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 June 14, 1997 (12 and 24 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 July 11, 1997:
1,530,535,858
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of
Income - 12 and 24 weeks ended
June 14, 1997 and June 15, 1996 2
Condensed Consolidated Statement of
Cash Flows - 24 weeks ended
June 14, 1997 and June 15, 1996 3
Condensed Consolidated Balance Sheet -
June 14, 1997 and December 28, 1996 4-5
Notes to Condensed Consolidated 6-8
Financial Statements
Management's Analysis of Operations,
Cash Flows and Financial Condition 9-25
Independent Accountants' Review Report 26
Part II Other Information and Signatures 27-29
- -1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended 24 Weeks Ended
6/14/97 6/15/96 6/14/97 6/15/96
Net Sales $7,707 $7,691 $14,409 $14,245
Costs and Expenses, net
Cost of sales 3,641 3,696 6,898 6,902
Selling, general and
administrative expenses 2,940 2,939 5,579 5,488
Amortization of intangible
assets 67 70 129 137
Unusual items (135) - (157) 26
Operating Profit 1,194 986 1,960 1,692
Interest expense (129) (141) (252) (282)
Interest income 14 25 27 48
Income Before Income Taxes 1,079 870 1,735 1,458
Provision for Income Taxes 423 287 652 481
Net Income $ 656 $ 583 $ 1,083 $ 977
Net Income Per Share $ 0.42 $ 0.36 $ 0.69 $ 0.60
Cash Dividends Declared
Per Share $0.125 $0.115 $ 0.240 $ 0.215
Average Shares Outstanding
Used To Calculate Net
Income Per Share 1,575 1,613 1,579 1,616
See accompanying notes.
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PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
24 Weeks Ended
6/14/97 6/15/96
Cash Flows - Operating Activities
Net income $1,083 $ 977
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 748 767
Noncash portion of unusual charges 259 26
PFS gain (500) -
Deferred income taxes 137 12
Other noncash charges and credits, net 32 166
Changes in operating working capital,
excluding effects of acquisitions and
dispositions
Accounts and notes receivable (324) (421)
Inventories (60) (135)
Prepaid expenses, deferred income taxes and
other current assets (184) (132)
Accounts payable and other current
liabilities (288) (204)
Income taxes payable 198 17
Net change in operating working capital (658) (875)
Net Cash Provided by Operating Activities 1,101 1,073
Cash Flows - Investing Activities
Capital spending (796) (960)
Acquisitions and investments in unconsolidated
affiliates (18) (28)
Refranchising of restaurants 384 200
Sales of businesses 176 3
Sales of property, plant and equipment 56 32
Short-term investments, by original maturity
More than three months - purchases (86) (87)
More than three months - maturities 89 110
Three months or less, net (26) 65
Other, net (36) (82)
Net Cash Used for Investing Activities (257) (747)
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt - 1,286
Payments of long-term debt (1,469) (454)
Short-term borrowings, by original maturity
More than three months - proceeds 57 412
More than three months - payments (130) (1,218)
Three months or less, net 1,747 518
Proceeds from formation of REIT 296 -
Cash dividends paid (342) (315)
Share repurchases (890) (725)
Proceeds from exercises of stock options 160 162
Other, net 8 (22)
Net Cash Used for Financing Activities (563) (356)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 4 (2)
Net Increase (Decrease) in Cash and
Cash Equivalents 285 (32)
Cash and Cash Equivalents - Beginning of year 447 382
Cash and Cash Equivalents - End of period $ 732 $ 350
See accompanying notes.
- -3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
Unaudited
6/14/97 12/28/96
Current Assets
Cash and cash equivalents $ 732 $ 447
Short-term investments, at cost............ 379 339
1,111 786
Accounts and notes receivable, less
allowance: 6/97 - $150, 12/96 - $183 3,275 2,516
Inventories
Raw materials and supplies 531 571
Finished goods 411 467
942 1,038
Prepaid expenses, deferred income taxes and
other current assets 982 799
Total Current Assets 6,310 5,139
Property, Plant and Equipment 17,337 17,840
Accumulated Depreciation (7,554) (7,649)
9,783 10,191
Intangible Assets, net 6,865 7,136
Investments in Unconsolidated Affiliates 1,334 1,375
Other Assets 612 671
Total Assets $24,904 $24,512
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
6/14/97 12/28/96
Current Liabilities
Accounts payable and other current
liabilities $ 4,783 $ 4,626
Income taxes payable 602 487
Short-term borrowings 1,004 26
Total Current Liabilities 6,389 5,139
Long-term Debt 7,519 8,439
Other Liabilities 2,594 2,533
Deferred Income Taxes 1,782 1,778
Shareholders' Equity
Capital stock, par value 1 2/3 cents
per share:
authorized 3,600 shares, issued 6/97
and 12/96 - 1,726 shares 29 29
Capital in excess of par value 1,267 1,201
Retained earnings 9,899 9,184
Currency translation adjustment (878) (768)
10,317 9,646
Less: Treasury Stock, at Cost:
6/97 - 196 shares, 12/96 - 181 shares (3,697) (3,023)
Total Shareholders' Equity 6,620 6,623
Total Liabilities and
Shareholders' Equity $24,904 $24,512
See accompanying notes.
