PepsiCo, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, the 12 weeks ended March 19, 2011. Interim financial statements are unaudited and were reviewed by KPMG; the review is not an audit. Results for the quarter are not necessarily indicative of full-year results. All dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net revenue | $11,937 | $9,368 | +27%; growth substantially reflects acquisitions and the expanded consolidated bottling business. |
| Operating profit | $1,726 | $840 | +105%; reported operating margin was 14.5%, versus 9.0%. Comparability items contributed 102 percentage points to profit growth and 8.9 points to margin expansion. |
| Net income attributable to PepsiCo | $1,143 | $1,430 | -20%; prior year included a $958 gain related to the PBG and PAS acquisitions. |
| Diluted EPS | $0.71 | $0.89 | -20%. Excluding identified comparability items, diluted EPS was $0.74 versus $0.76; constant-currency adjusted EPS declined 3%. |
| Operating cash flow | $380 | $241 | Improved year over year, partly because the prior-year period included a $600 discretionary pension contribution. |
| Management operating cash flow | $(41) | $(17) | After capital spending and property-sale proceeds; adjusted for listed items, $78 versus $794, including the prior-year pension contribution and other items. |
| Cash and cash equivalents | $3,662 | $5,943 at Dec. 25, 2010 | Down $2,281 during the quarter, principally reflecting acquisition spending. |
| Total debt obligations | $27,198 | $24,897 at Dec. 25, 2010 | Comprises $6,256 short-term obligations and $20,942 long-term debt; $3.6 billion of commercial paper was outstanding. |
| Dividends declared per share | $0.48 | $0.45 | Quarterly dividend increased year over year. |
Cost of sales was $5,447 and SG&A was $4,739. Gross margin was approximately 54.4%, compared with 52.4% in the prior-year quarter. Net interest expense was $163, up $15, primarily due to higher average debt balances. The reported tax rate was 26.8%, compared with a 2.3% tax benefit in the prior year; the prior-year result reflected the largely non-taxable acquisition-related gain.
Business trends and material changes
- Total servings increased 9%: worldwide snacks grew 3% and beverages 12%.
- Revenue by segment: FLNA $2,904 (+1.5%); QFNA $640 (-6%); LAF $1,108 (+13%); PAB $4,531 (+64%); Europe $1,626 (+56%); AMEA $1,128 (+10%). PAB and Europe growth primarily reflects acquired businesses and expanded finished-goods sales.
- Segment operating profit was higher at FLNA (+6%), QFNA (+9%) and LAF (+17%), but lower in Europe (-47%) and AMEA (-6%). PAB reported $558 versus $73, while profit excluding specified comparability items rose 9% to $588.
- Europe’s profit decline reflected higher commodity costs, greater strategic-market investment and higher fixed costs; excluding specified items, operating profit declined 33%. AMEA cited higher commodity costs, partly offset by recovery of a previously written-off receivable.
- PepsiCo completed the acquisition of Wimm-Bill-Dann Foods (WBD) in February, raising ownership to approximately 77%. The quarter included $2.4 billion of net cash acquisition outflow. Purchase-price allocations remained preliminary; PepsiCo commenced tender offers for remaining WBD shares, with stated expiration dates in May 2011.
- Balance-sheet changes from December 25, 2010 included total assets rising to $73,085 from $68,153, goodwill increasing to $15,824 from $14,661, and nonamortizable intangible assets increasing to $31,242 from $26,444, principally reflecting WBD.
Cash, liquidity and capital allocation
Investing cash outflow was $2,979, including WBD acquisition spending and $433 of capital spending. Financing cash inflow was $226: short-term borrowings and stock-option proceeds were largely offset by $769 of dividends paid and $361 of common-share repurchases. The current ratio was approximately 0.98 at March 19, 2011, versus 1.11 at December 25, 2010. Management said cash generation, credit facilities and financing access should be adequate for operating, investing and financing needs, while cautioning that capital-market volatility could affect access or terms. PepsiCo anticipated approximately $2.5 billion of share repurchases in 2011.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or EPS guidance. Management expected to continue returning cash through dividends and repurchases while maintaining short-term credit ratings and financial flexibility.
- Key exposures include commodity and energy prices, foreign exchange, interest rates, and the possibility that higher input costs cannot be fully recovered through pricing. Foreign operations generated approximately 40% of quarterly revenue; favorable currency added about one percentage point to reported revenue growth.
- Venezuelan currency restrictions affected the ability to transfer dividends outside the country; Venezuelan operations represented 7% of cash and cash equivalents.
- Quarterly comparability items included $55 of merger and integration charges, $34 of acquired-inventory fair-value costs, and $31 of commodity-hedge mark-to-market gains. The prior-year quarter included the $958 PBG/PAS-related gain, $312 of merger and integration charges, $281 of inventory fair-value costs, a $120 Venezuela devaluation charge, a $145 asset write-off and a $100 foundation contribution.
- QFNA changed certain U.S. inventory accounting from LIFO to average cost; management reported a roughly $9 benefit to Q1 2011 consolidated net income, less than one cent per share. Prior periods were not restated.
- Two Polish environmental proceedings sought sanctions of $1.2 million and $700,000; appeals were pending. Management did not expect the outcome of proceedings, individually or collectively, to materially adversely affect consolidated results or cash flows.
- Management reported disclosure controls and procedures were effective. It continued a multiyear financial-systems migration and related control enhancements. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate underlying performance from acquisition-driven revenue and from the substantial prior-year PBG/PAS gain; reconcile reported and adjusted earnings.
- Monitor WBD tender-offer results, final purchase accounting, integration costs and the contribution of the acquired business to Europe’s results.
- Assess cash conversion against capital spending, working-capital needs, dividends, repurchases and short-term borrowing; confirm the continuing availability and cost of financing.
- Track Europe and AMEA margins, commodity-cost recovery, and foreign-exchange and Venezuela-related restrictions or exposures.
- Review the pending Polish proceedings and any updates to acquisition-related contingencies or internal-control implementation.