Pepsi Cola Corporation

Financial Statement Analysis

CHIN NIEVE S. FIGURA

BSA-III
Disclaimer:

This analysis is only limited on analyzing the liability and Equity section of the Far Eastern
University Inc. It does not include the asset section and it does not reflect the whole
performance of the company.
 INTRODUCTION
I. Overview of PepsiCo Inc.
PepsiCo Inc., is an American multinational food, snack and beveregas
corporation headquartered in Purchase, New York. PepsiCo has interest in
manufacturing, marketing and distribution of grain-based food snacks, beverages, and
other products. Tge Company was formed in 1965 with tge merger of Pepsi-Cola
Company and Frito-Lay Inc. PepsiCo has since expanded from its namesake product
Pepsi to a broader food and beverage brand, the largestvof which is the acquisition of
Tropicana Products in 1998 and Quaker Oats Company in 2001, which added the
Gatorade brand to its portfolio.
As of January 26, 2012, 22 of PepsiCo's brand generated a retail sales of
more than $1 billion apiece, and the company's product is distributed across more than
200 countries, resulting in annual net revenue of $43.3 billion. Base on the net revenue,
PepsiCo is the second largest food and beverage business in the world. Within North
America it is the largest food and beverage business by net revenue. Indra Krishnamuthy
Nooyi has been cheif executive of PepsiCo since 2006. The company's beverag
distribution and bottling is conducted by PepsiCo as well as by licensed bottler in certain
regions. Approximately 274,000 employees generated, $66.145 billion in revenue as of
2013.
Pepsi-Cola Products Philippines, Inc. engages in manufacturing, sale, amd
distribution of carbonated soft-drinks(CSD) and noncarbonated beverages (NCB) in the
Philippines. The Company offers carbonated soft-drinks under Pepsi-Cola , 7Up,
Mountain Dew and Mirinda brand names; noncarbonated beverages under Gtorade,
Tropicana/ Twister, and Lipton brands; Sting energy drink and Propel fitness water.
Pepsi-Cola Proxucts Philippines offer its product through retail outlets, including direct
sales, distributors and wholesalers; small retailers ( sari-sari stores and carinderias) ,
supermakets, restaurants, and convenience store chains.
Pepsi-Cola Products Philippines, Inc. (the "Company") was registered
within the Philippine Securities and Exchange Commission (SEC) on March 8, 1989 with
a corporate life of 50 years, primarily to engage in manufacturing, sale and distribution of
CSD, NCB and confectionery products to retail, wholesaler, restaurants and bar trades.
The registered and principal place of business of the Company is at Km. 29, National
Road, Tunasan, Muntinlupa City.
The Company is listed in the Philippine Stock Exchange (PSE) and included
in the PSE composite index since February 1, 2008. Lotte Chilsung Beverage Co., Ltd.,
with a 38.88% stake in the Company, is te largest shareholder of the Company. Quaker
Oats Global Investments B. V. is a major shareholder with 25.00% stake. Lotte Chilsung
Beverage Co., Ltd., was organized and exosting under the laws of South Korea. Quaker
Oats Global Investments B.V. was organized and existing under the laws of Netherlands.

II. V-M-V Statement

Vision : To be the pioneer Food and Beverage Company in the Philippines.
Mission:
1. Continue to market portfolio of international and home-grown branded quality product
at prices that provides good value to the customers in key Food and Beverages categories.
2. Committed to expand the business and provide healthy financial returns to the
stakeholders, opportunities for growth and enrichment to tgeir employees, business
partners, and the communities wgere they operate.

Values:
Passion, Excellence, Professionalism, Service , and Integrity.

III. Current Operational Plans

1. Design of Goods and Sevices. The objective in this strategic decision area of
operations management is match to goods and services organizational capacity and
market demand and preferences. PepsiCo's operation managenent does so through
market-based research and development and product innovation. For example, PepsiCo
conducts market research about current trends, such as consumers lifestyles. Tge result of
such research are used to determine future directions of PepsiCo's product, such as future
variants of Pepsi.
2. Quality Management. The strategic decision area has the objective of optimizing
quality bases on business and consumer expectations. PepsiCo's operation management
aims to provide the highest quality products under the "Humsn Sustainability" goals. For
example, new PepsiCo products are usually improved variants, such as low-calorie Pepsi
product and less-salt Frito-Lay product.
3. Process and Capacity Design. Capacity utilization and process efficiency is the
emphasis in this strategic decision area of operations management. PepsiCo aims to
maximize it productivity-cost ratio in this area.
4. Location Strategy. PepsiCo has many company-owned and partnetpr-pwned facilities
in strategic locations. Such an operation management approach is based on strategic
decision area's objective of maximal reach to target market. In this case, PepsiCo is
especially interested in large retail outlets and food services estacblishment with high
sales volume.
5. Layout Design and Strategy. Efficient movement of people, materials, and
information is the operations management concern in this strategic decision area. In
PepsiCo's case, spaces are designed witb efficiency and productivity in mind.
6. Job Design and Human Resources. PepsiCo's Human Resource management
addresses this strategic decision area through a combination of global corporate HR
practices and disional HR practices. The main object of tge operations management in
this area is to ensure the adequacy of PepsiCo's workforce.
7. Supply Chain Management. This strategic decision area focuses on operations
management practices to optimize the supply chain to match the demand for materials
and intermediary products. PepsiCo's approach is to diversify and distribute it supply
chsin hubs.
8. Inventories. PepsiCo's inventory management emphasizes automation. Adequacy,
scgeduling and cost minimization are the key objective in this strategic decision area
operations management. Does so through computerized monitoring of inventory.
Inventory managers can access real time to help tgem market decision.
9. Scheduling. Facility and Human Resource schedule is tge primary concern in this
strategic decision area of opragions management. PepsiCo's facility managers implement
human resource schedule based on local data. However, automated schedulinv is also
used for some PepsiCo's product space scheduling.
10. Maintenance. PepsiCo's maintenance concerns are widely varied, considering the
company varried array products and market. This is a big help in ensuring that the
business ipcontinues to contribute to the preservation of natural resources.

