Business context and reporting period
PepsiCo, Inc. filed this unaudited Form 10-Q for the 12 weeks ended March 23, 2019, compared with the 12 weeks ended March 24, 2018. The company reports six divisions spanning beverages, foods and snacks. Most international results reflect January and February; the filing cautions that this quarter is not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2019 | Prior period | Change |
|---|---|---|---|
| Net revenue | $12.884 billion | $12.562 billion | +3% |
| Gross profit / margin | $7.196 billion / 55.9% | $6.907 billion / 55.0% | Margin +0.9 percentage points |
| Operating profit / margin | $2.008 billion / 15.6% | $1.807 billion / 14.4% | +11%; margin +1.2 points |
| Net income attributable to PepsiCo | $1.413 billion | $1.343 billion | +5% |
| Diluted EPS | $1.00 | $0.94 | +6% |
| Cash from operating activities | $(345) million | $(1.309) billion | Improved by $964 million |
| Free cash flow | $(785) million | $(1.652) billion | Improved by $867 million |
| Cash, cash equivalents and restricted cash | $5.305 billion | $10.769 billion at year-end 2018 | Down $5.464 billion |
Gross margin is calculated from reported revenue and gross profit. The reported effective tax rate was 23.9%, versus 18.3% a year earlier. PepsiCo attributed the increase mainly to higher reserves for uncertain foreign tax positions and timing of Tax Cuts and Jobs Act (TCJ Act) provisions, partly offset by a $29 million TCJ Act tax benefit. Net interest expense fell $21 million to $204 million.
Total debt obligations were $31.749 billion at March 23, 2019 ($3.291 billion short-term and $28.458 billion long-term), versus $32.321 billion at December 29, 2018. Current assets were $17.917 billion and current liabilities $19.090 billion, a current ratio of approximately 0.94. The company had no commercial paper outstanding at quarter-end.
Material changes versus the prior period
- Revenue grew 3%; management reported 5% organic revenue growth, with unfavorable foreign exchange reducing reported growth by 3 percentage points. Total servings increased 4%.
- Operating profit growth reflected revenue growth and productivity savings, partly offset by higher costs, advertising and marketing, and commodity costs. Management said a prior-year U.S. employee bonus related to the TCJ Act contributed 5 percentage points to reported operating profit growth. Comparability items contributed 3 percentage points to growth.
- Operating cash outflow was substantially lower than the prior-year outflow, principally because prior-year pension contributions included a discretionary $1.4 billion U.S. contribution; working-capital comparisons were unfavorable.
- Investing cash outflow was $2.300 billion, including $1.807 billion for the SodaStream acquisition. Financing cash outflow was $2.876 billion, including $1.332 billion of dividends, $940 million of common share repurchases and $1.851 billion of long-term debt repayments, partly offset by $1.122 billion of debt issuance proceeds.
Division performance
Frito-Lay North America revenue rose 5.5% and operating profit 10%; Quaker Foods North America revenue fell 1% and operating profit 11%. PepsiCo Beverages North America revenue increased 2%, while volume declined 2% and operating profit was approximately flat. Latin America revenue rose 1% and operating profit 21%, including a benefit from an insurance settlement. Europe Sub-Saharan Africa revenue rose 1.5%; operating profit increased 6%, with foreign exchange a significant offset. Asia, Middle East and North Africa revenue fell 1%, while operating profit grew 8%.
Outlook, management commentary and risks
- PepsiCo expects 2019 net capital spending of approximately $4.5 billion and approximately $8 billion in total shareholder returns: about $3 billion in share repurchases and $5 billion in dividends. The company announced a 3% increase in its annualized dividend to $3.82 per share, effective with the expected June 2019 payment.
- The 2019 multi-year productivity plan is expected to generate approximately $2.5 billion in pretax charges and $1.6 billion in cash expenditures. Through Q1, the company had incurred $164 million of charges and $12 million of cash expenditures; it expected approximately $800 million of charges and $450 million of cash expenditures for the remainder of 2019, with most program costs in 2019 and 2020.
- Management said operating cash generation, cash balances and access to credit and debt markets should meet operating, investing and financing needs, but cautioned that capital-market volatility could restrict access or worsen borrowing terms. The company expected to continue returning free cash flow through dividends and repurchases.
- Key disclosed risks include changing consumer preferences; regulation or taxes affecting products, ingredients or packaging; commodity and supply costs; foreign exchange and economic or political instability; retail-channel changes; cybersecurity and operational disruptions; acquisition integration; and credit-rating or capital-market access risk. Unfavorable currency translation reduced revenue growth by 3 percentage points.
- The TCJ Act transition-tax liability was $3.8 billion at quarter-end, payable over eight years; further IRS guidance may affect recorded amounts. SodaStream purchase accounting remained preliminary, with final valuations expected by the end of 2019. A Colombian environmental proceeding was resolved after an $11,000 penalty payment; management said other proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether reported revenue and earnings growth persist after separating currency effects, acquisition impacts and other comparability items.
- Whether working capital and operating cash flow improve through the year, given Q1 operating and free cash flow were negative.
- Execution, timing, cash costs and expected savings from the $2.5 billion productivity plan.
- Capital allocation plans, including the expected $8 billion shareholder return, alongside debt service and the $3.8 billion transition-tax liability.
- Final SodaStream purchase accounting and the effect of foreign exchange, commodity costs and regulatory developments on results.
The interim financial statements were reviewed by KPMG, not audited; the auditor reported no material modifications it believed were needed for GAAP conformity.