How did the Quaker Oats merger affect PepsiCo's reported 2001 results?

The merger was accounted for as a pooling-of-interests, so all prior periods were restated to combine both companies. The 2001 reported results include $356 million of pre-tax merger-related costs ($322 million after-tax, or $0.18 per share) plus $31 million of other impairment and restructuring charges. Because these charges depress reported earnings, comparable results that exclude them show faster growth: comparable net income rose 15% to $3.0 billion versus reported growth of 5%.

Which business segments drove growth in 2001?

Worldwide Snacks was the largest contributor, with Frito-Lay North America comparable operating profit up 10% and Frito-Lay International comparable operating profit up 17%. Pepsi-Cola North America comparable operating profit rose 13%, aided by the SoBe acquisition and new products such as Mountain Dew Code Red and Sierra Mist. Gatorade/Tropicana North America grew comparable operating profit 7%, while Quaker Foods North America was flat on sales but grew operating profit 6%.

What should investors expect for reported sales in 2002?

Adoption of EITF 01-9 is expected to reduce reported net sales by about $3.4 billion on a 2001 basis, since certain promotional payments to customers will be presented as reductions of revenue rather than SG&A expense. Selling, general and administrative expenses will fall by the same amount, so operating profit is not affected. Investors comparing 2002 sales with prior years should adjust for this presentation change.

How strong is PepsiCo's balance sheet and cash generation?

The company generated $4.2 billion in net operating cash flow in 2001 and reduced long-term debt to $2.65 billion from $3.01 billion. It maintained A1 (Moody's) and A (S&P) debt ratings, and $750 million of revolving credit facilities remained undrawn at year-end. Cash and equivalents fell to $683 million after $1.7 billion of share repurchases, $994 million of dividends, and a $421 million contribution to U.S. pension plans. Management said no pension contribution is expected in 2002.

What risks or contingent obligations should investors monitor?

PepsiCo guarantees $2.3 billion of Bottling Group LLC long-term debt and has about $425 million of obligations that could increase its ownership in bottlers if triggered. Other exposures include a $62 million impairment on its Turkish bottling investment, weaker currencies in Brazil and the United Kingdom, and roughly $90 million of guarantees tied to Tricon leases. Quaker integration costs of $450 million to $550 million in total are expected through 2003, and the company's 10-year agreement not to distribute Gatorade through its U.S. bottling system limits certain marketing options.

PEP 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 2002. Cited figures are marked; the original filing is the authoritative source.

PepsiCo's fiscal 2001 10-K reflects a transformative year, anchored by the August 2, 2001 merger with The Quaker Oats Company, accounted for as a pooling-of-interests with all prior periods restated.

Reported net sales rose 6% to $26.9 billion^a and reported operating profit rose 5% to $4.0 billion, but the headline figures are depressed by $356 million of merger-related costs and $31 million of other impairment and restructuring charges. Excluding these items and the 2000 fifty-third week, comparable net sales grew 7%, comparable operating profit grew 11%, and comparable operating margin expanded 0.7 points to 16.4%. Comparable net income rose 15% to $3.0 billion, or $1.66 per diluted share, versus reported net income of $2.66 billion, or $1.47 per diluted share.

Growth was broad-based. Worldwide Snacks (Frito-Lay North America and International) and Pepsi-Cola North America, boosted by the SoBe acquisition, Mountain Dew Code Red, and Sierra Mist, were the primary drivers. Quaker Foods North America was flat in sales but grew operating profit 6%^b.

Balance sheet strength was evident: long-term debt fell to $2.65 billion^c from $3.01 billion, operating cash flow was $4.2 billion, and the company returned cash through $994 million of dividends and $1.7 billion of share repurchases. Management guided that merger synergies could reach $400 million annually by 2005, with up to $175 million achieved by the end of 2002, and that adoption of EITF 01-9 will reduce reported net sales by roughly $3.4 billion in 2001 (with a corresponding SG&A reduction, so operating profit is unaffected).

