Merrick, Korey, 9-1 Final Project Milestone One

Running head: PEPSICO’S FINANCIAL HEALTH AND PERFORMANCE 1
9-1 Final Project Submission: PepsiCo’s Financial Health and Performance

MBA 520 -X1946
Acct & Financial Analysis 18TW1
Korey L. Merrick
Southern New Hampshire University
Submitted December 2, 2018
PEPSICO’S FINANCIAL HEALTH AND PERFORMANCE 2
Abstract
This paper examines a publicly listed company, PepsiCo (NYSE: PEP), while describing
the company's key goods and services, where the company operates, and its customers.
Additionally, the paper conducts a review of PEP’s 2017 Annual Reports, to include the
consolidated statement of income, balance sheet, statement of cash flows, and other
documents for fiscal years ended December 30, 2017, December 31, 2016 and December
26, 2015. Moreover, this paper assesses and evaluates PEP’s Financial Statements and
Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of
Operations using key financial indicators to include short-term (operating) activity and
long-term (investment) activity analysis, liquidity, solvency, and profitability ratios to
determine the financial performance, health, value, and to predict future earnings
(growth) of the company. Furthermore, the paper addresses success factors and risk,
while reviewing PEP’s financial and strategic priorities, nonfinancial factors, and risks.
The paper forecasts PEP’s future performance and propose potential business
opportunities of the company
Keywords: Pepsico (PEP), balance sheet, income statement, statement of cash
flows, gross margin, EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization), operating (profit) margin, price-to-sales (P/S), price to free cash flows
(P/FCF), price to cash flow (P/CF), quick ratio, current ratio, price-to-book (P/B),
projections, best-case scenario, worst-case scenario, forecast, cost of sales, interest
expense, selling, general and administrative, depreciation, amortization, net revenue

Table of Contents
Abstract ……………………………………………………………………………. 2
Executive Summary………………………………………………………………... 5
Financial Performance and Health…………………………………………………. 8
Organizational Context………………………………………………….………. 8
Key Goods and Services…………………………………………………… 8
Organizational Structure………………………………………………….... 9
Recent Financial Performance……………………………………………...……. 10
Assessment of the Income Statement…………………………………….… 10
Assessment of the Statement of Cash Flow………………………………... 11
Underlying Financial Performance……………………………………….... 12
Current Financial Health………………………………………………………… 13
Assessment of Capitalization………………….………...…………………. 14
Assessment of Growth……………………………………………………... 15
Assessment of Financial Value……………………………………………. 16
Success Factors and Risks……………………….…………………………………. 17
Financial and Strategic Priorities……………………………...…………………. 17
Key Non-financial Success Factors……………...………………………………. 19
Key Internal Risks…………………………………….…………………………. 22
Projections…………………………………………………………………………. 24
Projections: Likely Performance………………….……………………………... 24
Projections: Best-Case and Worst-Case ………………………………………… 28

Best-Case Projection ……………………………………...………………. 28
Worst-Case Projection ……………………………………………………. 30
Projection Discussion.…………………………………………………………… 30
Business Opportunities……………………………………………….……………. 32
Investment Features………………………………………….…………………. 33
Cost and Benefits…………………………………………………………….…. 34
References …………………………………………………………………………. 35
Appendix 1 – Selected Tables……………………………………………...………. 38
Appendix 2 – Reported Growth by Division………………………………………. 39
Appendix 3 – Product Offerings…………………………………………………… 40
Appendix 4 – Consolidated Statement of Income Statement………………………. 41
Appendix 5 – Consolidated Statement of Cash Flows…...………………...………. 42
Appendix 6 – Consolidated Balance Sheet……………………...……………….… 43
Appendix 7 – Selected Financial Indicators of Growth Reconciliations…………... 44
Appendix 8 – PepsiCo’s Three-Year Financial Projection ………………….….…. 45
Appendix 9 – COS and D&A Expense Analysis ……………………………….…. 46
Appendix 10 – Selling, General, and Administrative (SG&A) Expense Analysis.... 47
Appendix 11 – Capital Spending and Depreciation Forecast Development…….… 48
Appendix 12 – Gross profit and Operating Profit Margin Analysis …………….... 49

Appendix 13 – Best-Case Projected Statement of Income…………………...……. 50
Appendix 14 – Post SodaStream Acquisition Projection Debt Analysis………...… 51
Executive Summary
Mission: PepsiCo’s goal is to on deliver sustainable long-term growth while leaving a
positive imprint on society and the environment. They call this “Performance with
Purpose”, which emphasizes transforming its product portfolio to offer healthier options
and making its food and beverage operations more sustainable while making
communities more prosperous (PepsiCo, 2017).
Business Description: With a global portfolio of diverse and known brands, PepsiCo is
one of the world's leading food and beverage companies in the world that make, markets,
sells, and distributes its products to over 200 countries around the world (PepsiCo, 2017).
Company Background: In 1965, the merger of Pepsi-Cola and Frito-Lay gave birth to
PepsiCo -a multibillion-dollar company that today employs nearly 263,000 people
worldwide, with about 113,000 people employed in the United States (PepsiCo, 2017).
Products/Services:
 Make, markets, sells, and distributes a 22-brand complementary food and
beverage portfolio, such as:
o Diet Mountain Dew, Brisk, and Starbucks ready-to-drink
beverages
o Pepsi, Doritos, Lays, Tropicana, Quaker, and Gatorade
are popular brands
Markets: Products are sold in more than 200 countries and territories around the world
through the following segments (PepsiCo, 2017):
o North America Beverages (NAB)
o Frito-Lay North America (FLNA)
o Quaker Foods North America
o Latin America (LA)
o Europe Sub-Saharan Africa (ESSA)
o Asia, Middle East & North Africa (AMENA)
Distribution Channels:
 Pepsi Bottling Group, Inc. and PepsiAmericas, Inc. -two largest bottlers
 Independent distributors, bottling plants, distribution facilities and retailers
 Walmart is its largest customer
 Third-party distributors
 Products available on a growing number of e-commerce websites
Industry: Food and Beverage
Competition: Coca-Cola (Major competitor)

Financial Projections:
Financial Performance:
 $63.5B net revenue, 2017
 $6.5B cash returned to shareholders through dividends and share repurchases
(PepsiCo, 2017)
 $7.3B in free cash flow (PepsiCo, 2017)
 22.9% core net return on invested capital (ROIC), with 2.3% organic revenue
growth (PepsiCo, 2017)
 9% core constant currency EPS
Recommendation: PEP presents a great investment opportunity with steadily growth and
consistent dividend payments. Recommend buy shares of PEP
 Current stock price, $121.94 (02 December 2018)
 P/E 35.09
 Volume 8.05M
 Market Cap 172.13B

