Why did reported earnings decline in 1995 when sales grew?

Reported operating profit fell 7% to $2.99 billion because of a one-time, noncash $520 million charge from adopting SFAS 121 for impairment of long-lived assets, mostly in restaurants and international beverages. Excluding that charge, operating profit rose 10% and ongoing EPS rose 13% to $2.48.

How much exposure does PepsiCo have to the Mexican peso devaluation?

Mexico was PepsiCo's largest international profit market in 1994 but dropped sharply in 1995. Mexico's net sales fell 39% and operating profit fell 69% (reported) to $80 million, and identifiable assets fell 36%. Management says the impact was mostly translation-related, though the economic effects were also significant.

What tax risks should investors watch in 1996?

The proposed Q&A 12 Treasury regulation would reduce tax incentives on Puerto Rico beverage concentrate operations. If enacted retroactive to December 1, 1994 and based on 1996 earnings levels, it would raise the 1996 effective tax rate by about 3.7 points. The 1995 impact would have been about $44 million, or $0.05 per share, and the timing of recognition could cause quarterly tax rate volatility.

Is PepsiCo's balance sheet strong enough to support its growth plans?

Yes. Operating cash flow of $3.7 billion covered $2.1 billion of capital spending, $599 million of dividends, and $541 million of share repurchases. Market net debt fell to 18%, below the company's 20-25% target. The company also had $3.5 billion of unused credit facilities that support its short-term borrowings.

What is the outlook for the restaurant business?

Management is shifting its restaurant strategy toward franchising and refranchising, which produced a $51 million net gain in 1995. The company plans 1996 restaurant capital spending of about $750 million, similar to 1995, with more spent on refurbishing existing units and less on new development. It also expects more SFAS 121 charges and closures, including 185 stores scheduled to close in 1996.

PEP 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1996. Cited figures are marked; the original filing is the authoritative source.

PepsiCo's 1995 Form 10-K shows a company with $30.4 billion^a in net sales (up 7%) and ongoing operating profit up 10% to $3.5 billion, but reported operating profit fell 7% to $2.99 billion.

The decline was driven by a $520 million^b noncash charge from early adoption of SFAS 121 (impairment of long-lived assets), which cut reported net income to $1.6 billion ($2.00 per share, down 10%). Excluding the charge, ongoing EPS rose 13% to $2.48. Management attributed growth to volume gains in snack foods and beverages, while restaurants were restructured through refranchising, with a $51 million net gain on restaurant sales to franchisees.

The balance sheet remained strong: total assets rose 3% to $25.4 billion^c, shareholders' equity grew 7% to $7.3 billion, and operating cash flow was $3.7 billion against $2.1 billion of capital spending. Market net debt fell to 18% from 26%, below the company's 20-25% target range. Management guided to $2.5 billion of 1996 capital spending, with a shift toward snack foods and beverages and away from restaurants.

The main risks flagged were the Mexican peso devaluation (Mexico operating profit fell 69%^d reported), a proposed change to Puerto Rico tax rules (Q&A 12) that could raise the 1996 effective tax rate by about 3.7 points, and possible future SFAS 121 charges. For investors, the key issues are the quality of the 1995 earnings recovery excluding one-time items, the sustainability of restaurant margin improvements, and exposure to emerging-market currency and tax policy shifts.

02—Key points

Key Highlights

Net sales rose 7% to $30.4 billion, with U.S. sales up 7% and international sales up 6%; international operations were 29% of sales.
Reported net income fell 10% to $1.6 billion ($2.00 per share) after a $520 million ($0.48 per share) noncash SFAS 121 impairment charge; ongoing EPS rose 13% to $2.48.
Ongoing operating profit grew 10% to $3.5 billion, with snack foods and beverages driving volume gains and restaurants improving through refranchising.
Mexico was the main drag: net sales fell 39% and operating profit fell 69% (reported) after the peso devaluation.
Financial position strengthened: market net debt ratio fell to 18% from 26%, operating cash flow was $3.7 billion, and shareholder equity rose 7% to $7.3 billion.
A proposed change to Puerto Rico tax rules (Q&A 12) could raise the 1996 effective tax rate by about 3.7 points, a meaningful earnings headwind.
Dividends rose to $0.78 per share (up 11%), with 23 consecutive years of increases, and the company plans to repurchase at least 1-2% of its shares annually.

03—Questions

Frequently Asked Questions

Why did reported earnings decline in 1995 when sales grew?
Reported operating profit fell 7% to $2.99 billion because of a one-time, noncash $520 million charge from adopting SFAS 121 for impairment of long-lived assets, mostly in restaurants and international beverages. Excluding that charge, operating profit rose 10% and ongoing EPS rose 13% to $2.48.
How much exposure does PepsiCo have to the Mexican peso devaluation?
Mexico was PepsiCo's largest international profit market in 1994 but dropped sharply in 1995. Mexico's net sales fell 39% and operating profit fell 69% (reported) to $80 million, and identifiable assets fell 36%. Management says the impact was mostly translation-related, though the economic effects were also significant.
What tax risks should investors watch in 1996?
The proposed Q&A 12 Treasury regulation would reduce tax incentives on Puerto Rico beverage concentrate operations. If enacted retroactive to December 1, 1994 and based on 1996 earnings levels, it would raise the 1996 effective tax rate by about 3.7 points. The 1995 impact would have been about $44 million, or $0.05 per share, and the timing of recognition could cause quarterly tax rate volatility.
Is PepsiCo's balance sheet strong enough to support its growth plans?
Yes. Operating cash flow of $3.7 billion covered $2.1 billion of capital spending, $599 million of dividends, and $541 million of share repurchases. Market net debt fell to 18%, below the company's 20-25% target. The company also had $3.5 billion of unused credit facilities that support its short-term borrowings.
What is the outlook for the restaurant business?
Management is shifting its restaurant strategy toward franchising and refranchising, which produced a $51 million net gain in 1995. The company plans 1996 restaurant capital spending of about $750 million, similar to 1995, with more spent on refurbishing existing units and less on new development. It also expects more SFAS 121 charges and closures, including 185 stores scheduled to close in 1996.

04—Continue

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