PepsiCo, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the 12 and 36 weeks ended September 3, 2011, compared with the periods ended September 4, 2010. PepsiCo operates across foods and beverages in North America and internationally. Interim financial statements are unaudited; KPMG performed a review, not an audit. Results for the 36-week period are not necessarily indicative of full-year results.
The year-over-year comparison is affected by the 2010 acquisitions of Pepsi Bottling Group and PepsiAmericas, and the February 2011 acquisition of Wimm-Bill-Dann Foods (WBD). WBD’s contribution and favorable currency materially increased reported international growth.
Key financial metrics
Amounts are in millions of dollars except per-share data. Parentheses show decreases or outflows.
| Metric | 12 weeks ended Sep. 3, 2011 | 12 weeks ended Sep. 4, 2010 | 36 weeks ended Sep. 3, 2011 | 36 weeks ended Sep. 4, 2010 |
|---|---|---|---|---|
| Net revenue | $17,582 | $15,514 | $46,346 | $39,683 |
| Operating profit | $2,906 | $2,800 | $7,386 | $6,101 |
| Operating margin | 16.5% | 18.0% | 15.9% | 15.4% |
| Net income attributable to PepsiCo | $2,000 | $1,922 | $5,028 | $4,955 |
| Diluted EPS | $1.25 | $1.19 | $3.14 | $3.06 |
- For the 36 weeks, net revenue rose 17%, operating profit 21%, net income 1.5%, and diluted EPS 2%. Reported operating-profit growth included a 17-percentage-point contribution from items affecting comparability; the prior-year period included a large gain on previously held bottling interests.
- For the third quarter, revenue increased 13%, while operating profit increased 4% and margin declined 1.5 percentage points. Management cited revenue growth partly offset by higher commodity costs. Reported net income rose 4% and diluted EPS rose 5%.
- Third-quarter diluted EPS excluding listed comparability items was $1.31 versus $1.22, up 7%; this is a non-GAAP measure.
- Operating cash flow was $5,834 for 36 weeks, versus $5,788. Capital spending was $1,962 versus $1,670. Management operating cash flow, a non-GAAP measure, was $3,918 versus $4,173; excluding specified items, it was $4,233 versus $5,300.
- Cash and cash equivalents were $3,083 at September 3, 2011, down from $5,943 at December 25, 2010; short-term investments were $452. Current assets were $17,834 and current liabilities $17,565.
- Short-term obligations were $5,070 and long-term debt obligations $21,781. PepsiCo reported $2.8 billion of commercial paper outstanding. Cash dividends declared were $1.51 per share for the 36 weeks, versus $1.41.
Material changes and segment performance
- WBD contributed to Europe’s reported 37% third-quarter and 46% 36-week revenue growth; Europe operating profit rose 19% in both periods. WBD acquisition effects and currency account for a substantial portion of the growth.
- Latin America Foods revenue rose 19% in the quarter and 17% year to date, supported by pricing, volume, and favorable currency. AMEA revenue rose 25% and 18%, respectively, also supported by volume, pricing, and currency.
- PepsiCo Americas Beverages third-quarter operating profit declined 2.5%; excluding listed comparability items, it declined 5%, with higher commodity and selling and distribution costs cited. Year-to-date reported operating profit rose 24%, but declined 3% excluding comparability items.
- Quaker Foods North America revenue declined 2% over 36 weeks as volume fell 5%, despite higher operating profit. The inventory accounting-method change contributed 3 percentage points to its operating-profit growth.
- Third-quarter total servings increased 4.5%; the 36-week increase was 6%. Currency increased revenue growth by 3.5 percentage points in the quarter and nearly 3 points year to date.
Outlook, commentary, risks, and unusual items
- No specific full-year earnings or revenue guidance is stated in the supplied filing text. Management anticipated approximately $2.5 billion of share repurchases in 2011 and said cash generation, financing access, and credit facilities should be adequate for operating, investing, and financing needs.
- Management cautioned that capital-market volatility could impair financing access. International operations generated about 50% of 36-week revenue, exposing results to currency and political risks. Venezuelan currency restrictions impeded dividend transfers; Venezuelan operations represented 10% of cash and cash equivalents.
- Higher commodity costs pressured operating performance. The company uses hedging and sourcing initiatives, but said its ability to recover cost increases through pricing may be limited. About 40% of debt, after derivatives, was exposed to variable rates.
- Merger and integration charges were $174 million before tax for 36 weeks ($147 million after tax, or $0.09 per share), compared with $536 million before tax in the prior period. WBD fair-value inventory adjustments added $41 million of costs in the current 36-week period.
- During the third quarter, PepsiCo issued $500 million of 0.800% notes due 2014 and $750 million of 3.000% notes due 2021, and paid $784 million to repurchase $766 million principal of WBD debt, recording a $16 million interest charge.
- Management reported effective disclosure controls. It continued migrating financial systems to SAP and said shipment timing related to implementation reduced growth in certain divisions. No material changes to previously disclosed risk factors were reported.
- Legal matters included a paid environmental fine of about $200,000 in China and a possible Russian civil claim of about $300,000; management did not expect the proceedings to materially affect consolidated results, cash flows, or financial position.
Important facts for investors to verify
- How much reported revenue and operating-profit growth reflects WBD and other acquisition effects, favorable currency, and comparability items rather than underlying organic performance.
- Whether pricing and volume can offset elevated commodity and distribution costs, particularly in Americas Beverages and Quaker Foods.
- Cash conversion and working-capital trends, including the decline in management operating cash flow and the company’s planned dividends and share repurchases.
- Debt maturities, commercial-paper reliance, refinancing access, and sensitivity to interest rates and currency movements.
- Final WBD purchase-accounting valuations and integration costs; the filing said acquisition valuations remained preliminary.
- Potential effects of Venezuelan restrictions, SAP implementation, and outstanding tax-position reserves, which were $2,084 million at September 3, 2011.