- -5-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Our Condensed Consolidated Balance Sheet at June 14, 1997 and the
Condensed Consolidated Statement of Income for the 12 and 24 weeks ended
June 14, 1997 and June 15, 1996 and the Condensed Consolidated Statement of
Cash Flows for the 24 weeks ended June 14, 1997 and June 15, 1996 have not
been audited, but have been prepared in conformity with the accounting
principles applied in our 1996 Annual Report on Form 10-K (Annual Report)
for the year ended December 28, 1996. In our opinion, this information
includes all material adjustments necessary for a fair presentation. The
results for the 12 and 24 weeks are not necessarily indicative of the
results expected for the year. Certain reclassifications were made to
prior year amounts to conform with the current presentation.
(2) Unusual items were composed of the following:
6/14/97 6/15/96
($ in millions) 12 Weeks 24 Weeks 24 Weeks
Ended Ended Ended
Gain on sale of PepsiCo Food
Systems (PFS) $ (500) $ (500)
Net charges for decisions to:
Dispose of assets 247 225 $ 26
Improve worldwide Snack Foods
productivity 82 82
Strengthen International bottler
structure 36 36
Net (gain)/loss $ (135) $ (157) $ 26
After-tax $ (32) $ (30) $ 17
Per share $(0.02) $(0.02) $(0.01)
We sold PFS, our restaurant supply distribution business, to AmeriServe
Food Distribution, Inc. (a subsidiary of Holberg Industries), for
approximately $830 million, subject to certain future adjustments.
Consideration was received in the form of a note, payable early in the
third quarter of 1997. The sale resulted in a second quarter gain of $500
million ($307 million after-tax or $0.19 per share). The note plus
interest was paid in the third quarter.
- -6-
(3) During the quarter we recorded the following impairment charges:
($ in millions) Disposal Recurring Total
Beverages
North America $ 52 $ - $ 52
International 119 - 119
Snack Foods
North America 8 - 8
International 41 - 41
Restaurants
United States 39 39 78
$259(a) $39(b) $298
(a) Included in Unusual items in the Condensed Consolidated Statement of
Income.
(b) Included in Selling, general and administrative expenses in the
Condensed Consolidated Statement of Income.
Disposals
The impairment charges reflected adjustments to reduce the carrying amounts
of International Beverages and non-core U.S. restaurant businesses and
other assets to fair market value, less estimated costs of disposal.
The adjustments to the carrying amounts were primarily based on
internal estimates. However, the U.S. restaurants charge of $39 million,
which related to the five non-core U.S. restaurant businesses, considered
the actual selling prices of three businesses. Considerable management
judgment is necessary to estimate fair market value. Accordingly, actual
results could vary significantly from such estimates.
As of June 14, 1997, the remaining carrying amount of the net assets
held for disposal was $274 million. We anticipate that the balance of the
non-core U.S. restaurant businesses will be sold by the end of 1997 and the
International Beverage businesses and other assets will be disposed of in
1998.
Year-to-date, we sold three of our non-core U.S. restaurant businesses
(Chevys, East Side Mario's (ESM) and Hot'n Now (HNN). These disposals
generated cash proceeds of $91 million. The non-core U.S. restaurant
businesses sold or held for disposal contributed the following:
12 Weeks Ended 24 Weeks Ended_
($ in millions) 6/14/97 6/15/96 6/14/97 6/15/96
Net Sales $88 $74 $191 $141
Net Income/(Loss) $ 4 $(2) $ 6 $ (7)
- -7-
Recurring
Recurring impairment charges of $39 million were recorded to reduce the
carrying amounts of certain restaurants to be held and used. These charges
resulted from the semi-annual impairment evaluations of all restaurants
that either initially met the "two-year history of operating losses"
impairment indicator that we use to identify potentially impaired
restaurants or were previously evaluated for impairment and, 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.
(4) Significant debt repayments (exclusive of commercial paper) during the
quarter, including the related effects of any interest rate and/or foreign
currency swaps entered into concurrently with the debt, were:
Principal Interest
(in millions) Rate
$263 *
250 6.9%
15 14.0%
$528
* Variable rate debt indexed to either LIBOR or commercial paper rates.
(5) At June 14, 1997, $3.5 billion of short-term borrowings were included
in the Condensed Consolidated Balance Sheet under the caption "Long-term
Debt", reflecting our intent and ability, through the existence of unused
revolving credit facilities, to refinance these borrowings on a long-term
basis.
(6) Through the 24 weeks ended June 14, 1997, we repurchased 26.7 million
shares of our capital stock at a cost of $890 million. From June 15, 1997
through July 18, 1997, we repurchased 9.2 million shares at a cost of $352
million.
