Form 10-K
Table of Contents

 

No. 1-1183


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 28, 2002

 


 

PepsiCo, Inc.

Incorporated in North Carolina

700 Anderson Hill Road

Purchase, New York 10577-1444

(914) 253-2000

 

13-1584302

(I.R.S. Employer Identification No.)

 


 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of Each Class


  

Name of Each Exchange

on Which Registered


Common Stock, par value 1-2/3 cents per share

  

New York and Chicago Stock Exchanges

 

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None

 

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  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) ..  Yes  x  No  ¨

 

The number of shares of PepsiCo Common Stock outstanding as of February 22, 2003 was 1,718,625,330. The aggregate market value of PepsiCo Common Stock held by nonaffiliates of PepsiCo as of February 22, 2003 was $67,111,973,597.

 

Documents of Which Portions

Are Incorporated by Reference

 

Parts of Form 10-K into Which Portion of

Documents Are Incorporated


 

Proxy Statement for PepsiCo’s May 7, 2003

 

III

Annual Meeting of Shareholders

   

 


Table of Contents

PepsiCo, Inc.

 

Form 10-K Annual Report

For the Fiscal Year Ended December 28, 2002

 

Table of Contents

 

PART I

         

Item 1.

  

Business

  

1

Item 2.

  

Properties

  

5

Item 3.

  

Legal Proceedings

  

5

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

6

PART II

         

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

  

8

Item 6.

  

Selected Financial Data

  

8

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

9

Item 7a.

  

Quantitative and Qualitative Disclosures About Market Risk

  

72

Item 8.

  

Financial Statements and Supplementary Data

  

72

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  

72

PART III

         

Item 10.

  

Directors and Executive Officers of the Registrant

  

72

Item 11.

  

Executive Compensation

  

72

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

  

73

Item 13.

  

Certain Relationships and Related Transactions

  

73

PART IV

         

Item 14.

  

Control Procedures

  

73

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

74

Item 16.

  

Principal Accountant Fees and Services

  

75

 

 

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PART I

 

Item 1.     Business

 

PepsiCo, Inc. was incorporated in Delaware in 1919 and was reincorporated in North Carolina in 1986. When used in this report the terms “we,” “us,” “our” and the “Company” mean PepsiCo and its divisions and subsidiaries.

 

Our Divisions

 

We are a leading, global snack and beverage company. We manufacture, market and sell a variety of salty, convenient, sweet and grain-based snacks, carbonated and noncarbonated beverages and foods. We are organized in six divisions:

 

    Frito-Lay North America,
    Frito-Lay International,
    Pepsi-Cola North America,
    Gatorade/Tropicana North America,
    PepsiCo Beverages International, and
    Quaker Foods North America.

 

Our North American divisions operate in the United States and Canada. Our international divisions operate in over 175 countries, with our largest operations in Mexico and the United Kingdom. Financial information concerning our divisions and geographic areas is presented in Note 1 to our consolidated financial statements and additional information concerning our division operations, customers and distribution network is presented under the heading “ Our Business” contained in “ Item 7. Management’s Discussion and Analysis.”

 

Beginning in 2003, we will combine the results of PCNA and GTNA as PepsiCo Beverages North America, and of our international food and beverage businesses as PepsiCo International to reflect operating and management changes.

 

Snacks

 

Frito-Lay North America (FLNA) manufactures, markets, sells and distributes branded snacks. These snacks include Lay’s potato chips, Doritos flavored tortilla chips, Cheetos cheese flavored snacks, Fritos corn chips, Tostitos tortilla chips, Ruffles potato chips, Rold Gold pretzels, branded dips, Quaker Chewy granola bars, Sunchips multigrain snacks, Grandma’s cookies, Quaker Fruit & Oatmeal bars, Quaker Quakes corn and rice cakes, Quaker rice cakes, Cracker Jack treats and Go Snacks. These branded products are sold to independent distributors and retailers. FLNA’s net sales were $8.6 billion in 2002, $8.2 billion in 2001 and $7.8 billion in 2000 and accounted for 34% of our total division net sales in each of those years.

 

In addition to many of the FLNA and Quaker branded snacks sold in North America, Frito-Lay International (FLI) also manufactures and sells a number of leading snack brands including Sabritas, Gamesa and Alegro brands in Mexico, Walkers and Wotsits brands in the United Kingdom and Smith’s brands in Australia. These products are manufactured by consolidated businesses, as well as by noncontrolled affiliates and are sold to independent distributors and retailers. FLI’s net sales were

 

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$5.7 billion in 2002, $5.5 billion in 2001 and $5.2 billion in 2000 and accounted for 23% of our total division net sales in each of those years.

 

Beverages

 

Pepsi-Cola North America (PCNA) manufactures, markets, and sells beverage concentrates, and sells fountain syrups and finished goods, under the brands Pepsi, Mountain Dew, Sierra Mist, Mug, Slice, FruitWorks, SoBe and Dole. PCNA manufactures, markets and sells ready-to-drink tea and coffee products through joint ventures with Lipton and Starbucks. PCNA sells concentrate and finished goods for these brands to bottlers licensed by us. PCNA also licenses the Aquafina water brand to its bottlers. The franchise bottlers sell our brands as finished goods to independent distributors and retailers. PCNA’s net sales were $3.4 billion in 2002, $3.2 billion in 2001 and $2.7 billion in 2000 and accounted for 14% of our total division net sales in 2002, 13% of our total division net sales in 2001 and 12% of our total division net sales in 2000.

 

Gatorade/Tropicana North America (GTNA) manufactures, markets and sells Gatorade sports drinks, Tropicana Pure Premium, Dole, Tropicana Season’s Best and Tropicana Twister juices and juice drinks and Propel fitness water. GTNA’s net sales were $3.8 billion in 2002, $3.7 billion in 2001 and $3.5 billion in 2000 and accounted for 15% of our total division net sales in 2002 and 16% of our total division net sales in 2001 and 2000. These branded products are sold to independent distributors and retailers.

 

PepsiCo Beverages International (PBI) manufactures, markets and sells beverage concentrates, fountain syrups and finished goods under the brands Pepsi, 7UP, Mirinda, Mountain Dew, Gatorade and Tropicana. Generally, PBI’s brands are sold to franchise bottlers. However, in certain markets, PBI operates bottling plants and distribution facilities. PBI also licenses Aquafina water brand to certain of its franchise bottlers. PBI’s net sales were $2 billion in 2002, 2001 and 2000 and accounted for 8% of our total division net sales in 2002 and 2001 and 9% of our total division net sales in 2000.

 

Foods

 

Quaker Foods North America (QFNA) manufactures, markets and sells cereals, rice, pasta and other branded products. QFNA’s products include Quaker oatmeal, Cap’n Crunch and Life ready-to-eat cereals, Rice-A-Roni, Pasta Roni and Near East side dishes, Aunt Jemima mixes and syrups and Quaker grits. QFNA’s net sales were $1.5 billion and accounted for 6% of our total division net sales in 2002, 2001 and 2000. These branded products are sold to independent distributors and retailers.

 

Our Distribution Network

 

Our products are brought to market through direct-store-delivery, broker-warehouse and foodservice and vending distribution networks. These distribution systems are described under the heading “ Our Distribution Network” contained in “ Item 7. Management’s Discussion and Analysis.”

 

Ingredients and Other Supplies

 

The principal ingredients we use in our food and beverage businesses are almonds, aspartame, cocoa, corn, corn sweeteners, flavorings, flour, juice and juice concentrates, oats, oranges, grapefruits and other fruits, potatoes, rice, seasonings, sugar, vegetable and essential oils, wheat, and packaging

 

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materials. Our key packaging materials include P.E.T. resin used for plastic bottles and cardboard. Fuel and natural gas are also important commodities due to their use in our plants and in the trucks delivering our products. These products are purchased mainly in the open market. We employ specialists to secure adequate supplies of many of these items and have not experienced any significant continuous shortages. The prices we pay for such items are subject to fluctuation. When prices increase, we may or may not pass on such increases to our customers. When we have decided to pass along price increases in the past, we have done so successfully. However, there is no assurance that we will be able to do so in the future.

 

Our Brands

 

We own numerous valuable trademarks which are essential to our worldwide businesses, including Alegro, AMP, Aquafina, Aunt Jemima, Cap’n Crunch, Cheetos, Cracker Jack, Diet Pepsi, Doritos, Frito-Lay, Fritos, Fruitworks, Gamesa, Gatorade, Golden Grain, Grandma’s, Lay’s, Life, Mirinda, Mountain Dew, Mountain Dew Code Red, Mr. Green, Mug, Near East, Pasta Roni, Pepsi, Pepsi Blue, Pepsi Max, Pepsi One, Pepsi Twist, Pepsi-Cola, Propel, Quaker, Quaker Chewy, Quaker Quakes, Rice-A-Roni, Rold Gold, Ruffles, Sabritas, 7UP and Diet 7UP (outside the United States), Sierra Mist, Slice, Smith’s, SoBe, Sunchips, Tostitos, Tropicana, Tropicana Pure Premium, Tropicana Pure Tropics, Tropicana Season’s Best, Tropicana Twister, Walkers, Wild Cherry Pepsi and Wotsits. Trademarks remain valid so long as they are used properly for identification purposes, and we emphasize correct use of our trademarks. We have authorized, through licensing arrangements, the use of many of our trademarks in such contexts as snack food joint ventures and beverage bottling appointments. In addition, we license the use of our trademarks on promotional items for the primary purpose of enhancing brand awareness.

 

We either own or have licenses to use a number of patents which relate to some of our products, the processes for their production and the design and operation of various equipment used in our businesses. Some of these patents are licensed to others.

 

Seasonality

 

Our beverage and food divisions are subject to seasonal variations. Our beverage sales are higher during the warmer months and certain food sales are higher in the cooler months. However, taken as a whole, seasonality does not have a material impact on our business.

 

Our Customers

 

Our customers include retailers, distributors and franchise bottlers. No single customer represents more than 10% of our net sales. However, when considering both our volumes, and that of our bottlers, Wal-Mart Stores, Inc. is a significant customer. Additional information regarding our customers is provided under the heading “ Our Customers” and “ Cautionary Statements” contained in “ Item 7. Management’s Discussion and Analysis.”

