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 7, 1996 (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 4, 1996:
1,553,550,167
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of
Income - 12 and 36 weeks ended
September 7, 1996 and September 9, 1995 2
Condensed Consolidated Statement of
Cash Flows - 36 weeks ended
September 7, 1996 and September 9, 1995 3
Condensed Consolidated Balance Sheet -
September 7, 1996 and December 30, 1995 4-5
Notes to Condensed Consolidated
Financial Statements 6-8
Management's Analysis of Consolidated
Operations, Cash Flows
and Financial Condition 9-46
Independent Accountants' Review Report 47
Part II Other Information and Signatures 48-57
- -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
9/7/96 9/9/95 9/7/96 9/9/95
Net Sales $7,867 $7,648 $22,112 $21,050
Costs and Expenses, net
Cost of sales 3,817 3,751 10,719 10,324
Selling, general and
administrative expenses 3,029 2,795 8,543 7,983
Amortization of intangible
assets 71 71 208 214
International beverages
impairment charges 390 - 390 -
Operating Profit 560 1,031 2,252 2,529
Interest expense (143) (159) (425) (481)
Interest income 25 29 73 85
Income Before Income Taxes 442 901 1,900 2,133
Provision for Income Taxes 298 284 779 708
Net Income $ 144 $ 617 $ 1,121 $ 1,425
Net Income Per Share $ 0.09 $ 0.39 $ 0.69 $ 0.89
Cash Dividends Declared
Per Share $0.115 $ 0.10 $ 0.33 $ 0.29
Average Shares Outstanding
Used To Calculate Net
Income Per Share 1,607 1,607 1,613 1,604
See accompanying notes.
- -2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
36 Weeks Ended
9/7/96 9/9/95
Cash Flows - Operating Activities
Net income $1,121 $ 1,425
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 1,177 1,214
International beverages impairment charges 390 -
Deferred income taxes 18 3
Other noncash charges and credits, net 223 248
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable (401) (777)
Inventories (68) (47)
Prepaid expenses, taxes and other
current assets (81) 102
Accounts payable (123) (73)
Income taxes payable 125 66
Other current liabilities 94 81
Net change in operating working capital (454) (648)
Net Cash Provided by Operating Activities 2,475 2,242
Cash Flows - Investing Activities
Capital spending (1,476) (1,302)
Sales of restaurants 249 21
Sales of property, plant and equipment 51 74
Acquisitions and investments in unconsolidated
affiliates (34) (224)
Short-term investments, by original maturity
More than three months - purchases (108) (258)
More than three months - maturities 184 195
Three months or less, net (96) 114
Other, net (159) (212)
Net Cash Used for Investing Activities (1,389) (1,592)
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt 1,679 1,721
Payments of long-term debt (1,037) (871)
Short-term borrowings, by original maturity
More than three months - proceeds 656 1,365
More than three months - payments (1,542) (2,091)
Three months or less, net 530 (98)
Purchases of treasury stock (1,051) (381)
Cash dividends paid (496) (442)
Proceeds from exercises of stock options 239 142
Other, net (31) (32)
Net Cash Used for Financing Activities (1,053) (687)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (1) 1
Net Increase (Decrease) in Cash and Cash Equivalents 32 (36)
Cash and Cash Equivalents - Beginning of year 382 331
Cash and Cash Equivalents - End of period $ 414 $ 295
See accompanying notes.
- -3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
Unaudited
9/7/96 12/30/95
Current Assets
Cash and cash equivalents $ 414 $ 382
Short-term investments, at cost 1,134 1,116
1,548 1,498
Accounts and notes receivable, less
allowance: 9/96 - $171, 12/95 - $150 2,826 2,407
Inventories
Raw materials and supplies 568 550
Finished goods 537 501
1,105 1,051
Prepaid expenses, taxes and other
current assets 680 590
Total Current Assets 6,159 5,546
Investments in Unconsolidated Affiliates 1,301 1,635
Property, Plant and Equipment 17,798 16,751
Accumulated Depreciation (7,472) (6,881)
10,326 9,870
Intangible Assets, net 7,445 7,584
Other Assets 755 797
Total Assets $25,986 $25,432
Continued on next page.
- -4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
Unaudited
9/7/96 12/30/95
Current Liabilities
Accounts payable $ 1,433 $ 1,556
Accrued compensation and benefits 860 815
Short-term borrowings 577 706
Income taxes payable 525 387
Accrued marketing 408 469
Other current liabilities 1,537 1,297
Total Current Liabilities 5,340 5,230
Long-Term Debt 8,985 8,509
Other Liabilities 2,552 2,495
Deferred Income Taxes 1,903 1,885
Shareholders' Equity
Capital stock, par value 1 2/3 cents per
share: authorized 3,600 shares, issued
9/96 and 12/95 - 1,726 29 29
Capital in excess of par value 1,177 1,045
Retained earnings 9,334 8,730
Currency translation adjustment (827) (808)
9,713 8,996
Less: Treasury Stock, at Cost
9/96 - 166 shares, 12/95 - 150 shares (2,507) (1,683)
Total Shareholders' Equity 7,206 7,313
Total Liabilities and
Shareholders' Equity $25,986 $25,432
See accompanying notes.
- -5-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The Condensed Consolidated Balance Sheet at September 7, 1996 and the
Condensed Consolidated Statement of Income for the 12 and 36 weeks ended
September 7, 1996 and September 9, 1995 and the Condensed Consolidated
Statement of Cash Flows for the 36 weeks ended September 7, 1996 and
September 9, 1995 have not been audited, but have been prepared in
conformity with the accounting principles applied in the PepsiCo, Inc. and
Subsidiaries (PepsiCo) 1995 Annual Report on Form 10-K (1995 Annual Report)
for the year ended December 30, 1995, except as disclosed in Notes 2 and 5
below. In the opinion of management, this information includes all material
adjustments, including adjustments of a normal and recurring nature as well
as for international beverages impairment charges described in Note 2,
necessary for a fair presentation. The results for the 12 and 36 weeks are
not necessarily indicative of the results expected for the year. Certain
reclassifications were made to prior year amounts to conform with the 1996
presentation.
(2) The largely noncash international beverages impairment charges of $390
million ($376 million after-tax or $0.23 per share) are composed of:
- - $361 million ($347 million after-tax or $0.21 per share) related
primarily to impaired investments in unconsolidated affiliates ($204
million) and concentrate-related assets and non-core assets (primarily
packaging) ($157 million) and
- - $29 million ($29 million after-tax or $0.02 per share) for PepsiCo's 24%
equity share of the one-time charges announced by Buenos Aires
Embotelladora S.A. (BAESA) in its August 8, 1996 press release.
The international beverage assets were deemed impaired due to a reduction
in forecasted cash flows that was attributable to increased competitive
activity and weakened macroeconomic factors in various geographic regions
or the inability to recover the carrying value of non-core businesses upon
disposal. In addition, during the third quarter, PepsiCo changed its
methodology for determining impairment of its investments in unconsolidated
affiliates and enterprise level goodwill to largely conform with the
methodology it uses when applying the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The impact
of this accounting change was immaterial.
(3) Effective the beginning of the fourth quarter of 1995, PepsiCo adopted
SFAS 121 which primarily reduced the carrying amount of certain long-lived
assets to be held and used in the business. As a result, depreciation and
amortization expense for the quarter and year-to-date was reduced by $13
million ($7 million after-tax or $0.01 per share) and $46 million ($29
million after-tax or $0.02 per share), respectively. During the second
quarter of 1996 PepsiCo performed the impairment evaluation, recognition
and measurement tests required by SFAS 121, covering assets that in the
first half of 1996 that either initially met the "history of operating
losses" impairment indicator we use to identify potentially impaired assets
or assets previously evaluated for impairment where, due to changes in
circumstances, a current forecast of future cash flows would be expected to
- -6-
be significantly lower than the forecast used in the prior evaluation. As
a result of the review, a noncash impairment charge of $18 million ($12
million after-tax or $0.01 per share) was recorded in selling, general and
administrative expenses at the end of the second quarter to reduce the
carrying value of certain long-lived assets to be held and used in the
restaurant segment.
(4) On May 1, 1996 PepsiCo's Board of Directors authorized a two-for-one
stock split of PepsiCo's capital stock effective for shareholders of record
at the close of business on May 10, 1996. The number of authorized shares
was also increased from 1.8 billion to 3.6 billion. The current and prior
period information in the Condensed Consolidated Financial Statements, as
well as all other share data in this report, have been adjusted to reflect
the stock split and the increase in authorized shares. The par value
remains 1 2/3 cents per share, with capital in excess of par value reduced
to reflect the total par value of the additional shares.
(5) Effective beginning fiscal year 1996, PepsiCo changed its
classification of certain U.S. beverage promotional programs. To conform
the 1995 results to those of 1996, a reclassification was made within the
1995 results, decreasing both net sales and selling, general and
administrative expenses by $45 million and $120 million in the third
quarter and year-to-date, respectively. This reclassification did not
affect reported net income or net income per share.
(6) 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 1995 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 7, 1996:
$365 1999 *
25 2011 *
$390
Subsequent to September 7, 1996:
$ 25 2011 *
- -7-
Principal Interest
Debt Repayments (in millions) Rate
12 weeks ended September 7, 1996:
$350 7.9%
200 4.6%
25 *
15 5.0%
$590
Subsequent to September 7, 1996:
$ 28 *
* Variable rate debt indexed to either LIBOR or commercial paper rates.
(7) At September 7, 1996, $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 7, 1996, PepsiCo had unused
revolving credit facilities covering potential borrowings aggregating $3.5
billion which expire in January 2001.
(8) Through the 36 weeks ended September 7, 1996, PepsiCo repurchased 33.9
million shares of its capital stock at a cost of $1,051 million. From
September 8, 1996 through October 18, 1996, PepsiCo repurchased 9.8 million
shares at a cost of $285 million.
(9) Supplemental Cash Flow Information
($ in millions) 36 Weeks Ended
9/7/96 9/9/95
Cash Flow Data
Interest paid $424 $525
Income taxes paid 484 511
- -8-
MANAGEMENT'S ANALYSIS OF CONSOLIDATED OPERATIONS,
CASH FLOWS AND FINANCIAL CONDITION
Analysis of Consolidated Operations
As described in Note 4 to the Condensed Consolidated Financial Statements,
a two-for-one stock split was authorized for shareholders of record at the
end of business on May 10, 1996. All share data in Management's Analysis
have been adjusted to reflect the stock split.
