PepsiCo, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. PepsiCo is a global food, snack and beverage company reporting six divisions. This unaudited filing covers the 12 and 24 weeks ended June 17, 2017, compared with the periods ended June 11, 2016. International results generally reflect January–May for the 24-week period. The interim statements were reviewed, not audited.
Financial performance
| Metric | 12 weeks | 24 weeks |
|---|---|---|
| Net revenue | $15.71 billion, up 2% | $27.76 billion, up 2% |
| Operating profit | $2.99 billion, up 1% | $4.92 billion, up 7% |
| Operating margin | 19.0%, down 0.2 percentage points | 17.7%, up 0.9 percentage points |
| Net income attributable to PepsiCo | $2.11 billion, up 5% | $3.42 billion, up 17% |
| Diluted EPS | $1.46, up 6% | $2.38, up 18% |
For the 24 weeks, gross profit was $15.42 billion and gross margin was approximately 55.5%, versus approximately 56.1% in the prior-year period. The reported effective tax rate was 23.3%, compared with 28.2%. Results include share-based-payment tax benefits of $71 million for the 24 weeks, increasing diluted EPS by $0.05.
Cash flow and liquidity. Operating cash flow was $2.24 billion, down 28%; free cash flow, as defined by PepsiCo, was $1.39 billion, down 38%. Management attributed weaker operating cash flow principally to working-capital movements and timing of tax payments. Capital spending was $878 million. Cash and cash equivalents were $10.28 billion and short-term investments were $6.88 billion at June 17.
Current assets were $29.25 billion and current liabilities $22.11 billion. Short-term debt was $8.28 billion and long-term debt $31.21 billion. The company had $1.8 billion of commercial paper outstanding and no borrowings under its revolving credit facilities. Total debt obligations were approximately $39.5 billion.
Changes and notable items
- Revenue growth was 2% in both periods, while total servings were flat year over year. Organic revenue growth, a non-GAAP measure, was 3% for both the 12- and 24-week periods.
- Division results varied: FLNA operating profit rose 5% for 24 weeks; Latin America fell 14%; ESSA rose 49%; and AMENA rose 104% as reported. AMENA’s comparison was heavily affected by the $373 million prior-year Tingyi investment impairment; excluding specified items and currency, AMENA operating profit declined 19% for 24 weeks.
- ESSA’s 2017 operating profit included a $95 million pre-tax gain from selling PepsiCo’s Britvic minority stake. The sale also generated an $89 million after-tax reclassification gain in other comprehensive income.
- For 24 weeks, reported operating-profit growth included a 5-percentage-point contribution from items affecting comparability, principally the prior-year Tingyi impairment. PepsiCo’s adjusted measures exclude specified items and are not GAAP measures.
- Restructuring charges under the 2014 Productivity Plan were $61 million for 24 weeks. The company reported $800 million of cumulative charges since the plan began and expected total charges of approximately $990 million, including approximately $705 million in cash expenditures.
Outlook, commentary and risks
- Management expected 2017 net capital spending of approximately $3 billion, within its long-term target of no more than 5% of net revenue. It expected to return approximately $6.5 billion to shareholders in 2017: about $2.0 billion in repurchases and $4.5 billion in dividends.
- The annualized dividend was increased 7% to $3.22 per share, effective with the June 2017 payment. Management said operating cash generation, financing access and credit facilities should be adequate for operating, investing and financing needs, while cautioning that capital-market access is not assured.
- Unfavorable currency translation reduced revenue growth by 1.5 percentage points for the quarter and 1 point for 24 weeks. Commodity inflation reduced operating-profit growth by 6 percentage points in both periods. Management cited challenging international economic, political and currency conditions, particularly in certain emerging markets.
- Other risks include changing consumer preferences; product, labeling and packaging taxes or regulation; commodity and supply costs; competition; cybersecurity and operational disruptions; climate and water-related risks; and credit-market access. The filing reported no material change to previously disclosed risk factors.
- Management reported no material expected adverse effect from routine legal proceedings. It stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the Britvic gain, prior-year Tingyi impairment, restructuring, commodity mark-to-market items and share-based-payment tax benefits.
- Whether flat servings and pressure in beverage volumes, especially in Latin America and AMENA, affect future organic revenue and margins.
- Whether working-capital cash outflows reverse and operating cash flow supports planned capital spending, dividends, repurchases and debt obligations.
- Exposure to currency movements, commodity inflation, product-related taxes and regulatory changes, and international political and economic conditions.
- The pace and cash cost of the productivity plan, together with debt levels, variable-rate exposure and continued access to commercial-paper and credit markets.