 

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Our Competition

 

Our businesses operate in highly competitive markets. We compete against global companies and regional and private label manufacturers on the basis of price, quality, product variety and effective distribution. Success in this competitive environment is primarily achieved through effective promotion of existing products and the introduction of new products. We believe that the strength of our brands, innovation and marketing, coupled with our quality products and flexible distribution network, allow us to effectively compete. The following charts highlight our estimated competitive position for our major product categories.

 

U.S. Snack Chip Industry

% Volume in Supermarkets

Includes potato chips, tortilla chips, extruded

snacks and pretzels. Excludes Wal-Mart.

 

U.S. Beverage Market Share

% Volume in Measured Channels

Includes carbonated soft drinks, bottled water, ambient

juices and juice drinks, chilled juices and juice drinks,

sports drinks, energy drinks,

ready-to-drink tea and ready-to-drink coffee.

     

LOGO

 

 

LOGO

 

Regulatory Environment

 

The conduct of our businesses, and the production, distribution and use of many of our products, are subject to various federal laws, such as the Food, Drug and Cosmetic Act and the Occupational Safety and Health Act. Our businesses in the United States are also subject to state and local laws.

 

We are also subject to the laws of the countries in which we conduct our businesses. We rely on local in-house and outside counsel to ensure compliance with foreign laws and regulations. The cost of compliance with foreign laws does not have a material financial impact on our international operations.

 

Employees

 

As of December 28, 2002, we employed, subject to seasonal variations, approximately 142,000 people worldwide, including approximately 61,000 people employed within the United States. We believe that relations with our employees are generally good.

 

Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at http://www.pepsico.com as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission.

 

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Item 2.     Properties

 

We own our corporate headquarters building in Purchase, New York. Leases of plants in North America generally are on a long-term basis, expiring at various times, with options to renew for additional periods. Most international plants are leased for varying and usually shorter periods, with or without renewal options. We believe that our properties are in good operating condition and are suitable for the purposes for which they are being used.

 

Snacks

 

Frito-Lay North America owns or leases approximately 50 food manufacturing and processing plants and approximately 2,000 warehouses, distribution centers and offices, including its headquarters building and a research facility in Plano, Texas. Frito-Lay International owns or leases approximately 100 plants and approximately 1,200 distribution centers, warehouses and offices outside of North America.

 

Beverages

 

Pepsi-Cola North America owns or leases 2 concentrate plants and 7 warehouses throughout North America. Licensed bottlers in which we have an ownership interest own or lease approximately 70 bottling plants. Gatorade/Tropicana North America owns or leases approximately 10 manufacturing plants and approximately 20 distribution centers, warehouses and offices, including Tropicana’s corporate office space in Bradenton, Florida. PepsiCo Beverages International owns or leases approximately 50 manufacturing and bottling plants and approximately 140 warehouses, distribution centers and offices outside of North America.

 

Foods

 

Quaker Foods North America owns or leases approximately 10 manufacturing plants and distribution centers in North America.

 

Shared Properties

 

Frito-Lay North America and Quaker Foods North America share 2 plants that manufacture oat-based foods and snacks. Frito-Lay North America, Quaker Foods North America and Gatorade/Tropicana North America share approximately 20 distribution centers, warehouses and offices in North America including a research and development laboratory in Barrington, Illinois, and corporate office space in downtown Chicago, Illinois.

 

Item 3.     Legal Proceedings

 

We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. Management believes that the ultimate liability, if any, in excess of amounts already recognized for such claims or contingencies is not likely to have a material adverse effect on our results of operations, financial condition or liquidity.

 

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Item 4.     Submission of Matters to a Vote of Stockholders

 

Not applicable.

 

Executive Officers of the Registrant

 

The following is a list of names, ages and background of our current executive officers:

 

Steven S Reinemund, 54, has been our Chairman and Chief Executive Officer since May 2001. Mr. Reinemund began his career with PepsiCo as Senior Operating Officer of Pizza Hut, Inc. (a former subsidiary of the Company) in 1984. He became President and Chief Executive Officer of Pizza Hut in 1986, President and Chief Executive Officer of Pizza Hut Worldwide in 1991, President and Chief Executive Officer of Frito-Lay in 1992 and Chairman and Chief Executive Officer of Frito-Lay in 1996. Mr. Reinemund served as PepsiCo’s President and Chief Operating Officer from 1999 until 2001.

 

David R. Andrews, 61, became PepsiCo’s Senior Vice President, Government Affairs, General Counsel and Secretary in February 2002. Before joining PepsiCo, Mr. Andrews was a partner in the law firm of McCutchen, Doyle, Brown & Enersen, LLP, a position he held from 2000 to 2002 and from 1981 to 1997. From 1997 to 2000, he served as the legal adviser to the U.S. Department of State and former Secretary of State Madeleine Albright.

 

Peter A. Bridgman, 50, has been our Senior Vice President and Controller since August 2000. Mr. Bridgman began his career with PepsiCo at Pepsi-Cola International in 1985 and became Chief Financial Officer for Central Europe in 1990. He became Senior Vice President and Controller for Pepsi-Cola North America in 1992 and Senior Vice President and Controller for The Pepsi Bottling Group, Inc. in 1999.

 

Abelardo E. Bru, 54, was appointed Chairman and Chief Executive Officer of Frito-Lay North America in February 2003. Mr. Bru served as President and Chief Executive Officer of Frito-Lay North America from 1999 to 2003 and as President and General Manager of PepsiCo’s Sabritas snack unit from 1992 to 1999. Mr. Bru has served in various senior international positions with PepsiCo Foods International since joining PepsiCo in 1976.

 

Roger A. Enrico, 58, has been a member of our board since 1987. Mr. Enrico served as Chief Executive Officer and Chairman of the Board from 1996 to 2001. He was Vice Chairman from 1993 to 1996 and from 2001 to 2002. He joined PepsiCo in 1971, and became President and Chief Executive Officer of Pepsi-Cola USA in 1983, President and Chief Executive Officer of PepsiCo Worldwide Beverages in 1986, Chairman and Chief Executive Officer of Frito-Lay International in 1991 and Chairman and Chief Executive Officer of PepsiCo Worldwide Foods in 1992. In addition, he was Chairman and Chief Executive Officer, PepsiCo Worldwide Restaurants, from 1994 until the spin-off of PepsiCo’s restaurant businesses in 1997.

 

Matthew M. McKenna, 52, has been our Senior Vice President of Finance since August 2001. Mr. McKenna began his career at PepsiCo as Vice President, Taxes in 1993. In 1998, he became Senior Vice President, Taxes and served as Senior Vice President and Treasurer from 1998 until 2001. Prior to joining PepsiCo, he was a partner with the law firm of Winthrop, Stimson, Putnam & Roberts in New York.

 

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Margaret D. Moore, 55, is our Senior Vice President, Human Resources, a position she assumed at the end of 1999. From November 1998 to December 1999, she was Senior Vice President and Treasurer of The Pepsi Bottling Group, Inc. (PBG). Prior to joining PBG, Ms. Moore spent 25 years with PepsiCo in a number of senior financial and human resources positions.

 

Indra K. Nooyi, 47, was elected to our Board of Directors and became President and Chief Financial Officer in May 2001, after serving as Senior Vice President and Chief Financial Officer since 2000. Ms. Nooyi served as Senior Vice President Strategic Planning and Senior Vice President, Corporate Strategy and Development from 1994 until 2000. Prior to joining PepsiCo, she was Senior Vice President of Strategy, Planning and Strategic Markets for Asea Brown Boveri. She was also Vice President and Director of Corporate Strategy and Planning at Motorola.

 

Lionel L. Nowell III, 48, has been our Senior Vice President and Treasurer since August 2001. Mr. Nowell joined PepsiCo as Senior Vice President and Controller in 1999 and then became Senior Vice President and Chief Financial Officer of The Pepsi Bottling Group. Prior to joining PepsiCo, he was Senior Vice President, Strategy and Business Development for RJR Nabisco, Inc. From 1991 to 1998, he served as Chief Financial Officer of Pillsbury North America, and its Pillsbury Foodservice and Haagen Dazs units, serving as Vice President and Controller of the Pillsbury Company, Vice President of Food and International Retailing Audit, and Director of Internal Audit.

 

Gary M. Rodkin, 50, was appointed Chairman and Chief Executive Officer of PepsiCo Beverages and Foods North America in February 2003. Mr. Rodkin became President and Chief Executive Officer of PepsiCo Beverages and Foods North America in 2002. He served as President and Chief Executive Officer of Pepsi-Cola North America from 1999 to 2002. Mr. Rodkin was President of Tropicana North America from 1995 to 1998, and became President and Chief Executive Officer when PepsiCo acquired Tropicana in 1998.

 

Peter M. Thompson, 56, is President and Chief Executive Officer of PepsiCo Beverages International, a position he assumed in August 2001. Mr. Thompson was President and Chief Executive Officer of Pepsi-Cola International from 1998 to 2001 and its President and Chief Operating Officer from 1996 to 1998. Mr. Thompson worked at PepsiCo from 1980 to 1983, and returned in 1994, serving in several positions, including President of Snack Ventures Europe, our joint venture with General Mills, and President of Walkers Snack Foods in the U.K.

 

Michael D. White, 51, was appointed Chairman and Chief Executive Officer of PepsiCo International in February 2003, after serving as President and Chief Executive Officer of Frito-Lay’s Europe/Africa/Middle East division since 2000. From 1998 to 2000, Mr. White was Senior Vice President and Chief Financial Officer of PepsiCo. Mr. White has also served as Executive Vice President and Chief Financial Officer of PepsiCo Foods International and Chief Financial Officer of Frito-Lay North America. He joined Frito-Lay in 1990 as Vice President of Planning.

 

Executive officers are elected by our Board of Directors, and their terms of office continue until the next annual meeting of the Board or until their successors are elected and have qualified. There are no family relationships among our executive officers.

 

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PART II

 

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

 

Stock Trading Symbol—PEP

 

Stock Exchange Listings—The New York Stock Exchange is the principal market for our Common Stock, which is also listed on the Amsterdam, Chicago, Swiss and Tokyo Stock Exchanges.

 

Shareholders—At December 28, 2002, there were approximately 220,000 shareholders of record.

 

Dividend Policy—Our policy is to pay quarterly cash dividends at approximately one-third of our net income. Dividends are usually declared in November, January, May and July and paid at the beginning of January and the end of March, June and September. The dividend record dates for these payments are December 6, 2002, March 14, June 13 and September 12, 2003. We have paid quarterly cash dividends since 1965. The quarterly dividends declared in 2002 and 2001 are contained in Selected Financial Data—Quarterly.

