PepsiCo, Inc. — 2012 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, organized into six reportable segments: 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). This annual report covers the fiscal year ended December 29, 2012; it is not a quarterly filing. The comparable 2011 fiscal year included an extra 53rd week.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net revenue | $65.492 billion | $66.504 billion |
| Operating profit | $9.112 billion | $9.633 billion |
| Operating margin | 13.9% | 14.5% |
| Net income attributable to PepsiCo | $6.178 billion | $6.443 billion |
| Diluted EPS | $3.92 | $4.03 |
| Cash from operating activities | $8.479 billion | $8.944 billion |
| Capital spending | $2.714 billion | $3.339 billion |
2012 organic revenue growth, a company-defined non-GAAP measure excluding currency, acquisitions/divestitures and the extra 2011 week, was 5%. Total servings increased 3%. Cash and cash equivalents were $6.297 billion and short-term investments were $322 million at year-end. Total current assets were $18.720 billion versus current liabilities of $17.089 billion. Short-term obligations were $4.815 billion and long-term debt obligations were $23.544 billion. Management said operating cash generation, credit facilities and debt-market access were expected to meet operating, investing and financing needs.
Management’s non-GAAP management operating cash flow, excluding specified items, was $7.387 billion in 2012 versus $6.145 billion in 2011. The filing reports $6.5 billion returned to shareholders through dividends and repurchases in 2012. Dividends declared per common share were $2.1275.
Material changes versus the prior comparable period
- Reported revenue fell 1.5%; the 2011 extra week added $623 million to prior-year revenue. Currency and portfolio changes also affected reported comparisons.
- Operating profit declined 5%, and operating margin contracted 0.6 percentage points. Management cited roughly $1.2 billion of commodity inflation, strategic investments, higher advertising and marketing costs, and unfavorable foreign exchange; productivity actions generated more than $1 billion in cost reductions.
- Net income attributable to PepsiCo fell 4% and diluted EPS fell 3%. The 2012 tax rate was 25.2%, down from 26.8%, including a $217 million non-cash benefit from a favorable tax court decision.
- Segment results were mixed: PAB operating profit decreased 10%, AMEA decreased 16%, and QFNA decreased 13%; Europe increased 10% and FLNA increased 1%. Comparability items and changes in business scope affected these results.
- Operating cash flow decreased from $8.944 billion to $8.479 billion, primarily reflecting larger discretionary pension and retiree medical contributions, partly offset by favorable working-capital comparisons.
- Long-term debt obligations increased to $23.544 billion from $20.568 billion. The company issued long-term notes during 2012 and used proceeds for general corporate purposes, including repayment of commercial paper.
Outlook, management commentary, risks and unusual items
- Management’s priorities include investment in core brands and innovation, growth in nutrition and emerging markets, productivity, implementation of a global operating model, and talent development. The filing does not provide a clear numerical 2013 revenue or EPS guidance target.
- For 2013, PepsiCo expected net capital spending of approximately $3.0 billion. It announced an expected $6.4 billion shareholder return through approximately $3.4 billion of dividends and $3.0 billion of repurchases, and raised the annualized dividend to $2.27 per share effective with the June 2013 payment. A new $10 billion repurchase authorization was announced for July 2013 through June 2016.
- The multi-year productivity plan had an estimated total pre-tax charge of approximately $910 million, with the remaining charges expected in 2013–2015. Management said the program is intended to improve cost competitiveness and fund brand-building and innovation.
- Material risks include changing consumer preferences and health concerns, intense competition and retail customer concentration, commodity and supply-chain volatility, foreign exchange and political risks, regulation and litigation, climate and water constraints, and execution risks from productivity initiatives, acquisitions, and IT transformation. Wal-Mart and Sam’s Club represented approximately 11% of total net revenue.
- PepsiCo reported that Venezuela’s February 2013 currency devaluation was not expected to materially affect 2013 revenue or operating profit, but expected an approximately $100 million after-tax charge from remeasurement of bolivar-denominated monetary assets.
- Unusual 2012 items included $279 million of productivity-plan restructuring charges, $150 million of restructuring and other charges related to the Tingyi transaction, a $195 million pension settlement charge, and the $217 million tax benefit. These items affect comparisons of reported results.
- Environmental wastewater sanctions assessed against a Hungarian subsidiary totaled approximately $373,000 for alleged violations in 2010 and 2011; both decisions were under appeal. Management stated that ordinary-course legal and regulatory matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of the revenue decline and operating-margin pressure reflects underlying performance versus the extra 2011 week, currency, divestitures, and other comparability items.
- Whether productivity savings continue to offset commodity inflation and higher marketing and strategic investment costs, and whether expected restructuring charges remain within management’s estimate.
- The sustainability of volume and profit trends in PAB and AMEA, and the extent to which segment comparisons are affected by divestitures and the Tingyi transaction.
- Debt maturities, refinancing needs, cash location and repatriation constraints, and the consequences of increased long-term debt and shareholder distributions.
- The development of tax reserves and open audits; the filing said reserves could decrease by approximately $1.5 billion within twelve months, subject to audit outcomes.
- The impact of Venezuela’s currency devaluation and the realization of the announced 2013 outlook and capital-return plans.