(7) Supplemental Cash Flow Information
($ in millions) 24 Weeks Ended
6/14/97 6/15/96
Interest paid $260 $315
Income taxes paid $219 $409
- -8-
MANAGEMENT'S ANALYSIS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION
In the following discussion, volume is the estimated dollar effect of the
year-over-year change in case sales by company-owned bottling operations
and concentrate unit sales to franchisees in Beverages, pound or kilo sales
of salty and sweet snacks in Snack Foods and customer transaction counts
(i.e., same store sales excluding the impact of effective net pricing) in
Restaurants. Effective net pricing includes price increases/decreases and
the effect of product, package and country mix.
Our Beverages and Snack Foods segments are reported on a North
American basis (U.S. and Canada combined) and an International basis (all
other international) while the Restaurants segment is reported on a U.S.
and international basis.
Analysis of Consolidated Operations
Net sales rose $16 million in the quarter and $164 million or 1% year-to-
date. The increases reflected net volume gains and higher effective net
pricing partially offset by the effect of fewer company-operated U.S.
restaurants and an unfavorable currency translation impact. The sales
growth rate for both the quarter and year-to-date was reduced by one point
as a result of our initiative to reduce our ownership of the restaurant
system through selling company-operated restaurants to franchisees
(refranchising) and closing underperforming restaurants.
Cost of sales as a percent of net sales decreased .9% to 47.2% for the
quarter and .6% to 47.9% year-to-date. The declines were primarily due to
the impact of lower packaging and commodity costs in worldwide Beverages
and the higher effective net pricing.
Selling, general and administrative expenses (SG&A) increased at about the
same rate as sales. SG&A includes 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 or loss from
investments in unconsolidated affiliates. G&A grew significantly faster
than sales for the quarter and year-to-date, driven by a higher level of
spending to support international business growth, including inflation-
driven costs, and increased compensation costs and information systems-
related spending. A&M and S&D each increased at approximately the same
rate as sales for both the quarter and year-to-date.
- -9-
Other income and expense included increased net gains from facility
actions as summarized below and increased foreign exchange losses of $8
million and $10 million for the quarter and year-to-date, respectively.
Net Facility Actions
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Refranchising
gains $137 $ 42 $ 95 $153 $ 88 $ 65
Store closure
costs (25) (4) (21) (29) (4) (25)
Recurring impair-
ment charges (39) (18) (21) (39) (18) (21)
Net gains from
facility actions $ 73 $ 20 $ 53 $ 85 $ 66 $ 19
Equity income from our investments in unconsolidated affiliates,
compared to losses a year ago, primarily reflected the absence of losses
from our Latin American bottler, Buenos Aires Embotelladora S.A. (BAESA).
Amortization of intangible assets declined 4% and 6% to $67 million and
$129 million in the quarter and year-to-date, respectively. The decline
was primarily due to the actual or planned disposal of our non-core U.S.
restaurant businesses. The impact of restaurant facility actions also
reduced the 1997 amortization expense.
Unusual items produced a net gain of $135 million ($32 million after-tax or
$0.02 per share) and $157 million ($30 million after-tax or $0.02 per
share) in the quarter and year-to-date, respectively, compared to a $26
million ($17 million after-tax or $0.01 per share) charge in the first
quarter of 1996. The 1997 net gain reflected a $500 million gain from the
sale of PepsiCo Food Systems (PFS), our restaurant distribution company,
partially offset by $365 million and $343 million of net charges in the
quarter and year-to-date, respectively. See Notes 2 and 3. The 1996
charge was associated with the decision to dispose of the operating assets
of Hot'n Now (HNN).
Operating Profit
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Reported $1,194 $986 21 $1,960 $1,692 16
Ongoing* $1,059 $986 7 $1,803 $1,718 5
* Excluded the 1997 unusual items as described in Notes 2 and 3, and the
1996 decision to dispose of the operating assets of HNN.
___________________________________________________________________________
Reported operating profit increased $208 million and $268 million for the
quarter and year-to-date, respectively. Ongoing operating profit increased
$73 million for the quarter and $85 million year-to-date. The increase
- -10-
reflected the increased net gains from facility actions, favorable
recurring actuarial adjustments to prior years casualty claims liabilities
and special restaurant franchise renewal fees. Ongoing operating profit
growth also benefited from income from our non-core U.S. restaurant
businesses in 1997 compared to losses in 1996, primarily due to stopping
depreciation and amortization as these businesses are being held for
disposal.
Interest Expense, net declined $1 million or 1% in the quarter and $9
million or 4% year-to-date. The net impact of lower average debt levels
was partially offset by lower interest rates on our investments and lower
interest-bearing investment levels. The lower investment and debt levels
are primarily due to a 1996 change in the tax law which eliminated a tax
exemption on investment income in Puerto Rico effective for us December 1,
1996. Accordingly, as our investments matured in Puerto Rico, the proceeds
were repatriated and used to reduce debt.
Provision for Income Taxes
($ in millions)
12 Weeks Ended 24 Weeks Ended
6/14/97 6/15/96 6/14/97 6/15/96
Provision for
Income Taxes $423 $287 $652 $481
Effective tax rate
Reported 39.2% 33.0% 37.6% 33.0%
Ongoing* 33.1% 33.0% 34.0% 33.0%
* Excluded the effect of the unusual items as described in Note 2.