 

Stock Prices—The composite quarterly high, low and closing prices for PepsiCo Common Stock for each fiscal quarter of 2002 and 2001 are contained in Selected Financial Data—Quarterly.

 

Information on PepsiCo Common Stock authorized for issuance under equity compensation plans is contained in our Proxy Statement for our 2003 Annual Meeting of Shareholders under the captions “Equity Compensation Plan Information” and is incorporated herein by reference. See Note 7 to our consolidated financial statements for a description of our employee stock option plans.

 

Item 6.     Selected Financial Data

 

Selected Financial Data-5-year summary is included on page 71.

 

 

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Item 7.     Management’s Discussion and Analysis

 

    

Pages

 


OUR BUSINESS

    

Our Operations

  

10

Our Customers

  

12

Our Distribution Network

  

12

Our Competition

  

13

Other Relationships

  

13

Our Market Risks

  

13

Cautionary Statements

  

15

OUR CRITICAL ACCOUNTING POLICIES

    

Revenue Recognition

  

16

Brands and Goodwill

  

16

Income Taxes

  

17

Pension and Retiree Medical Plans

  

18

OUR FINANCIAL RESULTS

    

Consolidated Statement of Income

  

20

Items Affecting Comparability

  

21

Results of Operations – Consolidated Review

  

23

Results of Operations – Division Review

  

26

Frito-Lay North America

  

26

Frito-Lay International

  

27

Pepsi-Cola North America

  

28

Gatorade/Tropicana North America

  

29

PepsiCo Beverages International

  

30

Quaker Foods North America

  

31

Consolidated Statement of Cash Flows

  

32

Our Liquidity and Capital Resources

  

34

Consolidated Balance Sheet

  

37

Consolidated Statement of Common Shareholders’ Equity

  

38

Notes to Consolidated Financial Statements

    

Note 1 – Basis of Presentation and Our Divisions

  

39

Note 2 – Our Significant Accounting Policies

  

44

Note 3 – Our Merger with Quaker

  

46

Note 4 – Property, Plant and Equipment and Intangible Assets

  

48

Note 5 – Income Taxes

  

50

Note 6 – Pension and Retiree Medical Plans

  

52

Note 7 – Employee Stock Options

  

55

Note 8 – Noncontrolled Bottling Affiliates

  

57

Note 9 – Debt Obligations and Commitments

  

59

Note 10 – Risk Management

  

61

Note 11 – Net Income per Common Share

  

64

Note 12 – Preferred and Common Stock

  

64

Note 13 – Accumulated Other Comprehensive Loss

  

65

Note 14 – Supplemental Financial Information

  

66

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

  

67

INDEPENDENT AUDITORS’ REPORT

  

68

SELECTED FINANCIAL DATA

  

69

 

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Our discussion and analysis is an integral part of understanding our financial results. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.

 

OUR BUSINESS

 

Our Operations

 

We are a leading, global snack and beverage company. We manufacture, market and sell a variety of salty, convenient, sweet and grain-based snacks, carbonated and noncarbonated beverages and foods. We are organized in six divisions:

 

    Frito-Lay North America,
    Frito-Lay International,
    Pepsi-Cola North America,
    Gatorade/Tropicana North America,
    PepsiCo Beverages International, and
    Quaker Foods North America.

 

Net sales and operating profit contributions from each of our six divisions are as follows:

 

LOGO

 

LOGO

 

Our North American divisions operate in the United States and Canada. Our international divisions operate in over 175 countries, with our largest operations in Mexico and the United Kingdom. Additional information concerning our divisions and geographic areas is presented in Note 1 to our consolidated financial statements.

 

Beginning in 2003, we will combine the results of PCNA and GTNA as PepsiCo Beverages North America and of our international food and beverage businesses as PepsiCo International to reflect operating and management changes.

 

Snacks

 

Frito-Lay North America (FLNA) manufactures, markets, sells and distributes branded snacks. These snacks include Lay’s potato chips, Doritos flavored tortilla chips, Cheetos cheese flavored snacks, Fritos corn chips, Tostitos tortilla chips, Ruffles potato chips, Rold Gold pretzels, branded dips, Quaker Chewy granola bars, Sunchips multigrain snacks, Grandma’s cookies, Quaker Fruit & Oatmeal bars, Quaker Quakes corn and rice snacks, Quaker rice cakes, Cracker Jack treats and Go Snacks.

 

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In addition to many of the FLNA and Quaker branded snacks sold in North America, Frito-Lay International (FLI) also manufactures and sells a number of leading snack brands including Sabritas, Gamesa and Alegro brands in Mexico, Walkers and Wotsits brands in the United Kingdom, and Smith’s brand in Australia. These products are manufactured by consolidated businesses, as well as by noncontrolled affiliates.

 

FLNA and FLI branded products are sold to independent distributors and retailers. Our snacks businesses measure physical volume growth on a system-wide basis, which includes the volume sold by our noncontrolled affiliates.

 

Beverages

 

Pepsi-Cola North America (PCNA) manufactures, markets and sells beverage concentrates, and sells fountain syrups and finished goods, under the brands Pepsi, Mountain Dew, Sierra Mist, Mug, Slice, FruitWorks, SoBe and Dole. PCNA manufactures, markets and sells ready-to-drink tea and coffee products through joint ventures with Lipton and Starbucks. PCNA sells concentrate and finished goods for these brands to bottlers licensed by us. PCNA also licenses the Aquafina water brand to its bottlers. The franchise bottlers sell our brands as finished goods to independent distributors and retailers. PCNA reports two measures of volume performance. Concentrate shipments and equivalents (CSE) reflects PCNA’s sales to its bottlers, as well as bottler Aquafina volume, and is reported on a fiscal year basis consistent with net sales. Bottler case sales (BCS) reflects the sales of beverages bearing our trademarks that franchise bottlers have sold to independent distributors and retailers and is reported on a monthly basis. CSE and BCS growth may vary due to differences in the reporting calendar and short-term changes in bottler inventory.

 

Gatorade/Tropicana North America (GTNA) manufactures, markets and sells Gatorade sports drinks, Tropicana Pure Premium, Dole, Tropicana Season’s Best and Tropicana Twister juices and juice drinks and Propel fitness water. These branded products are sold to independent distributors and retailers.

 

PepsiCo Beverages International (PBI) manufactures, markets and sells beverage concentrates, fountain syrups and finished goods under the brands Pepsi, 7UP, Mirinda, Mountain Dew, Gatorade and Tropicana outside North America. Generally, PBI’s brands are sold to franchise bottlers. However, in certain markets, PBI operates bottling plants and distribution facilities. PBI also licenses the Aquafina water brand to certain of its franchise bottlers. PBI reports two measures of volume. Concentrate shipments reflects PBI’s sale of concentrate to franchise bottlers only and is reported on a monthly basis consistent with net sales. BCS reflects company-owned and franchise bottler sales of beverages bearing our trademarks and is also reported on a monthly basis. Concentrate shipments and the related BCS may differ due to short-term changes in bottler inventory.

 

Foods

 

Quaker Foods North America (QFNA) manufactures, markets and sells cereals, rice, pasta and other branded products. QFNA’s products include Quaker oatmeal, Cap’n Crunch and Life ready-to-eat cereals, Rice-A-Roni, Pasta Roni and Near East side dishes, Aunt Jemima mixes and syrups and Quaker grits. These branded products are sold to independent distributors and retailers.

 

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Our Customers

 

Our customers include franchise bottlers and independent distributors and retailers. We grant our bottlers exclusive contracts to manufacture and/or sell specified beverage products bearing our trademarks within a specific geographic area. These arrangements specify the amount to be paid by our bottlers for concentrate and full goods and for Aquafina royalties, as well as the manufacturing process required for product quality.

 

Since we do not sell directly to the consumer, we rely on, and provide financial incentives to our customers to assist in the distribution and promotion of our products. For our independent distributors and retailers, these incentives include volume-based rebates, promotions and displays. For our bottlers, these incentives are referred to as bottler funding and are negotiated annually with each bottler to support a variety of trade and consumer programs, such as consumer incentives, advertising support, new product support and vending and cooler equipment placement. Consumer incentives include consumer coupons, pricing discounts and consumer promotions, such as sweepstakes and other promotional offers. Advertising support is directed at advertising programs and supporting bottler media. New product funding includes targeted consumer and retailer incentives for these products and direct marketplace support, such as point-of-purchase materials, media and advertising. Vending and cooler equipment placement programs support the acquisition and placement of vending machines and cooler equipment. The nature and type of programs vary annually. The level of bottler funding is at our discretion because these incentives are not required by the terms of our bottling contracts.

 

No single customer represents more than 10% of our net sales. However, when considering both our volume and that of our bottlers, Wal-Mart Stores, Inc. is a significant customer. Retail consolidation has increased the importance of major customers and further consolidation is expected. Also see “ Cautionary Statements.”

 

Our Related Party Bottlers

 

We have ownership interests in certain of our bottlers. Our ownership is generally less than fifty percent and since we do not control these bottlers, we do not consolidate their results. We include our share of their net income based on our percentage of ownership in our income statement as bottling equity income. We have designated three related party bottlers, The Pepsi Bottling Group (PBG), PepsiAmericas (PAS) and Pepsi Bottling Ventures (PBV), as our anchor bottlers. Our anchor bottlers distribute over 70% of our Pepsi-Cola North America case sales volume and approximately 14% of our PepsiCo Beverages International case sales volume. These bottlers participate in the bottler funding programs described above. Approximately 12% of our total sales incentives are paid to these bottlers. See Note 8 to our consolidated financial statements for additional information on these related parties and related party commitments and guarantees.

 

Our Distribution Network

 

Our products are brought to market through direct-store-delivery, broker-warehouse and food service and vending distribution networks. The distribution system used depends on customer needs, product characteristics, and local trade practices.

 

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Direct-Store-Delivery

 

We and our bottlers operate direct-store-delivery systems that deliver snacks and beverages directly to retail stores where the products are merchandised by our employees or our bottlers. Direct-store-delivery enables us to merchandise with maximum visibility and appeal. Direct-store-delivery is especially well-suited to products that have high retail turnover and respond to in-store promotion and merchandising.

 

Broker-Warehouse Systems

 

Some of our products are delivered from our warehouses to customer warehouses and retail stores. These less costly systems generally work best for products that are less fragile and perishable, have lower turnover, and are less likely to be impulse purchases.

