UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 9, 1995 (12 and 36 Weeks Ended)
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1183
PEPSICO, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
700 Anderson Hill Road
Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
914-253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
Number of shares of Capital Stock outstanding as of October 6, 1995:
787,925,244
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information:
Condensed Consolidated Statement of
Income - 12 and 36 weeks ended
September 9, 1995 and September 3, 1994 2
Condensed Consolidated Balance Sheet -
September 9, 1995 and December 31, 1994 3-4
Condensed Consolidated Statement of
Cash Flows - 36 weeks ended
September 9, 1995 and September 3, 1994 5
Notes to Condensed Consolidated
Financial Statements 6-9
Management's Analysis of Operations,
Cash Flows and Financial Condition 10-32
Independent Accountants' Review Report 33
Part II Other Information and Signatures 34-35
Exhibit 11 Computation of Net Income Per Share of
Capital Stock - Primary and Fully
Diluted 36-37
Exhibit 12 Computation of Ratio of Earnings to
Fixed Charges 38-39
Exhibit 15 Letter from KPMG Peat Marwick LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment) 40
Exhibit 27 Financial Data Schedule 41
- -1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended 36 Weeks Ended
9/9/95 9/3/94 9/9/95 9/3/94
Net Sales $7,693.1 $7,064.0 $21,169.7 $19,349.9
Costs and Expenses, net:
Cost of sales 3,751.3 3,380.0 10,324.2 9,302.0
Selling, general and
administrative expenses 2,839.7 2,648.2 8,102.3 7,536.3
Amortization of intangible
assets 71.5 74.1 214.2 214.4
Operating Profit 1,030.6 961.7 2,529.0 2,297.2
Gain on Stock Offering
by an Affiliate - - - 17.8
Interest Expense (158.9) (151.2) (481.5) (433.9)
Interest Income 29.0 19.8 85.3 59.8
Income Before Income Taxes
and Cumulative Effect of
Accounting Changes 900.7 830.3 2,132.8 1,940.9
Provision for Income Taxes 283.9 288.9 707.7 670.2
Income Before Cumulative Effect
of Accounting Changes 616.8 541.4 1,425.1 1,270.7
Cumulative Effect of
Accounting Changes:
Postemployment benefits
(net of income tax benefit
of $29.3) - - - (55.3)
Pension assets (net of income
tax expense of $14.5) - - - 23.3
Net Income $ 616.8 $ 541.4 $ 1,425.1 $ 1,238.7
Income (Charge) Per Share:
Before Cumulative Effect of
Accounting Changes $ 0.77 $ 0.68 $ 1.78 $ 1.58
Cumulative Effect of
Accounting Changes:
Postemployment benefits - - - (0.07)
Pension assets - - - 0.03
Net Income Per Share $ 0.77 $ 0.68 $ 1.78 $ 1.54
Average Shares Outstanding
Used To Calculate Income
(Charge) Per Share 803.6 799.9 802.2 804.3
Cash Dividends Declared
Per Share $ 0.20 $ 0.18 $ 0.58 $ 0.52
See accompanying notes.
- -2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
Unaudited
9/9/95 12/31/94
Current Assets
Cash and cash equivalents $ 294.6 $ 330.7
Short-term investments, at cost 1,081.0 1,157.4
1,375.6 1,488.1
Accounts and notes receivable, less
allowance: 9/95 - $147.9, 12/94 - $150.6 2,767.9 2,050.9
Inventories
Raw materials and supplies 466.5 454.8
Finished goods 533.6 515.2
1,000.1 970.0
Prepaid expenses, taxes and other
current assets 403.0 563.2
Total Current Assets 5,546.6 5,072.2
Investments in Affiliates 1,469.7 1,295.2
Property, Plant and Equipment 17,068.0 16,130.1
Accumulated Depreciation (6,951.4) (6,247.3)
10,116.6 9,882.8
Intangible Assets, net 7,750.5 7,842.1
Other Assets 779.2 699.7
Total Assets $25,662.6 $24,792.0
Continued on next page.
- -3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
Unaudited
9/9/95 12/31/94
Current Liabilities
Accounts payable $ 1,370.3 $ 1,451.6
Short-term borrowings 826.6 678.5
Accrued compensation and benefits 803.2 753.5
Income taxes payable 701.3 671.7
Accrued marketing 496.6 546.2
Other current liabilities 1,260.7 1,168.9
Total Current Liabilities 5,458.7 5,270.4
Long-term Debt 8,690.7 8,840.5
Other Liabilities 2,059.3 1,852.1
Deferred Income Taxes 1,961.0 1,972.9
Shareholders' Equity
Capital stock, par value 1 2/3 cents per
share: authorized 1,800 shares, issued
9/95 and 12/94 - 863.1 shares 14.4 14.4
Capital in excess of par value 999.7 934.4
Retained earnings 8,707.3 7,739.1
Currency translation adjustment (607.4) (470.6)
9,114.0 8,217.3
Less: Treasury Stock, at Cost:
9/95 - 76.5 shares, 12/94 - 73.2 shares (1,621.1) (1,361.2)
Total Shareholders' Equity 7,492.9 6,856.1
Total Liabilities and
Shareholders' Equity $25,662.6 $24,792.0
See accompanying notes.
- -4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
36 Weeks Ended
9/9/95 9/3/94
Operating Activities:
Income before cumulative effect of
accounting changes $1,425.1 $ 1,270.7
Adjustments to reconcile income before cumulative
effect of accounting changes to net cash
provided by operating activities:
Depreciation and amortization 1,214.1 1,066.5
Deferred income taxes 3.0 54.7
Other noncash charges and credits, net 247.7 224.9
Changes in operating working capital,
excluding effects of acquisitions:
Accounts and notes receivable (776.4) (468.5)
Inventories (47.3) (60.9)
Prepaid expenses, taxes and other
current assets 101.7 62.3
Accounts payable (72.5) (179.8)
Income taxes payable 66.1 68.0
Other current liabilities 80.8 104.3
Net change in operating working capital (647.6) (474.6)
Net Cash Provided by Operating Activities 2,242.3 2,142.2
Investing Activities:
Acquisitions and investments in affiliates (223.8) (262.9)
Capital spending (1,301.5) (1,466.2)
Proceeds from sales of property, plant and
equipment 74.2 36.6
Short-term investments, by original maturity:
More than three months - purchases (258.4) (179.0)
More than three months - maturities 194.5 533.8
Three months or less, net 114.2 80.0
Other, net (190.8) (91.0)
Net Cash Used for Investing Activities (1,591.6) (1,348.7)
Financing Activities:
Proceeds from issuances of long-term debt 1,720.6 676.5
Payments of long-term debt (871.0) (839.5)
Short-term borrowings, by original maturity:
More than three months - proceeds 1,364.8 1,175.1
More than three months - payments (2,090.4) (1,527.2)
Three months or less, net (98.1) 538.7
Cash dividends paid (441.9) (397.5)
Purchases of treasury stock (381.4) (379.9)
Proceeds from exercises of stock options 141.6 69.1
Other, net (31.8) (33.7)
Net Cash Used for Financing Activities (687.6) (718.4)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 0.8 2.9
Net (Decrease) Increase in Cash and
Cash Equivalents (36.1) 78.0
Cash and Cash Equivalents - Beginning of year 330.7 226.9
Cash and Cash Equivalents - End of period $ 294.6 $ 304.9
See accompanying notes.
- -5-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The Condensed Consolidated Balance Sheet at September 9, 1995 and the
Condensed Consolidated Statements of Income for the 12 and 36 weeks ended
September 9, 1995 and September 3, 1994 and the Condensed Consolidated
Statement of Cash Flows for the 36 weeks ended September 9, 1995 and
September 3, 1994 have not been audited, but have been prepared in
conformity with the accounting principles applied in the PepsiCo, Inc. and
Subsidiaries (PepsiCo) 1994 Annual Report on Form 10-K for the year ended
December 31, 1994. In the opinion of management, this information includes
all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. The results for the 12 and 36 weeks are
not necessarily indicative of the results expected for the year.
(2) Significant debt issuances and repayments (exclusive of commercial
paper), including the related effects of any interest rate and/or foreign
currency swaps entered into concurrently with the debt, are listed below.
As disclosed in PepsiCo's 1994 Annual Report, PepsiCo enters into the swaps
to effectively change the interest rate and currency of specific debt
issuances with the objective of reducing borrowing costs.
Weighted
Average
Principal Maturity Interest
Debt Issued (in millions) Date Rate
12 weeks ended September 9, 1995:
$213.2 1998 *
60.0 2005 *
75.0 2007 *
$348.2
Subsequent to September 9, 1995:
$ 99.3 1997 *
65.9 2000 *
25.0 2007 *
50.0 2010 *
$240.2
Principal Interest
Debt Repayments (in millions) Rate
12 weeks ended September 9, 1995:
$300.0 *
200.0 5.625%
40.0 7.58%
28.6 5.9%
21.5 7.72%
20.0 7.65%
$610.1
* Variable rate debt indexed to either LIBOR or commercial paper rates.
- -6-
Subsequent to September 9, 1995 PepsiCo repaid $275.0 million of variable
rate debt.