___________________________________________________________________________
The 1997 reported effective tax rate increased 6.2% in the quarter and 4.6%
year-to-date, primarily reflecting the high effective tax rate in the
quarter associated with the 1997 unusual items.
Net Income
($ in millions except per
share amounts)
12 Weeks Ended 24 Weeks Ended
% %
6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Net Income
Reported $ 656 $ 583 13 $1,083 $ 977 11
Ongoing** $ 624 $ 583 7 $1,053 $ 994 6
Net Income Per Share
Reported $0.42 $0.36 15* $0.69 $0.60 13*
Ongoing** $0.40 $0.36 10* $0.67 $0.61 8*
Average Shares Outstanding
Used to Calculate Net
Income Per Share 1,575 1,613 (2) 1,579 1,616 (2)
* Net Income Per Share was calculated to four decimal places to eliminate
the effects of rounding.
**Excluded the unusual items as described in Notes 2 and 3.
___________________________________________________________________________
- -11-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
MANAGEMENT BASIS
($ in millions, unaudited)
Net Sales Operating Profit
% % Change B/(W)
12 Weeks Ended Change 12 Weeks Ended As
On-
6/14/97 6/15/96 B/(W) 6/14/97 6/15/96 Rept'd going
(b) (c)
Beverages (d)
- -N.A. $1,872 $1,903 (2) $ 340 $ 392 (13) -
- -Int'l 737 836 (12) (169) 45 NM (76)
2,609 2,739 (5) 171 437 (61) (8)
Snack Foods
- -N.A. 1,663 1,596 4 318 296 7 11
- -Int'l 784 709 11 7 81 (91) 12
2,447 2,305 6 325 377 (14) 11
Restaurants (e)
- -U.S. 2,093 2,118 (1) 667 190 NM 8
- -Int'l 558 529 5 99 28 NM NM
2,651 2,647 - 766 218 NM 40
Combined
Segments $7,707 $7,691 - 1,262 1,032 22 9
Unallocated Expenses (f) (68) (46) (48) (48)
Operating Profit $1,194 $ 986 21 7
NM - Not Meaningful
(Continued on following page)
-12-
Notes to the 12 weeks ended 6/14/97 and 6/15/96:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 16.
(b) Included a gain of $500 in 1997 from the sale of PFS and the following
unusual net charges:
Strengthen
Disposal of Productivity Bottling
Assets Initiatives Structure Total
Beverages
- N.A. $ 52 $ 52
- Int'l 144 $36 180
Snack Foods
- N.A. $10 10
- Int'l 12 72 84
Restaurants
- U.S. 39 39
$247 $82 $36 $365
(c) Adjusted to exclude unusual items as described in note (b) above.
(d) Certain reclassifications were made to prior year amounts to conform
with the current year presentation.
(e) Restaurants operating profit included the following:
1997 1996
Refranchising gains $137 $ 42
Store closure costs (25) (4)
Recurring impairment
charges (39) (18)
Net facility actions $ 73 $ 20
U.S. $ 7 $ 22
Int'l 66 (2)
Net facility actions $ 73 $ 20
(f) Increase due to foreign exchange losses and costs incurred in
connection with the planned dissolution of a real estate investment
trust established in the first quarter of 1997 and the pending spin-
off of our restaurant businesses.
- -13-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
MANGEMENT BASIS
($ in millions, unaudited)
Net Sales Operating Profit
% % Change B/(W)
24 Weeks Ended Change 24 Weeks Ended As On-
6/14/97 6/15/96 B/(W) 6/14/97 6/15/96 Rept'd going
(b) (c) (d)
Beverages (e)
- -N.A. $ 3,463 $3,440 1 $ 604 $ 649 (7) 1
- -Int'l 1,104 1,262 (13) (196) 35 NM NM
4,567 4,702 ( 3) 408 684 (40) (6)
Snack Foods
- -N.A. 3,184 3,024 5 607 548 11 13
- -Int'l 1,493 1,337 12 106 154 (31) 9
4,677 4,361 7 713 702 2 12
Restaurants (f)
- -U.S. 4,090 4,152 (1) 816 334 NM (1)
- -Int'l 1,075 1,030 4 143 64 NM NM
5,165 5,182 - 959 398 NM 17
Combined
Segments $14,409 $14,245 1 2,080 1,784 17 6
Unallocated Expenses (g) (120) (92) (30) (30)
Operating Profit $1,960 $1,692 16 5
NM - Not Meaningful
(Continued on following page)
- -14-
Notes to the 24 weeks ended 6/14/97 and 6/15/96:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 16.
(b) Included a gain of $500 from the sale of PFS and the following unusual
net charges:
Strengthen
Disposal of Productivity Bottling
Assets Initiatives Structure Total
Beverages
- N.A. $ 52 $ 52
- Int'l 144 $36 180
Snack Foods
- N.A. $10 10
- Int'l (10) 72 62
Restaurants
- U.S. 39 39
$225 $82 $36 $343
(c) U.S. restaurants included a charge of $26 related to the decision to
dispose of the operating assets of HNN.
