PepsiCo, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 25, 2010. The filing is an annual report, not a stand-alone Q4 filing; its fourth quarter comprised 16 weeks. Unless noted, amounts are USD and financial statement figures are in millions.
Business context and reporting period
PepsiCo is a global food, snack and beverage company operating in more than 200 countries. Its six reportable divisions were Frito-Lay North America, Quaker Foods North America, Latin America Foods, PepsiCo Americas Beverages, Europe, and Asia, Middle East & Africa.
A major change in 2010 was the February 26 acquisition of The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), bringing their bottling operations under PepsiCo’s control and consolidation. This materially changes year-over-year comparisons, especially in Americas Beverages and Europe; 2010 includes acquired results only from the applicable acquisition dates.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Net revenue | $57.84 billion | $43.23 billion | Up 34%, largely reflecting acquired bottling operations |
| Operating profit | $8.33 billion | $8.04 billion | Up 4%; reported operating margin fell to 14.4% from 18.6% |
| Net income attributable to PepsiCo | $6.32 billion | $5.95 billion | Up 6% |
| Diluted EPS | $3.91 | $3.77 | Up 4%; adjusted diluted EPS was $4.13, up 12% |
| Operating cash flow | $8.45 billion | $6.80 billion | Increase attributed mainly to acquired operations and working-capital comparisons |
| Capital spending | $3.25 billion | $2.13 billion | Management operating cash flow was $5.28 billion |
| Cash and cash equivalents | $5.94 billion | $3.94 billion | Year-end balance |
| Short-term obligations | $4.90 billion | $0.46 billion | Includes commercial paper and notes due in 2011 |
| Long-term debt | $20.00 billion | $7.40 billion | Increased substantially following acquisitions and related financing |
Gross profit was $31.26 billion, or approximately 54.1% of revenue, compared with $23.13 billion, or approximately 53.5%, in 2009. These margins are calculated from reported revenue and cost of sales. The reported operating-margin decline reflects, among other items, acquisition-related costs and the changed business mix.
Net cash used in investing activities was $7.67 billion, including $2.83 billion for PBG and PAS, $0.90 billion for manufacturing and distribution rights from Dr Pepper Snapple Group, and capital spending. Financing activities provided $1.39 billion. Cash dividends paid were $2.98 billion and common-share repurchases were $4.98 billion. Total assets rose to $68.15 billion from $39.85 billion.
For Q4, revenue was $18.16 billion versus $13.30 billion in Q4 2009; net income attributable to PepsiCo was $1.37 billion versus $1.43 billion, and diluted EPS was $0.85 versus $0.90. Consider the 16-week fiscal quarter and the acquisition-related changes when comparing these results.
Material changes, outlook, risks and unusual items
- Acquisition effects: PBG and PAS were acquired for a total purchase price of approximately $12.6 billion, including assumed debt and previously held equity interests. The acquisitions generated a $958 million gain on remeasurement of PepsiCo’s prior investments, while reported 2010 results also included $799 million of merger and integration charges and $398 million of acquired-inventory fair-value costs.
- Other unusual items: Results included a $120 million charge related to Venezuela’s currency devaluation and hyperinflationary accounting, a $145 million SAP-related asset write-off, a $100 million PepsiCo Foundation contribution, and a $178 million interest expense charge on a debt repurchase. The filing reports the prior-investment gain and these charges as items affecting comparability.
- Underlying performance: Total servings increased 7% in 2010, with snacks up 2% and beverages up 9%. Revenue and earnings growth should be assessed alongside acquisition effects; pro forma figures assuming PBG/PAS ownership for the full periods were revenue of $59.58 billion and diluted EPS of $3.60 for 2010, versus $57.47 billion and $4.09 for 2009. The filing cautions that these unaudited pro forma figures are not necessarily indicative of actual or future results.
- Management outlook: Priorities include sustainable beverage growth, expansion in emerging markets, integration of bottling operations, and development of nutrition products. Management expected 2011 net capital spending of about $3.7 billion and share repurchases of about $2.5 billion; it also expected approximately $160 million of pension contributions. These are stated expectations, not guarantees.
- Wimm-Bill-Dann (WBD): After year-end, PepsiCo completed its acquisition of approximately 66% of WBD for about $3.8 billion, taking total ownership to approximately 77%. The company expected an additional $1.4 billion of investing cash outflows to purchase remaining shares.
- Principal risks: Consumer preference shifts and health-related concerns; intense competition and retailer consolidation; commodity, energy and packaging cost volatility; foreign exchange and political risks, including Venezuela; supply-chain disruptions, climate and water constraints; regulatory changes and product liability; technology transformation and integration execution; and pension assumptions and funding needs. Wal-Mart and Sam’s Club represented approximately 12% of total 2010 revenue.
- Contingencies and controls: A Polish environmental audit sought $1.2 million in sanctions for alleged prior noncompliance; a further audit could result in an expected $0.9 million claim. Management stated that the outcome of ordinary-course proceedings was not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of reported revenue and operating-profit growth reflects PBG/PAS consolidation rather than organic performance; review full-period pro forma and segment comparisons.
- The reconciliation and repeatability of adjusted diluted EPS growth versus reported EPS, including the $958 million acquisition-related gain and other comparability items.
- Debt maturity, refinancing and liquidity exposure, including the rise in short-term obligations and total debt after the acquisitions.
- Whether planned integration benefits, 2011 capital spending and share repurchases proceed as expected, and the final cash cost of acquiring the remaining WBD shares.
- Exposure to currency restrictions and devaluation, commodity inflation, major-customer concentration, pension assumptions, and unresolved legal, environmental and tax matters.