Investors should note several watch items: the reclassification of promotional payments under EITF 01-9 will materially lower reported sales in 2002, comparable and reported results diverge significantly because of merger costs, a $62 million^d impairment on the Turkish bottling investment, and foreign currency headwinds in Brazil and the United Kingdom. The company also disclosed an unconditional guarantee of $2.3 billion of Bottling Group LLC debt and commitments for additional obligations that may increase its ownership in bottlers.

02—Key points

Key Highlights

Reported net sales increased 6% to $26.9 billion; comparable net sales increased 7%, driven by volume gains, higher effective net pricing, and the SoBe acquisition.
Reported operating profit rose 5% to $4.0 billion; comparable operating profit rose 11% to $4.4 billion, with comparable margin up 0.7 points to 16.4%.
Reported diluted EPS was $1.47 (up 4%); comparable diluted EPS was $1.66 (up 14%), excluding $356 million in merger-related costs and other charges.
Quaker merger closed August 2, 2001, issuing roughly 306 million shares; management targets $400 million in annual synergies by 2005, with up to $175 million by end-2002.
Operating cash flow was $4.2 billion; long-term debt was reduced to $2.65 billion from $3.01 billion, and cash used for dividends ($994 million) and buybacks ($1.7 billion) was funded internally.
EITF 01-9 adoption in 2002 will reduce reported net sales by about $3.4 billion (2001 basis) with an offsetting SG&A reduction, a presentation change with no operating profit impact.
Contingent obligations include a $2.3 billion guarantee of Bottling Group LLC debt and roughly $425 million in commitments that could increase PepsiCo's ownership of bottlers.

03—Questions

Frequently Asked Questions

How did the Quaker Oats merger affect PepsiCo's reported 2001 results?
The merger was accounted for as a pooling-of-interests, so all prior periods were restated to combine both companies. The 2001 reported results include $356 million of pre-tax merger-related costs ($322 million after-tax, or $0.18 per share) plus $31 million of other impairment and restructuring charges. Because these charges depress reported earnings, comparable results that exclude them show faster growth: comparable net income rose 15% to $3.0 billion versus reported growth of 5%.
Which business segments drove growth in 2001?
Worldwide Snacks was the largest contributor, with Frito-Lay North America comparable operating profit up 10% and Frito-Lay International comparable operating profit up 17%. Pepsi-Cola North America comparable operating profit rose 13%, aided by the SoBe acquisition and new products such as Mountain Dew Code Red and Sierra Mist. Gatorade/Tropicana North America grew comparable operating profit 7%, while Quaker Foods North America was flat on sales but grew operating profit 6%.
What should investors expect for reported sales in 2002?
Adoption of EITF 01-9 is expected to reduce reported net sales by about $3.4 billion on a 2001 basis, since certain promotional payments to customers will be presented as reductions of revenue rather than SG&A expense. Selling, general and administrative expenses will fall by the same amount, so operating profit is not affected. Investors comparing 2002 sales with prior years should adjust for this presentation change.
How strong is PepsiCo's balance sheet and cash generation?
The company generated $4.2 billion in net operating cash flow in 2001 and reduced long-term debt to $2.65 billion from $3.01 billion. It maintained A1 (Moody's) and A (S&P) debt ratings, and $750 million of revolving credit facilities remained undrawn at year-end. Cash and equivalents fell to $683 million after $1.7 billion of share repurchases, $994 million of dividends, and a $421 million contribution to U.S. pension plans. Management said no pension contribution is expected in 2002.
What risks or contingent obligations should investors monitor?
PepsiCo guarantees $2.3 billion of Bottling Group LLC long-term debt and has about $425 million of obligations that could increase its ownership in bottlers if triggered. Other exposures include a $62 million impairment on its Turkish bottling investment, weaker currencies in Brazil and the United Kingdom, and roughly $90 million of guarantees tied to Tricon leases. Quaker integration costs of $450 million to $550 million in total are expected through 2003, and the company's 10-year agreement not to distribute Gatorade through its U.S. bottling system limits certain marketing options.

04—Continue

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