PepsiCo, Inc. — Form 10-Q Summary
Reporting period: Third quarter (12 weeks) and year to date (36 weeks) ended September 4, 2010. The interim statements are unaudited. Comparisons with 2009 are materially affected by PepsiCo’s February 26, 2010 acquisitions of The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), whose results are included after acquisition.
Financial performance
| Metric | 12 weeks ended Sep. 4, 2010 | Prior-year period | 36 weeks ended Sep. 4, 2010 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $15.514 billion | $11.080 billion | $39.683 billion | $29.935 billion |
| Operating profit | $2.800 billion | $2.232 billion | $6.101 billion | $6.010 billion |
| Operating margin | 18.0% | 20.1% | 15.4% | 20.1% |
| Net income attributable to PepsiCo | $1.922 billion | $1.717 billion | $4.955 billion | $4.512 billion |
| Diluted EPS | $1.19 | $1.09 | $3.06 | $2.87 |
- Reported revenue grew 40% for the quarter and 33% year to date, largely reflecting the acquired bottling businesses. Worldwide servings increased 8% for the quarter and 6% year to date; beverage servings rose 11% and 8%, respectively, and snacks servings rose 2% in both periods.
- Quarterly operating profit rose 25%, while year-to-date operating profit increased only 1.5%. Reported operating margins fell 2.1 and 4.7 percentage points, respectively. Comparability items reduced year-to-date operating profit by 23 percentage points, according to management.
- Quarterly diluted EPS increased 9%; year-to-date diluted EPS increased 7%. Excluding listed comparability items, management reported diluted EPS growth of 13% for the quarter and 10% year to date.
- Segment highlights for the 36 weeks: FLNA operating profit rose 10%; QFNA fell 11%; LAF rose 2%; PAB rose 24% reported, or 62% excluding specified items; Europe rose 19% reported, or 31% excluding specified items; AMEA rose 2% reported and was approximately flat excluding a prior-year item.
Cash flow, balance sheet and capital
- Year-to-date operating cash flow was $5.788 billion, versus $4.403 billion. Capital spending was $1.670 billion; management operating cash flow, which deducts capital spending and includes asset-sale proceeds, was $4.173 billion.
- Cash and cash equivalents were $5.577 billion at September 4, 2010, compared with $3.943 billion at December 26, 2009. Current assets were $17.901 billion and current liabilities were $17.117 billion.
- Short-term obligations were $5.756 billion, including $3.622 billion of commercial paper; long-term debt was $18.445 billion. Total debt obligations on the balance sheet were approximately $24.2 billion. Debt increased substantially following the acquisitions and related financing.
- Year-to-date investing cash outflow was $5.444 billion, including $2.833 billion paid for PBG/PAS net of acquired cash and $900 million for Dr Pepper Snapple Group manufacturing and distribution rights. Financing cash inflow was $1.490 billion; share repurchases and dividends together returned $6.6 billion to shareholders.
- Cash dividends declared were $0.48 per share for the quarter and $1.41 year to date. The board increased the annual dividend 7% to $1.92 per share and authorized up to $15 billion of share repurchases through June 30, 2013.
Material changes, outlook and risks
- PepsiCo completed the PBG/PAS acquisitions for a purchase price of approximately $12.6 billion, including assumed debt and previously held equity interests. The acquisitions added substantial bottling operations, goodwill, franchise rights and debt; preliminary purchase accounting remained subject to revision.
- Year-to-date items included a $958 million gain on previously held PBG/PAS interests; $536 million of merger and integration charges (including $30 million in interest expense); $374 million of acquired-inventory fair-value costs; a $120 million Venezuela-related charge; a $145 million asset write-off; and a $100 million foundation contribution. Management said substantially all cash payments for merger and integration charges were expected by the end of 2011.
- Management expected 2010 operating cash flow of about $8.0 billion and net capital spending of about $3.3 billion. It stated that cash generation, credit facilities and other financing sources should meet operating, investing and financing needs, while cautioning that volatile credit markets could limit acceptable access to financing.
- Foreign exchange, commodity prices and interest rates are key exposures. Venezuela moved to hyperinflationary accounting; currency restrictions affected dividend remittances, and the bolivar’s official rate was devalued. Venezuela contributed less than 1% of revenue but accounted for 4% of cash and cash equivalents. A 1-percentage-point rise in interest rates was estimated to increase full-year net interest expense by $54 million.
- Moody’s and S&P lowered PepsiCo’s long-term ratings in early 2010; short-term ratings were affirmed with stable outlooks. The filing said a further downgrade could raise borrowing costs. Management reported no material changes to previously disclosed risk factors and did not expect pending ordinary-course legal proceedings to have a material adverse effect.
- The filing provides no clear full-year revenue, profit or EPS guidance. Management noted interim results are not necessarily indicative of full-year results. Disclosure controls were concluded to be effective; the interim financial statements received an independent accountant’s review, not an audit.
Investor verification priorities
- Separate acquired-bottler contributions from underlying growth and assess comparability against prior periods.
- Reconcile reported earnings and margins to the effects of the acquisition gain, integration costs, inventory adjustments and other one-time items.
- Track debt, commercial paper, interest expense, credit ratings and refinancing needs following the acquisitions.
- Compare the $8.0 billion operating-cash-flow and $3.3 billion capital-spending expectations with subsequent results; assess pension contributions and integration cash costs.
- Monitor final PBG/PAS purchase accounting, goodwill and franchise-rights impairment testing, and Venezuela currency and cash-remittance constraints.