(3) At September 9, 1995, $3.5 billion of short-term borrowings were
included in the Condensed Consolidated Balance Sheet under the caption
"Long-term Debt", reflecting PepsiCo's intent and ability, through the
existence of unused revolving credit facilities, to refinance these
borrowings on a long-term basis. At September 9, 1995, PepsiCo had unused
revolving credit facilities covering potential borrowings aggregating $4.5
billion, of which $1.0 billion expire in January 1996 and $3.5 billion
expire in January 2000.
(4) Through the third quarter ended September 9, 1995, PepsiCo repurchased
9.4 million shares of its capital stock at a cost of $381 million.
Subsequent to the third quarter, PepsiCo repurchased an additional 125
thousand shares at a cost of $6 million through October 18, 1995.
(5) On July 1, 1995, PepsiCo made an annual grant under its broad-based
SharePower Stock Option Plan of 7.8 million options to approximately
132,000 eligible employees. On July 27, 1995, the Compensation Committee
of PepsiCo's Board of Directors approved a 1995 Stock Option Incentive Plan
(SOIP) for managers and under it, awarded approximately 3.7 million options
to approximately 2,300 employees. SOIP stock options become exercisable
after one year at the fair market value of PepsiCo Capital Stock on the
date of grant and have a total term of 10 years.
(6) As described in Note 4 to the Consolidated Financial Statements in
PepsiCo's 1994 Annual Report, PepsiCo entered into a joint venture
arrangement with the principal shareholders of Buenos Aires Embotelladora
S.A. (BAESA) in 1993, a franchised bottler with operations in Brazil,
Argentina, Chile, Uruguay and Costa Rica. On March 24, 1994, BAESA
completed a public offering of 2.9 million American Depositary Shares (ADS)
at $34.50 per ADS, which are traded on the New York Stock Exchange. In
conjunction with the public offering, PepsiCo and certain other
shareholders exercised options for the equivalent of 1.6 million ADS. As a
result of these transactions, PepsiCo's ownership in BAESA declined to
23.8% from 25.9%. These transactions generated cash proceeds for BAESA of
$136.4 million. The resulting one-time noncash gain to PepsiCo was $17.8
million ($16.8 million after-tax or $0.02 per share).
(7) As described in Note 14 to the Consolidated Financial Statements in
PepsiCo's 1994 Annual Report, effective the beginning of fiscal year 1994,
PepsiCo adopted Statement of Financial Accounting Standards No. 112 (SFAS
112), "Employers' Accounting for Postemployment Benefits." The cumulative
effect noncash charge upon adoption of SFAS 112, which relates to years
prior to 1994, was $84.6 million ($55.3 million after-tax or $0.07 per
share).
(8) As described in Note 13 to the Consolidated Financial Statements in
PepsiCo's 1994 Annual Report, effective the beginning of fiscal year 1994,
PepsiCo changed the method for calculating the market-related value of plan
assets used in determining the return-on-asset component of annual pension
expense and the cumulative net unrecognized gain or loss subject to
amortization. The cumulative effect noncash credit upon adoption of this
change, which relates to years prior to 1994, was $37.8 million ($23.3
million after-tax or $0.03 per share).
- -7-
(9) Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," was issued in March 1995. PepsiCo is required
to adopt SFAS 121 beginning in 1996, although earlier application is
encouraged. SFAS 121 requires that most long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used in the business be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset or
an appropriate grouping of assets with identifiable cash flows ("Asset")
may not be recoverable. SFAS 121 requires that a forecast of undiscounted
future operating cash flows, including disposal value if any, to be
produced by the Asset be compared to its carrying amount to determine
whether an impairment exists. If an Asset is determined to be impaired,
the loss is measured based on quoted market prices in active markets, if
available. If quoted market prices are not available, the estimate of fair
value should be based on the best information available, including prices
for similar assets or the results of valuation techniques such as
discounting future cash flows as if the decision to continue to use the
impaired Asset is a new investment decision.
Currently, each of PepsiCo's operating divisions ("Divisions") is
required to evaluate recoverability of its long-lived assets to be held and
used in the business. Under PepsiCo's current accounting policy, a
Division's long-lived assets other than intangible assets are evaluated as
a group for impairment if the Division is currently incurring operating
losses or is expected to incur operating losses in the future. Because of
the strong operating profit history and prospects of each Division, no
impairment evaluation has been required for the last three years. As
disclosed in our 1994 Annual Report, our current policy also requires each
Division to evaluate the recoverability of its intangible assets based on
current or forecasted profitability over the estimated remaining life of
the intangible assets. Profitability is measured as the combined
operating profit of the acquired business (including amortization of the
intangible assets) and existing businesses that are directly related to the
acquired business. Consideration is also given to the estimated disposal
values of certain identifiable intangible assets compared to their carrying
amounts. If recoverability of an intangible asset is unlikely based on the
evaluation, the carrying amount is reduced by the amount it exceeds the sum
of forecasted operating profits and any disposal value. There were no
material adjustments to the carrying amounts of intangible assets in the
last three years.
SFAS 121 also requires, among other provisions, that long-lived assets
and certain identifiable intangibles to be disposed of that are not covered
by APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," be reported at the
lower of the asset's carrying amount or its fair value less cost to sell.
PepsiCo currently reports an asset to be disposed of at the lower of its
carrying amount or its estimated net realizable value. There were no
material adjustments to the carrying amounts of assets to be disposed of in
the last three years.
- -8-
PepsiCo is currently evaluating a variety of SFAS 121 implementation
issues, including the appropriate grouping of assets, the appropriate cash
flow models to be used and the impact of changing the carrying amounts for
assets currently held for disposal to their estimated fair values less
costs to sell. PepsiCo's Divisions are currently developing information
and preparing the extensive number of estimates that must be made to
determine the impact of adopting SFAS 121. Accordingly, PepsiCo cannot
currently estimate the one-time noncash charge of adopting SFAS 121 and the
resulting annual reduction of depreciation and amortization expense in the
future. PepsiCo has not yet decided whether it will voluntarily adopt SFAS
121 in 1995.
(10) Supplemental Cash Flow Information:
(in millions) 36 Weeks Ended
9/9/95 9/3/94
Cash Flow Data:
Interest paid $524.7 $432.5
Income taxes paid 511.1 386.6
Schedule of Noncash Investing and Financing
Activities:
Liabilities assumed in connection with
acquisitions 52.5 122.6
Issuance of treasury stock and debt for
acquisitions 4.3 12.6
- -9-
MANAGEMENT'S ANALYSIS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION
To improve comparability, Management's Analysis includes the impact, where
significant, of beverage and snack food acquisitions, net of operations
sold or contributed to joint ventures (collectively, "net acquisitions").
The impact of acquisitions represents the results of the acquired
businesses for periods in the current year corresponding to the prior year
periods that did not include the results of the businesses. Restaurant
units acquired, principally from franchisees, and constructed units, net of
units closed or sold, principally to franchisees, are treated the same for
purposes of this analysis and are collectively referred to as "additional
units."
Analysis of Consolidated Operations
Net sales rose $629 million to $7.7 billion for the quarter and $1.8
billion to $21.2 billion year-to-date or 9% for both periods. For both the
quarter and year-to-date, the sales growth benefited from volume gains of
$283 million and $1.0 billion, respectively, driven by worldwide snack
foods and beverages, higher effective net pricing reflecting increases in
international snack foods, driven by Mexico, and domestic beverages, in
large part reflecting a pass-through of higher packaging costs, and
additional restaurant units, which contributed $147 million and $505
million, respectively. These benefits were partially offset by unfavorable
currency translation impacts, primarily related to international snack
foods, driven by the Mexican peso. International net sales grew 9% for the
quarter and 10% year-to-date. They represented 29% of total net sales for
the quarter and 28% year-to-date, which remained unchanged from the
comparable periods in 1994.
Cost of sales as a percentage of net sales increased to 48.8% for both
the quarter and year-to-date of 1995 from 47.8% and 48.1% for the
respective periods in 1994. The 1995 increases were primarily due to
international beverages and snack foods, and for the year-to-date, domestic
beverages. The increase in international beverages is primarily due to a
sales mix shift from higher-margin concentrate to lower-margin packaged
products. The international snack foods increase is due in part to
increasing costs, as a result of the devaluation of the Mexican peso, at a
faster rate than price increases. The increase in domestic beverages was
driven by higher packaging costs, the effects of which were mitigated by
increased pricing.
- -10-
Selling, general and administrative (S,G&A) expenses rose 7% for the
quarter and 8% year-to-date. S,G&A expenses as a percentage of net sales
were 36.9% for the quarter and 38.3% year-to-date, as compared to 37.5% and
38.9% for the comparable periods in 1994. Selling and distribution
expenses grew at a slightly slower rate than sales, primarily reflecting a
slower rate of spending in international snack foods. The year-to-date
results also benefited from savings from a previously disclosed 1994
domestic beverage reorganization, partially offset by a faster rate of
spending in domestic restaurants, in part reflecting additional units.
Advertising and marketing expenditures grew at a substantially slower rate
than sales reflecting a slower rate of spending in worldwide beverages and
worldwide restaurants, partially offset by a higher rate of spending in
domestic snack foods. General and administrative (G&A) expenses grew at a
substantially slower rate than sales resulting from more favorable other
income/expense in international beverages, partially reflecting higher
equity income. These favorable G&A results were partially offset by a
higher rate of spending in worldwide snack foods. G&A savings in domestic
beverages from the 1994 reorganization also benefited year-to-date results.