 

Foodservice and Vending

 

Our foodservice and vending sales force distributes snacks, foods and beverages to third-party foodservice and vending distributors and operators, and through our bottlers. This distribution system supplies our products to schools, businesses, stadiums, restaurants and similar locations.

 

Our Competition

 

Our businesses operate in highly competitive markets. We compete against global companies and regional and private label manufacturers on the basis of price, quality, product variety and effective distribution. Success in this competitive environment is primarily achieved through effective promotion of existing products and the introduction of new products. We believe that the strength of our brands, innovation and marketing, coupled with our quality products and flexible distribution network, allow us to effectively compete.

 

Other Relationships

 

Certain members of our Board of Directors also serve on the boards of certain vendors and customers. Those Board members do not participate in our vendor selection and negotiations nor in our customer negotiations. Our transactions with these vendors and customers are in the normal course of business and are consistent with terms negotiated with other vendors and customers. In addition, certain of our employees serve on the boards of our anchor bottlers and other affiliated companies and do not receive incremental compensation for their board services.

 

Our Market Risks

 

We are exposed to the risks arising from adverse changes in:

    commodity prices, affecting the cost of our raw materials and fuel;
    foreign exchange rates;
    interest rates on our short-term investment and debt portfolios; and
    stock prices.

 

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In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives designated as cash flow and fair value hedges. See Note 10 to our consolidated financial statements for further discussion of these hedges and our hedging policies. The fair value of our hedges fluctuates based on market rates and prices. The sensitivity of our hedges to these market fluctuations is discussed below. See “ Our Critical Accounting Policies” for a discussion of the exposure of our pension plan assets and liabilities to risks related to interest rates and stock prices.

 

Inflationary, deflationary and recessionary conditions impacting these market risks also impact the demand for and pricing of our products. See “ Cautionary Statements” for further discussion.

 

Commodity Prices

 

Our commodity derivatives totaled $70 million at December 28, 2002 and $252 million at December 29, 2001. These derivatives resulted in a net unrealized gain of $6 million at December 28, 2002 and a net unrealized loss of $16 million at December 29, 2001. We estimate that a 10% decline in commodity prices would have resulted in an unrealized loss of $2 million in 2002 and increased the unrealized loss by $18 million in 2001.

 

Foreign Exchange

 

Our operations outside of the United States generate 34% of our net sales of which Mexico, the United Kingdom and Canada contribute 19%. As a result, we are exposed to foreign currency risks from unforeseen economic changes and political unrest. During 2002, the impact of declines in the Mexican peso were substantially offset by increases in the British pound and the euro. However, if future declines in the Mexican peso are not offset by increases in the British pound and the euro, our future results would be adversely impacted.

 

We may enter into derivatives to manage our exposure to foreign currency transaction risk. Our foreign currency derivatives had a total face value of $329 million at December 28, 2002 and $355 million at December 29, 2001. These contracts had a net unrealized loss of less than $1 million at December 28, 2002 and a net unrealized gain of $4 million at December 29, 2001. We estimate that an unfavorable 10% change in the exchange rates would have increased the unrealized loss by $34 million in 2002 and would have resulted in an unrealized loss of $31 million in 2001.

 

Interest Rates

 

Late in 2002, we terminated the majority of our interest rate swaps used to manage our interest rate risk. As a result, 12% of our debt is exposed to variable interest rates compared to approximately 45% in 2001. Assuming year-end variable rate debt and investment levels, a 1 percentage point increase in interest rates would have reduced net interest expense by $11 million in 2002 and increased net interest expense by $3 million in 2001. The impact of the 1 percentage point increase in rates at year-end 2002 reflects higher investment balances and lower variable debt balances. This sensitivity analysis includes the impact of existing interest rate swaps during these years.

 

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Stock Prices

 

We manage the market risk related to our deferred compensation liability, which is indexed to certain market indices and our stock price, with mutual fund investments and prepaid forward contracts for the purchase of our stock. The combined losses on these investments are offset by changes in our deferred compensation liability which is included in Corporate selling, general and administrative expenses.

 

Cautionary Statements

 

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press releases, and other written and oral statements. These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations.

 

You should consider the following key factors when evaluating our trends and future results:

    continued demand for our products, which is dependent on successful product introductions and other innovations, effectiveness of our sales incentives, advertising campaigns and marketing programs, seasonal weather conditions, relationships with key customers (including our bottlers), and our response to consumer health concerns and changes in product category consumption;
    competitive product and pricing pressures;
    continued success from our productivity initiatives, which is dependent upon our ability to implement and leverage these programs;
    continued success of acquisition integrations, including our ability to achieve cost savings and revenue enhancement opportunities from the Quaker merger;
    unforeseen economic changes and political unrest, which may result in business interruption, foreign currency devaluation, inflation, deflation and decreased demand, particularly in areas outside North America, such as in Latin America and the Middle East;
    maintenance of our profit margin in the face of a consolidating retail environment;
    changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws; and
    fluctuations in manufacturing costs and the availability of raw materials.

 

The discussion of these risks and uncertainties is by no means all inclusive but is designed to highlight what we believe are important factors to consider.

 

OUR CRITICAL ACCOUNTING POLICIES

 

An understanding of our accounting policies is necessary to completely analyze our financial results. Our critical accounting policies require management to make difficult and subjective judgments regarding uncertainties. As a result, estimates are included in and may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We applied our estimation methods consistently in all periods presented.

 

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Our critical accounting policies arise in conjunction with the following:

    revenue recognition,
    brands and goodwill,
    income taxes, and
    pension and retiree medical plans.

 

Revenue Recognition

 

Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery and may allow discounts for early payment. We recognize revenue upon delivery to our customers in accordance with written sales terms that do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace out-of-date products from store shelves to ensure that consumers receive the product quality and freshness that they expect. Based on our historical experience with this practice, we have reserved for anticipated out-of-date product. Our bottlers have a similar replacement policy and are responsible for our products that they distribute.

 

We offer sales incentives through various programs to customers, consumers and, for PCNA, directly to certain retailers. Sales incentives are accounted for as a reduction of sales and totaled $5.5 billion in 2002, $4.7 billion in 2001 and $4.3 billion in 2000. A number of these programs, such as bottler funding and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. The accruals are based on our previous experience with similar programs. The terms of most of our incentive arrangements do not exceed a year. However, we have arrangements, such as fountain pouring rights, which extend up to 12 years. Costs incurred to obtain these rights are recognized over the life of the contract as a reduction of sales, and the outstanding balance is included in other assets in our Consolidated Balance Sheet.

 

We estimate and reserve for our bad debt exposure from credit sales based on our experience. Our method of determining the reserves has not changed during the years presented in the consolidated financial statements. Bad debt expense is classified within selling, general and administrative expenses in our Consolidated Income Statement.

 

Brands and Goodwill

 

We sell products under a number of brand names around the world, many of which were developed by us. The brand development costs are expensed as incurred. We also purchase brands and goodwill in acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including brands, based on estimated fair value, with any remaining purchase price recorded as goodwill. Goodwill and perpetual brands are not amortized.

 

We believe that a brand has an indefinite life if it has significant market share in a stable macroeconomic environment, and a history of strong revenue and cash flow performance that we expect to continue for the foreseeable future. If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which generally range from five to twenty years. Determining the expected life of a brand requires considerable management judgment and is based on an evaluation of a number of factors, including the competitive environment, market share, brand history and the macroeconomic environment of the country in which the brand is sold.

 

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Perpetual brands and goodwill are assessed for impairment at least annually to ensure that future cash flows continue to exceed the related book value. A perpetual brand is impaired if its book value exceeds its fair value. Goodwill is evaluated for impairment if the book value of its reporting unit exceeds its fair value. A reporting unit can be a division or business. If the fair value of an evaluated asset is less than its book value, the asset is written down based on its discounted future cash flows to fair value.

 

Amortizable brands are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.

 

Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans.

 

We did not recognize any impairment charges for perpetual brands or goodwill during 2002. As of December 28, 2002, we had over $4 billion of perpetual brands and goodwill, of which 75% related to Tropicana and Walkers. In our most recent impairment evaluations for Tropicana and Walkers, no impairment charges would have resulted even if operating profit growth were assumed to be 5% lower.

 

Income Taxes

 

Our reported effective tax rate was 31.9% for 2002. Excluding the impact of nondeductible merger-related costs, our effective tax rate was 31.2%. For 2003, our effective tax rate, excluding the impact of nondeductible merger-related costs, is expected to be 30.5%. The decrease from 2002 primarily reflects the impact of our new concentrate plant.

 

Our effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may not succeed. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective tax rate includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well as related interest. This rate is then applied to our quarterly operating results. In the event that there is a significant unusual or one-time item recognized in our operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. We consider the Quaker merger-related costs to be a significant one-time item.

 

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Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, our effective tax rate reflected in our financial statements is different than that reported in our tax return. Some of these differences are permanent, such as expenses which are not deductible on our tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or expense for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our financial statements. We have not recognized any United States tax expense on undistributed international earnings since we intend to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings are approximately $7.5 billion at December 28, 2002.

 

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. In the United States, the audits for 1991 through 1993 remain open for certain items and the Internal Revenue Service is currently examining our tax returns for 1994 through 1997. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require use of our cash. Favorable resolution would be recognized as a reduction to our effective tax rate in the year of resolution. Our tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items we expect to settle in the coming year which are classified as current.

 

Pension and Retiree Medical Plans

 

Our pension plans cover full-time U.S. employees and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. U.S. employees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements and qualify for retirement benefits. Generally, our retiree medical costs are capped at a specified dollar amount, with retirees contributing the remainder.

 

The expected benefit to be paid is expensed over the employees’ expected service. Management must make many assumptions to determine the expected benefit and expected service, including:

    the interest rate used to determine the present value of liabilities (discount rate),
    the expected return on plan assets for plans funded by us,
    the rate of salary increases for plans where benefits are based on earnings,
    health care cost trend rates for retiree medical plans, and
    certain employee-related factors, such as turnover, retirement age and mortality.

 

We make contributions to trusts maintained to provide plan benefits for certain pension plans. These contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and taxation to the employee only upon receipt of plan benefits. We do not generally fund pension plans and retiree medical plans when our contributions would not be tax deductible or when the employee would be taxed prior to receipt of benefit. Pension plan investment guidelines are established based upon an evaluation of market conditions, risk tolerance and plan investment horizon.

