PepsiCo, Inc. — Form 10-Q Summary
Business context and reporting period. PepsiCo operates across six reporting divisions covering food, snacks and beverages. This unaudited quarterly filing covers the 12 weeks ended September 6, 2014, and year-to-date results for the 36 weeks ended that date; comparisons are to periods ended September 7, 2013. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | 12 weeks ended September 6, 2014 | 36 weeks ended September 6, 2014 |
|---|---|---|
| Net revenue | $17.218 billion, up 2% | $46.735 billion, up 1% |
| Operating profit | $2.847 billion, up 2% | $7.550 billion, up 3% |
| Operating margin | 16.5%, versus 16.4% | 16.2%, versus 15.8% |
| Net income attributable to PepsiCo | $2.008 billion, up 5% | $5.202 billion, up 4% |
| Diluted EPS | $1.32, up 7% | $3.40, up 6% |
| Operating cash flow | Not presented separately for the quarter | $6.693 billion, versus $6.662 billion |
| Free cash flow | Not presented separately for the quarter | $5.213 billion, versus $5.216 billion |
Organic revenue growth, excluding foreign exchange and acquisitions or divestitures, was 3% for the quarter and 3.5% year to date. Management’s adjusted diluted EPS, excluding listed comparability items, was $1.36 for the quarter (up 10%) and $3.51 year to date (up 6%); on a constant-currency basis, growth was 11% and 8%, respectively. These are non-GAAP measures.
Cash, liquidity and debt
- At September 6, 2014, cash and cash equivalents were $7.282 billion and short-term investments were $5.624 billion. Combined, they totaled about $12.9 billion; the company reported $12.0 billion of cash, cash equivalents and short-term investments outside the United States.
- Short-term obligations were $9.253 billion and long-term debt was $23.489 billion, or $32.742 billion combined. Commercial paper outstanding was $5.0 billion. No borrowings were outstanding under the two revolving credit facilities, each with commitments of $3.7725 billion.
- Current assets were $26.590 billion and current liabilities were $22.844 billion. The filing does not provide a separately stated current ratio.
- Year-to-date investing cash outflow was $6.678 billion, including $5.423 billion of purchases of short-term investments with original maturities over three months and $1.540 billion of capital spending. Financing cash outflow was $2.027 billion. Cash declined by $2.093 billion from year-end 2013.
Changes versus prior comparable periods
- For the quarter, revenue growth was supported by effective net pricing and volume in several businesses; reported volume growth across the company was 1%. Year-to-date total servings also increased 1%.
- For the first 36 weeks, foreign exchange reduced revenue growth by 2 percentage points. Reported operating profit growth reflected pricing, planned cost reductions and volume growth, partly offset by higher commodity costs; commodity inflation reduced operating profit growth by 3.5 percentage points.
- Performance varied by division. Year-to-date operating profit increased 4% at Frito-Lay North America, 6% at Latin America Foods and 5% in Europe, but declined 6% at PepsiCo Americas Beverages and 12% at Asia, Middle East and Africa. Quaker Foods North America was approximately flat.
- Year-to-date net income growth benefited in part from the absence of the prior-year $111 million Venezuela devaluation charge. The prior-year comparison also included a $137 million gain from the Vietnam beverage refranchising, affecting Asia, Middle East and Africa operating profit comparisons.
Outlook, management commentary and notable items
- Management expected 2014 net capital spending of approximately $3.0 billion, within its long-term target of no more than 5% of net revenue. It expected to return about $8.7 billion to shareholders in 2014: approximately $5.0 billion through share repurchases and $3.7 billion through dividends. The annualized dividend was increased 15% to $2.62 per share, effective with the June 2014 payment.
- The 2014 multi-year productivity plan is expected to generate approximately $990 million in pre-tax charges, including about $705 million of cash expenditures; approximately $130 million of charges and $115 million of cash expenditures were expected in the fourth quarter of 2014. The ongoing 2012 plan was expected to result in approximately $910 million of total charges. Year-to-date restructuring and impairment charges were $258 million across the two plans.
- Venezuela remains a significant uncertainty. PepsiCo continued to remeasure Venezuelan net monetary assets using the fixed rate of 6.3 bolivars per U.S. dollar, while noting that a change to an exchange rate in the 10-to-50 range could produce an estimated after-tax charge of approximately $190 million to $440 million. Venezuelan businesses represented 2% of year-to-date revenue, 4% of operating profit and 10% of cash and cash equivalents; net monetary assets were approximately $505 million. Dividend remittances requested for 2006–2012 remained pending.
- Foreign exchange depreciation in Russia, Ukraine, Argentina, Turkey and other markets weighed on results. Russia generated 7% of revenue in each year-to-date period, and PepsiCo reported $7 billion of long-lived assets there. Management did not anticipate current Russian sanctions to have a material impact, but said it would continue monitoring conditions.
- Other risks cited include changing consumer demand, regulation and taxes, commodity and supply disruption, competition, emerging-market conditions, execution of productivity and transformation initiatives, cybersecurity, litigation, and access to capital markets. Management said legal proceedings were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
- Unusual items included a $23 million impairment of a Greek brand, restructuring charges, and commodity-hedge mark-to-market effects. The interim financial statements received an independent accountant’s review, not an audit. Management concluded disclosure controls were effective and noted ongoing financial-system implementations and related control enhancements.
Important facts for investors to verify
- Whether full-year earnings guidance or subsequent operating updates are available; the filing text summarized here does not state a specific full-year EPS target.
- Progress, total cash costs and realized savings from both productivity plans, compared with their estimated charges and timing.
- Developments in Venezuelan exchange-rate access, dividend remittances and potential remeasurement exposure.
- How foreign exchange, commodity inflation and division-level trends affect operating margins and cash generation.
- The sustainability of planned shareholder returns alongside debt, commercial-paper usage and capital-market access.