9-1 Final Project Submission: PepsiCo’s Financial Health and Performance

Financial Performance and Health
Organizational Context
PepsiCo (NYSE: PEP) is a global food and beverage company that offers, makes,
markets, distributes and sells an amalgam of beverages, foods, and snacks to customers
and consumers in more than 200 countries and territories (PepsiCo, 2017). PEP has a
portfolio of well-name brands, to include Frito- Lay, Gatorade, Pepsi-Cola, Quaker and
Tropicana, which have become staples in customers’ homes and everyday life (PepsiCo,
2017). Other popular brands they offer include Fritos, Cheetos, Mountain Dew, Tostitos,
Naked, and much more (PepsiCo, 2017). PEP is recognized the second largest food and
beverage manufacturer in the world and it is a top contributor to retail sales growth in the
U.S. (PepsiCo, 2017).
Key goods or services/features. PEP product offerings are divided into three
categories; Good for You, Better for You, and Fun for You categories, which includes
different products within each category (PepsiCo, 2017). PEP’s Good for You offerings
provide healthy options that assist consumers’ intake of recommended daily amounts of
whole grains, vegetables, fruits, dairy, nuts and seeds, with low to no amounts of sugars,
salt, or saturated fat (PepsiCo, 2017). The company’s Better for You product line seeks to
limit consumer intake of sugars, salt or saturated fat, “when incorporated into a well-
balanced diet” (PepsiCo, 2017). Better for You options include beverages with fewer or
no calories, including products such as Pepsi Zero Sugar and Propel water. While PEP’s
Fun for You products, which include Mountain Dew, Fritos, and all those sugary,
unhealthy snacks that consumers have grown to love, providing no nutritional or
functional benefit. PEP sells their products across the globe, to countries in North
America (United States and Canada), Latin America, Europe, Sub-Saharan African, Asia,
Middle East and North Africa (PepsiCo, 2017). PEP customers are independent
distributors and retailers, and certain independent bottling companies.
Organizational structure. PEP sells its brands through six segments, which
includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA),
North America Beverages (NAB), Latin America, Europe Sub-Saharan Africa (ESSA),
Europe and Sub-Saharan Africa; and Asia, Middle East and North Africa (AMENA).
PEP has one global division for its Frito-Lay and its Quaker Foods offerings. In
connection with making, marketing, selling, and distributing its products, each of PEP’s
segments utilize warehouses, distribution centers, plants, storage facilities, offices, and
other leased or owned facilities (PepsiCo, 2017).
PEP’s FLNA segment produces and sells potato, corn, or tortilla chips. Familiar
brands include Cheetos cheese-flavored snacks, Doritos, Fritos, Lay’s, Ruffles, and
Tostitos tortilla chips (PepsiCo, 2017). The company’s QFNA segment produces cereal,
rice, pasta and other similar foods. QFNA’s offerings include Aunt Jemina mixes and
syrups, Cap’n Crunch cereal, Life cereal, and several Quaker products such as granola
bars, grits, oatmeal, and rice cakes (PepsiCo, 2017). In terms of geography, the company
has divisions for the Americas, Europe, Asia, Africa, and other regions (PepsiCo, 2017).
The NAB, Latin America, ESSA, and AMENA segments are included in the geography-
based category. The NAB promotes and sells beverage concentrates, fountain syrups,
and finished goods under several brands such as Aquafina, Mountain Dew, Pepsi, Propel,
Tropicana, Mist Twist, and Gatorade to the Americas (PepsiCo, 2017). The Latin
America, ESSA, and AMENA segments makes, distributes, and markets many of the
above snack foods, cereals, and beverages to distributors and retails in countries in their
respective geographic areas in the world (PepsiCo, 2017).
Recent Financial Performance
Assessment of income statement. Based on PEP’s 2017 consolidated statement
of income, fiscal years ended December 30, 2017, December 31, 2016 and December 26,
2015, PEP experienced an overall 0.74% increase in net revenues from 2015 to 2017
while declining from 63,056 in 2015 to 62,799 in 2016. However, sales rebounded in
2017 to 63,525, a 1.2% increase from 2016. Gross profit improved steadily each year
from 2015 to 2017 experiencing stable cost of sales (COS); however, COS increased
slightly from $28,209 million in 2016 to $28,785 million in 2017 (PepsiCo, 2017).
PEP’s gross profit margin indicates that PEP retains $0.55 from each dollar of revenue
generated, which it uses to pay off debts, general and administrative expenses, interest
expenses and distributions to shareholders (PepsiCo, 2017). The remainder $0.45 the
company spends on COS.