 

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The assets, liabilities and assumptions used to measure pension and retiree medical expense are determined as of September 30 of the preceding year (measurement date). Since the liabilities are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. The expected return on pension plan assets is based on our historical experience and our expectations for long-term rates of return. To measure pension expense, we use a calculated value for plan assets which recognizes changes in fair value over five years rather than the current fair value at each measurement date. The other assumptions also reflect our historical experience and management’s best judgment regarding future expectations.

 

Gains and losses resulting from actual experience differing from our assumptions are determined at each measurement date. If the net total gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion of the net gain or loss is included in expense for the next year. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service, is included in expense over the expected service of the employees.

 

Weighted-average assumptions for pension and retiree medical expense:

 

    

2003

  

2002

  

2001

  

     2000


Pension

                   

Expense discount rate

  

6.7%

  

7.4%

  

7.7%

  

7.7%

Expected rate of return on plan assets

  

8.2%

  

9.1%

  

9.8%

  

9.9%

Rate of salary increases

  

4.4%

  

4.4%

  

4.6%

  

4.5%

Retiree medical

                   

Expense discount rate

  

6.7%

  

7.5%

  

7.8%

  

7.8%

 

We review our assumptions at least at the annual measurement date. During 2002, we completed a review of our pension investment and funding strategy for our U.S. pension plans. As a result, we revised our U.S. investment allocation to a maximum of 65% equities with the balance in fixed income securities. As a result of the mid-year 2002 investment funding and strategy changes, we remeasured pension expense for our U.S. plans to incorporate a reduction in the rate of return on plan assets to 8.2%, as well as changes to employee-related assumptions based on current data. This mid-year valuation resulted in a weighted average expected return on plan assets for 2002 of 9.1% and increased the balance of year pension expense by $29 million. This increase is reported in Corporate selling, general and administrative expenses.

 

Health care cost trend rates have an impact on the retiree medical plan expense. A 1 percentage point increase in the assumed health care trend rate would increase the service and interest costs by $4 million for 2003 and a 1 percentage point decrease would reduce these costs by $4 million.

 

Pension expense for 2003 is estimated to be approximately $160 million and retiree medical expense is estimated to be approximately $120 million compared to 2002 pension expense of $111 million and retiree medical expense of $88 million. These estimates incorporate the 2003 assumptions, as well as the impact of the increased pension plan assets resulting from our contributions to funded plans.

 

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OUR FINANCIAL RESULTS

 

Consolidated Statement of Income

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000

(in millions except per share amounts)

 

    

 

2002

 

  

 

2001

 

  

 

2000

 


Net Sales

  

$

25,112

 

  

$

23,512

 

  

$

22,337

 

Cost of sales

  

 

11,497

 

  

 

10,750

 

  

 

10,226

 

Selling, general and administrative expenses

  

 

8,523

 

  

 

8,189

 

  

 

7,962

 

Amortization of intangible assets

  

 

138

 

  

 

165

 

  

 

147

 

Merger-related costs

  

 

224

 

  

 

356

 

  

 

 

Other impairment and restructuring charges

  

 

 

  

 

31

 

  

 

184

 

    


  


  


Operating Profit

  

 

4,730

 

  

 

4,021

 

  

 

3,818

 

Bottling equity income

  

 

280

 

  

 

160

 

  

 

130

 

Interest expense

  

 

(178

)

  

 

(219

)

  

 

(272

)

Interest income

  

 

36

 

  

 

67

 

  

 

85

 

    


  


  


Income before Income Taxes

  

 

4,868

 

  

 

4,029

 

  

 

3,761

 

Provision for Income Taxes

  

1,555

    

1,367

    

1,218

 
    


  


  


Net Income

  

$

3,313

 

  

$

2,662

 

  

$

2,543

 

    


  


  


Net Income per Common Share

                          

Basic

  

 

$1.89

 

  

 

$1.51

 

  

 

$1.45

 

Diluted

  

 

$1.85

 

  

 

$1.47

 

  

 

$1.42

 

 


 

See accompanying notes to consolidated financial statements.

 

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Items Affecting Comparability

 

The year-over-year comparisons of our financial results are affected by the following one-time items and accounting changes:

 

    

  2002

 

    

  2001

 

    

  2000

 


Net Sales

                        

SVE consolidation

  

 

    

$706

 

    

$648

 

53rd week in 2000

  

 

    

 

    

$(294

)

Operating Profit

                        

Merger-related costs

  

$224

    

    

$356

    

    

 

SFAS 142 adoption

  

 

    

$23

 

    

$88

 

SVE consolidation

  

 

    

$13

 

    

$16

 

Other impairment and restructuring charges

  

 

    

$31

 

    

$184

 

53rd week in 2000

  

 

    

 

    

$(62

)

Other

  

 

    

$(2

)

    

$17

 

Bottling Equity Income

                        

SFAS 142 adoption

  

 

    

$65

 

    

$70

 

53rd week in 2000

  

 

    

 

    

$(5

)

Net Income

                        

Merger-related costs

  

$190

 

    

$322

 

    

 

SFAS 142 adoption

  

 

    

$102

 

    

$151

 

Other impairment and restructuring charges

  

 

    

$19

 

    

$111

 

53rd week in 2000

  

 

    

 

    

$(44

)

Net Income per Common Share – Diluted

                        

Merger-related costs

  

$0.11

 

    

$0.18

 

    

 

SFAS 142 adoption

  

 

    

$0.06

 

    

$0.08

 

Other impairment and restructuring charges

  

 

    

$0.01

 

    

$0.06

 

53rd week in 2000

  

 

    

 

    

$(0.02

)

 

Merger-Related Costs

 

We incurred costs associated with our merger with Quaker. We expect to incur additional costs of approximately $50 million in 2003 to complete the integration of the two companies. For additional information, see Note 3 to our consolidated financial statements.

 

SFAS 142 Adoption

 

In 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets, which eliminated amortization of goodwill and perpetual brands (our nonamortizable intangibles), and resulted in the acceleration of the amortization of certain of our other intangibles. The prior year adjustments in the above table reflect the impact that would have resulted if adoption had occurred at the beginning of 2000. For additional information, see “ Our Critical Accounting Policies” and Note 4 to our consolidated financial statements.

 

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SVE Consolidation

 

As a result of changes in the operations of Snack Ventures Europe (SVE), we determined that consolidation was required, and we consolidated SVE in 2002. The prior year adjustments in the above table reflect the impact that would have resulted if consolidation had occurred at the beginning of 2000. For further information on our consolidation of SVE, see Note 1 to our consolidated financial statements.

 

Other Impairment and Restructuring Charges

 

We incurred costs for Quaker’s supply chain reconfiguration and manufacturing and distribution optimization project.

 

53rd Week in 2000

 

Our fiscal year ends on the last Saturday in December, and as a result, a 53rd week is added every five or six years. Comparisons of 2002 and 2001 to 2000 are affected by an additional week of results in 2000.

 

Other

 

This adjustment primarily reflects the reclassification of our prepaid forward contracts. Beginning in 2001, in connection with the adoption of the accounting standard on derivative instruments, gains or losses on prepaid forward contracts, which are used to hedge a portion of our deferred compensation liability, were reclassified to Corporate selling, general and administrative expenses. These amounts were previously reported in interest income. For more information on these prepaid forward contracts, see “ Our Market Risks.”

 

Pending Accounting Changes

 

Current pending accounting standards are not expected to have a material impact on our financial statements. For a description of these new accounting standards see Note 2 to our consolidated financial statements.

 

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RESULTS OF OPERATIONS

 

Consolidated Review

 

In the discussions of net sales and operating profit below, effective net pricing reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

 

Servings

 

Since our divisions each use different measures of physical unit volume (e.g., kilos, pounds, case sales, gallons, etc.), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products.

 

Total servings increased 4% in 2002 compared to 2001 due to volume gains across all divisions led by beverages. Total servings increased 4% in 2001 compared to 2000 primarily due to contributions from our international divisions and Pepsi-Cola North America.

 

Net Sales and Total Operating Profit

 

                   

Change


    

2002

  

2001

  

2000

  

     2002

  

     2001


Net sales

  

$25,112

  

$23,512

  

$22,337

  

       7%

  

5%

Operating profit

  

$4,730

  

$4,021

  

$3,818

  

     18%

  

5%

Operating profit margin

  

18.8%

  

17.1%

  

17.1%

  

       1.7

  

 

2002

 

Net sales increased 7% and operating profit increased 18% driven by volume gains across all divisions, the consolidation of SVE, higher concentrate pricing and favorable mix. These gains were partially offset by increased promotional spending at Gatorade/Tropicana North America and Frito-Lay North America and net unfavorable foreign currency movement. The consolidation of SVE increased net sales growth by 3 percentage points and operating profit by 1 percentage point. In addition, operating profit growth improved 5 percentage points from the impact of lower merger-related costs, the absence of other impairment and restructuring costs and the adoption of SFAS 142.

 

The impact of net unfavorable foreign currency movements reduced net sales growth by 1 percentage point. Operating profit growth was not materially affected by foreign currency movements.

 

Our operating profit margin increased 1.7 percentage points primarily due to lower costs reflecting merger synergies of approximately $250 million, lower merger costs and productivity. We expect our operating margins to continue to improve as a result of Quaker merger-related synergies that are expected to reach $400 million a year by 2004 and by our ongoing productivity initiatives.

 

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2001

 

Net sales and operating profit increased 5% primarily reflecting increased volume and higher effective net pricing of snacks and beverages, as well as the acquisition of South Beach Beverage Company, LLC (SoBe), which contributed nearly 1 percentage point to net sales growth. These gains were partially offset by the inclusion of the 53rd week in 2000, which reduced net sales growth by more than 1 percentage point and operating profit growth by 1.5 percentage points, and a net unfavorable foreign currency impact. In addition, operating profit was reduced by merger-related costs and higher general and administrative expenses, partially offset by lower costs for the Quaker supply chain project. Merger-related costs and lower supply chain costs reduced operating profit growth by approximately 5 percentage points.

 

The unfavorable foreign currency impact, primarily in Brazil and Europe, reduced net sales growth by more than 1 percentage point. Operating profit growth was reduced nearly 1 percentage point as a result of unfavorable foreign currency.

 

Bottling Equity Income

 

      

2002

    

2001

    

2000

 

% Change


                  

2002

    

     2001


Bottling equity income

    

$280

    

$160

    

$130

 

    75

    

    23

 

Bottling equity income includes our share of the net income or loss of our noncontrolled bottling affiliates as described in “ Our Customers.” Our interest in these bottling investments may change from time to time. Any gains or losses from these changes, as well as other transactions related to our bottling investments, are also included on a pre-tax basis.

