PEPSICO INC annual report, FY2013

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PepsiCo, Inc. — FY 2013 Form 10-K

Business context and reporting period. PepsiCo is a global food and beverage company operating in more than 200 countries and territories. The fiscal year ended December 28, 2013; the filing also provides unaudited fourth-quarter data. The company reports six divisions: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), Latin America Foods (LAF), PepsiCo Americas Beverages (PAB), Europe and Asia, Middle East and Africa (AMEA). Unless stated otherwise, financial amounts below are in U.S. dollars.

Financial performance and condition

  • Revenue and volume: FY revenue was $66.415 billion, up 1% from $65.492 billion in 2012. Organic revenue growth, a non-GAAP measure, was 4%; total servings rose 2%. Foreign exchange reduced revenue growth by 2 percentage points.
  • Profit and margins: Operating profit was $9.705 billion, up 7%; operating margin was 14.6%, versus 13.9%. Net income attributable to PepsiCo was $6.740 billion, up 9%; diluted EPS was $4.32, up 10% from $3.92. Gross profit was $35.172 billion, or approximately 53.0% of revenue, compared with approximately 52.2% in 2012. The effective tax rate fell to 23.7% from 25.2%.
  • Adjusted earnings: Diluted EPS excluding listed comparability items was $4.37, up 7% year over year, or up 9% on a constant-currency basis; these are non-GAAP measures.
  • Cash flow and investment: Cash from operations was $9.688 billion, versus $8.479 billion. Capital spending was $2.795 billion; free cash flow was $7.002 billion, up 19%. Free cash flow excluding specified items was $8.162 billion, up 10% (non-GAAP). Cash and cash equivalents were $9.375 billion, with another $303 million in short-term investments.
  • Debt and liquidity: Short-term obligations were $5.306 billion and long-term debt obligations were $24.333 billion, totaling approximately $29.639 billion, compared with $28.359 billion in 2012. Current assets were $22.203 billion and current liabilities $17.839 billion (current ratio approximately 1.24). The company reported $8.4 billion of cash, cash equivalents and short-term investments outside the U.S. and cited revolving credit facilities totaling $5.85 billion.
  • Shareholder returns: PepsiCo returned $6.4 billion through dividends and share repurchases in 2013. Dividends declared were $2.24 per common share. The Board announced a 15% increase in the annualized dividend to $2.62 per share, effective with the dividend expected in June 2014.

Fourth-quarter snapshot

Unaudited fourth-quarter revenue was $20.118 billion, compared with $19.954 billion in the prior-year quarter. Net income attributable to PepsiCo was $1.742 billion versus $1.661 billion, and diluted EPS was $1.12 versus $1.06.

Material changes versus 2012

  • Reported revenue rose 1%, while organic revenue growth slowed to 4% from 5% in 2012. FY 2012 reported revenue had declined 1.5%.
  • Operating profit increased 7%, reversing a 5% decline in 2012; margin improved 0.7 percentage points after falling 0.6 points in 2012. Productivity initiatives delivered more than $900 million in cost reductions in 2013.
  • Revenue growth was uneven by division: FLNA +4%, LAF +7% and Europe +2%; QFNA declined 1%, PAB declined 2% and AMEA declined 2%. AMEA’s reported revenue was affected by the prior-year Tingyi transaction and Vietnam refranchising.
  • Operating cash flow rose by $1.209 billion, partly reflecting comparison with approximately $1.5 billion of discretionary pension and retiree medical contributions made in 2012, as well as favorable working-capital comparisons. The 2013 figure included $758 million in federal tax payments related to the IRS settlement.
  • 2013 diluted EPS included several significant items; the reported increase should be assessed alongside the company’s adjusted, non-GAAP EPS presentation.

Outlook, commentary, risks and unusual items

  • Outlook and capital plans: Management emphasized long-term growth, brand investment, innovation, emerging markets, more nutritious product offerings and productivity. It forecast 2014 net capital spending of approximately $3.0 billion and expected to return $8.7 billion to shareholders in 2014, including approximately $3.7 billion in dividends and $5 billion in share repurchases. The filing does not provide a clear numerical 2014 revenue or EPS forecast.
  • Productivity charges: A new 2014 Productivity Plan was announced in February 2014. Expected pre-tax charges total approximately $990 million through 2018, including approximately $440 million expected in 2014. The continuing 2012 plan had an estimated total of approximately $910 million, with remaining charges expected in 2014–2015.
  • Notable 2013 items: Items included a $111 million after-tax charge from the Venezuelan currency devaluation; a $137 million gain on Vietnam beverage refranchising; a $209 million non-cash tax benefit from the IRS settlement; $163 million of restructuring and impairment charges; and $10 million of Wimm-Bill-Dann merger and integration charges. Commodity-hedge mark-to-market losses were $72 million pre-tax. These items affect comparisons of reported results.
  • Operating risks: Key exposures include changing consumer preferences and health concerns, intense competition, commodity inflation and supply disruption, foreign exchange and political instability, new product taxes and regulation, major-customer concentration, cybersecurity and information-system transformation, climate and water risks, and litigation or product-reputation risks. Wal-Mart and Sam’s Club represented approximately 11% of total revenue.
  • Contingencies: Environmental penalty appeals in Poland and Hungary remained pending. Management stated that the outcomes of proceedings and claims in the ordinary course were not expected to have a material adverse effect, while acknowledging uncertainty. The filing also describes tax, environmental, product liability and other legal exposures.
  • Venezuela and foreign currency: The bolivar’s official rate was devalued from 4.3 to 6.3 per U.S. dollar in February 2013. Currency effects reduced consolidated revenue growth by 2 percentage points. Restrictions on currency conversion and repatriation, and foreign earnings taxation, remain relevant. Approximately $34.1 billion of undistributed international earnings were intended to be reinvested abroad.
  • Controls and audit: KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end. Management also reported effective disclosure controls.

Important facts for investors to verify

  • Reconcile reported and adjusted EPS, including the tax benefit, Venezuela charge, Vietnam refranchising gain and restructuring charges.
  • Assess whether the 4% organic revenue growth and 2% servings growth can be sustained, particularly given PAB volume declines and mixed segment results.
  • Track delivery and cash costs of both productivity programs against their expected charges, savings and manufacturing changes.
  • Review debt maturities, commercial-paper access, the use of cash held abroad and the company’s planned dividend and repurchase commitments.
  • Monitor foreign exchange, commodity costs, Mexican product taxes, Venezuela currency restrictions and outstanding environmental and other legal matters.