PepsiCo, Inc. — 2009 Form 10-K
Business context and reporting period. PepsiCo reported its fiscal year ended December 26, 2009, a 52-week year; its fourth quarter covered 16 weeks. The company operates global food, snack and beverage businesses across six reporting divisions. This summary covers the annual filing and includes selected fourth-quarter results; it is not a standalone quarterly report. Dollar amounts are in U.S. dollars.
Financial results and key metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net revenue | $43.232 billion | $43.251 billion |
| Operating profit | $8.044 billion | $6.959 billion |
| Operating margin | 18.6% | 16.1% |
| Net income attributable to PepsiCo | $5.946 billion | $5.142 billion |
| Diluted EPS | $3.77 | $3.21 |
| Net cash from operating activities | $6.796 billion | $6.999 billion |
| Capital spending | $2.128 billion | $2.446 billion |
| Cash and cash equivalents at year-end | $3.943 billion | $2.064 billion |
| Short- and long-term debt obligations | $7.864 billion | $8.227 billion |
Gross profit was $23.133 billion, or approximately 53.5% of revenue, versus $22.900 billion, or approximately 53.0%, in 2008. Net margin was approximately 13.8%, compared with 11.9%. Net income and diluted EPS rose 16% and 17%, respectively, while revenue was essentially flat. Management operating cash flow, a company-defined non-GAAP measure, was $4.726 billion; excluding specified pension, restructuring and merger payments, it was $5.583 billion.
Fourth-quarter revenue was $13.297 billion versus $12.729 billion in 2008. Net income attributable to PepsiCo was $1.434 billion versus $719 million, and diluted EPS was $0.90 versus $0.46.
Material changes and business performance
- Annual servings increased slightly: snack servings rose 1%, while beverage servings declined 1%.
- North America beverages remained under pressure: PAB revenue fell 8%, beverage bottler case sales volume fell 6%, and North American carbonated soft drink volume fell 5%. Gatorade and Aquafina volumes also declined.
- International results were mixed by currency and region. AMEA revenue rose 9% and operating profit 21%; Europe revenue fell 2%, with foreign exchange reducing revenue growth by 12 percentage points. Latin America Foods revenue fell 3%, largely due to currency, despite favorable pricing.
- Reported operating profit benefited from a $274 million favorable commodity-hedge mark-to-market impact, compared with a $346 million loss in 2008, and substantially lower restructuring charges ($36 million versus $543 million). The 2009 results also included $61 million of PBG/PAS merger costs and a one-time gain related to formation of a Japan snacks joint venture.
- Cash from operations declined $203 million, principally reflecting a $1.0 billion discretionary U.S. pension contribution, restructuring payments and merger costs, partly offset by favorable working-capital comparisons. Year-end cash increased, while reported debt obligations declined.
Outlook, risks and unusual items
- PepsiCo agreed to acquire bottlers PBG and PAS, with shareholder approval received in February 2010; regulatory conditions remained outstanding when the filing was signed. The proposed consideration was a mix of cash and PepsiCo shares, subject to proration. The company hoped to close by the end of February 2010.
- After year-end, PepsiCo issued $4.25 billion of notes to fund part of the proposed acquisitions and related costs. It also expected to pay Dr Pepper Snapple Group $900 million upon closing for specified manufacturing and distribution arrangements.
- Management estimated 2010 capital spending of about $3.6 billion and pension contributions of about $700 million, up to approximately $600 million discretionary. Share repurchases together with a voluntary $600 million pre-tax pension contribution were expected to total about $5 billion.
- Management expected the 2010 annual tax rate to be approximately the same as 2009’s 26.0%. No clear full-year EPS or revenue guidance is provided in the supplied filing text.
- Venezuela’s January 2010 currency devaluation and the shift to hyperinflationary accounting were expected to result in a one-time first-quarter 2010 charge of approximately $125 million. Venezuelan operations generated less than 2% of 2009 revenue but represented 7% of cash and cash equivalents; currency controls restricted dividend remittances.
- Key risks include merger approval, integration and synergy execution; potential credit-rating downgrades and higher borrowing costs; currency and commodity volatility; weak beverage demand and consumer shifts; customer and bottler concentration; supply-chain disruption; regulatory and product-related risks; and pension funding and asset-return assumptions. Moody’s was reviewing ratings for possible downgrade, and S&P had a negative outlook.
- Management said ordinary-course legal proceedings were 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
- Whether and when the PBG and PAS transactions closed, their final cash-versus-stock mix, financing needs, integration costs and realized synergies.
- Underlying operating performance excluding hedge mark-to-market gains, restructuring benefits, merger costs and the Japan joint-venture gain—especially the trajectory of North American beverage volumes.
- Cash conversion and liquidity after pension contributions, planned capital spending, dividends, repurchases, merger payments and new borrowing.
- Actual impact of Venezuela’s devaluation and hyperinflation accounting, including the reported charge and ability to access or repatriate cash.
- Credit-rating developments and the resulting effect on borrowing costs and leverage after the acquisitions.