BACKGROUND OF THE ANALYSIS

PepsiCo, Inc. is one of the most succesful consumer product in the world with
2000 revenues of over $20 billion and 125,000 employees. The company is consist of:
Frito-Lay Company, the largest manufacturer and distributor of snack chips; Pepsi-Cola,
the second largest soft drink businesssand Tropicana Products the second largest
manufacturer and producer of branded juice. PepsiCo brands is one of the best known
and most respected in the world and are available in over 190 countries and teritories.
In 2000, PepsiCo has 2 reported $20,348 and a comparable net sales of
$20,144. In comparison to 1990's net sales of $20,367 and $18,666 respectively. PepsiCo
has increase its comparable net sales of 8% in 2000 while it had increase 15% in 1999.
This reflects tge increasing rate is going slower. On the other hand, PepsiCo's interest
expense declines 39% showing that the company is significantly lower the average debt.
Back to 1999, the report shows that the company's interest expense dropped to 8% which
indicate that the company is performing well in managing its finanacial strategies.

A. Principal Products
The Company is a licensed bottler of PepsiCo, Inc. (PepsiCo) and Pepsi Lipton
Internationational Limited (Pepsi Lipton) in the Philippines. It manufactures a range of
carbonated soft drink (CSD), noncarbonated beverages (NCB) that includes well known
brands; Pepsi-Cola, 7Up, Mountain Dew, Mirinda, Mug, Tropicana/Twister, Lipton,
Sting, and Propel.

b. Foreign sales

Foreign sales represent 0.02%, 0,02% and 0.08% of total net sales for the calendar
years ended December 31, 2013, 2012, and 2011, respectively.

c. Distribution methods of the products

The Company’s sales volumes depend on the reach of its distribution network. It
increases the reach of distribution system by adding routes and increasing penetration by
adding outlets on existing routes that currently do not stock its products. It relies on a
number of channels to reach retail outlets, including direct sales, distributors and
wholesalers.

The backbone of the distribution system is what is referred to as “Entrepreneurial

Distribution System,” which consists of independent contractors who service one or more
sales “routes,” usually by truck, selling directly to retail outlets and collecting empty
returnable bottles (RGBs).

The Company also employs its own sales force, which principally sells to what
is referred to as the “modern trade” channel, consisting largely of supermarkets,
restaurants and convenience store chains. Most of these sales are credit sales. In addition,
it sells products to third party wholesalers and distributors, which sell them to retail
outlets.

An important aspect of the distribution system is the infrastructure-intensive

process of selling and delivering RGB products to thousands of small retailers, including
sari-sari stores and carinderias. The efforts to increase the reach of the Company’s
distribution network require significant investments in distribution infrastructure such as
additional trucks, refrigeration equipment, warehouse space and a larger “float” of glass
bottles and plastic shells, as well as higher costs for additional sales and distribution staff.

d. Publicly-announced new product

The Company has no publicly-announced new products that are in the planning or
prototype stage.

e. Competition

The Company competes in the ready-to-drink, non-alcoholic beverage market

across the Philippines. The market is highly competitive and competition varies by
product category. The Company believes that the major competitive factors include
advertising and marketing programs that create brand awareness, pack/price promotions,
new product development, distribution and availability, packaging and customer
goodwill. The Company faces competition generally from both local and multi-national
companies across the Company’s nationwide operations.

Competitors in the CSD market are The Coca-Cola Company and Asiawide
Refreshments Corporation. The substantial investment in multiple plants, distribution
infrastructure and systems and the float of RGBs and plastic shells required to operate a
nationwide beverage business using RGBs represent a significant barrier to potential
competitors in widening their reach.

The market for NCB (including energy drinks) is more fragmented. Major
competitors in this market are Del Monte Pacific Limited, Universal Robina Corporation,
Zesto Corporation, The Coca-Cola Company, and Asia Brewery Incorporated, among
others. In recent years, the market has been relatively fluid, with frequent product
launches and shifting consumer preferences. These trends are expected to continue.