(d) Adjusted to exclude unusual items as described in notes (b) and
(c)above.
(e) Certain reclassifications were made to prior year amounts to conform
with the current year presentation.
(f) Restaurants operating profit included the following:
1997 1996
Refranchising gains $153 $ 88
Store closure costs (29) (4)
Recurring impairment
charges (39) (18)
Net facility actions $ 85 $ 66
U.S. $ 20 $ 64
Int'l 65 2
Net facility actions $ 85 $ 66
(g) Increase due to foreign exchange losses and costs incurred in
connection with the planned dissolution of a real estate investment
trust established in the first quarter of 1997 and the pending spin-
off of our restaurant businesses.
- -15-
Segments of The Business
Beverages
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Net Sales
N.A. $1,872 $1,903 (2) $3,463 $3,440 1
Int'l 737 836 (12) 1,104 1,262 (13)
$2,609 $2,739 (5) $4,567 $4,702 (3)
Operating Profit
Reported
N.A. $ 340 $ 392 (13) $ 604 $ 649 (7)
Int'l (169) 45 NM (196) 35 NM
$ 171 $ 437 (61) $ 408 $ 684 (40)
Ongoing*
N.A. $ 392 $ 392 - $ 656 $ 649 1
Int'l 11 45 (76) (16) 35 NM
$ 403 $ 437 (8) $ 640 $ 684 (6)
NM - Not Meaningful
* Excluded unusual net charges in 1997 of $232 ($52-North America, $180-
Int'l) for the disposal of assets and to strengthen the International
bottler structure. See Notes 2 and 3.
_________________________________________________________________________
System bottler case sales (BCS) is our standard volume measure. It
represents Pepsi Corporate brands as well as brands we have the right to
produce, distribute and market nationally. Second quarter BCS included the
months of April and May, consistent with prior years.
North America
Sales for the quarter fell $31 million, while rising $23 million year-to-
date. The decline for the quarter reflected lower effective net pricing
partially offset by volume growth, led by packaged goods; the year-to-date
increase reflected volume growth, partially offset by lower effective net
pricing. The decrease in effective net pricing, primarily in take-home
packaged products, reflected an intensely competitive environment.
BCS increased 2% for the quarter and 4% year-to-date, reflecting
double-digit growth by Mountain Dew. Alternative beverages (non-carbonated
soft drink products), led by Aquafina bottled water and Lipton Brisk, grew
at a strong double-digit rate for both the quarter and year-to-date.
Franchisees achieved positive BCS growth, while our concentrate shipments
to them declined in the quarter and were flat year-to-date.
- -16-
Reported operating profit declined $52 million for the quarter and $45
million year-to-date. Ongoing operating profit was even with last year in
the quarter and increased $7 million year-to-date, on top of prior year
increases of 13% and 15%, respectively. Both periods reflected the lower
effective net pricing, higher S&D and increased A&M. These unfavorable
items were partially offset in the quarter and fully offset year-to-date by
lower packaging and commodity costs, volume gains and reduced G&A expenses.
The lower G&A expenses primarily reflected savings from centralizing
certain accounting functions. The quarter and year-to-date also benefited
from a $10 million adjustment of a 1992 liability established for an
organizational restructuring to improve customer focus. This liability
adjustment was partially offset year-to-date by lapping a first quarter
1996 litigation settlement with a supplier for purchases made in prior
years.
International
Sales declined $99 million for the quarter and $158 million year-to-date
due to unfavorable currency translation effects and lower volume. The
volume decline primarily reflected lower concentrate shipments to
franchisees.
BCS decreased 2% for the quarter and 3% for the year-to-date.
Excluding the impact of the loss of our Venezuelan bottler in August 1996,
BCS remained relatively unchanged for both periods. Double-digit growth by
our China and India Business Units and, in the quarter, by our Asia
Business Unit, was substantially offset by declines in our South America,
Russia and Central Europe Business Units. Our concentrate shipments to
franchisees declined at a significantly greater rate than the decline in
their BCS.
Reported operating results declined $214 million for the quarter and
$231 million year-to-date. Ongoing operating results declined $34 million
in the quarter and $51 million year-to-date. The decline in ongoing
operating results reflected the lower volume, increased A&M, and,
particularly in the quarter, lower effective net pricing for packaged
products. These declines were partially offset by lower manufacturing
costs, G&A savings, and reduced equity losses from our investments in
unconsolidated affiliates, primarily due to the absence of losses from
BAESA. The lower manufacturing costs were the result of lower packaging
and commodity costs. Our fourth quarter 1996 restructuring generated G&A
savings of about $17 million in the quarter and $21 million year-to-date of
the $50 million of savings expected this year. See Cautionary Statements
on page 25.
