FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 5, 1998 (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
[GRAPHIC OMITTED]
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 2, 1998:
1,467,230,361
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of Income -
12 and 36 weeks ended September 5, 1998 and
September 6, 1997 2
Condensed Consolidated Statement of Cash Flows
- 36 weeks ended September 5, 1998 and September
6, 1997 3
Condensed Consolidated Balance Sheet -
September 5, 1998 and December 27, 1997 4-5
Condensed Consolidated Statement of Comprehensive
Income-12 and 36 weeks ended September 5, 1998 and
September 6, 1997 6
Notes to Condensed Consolidated Financial
Statements 7-8
Management's Discussion and Analysis of Operations,
Cash Flows and Liquidity and Capital Resources 9-23
Independent Accountants' Review Report 24
Part II Other Information and Signatures 25-26
-1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, unaudited)
12 Weeks Ended 36 Weeks Ended
------------------ ----------------
9/5/98 9/6/97 9/5/98 9/6/97
-------- -------- -------- ------
Net Sales............................. $5,544 $5,362 $15,155 $14,661
Costs and Expenses, net
Cost of sales....................... 2,283 2,179 6,181 5,969
Selling, general and administrative
expenses........................... 2,326 2,209 6,581 6,303
Amortization of intangible assets... 46 45 136 139
Unusual items....................... - - - 304
-------- -------- -------- ------
Operating Profit...................... 889 929 2,257 1,946
Interest expense.................... (89) (123) (241) (358)
Interest income..................... 12 31 59 54
-------- -------- -------- ------
Income from Continuing Operations
Before Income Taxes................. 812 837 2,075 1,642
Provision for Income Taxes.......... 51 286 443 597
-------- -------- -------- ------
Income from Continuing Operations..... 761 551 1,632 1,045
Income from Discontinued Operations,
net of tax($63 and $405)............. - 107 - 696
-------- -------- -------- ------
Net Income............................ $ 761 $ 658 $ 1,632 $1,741
======== ======== ======== =+====
Income Per Share - Basic
Continuing Operations............... $ 0.52 $ 0.36 $ 1.10 $ 0.68
Discontinued Operations............. - 0.07 - 0.45
-------- -------- -------- ------
Net Income.......................... $ 0.52 $ 0.43 $ 1.10 $ 1.13
======== ======== ======== ======
Average shares outstanding.......... 1,473 1,524 1,485 1,534
Income Per Share - Assuming Dilution
Continuing Operations............... $ 0.50 $ 0.35 $ 1.07 $ 0.66
Discontinued Operations............. - 0.07 - 0.45
-------- -------- -------- ------
Net Income.......................... $ 0.50 $ 0.42 $ 1.07 $ 1.11
======== ======== ======== ======
Average shares outstanding.......... 1,511 1,566 1,526 1,575
Cash Dividends Declared Per Share..... $ 0.13 $0.125 $0.385 $0.365
See accompanying notes.
-2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
36 Weeks Ended
----------------
9/5/98 9/6/97
------- -------
Cash Flows - Operating Activities
Income From Continuing Operations....... $1,632 $ 1,045
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Depreciation and amortization........ 792 746
Deferred income taxes................ 129 112
Other noncash charges and credits, net 122 386
Net change in operating working capital. (751) (237)
------- -------
Net Cash Provided by Operating Activities. 1,924 2,052
------- -------
Cash Flows - Investing Activities
Capital spending........................ (821) (957)
Acquisitions and investments in
unconsolidated affiliates.............. (4,141) (58)
Short-term investments.................. 746 (1,670)
Other, net.............................. 47 80
------ -------
Net Cash Used for Investing Activities.... (4,169) (2,605)
------- -------
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt 972 2
Payments of long-term debt.............. (1,382) (1,457)
Short-term borrowings................... 3,457 2,326
Cash dividends paid..................... (566) (545)
Share repurchases....................... (2,188) (1,643)
Proceeds from exercises of stock options 351 279
------- --------
Net Cash Provided by (Used for) Financing
Activities............................... 644 (1,038)
------- --------
Net Cash Provided by Discontinued
Operations.............................. - 1,791
Effect of Exchange Rate Changes on Cash and
Cash Equivalents........................ (1) (5)
-------- --------
Net (Decrease)/Increase in Cash and Cash
Equivalents.............................. (1,602) 195
Cash and Cash Equivalents - Beginning of
year..................................... 1,928 307
------- --------
Cash and Cash Equivalents - End of period. $ 326 $ 502
======= ========
See accompanying notes.
-3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
(Unaudited)
9/5/98 12/27/97
-------- --------
Current Assets
Cash and cash equivalents......... $ 326 $ 1,928
Short-term investments, at cost... 209 955
-------- --------
535 2,883
Accounts and notes receivable, less
allowance of $128 and $125....... 2,476 2,150
Inventories
Raw materials and supplies........ 420 400
Finished goods.................... 385 332
-------- --------
805 732
Prepaid expenses, deferred income
taxes and other current assets... 455 486
-------- --------
Total Current Assets............ 4,271 6,251
Property, Plant and Equipment....... 12,068 11,294
Accumulated Depreciation............ (5,498) (5,033)
------- --------
6,570 6,261
Intangible Assets, net.............. 8,744 5,855
Investments in Unconsolidated Affiliates 1,352 1,201
Other Assets........................ 1,438 533
------- --------
Total Assets.................... $22,375 $20,101
======= ========
Continued on next page.
