Business context and reporting period
PepsiCo, Inc. filed this Form 10-K for the fiscal year ended December 29, 2018. Fiscal 2018’s fourth quarter comprised 16 weeks. PepsiCo is a global food and beverage company operating in more than 200 countries and territories across six reportable segments.
Financial performance and liquidity
Amounts are in U.S. dollars; annual comparisons are 2018 versus 2017 unless noted.
| Metric | 2018 | Prior period |
|---|---|---|
| Net revenue | $64.661 billion | $63.525 billion; up 2% |
| Gross profit | $35.280 billion | $34.729 billion |
| Operating profit / margin | $10.110 billion / 15.6% | $10.276 billion / 16.2% |
| Net income attributable to PepsiCo | $12.515 billion | $4.857 billion |
| Diluted EPS | $8.78 | $3.38 |
| Operating cash flow | $9.415 billion | $10.030 billion |
| Free cash flow (company-defined) | $6.267 billion | $7.241 billion |
| Long-term debt | $28.295 billion | $33.796 billion |
Fourth-quarter revenue was $19.524 billion, gross profit $10.588 billion, operating profit $2.431 billion, and net income attributable to PepsiCo $6.854 billion. In fourth-quarter 2017, revenue was $19.526 billion and operating profit $2.570 billion; PepsiCo reported a $710 million net loss.
At year-end, cash and cash equivalents were $8.721 billion, short-term investments $272 million, and restricted cash $1.997 billion. Current assets were $21.893 billion versus current liabilities of $22.138 billion. Total debt, including short-term debt, was approximately $32.321 billion. Operating cash flow declined partly because of $1.5 billion in discretionary pension and retiree medical contributions. Capital spending was $3.282 billion.
Material changes versus prior period
- Reported net income and EPS rose sharply, largely because of tax items rather than operating growth. The company recorded $4.3 billion of tax benefits from reorganizing international operations and $717 million of non-cash tax benefits tied to tax audit conclusions and an IRS resolution. The 2017 comparison included a $2.5 billion provisional tax expense related to the Tax Cuts and Jobs Act.
- Operating profit fell 2% and operating margin declined 0.5 percentage points. Management cited higher operating costs and commodity costs, partly offset by productivity savings exceeding $1 billion and revenue growth.
- Organic revenue growth was 4% and servings increased 1%. North America Beverages operating profit fell 16%; Frito-Lay North America operating profit increased 4.5%.
- PepsiCo acquired SodaStream in December 2018 in a transaction valued at approximately $3.3 billion. It also refranchised beverage operations in Thailand and beverage bottling and snack distribution operations in Czech Republic, Hungary and Slovakia.
- Total debt declined from approximately $39.281 billion at year-end 2017 to $32.321 billion at year-end 2018. Financing cash outflows included $4.930 billion of dividends, $2.0 billion of common-share repurchases, and debt repayments and tender offers.
Outlook, commentary, risks and unusual items
- Management expected the 2019 adjusted annual tax rate to be in the low twenties. The $3.8 billion transition-tax liability was payable over eight years; approximately $0.4 billion was expected to be paid in 2019. The IRS issued additional guidance in early 2019, whose impact was still under evaluation.
- PepsiCo forecast 2019 capital spending of approximately $4.5 billion and expected to return approximately $8 billion to shareholders through about $3 billion of repurchases and $5 billion of dividends. It announced a 3% increase in the annualized dividend to $3.82 per share, effective with the expected June 2019 payment.
- A new multi-year productivity plan announced in February 2019 was expected to generate approximately $2.5 billion of pre-tax charges through 2023, with most charges and cash expenditures expected in 2019 and 2020.
- Key risks include shifting consumer preferences and health concerns; intense competition and changing retail and e-commerce channels; commodity, foreign-exchange and water-supply volatility; packaging regulation and sustainability demands; taxes and labeling rules; political and economic instability; cyber incidents; and successful execution and integration of SodaStream and productivity initiatives.
- A Colombian environmental administrative proceeding could result in a monetary sanction of up to $1.3 million; PepsiCo’s subsidiary submitted its defense. Management stated that the broader disclosed litigation and proceedings were not expected to have a material adverse effect.
- The 2018 financial statements received an unqualified audit opinion. Management and the auditor reported effective internal control over financial reporting; the assessment excluded SodaStream, acquired in December 2018.
Important facts for investors to verify
- How much of reported 2018 earnings growth is attributable to nonrecurring tax benefits, and what earnings trend remains after adjustments?
- Whether commodity-cost pressure, operating expenses, and weaker North America Beverages performance persist, and whether productivity savings offset them.
- The final purchase-price allocation, integration progress, and expected returns from SodaStream.
- Cash availability after distinguishing restricted SodaStream-related cash from unrestricted liquidity, and the timing of the $3.8 billion transition-tax payments.
- Whether 2019 capital spending, shareholder-return plans, and the productivity program proceed as forecast; the filing provides no clear 2019 revenue or EPS growth guidance in the supplied text.