Industry-wide competition intensified with marketing campaigns, and trade and

consumer promotions. The Company believes that it can effectively compete by
maximizing its 360-degree marketing presence, maintaining its competitive price
structures, and expanding the range and reach of the Company’s portfolio. For the years
to come, the Company will continue to expand its beverage offerings leveraging our wide
manufacturing platform and extensive distribution reach to meet consumer demands.

Moreover, the Company invested aggressively, positioning the business for

long-term growth while ensuring financial flexibility to battle current challenges. The
Company expanded and upgraded manufacturing facilities in different plants to provide
multiple product capabilities, maximize cost savings, improve product quality, and
increase operating efficiencies.

f. Sources and availability of raw materials

Over half of total costs comprise purchases of raw materials. Largest purchases
are sugar and beverage concentrates. The Company purchases sugar requirements
domestically because of import restrictions imposed by the Philippine government. It
purchases beverage concentrates from PepsiCo and Pepsi Lipton thru Pepsi Cola Far East
Trade Development Co., Inc. (PCFET) at prices that are fixed as a percentage of the
wholesale prices charged for the finished products, subject to a price floor in U.S. dollars.

Another substantial cost is packaging. The major components of this expense are
purchases of PET pre-forms, which are converted into PET bottles at the plants, non-
reusable glass bottles, aluminum cans and closures. It also makes regular purchases of
RGBs to maintain float at appropriate levels. Purchases of each of these materials are
from suppliers based in the Philippines and in other parts of Asia, usually under short
term, fixed price contracts

G. Customers

The Company has a broad customer base nationwide. Its customers include
supermarkets, convenience stores, bars, sari-sari stores and carinderias

h. Transactions with and/or Dependence on Related Parties Please refer to Item 13

of this report.

i. Patents, trademarks, copyrights, licenses, franchises, concessions, and royalty

agreements

The Company does not own any intellectual property that is material to the
business. Under the Exclusive Bottling Agreements, the Company is authorized to use
brands and the associated trademarks owned by PepsiCo and, in the case of the Lipton
brand and trademarks, Unilever N.V. Trademark licenses are registered with the
Philippine Intellectual Property Office. Certificates of Registration filed after January
1998 are effective for a period of 10 years from the registration date unless sooner
cancelled, while those filed before January 1998 are effective for 20 years from the
registration date. The table below summarizes most of the current Certificates of
Registration.

* trademark owned by the Company

** trademark owned by Lotte Chilsung Beverage Co.Ltd.

The Company produces its products under licenses from PepsiCo and Pepsi
Lipton and depends upon them to provide concentrates and access to new products. Thus,
if the Exclusive Bottling Agreements are suspended, terminated or not renewed for any
reason, it would have a material adverse effect on the business and financial results.

Refer to Note 23 to the December 31, 2013 Audited Financial Statements for details of
transactions with PepsiCo and Pepsi Lipton.

j. Government approvals of principal products

As a producer of beverages for human consumption, the Company is subject to the

regulation by the Food and Drugs Administration (FDA) of the Philippines, which is the
policy formulation and monitoring arm of the Department of Health of the Philippines on
matters pertaining to food and the formulation of rules, regulations, standards and
minimum guidelines on the safety and quality of food and food products as well as the
branding and labeling requirements for these products.

It is the Company’s policy to register all locally-produced products for local

market distribution. Each of the plants has a valid and current License to Operate as a
Food Manufacturer of Non-Alcoholic Beverages from FDA. These licenses are renewed
as per FDA’s validity period in accordance with applicable regulations. Any findings and
gaps found during the regulatory audit and inspection are thoroughly discussed with FDA
inspectors and compliance commitments are re-issued. There are no pending findings or
gaps that are material or that may materially affect the operation of each plant or all the
plants as a whole.

The Company is registered as a Food Manufacturer/Processor and in certain

plants has a Food Distributor/Exporter/Importer/Wholesaler license.

k. Effect of existing or probable governmental regulations on the business

The Company’s production facilities are subject to environmental regulation

under a variety of national and local laws and regulations, which, in particular, control
the emissions of air pollutants, water, noise and hazardous wastes. It is regulated by two
major government agencies, namely, the Department of Environment and Natural
Resources (DENR) and the Laguna Lake Development Authority (LLDA).
 The Company is compliant with all local environmental laws and regulations.
All plants are equipped with wastewater treatment plants and in some areas require air
pollution control facilities.

While the foregoing agencies actively monitor the Company’s compliance with
environmental regulations as well as investigate complaints brought by the public, it is
required to police its own compliance and prevent any incident that could expose the
Company to fines, civil or even criminal sanctions, considerable capital and other costs
and expense for refurbishing or upgrading environmental compliance system and
resources, third party liability such as clean-ups, injury to communities and individuals,
including, loss of life.

l. Research and development

The research and development costs amounted to P nil, P54,060, and P189,553 for
the calendar years ended December 31, 2018, 2017, and 2016 respectively.

m. Costs and effects of compliance with environmental laws

Compliance with all applicable environmental laws and regulations, such as the
Environmental Impact Statement System, the Pollution Control Law, the Laguna Lake
Development Authority Act of 1966, the Clean Air Act, Toxic and Hazardous and
Nuclear Waste Act and the Solid Waste Management Act has not had, and in the
Company’s opinion, is not expected to have a material effect on the capital expenditures,
earnings or competitive position. Annually, it invests about P30 million in wastewater
treatment and air pollution abatement, respectively, in its facilities

n. Employees

As of December 31, 2013, the Company employed approximately 2,940 people. In

addition, it generally deploys around 2,294 casual employees working in the non-core
operations of the business. Department of Labor and Employment (DOLE) accredited
third party manpower and services supply the temporary manpower needs of the
company. The number of casual employees varies seasonally, with generally higher
numbers during peak months of March through June. As of December 31, 2013, the
Company had 2,294 casual employees.