Amortization of intangible assets decreased 4% for the quarter and
remained unchanged year-to-date. This noncash expense reduced net income
per share by $0.07 and $0.21 for the quarter and year-to-date,
respectively, compared to $0.07 and $0.20 for the same periods in 1994.
Consolidated operating profit increased $69 million or 7% for the
quarter and $232 million or 10% year-to-date, driven by combined segment
operating profit growth of $79 million or 8% for the quarter and $258
million or 11% year-to-date. The segment profit performance benefited from
volume growth of $103 million for the quarter and $379 million year-to-
date, driven by worldwide snack foods and domestic beverages, and
international beverages year-to-date. Additional restaurant units,
primarily domestic, also contributed $23 million for the quarter and $63
million year-to-date. These advances were partially offset by unfavorable
net currency translation impacts, primarily from Mexico. The benefit of
higher effective net pricing for all segments combined was more than offset
by increased product and operating costs for both the quarter and year-to-
date. International segment profits increased 6% for the quarter and 2%
year-to-date, a significantly slower growth rate than net sales. The
resulting decline in the international profit margin reflected margin
deterioration in our Mexico businesses which was only partially offset by a
very strong performance by restaurants. International profits represented
20% and 18% of segment operating profits for the quarter and year-to-date,
respectively, compared to 21% and 20% for the comparable periods in 1994.
Foreign exchange gains and losses and equity income are not included in
segment operating profit. Consolidated operating profit growth for both
the quarter and year-to-date was hampered by net foreign exchange losses of
$9.5 million and $3.4 million, respectively, compared to net foreign
exchange gains of $4.8 million and $2.4 million for the comparable periods
in 1994. Equity income increased $0.5 million for the quarter to $12.7
million and declined $15.0 million to $19.8 million year-to-date. The year-
to-date decline reflected the effects of the devaluation of the peso on our
bottling joint ventures in Mexico, driven in large part by foreign exchange
losses on their dollar denominated debt.
The gain on stock offering by an affiliate of $17.8 million ($16.8
million after-tax or $0.02 per share) related to the March 24, 1994 public
offering of shares by BAESA, as further described in Note 6 to the
Condensed Consolidated Financial Statements.
- -11-
Interest expense, net of interest income, decreased 1% for the quarter
and increased 6% year-to-date. Both periods reflected the net impact of
higher average interest rates, which was more than offset in the quarter
and partially offset year-to-date by lower average borrowings. Excluding
the impact of net acquisitions, net interest expense decreased 3% for the
quarter and increased 3% year-to-date.
Provision for income taxes as a percentage of income before income
taxes and cumulative effect of accounting changes was 31.5% for the quarter
and 33.2% year-to-date, respectively. The effective tax rates for the
comparable periods in 1994 were 34.8% and 34.5%. The rate decline for both
the quarter and year-to-date reflected the reversal of prior year accruals
no longer required and a tax refund, both the result of the resolution of
certain audit issues for prior years. The significant decline in the
quarter also reflected the cumulative catch-up impact of the resolution of
certain prior year audit issues. These benefits were partially offset by a
higher foreign effective tax rate. The higher foreign effective rate is
primarily due to a provision in the 1993 U.S. tax legislation which reduced
the tax credit associated with beverage concentrate operations in Puerto
Rico and became effective for PepsiCo on December 1, 1994. This provision
limited the tax credit on income earned in Puerto Rico in the first year to
60% of the credit allowed under the previous tax law, with the limit
further reduced ratably over the following four years to 40%. As noted in
our 1994 Annual Report, the U.S. Department of the Treasury in 1994
proposed a change to a current regulation (known as Q&A 12) which would
further reduce the tax advantages associated with our beverage concentrate
operations in Puerto Rico. If it is adopted as currently proposed, the
change will become effective for PepsiCo retroactively to December 1, 1994.
However, to date, the Treasury Department has not finalized its Q&A 12
proposal and we cannot predict if or when the change will be adopted. In
accordance with Generally Accepted Accounting Principles, the impact of the
proposed change to Q&A 12 has not yet been included in the 1995 effective
tax rate.
For the quarter, net income increased 14% to $617 million and net
income per share increased 13% to $0.77. For the year-to-date, income and
income per share before cumulative effect of accounting changes increased
12% to $1.4 billion and 13% to $1.78, respectively. Excluding the impact
of the 1994 BAESA gain and the cumulative effect of accounting changes, net
income and net income per share both grew 14% year-to-date. Net
acquisitions are estimated to have had no effect on net income per share
for the quarter, but diluted year-to-date net income per share by $0.01.
Mexico represented our largest international market in 1994,
contributing $2 billion or 7% of PepsiCo's full year 1994 net sales, $261
million or 8% of full year 1994 segment operating profits and an estimated
$175 million ($0.22 per share) or 10% of full year 1994 net income. As
disclosed in our 1994 Annual Report, we expected to report lower earnings
from Mexico in 1995 than we otherwise would have because of the devaluation
of the Mexican peso and its related adverse effects. The peso has devalued
approximately 45% for the quarter and year-to-date compared with the same
periods in 1994.
- -12-
As presented below, the decline in results from operations in Mexico
compared to 1994 has continued into the third quarter. This is due in part
to softening demand resulting from the economic environment and its related
effects on cost increases which exceeded price increases.
Estimated Mexico results were as follows:
Third Quarter Year-To-Date
1995 1994 1995 1994
Net Sales ($ millions) 281.2 465.8 851.9 1,345.8
Operating Profit
($ millions) 26.8 64.3 84.3 196.2
Operating Profit Margin (%) 9.5 13.8 9.9 14.6
% of Total International
Segment Operating Profit 12.3 31.5 17.6 41.7
% of Total Segment Operating
Profit 2.5 6.5 3.2 8.3
Net Income ($ millions) 27.9 36.3 68.0 121.6
Earnings Per Share ($) 0.03 0.04 0.08 0.15
Note: All amounts for Mexico presented above and in Management's
Discussion and Analysis of Segments of the Business include an allocation
of the international divisions' headquarters expenses, but exclude any
allocation of PepsiCo's corporate expenses and financing costs.
The estimated decline in Mexico's segment operating profits reflected
higher product and operating costs, the unfavorable translation effect of
the weaker peso and slightly lower volumes, which collectively more than
offset increased pricing. The estimated decline in net income and earnings
per share reflected the decrease in Mexico's segment operating profits and
additional losses in equity in net income of our Mexican affiliates.
Although difficult to forecast, the adverse year-over-year impact of the
devaluation and its related effects is expected to continue into the fourth
quarter. In addition to our actions in other businesses to mitigate the
profit declines in Mexico, each of our operations in Mexico have taken and
will continue to take additional actions, when possible, to prudently
price, mitigate cost increases, reduce capital spending and drive volumes.
See each business segment discussion for additional information.
- -13-
PepsiCo, Inc. and Subsidiaries
Supplemental Schedule of Net Sales and Operating Profits
12 Weeks Ended September 9, 1995 and September 3, 1994
($ in millions, unaudited)
Net Sales Operating Profits
12 Weeks Ended 12 Weeks Ended
9/9/95 9/3/94 % Change 9/9/95 9/3/94 % Change
Beverages
- -Dom $1,847.8 $1,713.1 8 $ 346.6 $319.5 8
- -Int'l 1,035.7 906.4 14 114.9 102.7 12
2,883.5 2,619.5 10 461.5 422.2 9
Snack Foods
- -Dom 1,348.9 1,202.3 12 287.8 268.4 7
- -Int'l 717.6 741.9 (3) 65.9 80.1 (18)
2,066.5 1,944.2 6 353.7 348.5 1
Restaurants
- -Dom 2,234.0 2,069.8 8 208.6 189.7 10
- -Int'l 509.1 430.5 18 36.5 21.4 71
2,743.1 2,500.3 10 245.1 211.1 16
Total
- -Dom 5,430.7 4,985.2 9 843.0 777.6 8
- -Int'l 2,262.4 2,078.8 9 217.3 204.2 6
$7,693.1 $7,064.0 9 1,060.3 981.8 8
Equity Income 12.7 12.2 3
Other Unallocated
Expenses, net (a) (42.4) (32.3) 31
Operating Profit $1,030.6 $961.7 7
Results by Restaurant Chain:
Pizza Hut $1,170.4 $1,037.7 13 $ 104.5 $ 75.8 38
Taco Bell 893.2 829.8 8 81.2 86.8 (6)
KFC 679.5 632.8 7 59.4 48.5 22
$2,743.1 $2,500.3 10 $ 245.1 $211.1 16
NOTE:
(a) Other unallocated expenses, net includes corporate headquarters
expenses, minority interests, foreign exchange translation and
transaction gains and losses and other items not allocated to the
business segments. A net foreign exchange loss of $9.5 and gain of
$4.8 were included in 1995 and 1994, respectively.