-4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
9/5/98 12/27/97
Current Liabilities
Short-term borrowings................... $ 3,911 $ -
Other current liabilities............... 3,906 4,257
------- -------
Total Current Liabilities............. 7,817 4,257
Long-term Debt............................ 4,231 4,946
Other Liabilities......................... 2,294 2,265
Deferred Income Taxes..................... 1,818 1,697
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 3,600 shares, issued
1,726 shares.......................... 29 29
Capital in excess of par value.......... 1,231 1,314
Retained earnings....................... 12,630 11,567
Currency translation adjustment......... (1,068) (988)
------- -------
12,822 11,922
Less: Treasury Stock, at Cost
250 shares and 224 shares............. (6,607) (4,986)
------- -------
Total Shareholders' Equity............ 6,215 6,936
------- -------
Total Liabilities and Shareholders'
Equity............................. $22,375 $20,101
======= =======
See accompanying notes.
-5-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended 36 Weeks Ended
--------------- -----------------
9/5/98 9/6/97 9/5/98 9/6/97
------- ------ ------- --------
Net Income............................ $761 $658 $1,632 $1,741
Other Comprehensive Income/(Loss)
Currency translation adjustment,
net of related taxes............... (32) (157) (104) (281)
Reclassification adjustment for items
realized in net income............. 15 - 24 14
------- ------ ------- --------
(17) (157) (80) (267)
------- ------ ------- --------
Comprehensive Income.................. $744 $501 $1,552 $1,474
======= ====== ======= ========
See accompanying notes.
-6-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all per share information is computed using average shares outstanding,
assuming dilution)
(1) PepsiCo's Condensed Consolidated Balance Sheet at September 5, 1998 and the
Condensed Consolidated Statements of Income and Comprehensive Income for the 12
and 36 weeks ended September 5, 1998 and September 6, 1997 and the Condensed
Consolidated Statement of Cash Flows for the 36 weeks ended September 5, 1998
and September 6, 1997 have not been audited, and have been prepared in
conformity with the accounting principles applied in the 1997 Annual Report on
Form 10-K (Annual Report) for the year ended December 27, 1997. The Condensed
Consolidated Statement of Comprehensive Income was prepared in conformity with
generally accepted accounting principles and was not required for 1997. In
PepsiCo's opinion, this information includes all material adjustments, which are
of a normal and recurring nature, necessary for a fair presentation. The results
for the 12 and 36 weeks are not necessarily indicative of the results expected
for the year.
(2) At the end of the third quarter, PepsiCo completed the acquisitions of the
Tropicana Products, Inc. (Tropicana) from The Seagram Company Ltd. for $3.3
billion in cash and The Smith's Snackfoods Company in Australia from United
Biscuits Holdings plc (UB Australia) for $265 million in cash. Due to the timing
of these acquisitions, no operating results have been included in the
consolidated financial statements. The acquisitions were accounted for by the
purchase method and the purchase prices were largely funded by the issuance of
one year floating rate notes and commercial paper. The purchase prices have been
preliminarily allocated to Intangible Assets, net and Other Assets. The excess
purchase prices allocated to goodwill will be amortized on a straight-line basis
over 40 years.
The following table presents the unaudited pro forma combined results of PepsiCo
and Tropicana as if the acquisition had occurred at the beginning of fiscal
years 1998 and 1997. The aggregate impact of the other acquisitions in the
periods presented was not material to PepsiCo's net sales, income or income per
share from continuing operations. Accordingly, no related pro forma information
is provided.
36 Weeks Ended
9/5/98 9/6/97
Net Sales $16,669 $16,104
Reported
Income from Continuing
Operations $ 1,587 $ 995
Income Per Share from
Continuing Operations $ 1.04 $ 0.63
Ongoing *
Income from Continuing
Operations $ 1,387 $ 1,235
Income Per Share from
Continuing Operations $ 0.91 $ 0.78
* Excludes the effects of a 1998 income tax benefit described in Note 3 and the
1997 unusual charges.
-7-
The 1998 amounts include results of Tropicana on a quarter lag basis and,
therefore, the 36 weeks reflect the first two quarters ended June 30, 1998 and
the fourth quarter ended December 31, 1997. The 1997 amounts include results of
Tropicana for the first three quarters ended September 30, 1997. In addition,
the pro forma amounts reflect the amortization of intangibles based upon the
preliminary allocation of the purchase price and interest expense on the debt
issued to finance the purchase. The pro forma information does not present what
the actual consolidated results would have been for these periods and is not
necessarily indicative of future results.
(3) The third quarter of 1998 reflects an income tax benefit of $200 million (or
$0.13 per share) as a result of progress in discussions with the Internal
Revenue Service relative to a pending tax case related to concentrate operations
in Puerto Rico.
