PepsiCo, Inc. — Q1 2017 Form 10-Q
Reporting period: 12 weeks ended March 25, 2017; comparisons are with the 12 weeks ended March 19, 2016. Interim results are unaudited and are not necessarily indicative of full-year results. PepsiCo operates six reporting divisions across beverages, foods and snacks.
Financial performance
| Metric | Q1 2017 | Comparable 2016 period |
|---|---|---|
| Net revenue | $12.049 billion | $11.862 billion |
| Gross profit / gross margin | $6.763 billion / 56.1% | $6.711 billion / 56.6% |
| Operating profit / operating margin | $1.933 billion / 16.0% | $1.619 billion / 13.7% |
| Net income attributable to PepsiCo | $1.318 billion | $931 million |
| Diluted EPS | $0.91 | $0.64 |
| Net cash from operating activities | -$199 million | $305 million |
| Free cash flow (non-GAAP) | -$504 million | -$59 million |
Revenue increased 2% as reported and 2% organically; total servings grew 0.5%, versus 2% growth a year earlier. Foreign exchange reduced revenue growth by 1 percentage point. The reported effective tax rate was 22.7%, down from 31.9%. PepsiCo reported diluted EPS of $0.91; excluding specified comparability items, diluted EPS was $0.94, up 5.5% (7% on a constant-currency basis). The filing says the new share-based-payment accounting standard contributed $60 million of excess tax benefits, or $0.04 per diluted share, in Q1 2017.
Divisional results
| Division | Revenue change | Operating profit | Selected commentary |
|---|---|---|---|
| Frito-Lay North America | +2% | $1.060 billion, +4% | Pricing supported revenue; volume declined 1.5%. |
| Quaker Foods North America | -3% | $164 million, -1% | Unfavorable pricing and mix and lower volume. |
| North America Beverages | +2% | $505 million, +4% | Pricing and cost reductions helped; carbonated beverage volume fell. |
| Latin America | +3% | $132 million, -24% | Higher commodities, costs and restructuring charges weighed on profit. |
| Europe Sub-Saharan Africa | +6% | $102 million, +51% | Pricing and cost reductions helped; prior-year impairment affected comparison. |
| Asia, Middle East and North Africa | -9% | $171 million; prior-year loss of $148 million | Revenue was pressured by currency; prior-year profit included a $373 million Tingyi investment impairment. |
Liquidity, debt and capital allocation
At March 25, 2017, cash and cash equivalents were $9.528 billion and short-term investments were $6.461 billion. Total current assets were $27.150 billion against current liabilities of $21.644 billion. Short-term debt was $8.577 billion and long-term debt $30.081 billion, or $38.658 billion combined, compared with $36.945 billion at year-end 2016. PepsiCo had $4.5 billion of commercial paper outstanding; 42% of total debt was subject to variable rates after related derivatives.
Operating cash flow fell to negative $199 million, primarily due to working-capital timing, including vendor payments, customer settlements and advertising and marketing spend. The company adopted accounting guidance that retrospectively increased reported operating cash flow by $204 million in Q1 2017, with a corresponding decrease in financing cash flow. The company cited net maturities and sales of debt securities as the main reason investing cash flow was positive $269 million. Financing cash flow was positive $257 million, including $2.396 billion of net proceeds from short-term borrowings; dividends paid and share repurchases totaled about $1.542 billion.
Management expected 2017 net capital spending of approximately $3 billion and total shareholder returns of approximately $6.5 billion, comprising about $2.0 billion of repurchases and $4.5 billion of dividends. The annualized dividend was raised 7% to $3.22 per share, effective with the payment expected in June 2017. Management said cash generation, credit facilities and access to commercial paper and debt markets should be adequate for expected needs, while noting that capital-market access is not assured.
Material changes, outlook and risks
- Reported operating profit rose 19% and diluted EPS rose 43%, but comparability items contributed substantially: the prior-year $373 million Tingyi impairment was a major factor. Adjusted diluted EPS growth was 5.5%, rather than the reported 43% increase.
- Q1 2017 included $27 million of charges under the 2014 Productivity Plan; the filing reported $766 million of cumulative charges to date and estimated approximately $990 million in total program charges, including about $100 million expected in the remainder of 2017 and $124 million in 2018.
- Management cited effective pricing and planned cost reductions as supports to profit, partly offset by operating-cost increases and commodity inflation. Commodity inflation reduced consolidated operating profit growth by 5 percentage points.
- Key disclosed risks include changing consumer demand; new or increased product taxes and labeling or packaging rules; commodity, currency and interest-rate exposure; economic and political conditions; supply disruption, cybersecurity and product-safety issues; litigation; and the ability to deliver productivity savings and maintain access to financing. Unfavorable currency translation reduced Q1 revenue growth by 1 percentage point.
- PepsiCo reported no material change in previously disclosed risk factors. Management believed ordinary-course legal proceedings would not materially adversely affect financial condition, results or cash flows. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- How much of earnings growth reflects underlying operations versus the prior-year Tingyi impairment, restructuring and mark-to-market adjustments, and the Q1 tax benefit from share-based awards.
- Whether negative operating cash flow and free cash flow are temporary working-capital timing effects, and how cash conversion develops over the rest of 2017.
- Debt maturities, commercial-paper dependence, variable-rate exposure and the availability and cost of refinancing.
- Whether the $3 billion capital-spending and $6.5 billion shareholder-return plans remain achievable alongside productivity-plan cash expenditures.
- How currency, commodity inflation and regional volume trends—particularly in Latin America and AMENA—affect margins and full-year performance.