Long-term Strategic Actions
In a Form 8-K dated September 30, 1996, PepsiCo reported a series of
strategic actions to strengthen its competitiveness in the marketplace,
improve the consistency of its financial performance and significantly
improve shareholder returns. This will be accomplished by focusing on our
core businesses of Pizza Hut, Taco Bell and KFC restaurants, Frito-Lay
snacks and Pepsi-Cola beverage products causing us to re-evaluate all non-
core businesses in the portfolio. As described in more detail on page 20,
international beverages will also undertake a restructuring to reduce its
annual operating costs and shift its focus to building our core business in
markets in which we are already strong and on long-term development of the
business in emerging markets where we believe the competitive strategic
playing field is essentially level. In addition, international beverages
recognized $390 million of charges in the third quarter related to the
impairment of certain investments in unconsolidated affiliates ($204
million) and concentrate-related and non-core assets ($157 million) as well
as its 24% equity share of Buenos Aires Embotelladora S.A.'s (BAESA) one-
time charges announced in its August 8, 1996 press release ($29 million).
BAESA is one of our Latin America bottling joint ventures. See Note 2.
PepsiCo anticipates it will recognize an additional $40 million of
international beverages impairment charges in the fourth quarter as well as
a $125 million charge for the restructuring mentioned earlier. See pages
20-22 for additional information on the impairment charges and the status
of BAESA.
During the fourth quarter, PepsiCo will begin a review to determine
whether to retain its casual dining businesses, composed of California
Pizza Kitchen (CPK), Chevys and East Side Mario's. Because the review has
not yet been completed , PepsiCo is unable to determine the financial
impact of that review. However, it is reasonably possible that we will
recognize an impairment charge, if we retain one or more of the businesses,
an estimated disposal loss, or both, in the fourth quarter of 1996.
PepsiCo's net investment in the casual dining businesses is approximately
$400 million. Also, PepsiCo will expand its program of selling company-
operated Pizza Hut and Taco Bell restaurants to franchisees, and include
company-operated KFC restaurants beginning in 1997. See page 26 for
additional information.
See page 45, Cautionary Statements.
- -9-
Potential Fourth Quarter Impairment Charges
As discussed above, in the fourth quarter $40 million of impairment charges
are expected to be recognized by international beverages and it is also
reasonably possible that we will recognize an impairment charge, a disposal
loss, or both, for the casual dining businesses.
In addition, as disclosed in PepsiCo's 1996 first and second quarter Form
10-Qs, PepsiCo intends to perform its normal impairment evaluation,
recognition and measurement tests for its core businesses in the fourth
quarter of 1996. Excluding the potential impairment impact, if any, of the
casual dining businesses discussed above, management believes that noncash
impairment charges for our restaurant businesses are reasonably possible in
the fourth quarter and anticipates that, on a full-year basis, impairment
charges for our restaurant businesses will be more than offset by gains
from selling company-operated restaurants to franchisees (refranchising)
net of costs of closing other stores. See page 30.
See page 45, Cautionary Statements.
1997 Change in the Mexico Functional Currency
Beginning in fiscal year 1997, PepsiCo will be changing the functional
currency of its Mexican operations from the Mexican peso to the U.S. dollar
as it is expected that the cumulative rate of Mexico's inflation will
exceed 100% for the three year period ending with PepsiCo's 1996 fiscal
year-end. The effect of this change on future results of operations is not
yet determinable.
Net Sales
($ in millions)
12 Weeks Ended 36 Weeks
Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
U.S. $5,567 $5,385 3 $15,777 $15,022 5
International 2,300 2,263 2 6,335 6,028 5
$7,867 $7,648 3 $22,112 $21,050 5
_______________________________________________________________________________
Worldwide net sales rose $219 million or 3% in the quarter and $1.1
billion or 5% year-to-date. For both the quarter and year-to-date, the
sales growth benefited from higher effective net pricing in each of our
three business segments and net volume gains of $112 million and $518
million in the quarter and year-to-date, respectively, partially offset by
an unfavorable foreign currency exchange impact, primarily reflecting the
devaluation of the Mexican peso and Japanese yen. The volume gains were
driven by worldwide snack foods and U.S. beverages, partially offset by
declines at Pizza Hut in the U.S., due to lapping the exceptional results
from the national roll-out of Stuffed Crust pizza in 1995 and increased
competition. Year-over-year sales growth rates were moderated by the
effect of PepsiCo's restaurant strategy to reduce its ownership of the
restaurant system, as described on page 26.
- -10-
Cost of Sales
($ in millions)
12 Weeks Ended 36 Weeks Ended__
9/7/96 9/9/95 9/7/96 9/9/95
Cost of sales $3,817 $3,751 $10,719 $10,324
As a percent
of net sales 48.5% 49.0% 48.5% 49.0%
_______________________________________________________________________________
Cost of sales as a percent of net sales decreased in 1996 primarily
due to lower raw materials costs in U.S. beverages coupled with higher
effective pricing in U.S. beverages year-to-date. The quarter also
benefited from increased effective concentrate pricing in international
beverages. These decreases were partially offset in the quarter by U.S.
restaurants reflecting increased food costs, led by Pizza Hut, partially
offset by increased effective pricing.
Selling, General and Administrative Expenses (SG&A)
($ in millions)
12 Weeks Ended 36 Weeks Ended___
9/7/96 9/9/95 9/7/96 9/9/95
SG&A $3,029 $2,795 $8,543 $7,983
As a percent
of net sales 38.5% 36.5% 38.6% 37.9%
___________________________________________________________________________
SG&A is comprised of selling and distribution expenses (S&D),
advertising and marketing expenses (A&M), general and administrative
expenses (G&A), other income and expense and equity income/(loss) from
investments in unconsolidated affiliates. SG&A grew at a faster rate than
sales in the quarter and on a year-to-date basis. S&D grew at double the
rate of sales in the quarter and at about the same rate as sales year-to-
date. Both periods reflected increased effective pricing and reduced
depreciation and amortization expense as a result of the reduced carrying
amount of long-lived assets in connection with the 1995 adoption of SFAS
121, primarily in U.S. restaurants. S&D grew at rates faster than sales in
international beverages, worldwide snack foods and, year-to-date, U.S.
beverages, reflecting soft international beverages sales performance,
increased labor costs, spending by U.S. snack foods to capture volume
previously sold by Eagle, the snack food division of Anheuser-Busch, as a
result of their first quarter decision to exit the salty snack market and
route expansion in international snack foods, partially offset by a slower
rate of growth in U.S. restaurants due to higher effective pricing. A&M
grew at a significantly faster rate than sales reflecting a faster rate of
spending in worldwide beverages and worldwide snack foods, partially offset
by a slower rate of spending in U.S. restaurants. G&A expenses grew faster
than the rate of sales in the quarter and year-to-date. The quarter
primarily reflected the effect of soft U.S. restaurant sales trends,
including the absence of prior year sales for units closed and
refranchised. The year-to-date reflected soft U.S. restaurant sales trends
and the lapping of a 1995 Pizza Hut relocation charge partially offset
- -11-
year-to-date by increased effective pricing in U.S. beverages. Other
income and expense included refranchising gains in excess of costs of
closing other restaurants of $25 million and $109 million in the quarter
and year-to-date, respectively, compared to $3 million of store closure
costs in the third quarter of 1995 and a gain of $1 million year-to-date in
1995. In addition, the quarter included $23 million of gains from the sale
of non-core assets and, year-to-date, included an $18 million SFAS 121
noncash impairment charge to write-down the carrying value of certain long-
lived restaurant assets and a $26 million charge for Hot 'n Now. Operating
profit was hampered by losses from PepsiCo's unconsolidated equity
investments, compared to earnings a year ago, primarily reflecting our
share of operating losses from BAESA. Operating profit included the effect
of net foreign exchange gains of $2 million and losses of $6 million in the
quarter and year-to-date, respectively, compared to net foreign exchange
losses of $9 million and $3 million in the comparable periods in the prior
year.
Amortization of intangible assets was flat for the quarter and
declined 3% year-to-date as a result of the reduced carrying amount of
intangible assets in connection with the 1995 adoption of SFAS 121. This
noncash expense reduced net income per share by $0.03 and $0.10 for the
quarter and year-to-date, respectively, for both 1996 and 1995.
International beverages impairment charges of $390 million are largely
noncash and are composed of $204 million for the impairment of investments
in several unconsolidated affiliates, including BAESA, $29 million for
PepsiCo's 24% equity share of the one-time charges announced by BAESA on
August 8, 1996, and $157 million for impaired concentrate-related assets
and the disposal of some non-core businesses. See Note 2 and pages 20 and
22 for additional information on the impairment charges and the status of
BAESA.
Operating Profit
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Operating Profit
Reported $560 $1,031 (46) $2,252 $2,529 (11)
Ongoing* $950 $1,031 (8) $2,642 $2,529 4
* Excludes the effect of the one-time impairment charges for international
beverages.
________________________________________________________________________
Ongoing operating profit decreased $81 million for the quarter or 8%,
but increased $113 million or 4% year-to-date. The decline in the quarter
was driven by a combined segment operating profit decrease of 6% reflecting
a $134 million decline in international beverages operating profit and a
41% decline in Pizza Hut's U.S. results partially offset by double-digit
profit gains by U.S. Beverages, worldwide snack foods and KFC U.S. The
increase year-to-date reflected a combined segment operating profit
increase of 6% reflecting double-digit profit gains by U.S. beverages,
worldwide snack foods and KFC, partially offset by a 65% profit decline by
- -12-
international beverages. Included in the quarter and year-to-date segment
operating profit results was reduced depreciation and amortization expense
of $13 million and $46 million, respectively, associated with the adoption
of SFAS 121, substantially offset year-to-date by the $26 million Hot'n Now
charge and the SFAS 121 non-cash impairment charge of $18 million. Ongoing
international segment profits declined 53% in the quarter and 16% year-to-
date, reflecting significant declines in beverages partially offset by
double-digit increases in snack foods and restaurants. Ongoing
international segment profits as a percent of combined segment operating
profits declined to 10% in 1996 from 21% in 1995 in the quarter and to 14%
from 18% in 1995 on a year-to-date basis. Foreign exchange gains and
losses and equity (loss)/income from unconsolidated equity investments are
not included in segment operating profit. Ongoing operating profit growth
was hampered by the losses from unconsolidated equity investments as
discussed above compared to profits a year ago and, year-to-date, the net
effect of the foreign exchange losses.