(4) Through the 36 weeks ended September 5, 1998, PepsiCo repurchased 57.8
million shares of capital stock at a cost of $2.2 billion. From September 6,
1998 through October 16, 1998, PepsiCo repurchased 1.4 million shares at a cost
of $42 million.
(5) Supplemental Cash Flow Information
($ in millions)
36 Weeks Ended
----------------
9/5/98 9/6/97
------- -------
Interest paid.................... $ 225 $ 357
Income taxes paid................ $ 498 $ 352
Supplemental Schedule Noncash
Investing and Financing Activities
Fair value of assets acquired.... $ 4,291 $ 76
Cash paid and stock issued....... (4,141) (72)
------- -------
Liabilities assumed.............. $ 150 $ 4
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS, CASH FLOWS AND
LIQUIDITY AND CAPITAL RESOURCES
Cautionary Statements
From time to time, in written reports and oral statements, PepsiCo discusses
expectations regarding its future performance, Year 2000 risks, the impact of
the Euro conversion and the impact of current global macroeconomic issues. These
"forward-looking statements" are based on currently available competitive,
financial and economic data and PepsiCo's operating plans. They are also
inherently uncertain, and investors must recognize that events could turn out to
be significantly different from expectations.
General
All per share information is computed using average shares outstanding, assuming
dilution.
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, and in pound or kilo sales of salty and sweet snacks in Snack
Foods.
Effective net pricing includes price changes and the effect of product, package
and country mix.
Unusual items includes net unusual charges in 1997 of $304 million ($240 million
after-tax or $0.15 per share) related to decisions to dispose of and write-down
assets, improve productivity and strengthen the international bottler structure.
Consolidated Operations
Net sales rose $182 million or 3% during the quarter. The increase, excluding
foreign currency impact, reflects volume gains in all businesses and a favorable
mix shift to higher-priced products for North American Snack Foods, partially
offset by the absence of bottling sales as a result of refranchising a Japanese
bottler late in 1997. The effect of weaker foreign currencies, led by Canada,
Central Europe and Thailand, negatively impacted sales by one point.
Net sales rose $494 million or 3% year-to-date. The increase, excluding foreign
currency impact, reflects volume gains in all businesses and a favorable sales
mix shift to higher-priced products for Worldwide Snack Foods. These advances
were partially offset by the absence of bottling sales as a result of
refranchising a Japanese bottler late in 1997. The effect of weaker foreign
currencies, led by Central Europe, Canada and Thailand, negatively impacted
sales by one point.
-9-
Operating Profit and Margin
($ in millions)
12 Weeks Ended 36 Weeks Ended
-------------------------- ---------------------------
9/5/98 9/6/97 Change 9/5/98 9/6/97 Change
-------- ------- ------- --------- ------- -------
Reported $889 $929 (4%) $2,257 $1,946 16%
16.0% 17.3% (1.3) 14.9% 13.3% 1.6
Ongoing* $2,257 $2,250 -
14.9% 15.3% (0.4)
* Excludes the effect of unusual charges as described on page 9.
- --------------------------------------------------------------------------------
Reported operating profit margin decreased over one point for the quarter. Cost
of sales increased at a faster rate than sales due to higher manufacturing costs
related to new products in North American Snack Foods and an unfavorable mix
shift in International Snack Foods to lower-margin products. An unfavorable mix
shift from higher-margin concentrate business to packaged products in North
American Beverages was partially offset by a favorable mix shift in
International Beverages to concentrate from packaged products reflecting, in
part, the 1997 refranchising of a Japanese bottler. In addition, the lower
operating margin also reflects planned increases in advertising and marketing
(A&M) and selling and distribution (S&D) expenses both of which grew at a faster
rate than sales, partially offset by a decline in general and administrative
(G&A). The decline in G&A reflects overall savings in most segments, lower
corporate expenses and lower executive compensation expense related to deferred
compensation liability, which is indexed to various investment options,
including PepsiCo capital stock. These G&A benefits more than offset higher
foreign exchange losses primarily in Asia, Russia and Mexico and increased
spending on information systems related to Year 2000.
For the year-to-date, reported operating profit margin increased over one and
one-half points. Ongoing operating profit margin declined less than one-half
point due primarily to A&M growing at a significantly faster rate than sales,
partially offset by a decrease in G&A and S&D growing at a slower rate than
sales primarily in International Beverages and Worldwide Snack Foods. The A&M
growth was led by planned increases in Worldwide Beverages and North American
Snack Foods. The reduced G&A reflects savings in International Beverages and the
lower deferred compensation expense, partially offset by higher foreign exchange
losses, primarily in Asia, Russia and Mexico, and spending on information
systems related to Year 2000.
Interest expense, net of interest income declined $15 million or 16% for the
quarter. The decline is primarily due to lower average U.S. debt levels,
partially offset by lower worldwide investment levels and higher interest rates
on debt. The lower debt levels reflect the use of cash flows received from
discontinued operations in the latter half of 1997 to repay debt.