Over the last three years, operating margin improved nearly 1.0% each year,
indicating management is doing a good job controlling cost and reducing risk. Yet, there
was a huge percent change on operating profit of 17% from 2015 to 2016, which PEP
contributes to its Venezuela impairment and PEP now reports separately on its 2017
Annual Report (PepsiCo, 2017). Moreover, net profit margin improved from 8.6% in
2015 to 10.1% in 2016, but then deteriorated significantly from 2016 to 2017 (PepsiCo,
2017). Although PEP’s income taxes doubled in 2017 compared to 2015 and 2016,
earnings before interest, taxes, and depreciation and amortization (EBITDA) indicates
healthy improvements in earnings and profitability over the last three years. According
to PEP’s Management Discussion and Analysis (MD&A) of Financial Condition and
Results of Operations and Note 5 to its consolidated financial statements (2017), PEP
recorded a $2.5 billion provisional net tax expense in the fourth quarter of 2017 resulting
from the enactment of the Tax Cuts and Jobs Act (TCJ Act). The TCJ Act required PEP
to include a provisional mandatory, one-time transition tax of $4 billion on undistributed
international earnings, which was offset by a provisional $1.5 billion tax benefit
(PepsiCo, 2017). Thus, the $1,471 million reduction in net income from 2016 to 2017
does not indicate any issues with the profitability of PEP.
Assessment of statement of cash flows. PEP’s 2017 Statement of Cash Flows
also indicates that PEP’s financial performance and health is high (PepsiCo, 2017).
During 2017, PEP’s net cash from operating activities was nearly $10 billion, compared
to $10.7 billion in 2016 (PepsiCo, 2017). PEP attributes its reduced operating cash flow
performance to “higher current year payments to vendors and customers and the higher
net cash tax payments resulting from the TCJ Act” (PepsiCo, 2017). Fortunately,
management was able to lower pension and retiree medical plan contributions offsetting
the additional cash payments above.
Net cash flows from investing activities does not indicate any unusual or
significant financial performance concerns. Cash flows from investing activities
indicates the amount of cash a company spends on capital expenditures that it needs to
run the business (Early & McClure, 2018). There were no material changes to PEP’s
investing activities in the last three years; however, PEP is reinvesting capital in its
business at a higher rate of depreciation. This is good news because it indicates that the
company is reinvesting in the company and not showing artificially high cash inflows due
to lack of reinvestment, which is a good indication of long-term financial health (Early &
McClure, 2018).
Furthermore, net cash used for financing activities in 2017 was approximately
$4.2 billion, which resulted primarily from dividend payments of $4.5 billion, and
repayment of long-term debt of $4.4 billion (net proceeds from long-term debt was $3.1
billion) (PepsiCo, 2017). Financing activities include cash inflows and outflows
associated with outside financing activities, such as cash raised by selling securities
(stocks and bonds) or by borrowing cash from banks (Early & McClure, 2018).
Underlying financial performance. Compared to industry benchmarks, PEP is
meeting many benchmarks in profitability; however, compared to its top competitor,
Coca-Cola (NYSE: KO), PEP is a less profitable. For instance, KO makes 21 cents of
profit per dollar of sales, while PEP makes 17 cents of profit for every dollar of sales.
However, with an operating profit growth rate of 7.40% in 2017, analyst project that PEP
will generate high sales volume, while controlling costs in the future (Forbes, 2018).
Based on the relevant data and assessment of PEP’s income statement, improvements in
earnings will likely last in the future. Consequently, PEP saw a net increase in cash flows
of $1.5 billion, indicating that the company can produce cash constantly through its
operating, investing, and financing activities (Early & McClure, 2018).
Although PEP shows a steady profit on the income statement, cash flows are also
a good indicator of financial health and they can determine whether a company has the
cash or can generate cash to meet obligations arising for its operations. Additionally,
PEP’s free cash flow of $7.3 billion in 2017, calculated by taking “net cash provided by
operating activities less capital spending plus sales of property, plant and equipment,”
(PepsiCo, 2017), is further evidence of PEP’s financial strength and health. While free
cash flow decreased from $8 billion in 2016, a 9% decrease, PEP has adequate cash flow
for financing activities for debt repayments, dividend payments, and share repurchases
(PepsiCo, 2017). Comparing PEP’s Price to Cash Flow (P/CF) and Price to Free Cash
Flow (P/FCF) at 15% and 23%, respectively, to KO at 28% and 37% respectively, PEP is
clearly outperforming its competition and its industry.
Current Financial Health
According to Early and McClure (2018), investors or users of financial statements
can evaluate the current financial health of a corporation by exploring its balance sheet
(B/S), also called the statement of financial condition, offering a snapshot of health. The
balance sheet provides information about how much a company owns (assets), and how
much it owes (liabilities) (Early & McClure, 2018). Moreover, the B/S includes equity,
which is the difference between assets and liabilities, known as "net assets" or
"shareholders equity". In addition, investors use many indicators to determine and assess
the current financial health of corporations, to include liquidity and solvency ratios, from
quantitative data found off the company’s balance sheet. Liquidity ratios measure the
company’s ability to pay short obligations, while solvency or long-term debt ratios
measure a business’s ability to meet long-term obligations (Early & McClure, 2018).
Assessment of capitalization. PEP experienced an increase in current assets over
the last three years, with an increase of 15% from fiscal year 2016 to 2017, and 18%
increase in current assets for FY2016 to FY2017 (PepsiCo, 2017). The largest increase in
current assets reflects considerable purchases of short-term investments, which increased
206% from FY2015 to FY2017 –represented by increases of 139% from 2.9 billion in
FY2015 to approximately $6.7 billion in FF2016, and 66% from FY2016 to FY2017
finishing at $7.0 billion (PepsiCo, 2017). While cash and cash equivalents increased
16.6% over the three years (PepsiCo, 2017). PEP’s current ratio (CR) of 1.51, which
measures liquidity, whether a company can have enough resources to meet its short-term
obligations, was in line with the industry average and was greater than 1.0, indicating it
has more assets than liabilities (PepsiCo, 2017). In addition, PEP is outperforming the
industry average and KO.
PEP reported $20.5 billion of current liabilities in FY2017, a decrease of
approximately 3.0% from FY2016, and overall decrease of 16.6% over the three-year
period (PepsiCo, 2017). The quick ratio (QR) of 1.29, which measures PEP’s ability to
convert liquid assets to pay its current liabilities, illustrates that PEP can meet its short-
term obligations and more liquid than its competition (PepsiCo, 2017). Over the last
three years, PEP's CR deteriorated from FY2015 to FY2016, but then improved from
FY2016 to FY2017 exceeding FY2015 level of 1.31 (PepsiCo, 2017). During the same
time, QR improved each year from FY2015 at 1.05 to FY2017 at 1.29 (PepsiCo, 2017).
Regarding solvency, PEP is quite solvent. In other words, it can meet its long-
term liabilities. PEP’s long-term debt-to-equity (LTDE) ratio of 3.08, which measures a
company's financial leverage or how it is capitalized, indicates that the company is
relying on debt relative to equity more than that of the industry and KO at 1.32 and 1.83,
respectively. As such, PEP pose a greater risk for investors and it is at greater risk of
bankruptcy. Similarly, PEP’s the debt-to-equity (DTE) of 3.61 indicates that PEP is
financing its operations through debt as well. Although equity financing is attractive
because it does not contribute to default risk, despite the higher cost, debt is cheaper and
more attractive form of financing than equity because it reduces taxable income (CFI,
2018). As CFI states, this reduction in taxable income “is crucial...because it help
preserve the company’s cash flows and value” (2018).
On the other hand, too much debt increases a company’s risk of default if the cost
to issue said debt exceeds the cost of issuing equity (CFI, 2018). However, PEP has
adequate cash flows to pay for interest expense and debt repayments, indicating that PEP
has a respectable capital structure. Likewise, PEP’s interest coverage (IC) of 9.31,
reveals its ability to meet interest expenses is not a concern. Thus, the overall assessment
of PEP’s current financial health, using the ratios discussed above, illustrates it has the
right mix of debt versus equity while indicating PEP is using debt effectively to grow its
business.
Assessment of growth. PEP has a clear strategy to grow its operations and
business. As mentioned in the capitalization section, PEP is relying on debt to grow the
company. With high DTE and LTDE ratios at 3.08 and 3.61 respectively and the
adequate cash flows, as indicated in its evaluation of statement of cash flows, financial
analyst forecast that PEP will grow by 7.07% in sales (Nasdaq, 2018). In addition, the
market consensus forecast EPS growth of 5.65 for FY2018, 5.96 for FY2019, 6.38 for
FY2020, and 6.96 for FY2021 (Nasdaq, 2018). After review of the financial health of
PEP, evidence suggests that PEP is postured to produce significant gains for its
shareholders and investors. PEP is powered by a strong portfolio of products (Fun for
You, Better for You, and Good for You products), high inventory turnover rate of 9.77,
and promising return on assets, investment, and equity of 6.1%, 8.3%, and 44.6%,
respectively (Stock Analysis on Net, 2017). Along with a decent receivable turnover of
9.04 and inventory turnover of 9.77, data suggest that PEP will continue to achieve high
revenues with considerable profit margins (Stock Analysis on Net, 2017). Additionally,
PEP’s investment in ecommerce produced strong results in 2017 with annualized retail
sales of approximately $1 billion. Based on this analysis and the information provided by
management’s strategic plan in its 2017 Annual Report indicates growth in all its
markets.
Assessment of financial value. Currently, PEP shares are valued at $121.94 per
share (01 December 2018), up $2.02 from $119.92 date closing 29 December 2017
(Nasdaq, 2018). PEP’s price-to-earnings ratio (P/E) of 32.81 suggests it will grow more
slowly than that of the industry and KO. However, PEP delivered organic revenue growth
of 2.3%, expanded core operating margins by 45 basis points, and grew core constant
currency EPS by 9%, which exceeded PEP’s goal of 8% set at the beginning of 2017
(PepsiCo, 2017). Moreover, PEP generated free cash flow, excluding certain items, of
$7.3 billion, which also exceeded its goal of $7 billion set at the beginning of 2017
(PepsiCo, 2017). Additionally, PEP returned $6.5 billion in cash to its shareholders
through dividends and share repurchases combined (PepsiCo, 2017).
PEP’s price-to-book (P/B) ratio of 15.7 implies that investors expect management
to create more value from a given set of assets. Its price to sales (P/S) of 2.71 suggest the
market is less willing to purchase shares of stock in PEP. While its price to free cash flow
(P/FCF) of 22.7, which is nearly 15% less expensive than KO, signals to investors that
PEP is undervalued. Price to cash flows for FY2017 was 15.1, also signaling to investors
that PEP is a better investment. The lower the value of P/FCF and P/CF indicates that
PEP is investing in its future by investing in multiple operations (Early & McClure,
2018). Likewise, PEP’s shares are cheaper on a forward price-to-earnings and on a price-
to-earnings to growth basis. PEP's management is doing a better job utilizing resources
to grow the company, making it a must buy and attractive investment.
Success Factors and Risks
Recently, many food and beverage companies, such as KO, Campbell Soup, Dr.
Pepper, and Kellogg have struggled, while PEP stock continue to see positive stock
trends and continue to grow (Nasdaq, 2018). For example, from 2016 to 2017, PEP’s
shares rose 14.6% in 2017, while KO and Dr. Pepper Snapple stock rose 10.7% and
7.0%, respectively (Nasdaq, 2018). Additionally, PEP’s stock performance has kept pace
with the S&P 500, while its peers shown stagnant or fallen prices. Although domestic
soda consumption has steadily fallen, PEP found a way to become successful in this
austere economic environment -characterized by intense competition, reduce sales, and

