PepsiCo, Inc. — Q1 2016 Form 10-Q
Reporting period: 12 weeks ended March 19, 2016; comparison is the 12 weeks ended March 21, 2015. The interim statements are unaudited and were reviewed by the independent accountant, not audited. International results generally cover January and February.
Financial performance
| Metric | Q1 2016 | Comparable period | Change |
|---|---|---|---|
| Net revenue | $11.862 billion | $12.217 billion | Down 3% |
| Gross profit | $6.711 billion | $6.714 billion | Approximately flat |
| Operating profit | $1.619 billion | $1.797 billion | Down 10% |
| Operating margin | 13.7% | 14.7% | Down 1.0 percentage point |
| Net income attributable to PepsiCo | $931 million | $1.221 billion | Down 24% |
| Diluted EPS | $0.64 | $0.81 | Down 21% |
| Net cash from operating activities | $131 million | $270 million | Down 52% |
| Free cash flow | $(233) million | $11 million | Not meaningful |
Organic revenue growth, excluding foreign exchange and structural changes, was 3.5%. Unfavorable currency translation reduced reported revenue growth by 4.5 percentage points. Reported results included a $373 million after-tax impairment of PepsiCo’s 5% indirect investment in Tingyi-Asahi Beverages, equal to $0.26 per diluted share. Excluding identified comparability items, diluted EPS was $0.89, up 7% reported and 11% on a constant-currency basis; these are non-GAAP measures.
Gross profit was nearly unchanged, while selling, general and administrative expense rose to $5.078 billion from $4.901 billion. Net interest expense increased to $232 million from $196 million, and the reported tax rate rose to 31.9% from 23.1%, in part because the Tingyi impairment had no corresponding tax benefit.
Segments and material changes
- Frito-Lay North America revenue rose 3% to $3.418 billion and operating profit rose 11% to $1.018 billion.
- Quaker Foods North America revenue fell 3% to $617 million; operating profit increased to $166 million, largely reflecting the prior-year impairment and cessation of the Müller Quaker Dairy joint venture operations.
- North America Beverages revenue rose 1.5% to $4.361 billion and operating profit rose 7% to $485 million.
- Latin America revenue fell 26% to $1.042 billion and operating profit fell 20% to $175 million. Currency and the prior-year Venezuela results’ exclusion were significant factors.
- Europe Sub-Saharan Africa revenue fell 9% to $1.359 billion and operating profit fell 40% to $67 million, reflecting currency, higher input costs and a Russian production-asset impairment, among other factors.
- Asia, Middle East and North Africa reported an operating loss of $148 million, including the $373 million Tingyi investment impairment. Excluding listed comparability items, operating profit was $230 million, down 1%.
In 2015 PepsiCo deconsolidated its Venezuelan subsidiaries and began accounting for its Venezuelan investments using the cost method after concluding it no longer met the relevant control and significant-influence criteria. The filing says the conditions persisted through Q1 2016; no U.S.-dollar cash was received from those entities in the quarter.
Cash, debt, liquidity and capital allocation
- At March 19, 2016, cash and cash equivalents were $8.124 billion and short-term investments were $4.020 billion. Total current assets were $23.966 billion; total current liabilities were $16.842 billion.
- Balance-sheet short-term obligations were $4.018 billion and long-term debt obligations were $31.068 billion. PepsiCo reported $1.2 billion of commercial paper outstanding. It issued $2.5 billion of senior notes and repaid $1.3 billion of senior notes during the period.
- Cash declined by $972 million to $8.124 billion. Operating cash flow was $131 million; investing activities used $1.412 billion, principally reflecting net purchases of longer-term debt securities and capital spending.
- Capital spending was $389 million. Management expected 2016 net capital spending of approximately $3 billion.
- Dividends paid were $1.038 billion and common-share repurchases were $619 million. Management expected to return approximately $7 billion to shareholders in 2016, including approximately $4 billion in dividends and $3 billion in repurchases. The annualized dividend was increased 7.1% to $3.01 per share, effective with the expected June 2016 payment.
Management said cash generation, financing facilities and access to debt markets should be adequate for operating, investing and financing needs, while cautioning that capital-market volatility could limit access or raise its cost. Free cash flow excluding specified items was negative $197 million, compared with positive $57 million in the prior-year period.
Outlook, risks and unusual items
- Management expected the 2014 Productivity Plan to result in approximately $990 million of total pre-tax charges, including approximately $705 million of cash expenditures, through 2019; approximately $99 million of charges and $97 million of cash expenditures were expected for the remainder of 2016.
- A change in the pension and retiree medical cost estimation method reduced Q1 pre-tax benefit expense by $28 million ($18 million after tax, or $0.01 per share). Management expected a roughly $125 million pre-tax reduction for full-year 2016.
- Key exposures identified include foreign-exchange movements, volatile economic and political conditions, commodity and supply costs, regulation and potential new taxes, consumer demand and competition, productivity-plan execution, product safety, cyber incidents, and access to capital markets. The filing reports no material changes to the risk factors in the preceding Form 10-K.
- PepsiCo said legal and regulatory proceedings arising in the ordinary course were not expected by management to have a material adverse effect on financial condition, results or cash flows. It also disclosed ongoing migration of financial processing systems; management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the reported earnings decline reflects the Tingyi impairment and other comparability items, and how sustainable are the non-GAAP EPS trends?
- Whether foreign-exchange pressure, especially in Latin America and other international markets, and the Venezuela deconsolidation continue to affect reported growth.
- Whether operating cash flow and free cash flow recover after Q1’s working-capital, tax and capital-spending effects.
- Progress on the productivity plan, planned capital spending, and the stated 2016 dividend and share-repurchase targets.
- Developments affecting the remaining Tingyi investment value, Venezuela operations, and the identified market, regulatory and financing risks.