PepsiCo, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly filing covers the 12 weeks ended September 8, 2012, and year-to-date results for the 36 weeks ended September 8, 2012, compared with the corresponding 2011 periods. PepsiCo reports six segments across foods and beverages. International operations generated approximately 50% of year-to-date revenue.
Key financial results
Amounts are in millions of dollars except per-share amounts and percentages.
| Metric | 12 weeks ended Sept. 8, 2012 | Change vs. 2011 | 36 weeks ended Sept. 8, 2012 | Change vs. 2011 |
|---|---|---|---|---|
| Net revenue | $16,652 | (5%) | $45,538 | (2%) |
| Operating profit | $2,800 | (4%) | $6,899 | (7%) |
| Operating margin | 16.8% | Up 0.3 percentage points | 15.1% | Down 0.8 percentage points |
| Net income attributable to PepsiCo | $1,902 | (5%) | $4,517 | (10%) |
| Diluted EPS | $1.21 | (3%) | $2.86 | (9%) |
| Net cash provided by operating activities | Not presented for the 12-week period | — | $5,118 | Down from $5,834 |
Revenue fell on a reported basis, while organic revenue growth was 5% in both the quarter and year to date, excluding foreign currency and acquisitions or divestitures. Total servings increased 4% in the quarter and 3% year to date. Reported gross margin was approximately 53.0% for the quarter and 52.5% year to date, versus approximately 51.9% and 52.8%, respectively, in 2011.
Year-to-date operating cash flow less capital spending was approximately $3,709, compared with $3,872 in 2011; including property-sale proceeds, the corresponding amounts were $3,767 and $3,918. Management’s non-GAAP operating cash flow excluding specified items was $4,902 versus $4,233.
Liquidity, debt and capital returns
- At September 8, 2012, cash and cash equivalents were $5,309 and short-term investments were $402. Current assets of $19,270 exceeded current liabilities of $16,220; the comparable December 2011 balances were $17,441 and $18,154.
- Short-term obligations were $4,211 and long-term debt obligations were $23,732. The company had $0.9 billion of commercial paper outstanding. It issued $5.2 billion of long-term debt during the first 36 weeks and used proceeds for general corporate purposes, including commercial-paper repayment.
- Year-to-date investing cash outflow was $1,728, including $1,409 of capital spending and $298 of payments related to the Tingyi transaction. Financing cash outflow was $2,164, including $2,470 of dividends paid and $2,328 of common-share repurchases.
- Management anticipated dividends and share repurchases totaling more than $6 billion in 2012. Cash, cash equivalents and short-term investments held outside the U.S. totaled $4.8 billion.
Material changes and segment performance
- Quarterly organic revenue growth was positive across most segments, but reported results were pressured by currency translation and portfolio changes. Foreign currency reduced consolidated revenue growth by 5 percentage points in the quarter and 3 points year to date.
- PepsiCo Americas Beverages reported revenue down 7% in the quarter and 5% year to date; the 2011 Mexico beverage divestiture contributed 6 percentage points to each decline. Operating profit fell 16% and 13%, respectively.
- Asia, Middle East and Africa revenue fell 21% in the quarter and 9% year to date, principally reflecting the Tingyi transaction and deconsolidation of International Dairy and Juice Limited. Excluding listed comparability items, segment operating profit increased 13% in the quarter and 8% year to date.
- Latin America Foods revenue increased 2% in the quarter and 7% year to date, but operating profit declined 21% and 7%, respectively, amid commodity costs, currency effects and restructuring charges.
- Europe revenue fell 6% in the quarter and 2% year to date, with foreign exchange a major drag. Year-to-date reported operating profit increased 3%; impairments and currency affected performance.
Outlook, management commentary, risks and unusual items
- Management cited commodity-cost inflation of approximately $350 million in the quarter and $1.1 billion year to date, alongside higher advertising and marketing spending and unfavorable currency. Effective net pricing partly offset these pressures. No specific full-year revenue, profit or EPS guidance is stated in the provided filing text.
- The multi-year Productivity Plan is expected to incur approximately $910 million of total pre-tax charges. PepsiCo had recorded $193 million in 2012 through the third quarter and expected approximately $205 million more in the remainder of 2012, with the balance in 2013–2015. The plan was expected to be substantially completed by year-end 2012, with further productivity initiatives through 2015.
- The Tingyi transaction, completed March 31, 2012, transferred PepsiCo’s China bottling operations to Tingyi’s beverage subsidiary in exchange for a 5% indirect equity interest; PepsiCo has an option to increase its interest to 20% by 2015. Related restructuring and other charges were $137 million pretax ($163 million after tax, or $0.10 per share) year to date.
- Quarterly and year-to-date results included commodity-hedge mark-to-market gains of $121 million and $126 million, respectively, versus losses in the comparable 2011 periods. These timing-related items affect reported operating results. Year-to-date results also included productivity-plan charges and the Tingyi-related charge.
- Risks highlighted include foreign-exchange volatility, continued economic weakness and credit issues in Europe, commodity and energy costs, and access to capital markets. Venezuelan currency restrictions affect the ability to remit dividends; Venezuela held 8% of PepsiCo’s cash and cash equivalents at period end. Management stated that financing access and cash generation were expected to meet operating and investment needs, while noting capital-market access could not be assured.
- The company disclosed pending appeals of Hungarian wastewater-discharge sanctions of approximately $220,000 and $153,000. Management did not expect the proceedings and other ordinary-course matters to have a material adverse effect. A U.S. Tax Court decision issued after quarter-end favored PepsiCo on a tax matter but remained subject to government appeal.
- The interim financial statements were reviewed by the independent accountant, not audited. Management reported disclosure controls were effective and described ongoing financial-system migration and Wimm-Bill-Dann integration work.
Important facts for investors to verify
- Whether organic growth and volume trends persist after separating currency effects, divestitures and the Tingyi-related change in consolidation.
- How commodity inflation, pricing, marketing expense and segment mix affect operating margins and earnings in subsequent periods.
- The timing and cash cost of the Productivity Plan, and whether expected savings offset its charges.
- Debt maturities, commercial-paper refinancing needs, and the sustainability of planned dividends and share repurchases relative to cash generation.
- The ultimate outcome of the tax appeal, legal matters and other contingencies, and any material changes in international currency restrictions or market access.
- The reconciliation and assumptions behind management’s non-GAAP measures and items affecting comparability.