Business context and reporting period
PepsiCo, Inc. filed this Form 10-K for the fiscal year ended December 28, 2019. The company sells food, snacks and beverages in more than 200 countries and territories across seven reportable segments. Fiscal 2019 comprised 52 weeks; the fourth quarter comprised 16 weeks. The filing retrospectively realigned segment reporting, combining businesses into AMESA and separating Europe and APAC, without changing consolidated results.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $67.161 billion | $64.661 billion |
| Organic revenue growth | 4.5% | 4% |
| Operating profit | $10.291 billion | $10.110 billion |
| Operating margin | 15.3% | 15.6% |
| Net income attributable to PepsiCo | $7.314 billion | $12.515 billion |
| Diluted EPS | $5.20 | $8.78 |
| Cash from operations | $9.649 billion | $9.415 billion |
| Free cash flow | $5.587 billion | $6.267 billion |
Revenue rose 4%, with organic growth partly offset by 2 percentage points of unfavorable foreign exchange and 1 percentage point from acquisitions and divestitures. Operating profit increased 2%, but margin declined 0.3 percentage points, primarily due to higher advertising and marketing expense. Management cited more than $1 billion in productivity savings; higher commodity costs reduced operating profit growth by 5 percentage points.
Fourth-quarter revenue was $20.640 billion versus $19.524 billion in 2018; operating profit was $2.699 billion versus $2.431 billion. Quarterly net income attributable to PepsiCo was $1.766 billion versus $6.854 billion, with diluted EPS of $1.26 versus $4.83, reflecting large prior-year tax benefits.
Year-end cash and cash equivalents were $5.509 billion and short-term investments were $229 million. Current assets were $17.645 billion versus current liabilities of $20.461 billion. Short-term debt was $2.920 billion and long-term debt was $29.148 billion. Net interest expense was $935 million. Total assets were $78.547 billion and total equity was $14.868 billion.
Material changes versus the prior comparable period
- Net income and diluted EPS fell 42% and 41%, respectively, mainly because 2018 included $4.3 billion in tax benefits from an international reorganization and $717 million in tax benefits from tax audit resolutions. The 2019 effective tax rate was 21.0%, compared with a 2018 reported tax benefit rate of 36.7%.
- Free cash flow decreased 11% as capital spending rose to $4.232 billion from $3.282 billion. Operating cash flow increased modestly.
- Segment operating profit was mixed: FLNA increased 5%; QFNA decreased 15%; PBNA decreased 4%; LatAm increased 9%; Europe increased 6%; AMESA increased 1.5%; and APAC decreased 23%, largely reflecting a prior-year Thailand refranchising gain.
- PepsiCo completed the SodaStream acquisition in 2018; 2019 Europe revenue included an 8-percentage-point contribution from SodaStream. The company agreed to acquire Pioneer Foods for approximately $1.7 billion, subject to approvals.
Outlook, risks and unusual items
Management said it expects 2020 capital spending of approximately $5 billion and plans approximately $7.5 billion of shareholder returns: $5.5 billion in dividends and $2 billion in share repurchases. The annualized dividend was increased 7% to $4.09 per share, effective with the expected June 2020 payment. PepsiCo expected the Pioneer Foods acquisition to close in the first half of 2020.
The 2019 multi-year productivity plan is expected to generate approximately $2.5 billion in pre-tax charges and $1.6 billion in cash expenditures through 2023. Through year-end 2019, $508 million of charges and approximately $261 million of cash expenditures had been incurred. Management estimated approximately $450 million of plan charges and $400 million of cash expenditures in 2020.
Key risks include changing consumer preferences and intense competition; commodity, packaging, energy and water costs or supply disruptions; foreign exchange and political volatility; taxes and regulation affecting ingredients, labeling and packaging; climate and sustainability pressures; cyber incidents; reliance on major customers (Walmart and affiliates represented approximately 13% of 2019 revenue); and litigation, tax and environmental contingencies. Management stated that pending legal matters were not expected to have a material adverse effect, while acknowledging outcomes are uncertain. The filing also reported $3.3 billion of remaining U.S. transition-tax liability, payable through 2026, and $1.4 billion of reserves for unrecognized tax benefits.
Unusual 2019 items included $273 million of pre-tax pension settlement charges, $370 million of restructuring and impairment charges, and $55 million of SodaStream-related inventory fair-value and integration charges. Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Assess underlying earnings trends excluding the unusually large 2018 tax benefits and other comparability items; reported earnings growth is not directly comparable.
- Track whether pricing and productivity gains can offset commodity, marketing and other cost pressures, particularly in QFNA and PBNA.
- Monitor free cash flow, capital spending, dividends, buybacks and the funding of the Pioneer Foods acquisition alongside debt maturities and liquidity.
- Verify delivery of the productivity plan’s projected savings, charges and cash costs, and realization of SodaStream and Pioneer Foods benefits.
- Review exposure to currency movements, packaging regulation, water and climate risks, and the company’s significant customer concentration.