Business Context and Reporting Period
Company: PEPSICO INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 22, 2003 (12 weeks)
Reporting Calendar Change: Quaker businesses in the U.S. aligned their reporting calendar to fiscal periods in 2003, resulting in restated prior year quarterly results.
Key Financial Metrics
| Metric | 12 Weeks Ended 3/22/03 | 12 Weeks Ended 3/23/02 |
|---|---|---|
| Net Revenue | $5,530 million | $5,311 million |
| Operating Profit | $1,136 million | $1,001 million |
| Operating Profit Margin | 20.5% | 18.9% |
| Net Income | $777 million | $689 million |
| Diluted EPS | $0.45 | $0.38 |
| Cash from Operating Activities | $422 million | $692 million |
| Cash and Cash Equivalents (End of Period) | $926 million | $1,043 million |
| Long-Term Debt | $2,202 million | $2,187 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 4% driven by a 3% increase in total division servings (volume) and higher effective net pricing. Unfavorable foreign currency impacts reduced revenue growth by 1 percentage point.
- Profitability: Operating profit rose 13% and margins expanded 1.6 percentage points. This was aided by lower merger-related costs ($11 million vs. $36 million prior year) and a $25 million gain on the sale of the Mission pasta business.
- Division Performance:
- Frito-Lay North America: Revenue +5%, Operating Profit +6%. Volume grew 4% led by Cheetos and Quaker Chewy Granola bars.
- PepsiCo Beverages North America: Revenue +4%, Operating Profit +5%. Noncarbonated beverages grew 8% (Aquafina, Gatorade), offset by carbonated declines.
- PepsiCo International: Revenue +5%, Operating Profit +12%. Volume gains in beverages (Brazil, China, India) were partially offset by declines in Venezuela and Germany due to strikes and deposit requirements.
- Cash Flow: Operating cash flow decreased significantly to $422 million from $692 million, primarily due to a $528 million increase in working capital (seasonal receivables and inventory) and higher capital spending ($305 million vs. $187 million).
Guidance, Outlook, and Risks
- Share Repurchases: Management expects to spend between $1 billion and $2 billion on share buybacks in 2003. Through April 15, 2003, $353 million had been spent.
- Capital Spending: Full-year capital spending is expected to be between 5.5% and 6% of revenue (approx. $1.5 billion).
- Foreign Currency Risk: Operations outside North America generate ~30% of revenue. Declines in the Mexican peso negatively impacted results, though the British pound and euro provided some offset. Continued weakness in the peso is a risk.
- Macroeconomic Risks: Management cites weak macroeconomic conditions in Latin America, the impact of the war in Iraq, and increasing energy costs as key factors for 2003.
- Divestitures: Recent retailer bankruptcies are not expected to materially impact future results.
Investor Verification Checklist
- Working Capital Seasonality: Verify the impact of seasonal inventory and receivable build-up on the significant decline in operating cash flow.
- Foreign Currency Exposure: Monitor the Mexican peso's performance given its significant negative impact on International division results.
- Merger Integration Costs: Confirm the trajectory of Quaker Oats integration costs, which decreased significantly this quarter but remain a variable expense.
- Capital Allocation: Track progress against the $1 billion to $2 billion share repurchase guidance and the $1.5 billion capital spending target.
- Volume Trends: Assess the sustainability of volume growth in noncarbonated beverages and snacks versus declines in carbonated beverages and specific international markets (Venezuela, Brazil, Argentina).