As of December 31, 2003, the company had approximately $1. 58 billion in lines of credit and other short-term credit facilities available, of which $246 million was outstanding. This amount of outstanding debt is attributed to their international operations. The issuances of debt in 2003 primarily included $304 million in commercial paper with maturities of 90 days or less. Their overall short term borrowings (loans and notes payable) consist mostly of commercial paper issued in the United States.
Some of their short term notes payable are explained by their acquisitions of businesses. The lines of credit mentioned previously were available for general corporate purposes, including commercial paper back-up. Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk. This is a sound way to manage short term debt since the interest rates are generally substantially lower than a straight bank loan. It is a great way for a company to obtain cash quickly for their inventory needs, for example.
Another way that short term financing has been used is in the acquisition of businesses. This use can be either beneficial or detrimental. If the acquired company operates profitably, Coca-Cola would be able to use those profits t pay off debt; however, if the opposite occurs and the acquired company assumes a loss, Coca-Cola could suffer a dip in Net Income. The overall picture, however, shows that Coca-Cola has been around for quite some time and has been able to recover from poor decisions. One small acquisition is not going to end the reign of the Coca-Cola Company. PepsiCo, Inc.
is comprised of four divisions: Frito-Lay North America, PepsiCo Beverages North America (PBNA), PepsiCo International, and Quaker Foods North America. PepsiCo International and PBNA are the two divisions that manufacture and distribute beverages; however, their Annual Report and 10-K comprise PepsiCo as a whole. From 2001 to 2002, PepsiCo witnessed a greater increase in operating profit (18. 1%) and net income (25%) than compared to growth from 2002 to 2003 (11. 3% and 18. 9%, respectively). However, 2002 to 2003 had a slightly higher increase in net revenue (7. 4%) than 2001 to 2002 (6. 8%).
This change in growth can be attributed to strategies related to marketable securities, credit policy, foreign currency transactions, inventory and sources and use of short-term financing. PepsiCo identifies its strength as their “strong cash generating capability and financial condition” (PepsiCo, Inc. , 2003). PepsiCo experienced a decrease of cash provided by operating activities from 2002 to 2003 of approximately $3 million. The operating cash flows obtained from net income are the company’s main source of liquidity. The company attributes the decrease in working capital to higher net tax payments.
To their advantage, their pension costs have decreased providing some relief. By continuing to lower their pension plan contributions and reducing tax payments they can reduce the margin and hopefully maintain, or increase, cash from operations in 2004. In looking at their 2003 investing activities, PepsiCo invested $1. 3 billion of their capital and spent $1 billion on short-term investments. Their capital spending decreased $100,000 from 2002 to 2003. They increased short-term investments of three months or less from a loss of $14 million in 2002 to a gain of $25 million in 2003.
They apparently made excellent short-term investment decisions here potentially increasing working capital. The company anticipates capital spending will continue at a rate of 5% to 5. 5% of net revenue in 2004. PepsiCo values its investors and believes strongly that they need to pay one-third of their previous year’s net income in dividends. The company also believes it is necessary to use capital for new product concepts and innovations. Overall, their cash equivalent at the end of 2003 was $820 million. From 2001 to 2002 they increased cash 140% and from 2002 to 2003 they decreased cash by 50%.