PepsiCo, Inc. — FY 2011 Form 10-K
Business context and reporting period. PepsiCo is a global food and beverage company operating in more than 200 countries and territories across six reportable divisions. This annual filing covers the fiscal year ended December 31, 2011; the fiscal year included 53 weeks, with the extra week in the fourth quarter. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net revenue | $66.504 billion | $57.838 billion | +15% |
| Gross profit | $34.911 billion | $31.263 billion | +12% |
| Operating profit | $9.633 billion | $8.332 billion | +16% |
| Operating margin | 14.5% | 14.4% | +0.1 percentage point |
| Net income attributable to PepsiCo | $6.443 billion | $6.320 billion | +2% |
| Diluted EPS | $4.03 | $3.91 | +3% |
| Operating cash flow | $8.944 billion | $8.448 billion | +6% |
- Gross margin was approximately 52.5%, compared with 54.1% in 2010, reflecting higher cost of sales relative to revenue.
- Management’s non-GAAP diluted EPS, excluding identified comparability items, was $4.40, up 7% from $4.13; it is not a GAAP measure.
- Management operating cash flow, a non-GAAP measure after capital spending and property-sale proceeds, was $5.689 billion; it was $6.145 billion excluding specified items.
- Capital spending was $3.339 billion. Investing cash outflow was $5.618 billion, including $2.428 billion net cash paid for Wimm-Bill-Dann Foods (WBD).
- Financing cash outflow was $5.135 billion. Cash dividends paid were $3.157 billion and common share repurchases were $2.489 billion.
- At year-end, cash and cash equivalents were $4.067 billion; current assets were $17.441 billion and current liabilities $18.154 billion. Short-term obligations were $6.205 billion and long-term debt $20.568 billion.
- Total assets were $72.882 billion, versus $68.153 billion. Total debt, combining short-term obligations and long-term debt, was approximately $26.8 billion, compared with $24.9 billion.
Fourth-quarter and year-over-year developments
- Fourth-quarter revenue was $20.158 billion, versus $18.155 billion in the comparable 2010 quarter. Net income attributable to PepsiCo was $1.415 billion, versus $1.365 billion; diluted EPS was $0.89, versus $0.85.
- FY revenue growth partly reflected acquisitions and the extra week. The 53rd week added $623 million of revenue, $109 million of operating profit and $64 million of net income, or $0.04 per share.
- WBD, acquired in 2011, materially increased Europe division results. Europe revenue rose 41% to $13.560 billion; WBD contributed 29 percentage points of that growth. PepsiCo completed its purchase of the remaining WBD shares and owned 100% by September 2011.
- Revenue increased across most divisions: PAB +10%, Europe +41%, AMEA +17%, LAF +13% and FLNA +6%; QFNA was flat. Growth reflects differing combinations of volume, pricing, foreign exchange and acquisitions.
- Reported earnings included $383 million of restructuring and impairment charges, $329 million of merger and integration charges, $46 million of inventory fair-value adjustments and $102 million of net mark-to-market commodity hedge losses. In 2010, results included a $958 million gain on previously held bottler interests and $799 million of merger and integration charges.
Outlook, commentary and risks
- Management said it planned to increase advertising and marketing spending by approximately $500–$600 million in 2012, predominantly in North America, and was pursuing a multi-year productivity program.
- The productivity program was expected to incur about $910 million of pre-tax charges in total: approximately $425 million in 2012 and the balance over 2013–2015. Management expected about $550 million of related cash expenditures in 2012. The program was intended to lower costs and fund brand building and innovation.
- Management anticipated approximately $3.0 billion of 2012 capital spending and approximately $3.0 billion of 2012 common share repurchases. The Board approved a 4% dividend increase, to $2.15 per share beginning with the June 2012 payment.
- PepsiCo cited deteriorating European economic conditions and currency volatility, commodity-cost inflation, intense competition, consumer preference shifts, customer concentration, foreign exchange exposure, supply interruptions, regulatory and product-liability risks, and acquisition integration as risks to results.
- Management expected pension and retiree medical expenses to increase in 2012, largely due to lower discount rates, and projected approximately $1.3 billion of pension and retiree medical contributions, up to approximately $1 billion of which could be discretionary.
- The company said its cash generation, credit facilities and financing access should be adequate for operating and investment needs, while cautioning that capital-market volatility or a ratings downgrade could impair access or raise borrowing costs. Legal and environmental matters were described as arising in the normal course; management did not expect their final outcomes to materially adversely affect consolidated results or cash flows.
- No specific 2012 revenue or EPS guidance is provided in the supplied filing text.
Important investor verification points
- Separate underlying operating trends from the extra fiscal week, acquisitions, foreign exchange, divestitures and other comparability items; confirm the reconciliation of adjusted EPS to GAAP results.
- Assess whether WBD integration and the productivity program deliver expected savings, and track the remaining charges and cash costs.
- Review debt maturities, refinancing needs, the below-one current ratio, and the effect of planned shareholder returns on liquidity and leverage.
- Monitor commodity and currency exposures, particularly Europe and Russia, and the company’s ability to offset cost increases through pricing.
- Review pension funding assumptions and expected contributions, as well as the $2.167 billion of gross income-tax reserves and $660 million of accrued tax-related interest at year-end.
- Note that management’s and the auditor’s internal-control assessment excluded WBD, which represented 9% of consolidated assets and 4% of revenue; the company was still integrating WBD into its financial-control processes.