01—Abstract
Summary
Summary of the 10-K filed March 24, 1999. Cited figures are marked; the original filing is the authoritative source.
PepsiCo's 1998 Form 10-K shows a company in transition.
Net sales rose 7% to $22.3 billiona, driven by volume gains across all businesses, a Tropicana acquisition contribution of $722 million, and higher effective net pricing at Frito-Lay North America. Reported operating profit fell 3.0% to $2.58 billion, and reported operating margin declined to 11.6% from 12.7%. Ongoing operating profit (excluding $288 million of unusual impairment and restructuring charges, largely from Russian bottling operations) fell 3.0% to $2.87 billion, as higher advertising, marketing, and selling expenses and costs tied to Pepsi One and WOW! product launches weighed on margins.
Bottom-line results were flattered by a one-time $494 millionb tax benefit from settling a Puerto Rico concentrate tax case with the IRS. Reported net income fell 7% to $1.99 billion and diluted EPS rose to $1.31, but ongoing income from continuing operations rose only 2% to $1.76 billion, with ongoing EPS up 5% to $1.16. Share count fell roughly 3% after $2.2 billion of buybacks, and cash dividends rose to $0.515 per share.
The most significant strategic items for investors are structural. PepsiCo is separating its company-owned bottling operations into The Pepsi Bottling Group through an IPO expected in the second quarter of 1999, which will reduce PepsiCo's direct capital spending (guided to about $1.2 billionc in 1999).
Balance sheet leverage increased: total assets reached $22.7 billion, intangible assets nearly doubled to $9.0 billiond following the Tropicana purchase, short-term borrowings rose to $3.9 billion, and PBG incurred $6.55 billion of debt in early 1999, of which $2.3 billion is guaranteed by PepsiCo. Management also flagged macroeconomic pressure in Brazil, Mexico, Russia, and Asia, and a planned Whitman bottling realignment that is expected to yield a net gain.
02—Key points
Key Highlights
- Net sales rose 7% to $22.35 billion, with volume gains in every segment and a $722 million contribution from the newly acquired Tropicana.
- Reported operating profit fell 3.0% to $2.58 billion; ongoing operating profit fell 3.0% to $2.87 billion as A&M and S&D spending rose faster than sales.
- Reported EPS of $1.31 (diluted) was helped by a one-time $494 million ($0.32/share) Puerto Rico tax settlement; ongoing EPS rose only 5% to $1.16.
- The Pepsi Bottling Group IPO, expected in Q2 1999, will spin off company-owned bottling operations and reduce PepsiCo's capital spending to about $1.2 billion in 1999.
- Total debt rose to about $7.9 billion (short-term borrowings of $3.9 billion) after the $3.3 billion Tropicana and $270 million TSSC acquisitions; PBG also took on $6.55 billion of debt, with $2.3 billion guaranteed by PepsiCo.
- Russian bottling operations were impaired ($218 million charge), and management expects continued pressure in Brazil and Mexico, which is adding risk to international margins.
- The company repurchased 59.2 million shares for $2.23 billion in 1998 and paid $0.515 in dividends per share, with 73.2 million shares remaining under the current buyback authority.
03—Questions
Frequently Asked Questions
Why did reported earnings per share rise while operating profit fell?
Reported diluted EPS rose to $1.31 from $0.95 in continuing operations, but this was mainly due to a $494 million tax benefit from settling a long-running IRS case on Puerto Rico concentrate operations, plus a roughly 3% reduction in average share count from buybacks. Operating profit fell 3.0%, and ongoing income from continuing operations rose only 2%, so investors should focus on the ongoing figures.
What is the Pepsi Bottling Group and how will it affect PepsiCo?
The Pepsi Bottling Group (PBG) is a new company holding PepsiCo's company-owned U.S., Canadian, Spanish, Greek, and Russian bottling operations. PBG plans an IPO in Q2 1999, with PepsiCo retaining a noncontrolling stake. The IPO is expected to produce a gain for PepsiCo net of costs, and it will shift bottling capital spending and bottling debt off PepsiCo's direct balance sheet, although PepsiCo guarantees $2.3 billion of PBG's long-term debt.
How did the Tropicana acquisition change PepsiCo's financial profile?
PepsiCo acquired Tropicana Products from Seagram for $3.3 billion in cash in Q3 1998, making it the largest branded juice business in the world. It contributed $722 million in net sales and $40 million of operating profit for 1998. The purchase was funded largely by one-year notes and commercial paper, which increased short-term borrowings and intangible assets (goodwill now $5.1 billion).
What are the main risks flagged in the filing?
Key risks include economic weakness in Brazil, Mexico, Russia, and Asia Pacific; foreign exchange exposure (a 10% currency move affects operating profit by about $45 million); rising A&M and S&D costs squeezing margins; commodity cost exposure; Year 2000 readiness, particularly among bottling franchisees; and the euro conversion. The company also expects about $65 million of additional Frito-Lay restructuring charges in Q1 1999.
04—Continue