Year-to-date, interest expense, net of interest income declined $122 million or
40%. The decline is primarily due to lower average U.S. debt levels reflecting
the use of cash flows received from discontinued operations in the latter half
of 1997 to repay debt. This decline was partially offset by higher interest
rates on debt.
-10-
Provision for Income Taxes
($ in millions)
12 Weeks Ended 36 Weeks Ended
--------------- ----------------
9/5/98 9/6/97 9/5/98 9/6/97
------- ------ -------- -------
Reported
Provision for
Income Taxes $ 51 $286 $443 $597
Effective tax rate 6.3% 34.2% 21.3% 36.4%
Ongoing*
Provision for
Income Taxes $251 $286 $643 $661
Effective tax rate 30.9% 34.2% 31.0% 34.0%
* Excludes the effects of a 1998 income tax benefit described in Note 3 and
the unusual charges in 1997 as described on page 9.
- --------------------------------------------------------------------------------
In the third quarter of 1998, PepsiCo recorded an income tax benefit of $200
million (or $0.13 per share) (see Note 3). For the quarter, the reported
effective tax rate decreased 27.9 points. The ongoing effective tax rate
declined 3.3 points. The reduced ongoing effective tax rate is attributable to
favorable settlement of prior years' audit issues and lower state and local
income taxes, partially offset by an increase in foreign income tax expense.
Year-to-date, the reported effective tax rate decreased 15.1 points. The ongoing
effective tax rate declined 3.0 points primarily reflecting the favorable
settlement of prior years' audit issues.
Income from Continuing Operations and Income Per Share
($in millions except per share amounts)
12 Weeks Ended 36 Weeks Ended
--------------------- -------------------
% %
9/5/98 9/6/97 Change 9/5/98 9/6/97 Change
------ ------ ------ ------ ------ ------
Income from
continuing
operations
Reported $ 761 $ 551 38 $1,632 $1,045 56
Ongoing* $ 561 $ 551 2 $1,432 $1,285 11
Income per share
from continuing
operations
Reported $ 0.50 $0.35 43 $ 1.07 $ 0.66 61**
Ongoing* $ 0.37 $0.35 6 $ 0.94 $ 0.81 15**
* Excludes the effects of a 1998 income tax benefit described in Note 3 and
the unusual charges in 1997 as described on page 9.
** Based on unrounded amounts.
- --------------------------------------------------------------------------------
-11-
For the quarter, reported income from continuing operations increased $210
million while income per share increased $0.15. Ongoing income from continuing
operations and income per share increased $10 million and $0.02, respectively.
The ongoing increases are due to the lower effective tax rate and the lower net
interest expense partially offset by the decline in operating profit. In
addition, income per share benefited from a 4% reduction in average shares
outstanding.
Year-to-date, reported income from continuing operations increased $587 million
while income per share increased $0.41. Ongoing income from continuing
operations and income per share increased $147 million and $0.13, respectively.
The ongoing increases are due to the lower net interest expense and the lower
effective tax rate. In addition, income per share benefited from a 3% reduction
in average shares outstanding.
-12-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
--------------------------- ------------------------
% %
12 Weeks Ended Change 12 Weeks Ended Change
------------------- ----------------
9/5/98 9/6/97 B/(W) 9/5/98 9/6/97 B/(W)
-------- ------- ----- ------- ------- ------
Beverages
-North America $2,208 $2,082 6 $401 $420 (5)
-International 730 788 (7) 59 74 (20)
------ ------ ---- ----
2,938 2,870 2 460 494 (7)
Snack Foods
-North America 1,821 1,714 6 373 373 -
-International 785 778 1 90 90 -
------ ------ ---- ----
2,606 2,492 5 463 463 -
Combined
Segments $5,544 $5,362 3 923 957 (4)
====== ======
Unallocated
Expenses (34) (28) (21)
---- ----
Operating Profit $889 $929 (4)
==== ====
Notes:
(a) This schedule should be read in conjunction with Management's Discussion and
Analysis beginning on page 15. Certain reclassifications were made to prior
year amounts to conform with the 1998 presentation.
-13-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
--------------------------- -----------------------------------
%
36 Weeks Ended Change 36 Weeks Ended % Change B/(W}
As
9/5/98 9/6/97 B/(W) 9/5/98 9/6/97 Rept'd Adjusted
--------- -------- ------- ------- ------- ----- ----------
(b) (c)
Beverages
-North America $ 5,850 $ 5,591 5 $ 1,021 $ 1,012 1 (4)
-International 1,702 1,869 (9) 60 (125) NM 9
------- ------- ------- -------
7,552 7,460 1 1,081 887 22 (3)
Snack
Foods
-North America 5,254 4,905 7 1,032 968 7 6
-International 2,349 2,296 2 252 196 29 (2)
------- ------- ------- -------
7,603 7,201 6 1,284 1,164 10 4
Combined
Segments $15,155 $14,661 3 2,365 2,051 15 -
======= =======
Unallocated
Expenses (108) (105) (3) (3)
------ -----
Operating
Profit $ 2,257 $ 1,946 16 -
======= =======
NM - Not Meaningful.