All of the regular and permanent production employees at the bottling plants and
sales offices are represented by a union. The Company is a party to 13 collective
bargaining agreements, with separate agreements for the sales and the non-sales forces in
some business units. The collective bargaining agreements contain economic and non-
economic provisions (such as salary increase and performance incentive, sale
commission, laundry allowance, per diem, bereavement assistance, union leave, calamity
loan, and assistance to employees’ cooperative), which generally have a contract period
of three years and remain binding on the successors-in-interest of the parties, while the
representation aspect is valid for five years.

The Company believes that the relationship with both unionized and non-unionized
employees is healthy. It has not experienced any work stoppages due to industrial
disputes since 1999.

Significant emphasis is placed on training of personnel to increase their skill

levels, ensure consistent application of procedures and to instill an appreciation of
corporate values. It operates “Pepsi University,” a full-time training facility consisting of
four classrooms for this purpose. It has adopted a compensation policy which it believes
to be competitive with industry standards in the Philippines. Salaries and benefits are
reviewed periodically and improved to retain current employees and attract new
employees. Performance is reviewed annually and employees are rewarded based on the
attainment of pre-defined objectives.

The Company has a funded, noncontributory defined benefit retirement plan

covering substantially all of its regular and full time employees. The Company has a
Retirement Committee that sets the policies for the plan and has appointed two Philippine
banks as trustees to manage the retirement fund pursuant to the plan. Annual cost is
determined using the projected unit credit method.

o. Major Risks

Sales and profitability are affected by the overall performance of the Philippine
economy, the natural seasonality of sales, the competitive environment of the beverage
market in the Philippines, as well as changes in cost structures, among other factors.

Sales volume are also affected by the weather, generally being higher in the hot,
dry months from March through June and lower during the wetter monsoon months of
July through October. In addition, the Philippines is exposed to risk of typhoons during
the monsoon period. Typhoons usually result in substantially reduced sales in the affected
area, and have, in the past, interrupted production at the plants in affected areas. While
these factors lead to a natural seasonality in sales, unseasonable weather could also
significantly affect sales and profitability compared to previous comparable periods.
Sales during the Christmas/New Year holiday period in late December tend to be higher
as well.
 The CSD and NCB markets are both highly competitive. The actions of
competitors as well as the Company’s own continuous efforts on pricing, marketing,
promotions, and new product development affect sales. Some of the smaller competitors
have lower cost bases than the Corporation and price their products lower than the
Company’s prices. Thus, in addition to the cost of producing and distributing our
beverages, sales prices are greatly affected by the availability and price of competing
brands in the market.

All of the Company’s sales are denominated in Philippine pesos. However, some
of the significant costs, such as purchases of packaging materials, are denominated in
United States dollars. Some of the other costs, which are incurred in Philippine pesos, can
also be affected by fluctuations in the exchange rate between the Philippine peso and
United States dollars, Euro and Malaysian Ringgit. In respect of monetary assets and
liabilities held in currencies other than the Philippine peso, the Company ensures that its
exposure is kept to an acceptable level, by buying foreign currencies at spot rates where
necessary to address short-term imbalances. The Company considered the exposure to
foreign currency risk to be insignificant.

The business requires a significant supply of raw materials, water and energy. The
cost and supply of these materials could be adversely affected by changes in the world
market prices or sources of sugar, crude oil, aluminum, tin, PET resins, other raw
materials, transportation, water, and energy, and government regulation, among others.
Although direct purchases of fuel are relatively small as a proportion of total costs, the
Company is exposed to fluctuations in the price of oil through the dependence on freight
and delivery services. Changes in materials prices generally affect the competitors as
well.

Margins differ between beverage products and package types and sizes. Excluding
packaging, production costs are similar across the range of carbonated beverages, but
vary with non-carbonated beverages. Packaging costs vary, with RGBs being less
expensive than PET, aluminum cans or non- returnable glass. The incremental cost of
producing larger-sized serves in the same package type is proportionately lower than the
increased volume, creating opportunities to achieve higher margins where customers
perceive value in terms of volume.

As a result of the factors discussed above, the margins the Company earns on the
products can be substantially different, and the margins can change in both absolute and
relative terms from period to period. While the Company attempts to adjust its product
and package mix to maximize profitability, changes in consumer demand and the
competitive landscape can have a significant impact on mix and therefore profitability.

