PepsiCo, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
PepsiCo reported unaudited results for the 12 weeks ended March 24, 2012, compared with the 12 weeks ended March 19, 2011. The interim financial statements were reviewed, not audited. The company operates across foods and beverages in six reportable divisions: FLNA, QFNA, LAF, PAB, Europe and AMEA.
Financial performance and liquidity
- Revenue: $12.428 billion, up 4% year over year. Total servings increased 2%, versus 9% in the prior-year period. Foreign currency reduced revenue growth by 1 percentage point.
- Profit: Operating profit was $1.722 billion, essentially flat; reported operating margin fell to 13.9% from 14.5%. Net income attributable to PepsiCo was $1.127 billion, down 1%. Diluted EPS was $0.71, unchanged. Excluding specified comparability items, diluted EPS was $0.69 versus $0.74, down 7%.
- Costs: Commodity cost inflation was approximately $300 million, primarily affecting PAB and FLNA. Interest expense was $198 million versus $180 million; net interest expense increased $12 million, principally due to higher average debt and international borrowing rates.
- Cash flow: Operating cash flow was negative $690 million versus positive $380 million. The principal driver was $1.0 billion of discretionary pension and retiree medical contributions. Management operating cash flow excluding specified items was $79 million versus $78 million. Capital spending was $316 million; investing cash outflow was $257 million.
- Liquidity and debt: Cash and cash equivalents were $3.485 billion, short-term investments $328 million, and current assets $17.578 billion versus current liabilities of $16.985 billion. Short-term obligations were $5.656 billion and long-term debt $22.054 billion. The company issued $2.75 billion of senior notes and had $1.2 billion of commercial paper outstanding at quarter-end. Approximately 32% of total debt, after derivatives, was exposed to variable rates.
- Capital returns: Cash dividends paid were $816 million and common share repurchases were $142 million. PepsiCo anticipated dividends and share repurchases totaling more than $6 billion in 2012.
Material changes and segment performance
- Revenue growth was concentrated in Europe (+13%), AMEA (+12%), and LAF (+11%). PAF segment results were mixed: FLNA revenue rose 4%, while QFNA revenue declined 3% and operating profit declined 12%.
- PAB revenue declined 2% and operating profit declined 6%, reflecting the Mexico beverage business divestiture, weaker volumes and higher commodity costs. North American carbonated soft drink volume fell 4%.
- Europe’s reported growth reflected Wimm-Bill-Dann (WBD), acquired in 2011, as well as pricing; operating profit growth excluding comparability items was 2.5%. AMEA operating profit rose 2% reported, or 7% excluding restructuring charges.
- Operating profit margin fell despite higher revenue, primarily because of commodity inflation. Comparability items contributed positively to reported operating profit performance; mark-to-market commodity hedge gains were $84 million, versus $31 million in the prior-year period.
- Balance-sheet equity increased to $22.954 billion from $20.899 billion at year-end, including a substantial favorable currency translation adjustment in other comprehensive income.
Outlook, commentary, risks and unusual items
- Management’s multi-year Productivity Plan is intended to improve cost competitiveness and fund brand-building and innovation. Expected pre-tax charges total approximately $910 million: $383 million was reflected in 2011, approximately $425 million was expected in 2012, and the remainder in 2013–2015. The plan was expected to be substantially completed by end-2012, with incremental initiatives through 2015.
- Management expected approximately $506 million of additional Productivity Plan cash expenditures during the remainder of 2012 and approximately $175 million in 2013–2015. Q1 charges were $33 million pre-tax; substantially all related cash payments were expected by year-end.
- On March 31, 2012, PepsiCo completed the transfer of its China company-owned and joint-venture bottling operations to Tingyi’s beverage subsidiary for a 5% indirect interest, with an option to increase its interest to 20% by 2015. PepsiCo anticipated an approximately $200 million after-tax loss in Q2.
- Management said cash generation, credit facilities and debt-market access should meet operating and financing needs, but cautioned that global credit-market volatility could restrict access or increase costs. Other risks include foreign exchange, commodity and energy prices, and currency restrictions in Venezuela; 11% of company cash and equivalents was held in Venezuela at quarter-end.
- Legal proceedings were described as arising in the normal course of business; management did not expect their outcome to materially adversely affect consolidated results. The filing reported no material change to previously disclosed risk factors. Disclosure controls were concluded effective; financial systems migration and WBD integration continued.
Most important facts for investors to verify
- Whether volume, pricing and segment trends—particularly weakness in QFNA and PAB—persist beyond this 12-week period.
- How commodity inflation, currency movements and the timing of hedge gains affect underlying operating margins and earnings.
- Whether Productivity Plan savings and execution offset planned charges, and whether expected cash expenditures remain on schedule.
- The Q2 accounting and final impact of the China bottling transaction and its anticipated approximately $200 million after-tax loss.
- How pension contributions, planned shareholder returns, debt refinancing and potential credit-market constraints affect liquidity and leverage.