PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 36 weeks of fiscal 2019, ended September 7, 2019. The quarter covers 12 weeks; year-to-date results cover 36 weeks. Financial statements are unaudited and interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | 12 weeks ended Sept. 7, 2019 | Change vs. prior year | 36 weeks ended Sept. 7, 2019 | Change vs. prior year |
|---|---|---|---|---|
| Net revenue | $17.188 billion | +4% | $46.521 billion | +3% |
| Organic revenue growth | 4% | — | 5% | — |
| Operating profit | $2.855 billion | Approximately flat | $7.592 billion | -1% |
| Operating margin | 16.6% | -0.7 percentage points | 16.3% | -0.7 percentage points |
| Net income attributable to PepsiCo | $2.100 billion | -16% | $5.548 billion | -2% |
| Diluted EPS | $1.49 | -15% | $3.94 | -1% |
Quarterly gross profit was $9.494 billion, or approximately 55.2% of revenue, versus $8.958 billion, or approximately 54.3%, a year earlier. Year-to-date gross profit was $25.735 billion, approximately 55.3% of revenue, versus $24.692 billion, approximately 54.7%.
Management’s adjusted diluted EPS, excluding specified comparability items, was $1.56 for the quarter, down 2%, and $4.07 year to date, down 2%. Global servings increased 4% in both periods. For the 36 weeks, net revenue growth included a 2-percentage-point foreign-exchange headwind and a 1-point reduction from acquisitions and divestitures, on the company’s reported presentation.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $5.063 billion, versus $4.732 billion. Free cash flow, as defined by PepsiCo, was $3.167 billion, versus $3.273 billion.
- Capital spending was $1.959 billion. Investing activities used $4.285 billion, including $1.905 billion paid for SodaStream and $723 million for other acquisitions and investments.
- Cash, cash equivalents and restricted cash totaled $5.707 billion at period-end, down from $10.769 billion at fiscal year-end 2018. Cash and cash equivalents on the balance sheet were $5.494 billion.
- Short- and long-term debt obligations totaled $32.554 billion, compared with $32.321 billion at December 29, 2018. PepsiCo reported no commercial paper outstanding and no borrowings under its revolving credit facilities at September 7.
- Current liabilities exceeded current assets at period-end: $20.131 billion versus $19.198 billion. The company said operating cash generation, cash balances and financing access should be adequate for its expected needs, while noting capital-market access is not assured.
- Year-to-date dividends paid were $3.971 billion and common share repurchases were $2.268 billion. Management expected approximately $8 billion of 2019 shareholder returns: about $5 billion in dividends and $3 billion in repurchases.
Material changes and management commentary
- Reported quarterly earnings were affected by the prior-year period’s $364 million noncash tax benefit from international audit conclusions and by a higher current-year tax rate. The reported quarterly tax rate was 21.0%, versus 7.0% a year earlier. Year-to-date rates were 21.5% in both periods, but the prior year included large, offsetting tax items related to the Tax Cuts and Jobs Act and tax audit resolutions.
- Operating profit faced higher commodity costs, operating expenses and advertising and marketing spending. Productivity savings and revenue growth partly offset these pressures. Higher restructuring charges and the prior-year gain from Thailand refranchising also affected year-to-date comparisons.
- For the 36 weeks, segment revenue increased in all divisions. Operating profit increased at FLNA and LatAm, while it declined at QFNA, PBNA, ESSA and AMENA. SodaStream acquisition effects supported ESSA revenue and profit; foreign exchange and higher commodity costs weighed on several international results.
- PepsiCo’s 2019 multi-year productivity plan had incurred $420 million of pretax charges through September 7. The company estimated total plan charges of about $2.5 billion and cash expenditures of about $1.6 billion, with most expected in fiscal 2019–2021. It expected approximately $200 million of additional pretax charges and $150 million of cash expenditures in the remainder of 2019.
Outlook, risks and contingencies
- Management expected 2019 net capital spending of approximately $4.5 billion. The filing does not provide a clear full-year revenue or EPS guidance figure in the presented text.
- PepsiCo had agreed to acquire Pioneer Foods for approximately $1.7 billion, subject to shareholder approval, regulatory approvals and other conditions; closing was expected by the first quarter of 2020.
- The company reported a $3.4 billion mandatory transition-tax liability, payable over the remaining seven years. Further Swiss tax reform enactments could affect future tax expense; the impact was not reasonably estimable.
- Identified risks include changes in consumer demand, packaging and product regulation or taxes, commodity costs, foreign exchange, political and economic volatility, supply disruptions, cybersecurity, retail-channel shifts, acquisitions, litigation, and possible credit-rating downgrades. Foreign exchange reduced revenue growth by 1 percentage point in the quarter and 2 points year to date.
- Management stated that pending litigation and proceedings were not expected to have a material adverse effect on financial condition, results or cash flows. The independent accountant’s interim review found no material modifications needed for GAAP conformity; it was a review, not an audit. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported earnings and EPS with management’s adjusted measures, particularly the prior-year tax benefits and current-year restructuring charges.
- Monitor whether operating cash flow covers capital spending, dividends, repurchases, debt service and planned acquisitions as cash balances decline.
- Assess delivery and cash costs of the productivity plan against its estimated $2.5 billion of charges and $1.6 billion of cash expenditures.
- Track commodity-cost and currency effects, including their impact on segment margins and international revenue.
- Verify the timing, approvals, funding and integration risks for the proposed Pioneer Foods acquisition, as well as the remaining SodaStream purchase-accounting adjustments.