-Saharan Africa fell 5% and Asia, Middle East and North Africa was approximately flat.
- Year-to-date operating cash flow fell 3% to $6.595 billion and free cash flow fell 5% to $5.088 billion. Management attributed the operating cash flow decline primarily to higher current-year cash tax payments.
- At September 3, 2016, total liabilities were $61.179 billion, compared with $57.637 billion at December 26, 2015; short-term obligations increased from $4.071 billion to $6.284 billion.
Outlook, management commentary and risks
- Management expected 2016 net capital spending of approximately $3 billion and planned approximately $7 billion in shareholder returns: $3 billion of share repurchases and $4 billion of dividends. The annualized dividend was increased 7.1% to $3.01 per share. Fiscal 2016 includes an extra reporting week in Q4; management expected incremental business investments to offset its impact. The provided filing text does not state a full-year EPS guidance figure.
- Management expected to continue productivity initiatives. It estimated total 2014 Productivity Plan charges of approximately $990 million, with about $705 million in cash expenditures; further charges and expenditures were anticipated through 2019.
- A new pension-cost estimation method reduced 36-week pre-tax pension and retiree medical expense by $86 million; management expected an approximately $125 million pre-tax reduction for full-year 2016. After quarter-end, PepsiCo contributed $202 million to U.S. pension plans and said further contributions were possible.
- Key exposures include foreign exchange, commodity costs, consumer demand and product taxes, emerging-market economic and political instability, supply disruptions, water scarcity and climate-related impacts, litigation, cyber incidents, and access to capital markets. Management said Venezuela’s exchange restrictions and operating conditions were expected to continue; no U.S.-dollar cash was received from Venezuelan entities in 2016.
- PepsiCo reported ordinary-course legal and regulatory proceedings and said their final outcomes were not expected to materially affect financial condition, results or cash flows. It reported no material changes to the risk factors in its latest Form 10-K. Management stated disclosure controls were effective; financial systems migration and related control enhancements were ongoing.
Most important facts for investors to verify
- Separate underlying growth from currency effects, Venezuela deconsolidation and other structural changes; assess whether organic revenue and volume growth persist.
- Reconcile reported earnings growth with prior-year Venezuela impairment charges and the current-year $373 million TAB impairment; review adjusted measures alongside GAAP results.
- Monitor operating cash flow, working capital, planned capital spending, pension contributions and the ability to sustain dividends and repurchases.
- Track debt maturities, commercial-paper access, liquidity and credit ratings, particularly given the increase in short-term obligations and management’s reliance on capital markets.
- Assess ongoing foreign-exchange, commodity, political and regulatory risks in international markets, and changes in Venezuela’s operating and exchange-control conditions.