PEPSICO INC annual report, FY2014

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PepsiCo, Inc. — 2014 Form 10-K Summary

Business context and reporting period

PepsiCo is a global food and beverage company operating in more than 200 countries and territories across six divisions: Frito-Lay North America, Quaker Foods North America, Latin America Foods, PepsiCo Americas Beverages, Europe, and Asia, Middle East and Africa. This 10-K reports the fiscal year ended December 27, 2014; the fourth quarter comprised 16 weeks.

Financial performance and liquidity

  • Fourth quarter: Revenue was $19.95 billion, down from $20.12 billion in Q4 2013. Net income attributable to PepsiCo was $1.31 billion versus $1.74 billion, and diluted EPS was $0.87 versus $1.12. Comparisons were affected by unusual items, including a prior-year tax benefit.
  • Full-year revenue and volume: Revenue was $66.68 billion, up 0.4% from $66.42 billion; organic revenue growth was 4%. Total servings increased 1%. Foreign-exchange translation reduced revenue growth by 3 percentage points.
  • Profit and margins: Operating profit was $9.58 billion, down 1%; operating margin was 14.4%, versus 14.6%. Gross profit was $35.80 billion, up from $35.17 billion; gross margin was approximately 53.7%, versus 53.0%. Net income attributable to PepsiCo fell 3% to $6.51 billion, and diluted EPS declined 1% to $4.27. Excluding items affecting comparability, diluted EPS was $4.63, up 6% (9% in constant currency).
  • Segment performance: Frito-Lay North America revenue rose 3% and operating profit 5%. Quaker Foods North America revenue fell 2%; operating profit rose 1%, including a gain from a cereal-business divestiture. PepsiCo Americas Beverages revenue was flat and operating profit declined 4%. Europe revenue fell 3%, largely due to currency, while operating profit rose 3%. AMEA revenue increased 3%, but operating profit fell 11%, partly because 2013 included a one-time Vietnam refranchising gain.
  • Cash flow: Operating cash flow was $10.51 billion, up from $9.69 billion. Capital spending was $2.86 billion; free cash flow was $7.76 billion, versus $7.00 billion. Free cash flow excluding specified items was $8.26 billion, up 1%.
  • Liquidity and debt: Cash and cash equivalents were $6.13 billion and short-term investments $2.59 billion, totaling $8.73 billion. Short-term obligations were $5.08 billion and long-term debt $23.82 billion. Current assets of $20.66 billion compared with current liabilities of $18.09 billion. No borrowings were outstanding under the $7.55 billion revolving credit agreements at year-end.
  • Capital returns: PepsiCo returned $8.7 billion to shareholders in 2014 through dividends and share repurchases. Dividends declared were $2.5325 per common share.

Material changes versus prior comparable periods

  • Annual revenue was nearly unchanged, while organic growth was offset in reported results by currency translation and portfolio changes.
  • Operating profit declined despite productivity savings exceeding $1 billion. Higher commodity costs, foreign exchange and strategic investment costs weighed on results; favorable pricing and productivity partly offset those pressures.
  • Net income and EPS fell year over year, in part because 2013 included a $209 million tax benefit from an IRS audit resolution. 2014 also included higher restructuring charges and a pension settlement charge.
  • Cash from operations improved, reflecting, among other factors, the absence of certain large tax payments made in 2013. Cash used for investing rose to $4.94 billion, including net purchases of marketable debt securities; cash used for financing rose to $8.26 billion, primarily reflecting shareholder returns and net repayment of short-term borrowings.

Outlook, commentary, risks and unusual items

  • Management emphasized global growth, broader nutrition-focused product offerings, e-commerce, innovation, productivity and sustainable business practices. It reported completing a three-year $3 billion productivity program and expects a five-year $5 billion program to deliver about $1 billion in annual savings from 2015 through 2019.
  • For 2015, management expected net capital spending of approximately $3 billion and shareholder returns of $8.5 billion to $9.0 billion. It announced a 7% increase in the annualized dividend to $2.81 per share, effective with the expected June 2015 payment, and a new $12 billion share-repurchase authorization. The filing does not provide a clear specific 2015 revenue or EPS forecast.
  • Key exposures include foreign exchange and political or economic instability in international markets, particularly Venezuela, Russia and other emerging markets; commodity and water availability and costs; changing consumer preferences and health-related regulation; intense competition and customer concentration; cybersecurity and operational disruptions; and litigation, tax and environmental matters.
  • Venezuela generated 2% of revenue and 4% of operating profit in 2014. PepsiCo recorded a $105 million after-tax remeasurement charge and had approximately $310 million of pending dividend-remittance requests. Management described significant uncertainty regarding exchange mechanisms; alternative year-end remeasurement scenarios could have resulted in additional charges.
  • Items affecting comparability included $418 million of restructuring and impairment charges, a $141 million pension lump-sum settlement charge, a $105 million Venezuela remeasurement charge, and $68 million of net mark-to-market commodity-hedge losses. Goodwill impairment was not recorded; Europe recorded a $23 million impairment of nonamortizable intangible assets.
  • Specific environmental penalty appeals in Poland and Hungary remained pending. Management stated that the outcomes of the disclosed proceedings and claims were not expected to have a material adverse effect on consolidated results or cash flows.

Important facts for investors to verify

  • Reconcile reported and adjusted earnings, especially the 2013 IRS tax benefit and 2014 restructuring, pension and Venezuela charges.
  • Assess whether organic revenue growth and productivity savings can offset currency effects, commodity inflation and continued pressure in beverage categories.
  • Monitor Venezuela’s exchange-rate and remittance developments, including the potential for further remeasurement charges or asset impairment.
  • Review debt maturities, refinancing needs, liquidity and the sustainability of planned dividends and buybacks alongside capital spending.
  • Track execution and actual costs and savings from the 2015–2019 productivity program, as well as pending legal, tax and environmental matters.