The Company is also subject to credit risk, liquidity risk and various market risks,
including risks from changes in commodity prices, interest rates and currency exchange
rates (refer to Notes 25 of the December 31, 2013 Audited Financial Statements for
discussion on Financial Risk Management).

The Company was not aware of any event that resulted in a direct or contingent
financial obligation as of December 31, 2013 that was material to the Company,
including any default or acceleration of an obligation. To the Company’s knowledge,
there are no material off-balance sheet transactions, arrangement, obligations (including
contingent obligations), and other relationship of the Company with unconsolidated
entities or other persons created during the reporting period.

Cash Dividends

The Board of Directors (BOD) approved several declarations of cash dividends

amounting to P259 million in calendar year ended December 31, 2013, P369 million in
the six-months ended December 31, 2010 and P554 million in fiscal year 2010.

Dividend Policy

The Company has a dividend policy to declare dividends to stockholders of

record, which are paid from the unrestricted retained earnings. Any future dividends it
pays will be at the discretion of the BOD after taking into account the earnings, cash
flow, financial position, capital and operating progress, and other factors as the BOD may
consider relevant. Subject to the foregoing, the present policy is to pay cash dividends up
to 50% of its preceding year’s annual net income. This policy may be subject to future
revision.

Cash dividends are subject to approval by the BOD without need for
stockholders’ approval. Stock dividends require the further approval of the stockholders
representing no less than 2/3 of our outstanding capital stock.

Changes in Control

The Company is not aware of any voting trust agreement or any other similar
agreement which may result in a change in control of the Company.
 STATEMENT OF THE PROBLEM
As the worlds second largest food snack and beverages distributor by net
revenue, PepsiCo, tge Company must determine the Marketing and Management Strategy
that helps Pepsi-Cola Products Philippines, Inc. (PCPPI) regain its sales after the number
fever promotional disaster way back in 1992.

OBJECTIVES IN ANALYZING THE CASE

This case analysis aims to achieve the following objectives:

1. To identify the Liabilities and Equity section of the reporting Company.

2. To determine the nature, recognition, measurement and flows of the company's

Liabilities and Equity section.

3. To determine the factors that affects Liability and Equity section in the business
operation.

4. Determine the earnings per share diluted of the company.

ANALYSIS OF THE PROBLEM

To analyze the problem the research, evaluate the Liabilities and Equity sections
of the annual financial statement of Pepsi-Cola Products Philippines, Inc., to determine
thise stated sections nature, recognition, measurement and factors that affect the
company's operation.

Financial Position as to Liabilities and Equity

Liabilities

Note 2018 2017

 Current Liabilities:

Account Payable and Accrued 10, 13, 23, P 9,221,397 P 8,123,493

expenses 25, 26

Short-term Debt 11, 25

1,000,000 3,100,000
Current Portjon of Long-Term 11, 25
795,456 598,749
Debt
8 , 861 42,343
Income tax Payable
P 11,025, 714 P 11, 873, 545
Total Current Liabilities
Noncurrent Liabilities:

LT Debt-net of current portion 11, 25 P 4,626, 874 P 1,147,783

Deferred tax liabilities 12 596,564 870,002

Other noncurrent liabilities 13,25,26 664,423 807,545

Total Noncurrent Liabilities P 5,987, 861 P 2, 825,330

Total Liabilities P 17, 013, 575 P 14, 698,415

Accounts Payable and Accrued Expenses

The Company’s trade payables mostly pertain to raw material purchases made by
the Company with a general payment term of 30 to 90 days.

Accrued contract services pertain to accrued freight charges, tolling fees and other
services.

Non-trade payables mainly consist of withholding taxes, payables to other

government agencies and other items that are individually immaterial or insignificant.

Accrued personnel cost includes current portion of accrued retirement cost, salaries
and other employee benefits.

The Company’s other accrued expenses consist mainly of accruals for utilities and
other operating expenses which are not individually significant.
 The Company’s exposure to liquidity risk related to accounts payable and accrued
expenses is disclosed in Note 25 to the financial statements.

Short-term and Long-term Debt

a. Short-term Debt

As at December 31, 2013, this account represents outstanding unsecured, interest-

bearing short-term loans from local banks, which were subsequently paid on maturity
dates up to March 18, 2014. These short-term loans were acquired to finance its working
capital requirements. Interest rates on the said loans ranged from 2.2% to 3.5% in 2013
and 2012.

Total proceeds from these short-term loans amounted to P3.650 billion and P1.650
billion in 2013 and 2012, respectively, while total payments totaled P4.050 billion and
P1.450 billion in 2013 and 2012, respectively. As at December 31, 2013 and 2012, the
balance of short-term debt amounted to P550 million and P950 million, respectively.

b. Long-term Debt

P1 Billion term loan form MBTC

On March 8, 2013, the Company entered into a loan agreement with MBTC to
partially finance the Company’s capital expenditure for its carbonated and non-
carbonated beverage business. The loan is unsecured and with a term of 7 years, payable
in 20 successive quarterly principal repayments to commence at the end of the 9th quarter
from the initial drawdown date and with a fixed interest rate based on PDST-F at
drawdown date plus 0.75% spread. PDST-F rate is the average of the best sixty percent
(60%) of the live bids of participating fixing banks in the secondary market for the 5-year
Philippine peso-denominated Treasury bills and bonds.