Notes:
(a) This schedule should be read in conjunction with Management's Discussion and
Analysis beginning on page 15. Certain reclassifications were made to prior year
amounts to conform with the 1998 presentation. (b) Includes the following
unusual charges:
1997
------
Beverages
- North America $ 52
- International 180
Snack Foods
- North America 10
- International 62
====
Net unusual charges $304
====
(c) Excludes the effects of unusual items described in note (b) above.
-14-
Business Segments
Beverages
($ in millions)
12 Weeks Ended 36 Weeks Ended
--------------------------- -----------------------------
% %
9/5/98 9/6/97 Change 9/5/98 9/6/97 Change
------ ------ ------ ------ ------ ------
Net Sales
North America $2,208 $2,082 6 $5,850 $5,591 5
International 730 788 (7) 1,702 1,869 (9)
------ ------ ------ ------
$2,938 $2,870 2 $7,552 $7,460 1
====== ====== ====== ======
Operating Profit
Reported
North America $ 401 $ 420 (5) $1,021 $1,012 1
International 59 74 (20) 60 (125) NM
------ ------ ------ ------
$ 460 $ 494 (7) $1,081 $ 887 22
====== ====== ====== ======
Ongoing*
North America $1,021 $1,064 (4)
International 60 55 9
------- --------
$1,081 $1,119 (3)
======= =======
* For 36 weeks, ongoing amounts exclude net unusual charges in 1997 of $232
($52-North America and $180-International).
NM - Not Meaningful.
- -------------------------------------------------------------------------
System bottler case sales (BCS) is the standard volume measure. It represents
PepsiCo-owned brands as well as brands PepsiCo has been granted the right to
produce, distribute and market nationally. Third quarter BCS includes the months
of June, July and August.
North America
12 Weeks
Net sales increased $126 million or 6% primarily reflecting packaged products
volume growth and contributions from acquisitions, partially offset by lower
effective net pricing. Acquisitions contributed nearly two points to the sales
growth.
BCS increased 3% in the quarter, led by mid-single-digit growth of the Mountain
Dew brand and strong double-digit growth of Aquafina bottled water and Lipton
Brisk. The overall advance includes a slight decline in brand Pepsi with brand
Diet Pepsi remaining about even with the prior year. Concentrate shipments to
franchisees grew at a faster rate than their BCS growth.
-15-
Reported operating profit decreased $19 million. The decline primarily reflects
planned increases in S&D and A&M expenses partially offset by volume growth. S&D
and A&M grew at a significantly faster rate than sales and volume. The S&D
growth was driven by higher depreciation, maintenance and labor costs associated
with cooler and vendor placements.
36 Weeks
Net sales increased $259 million or 5%. The increase primarily reflects packaged
products volume growth, contributions from acquisitions and higher effective net
pricing. Acquisitions contributed one point to the sales growth.
BCS increased 4%, led by mid-single-digit growth by the Mountain Dew brand and
strong double-digit growth of Aquafina bottled water and Lipton Brisk. Brand
Diet Pepsi had single-digit growth with brand Pepsi remaining about even with
the prior year. Concentrate shipments to franchisees grew at a slightly slower
rate than their BCS growth.
Reported operating profit increased $9 million. Ongoing operating profit
declined $43 million primarily reflecting planned increases in S&D and A&M and
higher G&A costs, partially offset by volume growth. S&D grew faster than sales
and volume and reflects higher depreciation, maintenance and labor costs
associated with cooler and vendor placements. A&M expenses grew significantly
faster than sales and volume. The G&A growth includes higher spending on
information systems related to the Year 2000.
International
12 Weeks
Net sales declined $58 million or 7%. The decrease in net sales, excluding
foreign currency impact, was primarily driven by the absence of Japan bottling
sales in 1998 as a result of the refranchising of a bottler late in 1997 and
lower effective net pricing. These declines were partially offset by volume
gains. The effect of weaker foreign currencies, led by India, Thailand and
Central Europe, negatively impacted sales by two points.
BCS increased 8% reflecting solid double-digit growth in Mexico and in the
Middle East Business Unit and, strong double-digit growth in the Philippines. In
addition, BCS growth in Venezuela continued to more than double as the joint
venture increased its territories and capacity. These advances were partially
offset by significantly lower BCS in Japan. The decline in Japan reflects the
elimination of certain PepsiCo-owned brands which were partially offset by
double-digit growth of PepsiCo-owned brands which continued to be sold by the
new bottler Suntory. Total concentrate shipments to franchisees increased at a
slower rate than their BCS.
Reported operating profits declined $15 million. The operating results reflect
increased losses related to acquiring a partner's interest in a bottling
operation in Russia, the absence of bottling profit resulting from the Japanese
refranchising, higher A&M and the lower effective net pricing. These declines
were partially offset by increased volumes.
-16-
36 Weeks
Net sales declined $167 million or 9%. The decline, excluding foreign currency
impact, was primarily driven by the absence of Japan bottling sales in 1998 as a
result of refranchising a bottler late in 1997. Volume gains and higher
effective net pricing partially offset the decline. The effect of weaker foreign
currencies, led by Thailand, Spain and India, negatively impacted sales by five
points.