- -14-
PepsiCo, Inc. and Subsidiaries
Supplemental Schedule of Net Sales and Operating Profits
36 Weeks Ended September 9, 1995 and September 3, 1994
($ in millions, unaudited)
Net Sales Operating Profits
36 Weeks Ended 36 Weeks Ended
9/9/95 9/3/94 % Change 9/9/95 9/3/94 % Change
Beverages
- -Dom $ 4,934.6 $ 4,590.3 8 $ 876.2 $ 756.1 16
- -Int'l 2,515.3 2,157.9 17 192.0 178.2 8
7,449.9 6,748.2 10 1,068.2 934.3 14
Snack Foods
- -Dom 3,826.4 3,412.2 12 784.3 699.1 12
- -Int'l 2,061.5 2,122.0 (3) 201.2 238.6 (16)
5,887.9 5,534.2 6 985.5 937.7 5
Restaurants
- -Dom 6,381.3 5,886.2 8 482.2 438.4 10
- -Int'l 1,450.6 1,181.3 23 86.7 53.9 61
7,831.9 7,067.5 11 568.9 492.3 16
Total
- -Dom 15,142.3 13,888.7 9 2,142.7 1,893.6 13
- -Int'l 6,027.4 5,461.2 10 479.9 470.7 2
$21,169.7 $19,349.9 9 2,622.6 2,364.3 11
Equity Income 19.8 34.8 (43)
Other Unallocated
Expenses, net (a) (113.4) (101.9) 11
Operating Profit $2,529.0 $2,297.2 10
Results by Restaurant Chain:
Pizza Hut $ 3,456.6 $ 3,022.4 14 $ 282.5 $ 202.3 40
Taco Bell 2,461.0 2,270.6 8 156.3 175.1 (11)
KFC 1,914.3 1,774.5 8 130.1 114.9 13
$ 7,831.9 $ 7,067.5 11 $ 568.9 $ 492.3 16
NOTE:
(a) Other unallocated expenses, net includes corporate headquarters
expenses, minority interests, foreign exchange translation and
transaction gains and losses and other items not allocated to the
business segments. A net foreign exchange loss of $3.4 and gain of
$2.4 were included in 1995 and 1994, respectively.
- -15-
Segments Of The Business
Beverages
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales
Domestic $1,847.8 $1,713.1 8 $4,934.6 $4,590.3 8
Int'l 1,035.7 906.4 14 2,515.3 2,157.9 17
$2,883.5 $2,619.5 10 $7,449.9 $6,748.2 10
Operating
Profit
Domestic $ 346.6 $ 319.5 8 $ 876.2 $ 756.1 16
Int'l 114.9 102.7 12 192.0 178.2 8
$ 461.5 $ 422.2 9 $1,068.2 $ 934.3 14
Worldwide net sales increased $264 million for the quarter and $702 million
year-to-date or 10% for both periods. Worldwide operating profits
increased $39 million or 9% for the quarter and $134 million or 14% year-to-
date.
Domestic sales rose $135 million for the quarter and $344 million year-
to-date or 8% for both periods. Sales growth for both the quarter and year-
to-date benefited from higher pricing on most carbonated soft drink (CSD)
packages, in large part reflecting a pass-through of higher packaging
costs, and higher concentrate pricing. Volume growth, driven by CSD
products, contributed $44 million for the quarter and $153 million year-to-
date.
System bottler case sales of Pepsi Corporate brands (case sales)
consist of sales of packaged products to retailers and through vending
machines and fountain syrup by company-owned and franchised bottlers.
Previously existing Ocean Spray products sold to retailers under a
distribution agreement are not included in reported case sales growth.
Third quarter domestic and international case sales include the calendar
months of June, July and August, consistent with prior years. Domestic
case sales increased 5% for the quarter and 4% year-to-date, reflecting
double-digit growth in the Mountain Dew brand and solid increases in Brand
Pepsi. Total alternative beverages, which include Lipton brand ready-to-
drink tea, All Sport and the jointly developed Ocean Spray Lemonade
products, grew at a double-digit rate for the quarter and year-to-date.
The alternative beverage advances reflected strong double-digit growth in
Lipton brand tea and All Sport, partially offset by significant declines in
Ocean Spray Lemonade products. The growth in Lipton was led by volume
gains from Lipton Brisk and fountain syrup which more than offset lower
volumes of Lipton Original. Excluding the alternative beverages, case
sales growth was unchanged at 5% for the quarter and 4% year-to-date. Case
sales of fountain syrup grew at a slower rate than packaged products for
both the quarter and year-to-date.
- -16-
Domestic profits increased $27 million or 8% for the quarter and $120
million or 16% year-to-date. The quarter and year-to-date benefited from
the higher pricing on CSD packages and concentrate which exceeded increased
product costs, primarily higher packaging costs. Volume gains, driven by
packaged products, contributed $25 million to profit growth for the quarter
and $84 million year-to-date. Significant declines in administrative
expenses for both periods reflected savings from a previously disclosed
1994 consolidation of headquarters and field operations. For the quarter
and year-to-date, selling and distribution expenses grew at a faster rate
than volume, partially reflecting the effects of a 6 week strike in
California that ended in August, but grew at a slower rate than sales,
reflecting the benefits of increased pricing. Advertising and marketing
expenses increased modestly for both the quarter and year-to-date. Profit
growth for the quarter was aided by favorable results from alternative
beverages, reflecting profits from Ocean Spray Lemonade compared to losses
in the prior year, higher profits from Lipton and breakeven results on All
Sport compared to losses in the prior year. The favorable results on Ocean
Spray Lemonade and All Sport reflected the absence of higher costs in 1994
attributable to the national rollout of these products. The quarter and
year-to-date growth was dampened by $14.7 million of net charges taken in
the quarter, primarily for estimated probable future payments related to
losses on raw materials and marketing equipment supply contracts, and the
lapping of a $7.1 million one-time noncash net credit recognized in the
third quarter of 1994. The net credit related to Pepsi-Cola reversing into
income $24.2 million of the $115.4 million restructuring accrual
established in 1992 and recording an additional $17.1 million charge
reflecting management's decision to further consolidate field and
headquarters operations. Year-to-date profit growth was also mitigated by
the absence of 1994 gains totaling $8.9 million resulting from sales of
bottling businesses. The domestic profit margin was essentially unchanged
at 18.8% for the quarter and increased more than one point to 17.8% year-to-
date.
International sales rose $129 million or 14% for the quarter and $357
million or 17% year-to-date. Comparisons are affected by the impact of
start-up of company-owned bottling and distribution operations within the
past twelve months ("start-up operations"), principally in Eastern Europe,
and acquisitions, consisting primarily of franchised and independent
bottling operations in Asia, as well as the absence of certain small
operations sold (collectively, "net acquisitions"). The start-up
operations and net acquisitions contributed $32 million and $17 million,
respectively, for the quarter, and $69 million and $38 million,
respectively, year-to-date or 5 points to the sales growth on a combined
basis for both periods. Sales growth for the quarter benefited from volume
growth of $40 million reflecting higher volume of packaged product sales,
partially offset by lower concentrate shipments to franchised bottlers.
Year-to-date sales growth benefited from increased volumes of both packaged
products and concentrate totaling $188 million. Sales growth for the
quarter and year-to-date was also aided by higher effective net prices on
packaged products and concentrate, due in part to product, package and
country mix. The higher concentrate pricing primarily reflected increased
prices in Mexico. Favorable currency translation impacts, primarily due to
the strength of Western European currencies and the Japanese yen, were
substantially offset in the quarter and year-to-date by unfavorable
currency translation impacts, primarily reflecting a weaker Mexican peso.
- -17-
International case sales increased 8% for the quarter and 9% year-to-
date. The advances were broad based and reflected strong double-digit
growth in Asia, led by gains in China, India, Thailand and Pakistan, and
Eastern Europe, led by the Czech and Slovak Republics, Hungary and Russia.
The European division, primarily comprised of Western European countries,
Turkey and Israel, and the Middle East/North Africa division also
experienced double-digit growth. Gains in the European Division were led
by Turkey and the U.K. Latin America and Mexico represent our largest
international case sales division and country, respectively. Case sales in
Latin America declined for the quarter but increased year-to-date. Double-
digit declines in Mexico and Argentina were partially offset in the quarter
and more than offset year-to-date by triple-digit growth in Brazil and
strong growth in Venezuela.
International profits increased $12 million or 12% for the quarter and
$14 million or 8% year-to-date. Start-up operations and net acquisitions
each aided profits by $3 million or 7 points on a combined basis for the
quarter. For the year-to-date, start-up operations reduced profits by $5
million and net acquisitions contributed $1 million which, on a combined
basis, reduced profit growth by 2 points. Profit growth for the quarter
benefited from the higher effective net prices on concentrate and packaged
products and modest volume growth of $2 million. These benefits for the
quarter were partially offset by increased advertising and marketing
expenses, unfavorable currency translation impacts, principally due to the
devaluation of the Mexican peso, and higher field and headquarters
administrative expenses. For the year-to-date, profit growth reflected
increased volumes of packaged products and concentrate of $58 million and
the higher effective net prices on concentrate and packaged products. The
year-to-date benefits were partially offset by higher field and
headquarters administrative expenses and unfavorable currency translation
impacts, primarily related to the Mexican peso. The higher effective net
prices for both the quarter and year-to-date were partially offset by
higher operating costs, due in part to product, package and country mix.
On a regional basis, the quarter and year-to-date profit growth
reflected strong gains in Asia, the European division and Canada. The
growth in Asia reflected gains in Thailand, reduced losses in India and,
for the year-to-date, higher profits in Japan. The growth in the European
division was led by advances in the United Kingdom, Turkey, Spain and, year-
to-date, reduced losses in Germany. Eastern Europe contributed to the
profit growth for the quarter, however the year-to-date reflected increased
losses. Profit growth for the quarter and year-to-date was hampered by
declines in Latin America, reflecting lower profits in Mexico and
Argentina, which were partially offset in the quarter and year-to-date by
increased profits in Brazil. The international profit margin declined less
than one-half point to 11.1% for the quarter and slightly more than one-
half point to 7.6% year-to-date.
