PepsiCo, Inc. — Q2 2013 Form 10-Q
Business context and period: PepsiCo reports six segments across foods and beverages. This unaudited quarterly filing covers the 12 weeks and 24 weeks ended June 15, 2013; the comparable periods ended June 16, 2012. Dollar amounts below are in millions unless stated otherwise. Interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | 12 weeks ended June 15, 2013 | 24 weeks ended June 15, 2013 |
|---|---|---|
| Net revenue | $16,807; up 2% | $29,388; up 2% |
| Operating profit | $2,869; up 21% | $4,527; up 10% |
| Operating margin | 17.1%, versus 14.4% | 15.4%, versus 14.2% |
| Net income attributable to PepsiCo | $2,010; up 35% | $3,085; up 18% |
| Diluted EPS | $1.28; up 36% | $1.97; up 19% |
| Operating cash flow | Not separately presented | $3,015, versus $1,247 |
| Capital spending | Not separately presented | $911, versus $901 |
Reported Q2 operating profit growth included a $137 million gain from refranchising Vietnam beverage operations. Management said comparability items increased Q2 operating profit growth by 11 percentage points and first-half growth by 2 points. First-half net income growth also benefited from a lower reported tax rate: 25.0%, versus 29.1%.
At June 15, cash and cash equivalents were $7,793 and short-term investments were $346. Total current assets were $21,963 and current liabilities $19,162. Short-term obligations were $6,298 and long-term debt obligations $23,212. Shareholders’ equity was $22,786. The filing also reports $2.4 billion of commercial paper outstanding.
Changes versus the prior comparable period
- Revenue increased 2% for both the 12-week and 24-week periods; total servings increased 4% in both periods.
- Operating profit and EPS rose substantially, but reported growth reflects unusual items, including the Vietnam refranchising gain and prior-year Tingyi-related charges. First-half 2013 also includes a $111 million after-tax Venezuela devaluation charge.
- First-half operating cash flow increased by $1.8 billion. PepsiCo attributed the improvement mainly to $1.0 billion of discretionary pension and retiree medical contributions in the prior-year period and working-capital improvements.
- Reported segment results were mixed. First-half PAB revenue fell 1% and operating profit rose 6%; QFNA operating profit fell 8%. Europe operating profit fell 4%. AMEA operating profit rose 126%, substantially affected by the Vietnam gain and comparison with prior-year Tingyi-related charges.
Outlook, management commentary and risks
- Management expects 2013 net capital spending of approximately $3.0 billion, within its long-term target of no more than 5% of net revenue.
- PepsiCo expects to return approximately $6.4 billion to shareholders in 2013: about $3.4 billion in dividends and $3.0 billion in share repurchases. A new $10 billion repurchase authorization runs from July 1, 2013 through June 30, 2016. The annualized dividend was increased 5.6% to $2.27 per share.
- The multi-year Productivity Plan is expected to generate approximately $910 million in total pre-tax charges. Management expected about $115 million of additional charges in the remainder of 2013, with the balance in 2014–2015.
- Management said second-half investments in the business were expected to fully offset the Vietnam refranchising gain for full-year results. The filing provides no clear numerical full-year earnings or revenue guidance.
- Key exposures include foreign exchange, commodity prices, interest rates, political and economic conditions outside the U.S., and restrictions on Venezuelan currency conversion and dividend remittances. International operations generated 47% of first-half revenue. Management said the Venezuela devaluation’s 2013 impact on net revenue and operating profit was expected to be not material.
- Management considered liquidity adequate, citing cash generation, revolving credit facilities and access to debt markets, while cautioning that credit-market volatility or a ratings downgrade could raise borrowing costs or restrict access. Cash, cash equivalents and short-term investments held outside the U.S. were $7.2 billion.
- The filing reports routine legal and regulatory proceedings; management did not expect their outcomes to have a material adverse effect. No material changes to previously disclosed risk factors were reported. The interim financial statements were reviewed by the independent auditor, not audited.
Important facts for investors to verify
- How much underlying earnings growth remains after excluding the Vietnam gain, Venezuela devaluation charge, restructuring, and mark-to-market hedge effects.
- Whether beverage volume weakness, particularly in North America, persists and whether pricing can offset volume and mix pressure.
- Progress on productivity savings and the timing and cash cost of remaining restructuring actions.
- Cash conversion and working-capital trends, alongside planned capital spending, dividends and repurchases.
- Foreign-exchange and currency-access developments, especially in Venezuela and other exposed markets, and their effect on reported results.