Interest Expense, net
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Interest expense $(143) $(159) (10) $(425) $(481) (12)
Interest income 25 29 (14) 73 85 (14)
Interest expense,
net $(118) $(130) (9) $(352) $(396) (11)
___________________________________________________________________________
Interest expense, net, decreased 9% for the quarter and 11% year-to-
date, reflecting lower interest rates.
Provision for Income Taxes
($ in millions)
12 Weeks Ended 36 Weeks Ended
9/7/96 9/9/95 9/7/96 9/9/95
Provision for
Income Taxes $298 $284 $779 $708
Effective tax rate :
Reported 67.4% 31.5% 41.0% 33.2%
Ongoing* 37.8% 31.5% 34.7% 33.2%
* Excludes the effect of the one-time impairment charges for international
beverages.
___________________________________________________________________________
The 1996 ongoing effective tax rate increased 6.3 points and 1.5
points for the quarter and year-to-date, respectively. The increase
primarily reflected a decline in lower-taxed foreign income coupled with an
increase in foreign losses with low tax benefits and lapping the effect of
a 1995 reversal of prior year accruals no longer required and a 1995 tax
refund.
- -13-
Net Income
(in millions except per
share and percent amounts)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Income $ 144 $ 617 (77) $1,121 $1,425 (21)
Net Income Per Share:
Reported $ 0.09 $ 0.39 (77) $ 0.69 $ 0.89 (22)
Ongoing* $ 0.32 $ 0.39 (18) $ 0.92 $ 0.89 3
Average Shares Outstanding
Used to Calculate Net
Income Per Share 1,607 1,607 - 1,613 1,604 1
* Excludes the effect of the one-time impairment charges for international
beverages.
________________________________________________________________________
- -14-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
12 Weeks Ended 12 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change*
Beverages
- -U.S. $1,867 $1,803 4 $ 394 $ 346 14
- -International 944 1,036 (9) (176)(b) 115 $(291)
2,811 2,839 (1) 218 461 (53)
Snack Foods
- -U.S. 1,519 1,348 13 319 289 10
- -International 799 718 11 79 66 20
2,318 2,066 12 398 355 12
Restaurants (c)
- -U.S. 2,181 2,234 (2) 181 208 (13)
- -International 557 509 9 43 37 16
2,738 2,743 - 224 245 (9)
Total
- -U.S. 5,567 5,385 3 894 843 6
- -International 2,300 2,263 2 (54) 218 $(272)
$7,867 $7,648 3 840 1,061 (21)
Equity (Loss)/Income (243)(b) 13 $(256)
Other Unallocated Expenses, net (d) (37) (43) (14)
Operating Profit $ 560 $1,031 (46)
By U.S. Restaurant Chain: (c)
Pizza Hut $ 846 $ 940 (10) $ 54 $ 92 (41)
Taco Bell 883 873 1 82 80 3
KFC 452 421 7 45 36 25
$2,181 $2,234 (2) $ 181 $ 208 (13)
* Where percent changes are not meaningful, dollar changes are presented.
(Continued on following page.)
- -15-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
(Continued from previous page.)
NOTES:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 9.
(b) International beverages operating profit and Equity (Loss)/Income
included one-time impairment charges of $157 and $233, respectively.
(c) Restaurants operating profit included a net gain of $25 in 1996 from
sales of restaurants, including initial franchise fees, in excess of
costs of closing other restaurants and a $3 charge in 1995 for store
closure costs as follows:
U.S.: 1996 1995
Pizza Hut $ 7 $ (1)
Taco Bell 15 (1)
KFC (1) (1)
International 4 -
$ 25 $ (3)
NOTE - This disclosure excludes the effect of $3 of unplanned Pizza
Hut facility expenses which was included in the amounts disclosed in
the October 15, 1996 earnings release.
(d) Includes corporate headquarters expenses, minority interests, foreign
exchange translation and transaction gains and losses and other items
not allocated to the business segments.
- -16-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
36 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change*
Beverages
- -U.S. $ 5,078 $ 4,815 5 $1,003 $ 876 14
- -International 2,435 2,515 (3) (89)(b) 192 $(281)
7,513 7,330 2 914 1,068 (14)
Snack Foods
- -U.S. 4,368 3,826 14 854 785 9
- -International 2,311 2,062 12 234 201 16
6,679 5,888 13 1,088 986 10
Restaurants (c)
- -U.S. 6,331 6,381 (1) 523 482 9
- -International 1,589 1,451 10 100 87 15
7,920 7,832 1 623 569 9
Total
- -U.S. 15,777 15,022 5 2,380 2,143 11
- -International 6,335 6,028 5 245 480 (49)
$22,112 $21,050 5 2,625 2,623 -
Equity (Loss)/Income (246)(b) 20 $(266)
Other Unallocated Expenses, net (d) (127) (114) 11
Operating Profit $2,252 $2,529 (11)
By U.S. Restaurant Chain:(c)
Pizza Hut $ 2,622 $ 2,802 (6) $ 263 $ 253 4
Taco Bell 2,436 2,411 1 163 158 3
KFC 1,273 1,168 9 97 71 37
$ 6,331 $ 6,381 (1) $ 523 $ 482 9
* Where percent changes are not meaningful, dollar changes are presented.
(Continued on following page.)
- -17-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
(Continued from previous page.)
NOTES:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 9.
(b) International beverages operating profit and Equity (Loss)/Income
included one-time impairment charges of $157 and $233, respectively.
(c) Restaurants operating profit included a net gain of $65 in 1996 and $1
in 1995 as follows:
1996 1995
(A) (B) (C) Total (A)
U.S.:
Pizza Hut $ 71 $ (9) - $62 $5
Taco Bell 32 (4) $(26) 2 (2)
KFC - (3) - (3) (2)
International 6 (2) - 4 -
$109 $(18) $(26) $65 $1
(A) Gain on sales of restaurants, including initial franchise fees,
in excess of costs of closing other restaurants.
(B) A SFAS 121 charge for impairment of long-lived assets.
(C) A charge for underperforming units at Hot'n Now.
NOTE - This disclosure excludes the effect of $5 of unplanned Pizza
Hut facility expenses which was included in the amounts disclosed in
the October 15, 1996 earnings release.
(d) Includes corporate headquarters expenses, minority interests, foreign
exchange translation and transaction gains and losses and other items
not allocated to the business segments.
- -18-
Segments of the Business
Beverages
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change* 9/7/96 9/9/95 Change*
Net Sales
U.S. $1,867 $1,803 4 $5,078 $4,815 5
International 944 1,036 (9) 2,435 2,515 (3)
$2,811 $2,839 (1) $7,513 $7,330 2
Operating Profit
Reported
U.S. $ 394 $ 346 14 $1,003 $ 876 14
International (176) 115 $(291) (89) 192 $(281)
$ 218 $ 461 (53) $ 914 $1,068 (14)
Ongoing
U.S. $ 394 $ 346 14 $1,003 $ 876 14
International (19) 115 $(134) 68 192 (65)
$ 375 $ 461 (19) $1,071 $1,068 -
*Where percent changes are not meaningful, dollar changes are presented.
________________________________________________________________________
System bottler case sales (BCS) of Pepsi Corporate brands, which is
comprised of company-owned brands as well as brands we have the right to
produce, distribute and market nationally, consist of sales of packaged
products to retailers and through vending machines and of fountain syrup by
company-owned and franchised bottlers. Third quarter U.S. and
international BCS include the calendar months of June, July and August,
consistent with prior years.
Sales in the U.S. rose 4% for the quarter and 5% year-to-date or $64
million and $263 million, respectively. Volume growth contributed $38
million for the quarter and $129 million year-to-date, led by carbonated
soft drink (CSD) products. The sales growth for the quarter and year-to-
date also benefited from higher effective pricing on fountain syrup, and
year-to-date, on most CSD packages, coupled with a mix shift to higher-
priced alternative beverages. For the quarter, prices of packaged products
declined modestly reflecting a mix shift to lower-priced cans due, in part,
to a reduction in can pricing.
BCS in the U.S. increased 5% for the quarter and 4% year-to-date,
reflecting solid increases in Brand Pepsi and the Mountain Dew brand as
well as growth of more than 50% in Mug brand root beer. Total alternative
beverages, which primarily include Lipton brand ready-to-drink tea, All
Sport, Aquafina bottled water and Hawaiian Punch fountain syrup, grew at a
double-digit rate. Alternative beverage growth in the quarter and year-to-
date reflected triple-digit gains by Hawaiian Punch and Aquafina, off a
- -19-
small base, and double-digit All Sport growth. Lipton volume, which
represented approximately 65% of the alternative beverages BCS, was about
even with prior year in the quarter and grew single-digit on a year-to-date
basis. Alternative beverages contributed about 0.5 of a point to the BCS
growth for the quarter and year-to-date. Fountain syrup grew at a
significantly faster rate than packaged products for both the quarter and
year-to-date, primarily a result of several new customers added at the end
of 1995.
Profit in the U.S. increased $48 million for the quarter and $127
million year-to-date, or 14% for both periods. The profit growth reflected
the higher pricing on packaged products year-to-date, and for the quarter
and year-to-date, lower product costs, volume gains of $16 million and $65
million, respectively, as well as the higher effective pricing on fountain
syrup. Advertising and marketing expenses grew at a double-digit rate for
both the quarter and year-to-date, primarily due to the Pepsi Stuff
promotion. Selling and distribution expenses grew at a significantly
slower rate than sales and volume in the quarter reflecting the favorable
effect of lapping high costs last year due to a six-week strike in
California partially offset by increased labor costs this year. For the
year-to-date, selling and distribution expense grew at about the same rate
as sales and volume. Increased administrative expenses for both periods
primarily reflected costs incurred in connection with national initiatives
to upgrade operating and administrative systems. Profit growth for the
quarter and year-to-date was aided by lapping significant charges taken in
1995, primarily for estimated probable future payments related to losses on
supply contracts, and a gain on the sale of an investment in a bottling
cooperative in 1996. Year-to-date profit growth was also favorably
impacted by higher profit in alternative beverages in 1996, primarily
caused by lapping a 1995 charge for estimated probable future take-or-pay
co-packing penalties and a litigation settlement in 1996 with a supplier
for purchases made in prior years. The profit margin grew by almost 2
points to 21.1% for the quarter and by more than 1 1/2 points to 19.8% year-
to-date.
