PepsiCo, Inc. — FY 2016 Form 10-K
Business context and period: Global food and beverage company operating across six reportable segments and more than 200 countries and territories. The fiscal year ended December 31, 2016 and included 53 reporting weeks, versus 52 weeks in 2015. Fiscal fourth-quarter figures are noted separately below. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenue | $62.799 billion | $63.056 billion |
| Gross profit / margin | $34.590 billion / 55.1% | $34.325 billion / 54.4% |
| Operating profit / margin | $9.785 billion / 15.6% | $8.353 billion / 13.2% |
| Net income attributable to PepsiCo | $6.329 billion | $5.452 billion |
| Diluted EPS | $4.36 | $3.67 |
| Operating cash flow | $10.404 billion | $10.580 billion |
| Free cash flow (company-defined) | $7.463 billion | $7.908 billion |
| Long-term debt | $30.053 billion | $29.213 billion |
| Cash and cash equivalents; short-term investments | $9.158 billion; $6.967 billion | $9.096 billion; $2.913 billion |
- Reported revenue was essentially flat, while organic revenue grew 4%. The extra week added $657 million of revenue; management said its impact was fully offset by incremental business investment.
- Reported operating profit rose 17%, and diluted EPS rose 19%. Management’s adjusted diluted EPS was $4.85, up 6%; adjusted growth on a constant-currency basis was 9%. Adjusted measures exclude specified items and are not GAAP measures.
- Operating cash flow declined modestly, reflecting $459 million of discretionary pension contributions and unfavorable working-capital comparisons, partly offset by lower cash tax payments. Capital spending was $3.040 billion.
- Total current assets were $27.089 billion and current liabilities were $21.135 billion. Short-term debt obligations were $6.892 billion; total debt obligations on the balance sheet were approximately $36.9 billion.
- Dividends declared per common share were $2.96, compared with $2.7625 in 2015. The company repurchased $3.0 billion of common stock during 2016.
Material changes and unusual items
- Revenue mix and segment trends diverged: North America Beverages revenue increased 3%, Frito-Lay North America increased 5%, while Latin America fell 17% and Europe Sub-Saharan Africa fell 3% on a reported basis. Currency and Venezuela deconsolidation materially affected reported international comparisons.
- Foreign exchange reduced 2016 revenue growth by 3 percentage points. Excluding currency, structural changes and the extra week, organic revenue growth was 4%.
- GAAP results included a $373 million impairment of PepsiCo’s 5% indirect interest in Tingyi-Asahi Beverages, a $233 million pre-tax debt-redemption charge, and a $242 million pre-tax pension settlement charge. The prior year included $1.359 billion of Venezuela impairment charges, which substantially affected year-over-year comparisons.
- PepsiCo redeemed $2.5 billion principal amount of high-coupon notes due 2018 and 2019, paying a $233 million pre-tax redemption charge. It also issued new long-term debt during the year.
- In the fourth quarter, revenue was $19.515 billion versus $18.585 billion a year earlier; operating profit was $2.381 billion versus $2.240 billion; net income attributable to PepsiCo was $1.401 billion versus $1.718 billion; diluted EPS was $0.97 versus $1.17.
Outlook, management commentary and risks
- Management said it met or exceeded its financial goals for 2016 and highlighted productivity, innovation, portfolio shifts toward healthier products, and its Performance with Purpose strategy. It reported approximately $1 billion in annual productivity savings since 2012.
- For 2017, the company expected net capital spending of approximately $3 billion. It announced an expected total shareholder return of approximately $6.5 billion in 2017: about $2.0 billion in repurchases and $4.5 billion in dividends. The annualized dividend was increased 7% to $3.22 per share, effective with the dividend expected in June 2017.
- The filing does not provide a clear numerical 2017 revenue or earnings forecast in the supplied text. Management stated that cash generation, credit facilities and debt-market access were expected to support operating, investing and financing needs, while noting that market access is not assured.
- Key risks include changing consumer preferences and health concerns, product regulation and potential beverage or product taxes, intense competition and retailer concentration, commodity and water supply costs, foreign-exchange exposure, political and economic instability, climate-related disruption, cybersecurity, product safety, litigation, and credit-rating or capital-market risks.
- PepsiCo reported $49.627 billion of long-term contractual commitments, including debt principal, interest, leases, purchasing and marketing commitments. The filing identifies a Polish environmental proceeding seeking approximately $650,000 in sanctions; management did not expect the outcome of this and other ordinary-course matters to have a material adverse effect. KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Separate underlying growth from the effects of the extra reporting week, foreign exchange, Venezuela deconsolidation and other structural changes.
- Assess adjusted EPS and operating-profit comparisons alongside GAAP results and the specific exclusions, especially the prior-year Venezuela impairment and 2016 Tingyi, debt-redemption and pension charges.
- Track cash conversion, working capital, pension contributions, capital spending, dividends and repurchases against debt levels and upcoming maturities.
- Monitor Latin America and other international markets for currency, inflation, political and operating developments, and evaluate exposure to commodity, water and regulatory risks.
- Review whether the announced 2017 capital-spending and shareholder-return plans are achieved and whether the filing’s stated liquidity assumptions remain valid.