 

2002

 

Bottling equity income increased 75%. This increase primarily reflects the adoption of SFAS 142. The impact of impairment charges of $35 million related to a Latin American bottling investment was more than offset by the settlement of issues upon the sale of our investment in Pepsi-Gemex, our Mexican bottling affiliate, and the absence of one-time items discussed in 2001 below. Excluding these items, bottling equity income increased approximately 13% reflecting improved performance of our international bottling investments, and the contribution of our North American anchor bottlers.

 

2001

 

Bottling equity income increased 23%, primarily reflecting the strong performance of PBG. Results for 2001 also include a gain of $59 million from the sale of approximately 2 million shares of PBG stock, and a net credit of $23 million related to the resolution of issues for which a prior year accrual was established in connection with the creation of our anchor bottler system. Bottling equity income in 2001 also benefited from $5 million of losses from the 53rd week in 2000. These increases were offset by impairment charges of $62 million related to certain international bottling investments, primarily our equity investment in Turkey and a charge of $27 million for our share of a charge recorded by PepsiAmericas for environmental liabilities related to discontinued operations.

 

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Table of Contents

 

Interest Expense, net

 

                  

% Change


    

2002

  

2001

  

2000

 

2002

    

     2001


Interest expense, net

  

$(142)

  

$(152)

  

$(187)

 

      6

    

         19

 

2002

 

Net interest expense declined 6% primarily due to lower average debt levels, partially offset by increased losses of $10 million on investments used to hedge a portion of our deferred compensation liability. Decreases in borrowing rates were offset by decreases in investment rates.

 

2001

 

Net interest expense declined 19%. Interest expense declined primarily as a result of significantly lower average debt levels. Interest income declined as 2000 includes $19 million in gains from prepaid forward contracts. Excluding the prepaid forward contracts, interest income increased slightly as the impact of higher average investment balances was largely offset by lower average interest rates and losses on the investments hedging a portion of our deferred compensation liability.

 

Effective Tax Rate

 

    

2002

 

  

2001

 

  

2000

 


Effective tax rate

  

31.9

%

  

33.9

%

  

32.4

%

 

2002

 

The effective tax rate decreased 2 percentage points compared to prior year. The adoption of SFAS 142 reduced the rate by 0.8 percentage points. The impact of nondeductible merger-related costs on the rate decreased from 1.9 percentage points in 2001 to 0.7 percentage points in 2002. Excluding the impact of nondeductible merger-related costs in 2002, our effective tax rate would have been 31.2%.

 

2001

 

The effective tax rate increased 1.5 percentage points primarily due to limited tax benefits associated with merger-related costs, partially offset by lower taxes on foreign results.

 

Net Income and Net Income per Common Share

 

                  

% Change


    

2002

  

2001

  

2000

 

     2002

    

     2001


Net income

  

$3,313

  

$2,662

  

$2,543

 

         24

    

      5

Net income per common share – diluted

  

  $1.85

  

  $1.47

  

  $1.42

 

         26

    

      4

 

25


Table of Contents

 

2002

 

Net income increased 24% and the related net income per common share increased 26%. These increases primarily reflect the solid operating profit growth, lower merger-related costs and the adoption of SFAS 142. Net income per common share also reflects the benefit of a reduction in average shares outstanding primarily as a result of increased share buyback activity. Merger-related costs reduced net income per common share by $0.11 in 2002.

 

2001

 

Net income increased 5% and the related net income per common share increased 4%. These increases primarily reflect increased operating profit, reduced other impairment and restructuring costs, lower net interest expense, and a lower effective tax rate, partially offset by merger-related costs.

 

Division Review

 

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Prior year amounts reflect the adoption of SFAS 142 and consolidation of SVE and exclude the results of divested businesses. In addition, when our fiscal year contains a 53rd week, as occurred in 2000, our divisions are managed on a fifty-two week basis and, accordingly, the 53rd week is excluded from the results below. For additional information on these items and our divisions, see Note 1 to our consolidated financial statements.

 

Frito-Lay North America

 

                         

% Change


    

2002

    

2001

    

2000  

    

2002        

    

2001


Net sales

  

$8,565

    

    $8,216

    

$7,769  

    

      4        

    

      6

Operating profit

  

$2,216

    

    $2,056

    

$1,875  

    

      8        

    

    10

 

2002

 

Pound volume grew 4% primarily due to new products, strong growth in branded snack mix, single-digit growth in Cheetos cheese flavored snacks, Doritos tortilla chips, branded dips and Quaker Chewy Granola bars, and double-digit growth in Rold Gold pretzels. Go Snacks significantly contributed to the new product growth and Munchies drove the branded snack mix growth. These gains were partially offset by a single-digit decline in Ruffles potato chips.

 

Growth in net sales of 4% and operating profit of 8% reflects the increased volume. Approximately half of the net sales growth came from new products. Increased promotional spending more than offset favorable mix and other pricing. Lower costs, particularly performance-based compensation and commodity prices for vegetable oils and natural gas, contributed 4 percentage points of the operating profit growth.

 

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Table of Contents

 

2001

 

Pound volume advanced 3%. This growth was led by single-digit growth in Lay’s potato chips, Cheetos cheese flavored snacks, Doritos tortilla chips, Fritos corn chips and the introduction of our new Lay’s Bistro Gourmet potato chips. These gains were partially offset by a double-digit decline in Ruffles potato chips.

 

Growth in net sales of 6% and operating profit of 10% primarily reflects higher effective net pricing and the increased volume. Lay’s Bistro Gourmet potato chips contributed nearly 1 percentage point to the sales growth. Advertising and marketing expenses grew at a faster rate than sales, also negatively impacting operating profit growth.

 

Frito-Lay International

 

                     

% Change


    

  2002

  

  2001

  

  2000

    

2002

    

2001


Net sales

  

$5,713

  

$5,492

  

$5,172

    

      4

    

      6

Operating profit

  

   $781

  

   $651

  

   $577

    

    20

    

    13

 

2002

 

Volume grew 6% primarily reflecting 3% growth in salty snacks, 8% growth in sweet snacks and 6% growth in foods. Single-digit growth at Walkers and Sabritas contributed over 70% of the salty volume growth. Strong single-digit growth at Gamesa contributed nearly 80% of the sweet growth and the introduction of Chipita croissants in Russia contributed the remainder. Brazil drove the foods volume.

 

Unfavorable foreign currencies in Mexico, Argentina and Brazil reduced net sales growth by 4 percentage points. This impact was partially offset by the favorable 1 percentage point impact of the British pound and the euro. Foreign currency was not a factor in operating profit growth as the unfavorable Mexican peso offset the favorable impact of the British pound and, as a result of operating losses, the Argentinean peso.

 

Growth in net sales of 4% and operating profit of 20% primarily reflects solid results at Walkers, Gamesa and Sabritas. The impact of higher net effective pricing in Brazil and Argentina contributed 1 percentage point to net sales growth. These gains were partially offset by the impact of unfavorable foreign currencies. Walkers and Gamesa together contributed over 60% of the net sales growth and nearly half of the operating profit growth. Favorable advertising and marketing costs at Sabritas also contributed to operating profit growth.

 

2001

 

Volume increased 6%, reflecting growth in the salty and sweet categories. The salty volume grew 9% led by double-digit growth at SVE, in Brazil and in Poland, single-digit growth at Walkers and 2 percentage points of growth from acquisitions. Sweet volume grew 5% driven by growth at Gamesa.

 

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Table of Contents

 

Growth in net sales of 6% and operating profit of 13% primarily reflects solid results from Walkers, Gamesa and Poland, effective net pricing at Sabritas and Gamesa, and the impact of acquisitions. Macroeconomic conditions in Argentina negatively impacted operating profit growth. Unfavorable foreign currency movements in Brazil and the United Kingdom decreased net sales by 4 percentage points and operating profit growth by 2 percentage points.

 

Pepsi-Cola North America

 

                       

% Change


    

2002

  

2001

  

2000

      

2002

  

     2001


Net sales

  

$3,365

  

$3,189

  

$2,657

      

      6

  

         20

Operating profit

  

   $987

  

   $881

  

   $820

      

    12

  

           7

 

2002

 

Concentrate shipments and equivalents increased 2% driven by strong double-digit growth in Aquafina, the introductions of Lipton Brisk Lemonade and Pepsi Blue, and continued growth of Pepsi Twist, Code Red and Sierra Mist. Trademark Mountain Dew was flat compared to prior year reflecting the double-digit growth of Code Red offset by declines in base Mountain Dew. Trademark Pepsi was down slightly compared to prior year as gains from Pepsi Twist and Pepsi Blue were more than offset by declines in base Pepsi. BCS increased 2% over the prior year.

 

Net sales increased 6% and operating profit increased 12%. These increases reflect higher concentrate pricing contributing 3 percentage points to net sales growth and substantially all of the operating profit growth. These increases also reflect volume from the new product introductions, increased Aquafina royalties and higher national fountain pricing, partially offset by lower concentrate volume, costs associated with litigation, increased inventory costs and increased advertising and marketing expenses related to our new products. New products contributed approximately 2 percentage points to the net sales growth. Advertising and marketing costs, costs of sales and general and administrative expenses grew at a slower rate than sales.

 

As in 2002, we expect concentrate pricing to favorably impact our results due to the 2% price increase effective in the first quarter of 2003. In addition, our carbonated soft drink volume will be favorably impacted by the expanded distribution of Sierra Mist by many of our U.S. bottlers as these bottlers distribute Sierra Mist as their exclusive lemon-lime brand.

 

2001

 

Concentrate shipments and equivalents increased 4%. This increase was primarily driven by high single-digit growth in Mountain Dew reflecting the introduction of Code Red, strong growth in Sierra Mist and Aquafina, the acquisition of SoBe and the launch of Dole. These gains were partially offset by a low single-digit decline in trademark Pepsi, which was mitigated by the successful launch of Pepsi Twist, and a double-digit decline in Slice as a result of the introduction of Sierra Mist. Bottler case sales volume increased 4%. The carbonated soft drink portfolio and the acquisition of SoBe each contributed 1 percentage point to both concentrate shipments and equivalents and bottler case sales growth.

