PepsiCo, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 13, 2015 (12 weeks) and year-to-date (24 weeks). Interim statements are unaudited; the independent accountant performed a review, not an audit. Amounts below are U.S. dollars unless noted.
Financial performance
| Metric | 12 weeks ended June 13, 2015 | 12 weeks ended June 14, 2014 | 24 weeks ended June 13, 2015 | 24 weeks ended June 14, 2014 |
|---|---|---|---|---|
| Net revenue | $15.923 billion | $16.894 billion | $28.140 billion | $29.517 billion |
| Operating profit | $2.900 billion | $2.896 billion | $4.697 billion | $4.703 billion |
| Operating margin | 18.2% | 17.1% | 16.7% | 15.9% |
| Net income attributable to PepsiCo | $1.980 billion | $1.978 billion | $3.201 billion | $3.194 billion |
| Diluted EPS | $1.33 | $1.29 | $2.14 | $2.08 |
| Operating cash flow | — | $2.761 billion | $2.672 billion |
Revenue fell 6% for the quarter and 5% year to date, while operating profit and PepsiCo-attributable net income were essentially flat. Reported diluted EPS rose 3% in both periods; lower weighted-average share counts contributed. Excluding disclosed comparability items, diluted EPS was $1.32 for the quarter and $2.15 year to date, unchanged year over year; on a constant-currency basis, adjusted EPS growth was reported as 11% in both periods. These are non-GAAP measures.
Organic revenue growth was 5% for both the quarter and year to date, excluding foreign exchange and acquisitions/divestitures. Unfavorable currency translation reduced reported revenue growth by 10 percentage points for the quarter and 9 points year to date. Total servings increased slightly in both 2015 periods, versus 1% growth in the comparable 2014 periods.
Liquidity, debt and capital allocation
- At June 13, cash and cash equivalents were $7.562 billion and short-term investments were $2.017 billion; current assets were $23.069 billion and current liabilities $21.546 billion.
- Short-term obligations were $8.383 billion and long-term debt $23.075 billion, totaling $31.458 billion. PepsiCo had $2.9 billion of commercial paper outstanding and no borrowings under its revolving credit facilities. New five-year and 364-day revolving facilities each provide up to $3.7225 billion.
- Year-to-date operating cash flow was $2.761 billion; capital spending was $832 million. Reported free cash flow was $1.955 billion, or $2.060 billion excluding specified items. Cash dividends paid and common-share repurchases totaled approximately $4.1 billion.
- Management expects 2015 net capital spending of approximately $3.0 billion and shareholder returns of $8.5–$9.0 billion: approximately $4.5–$5.0 billion of repurchases and $4.0 billion of dividends. The annualized dividend was increased 7% to $2.81 per share. A new $12 billion repurchase authorization runs July 2015 through June 2018.
Material changes and unusual items
- Segment results diverged: Frito-Lay North America operating profit rose 7% year to date; PepsiCo Americas Beverages rose 6% reported; Europe fell 28%; Latin America Foods fell 12%; and Quaker Foods North America fell 23%, including a $65 million pre-tax impairment of the Muller Quaker Dairy joint venture investment.
- AMEA year-to-date operating profit rose 10%, including a $39 million pre-tax gain from refranchising part of bottling operations in India. The refranchising also reduced segment revenue.
- Comparability items included $38 million of year-to-date mark-to-market commodity hedge gains and $61 million of restructuring and impairment charges; the prior-year amounts were $65 million of gains and $190 million of charges. Management reported that these items increased year-to-date operating-profit performance by 2 percentage points.
- Productivity plans remained in progress. PepsiCo expected cumulative pre-tax charges of approximately $990 million for the 2014 plan, including $151 million expected in the remainder of 2015, and approximately $910 million for the 2012 plan, with $67 million expected in the remainder of 2015.
- Beginning in Q3 2015, PepsiCo planned to realign reporting segments: Latin American food, snack and beverage businesses will be combined; North American beverages will be reported separately; and Europe will include Sub-Saharan Africa. Historical segment data was to be retrospectively revised.
Management commentary, outlook and risks
Management attributed operating-profit resilience and improved margins mainly to effective net pricing and planned cost reductions, offset by commodity inflation, foreign exchange, operating-cost increases and, year to date, higher advertising and marketing costs. Commodity inflation reduced operating-profit performance by 7 percentage points in the quarter and 6 points year to date. No clear full-year revenue or earnings guidance is provided in the supplied filing text; the outlook figures disclosed include capital spending, shareholder returns and productivity-plan charges above.
- Venezuela: Results represented 2% of year-to-date revenue and operating profit; Venezuelan operations held 7% of consolidated cash. Bolivar-denominated net monetary assets were approximately $335 million, with about $310 million of dividend-remittance requests pending. Management described significant uncertainty around exchange mechanisms and U.S.-dollar availability. Remeasuring assets then carried at the fixed rate using the SICAD rate would have produced an estimated $160 million charge; using SIMADI would have produced an estimated $325 million charge and could also impair approximately $720 million of non-monetary assets. These were sensitivities, not recorded charges.
- International exposure: Operations outside North America generated 43% of year-to-date revenue. Currency movements and political, economic and social conditions in markets including Russia, Ukraine, Greece and the Middle East were identified as risks. Russia generated 4% of year-to-date revenue; sanctions were not expected to have a material impact according to management.
- Other identified risks include changing consumer demand, regulation and taxes, competition, raw-material costs and supply disruption, product safety, cybersecurity, labor issues, litigation, and access to capital markets or commercial paper. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were deemed effective. The company continued migrating financial-processing systems and enhancing related internal controls. The filing also notes the Iran-office wind-down process was paused pending a new U.S. Treasury license; no Iran-related revenue or profit was reported for the quarter.
Important facts for investors to verify
- Whether organic growth and margin resilience persist after accounting for substantial foreign-exchange headwinds and non-GAAP comparability adjustments.
- Progress and cash costs of the productivity plans, and the operational outlook for Europe, Quaker Foods and Latin America.
- Venezuela exchange-rate exposure, pending dividend remittances, and potential remeasurement or asset-impairment consequences.
- Debt maturities, commercial-paper access, planned shareholder returns and the effect of repurchases on per-share results.
- The impact of the Q3 segment realignment on reported historical comparisons and future segment disclosure.