reduction in consumer demand. Nonetheless, PEP must consider the critical success and
risks factors that will influence its ability to remain profitability and successful.
Financial and Strategic Priorities
Its brand. PEP’s strategic focus or priority is to expand its brand recognition
across its multiple markets. Branding and brand recognition are an important non-
financial focus that drives its current and future operations (PepsiCo, 2017). Creating
more recognizable brands through innovation and differentiation across its North
American and international markets that meet its customers shifting preferences, is how
PEP believes it will unlock opportunities for growth (PepsiCo, 2017). For example,
PEP’s product innovation and differentiation strategy includes exploiting health
consciousness trends by utilizing its Hello Goodness campaign, which offers customers
an assortment of lower-calorie and more-nutritious food and beverage options (PepsiCo,
2017).
Its partnerships. Additionally, PEP seek to reach its customers through exciting
marketing campaigns that maximize synergies with other companies. PEP believes that
these partnerships are key to the success of the company that further promote the PEP
brands. PEP is forging firm partnerships with companies in China, Thailand, Russia, the
UK, Poland and Mexico (PepsiCo, 2017), increasing its products global distribution and
market share.
Its people. This is a clear priority and strategy for PEP, stating that “its success
has always rested on our single greatest asset: our people” (2017). They offer education
assistance programs to enhance the skills of their employees and develop the necessary
skills of its workforce the company and employee needs (PepsiCo, 2017). Furthermore,
PEP, further their commitment to its people by providing on-site and near-site childcare
at or near several of its global locations (PepsiCo, 2017). Similarly, its “Ready to Return
initiative” allows employees who take off and return to work after taking care of loved
ones, while providing a 10-week training to refresh their skills (PepsiCo, 2017).
Key Non-financial Success Factors
Innovations and differentiation. A company’s ability to innovate and
differentiate its product portfolio is imperative to meet the changing needs and
preferences of consumers and its customers. Investments in research and development
(R&D) are key to help companies achieve product differentiation and innovation. Over
the last three years (2015 to 2017), PEP spent $754 million, $760 million and $737
million on research and development costs, respectively (PepsiCo, 2017). The company
recognized the importance of leveraging R&D, helping it refine and diversify its product
portfolio to meet consumer trends and needs through innovation and differentiation.
Through investments in R&D, PEP is developing products that are healthier, which are
low in added sugars and contain no high-fructose corn syrup, while focusing on naturally
flavored beverages (PepsiCo, 2017). In addition, PEP is refining its food and snack
options by reducing sodium and saturated fat contain and creating healthy food and snack
choices for its customers (PepsiCo, 2017).
However, PEP’s growth-oriented decisions have some accounting and
financial implications. One implication is the effect of accounting for research and
development expenditures, results in a company recognizing lower net income and

profitability in the short-term. According to generally accepted accounting
principles (GAAP), all research and development expenditures must be charged to
expense as incurred (Elmaleh, 2018). Thus, the company must recognize more
expenses in the current fiscal year, reducing net income (revenues minus expenses
equals net income) and overall profits (Elmaleh, 2018). Nonetheless, the trade-off
for management’s growth-focused strategy is decreased profitability in the short-
term, but increased growth in the long-term. Under current accounting rules, PEP
top executives must decide whether growth fueled by uncertain R&D investments,
which depress current earnings and hence stock price, is more important than short -
term profitability (Elmaleh, 2018).
Partnerships. PEP’s retail and foodservice partnerships is a key non-financial
factor that is imperative to increasing brand recognition and popularity in mature,
saturated markets and emerging markets as well. PEP must continue to sustain and
develop new partnerships with organizations like the National Football League (NFL)
and Subway to increase brand recognition to maintain and increase the volume and
growth of its market share, while forming international partnerships to further capture
emerging markets (PepsiCo, 2017). Although PEP’s assortment of prestigious brands
such as Pepsi, Gatorade, Doritos, and Quaker brands are popular in its North American
markets, which make up the majority of its revenue and profits, its brand recognition in
many of its international markets needs some improvement (Stock Analysis on Net,
2017). As such, both domestically and abroad, PEP must continue to seek opportunities
to maximize strategic synergies with other organizations through partnerships and
acquisitions or mergers. PEP’s management argues that forging such essential

partnerships are critical to improving brand recognition (PepsiCo, 2017). For instance,
PEP is celebrating its second year of partnership with UEFA Champions League
(Soccer), with “more than 100 markets activating across some of PEP’s biggest global
brands, including Pepsi, Lay’s and Gatorade” (PepsiCo, 2017). PEP’s commitment to
creating these important synergies was evident in 2017, it was ranked by Advantage
Report as the top food and beverage supplier in the United States (PepsiCo, 2017). In
addition, many of its business units’ brand recognition in markets such as China,
Thailand, Russia, the UK, Poland and Mexico is also ranked high (PepsiCo, 2017).
Capitalizing on eCommerce. Technology is an everchanging factor that
companies must account for when making important business decisions. Companies
must ensure that they find a way to leverage technology to remain competitive in its
market and industry. This is another key non-financial factor that has many companies
such as PEP, KO, Dr. Pepper Snapple, and others seeking ways to exploit technology to
create a competitive advantage over is competition. As such, PEP invested heavily in
eCommerce, producing approximately $1 billion in annual sales in 2017, mostly in the
United States and China (PepsiCo, 2017). In the United States, PEP’s eCommerce team
partnered with the NFL creating NFL branded products to exploit team-fueled consumer
loyalty (PepsiCo, 2017). Meanwhile, in China, which is one of the largest eCommerce
markets in the world, PEP is using online channels to increase revenue in the region
(PepsiCo, 2017).
Although eCommerce as not changed accounting rules, guidelines, and reporting
of financial information, companies that operate in the eCommerce world must consider
the issue of taxation (Levick, 2018). This issue is currently under intense scrutiny. Many
governments and businesses must consider the following question, are taxes based on
where the business is related or where the customer is located? In the United States, states
impose different tax rates, and governments as well. In fact, some eCommerce
transactions are not even taxed. Unfortunately, some governments, such as local and
state governments, rely on sales tax for crucial revenue, which will continue to fuel this
issue (Levick, 2018). Currently, the decision in the South Dakota v. Wayfair case will
prove to transform the landscape of eCommerce transactions and change eCommerce
forever (Levick, 2018). Nonetheless, while state and local tax collectors from several
jurisdictions around the world roam the internet looking out-of-state companies or
“eCommerce” transactions, eCommerce will continue to grow and become a critical key
success factor for PEP and the beverage and food industry (Levick, 2018).
Key Internal Risks
In addition to key success factors that PEP must exploit, there some risks that it
must avoid or mitigate. There are several internal risks that could potentially influence
PEP’s and other companies’ financial performance. Yet, the company’s ability to
anticipate benefits from productivity initiatives or global operating strategy, its ability to
recruit, hire or retain key employees or a highly skilled and a diverse workforce, and its
ability to reduce disruptions to its distribution networks are key risks that PEP must
mitigate to ensure its success and future (PepsiCo, 2017).
Productivity initiatives and global strategy. In part, PEP’s future success,
earnings, and growth depend on its ability to continue to reduce costs and improve
efficiencies through its productivity initiatives that support growth and contribute to
operations (PepsiCo, 2017). For future success and long-term sustainable growth in a
competitive beverage and food market, companies and PEP must implement strategic
plans that reduce cost, while increasing productivity achieving an efficient and
sustainable cost structure (PepsiCo, 2017). Moreover, PEP must be able to adapt a global
strategy that allows PEP to reduce disruptions from business disruptions caused by
employee morale issues, cultural differences, and other unique geographic nuisances
across its global divisions (PepsiCo, 2017).
Disruptions in its distribution networks. PEP is not immune to disruptions to
its extensive distribution channels. Undoubtably, any disruption to PEP’s suppliers and
other third parties that make, manufacture, transport, distribute, and sell PEP’s portfolio
of products may impact the company negatively (PepsiCo, 2017). For instance, in the
past years, natural disasters such as adverse weather conditions, earthquakes, etc., has
plagued the global economy. Recent hurricanes in Puerto Rico and the earthquakes in
Haiti caused disruptions in PEP’s distribution system and operations. Luckily for PEP,
the hurricanes and earthquakes, which occurred in the third and fourth quarters of 2017 in
North and Central America, according to PEP’s 2017 Annual Report, did not have a
material impact (2017). Consequently, any activity that disrupts PEPs internal and
external distribution network could adversely and materially affect its financial
performance. Additionally, like many other companies, PEP is vulnerable to
cyberattacks that may result in loss or impairment of key manufacturing sites. Such
cyber incidents, including the disruption or shutdown of computer systems or other
information technology systems at PEP’s offices, plants, warehouses, distribution centers

