PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Second quarter ended June 15, 2019, covering 12 weeks; year-to-date figures cover 24 weeks. Comparative periods ended June 16, 2018. Interim statements are unaudited; the auditor performed a review, not an audit.
Financial performance
| Metric | 12 weeks ended June 15, 2019 | 24 weeks ended June 15, 2019 | Change vs. comparable 2018 period |
|---|---|---|---|
| Net revenue | $16.449 billion | $29.333 billion | +2% in each period |
| Organic revenue growth | 4.5% | 5% | Excludes foreign exchange and structural changes |
| Operating profit | $2.729 billion | $4.737 billion | -10%; -2% |
| Operating margin | 16.6% | 16.1% | Down 2.2 and 0.8 percentage points, respectively |
| Net income attributable to PepsiCo | $2.035 billion | $3.448 billion | +12%; +9% |
| Diluted EPS | $1.44 | $2.44 | +13%; +10% |
| Adjusted diluted EPS | $1.54 | $2.52 | -4%; -2%; constant-currency year-to-date growth was 0% |
Gross profit was $9.045 billion for the quarter and $16.241 billion year to date. Gross margin was approximately 55.0% and 55.4%, respectively. Total servings increased 3% in the quarter and 3.5% year to date. Foreign exchange reduced revenue growth by 3 percentage points in both reported periods.
Quarterly net income and EPS growth were substantially affected by prior-year tax comparability, including a 2018 transition-tax charge and an IRS audit-resolution tax benefit. The company said comparability items contributed 17 percentage points to quarterly net-income growth and 13 percentage points to year-to-date growth; adjusted EPS declined in both periods.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $1.388 billion, versus $1.087 billion. Free cash flow, as defined by PepsiCo, was $263 million, versus $185 million.
- Investing cash outflow was $3.271 billion, including $1.880 billion for SodaStream and $1.167 billion of capital spending. Financing cash outflow was $5.439 billion, including $2.635 billion of dividends, $1.726 billion of share repurchases and $2.953 billion of long-term debt payments.
- Cash, cash equivalents and restricted cash totaled $3.471 billion at period-end, compared with $10.769 billion at fiscal year-end 2018. Cash plus short-term investments and restricted cash was about $3.7 billion.
- Short-term debt was $3.473 billion and long-term debt $27.712 billion. The company had $0.6 billion of commercial paper outstanding and no borrowings under its new revolving credit facilities, which provide $7.5 billion of aggregate commitments.
- Current assets of $17.212 billion were below current liabilities of $19.928 billion. PepsiCo said operating cash generation and access to debt and credit markets should meet its operating, investing and financing needs.
- The remaining mandatory transition-tax liability was $3.4 billion, payable over eight years. About 15% of total debt, after related interest-rate derivatives, was variable-rate, down from 29% at year-end.
Material changes and segment performance
- Revenue growth was led by FLNA, up 4.5% in the quarter and 5% year to date, and LatAm, where reported growth was 2% in both periods despite substantial currency headwinds. PBNA revenue rose 2.5% quarterly and 2% year to date, while beverage volume declined 2% in both periods.
- QFNA operating profit declined 12% in both periods. PBNA operating profit fell 8% in the quarter and 5% year to date. ESSA operating profit fell 16% and 12%; AMENA fell 34% and 23%. FLNA and LatAm operating profit increased.
- Commodity costs, operating expenses and advertising and marketing spending weighed on results. Management cited productivity savings, effective net pricing and revenue growth as offsets. Prior-year Thailand refranchising gains particularly affected AMENA comparisons.
- In the second quarter, PepsiCo announced a 3% increase in its annualized dividend to $3.82 per share, effective with the June 2019 dividend. It repurchased $1.726 billion of common stock year to date.
Outlook, commentary and risks
- PepsiCo expected 2019 net capital spending of approximately $4.5 billion and planned to return approximately $8 billion to shareholders in 2019: about $3 billion through repurchases and $5 billion through dividends. The provided filing text does not state a full-year revenue or EPS forecast.
- The 2019 productivity plan is expected to generate approximately $2.5 billion of pretax charges and $1.6 billion of cash expenditures over multiple years. Through June 15, $322 million of charges and $66 million of cash expenditures had been incurred; approximately $450 million of charges and $300 million of cash expenditures were expected for the remainder of 2019.
- Key exposures include foreign exchange, commodity costs, demand and consumer preferences, packaging and product regulation or taxes, political and economic instability, supply disruption, cybersecurity, retail-channel changes, acquisition integration, climate and water risks, and potential credit-rating downgrades. Management noted continuing uncertainty in several international markets and around the UK’s pending EU withdrawal.
- Swiss tax reform effective in 2020 was not material to the reported period, but future enactment details may affect subsequent financial statements. The company said existing litigation and proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- How much reported earnings growth reflects tax and other comparability items versus underlying operations; adjusted diluted EPS declined 4% for the quarter and 2% year to date.
- Whether commodity inflation, foreign exchange and operating costs continue to pressure segment profits and margins, especially in PBNA, ESSA and AMENA.
- Cash conversion and working-capital trends, given year-to-date free cash flow of $263 million and the decline in reported cash and restricted cash.
- Progress, timing and cash requirements of the $2.5 billion productivity plan, alongside planned capital spending and shareholder distributions.
- Debt-market access, the $3.4 billion transition-tax liability, and potential effects of currency, regulatory, tax and geopolitical developments.