Under the terms of the long-term loan agreement with MBTC, the Company may,
at its option, prepay the loan in full or in part without penalty, together with interest due.
Prepayment shall be applied against the scheduled installment payments in the inverse
order of their maturity. The Company shall give a notice of such prepayment not less than
30 days prior to such proposed date of prepayment.

The loan agreement also provides certain covenants, the more significant of which are as
follows:

 Debt-to-equity ratio shall not exceed 1:1 based on the financial statements; and 
Current ratio of at least 0.40:1 based on its financial statements.
P1 Billion term loan from BPI

On October 16, 2013, the Company entered into a loan agreement with BPI to
refinance the Company’s short-term debt. The loan is unsecured and with a term of 7
years, payable in 20 successive quarterly principal repayments to commence at the end of
the 9th quarter from the initial drawdown date and with a fixed interest rate which shall
be determined using the base rate plus a spread of seventy (70) basis points per annum or
four (4%) percent per annum on the drawdown date.

Under the terms of the long-term loan agreement with BPI, the Company may, at its
option, prepay the loan in full or in part without penalty, together with interest due.
Prepayment shall be applied against the scheduled installment payments in the inverse
order of their maturity. The Company shall give a notice of such prepayment not less than
30 days prior to such proposed date of prepayment.

The loan agreement also provides certain covenants, the more significant of which are
as follows:

 Debt-to-equity ratio shall not exceed 1:1 based on the financial statements; 
Current ratio of at least 0.40:1 based on its financial statements; and  Debt service
coverage ratio of 1:1 based on the financial statements.

As at December 31, 2013, the Company is compliant with all of the financial
covenants of its loan agreements.

Total interest capitalized in 2013 relating to the above-mentioned long-term debt

amounted to P35.2 million (see Note 9).

Information about the Company’s exposures to interest rate risk and liquidity risk
are disclosed in Note 25 to the financial statements.

Icome Taxes

Deferred tax expense relating to remeasurements of net defined benefit liability

recognized in other comprehensive income amounted to P23.3 million in 2013 and P14.7
million in 2012

The Company reviews the carrying amounts of deferred tax assets at each reporting
date and reduces the deferred tax assets to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred tax assets to
be utilized. The Company also reviews the expected timing and tax rates upon reversal of
temporary differences and adjusts the impact of deferred tax accordingly. The Company’s
assessment on the recognition of deferred tax assets is based on the forecasted taxable
income of the subsequent reporting periods. This forecast is based on the Company’s past
results and future expectations on revenues and expenses.

The Company has no unrecognized deferred tax assets as at December 31, 2013 and
2012.

Defined Benefit Plan

The Company has a funded, noncontributory, final salary defined benefit plan
covering substantially all of its regular and full time employees. The Company has a
Retirement Committee, which is composed mainly of the Company’s employees, that
sets the policies for the plan and has appointed two Philippine banks as trustees to
manage the retirement fund pursuant to the plan. Annual cost is determined by a qualified
actuary using the projected unit credit method. The latest actuarial valuation was made on
December 31, 2013.

Under the existing regulatory framework, Republic Act 7641, “The Retirement Pay
Law”, a company is required to provide retirement pay to qualified private sector
employees in the absence of any retirement plan in the entity, provided, however, that the
employee’s retirement benefits under collective bargaining and other agreement shall not
be less than those provided under the law. The law does not require minimum funding of
the plan.

The determination of the Company’s net defined benefit liability and retirement cost
is dependent on the selection of certain assumptions used by the actuary in calculating
such amounts. Remeasurements of the net defined benefit liability are recognized in other
comprehensive income and comprise of actuarial gains and losses on the net defined
benefit liability, return on plan assets, excluding amounts included in the net interest of
the net defined benefit liability and any change in the effect of asset ceiling, excluding
amounts included in the net interest on the net defined benefit liability.

The current portion of accrued retirement cost (included under “Accounts payable
and accrued expenses” account in the statements of financial position) amounted to P50.0
million as at December 31, 2013 and 2012, while the noncurrent portion (included under
“Other noncurrent liabilities” account in the statements of financial position) amounted to
P568.5 million and P484.3 million as at December 31, 2013 and 2012, respectively.

Retirement cost is allocated between “Cost of Goods Sold” account in the statements
of profit or loss and other comprehensive income, which amounted to P4.5 million, P4.8
million and P4.7 million for the years ended December 31, 2013, 2012 and 2011,
respectively, and “Operating Expenses” account in the statements of profit or loss and
other comprehensive income, which amounted to P76.4 million P64.4 million and P40.6
million for the years ended December 31, 2013, 2012 and 2011, respectively (see Notes
16, 17, 18 and 20).

As at December 31, 2013 and 2012, the present value of defined benefit obligation
amounting to P747.8 million and P644.0 million, respectively, pertains to active
members.

As at December 31, 2013, the weighted-average duration of the defined benefit

obligation is 21.51 years.