BCS increased 7% reflecting solid double-digit growth in Mexico and in the
Middle East Business Unit and strong double-digit growth in the Philippines and
India. In addition, BCS more than doubled in Venezuela reflecting the continued
momentum by the joint venture. These advances were partially offset by
significantly lower BCS in Japan. The decline in Japan is due to the elimination
of certain PepsiCo-owned brands which were partially offset by double-digit
growth in PepsiCo-owned brands which continued to be sold by the new bottler
Suntory. Total concentrate shipments to franchisees remained about even with
their BCS.
Reported operating results increased $185 million. Ongoing operating results
increased $5 million. The improved operating results reflect the higher volume,
lower G&A expenses and the higher effective net pricing. These gains were
partially offset by higher A&M, increased losses related to the acquisition of a
partner's interest in a bottling operation in Russia and the absence of bottling
profit resulting from the Japanese refranchising. The effect of the weaker
foreign currencies negatively impacted ongoing operating results by
approximately $8 million.
-17-
Snack Foods
($ in millions)
12 Weeks Ended 36 Weeks Ended
----------------------------- ---------------------------
% %
9/5/98 9/6/97 Change 9/5/98 9/6/97 Change
-------- -------- ------- -------- ------- -------
Net Sales
North America $1,821 $1,714 6 $5,254 $4,905 7
International 785 778 1 2,349 2,296 2
-------- -------- -------- -------
$2,606 $2,492 5 $7,603 $7,201 6
======== ======== ======== =======
Operating Profit
Reported
North America $ 373 $ 373 - $1,032 $ 968 7
International 90 90 - 252 196 29
-------- -------- -------- -------
$ 463 $ 463 - $1,284 $1,164 10
======== ======== ======= =======
Ongoing*
North America $1,032 $ 978 6
International 252 258 (2)
-------- -------
$1,284 $1,236 4
======== =======
* For the 36 weeks, ongoing amounts exclude net unusual charges in 1997 of $72
($10-North America and $62-International).
- ---------------------------------------------------------------------------
Pound and kilo sales are the standard volume measures. Pound and kilo growth are
reported on a systemwide and constant territory basis, which includes currently
consolidated businesses and unconsolidated affiliates reported for at least one
year.
North America
12 Weeks
Net sales grew $107 million reflecting increased volume and a favorable sales
mix shift to higher-priced products.
Pound volume advanced 4% led by "WOW" products. Growth in PepsiCo's core brands,
excluding their low-fat and no-fat versions, was led by double-digit growth in
Lay's brand potato chips. The gain in core brands was offset by declines in
"Baked" products and the elimination of Doritos Reduced Fat brand tortilla
chips.
-18-
Reported operating profit was even with the prior year. The higher volume and
the favorable sales mix shift was fully offset by increased operating costs. The
increase in operating costs was led by higher manufacturing costs, reflecting
costs associated with plants and lines related to "WOW" and Doritos 3-D
products, and increased S&D and A&M expenses. S&D grew at a faster rate than
sales and significantly faster than volume due to increased investments in
anticipation of higher sales. A&M grew at a significantly faster rate than sales
and volume due to increased "WOW" launch costs and promotional allowances.
36 Weeks
Net sales grew $349 million reflecting increased volume and a favorable sales
mix shift to higher-priced products.
Pound volume advanced 5% led by "WOW" products and core brand growth. The growth
in core brands, excluding their low-fat and no-fat versions, was led by
double-digit growth in Lay's brand potato chips and high single-digit growth in
Doritos brand tortilla chips. These gains were partially offset by declines in
"Baked" products and the elimination of Doritos Reduced Fat brand tortilla
chips.
Reported operating profit increased $64 million. Ongoing operating profit
increased $54 million reflecting the higher volume and the favorable sales mix
shift, partially offset by increased operating costs. The increase in operating
costs was led by higher manufacturing costs, reflecting costs associated with
the start-up of plants and lines related to "WOW" and Doritos 3-D products, and
increased A&M and S&D expenses. A&M grew at a significantly faster rate than
sales and volume due to increased promotional allowances and "WOW" launch costs.
S&D grew at a slightly slower rate than sales and faster than volume.
International
12 Weeks
Net sales increased $7 million or 1%. The increase in net sales, excluding
foreign currency impact, was driven by higher volume partially offset by an
unfavorable sales mix shift. The effect of weaker foreign currencies, led by
Brazil, Thailand and Australia, negatively impacted sales by two points.
Salty snack kilos increased 6%, led by double-digit growth at Sabritas in Mexico
and the Snack Ventures Europe JV, partially offset by double-digit declines in
Brazil. Sweet snack kilos increased 2% driven by Gamesa. Including
acquisitions/divestitures, salty snack kilos increased 13%, while sweet snack
kilos declined 6% led by the sale of a French biscuit business in the first
quarter.
Reported operating profit remained even with the prior year. Operating profit
growth at Sabritas, in Poland and in the U.K. was partially offset by continued
deterioration of operating performance in Brazil due to macroeconomic
conditions. The growth in Poland is substantially driven by the sweet snack
business. Operating profit was also negatively impacted by the lapping of a 1997
gain on a sale of a flour mill.