As discussed in Management's Analysis of Consolidated Operations on
page 9, PepsiCo filed a Form 8-K dated September 30, 1996 reporting long-
term strategies to improve PepsiCo's financial performance and improve
shareholders' returns. With respect to international beverage operations,
we reported that our strategy would be to shift our focus to building our
core business in markets in which we are already strong on long-term
development of the business in emerging markets where we believe the
competitive strategic playing field is essentially level. In addition, we
reported that the international beverage operations would be restructured
to ten core business units, which is expected to save about $100 million
annually in headcount and facility costs, beginning in 1997. Management
has not yet determined how much of those savings will be reinvested back in
the business. As a result, we expect to take a restructuring charge of
about $125 million in the fourth quarter, almost all of which is expected
to be paid by the end of 1997. In addition, a largely noncash charge of
$361 million was recognized in the third quarter related to the impairment
of certain investments in unconsolidated affiliates ($204 million),
concentrate-related assets ($97 million) and assets not related to the core
international beverage business ($60 million). The latter two amounts
aggregate $157 million and are included in international beverages
- -20-
operating profit above. See Note 2. Management expects that additional
impairment charges of approximately $40 million will be recorded in the
fourth quarter when evaluation of the recoverability of certain other
assets is completed. See page 45, Cautionary Statements.
International sales declined $92 million or 9% in the quarter and $80
million or 3% year-to-date. The decline reflected unfavorable currency
translation impacts, led by Japan, Spain, Mexico and Hungary and, for the
quarter, $15 million of lower volume, primarily due to lower concentrate
shipments to franchisees. The sales decline year-to-date also reflected
lower effective prices partially offset by volume growth of $49 million.
The lower effective prices reflected a decline in packaged products
partially offset by increased effective prices on concentrate. The volume
growth reflected gains in packaged products partially offset by lower
concentrate volumes.
International case sales decreased 4% for the quarter and increased 1%
year-to-date. The decline in the quarter was primarily the result of a
double-digit decline in Latin America (particularly Venezuela, Brazil and
to a lesser extent, Mexico, which is our largest BCS market) and Pakistan
and a single-digit decline in Europe. These declines were partially offset
by double-digit growth in Asia, led by China and Japan, and in India. On a
year-to-date basis, double-digit growth in Asia, led by China, Japan, and
India, and single-digit growth in Eastern Europe were almost fully offset
by a high single-digit decline by Latin America, driven by Mexico,
Venezuela and Brazil, and a double-digit decline in Pakistan.
Excluding the one-time charges, international profit declined $134
million in the quarter and $124 million or 65% year-to-date. The profit
decline was driven by increased advertising and marketing expenses,
reflecting increased spending levels coupled with an adjustment in the
quarter to recognize lower than anticipated sales for the year, decreased
volumes of $15 million and $21 million for the quarter and year-to-date,
respectively, unfavorable currency translation impacts and increased field
administrative expenses.
Following is a discussion of international results by our key business
groups. The first group, our Base Franchise business, is composed of our
concentrate business in well established franchised bottling markets like
Pakistan, Saudi Arabia, the U.K. and Venezuela. The second group is
primarily our Developed Company-Owned Bottling markets, which would include
Canada, France, Germany, Greece, Spain and Japan. The last group is our
Developing Markets, those which have higher than average long-term growth
potential (for example, Argentina, Brazil, Mexico and Thailand) and may
require heavy investment in the near term (for example, China, Eastern
Europe, India and Russia). The operating results of each group declined
significantly from the prior year. The decline in our Base Franchise
business' operating profit reflected the increased advertising and
marketing, higher field administrative expenses and, year-to-date, volume
declines, partially offset by higher effective net pricing. Operating
results declined in all of our major franchise markets. Operating profit
from Developed Company-Owned Bottling markets declined due to increased
advertising and marketing expenses, lower effective pricing and, in the
quarter, volume declines which were partially offset by small volume gains
year-to-date and lower field administrative expenses. Declines in Spain,
France and Japan were partially offset by a significant advance in Germany,
primarily reflecting lower depreciation as a result of the reduced carrying
- -21-
amount of bottling assets in connection with the 1995 adoption of SFAS 121
and, year-to-date, a favorable adjustment to our customer deposit
liability. Developing Markets reported losses this year compared to
profits last year due to a significant increase in advertising and
marketing, the unfavorable effects of foreign currency translation and
volume declines partially offset year-to-date by increased effective
prices. Significant declines were reported by Brazil, Russia, Mexico and
Eastern Europe.
In August our Venezuelan bottler breached its agreement to manufacture
and distribute Pepsi-Cola products and entered into an arrangement with The
Coca-Cola Company to immediately begin manufacturing and distributing Coke
products in Venezuela. Our agreement with the Venezuelan bottler extended
to the end of 2002 and provided that, if the agreement was terminated by
the Venezuelan bottler before the end of 2002, PepsiCo would be entitled to
receive substantial monetary damages in addition to any other remedies or
damages it could recover. Due to our prudent accounting practice of not
recognizing gains from disputed claims, we have not yet recognized any
income for the termination damages. PepsiCo is pursuing various legal
actions against the Venezuelan bottler and The Coca-Cola Company including
an arbitration in New York for damages and an action with the Venezuelan
anti-trust authorities to declare the transaction in violation of the
Venezuelan anti-trust laws. In addition, PepsiCo is evaluating various
options to replace its manufacturing and distribution capability in
Venezuela. International beverages earned about $10 million of operating
profits in Venezuela in 1995 and Venezuela represented less than 5% of
international beverages' 1995 BCS.
As described on pages 9 and 12, PepsiCo recorded an impairment charge
against its investment in BAESA and recognized its 24% equity share of
BAESA losses in equity earnings, including $29 million related to one-time
charges for restructuring actions and noncash accounting charges.
Subsequent to the end of the quarter, BAESA announced in its October 18,
1996 press release that it had reached a "Standstill Agreement" with
unsecured creditors (including PepsiCo), that represent about $520 million
of BAESA's total unsecured debt of approximately $682 million. The
agreement runs through March 31, 1997 and provides for the payment of past
due interest as well as provisions for future interest payments. The
agreement also provides that the creditors will maintain their loans and
forebear action as long as the terms of the agreement are met and
contemplates that a restructuring agreement will be in place by the
termination of the agreement. As part of that agreement, PepsiCo has
committed to provide a $25 million unsecured loan and $15 million of market
support to BAESA in the fourth quarter of 1996. Due to BAESA's operating
difficulties, international beverages' results have been and will continue
to be negatively impacted by reduced concentrate sales and profitability in
Brazil and, to a lesser degree, Argentina.
- -22-
Snack Foods
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales
U.S. $1,519 $1,348 13 $4,368 $3,826 14
Int'l 799 718 11 2,311 2,062 12
$2,318 $2,066 12 $6,679 $5,888 13
Operating
Profit
U.S. $ 319 $ 289 10 $ 854 $ 785 9
Int'l 79 66 20 234 201 16
$ 398 $ 355 12 $1,088 $ 986 10
___________________________________________________________________________
Sales in the U.S. grew $171 million or 13% for the quarter and $542
million or 14% year-to-date. The sales increase reflected strong volume
growth, net of increased stale product returns, of $112 million for the
quarter and $370 million year-to-date and the effects of increased pricing
taken in the latter half of 1995 across all major brands. The volume
growth reflected gains in almost all major brands, led by low-fat and no-
fat snacks, which accounted for about 50% of the sales growth for the
quarter and year-to-date.
Pound volume in the U.S. advanced 9% and 10% for the quarter and year-
to-date, respectively, reflecting exceptional performance from the low-fat
and no-fat categories. These categories contributed about 50% of the total
pound growth for the quarter and year-to-date driven by Baked Lay's brand
potato chips, Doritos Reduced Fat brand tortilla chips and Tostitos brand
salsa. Rold Gold brand pretzels volume increased modestly for the quarter
and declined slightly year-to-date. Core brands, excluding their low-fat
and no-fat versions, had mid-single-digit growth for both the quarter and
year-to-date reflecting double-digit growth for the quarter and strong
single-digit growth year-to-date in Lay's brand potato chips; for the
quarter and year-to-date, strong double-digit growth in Fritos brand corn
chips; strong double-digit growth of Tostitos brand tortilla chips; double-
digit growth in Chee.tos brand cheese flavored snacks and double-digit
growth in cheese dips. Ruffles brand potato chips declined in the quarter
and grew single-digit year-to-date. Doritos brand tortilla chips declined
for the quarter and remained flat year-to-date.
Profit in the U.S. grew $30 million or 10% for the quarter and $69
million or 9% year-to-date. The profit increase reflected the volume
growth which contributed $52 million and $171 million for the quarter and
year-to-date, respectively, the higher pricing that exceeded increased
promotional price allowances and merchandising support, and a favorable
sales mix shift to higher-margin low-fat and no-fat products, partially
offset by an unfavorable sales mix shift to larger value-oriented packages.
This profit growth was partially offset by higher operating costs and, for
- -23-
the year-to-date, administrative expenses. The increase in operating costs
reflected higher manufacturing costs, increased selling and distribution
and higher advertising expenses. The increased manufacturing costs
reflected higher capacity costs and, year-to-date, higher commodity prices
partially offset by lower packaging prices. Some of the increases in
operating costs were incurred in an effort to capture volume that has
become available as a result of a first quarter decision by Anheuser-Busch
to exit the salty snack food business and are not expected to continue.
Administrative expenses in the quarter and year-to-date reflected
investment spending to sustain strong volume growth including improved
manufacturing and delivery systems, costs related to new single-serve sweet
snack products produced under a joint venture arrangement with Sara Lee
Bakery and costs associated with development and tests of new products
using the recently approved fat-replacer, Olean. This investment spending
was more than offset in the quarter by a gain on the sale of a non-core
business. Unfavorable corn and potato prices were fully offset by
favorable packaging and oil prices during the quarter and partially offset
year-to-date. Although difficult to forecast, our 1996 commodity and
packaging costs on a combined basis are expected to increase modestly over
1995. The profit margin decreased almost one-half point for the quarter
and 1 point year-to-date to 21.0% and 19.6%, respectively.
International sales increased $81 million or 11% for the quarter and
$249 million or 12% year-to-date. The sales increase reflected higher
pricing, almost all due to the effect of inflation-based pricing actions in
Mexico, and increased volume growth of $50 million and $159 million for the
quarter and year-to-date, respectively, partially offset by a net
unfavorable currency translation impact, primarily due to the Mexican peso
and the British pound.