These defined benefit plans expose the Company to actuarial risks, such as longevity
risk, interest rate risk, and market (investment) risk.

The Retirement Committee reviews the level of funding required for the retirement
fund. Such a review includes the asset-liability matching (ALM) strategy and investment
risk management policy. The Company’s ALM objective is to match maturities of the
plan assets to the retirement benefit obligation as they fall due. The Company monitors
how the duration and expected yield of the investments are matching the expected cash
outflows arising from the retirement benefit obligations.

The Company’s expected contribution to the plan for the year 2014 is P50.0 million.
Any future contribution to the plan is determined taking into account the cash flow and
financial condition as at the date of intended contribution, as well as other factors as the
Company may consider relevant.

The Company’s funding policy is to contribute to the Plan’s fund as required under
actuarial principles to maintain the fund balance in sound condition. In addition, the
Company reserves the right to discontinue, suspend or change the rate and amount of the
contributions to the fund at any time due to the business necessity or economic
conditions.

Equity

Share Capital 14 P 1,751,435 P 1,751,413

Remeasurement losses on net

define benefit liability 13 ( 195, 079) ( 270,754)
 Retained Earnings 11,15 7, 602,709 7,964,775

Total Equity P 9,159, 065 P 9,445,456

Total Liabilities and Equity P 26,172,640 P 24, 144,371

Capital Stock

Capital Management

The Company’s objectives when managing capital are to increase the value of
shareholders’ investment and maintain reasonable growth by applying free cash flow to
selective investments that would further the Company’s product and geographic
diversification. The Company sets strategies with the objective of establishing a versatile
and resourceful financial management and capital structure.

The Chief Financial Officer has overall responsibility for the monitoring of capital
in proportion to risk. Profiles for capital ratios are set in the light of changes in the
Company’s external environment and the risks underlying the Company’s business
operations and industry.

The Company maintains its use of capital structure using a debt-to-equity ratio
which is gross debt divided by equity. The Company includes within gross debt all
interest- bearing loans and borrowings, while the Company defines equity as total equity
shown in the statements of financial position.

There were no changes in the Company’s approach to capital management during

the year. The Company is subject to debt covenants relating to its long-term debt (see
Note 11)

Retained Earnings

The BOD approved the declaration of cash dividends on May 24, 2013, with the record
date of June 7, 2013, and a payment date of June 28, 2013, amounting to P258.6 million
or P0.07 per share for the year ended December 31, 2013.

The Company has a dividend policy to declare dividends to stockholders of record,

which are paid out of its unrestricted retained earnings. Any future dividends it pays will
be at the discretion of the BOD after taking into account the Company’s earnings, cash
flows, financial position, capital and operating progress (see Note 9), and other factors as
the BOD may consider relevant. Subject to the foregoing, the policy is to pay up to 50%
of the annual profit as dividends.

Basic/Diluted Earnings Per Share (EPS)

Basic EPS is computed as follows:

2013 2012 (As restated- 2011(As restated -

see note 3) see note 3)
Profit for the year P903,474 P848,566 P292,918
attributable to equity
holders of the
Company (a)
Number of issued 3,693,772,279 3,693,772,279 3,693,772,279
shares at beginning
of the year
Number weighted 3,693,772,279 3,693,772,279 3,693,772,279
average number of
shares outstanding
(b)
Basic/diluted EPS P0.24 P 0.23 P0.08
(a/b)
As at December 31, 2013, 2012, and 2011, the Company has no dilutive equity
instruments.

Financial Risk Managrment

The Company’s risk management policies are established to identify and analyze the
risks faced by the Company, to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies and systems are reviewed
regularly to reflect changes in market conditions and the Company’s activities. The
Company, through its training and management standards and procedures, aims to
develop a disciplined and constructive control environment in which all employees
understand their roles and obligations.

The Company has an Audit Committee, which performs oversight over financial
management and internal control, specifically in the areas of managing credit, liquidity,
market and other risks of the Company. The Company’s Audit Committee is assisted in
the oversight role by the Internal Audit (IA). The Company’s IA undertakes both regular
and ad hoc reviews of risk management controls and procedures, the results of which are
reported to the Audit Committee.

Credit Risk

Credit risk represents the risk of loss the Company would incur if credit customers
and counterparties fail to perform their contractual obligations. The Company’s credit
risk arises principally from the Company’s cash and cash equivalents, receivables and
due from related parties

Most of the Company’s customers have been transacting with the Company for
several years, and losses have occurred from time to time. Customer credit risks are
monitored through annual credit reviews conducted on a per plant basis. Results of credit
reviews are grouped and summarized according to credit characteristics, such as
geographic location, aging profile and credit violations. Historically, credit violations
have been attributable to bounced checks, denied and absconded credit accounts.
Receivables from these customers are considered by the Company to be impaired.

It is the Company’s policy to enter into transactions with a diversity of

creditworthy parties to mitigate any significant concentration of credit risk.

