Business Context and Reporting Period
Company: PEPSICO INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 4, 1999 (12 and 36 weeks)
Key Context: The reporting period is significantly impacted by the strategic separation of bottling operations. PepsiCo completed the IPO of The Pepsi Bottling Group (PBG) in April 1999, combined midwestern bottling operations with Whitman Corporation in May 1999, and formed a venture with PepCom Industries in July 1999. Consequently, bottling operations are largely deconsolidated from the 1999 results compared to 1998, while the Tropicana acquisition is now fully consolidated.
Key Financial Metrics
| Metric (in millions) | 12 Weeks Ended 9/4/99 | 36 Weeks Ended 9/4/99 | 36 Weeks Ended 9/5/98 |
|---|---|---|---|
| Total Net Sales | $4,591 | $14,687 | $15,155 |
| Operating Profit | $738 | $2,054 | $2,257 |
| Net Income | $484 | $1,560 | $1,632 |
| Diluted EPS | $0.32 | $1.04 | $1.07 |
| Operating Cash Flow (36 wks) | N/A | $1,842 | $1,924 |
| Cash & Equivalents (End) | $478 | $478 | $326 |
| Long-Term Debt | $2,641 | $2,641 | $4,028 |
| Short-Term Borrowings | $94 | $94 | $3,921 |
Note: Reported figures include a $1.0 billion pre-tax gain on bottling transactions recognized in the 36-week period.
Material Changes vs. Prior Period
- Revenue Decline: Total net sales decreased 3% year-to-date ($468 million) primarily due to the deconsolidation of PBG, PBO, and PepCom bottling operations. However, "New PepsiCo" (excluding bottling) sales increased 19% due to the inclusion of Tropicana and volume gains at Frito-Lay.
- Profitability: Reported operating profit declined 9% year-to-date. Ongoing "New PepsiCo" operating profit increased 9%, but margins were compressed by the Tropicana acquisition and increased advertising/marketing expenses.
- Net Income: Reported net income decreased 4% year-to-date. This decline is largely driven by the removal of bottling income, partially offset by a $1.0 billion pre-tax gain on the PBG IPO and Whitman transaction.
- Balance Sheet: Total assets decreased from $22.66 billion to $16.72 billion due to the transfer of bottling assets to unconsolidated affiliates. Long-term debt decreased significantly as bottling debt was transferred to PBG.
- Cash Flow: Operating cash flow remained strong at $1.84 billion. Investing cash outflows decreased significantly compared to 1998, which included the large cash outlay for the Tropicana acquisition.
Guidance, Outlook, and Risks
- Outlook: Management expects the full-year effective tax rate to be 32.2%. The restructuring program in Frito-Lay North America is expected to generate approximately $15 million in annual savings beginning in 2000.
- Year 2000 Compliance: Remediation is 99% complete. Incremental costs are estimated at $111 million (1998-2000), with 85% already spent. Risks remain regarding third-party bottlers, though contingency plans are in place.
- Macro-Economic Risks: Conditions in South America and Asia Pacific continue to negatively impact results. Unfavorable foreign currency impacts (primarily Mexico and Brazil) reduced net sales growth by 2 percentage points.
- Accounting Changes: The company is assessing the impact of SFAS 133 (Derivatives), effective for the 2001 fiscal year.
- Unusual Items: A $65 million impairment and restructuring charge was recorded in Q1 1999 related to Frito-Lay plant closures. A $1.0 billion gain was recognized on bottling transactions.
Investor Verification Checklist
- Deconsolidation Impact: Verify the specific contribution of "New PepsiCo" vs. bottling equity income to understand organic growth trends.
- Restructuring Costs: Confirm the timeline for the remaining Frito-Lay terminations (expected Q4 1999) and the realization of projected $15 million annual savings.
- Year 2000 Exposure: Review the status of the 1% of international bottling volume identified as "high risk" for Y2K compliance.
- Share Repurchases: Note that $986 million was spent on repurchases in the first 36 weeks, with an additional $180 million spent post-period (Sept-Oct 1999).
- Foreign Currency: Assess the sensitivity of future earnings to currency fluctuations in Mexico and Brazil, which currently exert downward pressure on sales.