or other facilities or those of suppliers may increase costs (PepsiCo, 2017). therefore,
failure to take suitable steps to lessen the possibility of these vulnerabilities or to
effectively manage them if they occur could affect its business operations.
Recruitment and retention of key employees or highly skilled workforce.
Lastly, another risk that PEP must mitigate is the failure to recruit or retain key personnel
and a diverse workforce. To mitigate this risk, PEP is making considerable investments
in its people. According to PEP’s 2017 Annual Report, its people is its “single greatest
asset” (2017). Thus, they are developing and enhancing employee skills through its
Education Assistance Programs and its PepsiCo University courses (PepsiCo, 2017).
Although companies cannot eliminate such personnel risk entirely, management must
realize that success has always rested on its people. For a company to be successful, its
people must grow and prosper. Additionally, showing employees that the company cares
by increasing in their education and enhancing their skills, while ensuring workplace
diversification, is a great way to sustain and improve employee retention and recruitment.
Projections
Projections: Likely Performance
In the third quarter of fiscal year 2017, PEP reported net revenues of
approximately 16.5B, which increased from 16.24B, outperforming past consensus of
16.37B (PepsiCo, 2017). Additionally, the beverage and snack company exceeded net
income expectations, which rose to 2.50B from 2.14B reported in the same period a year
prior, in the third quarter FY2016 (Forbes, 2018). A major catalyst to its performance
was a 3% rise in its Frito-Lay North America segment’s revenue of 3.89B. Furthermore,
revenue grew 2% to 5.46B in its North America beverages segment, just shy of analysts’
consensus mark of 5.47B, while its Quaker Foods North America segment fall 2% to
567M (Kilgore, 2018). Yet, the QFNA segment beat consensus estimates of $562M. By
end of 2018, PEP is expected to report sales between 64.2B to 65.6B with a consensus
estimate of 64.7B, in which, it is expected to meet or surpass these estimates (Forbes,
2018). Furthermore, analyst and PEP indicates that the company’s current revenue
growth is steady at 3% compared to 2.3% growth rate in 2017 (Kell, 2017). Moving
forward, PEP expects unfavorable currency translation, which it believes will impact
revenue growth by 1% (PepsiCo, 2017). In addition, the recent departure Indra Nooyi,
PEP’s CEO, may also affect growth moving into 2019 and 2020, but experts do not
believe she departure will stifle PEP’s growth. As such, revenue projections are
forecasted assuming a growth range from 1.8% to 2.3%, despite current 3% growth, not
to exceed a total growth of or around 7% from 2017 to 2020 (Kilgore, 2018). Tomi
Kilgore (2018) of MarketWatch.com forecast a growth rate of 1.86%; however, the
forecast assumes a mean growth rate of 2.05% because sales are expected to increase
steadily due to product differentiation, emphasis on healthy beverage and food market,
and increased market share in emerging markets.
Based on PEP’s financial notes for cost of sales (COS), included in cost of sales
are raw materials, direct labor and plant overhead, as well as purchasing and receiving
costs, costs directly related to production planning, inspection costs and raw materials
handling facilities (PepsiCo, 2017). Although PEP does not explicitly indicate that
depreciation and amortization are included in COS, depreciation and amortization (D&A)
is normally included in COS. As such, COS is reported assuming COS includes
depreciation and amortization. See tables 2.1 and tables 2.2 in Appendix 9 for COS
analysis and D&A allocation analysis. In 2017, cost of sales, forecasted as a percentage
for net revenues, was 45.3%, while the weighted average over three years was 45.0% of
net revenues. Thus, moving forward, COS is computed as a percentage of future net
revenues. Accordingly, the anticipated cost of sales, as a factor of net revenue, for year
+1, year +2, and year +3 are $29.2B, $29.9B, and $30.6B respectively.
Similarly, selling, general, and administrative expenses (SG&A), which according
to PEP’s 2017 Annual Report, are the costs of moving, storing and delivering finished
product are included in selling, general and administrative expenses, are forecasted as a
percentage of net revenue as well (PepsiCo, 2017). Assuming the SG&A, like COS, will
increase and/or decrease concurrently with net revenues, year +1, year +2, and year +3
forecasted amounts are $25.2B, $25.7B, and $26.3B respectively, which represents the
weighted average as a percent of sales of 38.7%. Despite a 2.3% reduction in SG&A,
PEP’s growth and distribution network strategy contributes to the assumption that it will
increase SG&A slightly as it adds new jobs and acquiring independent bottling
companies to seize more control over its distribution.
Based on the year +1, year +2, and year +3 revenue, cost of sales, and SG&A,
projections indicate that PEP will achieve a steady gross profit margin of 55.0% and
16.3% operating profit margin, also known as operating margin or return on sales.
Operating profit margin is a good indicator of business risk because it shows the portion
of revenues left over to cover non-operating costs, such as interest (Wahlen et al., 2017).
Moreover, investors use operating margin as a good tool to gauge whether earnings will
last.
Interest expense is expected to remain steady over the next three years, while
initially increasing slightly from $1.15B to $1.22B due to forecasting using the highest on
the books debt interest rate of 3.8%, with the lowest interest rate of 1.3%. In years 2019
(year +2) and 2020 (year +3), interest expense is projected to decrease as debt obligations
decrease due to maturities of long-term debt obligations. Debt obligations decrease by
$4.0B in 2018, $3.9B in 2019, and $3.8B in 2020, reducing interest expense as PEP
eliminates debt obligations. Conversely, interest income is expected to increase by 2.0%
over the three years. However, interest income in an immaterial income source gained
from the “market value of investments used to economically hedge a portion of its
deferred compensation liability” (PepsiCo, 2017).
PEP projected steady revenue growth and steady costs results in a year +1
increase in net income of 37.61% from $4.9B in 2017 to $7.8B in year +1. The increase
in net income is due to the enactment of the Tax Cuts and Job (TCJ) Act by the United
States (PepsiCo, 2017). According note 5 of PEP 2017 Annual Report, the TCJ Act
levied a “provisional mandatory one-time transition tax on undistributed international
earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective
January 1, 2018” (pg. 99), resulting in PEP reducing net income by $2.5B in the fourth
quarter of 2017, as it recognized the provisional net tax expense. However, from year +2
to year +3, PEP’s net income is projected to grow by 1.91% and 1.93% respectively.
As mentioned above, the reduction in the corporate tax rate resulting from the
enactment of the TCJ Act, which reduces the corporate tax rate from 35% to 21%, PEP
estimates that its effective tax rate for FY 2018 will drop significantly from the 48.9% tax
rate recorded in FY 2017 to between 19% and 20% (PepsiCo, 2017). This will assist in
driving the provision for income taxes (tax expense) and the corresponding effective tax
rate down while improving its net income margin.
Projections: Best-case and Worst-case
Best-case projection. On Aug 20, 2018, PEP announced that it will enter the
home beverage carbonation and sparkling water business by acquiring SodaStream
(NYSE: SODA), which manufactures carbonation systems that transforms tap water into
carbonated soft drinks and more (Forbes, 2018). Notably, SODA is the number one
sparkling water brand and the leader amongst sparkling water manufacturers and
distributors (Forbes, 2018). This acquisition marks one of the last deals of the outgoing
CEO, Indra Nooyi, which is in-line with the company’s “Performance with Purpose”
philosophy of creating healthier, more nutritious, and less sugar-added products (Forbes,
2018). PEP expects to finalize the $3.2B acquisition in January 2019. Nonetheless, the
SODA acquisition marks PEP’s continuous step towards a more nutritious, health-
conscious product portfolio. With the increasingly sluggish sales of the traditional soda
market, beverage companies must focus on ways to drive future sales (Kell, 2017). As
the industry transition from traditional carbonated beverages and diet soda drinks,
sparkling water beverages grew tremendously (Forbes, 2018). PEP hopes to benefit from
the sparkling water segment’s 38% growth last year, which outperformed and is out-
growing bottled water growth (7% growth) (Forbes, 2018). This sector is expected to
continue to grow in the future as well. In addition, the sparkling water brand can now
leverage PEP’s huge distribution system and capture the sparkling water market in North
America, where it has a very small presence.
Based on SodaStream’s 2017 Annual Report, over a five-year period, SODA
produced on average $501M in revenue, while revenue growth from 2016 and 2017 grew
on average of 14.7%. However, over the next three years the sparkling water segment is
expected to continue to grow tremendously in North America (Kell, 2017). According to
the latest report from Technavio, a leading global technology research and advisory
company, the global sparkling water market is expected to grow by more than 3% from
2016 to 2020 (Business Wire, 2016). As such, the projection assumption assumes annual
growth of 4% (approximately 13% total growth over three years) –accounts for increased
growth in the United States. Thus, from 2019 to 2020, PEP is accepted to add
approximately 599M, on average, to net revenues each year.
Regarding expenses, PEP is expected to add approximately $265M cost of sales
and approximately $235M of operating expenses, which includes SG&A and other
expenses. For years 2019 (year +2) to 2020, PEP should expect operating income to
increase by $88M and $92M. Projected cost of sales and operating expenses are
calculated as a percentage of net revenues reported on its SODA 2017 Annual Report.
Interest expense and other expenses will not materially impact PEP’s financial
performance and consolidated financial statements; however, assuming PEP finances the
$3.2B acquisition, PEP will increase outstanding debt starting in year +2 and should see
an initial 2.8% change in net income from the added interest expense (assuming 3.8%
interest rate). Interest expense increases $138M in year +2 and $155M in year +3. See
Appendix 6 to see the details that illustrate and support this best-case projection.
Worst-case projection. PEP’s future earnings and financial performance face
many risks. Most notably, future consumer trends regarding health-conscious beverage
and food consumption. With PEP investing so much in healthier beverages and food, if
the healthy beverage and food trend does not meet or match expected growth projections
or trends, PEP will see reduced financial outputs. Additionally, if the decline of
traditional beverages (sugary drinks) sales out-paces the growth associated with healthy
beverages sales, such as bottled water, sparkling water, diet sodas, and similar healthy
products, PEP may not be able to absorb the reduction in sales from traditional beverages.
In fact, according to Beverage Digest, carbonated soft drinks by volume dropped by 0.8%
in 2016, 1.2% in 2015, and 0.9% in 2014’s 0.9%, with PEP’s Diet Pepsi experiencing the
sharpest drop at 9.2% (Kell, 2017).
Thus, the worst-case scenario would result in an annual decline in revenue as a
result of continued soda decline and slow healthy beverage growth. Hence, if PEP’s total
revenues decline annually by 0.2% (small decline is due to PEP’s production volume and
ability to increase unit prices), revenues would decrease by $135M and $141M
respectively, while COS and operating expenses (SG&A and other expenses) may move
in the same direction or the opposite direction. The overall effects of the 0.2% annual
decline would result in net income declining to $6.29B down from $6.39B and $7.13B
down from $7.27B for 2019 and 2020 respectively. However, the biggest hit would be
on the PEP’s stock price because the acquisition increases its debt to income level
making PEP more financially leveraged and riskier.
Projections Discussion
Regarding net revenue projections, the validity of this assumption assumes that
increased or intense competition will not force PEP to lower sales prices, increasing its
expense-to-sales ratio and reducing its profit margin (Wahlen et al., 2017). Additionally,
the assumption, as it relates to revenue growth, assumes an annual growth rate of 2.30%
based on the weighted average from 2015 to 2017, which is a reasonable measure of
future growth, notwithstanding other internal factors and external market and industry
factors. However, the forecast models’ assumptions are in line with market consensus as
that projected 2019 sales should range from 65.2B to 67.7B with a consensus estimate of
66.6B (Kilgore, 2018). The revenue projections account for PEP’s increasing marketing
spending for its core beverages, launching its “Pepsi Generations” campaign, which it
contributes to improved sales, market share, and NAB segment returning to growth
(Forbes, 2018). Addition to NAB solid performance in the third quarter, revenue
assumptions account for PEP’s FLNA strong third quarter FY2018 performance as well
(Forbes, 2018).
The above COS expectations assume that sales and expenses change
simultaneously and in the same direction (Wahlen et al., 2017). In other words, as one
increases the assumption is the other will also increase. Conversely, the above
assumptions are invalidated if the sales and expenses change simultaneously, but in the
opposite direction (Wahlen et al., 2017). Nonetheless, based on PEP’s strategies as it