To pursue timely realization of collateral in an orderly manner, the Company’s

policy discourages the acceptance of chattel and real estate collateral. For chattel and real
estate collaterals, the Company created rules governing the acceptance of such
guarantees. On instances of customer default, the PCC with the support of the corporate
legal department is responsible for the foreclosure of collaterals in the form of real and
movable personal properties. Series of demand letters are sent to the defaulting customer
to command for payment and to propose for debt repayment agreements. If the customer
fails to cooperate, the case will be endorsed to the legal department to facilitate the
foreclosure of the collateral. The Company generally does not use non-cash collateral for
its own operations.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting
financial obligations as they fall due. The Company manages liquidity risk by forecasting
projected cash flows and maintaining a balance between continuity of funding and
flexibility. Treasury controls and procedures are in place to ensure that sufficient cash is
maintained to cover daily operational and working capital requirements, as well as capital
expenditures and debt service payments. Management closely monitors the Company’s
future and contingent obligations and sets up required cash reserves as necessary in
accordance with internal requirements.

It is not expected that the cash flows included in the maturity analysis could occur
significantly earlier, or at significantly different amounts.

Financial Assets Used for Managing Liquidity Risk

The Company considers expected cash flows from financial assets in assessing and
managing liquidity risk. To manage its liquidity risk, the Company forecasts cash flows
from operations for the next six months which will result in additional available cash
resources and enable the Company to meet its expected cash outflow requirements.

Market Risk

Market risk is the risk that changes in market prices, such as commodity prices,
foreign exchange rates, interest rates and other market prices, will affect the Company’s
income or the value of its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable
parameters, while optimizing the return.

The Company is subject to various market risks, including risks from changes in
commodity prices, interest rates and currency exchange rates.

Exposure to Commodity Prices

The risk from commodity price changes relates to the Company’s ability to recover
higher product costs through price increases to customers, which may be limited due to
the competitive pricing environment that exists in the Philippine beverage market and the
willingness of consumers to purchase the same volume of beverages at higher prices. The
Company is exposed to changes in Philippine sugar prices.

Foreign Currency Risk

The Company is exposed to foreign currency risk on purchases that are denominated in
currencies other than the Philippine peso, mostly in United States (U.S.) dollar and Euro.
In respect of monetary assets and liabilities held in currencies other than the Philippine
peso, the Company ensures that its exposure is kept to an acceptable level, by buying
foreign currencies at spot rates where necessary to address short-term imbalances. The
Company considered the exposure to foreign currency risk to be insignificant. Further,
the Company does not hold any investment in foreign securities as at December 31, 2013
and 2012.

Exposure to Interest Rate Risk

The Company’s exposure to interest rates pertains to its cash and cash equivalents, short-
term, long-term debt and finance lease obligation. These financial instruments bear fixed
interest rates and accordingly, the Company is not significantly exposed to interest rate
risk.

Fair Values

As at December 31, 2013 and 2012, the carrying amounts of the financial assets and
liabilities, which include cash and cash equivalents, receivables, short-term debt and
accounts payable and accrued expenses, reasonably approximate fair values due to the
short-term nature of these financial instruments.

ALTERNA TIVES
Despite of being a successful company with subtancial revenue, and a large
footprint in the marketplace, PeosiCo should expand their growth and take advantage of
potential opportunities by continuing to improve on areas at the corporate top level, in the
market that they are in, and in the new markets and maket segments they wish they are in
to. So, PepsiCo , might take in to consideration these following alternatives;

1. They sbould expand markets and market to expand their market share into the global
level and to increase their overall revenue.

2. Continue to expand with their "Human Sustainability". The healthy eatimg market is a
demographic that will comtinue to grow in thr future and will provide generous profits if
PepsiCo will able to obtain a large market share.

3. Capture more of the aging papulations market share. Pepsi focuses on the younger
market hoping to repeat the worldwide success of Coca Cola in regards to brand loyalty
with the generations born on 1980, hawever there is still a large market with the Baby
boomer demographic that they can break into.
4. PepsiCo shoud look to cut somd of their expenses as they have currently $10 billion
more in revenue than the competition, but they has a simillar Net Income of $5.5 billion.

EVALUATION OF ALTERNATIVES
1. PepsiCo should expand into markets and market segment they are currently not in such
as Asia, India, and South America, in order to expand their market share at the global
level and to increase their overall revenue. In doing so, they should increase the revenue
percentage above the current below 20%. They should evaluate the situation and growth
again in on calendar year, and analyze the total effect.

2. PepsiCo should do survey about their target market segments in order to analyze the
existing brand awareness in the market place every two quarters and then analyze the
overall change and overall trend in the two quarters.

3. They should cut their expenses by a set percentage in order to increase their Net
Income each quarter and year. This would increase the bottom line and benefit the
stockholders. It would be advised to reduce cost by 10% from the original amount, and
then potentially increase after few trial quaters.

4. They should position themselves on the edge of health trend in the market place by
increasing funds in the R&D in order to research new potential product ideas. Cunding
should be increase significantly and then ROI on the positioning should be analyzed after
multiple quarters of study.

REFERENCES:
● https://www.slideshare.net

● https://www.pepsi.com/who-we-are/our-history/

● https://www.studocu.com