As part of the global strategy to focus on the core businesses in beverages and
salty snacks, PepsiCo announced in the fourth quarter a preliminary agreement
was reached to sell the chocolate business in Poland in early 1999.
-19-
36 Weeks
Net sales increased $53 million or 2%. The increase in net sales, excluding
foreign currency impact, was driven by higher volume, a favorable sales mix
shift and net contributions from acquisitions/divestitures. Net
acquisitions/divestitures contributed one point to the sales growth. The effect
of weaker foreign currencies, led by Brazil, Poland, Thailand and Australia,
negatively impacted sales by three points.
Salty snack kilos increased 7%, led by double-digit growth at Sabritas and the
Snack Ventures Europe JV, partially offset by double-digit declines in Brazil.
Sweet snack kilos declined 2% driven by Gamesa. Including
acquisitions/divestitures, salty snack kilos increased 13%, while sweet snack
kilos declined 8% led by the first quarter sale of the French biscuit business.
Reported operating profit increased $56 million. Ongoing operating profit
declined $6 million. Deterioration of operating performance in Brazil due to the
macroeconomic conditions, market softness at Gamesa and lower profit in the U.K.
were partially offset by growth at Sabritas and in Poland. The growth in Poland
is substantially driven by the sweet snack business which PepsiCo has agreed to
sell in early 1999. Operating profit was also negatively impacted by the lapping
of a 1997 gain on a sale of a flour mill.
-20-
Cash Flows
PepsiCo's 1998 consolidated cash and cash equivalents decreased $1.6 billion
compared to a $195 million increase in 1997. Excluding the 1997 cash provided by
discontinued operations, the cash and cash equivalents for 1998 decreased
slightly compared to 1997. The decrease in cash flow over the prior year
primarily reflects increased cash outflows for acquisitions and investments in
unconsolidated affiliates and increased share repurchases partially offset by
the liquidation of investment portfolios and net proceeds from issuance of debt,
which were used to fund acquisitions late in the quarter.
Our share repurchase activity was as follows:
36 Weeks Ended
------------------
($ and shares in
millions) 9/5/98 9/6/97
------- -------
Cost $2,188 $1,643
Number of shares
repurchased 57.8 46.6
% of shares outstanding
at beginning of year 3.8% 3.0%
The increase in acquisitions and investments in unconsolidated affiliates
includes the acquisitions of Tropicana, UB Australia, a bottler in Canada, the
Cracker Jack brand, the remaining ownership interests of the snack food business
in Poland and a Russian bottler and various International salty snack food
businesses. Subsequent to the third quarter, PepsiCo announced that it reached
an agreement to sell the chocolate business in Poland.
Liquidity and Capital Resources
At the end of the third quarter, PepsiCo completed the acquisitions of Tropicana
for $3.3 billion in cash and UB Australia for $265 million in cash. The purchase
prices were largely funded by the issuance of one year floating rate notes and
commercial paper and have been preliminarily allocated primarily to Intangible
Assets, net and Other Assets in the Consolidated Balance Sheet.
During the quarter, PepsiCo increased its revolving credit facilities by $2.0
billion to $4.75 billion from $2.75 billion at year-end 1997. These unused
credit facilities exist largely to support the issuances of short-term debt. The
facilities are composed of $3.1 billion expiring March 1999 and $1.65 billion
expiring March 2003. At September 5, 1998, $1.65 billion of short-term
borrowings were reclassified as long-term, reflecting PepsiCo's intent and
ability, through the existence of the unused revolving credit facilities, to
refinance these borrowings. PepsiCo has the intent and ability to renew its
credit facilities on a long-term basis.
Please refer to PepsiCo's 1997 Annual Report on Form 10-K for further discussion
regarding Liquidity and Capital Resources.
-21-
Year 2000
Each of PepsiCo's business segments and corporate headquarters have established
teams to identify and correct Year 2000 compliance issues. Information (IT)
systems with non-compliant code are expected to be modified or replaced with
systems that are Year 2000 compliant. Similar actions are being taken with
respect to non-IT systems, primarily systems embedded in manufacturing and other
facilities. The teams are also charged with investigating the Year 2000
readiness of suppliers, customers, franchisees and other third parties and with
developing contingency plans where necessary.
Key IT systems have been inventoried and assessed for compliance, and detailed
plans are in place for required system modifications or replacements.
Remediation and testing activities are well underway with approximately 40% of
the systems already compliant. This percentage is expected to increase to
approximately 75% by year-end, to approximately 90% and 98% by the end of the
first and second quarters of 1999, respectively, and be fully compliant by the
fourth quarter of 1999. Inventories and assessments of non-IT systems are in
progress and expected to be complete by year-end. Remediation of all non-IT
systems has begun in the fourth quarter with a mid-year 1999 target completion
date. Independent consultants are monitoring progress against remediation
programs and performing testing at certain key locations. In addition, progress
against the programs is also monitored by senior management, and periodically
reported to PepsiCo's Board of Directors.
