What was the impact of the restaurant spin-off on PepsiCo's financial statements?

Pizza Hut, Taco Bell, KFC, PepsiCo Food Systems, and several non-core restaurant businesses were classified as discontinued operations. Their results are reported separately, which produced $651 million of discontinued-operations income in 1997, including a $500 million gain on the PFS sale. Continuing operations now reflect only the beverage and snack food businesses, so year-over-year comparisons are cleaner but reported net income is not a clean measure of recurring earnings.

Why did reported operating profit rise 30% while ongoing profit rose only 13%?

Reported operating profit benefited from lapping 1996's larger unusual charges of $576 million, compared with $290 million of unusual items in 1997. Excluding these items, ongoing operating profit rose 13% to $2.95 billion, driven by segment profit growth of 14%, partly offset by higher unallocated corporate expenses and foreign exchange losses.

How did PepsiCo use the cash it received from the spin-off?

PepsiCo used the cash mainly to reduce debt and repurchase shares. Long-term debt fell about $3.2 billion to $4.95 billion, and the company bought back $2.46 billion of stock. Management said it plans to gradually re-leverage the balance sheet over time, and it expects acquisition and investment spending to increase in 1998.

Which parts of the business are weakest, and what risks should investors watch?

North American Beverages ongoing operating profit declined 4% because of lower effective net pricing, higher selling and advertising costs, and an intensely competitive environment. International Beverages, however, improved sharply from a loss to a small profit. Other risks include currency volatility (a 10% move would affect operating profit by less than $50 million), commodity costs, and Year 2000 remediation, which management says will not be material but cannot yet be fully quantified.

Is the dividend growing, and how strong is the shareholder return story?

The 1997 dividend declared was $0.49 per share, up from $0.445 in 1996, and dividends have increased for 25 consecutive years. Shareholders also benefited from heavy buybacks, with 69 million shares repurchased in 1997 (about 4.5% of shares outstanding at the start of the year). Year-end shares outstanding fell to 1.502 billion from 1.545 billion.

PEP 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 24, 1998. Cited figures are marked; the original filing is the authoritative source.

PepsiCo's 1997 10-K shows a company in transition after spinning off its restaurant businesses (Pizza Hut, Taco Bell, KFC) to shareholders on October 6, 1997 as TRICON Global Restaurants, and selling PepsiCo Food Systems.

Continuing operations now consist of two segments: Beverages (Pepsi-Cola) and Snack Foods (Frito-Lay). Net sales rose 3% to $20.9 billion^a, and reported net income more than doubled to $2.14 billion ($1.36 per diluted share), though that figure is inflated by $651 million of discontinued-operations income, including a $500 million gain on the PFS sale. Reported operating profit rose 30% to $2.66 billion, while ongoing operating profit grew 13% to $2.95 billion, and ongoing diluted EPS from continuing operations was $1.10 versus $0.92 in 1996.

The balance sheet and cash flow picture improved markedly. Cash flow from operations was $3.4 billion^b, free cash flow from continuing operations nearly doubled to $1.38 billion, and the company received a $4.5 billion cash distribution from TRICON before the spin-off. Management used these proceeds to cut long-term debt from $8.2 billion to $4.9 billion and repurchased $2.5 billion of stock (69 million shares).

Shareholders' equity is still modest at $6.9 billion^c, and the company is signaling it plans to gradually re-leverage over time. Segment results were uneven: North American Beverages ongoing profit fell 4%, while International Beverages improved sharply from a loss, and Snack Foods grew ongoing profit 11% on 6% sales growth.

For investors, the key takeaways are the cleaner, more focused packaged goods business, a materially stronger balance sheet, and an aggressive capital return program. Risks to watch include competitive pricing pressure in North American beverages, continued international volatility, $290 million^d of unusual charges in 1997, and Year 2000 remediation costs that management says will not be material but cannot yet be fully quantified.

02—Key points

Key Highlights

Net sales rose 3% to $20.917 billion in 1997, driven by volume gains and partly offset by unfavorable currency translation.
Reported net income more than doubled to $2.142 billion ($1.36 per diluted share), but this includes $651 million from discontinued operations, mainly the restaurant spin-off and the $500 million PFS gain.
Ongoing diluted EPS from continuing operations rose 20% to $1.10, while reported diluted EPS from continuing operations was $0.95.
Long-term debt fell from $8.17 billion to $4.95 billion, and the company reduced debt using $4.5 billion received from TRICON.
Share repurchases totaled $2.46 billion (69 million shares), with $132 million of authority remaining.
Free cash flow from continuing operations nearly doubled to $1.38 billion, and operating cash flow reached $3.42 billion.
Snack Foods ongoing operating profit grew 11% to $1.82 billion, while Beverages ongoing operating profit rose 18% to $1.37 billion, aided by a turnaround in International Beverages.

03—Questions

Frequently Asked Questions

What was the impact of the restaurant spin-off on PepsiCo's financial statements?
Pizza Hut, Taco Bell, KFC, PepsiCo Food Systems, and several non-core restaurant businesses were classified as discontinued operations. Their results are reported separately, which produced $651 million of discontinued-operations income in 1997, including a $500 million gain on the PFS sale. Continuing operations now reflect only the beverage and snack food businesses, so year-over-year comparisons are cleaner but reported net income is not a clean measure of recurring earnings.
Why did reported operating profit rise 30% while ongoing profit rose only 13%?
Reported operating profit benefited from lapping 1996's larger unusual charges of $576 million, compared with $290 million of unusual items in 1997. Excluding these items, ongoing operating profit rose 13% to $2.95 billion, driven by segment profit growth of 14%, partly offset by higher unallocated corporate expenses and foreign exchange losses.
How did PepsiCo use the cash it received from the spin-off?
PepsiCo used the cash mainly to reduce debt and repurchase shares. Long-term debt fell about $3.2 billion to $4.95 billion, and the company bought back $2.46 billion of stock. Management said it plans to gradually re-leverage the balance sheet over time, and it expects acquisition and investment spending to increase in 1998.
Which parts of the business are weakest, and what risks should investors watch?
North American Beverages ongoing operating profit declined 4% because of lower effective net pricing, higher selling and advertising costs, and an intensely competitive environment. International Beverages, however, improved sharply from a loss to a small profit. Other risks include currency volatility (a 10% move would affect operating profit by less than $50 million), commodity costs, and Year 2000 remediation, which management says will not be material but cannot yet be fully quantified.
Is the dividend growing, and how strong is the shareholder return story?
The 1997 dividend declared was $0.49 per share, up from $0.445 in 1996, and dividends have increased for 25 consecutive years. Shareholders also benefited from heavy buybacks, with 69 million shares repurchased in 1997 (about 4.5% of shares outstanding at the start of the year). Year-end shares outstanding fell to 1.502 billion from 1.545 billion.

04—Continue

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