As discussed on pages 12 and 13, results in Mexico have been adversely
impacted by economic difficulties resulting from the significant
devaluation of the Mexican peso. Net sales in Mexico declined $28 million
for the quarter and $46 million year-to-date, while operating profits
declined $8 million or 60% to $6 million for the quarter and $18 million or
63% to $11 million year-to-date. Mexico represented 5% and 6% of 1995
international beverages segment operating profit for the quarter and year-
to-date, respectively, and 14% and 16% for the comparable periods in 1994.
Mexico represented 22% of international beverages operating profits for the
full year 1994.
- -18-
Snack Foods
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales
Domestic $1,348.9 $1,202.3 12 $3,826.4 $3,412.2 12
Int'l 717.6 741.9 (3) 2,061.5 2,122.0 (3)
$2,066.5 $1,944.2 6 $5,887.9 $5,534.2 6
Operating
Profit
Domestic $ 287.8 $ 268.4 7 $ 784.3 $ 699.1 12
Int'l 65.9 80.1 (18) 201.2 238.6 (16)
$ 353.7 $ 348.5 1 $ 985.5 $ 937.7 5
Worldwide net sales rose $122 million for the quarter and $354 million year-
to-date, or 6% for both periods. Worldwide operating profits increased $5
million or 1% for the quarter and $48 million or 5% year-to-date.
Domestic sales grew $147 million for the quarter and $414 million year-
to-date, or 12% for both periods, reflecting volume growth of $126 million
for the quarter and $376 million year-to-date. This growth reflected gains
in almost all major brands, led by our low-fat and no-fat snacks, which
accounted for about 40% of the total sales growth for both the quarter and
year-to-date. Volume growth was aided by increased promotional price
allowances and merchandising programs to retailers, which are reported as
marketing expenses, and therefore, do not reduce reported sales. For both
the quarter and year-to-date, modestly increased pricing across all major
brands was partially offset by a sales mix shift to larger value-oriented
packages.
Domestic pound volume advanced 11% for both the quarter and year-to-
date, reflecting exceptional performance from the low-fat and no-fat
categories. These categories comprised nearly 50% of the total pound
growth, driven by Rold Gold Fat Free Thins brand pretzels, Baked Tostitos
brand tortilla chips, Tostitos brand salsa and Ruffles Light brand potato
chips. Other Ruffles products and Lay's brand potato chips grew single
digits during the quarter and year-to-date, benefiting from the late 1994
introduction of Lay's KC Masterpiece Barbecue Flavor brand potato chips and
the third quarter introduction of French Onion Flavored Ruffles and Lay's
Salsa & Cheese Flavored brand potato chips flavor extensions. Doritos
brand tortilla chips, driven by new line extensions and packaging, had
solid single-digit pound growth for the quarter and year-to-date. Gains in
the Taco Bell line of Mexican foods also aided the quarter and year-to-date
growth. For both the quarter and year-to-date, Chee.tos cheese flavored
snacks, fueled by fried Chee.tos, had single-digit growth, while Fritos
brand corn chips declined slightly.
- -19-
Domestic profits grew $19 million or 7% and $85 million or 12% for the
quarter and year-to-date, respectively. The low-fat and no-fat categories
contributed about 80% and 45% of the total profit growth for the quarter
and year-to-date, respectively. The profit increase reflected strong
volume growth, which contributed $61 million and $185 million for the
quarter and year-to-date, respectively, and higher pricing that exceeded
increased promotional allowances and merchandising support. This growth
was partially offset by increased operating costs which were driven by
higher selling and distribution expenses, administrative expenses, and
increased investment in brand marketing to support and maintain strong
volume momentum. The higher administrative costs reflected investment
spending to maintain volume growth and a competitive advantage including
new manufacturing and delivery systems and a reorganization of field
operations to improve customer service. The profit growth was also
mitigated by higher manufacturing costs, reflecting increased capacity
costs and higher carton and packaging costs, partially offset by favorable
commodity costs and the unfavorable sales mix shift to lower-margin value-
oriented packages. Potato and oil costs were favorable for both the
quarter and year-to-date. Although difficult to forecast, corn costs for
full year 1995 are expected to remain about even with 1994, while potato
and vegetable oil costs for the full year are expected to decline from the
high 1994 levels. Carton and packaging costs are expected to increase for
full year 1995. The domestic profit margin decreased one point in the
quarter to 21.3% and remained unchanged at 20.5% year-to-date.
International sales decreased $24 million for the quarter and $61
million year-to-date or 3% for both periods. Acquisitions contributed $12
million for the quarter and $29 million year-to-date reducing the decline
by two points and one point for the respective periods. The decline was
driven by a net unfavorable currency translation impact, principally due to
the devaluation of the Mexican peso. Higher pricing, primarily in Mexico,
increased volumes of $43 million and $233 million for the quarter and year-
to-date, respectively, and a favorable mix shift to higher-priced packages
and products, partially offset the decline. Higher volumes were led by
Brazil and the U.K., partially offset by declines at Sabritas, which
includes our snack chip and Alegro candy businesses in Mexico.
International kilo growth is reported on a systemwide basis, which
includes both consolidated businesses and joint ventures operating for at
least one year. Salty snack chip kilos rose 12% for both the quarter and
year-to-date, as volumes in Brazil about doubled, reflecting a more stable
economy, and the U.K., Netherlands and Spain achieved double-digit growth,
fueled by in-bag promotions. These advances were partially offset by
double-digit declines at Sabritas. Sweet snack kilos grew 12% for the
quarter and 14% year-to-date, reflecting double-digit advances at Gamesa,
our cookie business in Mexico, partially offset by a decline in Poland.
The year-to-date also benefited from double-digit growth at the Alegro
division (formerly Sonrics) of Sabritas.
- -20-
International profits decreased $14 million or 18% for the quarter and
$37 million or 16% year-to-date. For both periods, higher pricing, the
favorable mix shift to higher-priced packages and products and increased
volumes of $3 million and $34 million for the quarter and year-to-date,
respectively, were more than offset by higher operating costs, a net
unfavorable currency translation impact, driven by the devaluation of the
Mexican peso, and increased administrative costs. The increased operating
costs reflected higher manufacturing costs due to increased commodity and
packaging costs, higher wages and increased selling and distribution
expenses, and on a year-to-date basis, higher advertising expenses. The
higher administrative costs reflected broad-based investment spending on
regional business development activities and increased headquarters
expenses. The international profit margin decreased about one and one-half
points to 9.2% for the quarter and 9.8% year-to-date. The decreases are
primarily due to Mexico, as declines at Sabritas were only partially offset
by gains at Gamesa, and the increased investment spending on regional
business development activities partially offset by gains in the U.K. and
Brazil.
As discussed on pages 12 and 13, results in Mexico have been adversely
impacted by economic difficulties resulting from the significant
devaluation of the Mexican peso. Net sales in Mexico declined $140 million
for the quarter and $406 million year-to-date, while segment operating
profits declined $28 million or 54% to $24 million for the quarter and $85
million or 51% to $83 million year-to-date. Mexico represented 37% and 41%
of 1995 international snack foods segment operating profit for the quarter
and year-to-date, respectively, and 66% and 70% for the comparable periods
in 1994. Mexico represented 63% of international snack foods segment
operating profits for the full year 1994.
Profits declined almost 60% at Sabritas during the quarter and year-to-
date. This decline reflected an increase in operating costs, an
unfavorable currency translation impact and lower volumes, which were only
partially offset by higher pricing. The increased operating costs
reflected significantly higher manufacturing costs due to higher ingredient
and wage costs, as well as increased selling and distribution expenses, and
for the year-to-date, increased advertising expenses. Lower-margin sweet
snack kilo volume from the Alegro division was unchanged in the quarter,
due to lapping of a successful 1994 promotion, and increased 21% year-to-
date. Higher-margin salty kilos declined 28% for the quarter and 20% year-
to-date, due in part to higher effective pricing and lapping strong volume
gains in 1994 as a result of a successful in-bag promotion.
Despite the effects of the economic difficulties resulting from the
devaluation of the Mexican peso, Gamesa's profits about tripled in the
quarter and year-to-date, both on a small base, as higher pricing, a
favorable package mix shift to higher-margin single-serve products and
increased volumes more than offset higher operating costs and the
unfavorable currency translation impact. The increased operating costs
primarily reflected higher manufacturing costs reflecting higher ingredient
and wage costs and higher advertising expenses. Sweet snack kilo grew 21%
for the quarter and 17% year-to-date driven by route expansion. The
quarter was also aided by a successful promotion.
- -21-
Walkers profits grew 31% and 47% for the quarter and year-to-date,
respectively, driven by increased volumes, reflecting gains in the Walkers
Crisps brand and, in the quarter, successful promotions. Higher
manufacturing costs, reflecting higher potato and packaging costs, were
partially offset in the quarter and more than offset year-to-date by
favorable selling and distribution and advertising and marketing expenses.
Increased volume of Doritos brand tortilla chips, introduced late in the
second quarter of 1994, represented approximately 15% and 24% of the kilo
growth in the U.K. for the quarter and year-to-date, respectively.
Although Doritos generated a slight profit for the quarter compared to a
loss last year, the substantially reduced year-to-date losses reflected
continued heavy advertising and marketing investment to expand the
acceptance by consumers of corn-based snack foods.