International kilo growth is reported on a systemwide basis, which
includes both consolidated businesses and joint ventures (JV) operating for
at least one year. Salty snack kilos rose 7% for both the quarter and year-
to-date, reflecting single-digit volume growth for the quarter and double-
digit growth year-to-date in the U.K., fueled by in-bag promotions
beginning late in the first quarter; double-digit growth in Brazil for the
quarter and year-to-date; strong single-digit growth in Canada; and strong
double-digit growth for the quarter driving a strong single-digit growth
year-to-date at Sabritas. These gains were partially offset by a double-
digit decline in our Spain JV and, for the quarter, our Netherlands JV,
both reflecting the lapping of successful 1995 in-bag promotions. Sweet
snack kilos declined 4% for the quarter and increased 1% year-to-date
reflecting a double-digit decline for the quarter and a single-digit
decline year-to-date at Gamesa, due to market-wide contraction, and at
Alegro, the sweet snack division of Sabritas, in part reflecting the impact
of the price increases and lapping strong 1995 volume growth year-to-date.
These sweet snack decreases year-to-date were fully offset by strong double-
digit advances in Poland and in our France JV.
International operating profit increased $13 million or 20% for the
quarter and $33 million or 16% year-to-date. The operating profit growth
reflected the higher pricing and the increased volumes of $8 million and
$25 million for the quarter and year-to-date, respectively, which were
- -24-
partially offset by higher operating costs, increased administrative
expenses and the net unfavorable currency translation impact, primarily in
Mexico and the U.K. The growth in operating costs, driven by Mexico,
reflected increased manufacturing costs primarily due to higher commodity
prices, selling and distribution and advertising expenses. The increased
administrative costs reflected business growth. The profit margin
increased almost 1 point in the quarter to 9.9% and improved almost one-
half point year-to-date to 10.1%.
The following are discussions by key business. Operating profit
increased about 15% and 10% at Sabritas during the quarter and year-to-
date, respectively, reflecting higher pricing, partially offset by an
increase in operating costs and an unfavorable currency translation impact.
The increased operating costs reflected significantly higher manufacturing
costs due to higher ingredient prices as well as increased selling and
distribution expenses. The operating profit growth benefited from the
absence of a third quarter 1995 restructuring charge. Lower-margin sweet
snack kilo volume from the Alegro division decreased double-digit in the
quarter and single-digit year-to-date, against a strong double-digit 1995
year-to-date increase. Higher-margin salty snack kilos increased a strong
double-digit for the quarter and mid-single-digit year-to-date lapping a
weak prior year performance.
Gamesa's profit increased slightly for the quarter and nearly 40% year-
to-date as higher pricing more than offset higher operating costs and the
unfavorable currency translation impact. The increased operating costs
primarily reflected higher manufacturing costs due to higher ingredient
prices, in part reflecting the government's decision to discontinue
providing a wheat subsidy in the fourth quarter of 1995, and increased
selling and distribution expenses, reflecting route expansion. Sweet snack
kilos declined double-digit in the quarter and mid-single-digit year-to-
date.
In the U.K., Walkers' profit increased nearly 30% and about 35% during
the quarter and year-to-date, respectively. Higher pricing, due to a 1995
fourth quarter price increase, favorable manufacturing costs due to lower
labor costs and favorable potato prices and increased volumes, fueled by in-
bag promotions beginning late in the first quarter, were partially offset
by higher advertising expenses and the unfavorable currency translation
impact. The profit growth was also aided by a gain on the sale of a nut
business in the second quarter. Salty snack kilos increased mid- single-
digit for the quarter and double-digit year-to-date.
Brazil's profit increased nearly 15% in the quarter and over 10% year-
to-date. Increased volume of core brands, a favorable sales mix shift and,
year-to-date, lower selling and distribution expenses were partially offset
by increases in administrative and advertising expenses. Brazil for most
of the first half of 1996 had been operating at maximum capacity and during
the second quarter expanded production capacity and distribution to respond
to the strong consumer demand. Salty snack kilos increased a solid double-
digit for both the quarter and year-to-date.
- -25-
Restaurants
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales
U.S $2,181 $2,234 (2) $6,331 $6,381 (1)
International 557 509 9 1,589 1,451 10
$2,738 $2,743 - $7,920 $7,832 1
Operating Profit
U.S. $ 181 $ 208 (13) $ 523 $ 482 9
International 43 37 16 100 87 15
$ 224 $ 245 (9) $ 623 $ 569 9
___________________________________________________________________________
Net sales by PFS, PepsiCo's restaurant distribution operation, to the
franchisees and licensees of each restaurant chain and the related
estimated operating profit have been allocated to each restaurant chain.
We have been executing a strategy to reduce our percentage ownership
in our restaurant systems by selling company-owned restaurants to
franchisees (refranchising) and closing underperforming units. This
refranchising strategy, while reducing reported sales, is intended to
improve restaurant returns and profits by transferring underperforming
units from the company-operated portfolio to franchisees who generate
better margins than we can, coupled with the benefit of eliminating our
capital investment in the units while generating a franchise royalty
revenue stream which sometimes exceeds the profit we had earned from the
stores prior to refranchising. In addition, restaurants' operating profit
and cash flows benefit from the one-time impact of the sale of the
restaurant units, including initial franchise fees. As disclosed in
Management's Analysis of Consolidated Operations on page 9, we have filed
a Form 8-K reporting that we will be expanding the program to sell company-
operated Pizza Hut and Taco Bell restaurants in the U.S. to franchisees,
and include company-operated KFC restaurants beginning in 1997. Therefore,
PepsiCo expects that its percentage ownership in its restaurant systems
will decline between 2% and 4% annually over the next several years. This
forecast is subject to the continued interest and ability of investors to
purchase our restaurants at prices we consider appropriate. See page 45,
Cautionary Statements. See pages 28-29 for restaurant unit activity and
the estimated effect of net unit activity on sales and operating profit.
We also reported in the Form 8-K that we will be conducting a review
to determine whether to retain our casual dining businesses (California
Pizza Kitchen (CPK), East Side Mario's and Chevys). Because the review has
not yet been completed, PepsiCo is unable to determine the financial impact
of that review. However, it is reasonably possible that we will recognize
an impairment charge, if we retain one or more of the businesses, an
estimated disposal loss, or both, in the fourth quarter of 1996. PepsiCo's
net investment in the casual dining businesses is approximately $400
million. See page 45, Cautionary Statements.
- -26-
As summarized below, PepsiCo refranchised, licensed or closed 215 and
695 company-operated stores and opened or acquired 72 and 246 company-
operated units in the quarter and the year-to-date, respectively. As a
result, coupled with net store growth by our franchisees, PepsiCo's overall
ownership percentage of total system units, which includes joint venture
units, declined almost 3 points to 45.4% since the end of 1995, driven by a
more than 3% decline in the U.S. Total system units grew almost 3% since
the end of 1995.
- -27-
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
12 Weeks Ended:
Worldwide Restaurants
Beginning of Quarter 12,457 1,029 12,469 3,111 29,066
New Builds &
Acquisitions 72 17 204 308 601
Refranchising &
Licensing (146) - 146 - -
Transfers 71 (76) 5 - -
Closures (69) (3) (59) (159) (290)
September 7, 1996 12,385 967 12,765 3,260 29,377
U.S. Restaurants*
Beginning of Quarter 10,007 76 7,879 2,866 20,828
New Builds &
Acquisitions 47 - 78 285 410
Refranchising &
Licensing (144) - 144 - -
Transfers 71 (76) 5 - -
Closures (56) - (34) (153) (243)
September 7, 1996 9,925 - 8,072 2,998 20,995
36 Weeks Ended:
Worldwide Restaurants
Beginning of Year 12,763 1,004 12,025 2,748 28,540
New Builds &
Acquisitions 246 51 492 833 1,622
Refranchising &
Licensing (414) - 403 11 -
Transfers 71 (76) 5 - -
Closures (281) (12) (160) (332) (785)
September 7, 1996 12,385 967 12,765 3,260 29,377
U.S. Restaurants*
Beginning of Year 10,309 78 7,599 2,551 20,537
New Builds &
Acquisitions 140 1 171 760 1,072
Refranchising &
Licensing (375) - 372 3 -
Transfers 71 (76) 5 - -
Closures (220) (3) (75) (316) (614)
September 7, 1996 9,925 - 8,072 2,998 20,995
* The U.S. joint venture units represent California Pizza Kitchen (CPK).
CPK's results were consolidated by Taco Bell at the beginning of the
third quarter of 1996 and the units have been transferred to the Company-
Operated and Franchised columns.
_______________________________________________________________________________
[Note: A summary of the 1996 restaurant unit activity for each U.S.
concept and for international restaurant operations is included in each of
the following discussions.]
- -28-
Where significant, the estimated effects of net unit activity on net
sales and operating profit are provided in the following discussions for
each chain to facilitate an understanding of their impact on year-over-year
comparisons. Net unit activity includes the effects of:
- - Closed stores and refranchised stores - company-operated stores sold to
existing or new franchisees,
- - New stores - company-operated stores that are constructed or acquired,
principally from franchisees,
- - Ongoing franchise fees and PFS sales and related profit to refranchised
stores,
- - Initial franchise fees related to refranchised stores,
- - Net refranchising gains - gains on sales of stores in excess of costs of
closing other stores.
As summarized below, the effect of this net unit activity decreased our
worldwide restaurant sales by $49 million in the quarter and $36 million
year-to-date. Net unit activity increased operating profit by $33 million
and $127 million in the quarter and year-to-date, respectively. In
addition, 1996 year-to-date operating profit included a $26 million charge
primarily for the disposal of underperforming units at Hot'n Now.
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended Ended
Net Sales:
Closed and refranchised stores $(127) $(303)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 74 256
Initial franchise fees related to
refranchised stores 4 11
Net unit activity $ (49) $ (36)
Operating Profit:
Closed and refranchised stores $ (8) $ (18)
New stores and ongoing franchise
fees and PFS profit related to
refranchised stores 13 37
Initial franchise fees related to
refranchised stores 4 11
Net refranchising gains* 24 97
Net unit activity $ 33 $ 127
* The quarter reflected $20 of refranchising gains plus the reversal of $1
of excess store closure costs in 1996 compared to $3 of store closure
costs in 1995. Year-to-date reflected $99 of refranchising gains less
$2 of store closure costs in 1996 compared to $13 of refranchising gains
less $13 of store closure costs in 1995.
- -29-
As previously disclosed in PepsiCo's first and second quarter Form 10-
Q's, PepsiCo would be performing the SFAS 121 impairment evaluation,
recognition and measurement tests for company-operated restaurants in the
second and fourth quarters of 1996, absent circumstances that would require
an immediate evaluation. The evaluations would cover restaurants that
either initially met the "history of operating losses", impairment
indicator that we use to identify potentially impaired assets, or
restaurants previously evaluated for impairment where, due to changes in
circumstances, a current forecast of future cash flows would be expected to
be significantly lower than the forecast used in the prior evaluation. As
a result of the second quarter review, an $18 million noncash impairment
charge was recorded at the end of the second quarter to reduce the carrying
value of certain long-lived restaurant assets. See Note 3 to the Condensed
Consolidated Financial Statements.
