PepsiCo, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). PepsiCo is a global food and beverage company operating through six reportable segments and serving more than 200 countries and territories.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenue | $63.525 billion | $62.799 billion | +1% reported; +2% organic |
| Gross profit | $34.740 billion | $34.590 billion | +0.4% |
| Operating profit | $10.509 billion | $9.785 billion | +7% |
| Operating margin | 16.5% | 15.6% | +0.9 percentage points |
| Net income attributable to PepsiCo | $4.857 billion | $6.329 billion | -23% |
| Diluted EPS | $3.38 | $4.36 | -23% |
| Operating cash flow | $9.994 billion | $10.673 billion | -6% |
| Free cash flow | $7.205 billion | $7.732 billion | -7% |
Reported revenue growth was held below organic growth partly by unfavorable foreign exchange and prior-year comparison effects. Fiscal 2016 included an extra reporting week that added $657 million of revenue. Productivity actions generated more than $1 billion in cost reductions; effective net pricing also supported operating profit. Commodity inflation reduced operating profit growth by 6 percentage points.
Fiscal 2017 fourth-quarter net revenue was $19.526 billion and operating profit was $2.593 billion. The quarter included a provisional $2.451 billion tax expense from U.S. tax legislation; PepsiCo reported a $710 million net loss attributable to the company for the quarter.
Segments and material changes
Revenue performance varied: ESSA grew 8%, Latin America 6%, and FLNA 2%; QFNA and North America Beverages each declined 2%, while AMENA declined 5% as currency translation weighed on reported results. Organic revenue growth was 6% in ESSA, 5% in Latin America and AMENA, 3% in FLNA, and negative 2% in North America Beverages.
Operating profit rose across FLNA, Latin America, ESSA and AMENA, but declined 9% in North America Beverages and 2% in QFNA. ESSA’s increase included an 8-percentage-point contribution from the Britvic stake sale; AMENA benefited from prior-year impairment comparisons and Jordan beverage refranchising. PepsiCo sold its minority stake in Britvic for a reported $95 million gain and refranchised its Jordan beverage business, recording a $140 million gain.
Cash, debt and liquidity
- Cash and cash equivalents were $10.610 billion; short-term investments were $8.900 billion, totaling $19.510 billion in cash and short-term investments.
- Current assets were $31.027 billion versus current liabilities of $20.502 billion. Short-term debt was $5.485 billion and long-term debt was $33.796 billion.
- Long-term debt increased from $30.053 billion in 2016. Cash from operations fell mainly because of working-capital comparisons and higher cash tax payments.
- Capital spending was $2.969 billion. The company returned $6.5 billion to shareholders through dividends and common share repurchases during 2017.
- PepsiCo stated that cash generation, revolving facilities and debt markets should provide adequate funding for operating, investing and financing needs. It had no borrowings under its $3.75 billion five-year and $3.75 billion 364-day revolving facilities at year-end.
Outlook, risks and unusual items
- Management described its Performance with Purpose strategy as supporting continued performance and long-term sustainable growth, with emphasis on product choices, customer relationships, productivity, talent, environmental initiatives and e-commerce. No specific 2018 revenue or EPS guidance is stated in the supplied filing text.
- Management expected 2018 net capital spending of approximately $3.6 billion and planned approximately $7 billion of shareholder returns: $2 billion in repurchases and $5 billion in dividends. The board announced a 15.2% increase in the annualized dividend to $3.71 per share, effective with the expected June 2018 payment, and authorized a new $15 billion repurchase program beginning July 2018.
- The Tax Cuts and Jobs Act produced a provisional net tax expense of $2.5 billion, including an approximately $4 billion transition-tax provision partly offset by a $1.5 billion deferred-tax remeasurement benefit. The estimates remained provisional, with finalization expected by the end of 2018. Management expected the 2018 annual tax rate to be in the low twenties, while noting uncertainty around provisions including GILTI.
- The multi-year productivity plan was extended through 2019. Expected total pre-tax charges increased to approximately $1.3 billion, with cash expenditures of approximately $985 million; 2018 plan charges were estimated at $254 million.
- Key risks include changing health and wellness preferences, competition and private-label growth, retailer concentration and e-commerce disruption, commodity and water availability and costs, foreign exchange and political volatility, new product taxes or labeling rules, cyber incidents, and litigation or product-safety matters. Walmart and Sam’s Club represented approximately 13% of consolidated revenue.
- PepsiCo had deconsolidated its Venezuelan businesses in 2015 after a $1.4 billion impairment; the conditions persisted through 2017, and no U.S.-dollar cash had been received from those entities since deconsolidation. Management said the disclosed legal matters were not expected to have a material adverse effect; a Polish environmental matter was resolved through investment up to the penalty amount.
Important facts for investors to verify
- Track the final accounting and cash-payment schedule for the provisional tax expense and transition-tax liability.
- Assess whether organic growth, especially beverage volumes in North America, improves without reliance on pricing or prior-year comparison effects.
- Evaluate the sustainability of productivity savings against commodity inflation, operating costs and the extended restructuring program.
- Monitor debt growth, cash conversion, the planned pension contribution of $1.4 billion, and the company’s shareholder-return commitments.
- Review foreign-exchange exposure, particularly in emerging markets, and any material changes in tax, regulatory, litigation or supply risks.
KPMG issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 30, 2017.