Brazil's profits tripled in the quarter and quadrupled year-to-date
both on a relatively small base, as increased volumes of both core and
value line products, a favorable mix shift to higher-priced packages and
reduced selling and distribution expenses were only partially offset by
higher manufacturing costs, primarily potato costs. Investments are
currently being made to expand production capacity to meet the strong
volume demands, due in part to the substantial improvement in the country's
economy.
Restaurants
For purposes of the Restaurants analysis, net sales by PFS, PepsiCo's
restaurant distribution operation, to the franchisees of each restaurant
chain and the related estimated operating profits have been allocated to
each restaurant chain.
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales
Domestic $2,234.0 $2,069.8 8 $6,381.3 $5,886.2 8
Int'l 509.1 430.5 18 1,450.6 1,181.3 23
$2,743.1 $2,500.3 10 $7,831.9 $7,067.5 11
Operating
Profit
Domestic $ 208.6 $ 189.7 10 $ 482.2 $ 438.4 10
Int'l 36.5 21.4 71 86.7 53.9 61
$ 245.1 $ 211.1 16 $ 568.9 $ 492.3 16
Worldwide net sales increased $243 million or 10% and $764 million or
11% for the quarter and year-to-date, respectively. This growth reflected
$147 million for the quarter and $505 million for the year-to-date from
additional units (units constructed and acquired, principally from
franchisees, net of units closed or sold, principally to franchisees).
Volume growth of $30 million for the quarter and $87 million year-to-date
also aided sales growth. Domestic sales increased $164 million for the
quarter and $495 million year-to-date or 8% for both periods.
International sales rose $79 million or 18% for the quarter and $269
million or 23% year-to-date.
- -22-
Worldwide operating profits advanced $34 million for the quarter and
$77 million year-to-date or 16% for both periods aided by comparisons to a
weak profit performance in 1994. The increase reflected additional units
that contributed $24 million for the quarter and $63 million year-to-date,
volume growth of $12 million for the quarter and $18 million year-to-date
and increased license fees and franchise royalty revenues. These increases
were partially offset by higher administrative and support spending and
lower effective pricing, due in part to the net impacts of product and
country mix. The year-to-date also benefited from reduced domestic store
operating costs and favorable net currency translation impacts which were
partially offset by a $16 million charge for the relocation of certain of
Pizza Hut's domestic headquarters functions. The worldwide profit margin
increased about one-half point to 8.9% and 7.3% for the quarter and year-to-
date, respectively.
Domestic profits increased $19 million for the quarter and $44 million
year-to-date or 10% for both periods while the profit margin remained
relatively unchanged for the quarter and year-to-date at 9.3% and 7.6%,
respectively. International profits rose $15 million or 71% for the
quarter and $33 million or 61% year-to-date and the profit margin increased
more than 2 points to 7.2% for the quarter and nearly one and one-half
points to 6.0% year-to-date.
As discussed on pages 12 and 13, results in Mexico have been adversely
impacted by economic difficulties resulting from the significant
devaluation of the Mexican peso. Net sales in Mexico declined $17 million
for the quarter and $42 million year-to-date, while operating losses
increased $1 million to $3 million for the quarter and operating losses of
$9 million were incurred year-to-date compared to break-even results in
1994. For the full year 1994, Mexico incurred an operating loss of $9
million.
As disclosed in our 1994 Annual Report and updated in our prior 1995
reports on Form 10-Q, we have been evaluating and have begun to execute
actions in 1995 in an effort to improve total restaurant operating results
and returns on our restaurant investments. Our overall strategy is to
leverage the collective strength of our three restaurant concepts by
strengthening our brand leadership, leveraging our business systems and
restaurant development activities and achieving operational excellence.
Brand leadership contemplates, in part, the need to be innovative by
providing new products and programs to respond to consumer needs while
maintaining a value orientation. This year, for example, we have
introduced several new successful products such as Pizza Hut's Stuffed
Crust Pizza and Buffalo Wings, KFC's reformulated Original Recipe product
and Crispy Strips and Taco Bell's Double Decker Taco and Texas Taco. In
addition, we have also offered new programs to respond to consumer needs
such as the Mega Meal value offering and delivery service at KFC and the
Border Lights menu, Kids' meals and Extreme Value Meals at Taco Bell. With
respect to leveraging our business systems, consolidation of international
headquarters and field administration has begun this year and domestic
administrative operations, such as payroll, accounts payable, etc., are
expected to be consolidated over the next couple of years. Also,
restaurant procurement is being consolidated on a worldwide basis with
significant annual savings anticipated in 1996. As we move forward, our
restaurant concepts will share facilities when appropriate. For example,
early indications are that our combined Taco Bell - KFC domestic units are
performing well as the strong Taco Bell lunch crowd balances the heavy KFC
dinner customers. In addition, we plan to selectively use franchisees in
certain markets where their expertise can be leveraged to improve the
overall operational excellence of our concepts systemwide.
- -23-
Although there was not a material impact to earnings to date, we have
begun to refranchise and license company-operated stores and increase
closures of others in 1995. We expect that system units will, on average,
continue to expand at its current annual rate of 6%, though only 1% of the
net growth will be company-operated. As a result, we anticipate that our
overall ownership percentage of total system units will decline by one to
two percentage points over the next three to five years, driven by
domestic. A summary of the 1995 year-to-date domestic restaurant unit
activity through the third quarter is as follows:
Company-
Operated Franchised Licensed Total
Domestic Restaurants
Beginning of Year 10,520 7,238 1,693 19,451
New Builds & Acquisitions 337 130 636 1,103
Refranchising & Licensing (145) 53 92 -
Closures (176) (68) (75) (319)
September 9, 1995 10,536 7,353 2,346 20,235
_______________________________________________________________
Domestic By Restaurant Chain:
Pizza Hut
Beginning of Year 5,249 2,708 661 8,618
New Builds & Acquisitions 139 55 191 385
Refranchising & Licensing (38) 38 - -
Closures (116) (39) (37) (192)
September 9, 1995 5,234 2,762 815 8,811
Taco Bell
Beginning of Year 3,232 1,523 929 5,684
New Builds & Acquisitions 189 58 429 676
Refranchising & Licensing (107) 15 92 -
Closures (41) (4) (22) (67)
September 9, 1995 3,273 1,592 1,428 6,293
KFC
Beginning of Year 2,039 3,007 103 5,149
New Builds & Acquisitions 9 17 16 42
Refranchising & Licensing - - - -
Closures (19) (25) (16) (60)
September 9, 1995 2,029 2,999 103 5,131
Additionally, 1995 combined restaurant capital spending and
acquisitions are anticipated to be approximately $200 to $300 million lower
than 1994, and together with a forecasted improvement in cash flow from
operations, should result in 1995 restaurant cash flows that are
approximately $400 to $500 million higher compared to 1994.
We will continue to take additional actions, where appropriate, as we
refine our restaurant operating and investment strategies to improve
performance.
- -24-
Pizza Hut
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales $1,170.4 $1,037.7 13 $3,456.6 $3,022.4 14
Operating
Profits $ 104.5 $ 75.8 38 $ 282.5 $ 202.3 40
Worldwide sales increased $133 million or 13% for the quarter and $434
million or 14% year-to-date. Domestic operations represent the major
portion of worldwide Pizza Hut. The worldwide sales increase was driven by
additional units that contributed $64 million for the quarter and $247
million year-to-date, higher effective pricing, due in part to the net
impacts of product and country mix, and higher volumes of $14 million for
the quarter and $70 million year-to-date. The higher effective net pricing
was driven by lapping high discounting in 1994 combined with the
introduction of Buffalo Wings in 1995. The increased year-to-date volumes
reflected domestic gains driven by Stuffed Crust Pizza, introduced
nationally early in the second quarter.
Same store sales for domestic company-owned units increased 6% for the
quarter and 5% year-to-date though volume increased at lower rates,
particularly in the quarter. The improved same store sales performance was
driven by Stuffed Crust Pizza. The quarterly performance reflected
increases in the delivery and carryout distribution channels. The year-to-
date performance was driven by strong growth in carryout and solid growth
in delivery.
Worldwide profits grew $29 million or 38% for the quarter and $80
million or 40% year-to-date aided by comparisons to a weak profit
performance in 1994. This growth reflected additional units that
contributed $13 million for the quarter and $35 million year-to-date,
volume gains of $8 million for the quarter and $21 year-to-date, the higher
effective pricing, increased franchise royalty revenues and lower domestic
store operating costs. These were partially offset by increased
international administrative and support spending, primarily to develop
international markets. The lower store operating costs primarily reflected
favorable food costs, led by lower cheese and meat costs, increased labor
productivity and reduced advertising and marketing expenses. Though
difficult to forecast, domestic food costs are expected to be lower in 1995
as compared to 1994, led by lower cheese and meat costs. However, the
cheese and meat favorabilties experienced to date are not expected to
continue in the fourth quarter as prices are expected to increase resulting
in fourth quarter cheese and meat costs about even with those of last year.
The year-to-date profit growth was also depressed by a net $16 million
charge composed of a $20 million charge recorded in the second quarter for
the relocation of certain functions of Pizza Hut's domestic headquarters
from Wichita to Dallas, partially offset by a third quarter $4 million
favorable adjustment as a result of better than expected costs. The year-
to-date was also hampered by 1995 actuarial adjustments to prior and
current year domestic casualty claims liabilities. Year-to-date results
also include gains of $12 million from refranchising a number of domestic
company-owned stores, which were partially offset by increased store
closure costs of $8 million. Stuffed Crust Pizza contributed most of the
quarter and year-to-date growth in sales and operating profits. The
worldwide profit margin increased about one and one-half points to 8.9% for
the quarter and to 8.2% year-to-date.