PepsiCo has identified critical suppliers, customers and other third parties and
has surveyed their Year 2000 remediation programs. Risk assessments and
contingency plans, where necessary, will be finalized in the first quarter of
1999. Independent consultants have completed a survey of the state of readiness
of PepsiCo's significant bottling franchisees. Such surveys have identified
readiness issues and, therefore, potential risk to PepsiCo. As a result, the
franchisees' remediation programs are being accelerated to minimize the risk.
Incremental costs directly related to Year 2000 issues are estimated to be $130
million from 1998 to 2000, of which $28 million or 22% has been spent to date.
Approximately 72% of the total estimated spending represents costs to modify
existing systems. Costs incurred prior to 1998 were immaterial. This estimate
assumes that PepsiCo will not incur significant Year 2000 related costs on
behalf of its suppliers, customers, franchisees or other third parties.
Contingency plans for Year 2000-related interruptions are being developed and
will include, but not be limited to, the development of emergency backup and
recovery procedures, remediation of existing systems parallel with installation
of new systems, replacing electronic applications with manual processes,
identification of alternate suppliers and increasing raw material and finished
goods inventory levels. All plans are expected to be completed by the end of the
second quarter in 1999.
PepsiCo's most likely potential risk is a temporary inability, particularly the
inability of bottling franchisees, to manufacture or bottle some products in
certain locations, and the inability of some customers to order and pay on a
timely basis.
PepsiCo's Year 2000 efforts are ongoing and its overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While PepsiCo anticipates no major interruption of its
business activities, that will be dependent in part, upon the ability of third
parties, particularly bottling franchisees to be Year 2000 compliant. Although
PepsiCo has
-22-
implemented the actions described above to address third party issues, it has no
direct ability to influence the compliance actions by such parties. Accordingly,
while PepsiCo believes its actions in this regard should have the effect of
ameliorating Year 2000 risks, it is unable to eliminate them or to estimate the
ultimate effect Year 2000 risks will have on PepsiCo's operating results.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the euro. The euro will then
trade on currency exchanges and may be used in business transactions. The
conversion to the euro will eliminate currency exchange rate risk between the
member countries. Beginning in January 2002, new euro-denominated bills and
coins will be issued, and legacy currencies will be withdrawn from circulation.
PepsiCo's operating subsidiaries affected by the euro conversion have
established plans to address the issues raised by the euro currency conversion.
These issues include, among others, the need to adapt computer and financial
systems, business processes and equipment, such as vending machines, to
accommodate euro-denominated transactions and the impact of one common currency
on pricing. Since financial systems and processes currently accommodate multiple
currencies, the plans contemplate conversion by mid 2001 if not already
addressed in conjunction with Year 2000 remediation. PepsiCo does not expect the
system and equipment conversion costs to be material. Due to numerous
uncertainties, PepsiCo cannot reasonably estimate the effects one common
currency will have on pricing and the resulting impact, if any, on financial
condition or results of operations.
Certain Factors Expected to Impact Future Results
Throughout the year, macroeconomic conditions in Brazil, Mexico and across Asia
Pacific have adversely impacted PepsiCo's results. In addition, late in
PepsiCo's third quarter, the Russian ruble was devalued significantly. Economic
conditions have continued to deteriorate in Russia. Much of PepsiCo's costs in
Russia are denominated in U.S. dollars. Although little of this impact was
reflected in the third quarter results, the fourth quarter will be adversely
affected by these events.
PepsiCo is currently evaluating what actions may need to be taken in these
markets in response to the global economic events, most particularly in Russia
to reduce the fixed cost structure as well as to account for any potential
impairment of long-lived assets. PepsiCo's impairment assessments will
necessarily take into account these economic conditions.
Ongoing combined segment operating profit for the full year, including Tropicana
from the date of acquisition, is expected to be about the same as 1997.
-23-
<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 5, 1998 and the related condensed
consolidated statements of income and comprehensive income for the twelve and
thirty-six weeks ended September 5, 1998 and September 6, 1997 and the condensed
consolidated statement of cash flows for the thirty-six weeks ended September 5,
1998 and September 6, 1997. 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 27, 1997, 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 3, 1998, 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 27, 1997, 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."
KPMG Peat Marwick LLP
New York, New York
October 13, 1998
-24-
</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 27.
(b)Reports on Form 8-K
PepsiCo filed a current report on Form 8-K dated July 24, 1998
attaching the PepsiCo, Inc. press release of July 20, 1998
announcing the planned acquisition of the Tropicana juice business
from The Seagram Company Ltd.
-25-
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 20, 1998 Sean F. Orr
-------------------------
Senior Vice President and
Controller
Date: October 20, 1998 Lawrence F. Dickie
---------------------------------
Vice President, Associate General
Counsel and Assistant Secretary
-26-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 11 Computation of Net Income Per Share of Capital Stock -
Basic and Assuming Dilution
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 27.1 Financial Data Schedule 36 weeks ended September 5, 1998
Exhibit 27.2 Financial Data Schedule 36 weeks ended September 6, 1997
-27-