PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Second quarter ended June 12, 2010 (12 weeks); year-to-date period covers 24 weeks. Interim statements are unaudited. Results include The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS) following their February 26, 2010 acquisition, so reported growth is not directly comparable with the prior year.
Financial performance
| Metric | 12 weeks ended June 12, 2010 | 12 weeks ended June 13, 2009 | 24 weeks ended June 12, 2010 | 24 weeks ended June 13, 2009 |
|---|---|---|---|---|
| Net revenue | $14.801B | $10.592B | $24.169B | $18.855B |
| Operating profit | $2.461B | $2.190B | $3.301B | $3.778B |
| Operating margin | 16.6% | 20.7% | 13.7% | 20.0% |
| Net income attributable to PepsiCo | $1.603B | $1.660B | $3.033B | $2.795B |
| Diluted EPS | $0.98 | $1.06 | $1.87 | $1.78 |
| Operating cash flow | Not presented for the 12-week period | $2.442B | $1.492B |
- Reported revenue increased 40% in the quarter and 28% year to date, substantially reflecting consolidation of the acquired bottlers. Management reported worldwide servings growth of 7% for the quarter and 4.5% year to date.
- Quarterly operating profit rose 12%, but operating margin contracted 4.1 percentage points; year-to-date operating profit fell 13% and margin contracted 6.3 points. Management attributed much of the year-to-date decline to comparability items, including acquisition-related costs and acquired-inventory fair-value adjustments.
- Quarterly net income attributable to PepsiCo fell 3% and diluted EPS fell 7%. Year-to-date net income rose 9% and diluted EPS rose 5%, with the comparison affected by a $958 million gain on previously held PBG/PAS equity interests.
- Cash generated from operations less capital spending was approximately $1.511B for the 24 weeks. Cash and cash equivalents were $4.529B at June 12, versus $3.943B at December 26, 2009.
Balance sheet, debt and liquidity
- Total assets were $65.074B and total liabilities were $45.160B at June 12, 2010, up from $39.848B and $22.406B, respectively, at fiscal year-end; the increase primarily reflects the acquisitions.
- Short-term obligations were $4.493B and long-term debt obligations were $19.586B, compared with $464M and $7.400B at December 26, 2009. The company also had $3.5B of commercial paper outstanding; disclosed revolving credit lines were unused at June 12.
- PepsiCo issued $4.25B of notes in the first quarter, partly to finance the acquisitions. Acquired bottler debt had approximately $7.5B face value and a 5.7% weighted-average stated rate. Total long-term contractual commitments were $31.6B.
- Moody’s lowered PepsiCo’s long-term rating to Aa3 and S&P lowered it to A; both affirmed short-term ratings and stable outlooks. The company said its ratings remained investment grade.
Material changes, outlook and risks
- Acquisitions and integration: PBG and PAS were acquired for a stated total purchase price of approximately $12.6B, including the fair value of previously held interests. Preliminary acquisition accounting included $7.229B of goodwill. Purchase-price allocations remained subject to revision, expected no later than year-end 2010.
- Significant comparability items: Year-to-date results included the $958M acquisition-related gain; $467M of PBG/PAS merger and integration charges (including interest costs); $357M of inventory fair-value adjustments; a $120M Venezuela currency-related charge; a $145M asset write-off; and a $100M foundation contribution. The PPACA also resulted in a one-time $41M tax charge in the second quarter.
- Management outlook: PepsiCo expected approximately $7.9B of operating cash flow and $3.6B of net capital spending for 2010, and planned a further $600M discretionary pension contribution in the third quarter. It expected to return management operating cash flow to shareholders through dividends and repurchases while preserving financial flexibility.
- Shareholder returns: The board approved a 7% increase in the annual dividend to $1.92 per share and authorized up to $15B of repurchases through June 30, 2013. The filing reports $3.308B of common-share repurchases in the first 24 weeks.
- Key risks: International operations generated approximately 45% of revenue. Currency movements, commodity costs, interest rates and access to capital markets could affect results. Venezuela was under hyperinflationary accounting; the company reported restrictions affecting dividend remittances and a $120M first-quarter charge following the bolivar devaluation. A 1-percentage-point increase in interest rates was estimated to add $66M to full-year net interest expense.
- Management stated that existing cash generation, credit facilities and other financing sources were expected to meet operating, investing and financing needs, while cautioning that capital-market volatility could limit access on acceptable terms. Other legal proceedings were not expected by management to have a material adverse effect; a wastewater-permit matter was settled for $123,500.
- The independent accountant performed a review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective; the company continued its SAP implementation and related control enhancements.
Important facts for investors to verify
- Separate underlying organic growth and operating performance from the substantial acquisition-driven revenue increase; confirm the acquired businesses’ contribution and subsequent integration progress.
- Reconcile reported and adjusted earnings, margins and EPS, particularly the acquisition gain, integration costs, inventory step-up charges and other one-time items.
- Track debt maturities, commercial-paper refinancing, interest expense, credit ratings and liquidity after the acquisition-related increase in leverage.
- Monitor realization of anticipated integration benefits, final purchase accounting and the cash costs and timing of merger-related actions.
- Assess the assumptions behind 2010 cash-flow, capital-spending and pension-contribution expectations, as well as exposure to Venezuela, currency, commodities and interest rates.