 

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Table of Contents

 

Growth in net sales of 20% and operating profit of 7% primarily reflects the increased volume and higher effective net pricing. The acquisition of SoBe and our new products Dole, Mountain Dew Code Red, Sierra Mist and Pepsi Twist, accounted for the majority of the revenue growth. SoBe and Dole are sold as finished product to our bottlers. Accordingly, net sales growth was accelerated due to their significantly higher price per unit for these products. The SoBe acquisition contributed 7 percentage points to net sales growth. These gains were partially offset by increased customer support.

 

Operating profit growth was slowed by the increased advertising and marketing expenses and general and administrative expenses. General and administrative expenses grew at a significantly faster rate than sales. The SoBe acquisition reduced operating profit growth by 4 percentage points primarily due to brand amortization.

 

Gatorade/Tropicana North America

 

              

% Change


    

  2002

  

  2001

  

  2000

  

2002

    

    2001


Net sales

  

$3,835

  

$3,699

  

$3,514

  

      4

    

      5

Operating profit

  

   $590

  

   $585

  

   $554

  

      1

    

      6

 

 

2002

 

Overall volume grew 8% reflecting strong 17% growth in Gatorade products and a 1% decline in Tropicana products. The Gatorade volume growth resulted from new product introductions and the national launch of Propel. Excluding the loss of the single serve Pure Premium business at Burger King, Tropicana volume growth was nearly 1% as gains in Tropicana chilled products, driven by Pure Premium nutritionals and Dole blends, were offset by declines in Tropicana ambient products led by Twister.

 

Net sales increased 4% and operating profit increased 1% primarily due to the volume gains and favorable product mix. The volume gains contributed over 7 percentage points to the net sales growth which were greatly offset by increased promotional spending. The increased promotional spending reflects the competitive marketplace and chilled juice and juice drink category softness. Operating profit benefited from lower costs driven by merger-related synergies.

 

2001

 

Overall volume grew 4%. This growth was led by three new Gatorade flavors and double-digit growth in Tropicana Pure Premium nutritionals, offset by low double-digit declines in Tropicana Season’s Best.

 

Net sales increased 5% and operating profit increased 6% due to the volume gains and higher effective net pricing for Gatorade. Operating profit also benefited from lower general and administrative expenses, partially offset by higher advertising and marketing expenses and higher Tropicana manufacturing costs as a result of lower fruit yields, higher energy costs and lower production leverage.

 

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Table of Contents

 

PepsiCo Beverages International

 

                   

% Change


    

  2002

  

  2001

  

  2000

  

2002

    

    2001


Net sales

  

$2,036

  

$2,012

  

$1,981

  

      1

    

      2

Operating profit

  

   $261

  

   $212

  

   $161

  

    23

    

    32

 

2002

 

BCS increased 5% reflecting broad-based increases led by strong double-digit growth in China, India, Turkey and Russia. These advances were partially offset by declines in Argentina due to poor macroeconomic conditions. For the year, total concentrate shipments to franchisees grew 6%, while their BCS grew at a slower rate.

 

Unfavorable foreign currency movements reduced net sales growth by 2 percentage points and operating profit by 7 percentage points as currency weaknesses in Latin America and Egypt were partially offset by stronger currencies in Europe.

 

Net sales increased 1% and operating profit increased 23% due to the volume gains partially offset by the unfavorable effect of foreign currency movements. We franchised our Gatorade business in certain countries and, as a result, we now sell concentrate as opposed to full goods to bottlers in these countries. The impact of the franchising reduced net sales growth by 2 percentage points. The Gatorade franchising increased operating profit growth by 13 percentage points as a result of prior year operating losses. This growth was partially offset by increases in general and administrative and advertising and marketing expenses.

 

2001

 

BCS increased 4.5% due to broad-based increases led by Russia, China and Brazil. These increases were partially offset by pricing-related declines in Mexico and Saudi Arabia coupled with a macroeconomic decline in Turkey. For the year, total concentrate shipments to franchisees grew 3%, while their BCS grew at about the same rate.

 

Net sales increased 2% and operating profit increased 32% primarily due to the volume gains and higher effective net pricing, partially offset by a net unfavorable foreign currency impact. The net unfavorable foreign currency impact reduced net sales growth by 4.5 percentage points, primarily in Europe, Brazil and Egypt, and reduced operating profit growth by 11 percentage points, primarily in Europe. Overall margin improvements contributed to operating profit growth.

 

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Table of Contents

 

Quaker Foods North America

 

                   

% Change


    

2002

  

2001

  

2000    

  

2002        

  

2001


Net sales

  

$1,491

  

$1,466

  

$1,453    

  

2        

  

1

Operating profit

  

$481

  

$399

  

$369    

  

21        

  

8

 

2002

 

Pound volume increased 2%. Hot cereals and ready-to-eat cereals each contributed 1 percentage point of volume growth driven by new product introductions and product news.

 

Growth in net sales of 2% and operating profit of 21% was due to increased cereal volume. In addition, the benefit of productivity, merger-related synergies and lower advertising and marketing expense, partially offset by higher oat prices, contributed more than 15 percentage points of the operating profit growth.

 

2001

 

Pound volume decreased 1% driven by declines in ready-to-eat cereals and bulk cornmeal and oats products, largely offset by growth in hot cereals. The hot cereals growth resulted primarily from new products and flavor varieties.

 

Growth in net sales of 1% and operating profit of 8% was primarily due to higher effective net pricing, reflecting a mix shift to higher priced products, and the price increases for cereals which more than offset lower overall volume.

 

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Table of Contents

Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000

 

(in millions)

  

 

2002

 

  

 

2001

 

  

 

2000

 


Operating Activities

                          

Net income

  

$

3,313

 

  

$

2,662

 

  

$

2,543

 

Adjustments to reconcile net income to net cash provided

    by operating activities

                          

Depreciation and amortization

  

 

1,112

 

  

 

1,082

 

  

 

1,093

 

Merger-related costs

  

 

224

 

  

 

356

 

  

 

 

Other impairment and restructuring charges

  

 

 

  

 

31

 

  

 

184

 

Cash payments for merger-related costs and other restructuring charges

  

 

(123

)

  

 

(273

)

  

 

(38

)

Pension plan contributions

  

 

(820

)

  

 

(446

)

  

 

(103

)

Bottling equity income, net of dividends

  

 

(222

)

  

 

(103

)

  

 

(74

)

Deferred income taxes

  

 

288

 

  

 

162

 

  

 

33

 

Deferred compensation – ESOP

  

 

 

  

 

48

 

  

 

36

 

Other noncash charges and credits, net

  

 

263

 

  

 

209

 

  

 

303

 

Changes in operating working capital, excluding effects of acquisitions and dispositions

                          

Accounts and notes receivable

  

 

(260

)

  

 

7

 

  

 

(52

)

Inventories

  

 

(53

)

  

 

(75

)

  

 

(51

)

Prepaid expenses and other current assets

  

 

(78

)

  

 

(6

)

  

 

(35

)

Accounts payable and other current liabilities

  

 

426

 

  

 

(236

)

  

 

219

 

Income taxes payable

  

 

278

 

  

 

394

 

  

 

335

 

    


  


  


Net change in operating working capital

  

 

313

 

  

 

84

 

  

 

416

 

Other

  

 

279

 

  

 

8

 

  

 

(215

)

    


  


  


Net Cash Provided by Operating Activities

  

 

4,627

 

  

 

3,820

 

  

 

4,178

 

    


  


  


Investing Activities

                          

Capital spending

  

 

(1,437

)

  

 

(1,324

)

  

 

(1,352

)

Sales of property, plant and equipment

  

 

89

 

  

 

 

  

 

57

 

Acquisitions and investments in noncontrolled affiliates

  

 

(351

)

  

 

(432

)

  

 

(98

)

Divestitures

  

 

376

 

  

 

 

  

 

33

 

Short-term investments, by original maturity

                          

More than three months – purchases

  

 

(62

)

  

 

(2,537

)

  

 

(4,950

)

More than three months – maturities

  

 

833

 

  

 

2,078

 

  

 

4,585

 

Three months or less, net

  

 

(14

)

  

 

(41

)

  

 

(9

)

Snack Ventures Europe consolidation

  

 

39

 

  

 

 

  

 

 

    


  


  


Net Cash Used for Investing Activities

  

 

(527

)

  

 

(2,256

)

  

 

(1,734

)

    


  


  


 


(Continued on following page)

 

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Table of Contents

 

Consolidated Statement of Cash Flows (continued)

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000

 

(in millions)

  

 

2002

 

  

 

2001

 

  

 

2000

 


Financing Activities

                          

Proceeds from issuances of long-term debt

  

 

11

 

  

 

324

 

  

 

130

 

Payments of long-term debt

  

 

(353

)

  

 

(573

)

  

 

(879

)

Short-term borrowings, by original maturity

                          

More than three months – proceeds

  

 

707

 

  

 

788

 

  

 

198

 

More than three months – payments

  

 

(809

)

  

 

(483

)

  

 

(155

)

Three months or less, net

  

 

40

 

  

 

(397

)

  

 

1

 

Cash dividends paid

  

 

(1,041

)

  

 

(994

)

  

 

(949

)

Share repurchases – common

  

 

(2,158

)

  

 

(1,716

)

  

 

(1,430

)

Share repurchases – preferred

  

 

(32

)

  

 

(10

)

  

 

 

Quaker share repurchases

  

 

 

  

 

(5

)

  

 

(254

)

Proceeds from reissuance of shares

  

 

 

  

 

524

 

  

 

 

Proceeds from exercises of stock options

  

 

456

 

  

 

623

 

  

 

690

 

    


  


  


Net Cash Used for Financing Activities

  

 

(3,179

)

  

 

(1,919

)

  

 

(2,648

)

    


  


  


Effect of exchange rate changes on cash and cash equivalents

  

 

34

 

  

 

 

  

 

(4

)

    


  


  


Net Increase/(Decrease) in Cash and Cash Equivalents

  

 

955

 

  

 

(355

)

  

 

(208

)

Cash and Cash Equivalents, Beginning of Year

  

 

683

 

  

 

1,038

 

  

 

1,246

 

    


  


  


Cash and Cash Equivalents, End of Year

  

$

1,638

 

  

$

683

 

  

$

1,038

 

    


  


  


 


See accompanying notes to consolidated financial statements.

 

33


Table of Contents

 

OUR LIQUIDITY AND CAPITAL RESOURCES

 

Our strong cash-generating capability and financial condition give us ready access to capital markets throughout the world. Our principal source of liquidity is operating cash flows, which are derived from net income. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating, investing and financing needs. We focus on management operating cash flow as a key element in achieving maximum shareholder value.