- -17-
Snack Foods
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Net Sales
N.A. $1,663 $1,596 4 $3,184 $3,024 5
Int'l 784 709 11 1,493 1,337 12
$2,447 $2,305 6 $4,677 $4,361 7
Operating Profit
Reported
N.A. $ 318 $ 296 7 $ 607 $ 548 11
Int'l 7 81 (91) 106 154 (31)
$ 325 $ 377 (14) $ 713 $ 702 2
Ongoing*
N.A. $ 328 $ 296 11 $ 617 $ 548 13
Int'l 91 81 12 168 154 9
$ 419 $ 377 11 $ 785 $ 702 12
* Excluded unusual net charges in 1997 of $94 (N.A.-$10, Int'l-$84) in the
quarter and $72 (N.A.-$10, Int'l-$62) year-to-date for worldwide
productivity initiatives and the disposal of assets. See Notes 2 and 3.
___________________________________________________________________________
North America
Sales grew $67 million for the quarter and $160 million year-to-date. The
sales increases reflected higher pricing taken in the latter half of 1996
across all major brands and volume growth. Sales increased in most core
brands; low-fat and no-fat snacks declined slightly in the quarter, while
accounting for approximately 15% of total sales growth year-to-date.
Pound volume advanced 2% and 3% for the quarter and year-to-date,
respectively. Although low-fat and no-fat snacks decreased the growth rate
by 1% for the quarter, they contributed over 15% of the total pound growth
year-to-date, reflecting strong double-digit growth in Baked Lay's and
exceptional growth in Reduced Fat Doritos for both the quarter and year-to-
date. Excluding their low-fat and no-fat versions, core brand growth for
both the quarter and year-to-date was led by double-digit growth in Lay's
brand potato chips and Tostitos brand tortilla chips and, for the quarter,
strong single-digit growth by Doritos brand tortilla chips.
Reported operating profit grew $22 million for the quarter and $59
million year-to-date. Ongoing operating profit rose $32 million and $69
million for the quarter and year-to-date, respectively. The ongoing profit
increase reflected the higher pricing and volume growth, partially offset
by increased manufacturing costs and G&A expenses. Ongoing operating
profit growth was also aided by favorable recurring actuarial adjustments
to prior years casualty claim liabilities.
- -18-
International
Sales increased $75 million for the quarter and $156 million year-to-date.
The sales increase reflected higher effective net pricing and volume
growth.
Kilo growth is reported on a systemwide basis, which includes both
consolidated businesses and unconsolidated affiliates operating for at
least one year. Salty snack kilos rose 12% and 11% for the quarter and
year-to-date, respectively, led by Sabritas and Brazil, while sweet snack
kilos declined 13% and 12%, respectively.
Reported operating profit decreased $74 million for the quarter and
$48 million year-to-date. Ongoing operating profit for the same periods
increased $10 million and $14 million, respectively. These increases
reflected inflation-driven higher effective net pricing and volume gains,
partially offset by cost increases, primarily in Mexico.
- -19-
Restaurants
Ownership Initiatives
As a result of our initiative to refranchise units and close
underperforming units, coupled with net new points of distribution by our
franchisees and licensees, our overall ownership percentage (which includes
joint venture units) of total system units since year-end 1996 declined 3%
to 42% at June 14, 1997, driven by declines in the U.S. We refranchised
and licensed 264 and 357 company-operated units in the quarter and year-to-
date, respectively. Total system units declined less than half a point
from the end of 1996. At June 14, 1997, March 23, 1997 and December 28,
1996 we had 166, 284 and 296 company-operated non-core U.S. restaurants,
respectively.
Operating Results
The operating results presented below include both the U.S. and
international operations of Pizza Hut, Taco Bell and KFC. In addition, the
U.S. information includes our non-core restaurant businesses consisting of
Chevys, East Side Mario's (ESM), and Hot'n Now (HNN) through their
respective dates of disposal, and California Pizza Kitchen (CPK), and
D'Angelo Sandwich Shops (D'Angelo), which are held for disposal. PepsiCo
Food Systems (PFS) is included in our U.S. operating results through its
disposal date (see Note 2).
12 Weeks Ended 24 Weeks Ended
% %
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Net Sales
U.S. $2,093 $2,118 (1) $4,090 $4,152 (1)
Int'l 558 529 5 1,075 1,030 4
$2,651 $2,647 - $5,165 $5,182 -
Operating Profit
Reported
U.S. $ 667 $ 190 NM $ 816 $ 334 NM
Int'l 99 28 NM 143 64 NM
$ 766 $ 218 NM $ 959 $ 398 NM
Ongoing*
U.S. $ 206 $ 190 8 $ 355 $ 360 (1)
Int'l 99 28 NM 143 64 NM
$ 305 $ 218 40 $ 498 $ 424 17
NM - Not Meaningful
* Excluded a gain of $500 from the sale of PFS and unusual disposal
charges related to the non-core U.S. businesses of $39 and $26 in the
second quarter of 1997 and first quarter of 1996, respectively. See
Notes 2 and 3.
___________________________________________________________________________
- -20-
U.S.
