PepsiCo, Inc. — Q2 2011 Form 10-Q
Business context and period. The filing covers the 12 and 24 weeks ended June 11, 2011; financial statements are unaudited and the interim results are not necessarily indicative of full-year results. PepsiCo reports six segments across foods and beverages. Comparisons are affected by the 2010 acquisitions of PBG and PAS and the February 2011 acquisition of Wimm-Bill-Dann Foods (WBD), particularly in beverage and European results.
Key financial metrics
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are to the corresponding 2010 period.
| Metric | 12 weeks | 24 weeks |
|---|---|---|
| Net revenue | $16,827; up 14% | $28,764; up 19% |
| Operating profit | $2,754; up 12% | $4,480; up 36% |
| Operating margin | 16.4%, down 0.2 percentage points | 15.6%, up 1.9 percentage points |
| Net income attributable to PepsiCo | $1,885; up 18% | $3,028; essentially flat versus $3,033 |
| Diluted EPS | $1.17; up 20% | $1.89; up 1% |
| Net cash from operating activities | Not presented for the 12-week period | $2,353, versus $2,442 |
For the 24 weeks, net capital spending was $1,231, leaving management operating cash flow of $1,156, down from $1,511. PepsiCo’s non-GAAP management operating cash flow excluding specified items was $1,365, versus $2,171. Cash and cash equivalents were $2,913 at June 11, down from $5,943 at year-end 2010; short-term investments were $431.
At June 11, short-term obligations were $5,715 and long-term debt obligations were $21,607, totaling $27,322, compared with $24,897 at December 25, 2010. Current assets of $17,917 were slightly below current liabilities of $18,057. The company declared dividends of $0.515 per share for the quarter and $0.995 for the 24 weeks.
Material changes and operating performance
- Reported 24-week operating profit growth was substantially affected by prior-year and acquisition-related items: the 2010 period included a $958 gain on previously held PBG/PAS interests, as well as larger merger and inventory fair-value charges and other unusual charges. Management said comparability items contributed 31 percentage points to reported operating-profit growth and 4.2 points to margin improvement.
- On management’s adjusted, non-GAAP basis, diluted EPS was $1.21 for the quarter, up 10% (8% on a constant-currency basis), and $1.95 for the 24 weeks, up 5% (3% constant currency). These measures exclude specified comparability items and are not GAAP results.
- Quarterly revenue growth included 3 percentage points from foreign currency; for the 24 weeks, currency added 2 points. Total servings increased 6% in the quarter and 7% over 24 weeks.
- WBD drove much of Europe’s reported revenue growth: Europe revenue rose 52% in the quarter and 53% over 24 weeks, with WBD contributing 33 and 30 percentage points, respectively. WBD acquisition effects also increased reported European volumes and assets.
- North American beverage performance was pressured by declines in carbonated soft drinks and higher commodity and distribution costs. Excluding comparability items, Americas Beverages operating profit declined 7% in the quarter and 1% over 24 weeks. Quaker Foods 24-week revenue fell 3%, with volume down 6%.
Outlook, risks, and unusual items
- Management anticipated approximately $2.5 billion of share repurchases in 2011 and said it expected cash generation, credit facilities, and other financing sources to meet operating, investing, and financing needs. The filing provides no full-year revenue or EPS guidance.
- PepsiCo acquired additional WBD shares through tender offers, raising ownership to approximately 98.6%. After quarter-end it exercised Russian squeeze-out rights and expected to own 100% by mid-September 2011. The acquisition’s preliminary fair-value allocations remained subject to revision.
- After quarter-end, PepsiCo entered into revolving credit facilities totaling $5.75 billion and paid $784 million to repurchase $766 million principal amount of WBD debt; it expected a $16 million interest-expense charge in Q3. At June 11, commercial paper outstanding was $2.2 billion.
- Key exposures include commodity prices, foreign exchange, and interest rates. About 50% of 24-week revenue came from outside the U.S.; Venezuela currency restrictions affected the ability to remit dividends, and Venezuelan operations represented 9% of cash and cash equivalents. Management noted that capital-market volatility could limit access to financing.
- Merger and integration charges were $113 million for the 24 weeks, with substantially all related cash payments expected by year-end. A Hungarian authority assessed a subsidiary approximately $220,000 for alleged wastewater violations; the appeal was pending. Management said other routine legal proceedings were not expected to have a material adverse effect.
- Disclosure controls were judged effective. The filing reported continued financial-system migration and related control-process enhancements, but no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Separate underlying growth from acquisition, foreign-exchange, and timing effects, especially for WBD and the PBG/PAS integration.
- Reconcile reported earnings and margins with the company’s non-GAAP adjustments, including the prior-year PBG/PAS gain and acquisition-related charges.
- Monitor working-capital needs, cash balances, debt maturities, commercial paper, and the cost and availability of credit.
- Assess whether higher commodity costs, foreign-exchange movements, and weaker beverage or Quaker volumes persist, and whether planned buybacks are consistent with cash generation.
- Track completion and final purchase accounting for WBD, as well as the outcome of the pending wastewater-sanctions appeal.