We will perform our impairment evaluation, recognition and measurement
tests in the fourth quarter of 1996 for company-operated restaurants that,
in the second half of 1996, initially meet the impairment indicator or
experienced changes in circumstances that would significantly lower future
cash flows. Excluding the potential impact, if any, of the casual dining
businesses, management believes that restaurant impairment charges are
reasonably possible, and anticipates that, on a full-year basis, impairment
charges for our restaurant businesses will be more than offset by
refranchising gains net of costs of closing other stores. See page 45,
Cautionary Statements.
Restaurant operating profit in 1996 included reduced depreciation and
amortization expense of $11 million and $40 million in the quarter and year-
to-date, respectively. This resulted from the reduced carrying amount of
certain long-lived assets in connection with the adoption of SFAS 121 as of
the beginning of the fourth quarter of 1995.
- -30-
Pizza Hut-U.S
($ in millions)
The tables of operating results and unit activity presented below include
Pizza Hut as well as the D'Angelo Sandwich Shops (D'Angelo) and East Side
Mario's (ESM) concepts, which are reported by Pizza Hut. As Pizza Hut and
D'Angelo operations are partially integrated, the elements in the year-over-
year discussion of net sales and operating profit that follows include both
Pizza Hut and D'Angelo but exclude ESM, unless otherwise indicated.
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales $846 $ 940 (10) $2,622 $2,802 (6)
Operating Profit $ 54 $ 92 (41) $ 263 $ 253 4
___________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated* Franchised Licensed Total
12 Weeks Ended:
Beginning of Quarter 4,940 2,962 943 8,845
New Builds &
Acquisitions 13 29 57 99
Refranchising &
Licensing (26) 26 - -
Closures (29) (19) (16) (64)
September 7, 1996* 4,898 2,998 984 8,880
36 Weeks Ended:
Beginning of Year 5,145 2,819 863 8,827
New Builds &
Acquisitions 52 62 161 275
Refranchising &
Licensing (157) 157 - -
Closures (142) (40) (40) (222)
September 7, 1996* 4,898 2,998 984 8,880
* As of September 7, 1996 101 stand-alone and 53 combined Pizza Hut/
D'Angelo units are included in Company-Operated and 56 stand-alone
D'Angelo units are included in Franchised; 13 units and 26 units of ESM
are included in Company-Operated and Franchised, respectively.
___________________________________________________________________________
Net sales decreased $94 million or 10% for the quarter and $180
million or 6% year-to-date. The sales decline was driven by a decrease in
same store sales for company-operated units of 10% for the quarter and 5%
year-to-date and the unfavorable impact of net unit activity of $36 million
- -31-
for the quarter and $80 million year-to-date as summarized below. The
decline in same store sales reflected lower volumes of $113 million for the
quarter and $269 million year-to-date, partially offset by higher effective
net pricing as a result of reduced promotional activities. The lower
volumes resulted primarily from lapping the successful second quarter 1995
introduction of Stuffed Crust pizza, increased competition in the pizza
segment and the effects of the reduced promotional activities.
The summary of the impact of net unit activity on year-over-year net
sales comparisons is as follows:
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended__ Ended_
Closed and refranchised stores $(48) $(129)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 11 46
Initial franchise fees related
to refranchised stores 1 3
Net unit activity $(36) $ (80)
Operating profit decreased $38 million or 41% for the quarter and
increased $10 million or 4% year-to-date. In the quarter, lower volumes of
$46 million, higher store operating costs and higher administrative
expenses were partially offset by reduced promotions and the favorable
impact of net unit activity of $5 million, as summarized below. For the
year-to-date, the reduced promotions and the favorable impact of net unit
activity of $65 million, as summarized below, were partially offset by
lower volumes of $107 million and increased store operating costs. The
higher store operating costs reflected record high cheese prices and
increased labor costs, higher repairs and maintenance and advertising
expenses, primarily the result of the write-off of certain excess
promotional items and, year-to-date, a $9 million SFAS 121 noncash
impairment charge. These were partially offset by reduced depreciation and
amortization expense of $3 million and $11 million for the quarter and year-
to-date, respectively, as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121. See
Note 3 to the Condensed Consolidated Financial Statements and page 30 for
further details on the 1996 impairment charge. The increase in
administrative expenses for the quarter and year-to-date reflected
increased field and headquarters administrative expenses, in part related
to costs associated with the new headquarters facility in Dallas, fully
offset year-to-date by the absence of the 1995 $16 million headquarters
relocation charge.
- -32-
The summary of the impact of net unit activity on year-over-year
operating profit comparisons is as follows:
($ in millions) September 7, 1996______
12 Weeks 36 Weeks
Ended__ Ended___
Closed and refranchised stores $(5) $(10)
New stores and ongoing franchise
fees and PFS profit related
to refranchised stores 2 9
Initial franchise fees related
to refranchised stores 1 3
Net refranchising gains* 7 63
Net unit activity $ 5 $ 65
* The quarter reflected refranchising gains of $7 less $1 of store closure
costs in 1996 compared to $1 of store closure costs in 1995. Year-to-
date reflected $70 of refranchising gains less $3 of store closure costs
in 1996 compared to $13 of refranchising gains less $9 of store closure
costs in 1995.
The operating profit margin decreased over 3 points to 6.4% for the
quarter and increased approximately 1 point to 10% year-to-date.
Refer to page 26 for a discussion regarding the strategic review of
whether to retain PepsiCo's casual dining businesses, which includes the
ESM concept.
- -33-
Taco Bell-U.S
($ in millions)
The tables of operating results and unit activity presented below include
Taco Bell as well as the Hot 'n Now (HNN), California Pizza Kitchen (CPK)
and Chevys concepts, which are reported by Taco Bell. The consolidation of
CPK, previously an unconsolidated equity investment, beginning this quarter
reflects PepsiCo obtaining majority control of CPK's Board of Directors at
the end of the second quarter 1996. Prior period operating results have
not been restated for the consolidation of CPK. CPK's unit activity is
reflected as Transfers under the columns Company-Operated and Franchised in
the 1996 Restaurant Unit Activity chart below. The elements in the year-
over-year discussions of net sales and operating profit that follow do not
include HNN, CPK and Chevys, unless otherwise indicated.
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales $883 $873 1 $2,436 $2,411 1
Operating Profit $ 82 $ 80 3 $ 163 $ 158 3
___________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
12 Weeks Ended:
Beginning of Quarter 3,054 1,916 1,810 6,780
New Builds &
Acquisitions 28 35 225 288
Refranchising &
Licensing (118) 118 - -
Transfers 71 5 - 76
Closures (7) (7) (129) (143)
September 7, 1996 * 3,028 2,067 1,906 7,001
36 Weeks Ended:
Beginning of Year 3,133 1,779 1,578 6,490
New Builds &
Acquisitions 70 79 585 734
Refranchising &
Licensing (218) 215 3 -
Transfers 71 5 - 76
Closures (28) (11) (260) (299)
September 7, 1996 * 3,028 2,067 1,906 7,001
* As of September 7, 1996, 72 units, 5 units and 1 unit of CPK are
included in Company-Operated, Franchised and Licensed, respectively; 72
units of Chevy's are included in Company-Operated; and 36 units, 46
units and 13 units of HNN are included in Company-Operated, Franchised
and Licensed, respectively.
___________________________________________________________________________
- -34-
Net sales increased 1% for both the quarter and year-to-date or $10
million and $25 million, respectively. The sales growth for both periods
was driven by the inclusion of CPK's sales beginning this quarter.
Excluding CPK, sales declined modestly for both periods reflecting a
decline in restaurant volumes of $22 million for the quarter and $66
million year-to-date, mitigated by increased lower-margin PFS volumes to
franchisees of $20 million for the quarter and $55 million year-to-date,
and an unfavorable impact from net unit activity of $33 million for the
quarter and $36 million year-to-date as summarized below. Partially
offsetting these negative factors for the quarter and year-to-date were
lower promotional activity and, year-to-date, increased pricing. The year-
to-date decline in promotional activity in part reflected the absence of
second quarter 1995 promotional costs related to the introduction of Border
Lights. Same store sales for company-operated units declined 3% for the
quarter and 2% year-to-date, though the year-to-date decrease in volume was
partially mitigated by increased effective prices. Year-to-date, increased
sales at Chevys, driven by additional units, were substantially offset by a
decline in sales at HNN, primarily reflecting the absence of 1995 sales
associated with company-operated units licensed or closed after the second
quarter of 1995.
The summary of the impact of net unit activity on year-over-year net
sales comparisons is as follows:
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended Ended
Closed and refranchised stores $(66) $(142)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 30 98
Initial franchise fees related
to refranchised stores 3 8
Net unit activity $(33) $ (36)
Operating profit increased 3% both for the quarter and year-to-date or
$2 million and $5 million, respectively. The year-to-date operating profit
growth was significantly depressed by increased losses from HNN, reflecting
a $26 million charge discussed below. Taco Bell's quarter and year-to-date
core operating profit growth benefited from the impact of net unit activity
of $17 million for the quarter and $42 million year-to-date, as summarized
below, the reduced promotions and, year-to-date, the higher effective net
pricing. These benefits were partially offset by volume declines of $10
million for the quarter and $28 million year-to-date, higher operating
costs and increased administrative costs, led by spending for initiatives
to improve efficiencies and speed of service in our restaurants. The year-
to-date was also impacted by a net unfavorable product mix shift to lower-
margin products. The higher operating costs for both periods primarily
reflected an increase in labor costs, reflecting an initiative to increase
management in the restaurants; year-to-date also reflected favorable food
costs fully offset by increased marketing costs, led by the "Nothing
Ordinary About It" campaign, and a $4 million SFAS 121 noncash impairment
charge. See Note 3 to the Condensed Consolidated Financial Statements and
page 30 for further details on the 1996 impairment charge. The year-to-
date favorable food costs reflected the benefits of lapping unusually high
- -35-
lettuce prices in 1995 and lower beef prices, partially offset by higher
cheese prices. The quarter and year-to-date results were also favorably
impacted by the reduced depreciation and amortization expense of $2 million
and $7 million, respectively, as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121 and,
year-to-date, from the lapping of roll-out costs for Border Lights incurred
during the first half of 1995.