Sales decreased $25 million and $62 million for the quarter and year-to-
date, respectively. The declines primarily reflected fewer company-
operated units as a result of our initiative to reduce our ownership of the
restaurant system and lower transaction counts, primarily due to lapping
the first quarter 1996 introduction of Triple Decker Pizza. These declines
were partially offset by higher effective net pricing and increases in our
non-core restaurant businesses of $14 million and $50 million for the
quarter and year-to-date, respectively. The non-core increase was
primarily as a result of the consolidation of CPK at the end of the second
quarter of 1996. Sales also benefited from initial fees under a special
KFC renewal program, which will continue into the third quarter. Including
the initial franchise renewal fees expected to be received in the third
quarter, 96% of KFC's franchisees will have elected to renew their
franchise agreements during 1997, covering the next 20 years.
Same store sales at Pizza Hut decreased 5% for the quarter and 7% year-
to-date reflecting fewer customer transactions and in the quarter, reduced
pricing. At Taco Bell, same store sales increased 2% for the quarter and
3% year-to-date reflecting mix shifts into higher-priced products such as
Border Select Combos, Grilled Steak Tacos and Fajita Wraps and higher
pricing taken in late 1996. The year-to-date same store sales growth
benefited from the very successful first quarter Star Wars promotion. Same
store sales at KFC increased 3% for the quarter and 4% year-to-date, due to
a higher average guest check, reflecting both pricing and new products, as
well as increased transaction counts.
Reported operating profit increased $477 million and $482 million for
the quarter and year-to-date, respectively. Ongoing operating profit
increased $16 million for the quarter but decreased $5 million year-to-
date, reflecting a decline in net gains from facility actions. Excluding
the net gains from facility actions, ongoing operating profit increased in
both the quarter and year-to-date reflecting the higher effective net
pricing and the initial KFC franchise renewal fees. These gains were
partially offset by lower transaction counts and increased store operating
costs. The higher store operating costs were primarily driven by expenses
incurred for the quality initiatives of Pizza Hut's Totally New Pizza
campaign and higher labor costs, partially offset by favorable recurring
actuarial adjustments to prior years casualty claim liabilities. The
higher labor costs were primarily due to minimum wage increases.
- -21-
Net gains from facility actions declined $15 million and $44 million in the
quarter and year-to-date, respectively, as summarized below:
Net Facility Actions
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Refranchising
gains $ 48 $ 42 $ 6 $ 64 $ 86 $(22)
Store closure
costs (3) (4) 1 (6) (6) -
Recurring impair-
ment charges (38) (16) (22) (38) (16) (22)
Net gains from
facility actions $ 7 $ 22 $(15) $ 20 $ 64 $(44)
Ongoing operating profit also benefited from income from our non-core
U.S. restaurant businesses of $5 million and $10 million for the quarter
and year-to-date, respectively, compared to losses of $2 million and $7
million for the comparable periods in 1996. The improvement was primarily
due to stopping depreciation and amortization expense in 1997 because these
businesses are being held for sale.
International
Sales increased $29 million for the quarter and $45 million year-to-date.
The growth was driven by net additional company-operated units and higher
effective net pricing. These gains were partially offset by the effects of
unfavorable currency translation and year-to-date, one less accounting
period for Canada and Korea in the first quarter of 1997 to facilitate the
quarterly closing process.
Operating profit increased $71 million and $79 million for the quarter
and year-to-date, respectively. The profit growth primarily reflected
increased net gains from facility actions as summarized below, driven by
the refranchising of our restaurants in New Zealand to a new independent
publicly-traded company in which we have no residual interest.
The positive impact of the higher effective net pricing, the net
additional company-operated units and higher franchise fees was partially
offset by higher store operating costs, reflecting increased incentive-
based compensation.
Net Facility Actions
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Refranchising
gains $ 89 $ 89 $ 89 $ 2 $ 87
Store closure
costs (22) (22) (23) 2 (25)
Recurring impair-
ment charges (1) $(2) 1 (1) (2) 1
Net gains/(losses)
from facility
actions $ 66 $(2) $ 68 $ 65 $ 2 $ 63
- -22-
Cash Flows and Financial Condition
Please refer to our 1996 Annual Report on Form 10-K for information
regarding our liquidity.
Net cash provided by operating activities increased $28 million or 3% to
$1.1 billion. The increase reflected a decrease in operating working
capital cash outflows of $217 million partially offset by a $189 million
decrease in income before noncash charges and credits. The reduced cash
use for operating working capital primarily reflected an increase in Income
taxes payable and smaller increases in Accounts and notes receivable and
Inventories, partially offset by a larger reduction in Accounts payable and
other current liabilities. The benefit in Accounts and notes receivable
was primarily due to timing of collections partially offset by lapping the
effect of a 1996 sale of U.S. trade accounts receivable to take advantage
of favorable effective financing rates. The change in Inventories was
driven by reduced purchases. The unfavorable change in Accounts payable
and other current liabilities was primarily due to reduced promotional
accruals for U.S. beverage promotions.