- -25-
International sales for the quarter and year-to-date posted strong
double-digit growth, led by additional units in Korea, Spain, Germany, New
Zealand and Poland as well as increased volumes. International profits for
the quarter and year-to-date increased approximately threefold. The growth
for the quarter reflected volume growth, additional units, favorable net
currency translation impacts, increased franchise royalty revenues and the
higher effective pricing. The year-to-date gain reflected additional
units, the higher effective pricing, increased franchise royalty revenues,
favorable net currency translation impacts and higher volumes. These
quarter and year-to-date benefits were partially offset by increased store
operating costs and field administrative expenses. The increased
administrative expenses reflected costs to support country development
strategies, partially offset on a year-to-date basis by reduced
administrative spending as a result of the consolidation with KFC of the
international restaurant headquarters and certain regional offices.
Strong profit gains in Korea for the quarter and year-to-date
primarily reflected additional units, higher effective pricing, due in part
to the net impacts of product mix, and year-to-date, volume growth,
partially offset by higher administrative expenses to support expansion.
In Australia, our largest international sales market, profits for the
quarter and year-to-date improved significantly as a result of the full
implementation of its value strategy and the adoption of store cost control
measures. Canada's profits increased for the quarter and year-to-date,
primarily the result of a successful introduction of Stuffed Crust Pizza.
Additionally, the international profit growth for the quarter and year-to-
date continued to be moderated by increased losses in Spain, Brazil and
Mexico. Mexico's quarter and year-to-date operating losses increased
significantly due to the adverse effects of the devaluation of the peso,
with higher costs only partially offset by increased volumes, the favorable
currency translation impact of increased operating losses and higher
effective pricing, due in part to the net impacts of product mix.
Taco Bell
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales $893.2 $829.8 8 $2,461.0 $2,270.6 8
Operating
Profits $ 81.2 $ 86.8 (6) $ 156.3 $ 175.1 (11)
Worldwide sales increased $63 million for the quarter and $190 million year-
to-date or 8% for both periods. Domestic operations represent
substantially all of worldwide Taco Bell. The worldwide sales growth was
led by additional Taco Bell units which contributed $66 million for the
quarter and $191 million year-to-date. Restaurant volumes declined $22
million and $54 million for the quarter and year-to-date, respectively, as
gains from Border Light products were more than offset by declines in other
menu items. The volume declines resulted in a 4% decrease in same store
sales for domestic company-owned Taco Bell units for both periods, though
volume decreased at a slightly higher rate for the quarter. These
restaurant volume declines were partially offset by increased PFS sales to
franchisees of $14 million and $43 million for the quarter and year-to-
date, respectively, primarily reflecting sales to existing franchisees
previously serviced by another supplier.
- -26-
Worldwide profits declined $6 million or 6% for the quarter and $19
million or 11% year-to-date. The decrease in profits reflected a net
unfavorable product mix shift to lower-margin products, net volume declines
for the quarter and year-to-date of $9 million and $19 million,
respectively, and year-to-date, higher promotional costs. The net volume
declines resulted from the reduced same store sales partially offset year-
to-date by the lower-margin PFS increases. Year-to-date results were
adversely impacted by roll-out costs for Border Lights incurred during the
first and second quarters. These unfavorable impacts were partially offset
by additional Taco Bell units, which contributed $8 million for the quarter
and $17 million year-to-date, lower store operating costs, increased
license fees and franchise royalty revenues and reduced headquarters
administrative expenses. The decrease in store operating costs reflected
favorable food costs and year-to-date, reduced local store marketing.
Lower meat and bean prices for both the quarter and year-to-date were
partially offset year-to-date by increased lettuce costs. Food costs for
the full year are expected to be favorable as compared to 1994, led by
lower meat prices.
Operating profit at Chevys declined for the quarter and losses
increased year-to-date, primarily reflecting one-time costs associated with
a reduction of anticipated new unit growth and a decline in same store
sales. Hot 'n Now's (HNN) losses declined for the quarter and year-to-
date. As disclosed in our 1994 Annual Report and updated in our previous
1995 reports on Form 10-Q, Taco Bell, in an effort to eliminate HNN's
operating losses over time, plans to license or franchise all of its units,
with almost 75% of the units licensed or franchised at the end of the third
quarter. Taco Bell originally anticipated that the program would be
completed during 1995; however, it is now expected to be completed during
1996. Based upon its original cash flow forecasts for each HNN market,
which assumed an improvement in the operating performance, Taco Bell
expected to recover its investment in HNN. If improved operating
performance is not achieved or if the licensees exercise certain provisions
contained in the license arrangements, some or all of HNN's net assets may
become impaired. Initial results of the recently licensed and franchised
stores have been disappointing. Taco Bell is in the process of updating
its forecasts and expects to complete its evaluation of the recoverability
of all of its HNN long-lived assets in the fourth quarter.
International operations posted strong double-digit sales growth for
both the quarter and year-to-date, reflecting additional units.
International operating profits were unchanged for the quarter but losses
increased slightly year-to-date from a modest loss in 1994.
Taco Bell worldwide profit margin fell nearly one and one-half points
for the quarter and year-to-date to 9.1% and 6.4%, respectively.
- -27-
KFC
12 Weeks Ended 36 Weeks Ended
% %
9/9/95 9/3/94 Change 9/9/95 9/3/94 Change
($ in millions)
Net Sales $679.5 $632.8 7 $1,914.3 $1,774.5 8
Operating
Profits $ 59.4 $ 48.5 22 $ 130.1 $ 114.9 13
Worldwide sales rose $47 million or 7% for the quarter and $140 million or
8% year-to-date. The sales growth reflected additional units that
contributed $17 million for the quarter and $67 million year-to-date and
volume gains of $24 million for the quarter and $28 million year-to-date.
Worldwide profits increased $11 million or 22% for the quarter and $15
million or 13% year-to-date. The performance for the quarter and year-to-
date reflected higher volumes of $13 million and $16 million, respectively,
additional units that contributed $3 million for the quarter and $11
million year-to-date and increased franchise royalty revenues. The year-to-
date also included higher effective pricing, led by Mexico, due in part to
the net impacts of product and country mix, and a net favorable currency
translation impact. Partially offsetting these quarter and year-to-date
gains were higher administrative and support costs, costs incurred in
expanding domestic delivery service and increased store operating costs.
The worldwide profit margin increased 1 point to 8.7% for the quarter and
increased slightly to 6.8% year-to-date.
An improvement in KFC's domestic sales for both the quarter and year-
to-date reflected volume gains. The quarter benefited from the
introduction of a reformulation of the Original Recipe product and "You'd
Be Crazy To Cook" promotion while the year-to-date primarily reflected
increases from the national introduction of the value-oriented Mega Meal
late in 1994 and the expansion of delivery. Partially offsetting the year-
to-date volume gains was lower net pricing, reflecting increased price
promotions, primarily due to the Mega Meal. Same store sales advanced 7%
for the quarter and 4% year-to-date, though year-to-date volume grew at an
even higher rate.
Domestic profits grew at a double-digit rate for the quarter and
modestly for the year-to-date reflecting increased volumes, additional
units and, for the year-to-date, lower store operating costs. The quarter
and year-to-date gains were partially offset by losses attributed to
expanding delivery service and increased spending related to new product
development and, for the quarter, increased store operating costs. The
year-to-date profit growth was also hampered by increased promotional
activity that was partially offset by higher pricing and the absence of
favorable actuarial adjustments for casualty claims liabilities in the
second quarter of 1994. Store operating costs for both periods reflected
increased labor costs, primarily the result of efforts to improve
restaurant quality and service. However, year-to-date those labor costs
were substantially offset by reduced food costs, primarily due to lower
chicken costs and the reformulation of side items late in the second
quarter of 1994, and lower fixed costs.
- -28-
Strong international sales growth for the quarter and year-to-date was
led by additional units, primarily in Thailand, China and Brazil, and, for
the year-to-date, higher effective pricing in Mexico, partially offset by
volume declines in Mexico as a result of the devaluation of the peso and
its related adverse effects. International profits experienced strong
double-digit growth for the quarter and year-to-date. The quarter
reflected gains from increased franchise royalty revenues, reduced store
operating costs, additional units, higher effective pricing, due in part to
the net impacts of country and product mix, and favorable net currency
translation impacts. These gains were partially offset by higher field
administrative and support costs. The year-to-date reflected benefits from
the higher effective pricing, led by Mexico, additional units, favorable
net currency translation impacts and increased franchise royalty revenues.
These gains were partially offset by higher field administrative and
support costs, lower volumes and increased store operating costs. The
increased field and administrative support costs for the quarter and year-
to-date, primarily for the development of international markets, were
somewhat mitigated in the quarter by the consolidation with Pizza Hut of
the international restaurant headquarters and certain regional offices.