The summary of the impact of net unit activity on year-over-year
operating profit comparisons is as follows:
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended Ended
Closed and refranchised stores $(6) $(9)
New stores and ongoing franchise
fees and PFS profit related to
refranchised stores 7 17
Initial franchise fees related
to refranchised stores 3 8
Net refranchising gains* 13 26
Net unit activity $17 $42
* The quarter reflected $12 of refranchising gains compared to $1 of store
closure costs in 1995. Year-to-date reflected $26 of refranchising
gains less $2 of store closure costs in 1996 compared to $2 of store
closure costs in 1995.
Chevys reported operating profits for the quarter and year-to-date
compared to a modest profit and an operating loss for the same respective
periods in 1995. The improvement primarily reflected the benefit of a
margin improvement program and reduced store opening costs as a result of
fewer openings. CPK reported a modest loss for the third quarter of 1996,
primarily reflecting several nonrecurring expenses. HNN's losses were
reduced in the quarter, but increased significantly year-to-date. Both
periods were favorably impacted by reduced depreciation and amortization
expense of $1 million and $5 million for the quarter and year-to-date,
respectively, as a result of the reduced carrying amount of restaurant
assets in connection with the 1995 adoption of SFAS 121 and the absence of
1995 operating losses associated with licensed or closed units. The
quarter also benefited from improved store operating results from
comparable units, in part reflecting a low double-digit same store sales
growth rate. For the year-to-date, a $26 million charge related to the
write-down of HNN assets held for disposal and additional store closure
costs more than offset these benefits. Taco Bell is vigorously continuing
its efforts to sell the HNN concept.
The Taco Bell operating profit margin increased modestly for the
quarter and year-to-date to 9.3% and 6.7%, respectively.
Refer to page 26 for a discussion regarding the strategic review of
whether to retain PepsiCo's casual dining operations, which includes the
CPK and Chevys concepts.
- -36-
KFC-U.S.
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales $452 $421 7 $1,273 $1,168 9
Operating Profit $ 45 $ 36 25 $ 97 $ 71 37
___________________________________________________________________________
Company-
Operated Franchised Licensed Total
12 Weeks Ended:
Beginning of Quarter 2,013 3,001 113 5,127
New Builds &
Acquisitions 6 14 3 23
Refranchising &
Licensing - - - -
Closures (20) (8) (8) (36)
September 7, 1996 1,999 3,007 108 5,114
36 Weeks Ended:
Beginning of Year 2,031 3,001 110 5,142
New Builds &
Acquisitions 18 30 14 62
Refranchising &
Licensing - - - -
Closures (50) (24) (16) (90)
September 7, 1996 1,999 3,007 108 5,114
___________________________________________________________________________
Net sales rose $31 million or 7% for the quarter and $105 million or
9% year-to-date driven by an increase in same store sales for company-
operated units of 6% and 8% for the quarter and year-to-date, respectively.
This growth primarily reflected a higher average guest check, higher
volumes of $11 million for the quarter and $44 million year-to-date and
increased franchise royalty revenue. The higher average guest check
reflected a benefit from the higher priced "Mix Your Bucket" promotion
featuring our new Tender Roast product, across the board menu price
increases, lower promotional activity and the incremental impact of
Colonel's Crispy Strips and Honey BBQ and Hot Wings. The volume gains were
driven by increased Taco Bell product sales reflecting expansion in our
combined KFC and Taco Bell stores and as well as volume increases at our
home delivery stores, partially offset by volume declines in our inner city
traditional stores.
Operating profit increased $9 million or 25% for the quarter and $26
million or 37% year-to-date. The profit growth in the quarter primarily
reflected the higher average guest check, franchise royalty revenues and
lower store operating costs partially offset by increased administrative
costs. The year-to-date profit growth also reflected the higher average
guest check, franchise royalty revenues and increased volumes of $7 million
- -37-
partially offset by increased administrative and store operating costs.
The increase in administrative costs is primarily due to a continued effort
to improve restaurant quality and service by hiring and supporting well-
trained Restaurant General Managers (RGM) for each store. The year-to-date
increase also reflected the national conference KFC held to focus and
develop its RGM's. The lower store operating costs in the quarter
reflected reduced advertising and lower depreciation and amortization
expense of $2 million as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121,
partially offset by higher labor costs and food costs, principally chicken
prices. The higher store operating costs year-to-date reflected increased
food costs, primarily higher chicken prices, higher labor costs and a $3
million SFAS 121 noncash impairment charge, partially offset by lower
depreciation and amortization expense of $7 million associated with the
adoption of SFAS 121. See Note 3 to the Condensed Consolidated Financial
Statements and page 30 for further details on the 1996 impairment charge.
In addition, the year-to-date profit growth was also depressed by a charge
related to estimated costs expected to be incurred in connection with an
acquisition made several years ago. The profit margin increased about 1
1/2 points to 10% and 7.6% for both the quarter and year-to-date,
respectively.
- -38-
International
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/7/96 9/9/95 Change 9/7/96 9/9/95 Change
Net Sales $557 $509 9 $1,589 $1,451 10
Operating Profit $ 43 $ 37 16 $ 100 $ 87 15
___________________________________________________________________________
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
12 Weeks Ended:
Beginning of Quarter 2,450 953 4,590 245 8,238
New Builds &
Acquisitions 25 17 126 23 191
Refranchising &
Licensing (2) - 2 - -
Closures (13) (3) (25) (6) (47)
September 7, 1996 2,460 967 4,693 262 8,382
36 Weeks Ended:
Beginning of Year 2,454 926 4,426 197 8,003
New Builds &
Acquisitions 106 50 321 73 550
Refranchising &
Licensing (39) - 31 8 -
Closures (61) (9) (85) (16) (171)
September 7, 1996 2,460 967 4,693 262 8,382
___________________________________________________________________________
The KFC, Pizza Hut and Taco Bell concepts represented approximately
54%, 43% and 3%, respectively, for both the quarter and year-to-date of
total international restaurant sales in 1996, which approximates prior year
percentages.
Net sales increased $48 million or 9% for the quarter and $138 million
or 10% year-to-date with KFC and Pizza Hut contributing approximately 60%
and 40%, respectively, for the quarter and approximately 50% for both KFC
and Pizza Hut year-to-date. The sales growth was driven by the favorable
impact of net unit activity of $20 million in the quarter and $80 million
year-to-date as summarized below, increased volumes which contributed $31
million for the quarter and $47 million year-to-date and higher effective
pricing, partially offset by lower equipment sales to franchisees and
licensees.
- -39-
The summary of the impact of net unit activity on year-over-year net
sales comparisons is as follows:
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended Ended
Closed and refranchised stores $ (9) $(22)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 29 102
Initial franchise fees related
to refranchised stores - -
Net unit activity $20 $ 80
Operating profit increased $6 million or 16% for the quarter and $13
million or 15% year-to-date. Growth in concept contribution, as measured
by store level contribution and franchise royalty revenues, was primarily
led by Pizza Hut and KFC though to a much lesser extent by KFC year-to-
date. The profit growth reflected the higher effective net pricing, the
favorable impact of net unit activity of $11 million for the quarter and
$18 million year-to-date as summarized below, increased volumes of $6
million for the quarter and $12 million year-to-date, increased franchise
royalty revenues and a net favorable currency translation impact in the
quarter. These gains were partially offset by higher store operating costs
and increased administrative and support costs. The higher store operating
costs primarily reflected increased food prices and, year-to-date, higher
labor costs and advertising expenses and a $2 million SFAS 121 noncash
impairment charge. These increased store operating costs were partially
offset by reduced depreciation and amortization expense of $3 million and
$10 million for the quarter and year-to-date, respectively, as a result of
the reduced carrying amount of restaurant assets in connection with the
1995 adoption of SFAS 121. See Note 3 to the Condensed Consolidated
Financial Statements and page 30 for further details on the 1996 impairment
charge. The increase in administrative and support costs is primarily due
to the "PRI Way," an initiative to standardize processes, other project
spending and additional costs in certain regional offices to support
growth, partially offset by savings from the 1995 consolidation of the
separate regional and country offices supporting KFC and Pizza Hut
operations. The operating profit margin increased modestly to 7.7% for the
quarter and 6.3% year-to-date.
- -40-
The summary of the impact of net unit activity on year-over-year
operating profit comparisons is as follows:
($ in millions) September 7, 1996
12 Weeks 36 Weeks
Ended Ended
Closed and refranchised stores $ 3 $ 1
New stores and ongoing franchise
fees and PFS profit related to
refranchised stores 4 11
Initial franchise fees related
to refranchised stores - -
Net refranchising gains* 4 6
Net unit activity $11 $18
* The quarter reflected $1 of refranchising gains plus the reversal of $3
of excess store closure costs in 1996. Year-to-date reflected $3 of
refranchising gains plus the reversal of $3 of excess store closure
costs in 1996.
The increase in operating profit was primarily driven by improvements
in Spain, Korea, Mexico and, Australia in the quarter, partially offset by
declines in Canada in the quarter and Australia, year-to-date. The
decreased losses in Spain primarily resulted from gains in volume,
reflecting the continued success of Stuffed Crust pizza, and reduced
depreciation and amortization expense as a result of the reduced carrying
amount of restaurant assets in connection with the 1995 adoption of SFAS
121 and the absence of 1995 losses from closed units. A double-digit
profit gain in Korea, one of our largest international profit markets,
primarily reflected higher effective net pricing and additional units,
partially offset by increased labor costs and, year-to-date, volume
declines. The reduced losses in Mexico were driven by gains in volume and
reduced depreciation and amortization expense as a result of the reduced
carrying amount of restaurant assets in connection with the 1995 adoption
of SFAS 121 partially offset by increased food prices and labor costs.
Year-to-date, Mexico also benefited from higher effective pricing and
savings from the consolidation of the local KFC and Pizza Hut offices.
Australia, our largest international sales market, experienced a double-
digit profit increase in the quarter and a double-digit decline year-to-
date. The increase in the quarter reflected higher effective prices and
volume gains, partially offset by increased food costs, primarily chicken
and cheese. The year-to-date decline reflected increased food costs in
excess of price and volume gains and lower administrative costs. In the
quarter, significant double-digit profit declines in Canada, our second
largest international sales market, reflected lower volumes and escalating
food prices and labor costs, partially offset by increased effective
pricing.
- -41-
Cash Flows and Financial Condition
Summary of Cash Flows
Through September 7, 1996, PepsiCo's net cash increased by $32 million as
our significant sources of cash, primarily operations ($2.5 billion), debt
activities ($286 million), sales of restaurants ($249 million), and
exercises of stock options ($239 million) funded capital spending ($1.5
billion), share repurchases ($1.1 billion) and dividend payments ($496
million).