relates to risk management, diverse product portfolio, production differentiation,
partnerships, and distribution efficiencies, provides consensus for steady growth for PEP.
Furthermore, PEP’s consolidated statement of income indicates that its selling, general
and administrative expenses remained steady as a percentage of net revenues, fluctuating
from 38.6% in 2015, to 39.3% in 2016, and to 38.1% of net revenue in 2017. Projecting
forward, we assume PEP’s selling, general and administrative expenses will persist,
staying roughly close to the past three-year average of 38.7% of net revenues.
Interest expense is projected assuming a 3.8% interest rate on all outstanding
loans while projecting new debt will grow at 13% annually. The projection assumes a
13% annual growth in debt because on PEP’s aggressive approach to gaining more
market share and its focus on improving control of its distribution network as it acquires
bottling companies throughout its market. The assumption for interest expense takes a
conservative, yet realistic approach; nonetheless, interest expense would be overstated if
the assumptions above are not in line with actual financial performance.
Lastly, the three-year projection assumes that PEP will pay the current corporate
income tax rate of 35%. However, as mentioned above, the United States U.S. corporate
income tax rate will drop from 35% to 21% (PepsiCo, 2017). Thus, the projection
conservatively overstates the provision for income taxes.
Business Opportunities
Over the last 43 years, PepsiCo (PEP) increased its dividend payments and grown
its revenues per share at 9.7% per year over the last 10 years (Tenebruso, 2018). I say
this to illustrate that PEP accomplished its high yield, growth, and stability achievements
by looking past the beverage (carbonated drinks) market. The company went form “good
to great” by making investments in other similar companies. One such investment was
its acquisition and merger with Frito-Lay in 1965 (PepsiCo, 2017). Since its acquisition
of Frito-Lay, the Frito-Lay brand realized tremendous growth, making PEP a leader in
the beverage and food industry and it is outperforming its rival KO (Tenebruso, 2018).
Currently, PEP has 22 brands that generate more than $1 billion a year in sales, giving it
more billion-dollar brands than KO (PepsiCo, 2017). In 2017, PEP generated $64.42
billion in sales versus $33.92 billion for KO. Nonetheless, KO is more profitable
(Nasdaq, 2018). Despite having 22 brands, arranging from snack foods to bottled water,
to fruit juices, to Starbucks (partnership), to energy drinks, PEP does not have alcoholic
beverages in its portfolio (Stock Analysis on Net, 2017). As such, PEP should invest in
or acquire a beer company; especially, with KO considering a merger with SABMiller.
Investment Features
The non-alcoholic beverage and alcoholic beverage industry merging under one
roof may seem alien, but PEP merging with a beer (alcoholic beverage) company would
be tantalizing. With that said, PEP is attempting to purchase many its remaining stakes in
its two North American independent bottlers, Pepsi Bottling Group (PBG) and
PepsiAmericas (PAS), in other to improve innovation and improve its ability to take more
risks. PEP indicates that integrating its brand ownership with its distribution network
(bottlers) would create a fully-integrated supply chain that would save the company over
$200 million per year (Stock Analysis on Net, 2017). Additionally, PEP would be able to
bundle food and beverage offerings and control 80% of its North American distribution,
to include its store-delivery and warehouse distribution.

