PepsiCo, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. PepsiCo reported results for the 12 weeks ended March 21, 2015, compared with the 12 weeks ended March 22, 2014. The interim statements are unaudited; international operations generally reflect January and February. PepsiCo operates six divisions across beverages, food and snacks.
Key financial results
| Metric | Q1 2015 | Prior period | Change / context |
|---|---|---|---|
| Net revenue | $12.217 billion | $12.623 billion | Down 3% reported; organic revenue grew 4%, with foreign exchange reducing reported growth by 8 percentage points. |
| Gross profit / margin | $6.775 billion / 55.5% | $6.876 billion / 54.5% | Gross profit declined; margin improved about 1.0 percentage point. |
| Operating profit / margin | $1.797 billion / 14.7% | $1.807 billion / 14.3% | Profit down 1%; margin up 0.4 percentage point. |
| Net income attributable to PepsiCo | $1.221 billion | $1.216 billion | Approximately flat. |
| Diluted EPS | $0.81 | $0.79 | Up 3%. Excluding specified comparability items, diluted EPS was $0.83 in both periods; constant-currency growth on that basis was 12% (non-GAAP). |
| Operating cash flow | $270 million | $181 million | Improved, primarily reflecting higher prior-year cash tax payments. |
| Free cash flow | $11 million | $(167) million | Free cash flow excluding specified items was $57 million versus $(135) million (non-GAAP). |
| Cash and short-term investments | $8.495 billion | $8.726 billion | At March 21, 2015 and December 27, 2014, respectively. |
| Total debt obligations | $30.365 billion | $28.897 billion | Short-term obligations rose to $7.962 billion; long-term debt was $22.403 billion. Commercial paper outstanding was $4.4 billion. |
| Dividends declared per common share | $0.655 | $0.5675 | Annualized dividend increase of 7% to $2.81 per share announced for June 2015. |
Material changes and segment performance
- Reported revenue was pressured by currency translation, particularly in Europe and Latin America. Revenue grew organically 4% overall; total servings increased 1%.
- Frito-Lay North America revenue rose 3% and operating profit 7%, supported by volume, pricing, cost reductions and lower commodities.
- Quaker Foods North America operating profit fell 38%, including a $65 million pre-tax impairment charge related to the Muller Quaker Dairy joint venture.
- Latin America Foods revenue declined 4% reported but grew 18% organically; operating profit fell 12% reported, reflecting currency effects and costs, partly offset by pricing and cost reductions.
- PepsiCo Americas Beverages revenue was flat; reported operating profit rose 9%, but fell 8% excluding comparability items. Venezuela-related currency effects were significant.
- Europe revenue fell 25% reported, with foreign exchange reducing growth by 27 percentage points; operating profit fell 34% reported.
- Asia, Middle East and Africa revenue rose 2.5% reported and operating profit rose 25%, including a $39 million pre-tax gain from refranchising bottling operations in India.
Outlook, risks and unusual items
- Management expected 2015 net capital spending of approximately $3.0 billion, within its long-term target of no more than 5% of revenue.
- PepsiCo expected to return $8.5–$9.0 billion to shareholders in 2015, including approximately $4.5–$5.0 billion of repurchases and $4.0 billion of dividends. A new $12.0 billion repurchase authorization was announced, commencing July 1, 2015; it supplements the existing program.
- The company stated that operating cash generation, credit facilities and debt financing should be adequate for expected needs, while cautioning that capital-market access and borrowing costs could be affected by market volatility or credit-rating changes.
- Venezuela was a material uncertainty. It represented 2% of revenue, 1% of operating profit and 9% of cash and cash equivalents. Bolivar-denominated net monetary assets were approximately $505 million; requests for $310 million of dividend remittances remained pending. Alternative exchange-rate assumptions could have produced estimated charges of about $160 million or $480 million, and use of SIMADI could also lead to impairment of approximately $635 million in non-monetary assets.
- The 2014 productivity plan was expected to generate approximately $990 million of total pre-tax charges, including $690 million of cash expenditures; the 2012 plan was expected to generate approximately $910 million of charges, including $704 million of cash expenditures.
- Other comparability items included the QFNA impairment, the India refranchising gain, restructuring charges and commodity-hedge mark-to-market effects. Reported results may not indicate full-year performance.
- Market risks include foreign exchange, commodities and interest rates; 31% of total debt was exposed to variable rates after derivatives, compared with 25% at year-end. Management said risk factors had no material changes from the 2014 Form 10-K.
- PepsiCo disclosed an appeal of a $650,000 environmental sanction in Poland. Management did not expect the ordinary-course legal proceedings and claims described to have a material adverse effect.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed to the interim financial statements. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether organic growth and operating performance persist after the significant foreign-exchange headwinds, particularly in Europe, Latin America and Venezuela.
- The status of Venezuelan exchange mechanisms, pending dividend remittances, asset recoverability and any resulting remeasurement or impairment charges.
- Cash conversion and liquidity through the year, including commercial-paper refinancing, debt maturities, capital spending and shareholder distributions.
- Execution, timing, cash costs and realized savings from the productivity plans, and the performance of the Muller Quaker Dairy investment.
- Actual 2015 repurchases, dividends and capital spending versus management’s stated expectations; these are outlook statements, not guarantees.