Net cash used for investing activities decreased $490 million or 66% to
$257 million. The decline primarily reflected increased proceeds of $184
million and $173 million from refranchising of restaurants and the sale of
primarily non-core businesses, respectively, as well as reduced capital
spending of $164 million. These were partially offset by a net use of cash
for short-term investing activities in 1997 compared to proceeds from
investing activities in 1996. Because we sold PFS in exchange for a note,
payable early in the third quarter of 1997, the transaction had no cash
impact year-to-date. However, cash proceeds of about $830 million (before
tax) plus interest, received subsequent to the end of the second quarter
will reduce our cash flows used for investing activities for the full year.
Net cash used for financing activities increased $207 million or 58% to
$563 million. The increase was primarily due to $339 million of lower net
debt proceeds and increased share repurchases of $165 million, partially
offset by proceeds of $296 million from the sale of preferred stock in a
real estate investment trust (REIT) we established in 1997. However, we
dissolved the REIT in the third quarter of 1997 and redeemed the preferred
stock.
Our share repurchase activity was as follows:
24 Weeks Ended
($ and shares in millions) 6/14/97 6/15/96
Cost $ 890 $ 725
Number of shares repurchased 26.7 23.4
% of shares outstanding at
beginning of year 1.7% 1.5%
-23-
Free cash flow is the primary measure we use internally to evaluate our
cash flow performance.
24 Weeks Ended
($ in millions) 6/14/97 6/15/96
Net cash provided by operating
activities $1,101 $1,073
Cash dividends paid (342) (315)
Investing activities
Capital spending (796) (960)
Refranchising of restaurants 384 200
Sales of businesses 176 3
Sales of property, plant and
equipment 56 32
Other, net (36) (82)
Free cash flow $ 543 $ (49)
Free cash flow had a favorable swing of $592 million, primarily
reflecting the increased proceeds from refranchising of restaurants and
sales of businesses and reduced capital spending.
Historically, our negative operating working capital position, which
reflected the cash sales nature of our restaurant operations partially
offset by our more working capital intensive packaged goods businesses,
effectively provided additional capital for investment. Operating working
capital, which excludes short-term investments and short-term borrowings,
was a positive $546 million at the end of the second quarter of 1997,
compared to a negative $313 million at year-end 1996. The $859 million
swing was primarily due to the receipt of the short-term note receivable
from the sale of PFS and cash proceeds from the New Zealand IPO, partially
offset by the minority interest associated with the REIT. Working capital
also increased due to seasonality in the base business and the effects of
reclassifying the reduced carrying amount (which reflects estimated fair
market value) of the International Beverages businesses held for disposal
to prepaid expenses, deferred income taxes and other current assets. These
increases were substantially offset by declines in working capital related
to the sale of certain of our non-core U.S. restaurant businesses and the
recognition of accounts payable by our core restaurant businesses to PFS
which, prior to the PFS sale, had been an intercompany balance eliminated
in consolidation.
The decline in Property, plant and equipment primarily reflected
restaurant facility actions, the partial impairment and reclassification of
the remaining balance of fixed assets to current assets by International
Beverages related to businesses held for disposal and the disposal of PFS.
The decline in Intangible assets also included the effects of
restaurant facility actions and impairment charges related to International
Beverages businesses held for disposal.
- -24-
Cautionary Statements
From time to time, in written reports and oral statements, we discuss our
expectations regarding future performance of the Company. These "forward-
looking statements" are based on currently available competitive, financial
and economic data and our operating plans. They are also inherently
uncertain, and investors must recognize that events could turn out to be
significantly different from what we had expected. In addition, as
disclosed:
- - The forecasted annual savings of $50 million in 1997, related to the
1996 International Beverages restructuring charge, assumes that
facilities are vacated and employees are terminated within the time
frames used to develop the estimate (page 17).
- -25-
<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 June 14, 1997 and the related
condensed consolidated statement of income for the twelve and twenty-four
weeks ended June 14, 1997 and June 15, 1996, and the condensed consolidated
statement of cash flows for the twenty-four weeks ended June 14, 1997 and
June 15 1996. 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 28, 1996, 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 4, 1997, 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 28, 1996, 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
July 22, 1997
- -26-
</audit-report>
PART II. OTHER INFORMATION AND SIGNATURES
Item 4. Submission of Matters to a Vote of Security Holders
(a) PepsiCo's Annual Meeting of Shareholders was held on
May 7, 1997.
(c) Certain proposals voted upon at the Annual Meeting, and
the number of votes cast for, against and abstentions with
respect to each, were as follows:
Description of Proposals Number of Shares (in millions)
For Against Abstain
Approval of the appointment
of KPMG Peat Marwick LLP as
independent auditors 1,293 3 5
Shareholders' proposal
concerning the election of a
President and CEO. 34 976 24
Shareholders' proposal
concerning cumulative voting. 272 747 16
Shareholders' proposal
concerning a cap on non-
performance based executive
compensation. 75 942 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 29.
(b) Reports on Form 8-K
None
- -27-
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: July 29, 1997 Robert L. Carleton
Senior Vice President and
Controller
Date: July 29, 1997 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
- -28-
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
- -29-