Summary of Operating Activities
($ in millions) 36 Weeks Ended
9/7/96 9/9/95
Net income $1,121 $1,425
International beverages impairment charges 390 -
Other noncash charges and credits, net 1,418 1,465
Income before noncash charges and credits 2,929 2,890
Net change in operating working capital (454) (648)
Net Cash Provided by Operating Activities $2,475 $2,242
_________________________________________________________________________
Net cash provided by operating activities increased $233 million or
10% from 1995 to $2.5 billion due to a $39 million increase in income
before noncash charges and credits and a $194 million decrease in operating
working capital net cash outflows. Other noncash charges and credits, net
declined modestly and primarily included depreciation and amortization
expense. The reduction in operating working capital net cash outflows
primarily reflected a decrease in accounts and notes receivable cash
outflows, reflecting lower cash outflows by international beverages and a
sale of $107 million of U.S. trade accounts receivable in 1996 to take
advantage of favorable effective financing rates implicit in the
transaction, as compared to commercial paper financing, and an increase in
accrued income taxes. These sources of funds were partially offset by an
increase in prepaid expenses, taxes and other current assets in 1996
compared to a decrease in 1995, reflecting the absence in 1996 of a
prefunded employee benefit plan and 1996 prepayments for the Pepsi-Stuff
campaign, and a greater decline in accounts payable, due to timing of
payments.
Summary of Investing Activities
($ in millions) 36 Weeks Ended
9/7/96 9/9/95
Capital spending $(1,476) $(1,302)
Sales of restaurants 249 21
Acquisitions and investments
in unconsolidated affiliates (34) (224)
Net short-term investments (20) 51
Other investing activities, net (108) (138)
Net Cash Used for Investing Activities $(1,389) $(1,592)
_________________________________________________________________________
Consistent with our strategy to improve restaurant returns and profits
(see page 26), net cash used for investing activities decreased $203
- -42-
million or 13% principally reflecting increased proceeds from sales of
restaurants of $228 million. This source of cash, along with reduced
acquisition and investment activity of $190 million was partially offset by
increased capital spending of $174 million and a $71 million swing in our
short-term investment portfolios. As discussed on page 26, we expect to
expand the restaurant refranchising program. The increase in capital
spending primarily reflected increased U.S. snack food spending of $201
million, primarily for capacity expansion for both established and new
products, including acquisition of plants previously owned by Eagle, and
improved manufacturing and delivery systems, increased spending in
worldwide beverages of $76 million, partially offset by decreased spending
in worldwide restaurants, driven by the U.S., of $90 million. The 1996
full-year forecast of restaurant capital spending represents a decline of
8% and 36% from spending levels in 1995 and 1994, respectively. For the
full year, acquisition and investment activity is expected to be
substantially lower than in 1995.
PepsiCo manages the investment activity in its short-term portfolios,
which are primarily held outside the U.S., as part of its overall financing
strategy. PepsiCo continually reassesses its alternatives to redeploy them
considering investment opportunities and risks, tax consequences and
current financing activity. As a result of a provision included in the
Small Business Job Protection Act of 1996 enacted in August, 1996 the
exemption from U.S. federal income tax of investment income generated in
Puerto Rico was completely eliminated, which will be effective as of
December 1, 1996 for PepsiCo. Accordingly, upon the maturity of its
investments in Puerto Rico, PepsiCo will repatriate the proceeds of
approximately $750 million in the fourth quarter of 1996 and use the
proceeds to reduce outstanding commercial paper debt.
Summary of Financing Activities
($ in millions) 36 Weeks Ended
9/7/96 9/9/95
Net short and long-term debt $ 286 $ 26
Purchases of treasury stock (1,051) (381)
Cash dividends paid (496) (442)
Proceeds from exercises of stock options 239 142
Other, net (31) (32)
Net Cash Used for
Financing Activities $(1,053) $(687)
_________________________________________________________________________
Net cash used for financing activities increased $366 million or 53%,
primarily reflecting a $670 million increase in our share repurchases.
This use of cash, along with increased dividend payments of $54 million was
partially offset by increased proceeds from net debt activity and exercises
of stock options of $260 million and $97 million, respectively.
In anticipation of double-digit cash flow growth, PepsiCo reported its
intention to repurchase about $2 billion of its stock annually in its Form
8-K dated September 30, 1996. For this purpose cash flow is defined as
cash provided by operating activities and sales of restaurants net of
capital spending. However, PepsiCo's commitment to the share repurchase
- -43-
program could be reduced if significant new strategic investment
opportunities arise. PepsiCo views its share repurchase program as an
effective tool to manage leverage and optimize the weighted average cost of
capital. See page 46, Cautionary Statements.
Through October 18, 1996, PepsiCo repurchased 43.7 million treasury
shares or 2.8% of the shares outstanding at the beginning of the year, at a
cost of $1.34 billion. At October 18, 1996, 61.9 million shares are
available under the current repurchase authority granted by PepsiCo's Board
of Directors.
As described in the Summary of Investing Activities, PepsiCo intends
to reduce its outstanding commercial paper debt in the fourth quarter of
1996 as a result of substantially liquidating the short-term investment
portfolio in Puerto Rico.
See Note 6 to Condensed Consolidated Financial Statements for details
of debt issuances and repayments during the quarter.
Financial Condition
At September 7, 1996 and December 30, 1995, $3.5 billion 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. PepsiCo's unused credit
facilities with lending institutions, which exist largely to support the
issuances of short-term borrowings, were $3.5 billion at September 7, 1996
and December 30, 1995.
As described in PepsiCo's 1995 Annual Report, PepsiCo measures
financial leverage on a market value basis as well as on an historical cost
basis. PepsiCo's market value ratio was 19% at September 7, 1996 and 18%
at December 30, 1995. The increase was due to a 5% increase in net debt
and a 1% decline in shares outstanding partially offset by a 2% increase in
PepsiCo's stock price. PepsiCo's historical cost ratio of net debt to net
capital employed was 48% at September 7, 1996 and 46% at December 30, 1995.
The increase reflected the growth in net debt, in part reflecting the
effect of share repurchases, partially offset by a 2% increase in net
capital.
PepsiCo's operating working capital position, which excludes short-
term investments and short-term borrowings, was a positive $262 million at
September 7, 1996 as compared to a negative $94 million at December 30,
1995. PepsiCo has historically had a negative operating working capital
position, which principally reflected the cash sales nature of its
restaurant operations. This condition effectively provided additional
capital for investment. The positive working capital position at the end
of the third quarter reflects PepsiCo's continued trend of increased
investment in its more working capital intensive bottling and snack food
businesses combined with a decline in the number of company-operated
restaurants. This decline is consistent with the strategy to improve
restaurant returns. The $356 million increase in working capital reflected
an increase in receivables, led by worldwide beverages and snack foods,
- -44-
reflecting seasonality, volume growth and timing of collections, due in
part to system issues as U.S. beverages consolidates its receivable
function into one location. This was partially offset by the sale of $107
million of trade accounts receivable in 1996. Additionally, the increase
in working capital also reflected lower accounts payable, higher prepaid
expenses partially offset by increased other current liabilities and taxes
payable, reflecting a reclassification from other liabilities.
Investments in unconsolidated affiliates declined $334 million
primarily due to the impairment charges recorded by international beverages
(see Note 2) and the consolidation of CPK, previously an unconsolidated
equity investment, at the end of the second quarter. The latter reflected
our gaining majority control of CPK's Board of Directors as a result of
PepsiCo acquiring 100% of CPK's newly issued voting preferred shares in
settlement of a $119 million outstanding note to PepsiCo.
Shareholders' equity decreased $107 million as net income of $1.1
billion and a $132 million increase in capital in excess of par value was
more than offset by a $824 million increase in treasury stock, driven by
the share repurchases, and $517 million of dividends declared.
Cautionary Statements
From time to time, in both written reports and oral statements by PepsiCo
senior management, we may express our expectations regarding future
performance of the Company. These "forward-looking statements" are
inherently uncertain and investors must recognize that events could turn
out to be different than what senior management expected. Key factors
impacting current and future performance are described in PepsiCo's 1995
Annual Report in Management's Analysis - Worldwide Marketplace on page 14.
In addition, as discussed in the management's analysis:
- - The level of our forecasted international beverages impairment charges
(pages 10 and 21) to be taken in the fourth quarter assumes that
international beverages' future operating performance does not weaken as
compared to current performance.
- - The $125 million international beverage restructuring charge forecasted
for the fourth quarter (pages 9 and 20) and the related expected annual
savings of $100 million (page 20) assumes the restructuring will occur
as currently expected.
- - Our ability to execute our restaurant refranchising program (pages 9 and
26) is subject to the continued interest and ability of investors to
purchase our restaurants at prices we consider appropriate.
- - Our forecast that restaurant impairment charges for the full-year will
be more than offset by net refranchising gains (pages 10 and 30) assumes
that future restaurant operating performance does not weaken as compared
to current performance and that sales of restaurants forecasted for the
fourth quarter occur at the expected sales prices.
- - The fourth quarter and full-year tax rate may differ from the third
quarter year-to-date tax rate (page 13) if the source and level of
earnings/losses varies from the current forecast.
- -45-
- - PepsiCo's intent to repurchase $2 billion of its stock annually over the
next several years (page 44) is subject to double-digit growth in cash
flow and the absence of any significant strategic acquisitions or
investments.
- -46-
<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 7, 1996 and the related
condensed consolidated statement of income for the twelve and thirty-six
weeks ended September 7, 1996 and September 9, 1995, and the condensed
consolidated statement of cash flows for the thirty-six weeks ended
September 7, 1996 and September 9, 1995. 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 30, 1995, 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 6, 1996, 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 30, 1995, 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 1995 adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," and 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.
KPMG Peat Marwick LLP
New York, New York
October 15, 1996
- -47-
</audit-report>
PART II. OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 50.
(b) Reports on Form 8-K
PepsiCo filed a current report on Form 8-K dated August 12,
1996 describing $251 million of losses which Buenos Aires
Embotelladora S.A. (BAESA), PepsiCo's beverage bottling joint
venture with operations in Latin America, reported in its
August 8, 1996 press release. PepsiCo owns a 24% equity
interest in BAESA.
- -48-
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 22, 1996 Robert L. Carleton
Senior Vice President and
Controller
Date: October 22, 1996 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
- -49-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
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
- -50-