In Australia, our largest international sales market, profits
increased significantly for the quarter and year-to-date primarily
reflecting increased volumes. Canada's profits for the quarter and year-to-
date improved reflecting higher effective pricing, due in part to the net
impacts of product mix. Year-to-date profit growth in the U.K. was due
primarily to additional units. In New Zealand, profits grew for both the
quarter and year-to-date reflecting volume growth. Mexico's operating
results improved slightly in the quarter as favorable currency translation
of increased operating losses and the higher effective pricing more than
offset volume declines. Mexico's year-to-date operating profits declined
sharply due to the adverse effects of the devaluation of the peso, with
reduced volumes and higher costs only partially offset by favorable
currency translation of current operating losses and the higher effective
pricing.
International sales represented about 40% of worldwide sales for both
the quarter and year-to-date in 1995 as compared to approximately 40% for
the quarter and 35% year-to-date in 1994. International profits
represented about 40% and 45% of worldwide profits for the quarter and year-
to-date in 1995, respectively, as compared to approximately 35% and 40% for
the quarter and year-to-date in 1994, respectively.
- -29-
Cash Flows and Financial Condition
Summary of Cash Flows
Year-to-date, net cash provided by operating activities of $2.2 billion
substantially funded capital spending of $1.3 billion, dividend payments of
$442 million, share repurchases of $381 million and acquisitions and
investments in affiliates of $224 million.
Mexico's cash flows from operations declined significantly on a year-
to-date basis as compared to 1994. The decline was primarily due to an
increase in operating working capital net cash outflows and decreased
earnings. Mexico represented approximately 2% and 8% of the year-to-date
consolidated cash flows from operations for 1995 and 1994, respectively.
For the full year 1994, Mexico represented approximately 7% of consolidated
cash flows from operations.
Operating Activities
Net cash provided by operating activities increased $100 million or 5% from
1994 to $2.2 billion due to a $273 million or 10% increase in income before
cumulative effect of accounting changes, after adding back all three
classes of noncash charges and credits, which was partially offset by a
$173 million increase in operating working capital net cash outflows. The
working capital net cash outflows primarily reflected increased growth of
accounts and notes receivable in 1995 compared to 1994, driven by worldwide
beverages and international snack foods. The growth in accounts and notes
receivable reflected slower collections, volume growth, advances to certain
international bottlers and lapping a one-time reduction in accounts and
notes receivable during the first half of 1994 as a result of changing the
distributor for Stolichnaya vodka. These outflows were partially offset by
a slower rate of decline in accounts payable in 1995 compared to 1994, led
by domestic beverages, and a greater reduction in prepaid expenses, taxes
and other current assets in 1995 compared to 1994.
- -30-
Investing Activities
PepsiCo's investing activities resulted in a net cash outflow of $1.6
billion in 1995 compared to $1.3 billion in 1994. The increased net cash
outflows principally reflected decreased net proceeds from PepsiCo's short-
term investment portfolios of $385 million, partially offset by a $165
million reduction in capital spending. PepsiCo continually reassesses its
alternatives to redeploy its investment portfolios, which are primarily
held outside the U.S., considering investment opportunities and risks, tax
consequences and overall financing strategies. The decline in capital
spending primarily reflected decreased spending in restaurants of $188
million and beverages of $152 million, partially offset by increased
domestic snack food spending of $134 million primarily for capacity
expansion. Capital spending for 1995 is currently projected to be
approximately $2.3 billion as compared to the $2.4 billion projection
disclosed as of the end of second quarter in our report on Form 10-Q.
Capital spending for the snack food and restaurant segments is projected to
be approximately 35% each of total spending, representing a 5 percentage
point shift in spending from the restaurant segment to the snack food
segment as compared to the projections included in PepsiCo's 1994 Annual
Report. This decline in restaurant spending is consistent with our overall
strategy to improve total restaurant operating results and returns on our
restaurant investments as summarized in management's analysis of restaurant
operations on pages 23 and 24. The $224 million of acquisitions and
investments in affiliates included acquisitions of and equity investments
in international franchised and independent bottling operations and equity
investments in international snack food operations. As noted in our 1994
Annual Report, we continue to seek opportunities to strengthen our position
in our domestic and international industry segments through strategic
acquisitions. For the full year, acquisition and investment activity is
expected to be about double the relatively low 1994 level.
Financing Activities
Year-to-date financing activities resulted in net cash outflows of $688
million as compared to $718 million for the same period in 1994. The $30
million decline in outflows principally reflected increased proceeds of $73
million from stock option exercises, partially offset by $44 million of
increased dividends paid.
See Note 2 to Condensed Consolidated Financial Statements for details
of debt issuances and repayments during the quarter. As of September 9,
1995, PepsiCo had authority from its Board of Directors to issue $4.4
billion of additional long-term debt and had capacity to issue up to $3.5
billion under shelf registrations in place in the U.S., Europe and Japan to
take advantage of marketplace opportunities. The principal purposes of
these facilities are for financing growth activities and refinancing
borrowings. Generally, PepsiCo intends to convert any foreign currency-
denominated debt obligations into U.S. dollar-denominated debt obligations
through foreign currency exchange agreements with strong, creditworthy
counterparties.
Through October 18, 1995, PepsiCo has repurchased 9.5 million shares
at a cost of $387 million in 1995. Including these 1995 purchases of
treasury stock, 24.9 million shares have been purchased under the 50
million share repurchase authority granted by PepsiCo's Board of Directors
on July 22, 1993.
- -31-
Financial Condition
At September 9, 1995 and December 31, 1994, $3.5 and $4.5 billion,
respectively, of short-term borrowings were classified as long-term,
reflecting PepsiCo's intent and ability, through the existence of its
unused revolving credit facilities, to refinance these borrowings on a long-
term basis. At September 9, 1995 and December 31, 1994, PepsiCo had unused
revolving credit agreements covering potential borrowings aggregating $4.5
billion and $3.5 billion, respectively. Effective January 3, 1995, PepsiCo
replaced its $3.5 billion of existing credit facilities with new credit
facilities aggregating $4.5 billion, of which $1.0 billion expire in
January 1996 and $3.5 billion expire in January 2000. These unused credit
facilities provide the ability to refinance short-term borrowings and are
available for acquisitions and other general corporate purposes.
As described in PepsiCo's 1994 Annual Report, PepsiCo measures
financial leverage on a market value basis as well as a historical cost
basis. PepsiCo believes that the market value ratio is an appropriate
measure of financial leverage. PepsiCo's market value ratio was 22% at
September 9, 1995 and 26% at December 31, 1994. The decrease was primarily
due to a 26% increase in PepsiCo's stock price. PepsiCo's historical cost
ratio of net debt to net capital employed was 47% at September 9, 1995 and
49% at December 31, 1994. The decline was primarily due to a 5% increase
in net capital.
Because of PepsiCo's strong cash generating capability and its strong
financial condition, PepsiCo has continued access to capital markets
throughout the world.
PepsiCo's operating working capital position, which excludes short-
term investments and short-term borrowings, was a negative $167 million at
September 9, 1995 as compared to a negative $677 million at December 31,
1994 and a negative $346 million at September 3, 1994. PepsiCo's negative
operating working capital position, which principally reflects the cash
sales nature of its restaurant operations, effectively provides additional
capital for investment. The negative working capital position at the end
of the third quarter compared to the third quarter 1994 position reflects
PepsiCo's continued trend of increased investments in its more working
capital intensive bottling and snack food businesses. The $510 million
increase in working capital compared to the amount at December 31, 1994
primarily reflected a $717 million increase in accounts and notes
receivable, led by the worldwide beverage and domestic snack food
businesses, offset by a decrease in prepaid expenses, taxes and other
current assets, primarily due to the timing of insurance payments. The
increase in receivables was due to seasonality, advances to international
bottlers, slower collections and volume growth.
Shareholders' equity increased $637 million as net income of $1.4
billion was partially offset by $457 million of dividends declared, a $260
million increase in treasury stock, driven by share repurchases, and a $137
million net unfavorable change in the currency translation account, driven
by the devaluation of the Mexican peso.
- -32-
<audit-report>
Independent Accountants' Review Report
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of September 9, 1995 and the related
condensed consolidated statement of income for the twelve and thirty-six
weeks ended September 9, 1995 and September 3, 1994, and the condensed
consolidated statement of cash flows for the thirty-six weeks ended
September 9, 1995 and September 3, 1994. These financial statements are
the responsibility of PepsiCo, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries
as of December 31, 1994, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended not presented
herein; and in our report dated February 7, 1995, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1994, is fairly presented, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Our report, referred to above, contains an explanatory paragraph that
states that PepsiCo, Inc. in 1994 adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits," and changed
its method for calculating the market-related value of pension plan assets
used in the determination of pension expense and in 1992 adopted the
provisions of the Financial Accounting Standards Board's Statements of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and No. 109, "Accounting for
Income Taxes."
KPMG Peat Marwick LLP
New York, New York
October 17, 1995
- -33-
</audit-report>
PART II. OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 11 - Computation of Net Income Per Share
of Capital Stock - Primary and Fully Diluted
Exhibit 12 - Computation of Ratio of Earnings to
Fixed Charges
Exhibit 15 - Letter from KPMG Peat Marwick LLP regarding
Unaudited Interim Financial Information
(Accountants' Acknowledgment)
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter covered by this report.
- -34-
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned.
PEPSICO, INC.
(Registrant)
Date: October 23, 1995 Robert L. Carleton
Senior Vice President and
Controller
Date: October 23, 1995 Edward V. Lahey, Jr.
Senior Vice President, General
Counsel and Secretary
- -35-