PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 5, 2009 (12 weeks), with year-to-date results for the 36 weeks ended September 5, 2009. Comparatives are the periods ended September 6, 2008. Amounts are in millions except per-share data. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | 12 weeks 2009 | 12 weeks 2008 | 36 weeks 2009 | 36 weeks 2008 |
|---|---|---|---|---|
| Net revenue | $11,080 | $11,244 | $29,935 | $30,522 |
| Operating profit | $2,232 | $1,991 | $6,010 | $5,739 |
| Operating margin | 20.1% | 17.7% | 20.1% | 18.8% |
| Net income attributable to PepsiCo | $1,717 | $1,576 | $4,512 | $4,423 |
| Diluted EPS | $1.09 | $0.99 | $2.87 | $2.74 |
| Net cash from operating activities | Not separately reported for the quarter | $4,403 | $4,658 |
- Quarter revenue declined 1.5%, while operating profit rose 12%, net income attributable to PepsiCo rose 9%, and diluted EPS rose 10%. Year to date, revenue declined 2%, operating profit increased 5%, net income increased 2%, and diluted EPS increased 5%.
- Operating profit growth was significantly aided by commodity-hedge mark-to-market gains: $29 for the quarter and $191 year to date, versus losses of $176 and $119, respectively, in the comparable 2008 periods. Management said these gains contributed 10 percentage points to quarterly operating-profit growth and 5 points year to date.
- Year-to-date operating cash flow fell to $4,403 from $4,658. It included a discretionary $1.0 billion pension contribution ($640 after tax) and $183 of restructuring payments. Management’s non-GAAP management operating cash flow, excluding specified pension and restructuring effects, was $4,121 versus $3,368.
- Cash and cash equivalents were $3,254 at September 5, 2009, versus $2,064 at December 27, 2008. Current assets were $12,416 and current liabilities $9,295. Short-term obligations were $511 and long-term debt obligations $7,434, compared with $369 and $7,858 at year-end, respectively.
- Year-to-date investing cash use was $1,245, including $1,138 of capital spending; financing cash use was $1,987, including $2,032 of dividends paid. The company expects about $2.1 billion in 2009 net capital spending, excluding the proposed bottler transactions.
Material changes and segment performance
- Quarterly revenue was pressured by currency, which reduced consolidated revenue performance by 6 percentage points; the year-to-date impact was 7 points. Total servings rose 1% in the quarter; worldwide beverage servings increased 0.5% and snacks servings increased 2%. Year-to-date total servings increased slightly.
- Frito-Lay North America was a relative strength: quarter revenue and operating profit each rose 5%; year-to-date each rose 7%. Quaker Foods North America revenue rose 7% in the quarter but operating profit slipped 1%; year-to-date revenue rose 1% and operating profit 4%.
- Latin America Foods revenue declined 10% and operating profit 11% in the quarter, largely reflecting currency effects and volume declines. PepsiCo Americas Beverages revenue fell 9% and operating profit 8%; North American beverage case volume declined 6%, including weakness in non-carbonated drinks and carbonated soft drinks.
- Europe revenue declined 2% in the quarter, while operating profit increased 1%; acquisitions partly offset substantial currency headwinds. Asia, Middle East and Africa revenue rose 9% and operating profit 49%, with the latter benefiting materially from acquisitions and a one-time gain related to contributing the Japan snacks business to a Calbee joint venture.
- Bottling equity income declined 27% for the quarter and 34% year to date, principally because the prior-year periods included gains on sales of PBG and PAS stock. Net interest expense increased $11 for the quarter and $89 year to date, reflecting higher average debt and lower investment returns.
Outlook, transactions, risks and unusual items
- Management stated it believed operating cash generation, credit facilities and other debt-financing options would be adequate for operating, investing and financing needs, while warning that continued volatility in capital and credit markets could impair access or increase its cost. The filing provides no clear numerical full-year earnings or revenue guidance.
- The company expected to invest about $2.1 billion in net capital spending in 2009. The board approved a 6% annual dividend increase, from $1.70 to $1.80 per share. No common shares were repurchased during the first 36 weeks, and the company did not anticipate repurchases in the fourth quarter.
- On August 3, 2009, PepsiCo agreed to acquire The Pepsi Bottling Group and PepsiAmericas. Consideration for each company was structured as an election of PepsiCo shares or cash, subject to proration intended to make each transaction 50% cash and 50% stock. Completion depended on stockholder and regulatory approvals and other conditions; neither merger had a financing condition. PepsiCo arranged a $4.0 billion bridge commitment, with final documentation not yet completed.
- Management identified integration, expected synergies, transaction costs, potential employee/customer disruption, regulatory approvals and increased debt as risks. The filing estimated pro forma indebtedness of approximately $19.7 billion after both mergers, versus PepsiCo standalone indebtedness of approximately $8.0 billion as of September 5, 2009.
- Other notable items included $36 of year-to-date Productivity for Growth restructuring charges (after-tax impact $29); the program’s initiatives were completed in the second quarter, with substantially all related cash payments expected by 2010. The company also warned that Venezuela could become hyperinflationary by early 2010 and that a change in its official exchange rate could negatively affect results; Venezuelan operations represented less than 2% of revenue but 9% of cash and cash equivalents, and currency restrictions constrained dividend transfers abroad.
- Foreign currency, commodity prices and interest rates remain market risks. Approximately 56% of debt was exposed to variable rates after related derivatives. Management described counterparty credit risk as low and said hedge ineffectiveness was not material. The filing reported no material changes to previously disclosed risk factors other than those concerning the proposed mergers.
- Management said disclosure controls were effective. The company continued migrating financial processing systems to SAP and enhancing related control design and documentation; it reported no other material change in internal control over financial reporting. Management believed ongoing legal proceedings would not have a material adverse effect.
Important facts for investors to verify
- Whether the PBG and PAS mergers closed, their final financing and consideration mix, integration costs, debt levels and realized synergies.
- How much operating-profit and EPS growth persists after excluding hedge mark-to-market gains, the Japan joint-venture gain and other comparability items.
- Whether beverage volume weakness, currency pressure and declines in Latin America and parts of Europe continue, and whether pricing offsets costs without further volume losses.
- Full-year cash conversion and funding needs, including pension contributions, capital spending, dividends and potential merger-related spending.
- Developments in Venezuela’s exchange-rate and inflation treatment, and the effect on reported results and cash repatriation.