PepsiCo, Inc. — Q1 2014 Form 10-Q
Reporting period: 12 weeks ended March 22, 2014; comparison is the 12 weeks ended March 23, 2013. Interim financial statements are unaudited and results are not necessarily indicative of the full year.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $12.623 billion | $12.581 billion | Flat reported; organic growth 4% |
| Operating profit | $1.807 billion | $1.658 billion | +9% |
| Operating margin | 14.3% | 13.2% | +1.1 percentage points |
| Net income attributable to PepsiCo | $1.216 billion | $1.075 billion | +13% |
| Diluted EPS | $0.79 | $0.69 | +15% |
| Net cash from operating activities | $181 million | $702 million | Down $521 million |
| Free cash flow, as reported by company | $(167) million | $407 million | Not meaningful |
Gross profit was $6.876 billion, versus $6.747 billion; derived gross margin was approximately 54.5%, up from 53.6%. Interest expense was $201 million and interest income and other was $10 million. The effective tax rate was 24.1%, versus 26.3%. Reported diluted EPS excluding specified comparability items was $0.83, up 7%; on a constant-currency basis, it increased 10%.
Operating cash flow fell mainly because of unfavorable working-capital comparisons, including cash outflows from receivables, inventories, prepaid/current assets, and payables/current liabilities. Free cash flow excluding specified items was $(135) million, compared with $464 million. Capital spending was $355 million; the company expects 2014 net capital spending of approximately $3.0 billion.
At March 22, 2014, cash and cash equivalents were $9.839 billion and short-term investments were $247 million. Current assets totaled $23.285 billion and current liabilities $19.457 billion. Short-term obligations were $7.832 billion and long-term debt $24.240 billion; total debt obligations were therefore approximately $32.072 billion. Commercial paper outstanding was $4.9 billion. The company issued $2.0 billion of senior notes and had $1.7 billion of senior notes mature during the quarter.
Material changes and segment performance
- Reported revenue was essentially unchanged; organic growth of 4% was offset by unfavorable currency translation, which reduced reported revenue growth by 3 percentage points. Total servings increased 1%, compared with 3% growth in the prior-year quarter.
- Operating profit growth reflected pricing, planned cost reductions, and volume growth, partly offset by operating costs and commodity inflation, which reduced growth by 6 percentage points. Comparability items contributed 5 percentage points to reported operating-profit growth.
- FLNA revenue increased 3% and operating profit 4%. QFNA revenue was flat and operating profit declined 11%, with oat-supply disruption among the cited pressures. Latin America Foods revenue declined 2% reported but grew 9% organically; operating profit increased 7% reported.
- Americas Beverages revenue was flat and operating profit declined 24% reported, including productivity-plan charges; excluding listed comparability items, operating profit declined 7%. Europe revenue rose 1% and operating profit rose 72%, including a $31 million one-time gain on the sale of agricultural assets in Russia. AMEA revenue declined 5% reported, partly reflecting the prior-year Vietnam refranchising and currency, while operating profit increased 5%.
Outlook, management commentary, risks, and unusual items
- The company announced a new multi-year productivity plan, with expected total pre-tax charges of approximately $990 million through 2018. It expects approximately $345 million of additional charges in the remainder of 2014; related cash expenditures are also expected over several years. The earlier productivity plan was expected to incur approximately $75 million of additional charges in the remainder of 2014.
- Management said cash generation, credit facilities, and debt-market access should be adequate for operating, investing, and financing needs, while warning that credit-market volatility or a ratings downgrade could constrain or raise the cost of financing. Planned 2014 shareholder returns were approximately $8.7 billion: $3.7 billion in dividends and $5.0 billion in share repurchases. The annualized dividend was raised 15% to $2.62 per share, effective with the expected June 2014 payment.
- Foreign exchange was a material headwind. Operations outside the U.S. generated 41% of quarterly revenue; unfavorable currency reduced revenue growth by 3 percentage points. Management highlighted economic and political uncertainty in Russia, Ukraine, the Middle East, and other markets.
- Venezuela remained a significant uncertainty. PepsiCo continued remeasuring net monetary assets at 6.3 bolivars per U.S. dollar, while new exchange mechanisms had different rates and uncertain availability. If remeasurement rates were in the range of 10 to 50 bolivars per dollar, the company estimated a potential after-tax charge of approximately $140 million to $330 million. Venezuelan operations generated 2% of revenue and 3.5% of operating profit; net monetary assets were approximately $380 million. Dividend remittances were subject to restrictions and pending government requests.
- Other risks cited include demand and competition, commodity costs and supply disruption, regulation and taxes, emerging-market conditions, litigation, cybersecurity, labor matters, and execution of productivity and business-transformation initiatives. The filing reported no material change to the risk factors in the 2013 Form 10-K. Management believed ordinary-course legal proceedings would not materially affect consolidated results or cash flows.
- Specified comparability items included $34 million of pre-tax mark-to-market gains in 2014 versus $16 million of losses in 2013; $96 million of 2014 productivity-plan charges; and a $111 million after-tax Venezuela devaluation charge in the 2013 comparison period. The 2014 statement of comprehensive income included an $874 million currency-translation loss before tax.
Important facts for investors to verify
- Whether organic growth, volume, pricing, and segment trends persisted beyond this 12-week period, particularly in beverages and markets affected by taxes, currency, or political uncertainty.
- The cash-flow trajectory: operating cash flow was $181 million and free cash flow was negative, while dividends and repurchases totaled approximately $2.1 billion during the quarter.
- The assumptions and eventual cash costs of both productivity plans, including the expected $990 million charge under the new plan.
- Venezuela’s exchange-rate treatment, access to foreign currency, pending dividend remittances, and potential remeasurement or asset-impairment exposure.
- Debt and refinancing needs, commercial-paper access, and the effect of planned shareholder distributions on liquidity and leverage.
The independent accountant conducted a review, not an audit, and reported no material modifications needed for conformity with U.S. GAAP. Disclosure controls were reported effective as of quarter-end.