Outside of the United States, the largest PEP bottler is known as Ambev (ABV). What
does this have to do with beer? Besides bottling beverages for PEP, Ambev sells
beverages and beer across South America, and it is the fifth largest brewer in the world.
In addition, its Skol and Brahma brands are considering the third and ninth top-selling
beers in the world. Furthermore, Anheuser-Busch Inbev is the majority owner of ABV,
and AnheuserBusch-Inbev (AHBIV) is not a stranger to mega mergers. Why would ABV
and AHBIV be a great investment? Through Ambev, AHBIV has immense exposure to
emerging markets and with a stock market capitalization of about $58 million, it would
make an outstanding addition to PEP’s team. Moreover, since emerging markets are
driving change and innovation, this investment would be a great opportunity for PEP and
the convergence of the non-alcoholic beverage and alcoholic beverage market under one
distribution system. This investment makes sense for PEP.
Cost and Benefits
There are several implications of this an acquisition and merger for both the target
company and acquirer. the immediate implication is that the acquirer (PEP) would have
to make the purchase with cash or financed through debt (Picardo, 2018). If PEP acquire
the target company using a cash deal, this would significantly decrease PEP’s cash
holdings or cash on hand. Conversely, if financed through debt, PEP’s debt to income
ratio will increase. In other words, PEP’s indebtedness would increase. Furthermore, the
PEP stock price may take a hit as well. PEP’s stock may decline because the purchase
price to acquire the target company (AHBIV) is too high, it’s too much debt, and the
market could feel the acquisition does not contribute to the growth of PEP’s earnings per
share (EPS) (Picardo, 2018).

References
Business Wire. (2016, November 26). Global Sparkling Water Market to Witness Growth
Through 2020, Due to Increasing Health Awareness: Technavio. Retrieved
November 14, 2018, from Business Wire:
https://www.businesswire.com/news/home/20161129005069/en/Global-
Sparkling-Water-Market-Witness-Growth-2020
Coca-Cola Company. (2017). Annual & Other Reports. Retrieved from Coca-Cola
Company Website: https://www.coca-
colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2018/2017-
10K.pdf
Early, J., & McClure, B. (2018). Fundamental Analysis: The Balance Sheet. Retrieved
from Investopedia:
https://www.investopedia.com/university/fundamentalanalysis/fundanalysis9.asp
Early, J., & McClure, B. (2018). Fundamental Analysis: The Cash Flow Statement.
Retrieved from
Early, J., & McClure, B. (2018). Fundamental Analysis: The Income Statement.
Retrieved from Investopedia:
Elmaleh, M. S. (2018). Do Accounting Rules Discourage Research & Development? .
Retrieved from Understanding Accounting.not: Basic Concepts Explained:
http://www.understand-accounting.net/ResearchandDevelopmentCosts.html
Forbes. (2018, October 03). Beverage Growth Impresses For PepsiCo, But Margin Drop
Disappoint. Retrieved November 14, 2018, from Forbes:
https://www.forbes.com/sites/greatspeculations/2018/10/03/beverage-growth-
impresses-for-pepsico-but-margin-drop-disappoints/#5d4e9db459e0
Kell, J. (2017, April 19). Bottled Water Continues to Take the Fizz Out of Diet Soda.
Retrieved November 15, 2018, from Fortune: http://fortune.com/2017/04/19/coca-
cola-pepsi-dr-pepper-soda-water/
Kilgore, T. (2018, October 02). Market Pulse: Pepsi-parent PepsiCo's stock gains after
profit and revenue rise above expectations October 2, 2018. Retrieved November
13, 2018, from Marketwatch: https://www.marketwatch.com/story/pepsi-stock-
gains-after-profit-and-revenue-rise-above-expectations-2018-10-02
Levick, R. (2018). E-Commerce Beware: Sales Taxes Could Be Coming To A State Or
Locality Near You. Retrieved from Forbes:
https://www.forbes.com/sites/richardlevick/2018/08/07/e-commerce-beware-
sales-taxes-could-be-coming-to-a-state-or-locality-near-you/
Nasdaq. (2018). PEP Company Financials. Retrieved from Nasdaq:
https://www.nasdaq.com/symbol/pep/financials?query=balance-sheet
PepsiCo. (2017). PepsiCo 2017 Annual Report 2017. Retrieved from PepsiCo:
http://www.pepsico.com/docs/album/investor/pepsico-inc-2017-annual-report.pdf
Picardo, E. (2018). How mergers and acquisitions can affect a company . Retrieved from
Investopedia: https://www.investopedia.com/articles/investing/102914/how-
mergers-and-acquisitions-can-affect-company.asp
Stock Analysis on Net. (2017). PepsiCo Inc. (PEP). Retrieved from Stock Analysis on
Net: https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo-Inc/Profile
Tenebruso, J. (2018, July 20). Better Buy: Coca-Cola vs. Pepsi. Retrieved from The
Motely Fool: https://www.fool.com/investing/2018/07/20/better-buy-coca-cola-
vs-pepsi.aspx
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2017). Financial Reporting, Financial
Statement Analysis, and Valuation. 9th Edition. Boston: Cengage Learning.

