10-QPeriod: Q3 FY2008

PEPSICO INC Quarterly Report for Q3 Ended Sep 6, 2008

Filed October 15, 2008For Securities:PEP

Summary

PepsiCo, Inc. reported its third-quarter 2008 financial results, showcasing a 11% increase in net revenue for the 12-week period to $11.24 billion, and a 13% increase year-to-date to $30.52 billion. While net income saw a 10% decrease for the quarter to $1.58 billion, it remained relatively flat year-to-date, increasing by 1% to $4.42 billion. This performance reflects a mixed operational environment, with strong revenue growth driven by volume and pricing across most segments, particularly in emerging markets like Latin America, the UK/Europe, and MEAA. However, the company faced headwinds including higher commodity costs and a significant unfavorable impact from mark-to-market losses on commodity hedges, which notably impacted operating profit. The company also announced a "Productivity for Growth" program in October 2008, anticipating pre-tax charges of $550-$600 million in Q4 2008 for workforce reductions and plant closures, aimed at streamlining operations and improving cost competitiveness. Despite these challenges, PepsiCo continued its commitment to returning capital to shareholders, with substantial share repurchases and dividend payments.

Financial Highlights

29 data points
Beta

Revenue

$11.24B

53.1% Gross Margin

Net Income

$1.58B

14.0% Net Margin

EPS (Diluted)

$0.99

Cash & Equivalents

$1.52B

Free Cash Flow

$4.66B

Financial Statements
Beta
Revenue$11.24B
Cost of Revenue$5.27B
Gross Profit$5.98B
SG&A Expenses$3.97B
Operating Income$1.99B
Interest Expense$73.00M
Net Income$1.58B
EPS (Basic)$1.01
EPS (Diluted)$0.99

Key Highlights

  • 1Net revenue increased by 11% to $11.24 billion for the 12 weeks ended September 6, 2008, and by 13% year-to-date to $30.52 billion, demonstrating strong top-line growth.
  • 2Net income for the 12-week period decreased by 10% to $1.58 billion, largely due to unfavorable mark-to-market impacts on commodity hedges and the absence of prior-year tax benefits. Year-to-date net income saw a slight 1% increase to $4.42 billion.
  • 3Operating profit for the 12-week period decreased by 4% to $1.98 billion, significantly impacted by $176 million in mark-to-market net losses on commodity hedges.
  • 4The company announced a 'Productivity for Growth' program expecting to incur $550-$600 million in pre-tax charges in Q4 2008 for restructuring, including approximately 3,300 job eliminations and plant closures.
  • 5Significant investments were made in acquisitions, particularly the joint acquisition of Russia's JSC Lebedyansky, with total acquisitions and investments in noncontrolled affiliates reaching $1.7 billion for the 36-week period.
  • 6Share repurchases remained substantial, with $4.2 billion used in the 36-week period, alongside $1.9 billion in dividend payments, underscoring a commitment to returning capital to shareholders.
  • 7Volume growth was positive across most segments, with particular strength in snacks in MEAA and beverages in UKEU and LAF, although the North America Beverages segment experienced volume declines.

Frequently Asked Questions

The primary driver for the 10% decrease in net income for the 12 weeks ended September 6, 2008, compared to the prior year, was the unfavorable impact of mark-to-market losses on commodity hedges, which reduced net income by $112 million. Additionally, the absence of $115 million in tax benefits recognized in the prior year related to foreign tax matters also contributed to the decline.

Acquisitions played a significant role, with $1.7 billion invested in acquisitions and investments in noncontrolled affiliates during the first 36 weeks of 2008. Notable was the joint acquisition of Russia's JSC Lebedyansky. These acquisitions contributed to revenue growth in segments like Latin America Foods and UK & Europe, although they also increased cash used for investing activities.

Announced in October 2008, the 'Productivity for Growth' program aims to simplify the organization, improve cost competitiveness, and streamline the product portfolio. It involves global workforce reductions (approximately 3,300 positions) and plant closures. The company expects to incur a pre-tax charge of $550 million to $600 million in the fourth quarter of 2008, comprising severance costs, asset impairments, and other related expenses.

PepsiCo utilizes derivative contracts to mitigate exposure to price fluctuations in raw material and energy costs. However, certain of these derivatives do not qualify for hedge accounting. For these, gains and losses are marked to market and recognized in the income statement. In the 12 weeks ended September 6, 2008, these mark-to-market adjustments resulted in net losses of $176 million that impacted operating profit and $112 million that impacted net income.