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58 PepsiCo, Inc. 2009 Annual Report
Management’s Discussion and Analysis
We annually review our capital structure with our Board,
including our dividend policy and share repurchase activity. In
the second quarter of 2009, our Board of Directors approved a
6% dividend increase from $1.70 to $1.80 per share. We did not
repurchase any shares in 2009 under our $8.0 billion repurchase
program authorized by the Board of Directors in the second quarter
of 2007 and expiring on June 30, 2010. The current $8.0 billion
authorization has approximately $6.4 billion remaining for repur-
chase. We anticipate that in 2010 share repurchases together with
a voluntary $600 million pre-tax pension plan contribution will
total about $5 billion.
Management Operating Cash Flow
We focus on management operating cash flow as a key element
in achieving maximum shareholder value, and it is the primary
measure we use to monitor cash flow performance. However, it
is not a measure provided by accounting principles generally
accepted in the U.S. Therefore, this measure is not, and should
not be viewed as, a substitute for U.S. GAAP cash flow measures.
Since net capital spending is essential to our product innovation
initiatives and maintaining our operational capabilities, we believe
that it is a recurring and necessary use of cash. As such, we believe
investors should also consider net capital spending when evaluating
our cash from operating activities. Additionally, we consider certain
items, including the impact of a discretionary pension contribution
in the first quarter of 2009, net of tax, restructuring-related cash
payments, net of tax, and PBG/PAS merger cost payments in 2009
in evaluating management operating cash flow. We believe investors
should consider these items in evaluating our management
operating cash flow results. The table below reconciles net cash
provided by operating activities, as reflected in our cash flow
statement, to our management operating cash flow excluding
the impact of the above items.
2009 20082007
Net cash provided by operating activities $«6,796 $«6,999 $«6,934
Capital spending (2,128) (2,446) (2,430)
Sales of property, plant and equipment 58 98 47
Management operating cash flow 4,726 4,651 4,551
Discretionary pension contribution
(after-tax) 640 – –
Restructuring payments (after-tax) 168 180 22
PBG/PAS merger cost payments 49 – –
Management operating cash flow
excluding above items $«5,583 $«4,831 $«4,573
In 2009, management operating cash flow was used primarily
to pay dividends. In 2008 and 2007, management operating cash
flow was used primarily to repurchase shares and pay dividends.
We expect to continue to return approximately all of our manage-
ment operating cash flow to our shareholders through dividends
and share repurchases. However, see “Our Business Risks” for certain
factors that may impact our operating cash flows.
Credit Ratings
Our objective is to maintain short-term credit ratings that provide
us with ready access to global capital and credit markets at
favorable interest rates. As anticipated, following the public
announcement of the PBG Merger Agreement and the PAS Merger
Agreement, Moody’s indicated that it was reviewing our ratings for
possible downgrade and S&P indicated that its outlook on PepsiCo
was negative and it could lower our ratings. Moody’s has noted
that the additional debt involved in completing the PBG Merger
and the PAS Merger and our consolidated level of indebtedness
following completion of the PBG Merger and the PAS Merger could
result in a rating lower than the current rating level. S&P has
indicated that when additional information becomes available, S&P
will review whether, following completion of the PBG Merger and
the PAS Merger, any of our senior unsecured debt will, in S&P’s view,
be structurally subordinated, which could result in a lower rating for
PepsiCo’s debt. Our current long-term debt rating is Aa2 at Moody’s
and A+ at S&P. We have maintained strong investment grade
ratings for over a decade. Each rating is considered strong invest-
ment grade and is in the first quartile of its respective ranking
system. These ratings also reflect the impact of our anchor bottlers’
cash flows and debt. See also “Our Business Risks.”
Credit Facilities and Long-Term Contractual Commitments
See Note 9 for a description of our credit facilities and long-term
contractual commitments.
Off-Balance-Sheet Arrangements
It is not our business practice to enter into off-balance-sheet
arrangements, other than in the normal course of business.
However, at the time of the separation of our bottling operations
from us, various guarantees were necessary to facilitate the
separation. In 2008, we extended our guarantee of a portion of
Bottling Group LLC’s long-term debt in connection with the
refinancing of a corresponding portion of the underlying debt.
88045_pepsico-09ar_33-59_R1.indd 58 2/24/10 4:51 PM