Appendix 1
Selected Tables
Table 1: PepsiCo Inc., selected income statement items, three-year trend
Net income attributable
12 months ended Net revenue Operating profit
to PepsiCo
Dec 26, 2015 63,056 8,353 5,452
Dec 31, 2016 62,799 9,785 6,329
Dec 30, 2017 63,525 10,509 4,857
Source: Based on data from PepsiCo Inc. Annual Reports
Table 2: PepsiCo Inc., net profit margin, three-year trends, calculation
Net income attributable

12 months ended Net Profit Margin Net revenue
to PepsiCo
Dec 26, 2015 8.65% 5,452 63,056
Dec 31, 2016 10.08% 6,329 62,799
Dec 30, 2017 7.65% 4,857 63,525
Table 3: PepsiCo Inc., operating profit margin, long-term trends, calculation

Operating Profit Margin Operating profit Net revenue
Dec 26, 2015 13.25% 8,353 63,056

Dec 31, 2016 15.58% 9,785 62,799
Dec 30, 2017 16.54% 10,509 63,525
Table 4: PepsiCo, operating profit margin, three-year trends, comparison to competitors

Beverage Industry PepsiCo Inc. Coca-Cola Co.
Dec 26, 2015 15.91% 13.25% 19.70%

Dec 31, 2016 17.59% 15.58% 20.61%
Dec 30, 2017 18.20% 16.54% 21.18%
Table 5: PepsiCo Inc., selected statement of cash flows items, three-year trend
Net cash provided by Net cash used for Net cash provided by (used
12 months ended
operating activities investing activities for) financing activities
Dec 26, 2015 10,580 -3,569 -3,828

Dec 31, 2016 10,404 -7,148 -2,942
Dec 30, 2017 9,994 -4,403 -4,186
Appendix 2
Reported Growth by Division
Appendix 3
PepsiCo Product Offerings
Appendix 4
Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015
(In millions except per share amounts)
Apendix 5
Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015
(in millions)
Summarization of Cash Activity
Appendix 6
Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries December 30, 2017 and December 31, 2016
(in millions except per share amounts)
Appendix 7
Selected Financial Indicator Growth Reconciliations
Appendix 8
PepsiCo Three-Year Financial Projection

Appendix 9
COS and D&A Expense Analysis
Table 2.1. PEP’s cost of sales and depreciation and amortization analysis
(in millions)
Table 2.2. PEP’s cost of sales including D&A analysis
(in millions)
Appendix 10
Selling, General, and Administrative (SG&A) Expense Analysis
(in millions)
Appendix 11
Capital Spending and Depreciation Expense Forecast Development
(in millions)
Running head: FINANCIAL HEALTH AND PERFORMANCE OF PEPSICO 50
Appendix 12
Gross profit and Operating Profit Margin Analysis

FINANCIAL HEALTH AND PERFORMANCE OF PEPSICO 51
Appendix 13
PepsiCo’s Best-Case Projected Consolidated Statement of Income

FINANCIAL HEALTH AND PERFORMANCE OF PEPSICO 52
Appendix 14
PepsiCo’s Post SodaStream Acquisition Projection Debt Analysis

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Running head: PEPSICO’S FINANCIAL HEALTH AND PERFORMANCE 1

9-1 Final Project Submission: PepsiCo’s Financial Health and Performance

Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of

long-term (investment) activity analysis, liquidity, solvency, and profitability ratios to

opportunities of the company

Keywords: Pepsico (PEP), balance sheet, income statement, statement of cash

projections, best-case scenario, worst-case scenario, forecast, cost of sales, interest

expense, selling, general and administrative, depreciation, amortization, net revenue

Financial Performance and Health…………………………………………………. 8

Key Goods and Services…………………………………………………… 8

Recent Financial Performance……………………………………………...……. 10

Assessment of the Income Statement…………………………………….… 10

Assessment of the Statement of Cash Flow………………………………... 11

Underlying Financial Performance……………………………………….... 12

Current Financial Health………………………………………………………… 13

Assessment of Financial Value……………………………………………. 16

Success Factors and Risks……………………….…………………………………. 17

Financial and Strategic Priorities……………………………...…………………. 17

Key Non-financial Success Factors……………...………………………………. 19

Key Internal Risks…………………………………….…………………………. 22

Projections: Likely Performance………………….……………………………... 24

Projections: Best-Case and Worst-Case ………………………………………… 28

Best-Case Projection ……………………………………...………………. 28

Worst-Case Projection ……………………………………………………. 30

Cost and Benefits…………………………………………………………….…. 34

Appendix 1 – Selected Tables……………………………………………...………. 38

Appendix 2 – Reported Growth by Division………………………………………. 39

Appendix 3 – Product Offerings…………………………………………………… 40

Appendix 4 – Consolidated Statement of Income Statement………………………. 41

Appendix 5 – Consolidated Statement of Cash Flows…...………………...………. 42

Appendix 6 – Consolidated Balance Sheet……………………...……………….… 43

Appendix 7 – Selected Financial Indicators of Growth Reconciliations…………... 44

Appendix 8 – PepsiCo’s Three-Year Financial Projection ………………….….…. 45

Appendix 9 – COS and D&A Expense Analysis ……………………………….…. 46

Appendix 10 – Selling, General, and Administrative (SG&A) Expense Analysis.... 47

Appendix 11 – Capital Spending and Depreciation Forecast Development…….… 48

Appendix 12 – Gross profit and Operating Profit Margin Analysis …………….... 49

Appendix 13 – Best-Case Projected Statement of Income…………………...……. 50

Appendix 14 – Post SodaStream Acquisition Projection Debt Analysis………...… 51

Mission: PepsiCo’s goal is to on deliver sustainable long-term growth while leaving a

communities more prosperous (PepsiCo, 2017).

PepsiCo -a multibillion-dollar company that today employs nearly 263,000 people

 Make, markets, sells, and distributes a 22-brand complementary food and

beverage portfolio, such as:

o Diet Mountain Dew, Brisk, and Starbucks ready-to-drink

o Pepsi, Doritos, Lays, Tropicana, Quaker, and Gatorade

are popular brands

through the following segments (PepsiCo, 2017):

o North America Beverages (NAB)

o Frito-Lay North America (FLNA)

o Quaker Foods North America

o Latin America (LA)

o Europe Sub-Saharan Africa (ESSA)

o Asia, Middle East & North Africa (AMENA)

 Independent distributors, bottling plants, distribution facilities and retailers

 Walmart is its largest customer

 Products available on a growing number of e-commerce websites

Industry: Food and Beverage

Competition: Coca-Cola (Major competitor)

 $63.5B net revenue, 2017

 $6.5B cash returned to shareholders through dividends and share repurchases

 $7.3B in free cash flow (PepsiCo, 2017)

growth (PepsiCo, 2017)