 

LOGO

 

Operating Activities

 

In 2002, net cash provided by operating activities of $4.6 billion primarily reflects our solid business results and our emphasis on working capital efficiencies. Net cash provided by operating activities includes pension plan contributions of $820 million and a net tax refund of approximately $250 million in 2002. We expect pension plan contributions to be at a significantly lower level in 2003.

 

In 2001, net cash provided by operating activities of $3.8 billion primarily reflects our solid business results less cash paid for merger-related costs and other restructuring charges.

 

Investing Activities

 

In 2002, net cash used in investing activities of $0.5 billion primarily reflects capital spending and acquisitions, primarily the Wotsits brand in the United Kingdom, partially offset by maturities of short-term investments of $0.8 billion, and proceeds from the Pepsi-Gemex transaction.

 

In 2001, net cash used in investing activities of $2.3 billion primarily reflects capital spending, the acquisition of SoBe and purchases of short-term investments of $0.5 billion.

 

Capital spending was $1.4 billion in 2002, $1.3 billion in 2001 and $1.4 billion in 2000. We expect capital spending to continue at a rate of approximately 5.5% to 6% of net sales.

 

Financing Activities

 

In 2002, cash used for financing activities of $3.2 billion primarily reflects share repurchases of $2.2 billion and dividend payments of $1 billion. Our policy is to pay dividends equal to approximately one-third of our previous year’s net income.

 

In 2001, cash used for financing activities of $1.9 billion primarily reflects share repurchases of $1.7 billion and dividend payments of $1.0 billion. These payments were partially offset by the net proceeds of $524 million from the issuance of 13.2 million shares of our repurchased common stock to qualify for pooling-of-interests accounting treatment in connection with the merger with Quaker.

 

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Table of Contents

 

In 2002, our Board of Directors authorized a share repurchase program of up to $5 billion over a three-year period. In 2003, we expect share repurchases to continue at a level consistent with the years presented. In 2001, subsequent to our merger with Quaker, we repurchased shares of our common stock, as permitted by the emergency and exemptive orders from the Securities and Exchange Commission aimed at facilitating the reopening of the United States equities market on September 17, 2001, following the events of September 11th. Our Board of Directors authorized the repurchase of up to $2 billion worth of our common stock during the terms of these orders. Repurchases under these orders did not compromise our accounting for the Quaker merger. All prior authorizations for share repurchases had been rescinded as a result of the PepsiCo and Quaker merger.

 

Management Operating Cash Flow

 

Management operating cash flow is the primary measure management uses to monitor cash flow performance. It is not a measure calculated under United States generally accepted accounting principles. We believe capital spending is a recurring and essential use of cash necessary to maintain our operating capabilities. The table below reconciles net cash provided by operating activities as reflected in our Consolidated Statement of Cash Flows to our management operating cash flow.

 

    

2002


    

2001


    

2000


 

Net cash provided by operating activities

  

$

4,627

 

  

$

3,820

 

  

$

4,178

 

Capital spending

  

 

(1,437

)

  

 

(1,324

)

  

 

(1,352

)

Sales of property, plant and equipment

  

 

89

 

  

 

 

  

 

57

 

After-tax interest and forex

  

 

10

 

  

 

87

 

  

 

116

 

    


  


  


Management operating cash flow

  

$

3,289

 

  

$

2,583

 

  

$

2,999

 

    


  


  


 

Management operating cash flow was used primarily to fund share repurchases and dividend payments. In 2000, management operating cash flow was also used to reduce long-term debt. We expect management operating cash flow for fiscal year 2003 to remain strong and at levels consistent with the years presented above. However, see “ Cautionary Statements” for certain factors that may impact our operating cash flows.

 

Credit Ratings

 

Our debt ratings of A1 from Moody’s and A from Standard & Poor’s contribute to our ability to access global capital markets. Each rating is considered a strong investment grade bond rating with strong debt protection measures. These ratings reflect the third highest rankings out of nine-tier ranking systems. They reflect our strong operating cash flows and include the impact of the cash flows and debt of our anchor bottlers. We have maintained these healthy ratings since 1989, demonstrating the stability of our operating cash flows.

 

35


Table of Contents

 

Credit Facilities and Long-Term Contractual Commitments

 

See Note 9 to our consolidated financial statements for a description of our credit facilities and long-term contractual commitments.

 

Off-Balance Sheet Arrangements

 

It is not our business practice to enter into off-balance sheet arrangements nor is it our policy to issue guarantees to our bottlers, noncontrolled affiliates or third parties. However, certain guarantees were necessary to facilitate the separation of our bottling and restaurant operations from us. As of year-end 2002, we believe it is remote that these guarantees would require any cash payment. See Note 9 to our consolidated financial statements for a description of our off-balance sheet arrangements.

 

36


Table of Contents

Consolidated Balance Sheet

PepsiCo, Inc. and Subsidiaries

December 28, 2002 and December 29, 2001

 

(in millions except per share amounts)

  

 

2002

 

  

 

2001

 


ASSETS

                 

Current Assets

                 

Cash and cash equivalents

  

$

1,638

 

  

$

683

 

Short-term investments, at cost

  

 

207

 

  

 

966

 

    


  


    

 

1,845

 

  

 

1,649

 

Accounts and notes receivable, net

  

 

2,531

 

  

 

2,142

 

Inventories

  

 

1,342

 

  

 

1,310

 

Prepaid expenses and other current assets

  

 

695

 

  

 

752

 

    


  


Total Current Assets

  

 

6,413

 

  

 

5,853

 

Property, Plant and Equipment, net

  

 

7,390

 

  

 

6,876

 

Amortizable Intangible Assets, net

  

 

801

 

  

 

875

 

Nonamortizable Intangible Assets

  

 

4,418

 

  

 

3,966

 

Investments in Noncontrolled Affiliates

  

 

2,611

 

  

 

2,871

 

Other Assets

  

 

1,841

 

  

 

1,254

 

    


  


Total Assets

  

$

23,474

 

  

$

21,695

 

    


  


LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Current Liabilities

                 

Short-term obligations

  

$

562

 

  

$

354

 

Accounts payable and other current liabilities

  

 

4,998

 

  

 

4,461

 

Income taxes payable

  

 

492

 

  

 

183

 

    


  


Total Current Liabilities

  

 

6,052

 

  

 

4,998

 

Long-Term Debt Obligations

  

 

2,187

 

  

 

2,651

 

Other Liabilities

  

 

4,226

 

  

 

3,876

 

Deferred Income Taxes

  

 

1,718

 

  

 

1,496

 

Preferred Stock, no par value

  

 

41

 

  

 

41

 

Repurchased Preferred Stock

  

 

(48

)

  

 

(15

)

Common Shareholders’ Equity

                 

Common stock, par value 1 2/3¢ per share (issued 1,782 shares)

  

 

30

 

  

 

30

 

Capital in excess of par value

  

 

 

  

 

13

 

Retained earnings

  

 

13,464

 

  

 

11,519

 

Accumulated other comprehensive loss

  

 

(1,672

)

  

 

(1,646

)

    


  


    

 

11,822

 

  

 

9,916

 

Less: repurchased common stock, at cost (60 and 26 shares, respectively)

  

 

(2,524

)

  

 

(1,268

)

    


  


Total Common Shareholders’ Equity

  

 

9,298

 

  

 

8,648

 

    


  


Total Liabilities and Shareholders’ Equity

  

$

23,474

 

  

$

21,695

 

    


  


 


See accompanying notes to consolidated financial statements.

 

37


Table of Contents

Consolidated Statement of Common Shareholders’ Equity

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000

(in millions)

 

   

2002


    

2001


    

2000


 
   

Shares


    

Amount


    

Shares


   

Amount


    

Shares


   

Amount


 

Common Stock

                                            

Balance, beginning of year

 

1,782

 

  

$

30

 

  

2,029

 

 

$

34

 

  

2,030

 

 

$

34

 

Quaker share repurchases

 

 

  

 

 

  

 

 

 

 

  

(9

)

 

 

 

Stock option exercises

 

 

  

 

 

  

6

 

 

 

 

  

 

 

 

 

Quaker stock option exercises

 

 

  

 

 

  

3

 

 

 

 

  

8

 

 

 

 

Shares issued to effect merger

 

 

  

 

 

  

(256

)

 

 

(4

)

  

 

 

 

 

   

  


  

 


  

 


Balance, end of year

 

1,782

 

  

 

30

 

  

1,782

 

 

 

30

 

  

2,029

 

 

 

34

 

   

  


  

 


  

 


Capital in Excess of Par Value

                                            

Balance, beginning of year

        

 

13

 

        

 

375

 

        

 

559

 

Quaker share repurchases

        

 

 

        

 

 

        

 

(236

)

Stock option exercises (a)

        

 

(9

)

        

 

82

 

        

 

52

 

Reissued shares

        

 

 

        

 

150

 

        

 

 

Shares issued to effect merger

        

 

 

        

 

(595

)

        

 

 

Other

        

 

(4

)

        

 

1

 

        

 

 

          


        


        


Balance, end of year

        

 

 

        

 

13

 

        

 

375

 

          


        


        


Deferred Compensation

                                            

Balance, beginning of year

        

 

 

        

 

(21

)

        

 

(45

)

Net activity

        

 

 

        

 

21

 

        

 

24

 

          


        


        


Balance, end of year

        

 

 

        

 

 

        

 

(21

)

          


        


        


Retained Earnings

                                            

Balance, beginning of year

        

 

11,519

 

        

 

16,510

 

        

 

14,921

 

Net income (b)

        

 

3,313

 

        

 

2,662

 

        

 

2,543

 

Shares issued to effect merger

        

 

 

        

 

(6,644

)

        

 

 

Cash dividends declared – common

        

 

(1,042

)

        

 

(1,005

)

        

 

(950

)

Cash dividends declared – preferred

        

 

(4

)

        

 

(4

)

        

 

(4

)

Stock option exercises (a)

        

 

(322

)

        

 

 

        

 

 

          


        


        


Balance, end of year

        

 

13,464

 

        

 

11,519

 

        

 

16,510

 

          


        


        


Accumulated Other Comprehensive Loss

                                      

Balance, beginning of year

        

 

(1,646

)

        

 

(1,374

)

        

 

(1,085

)

Currency translation adjustment (b)

        

 

56

 

        

 

(218

)

        

 

(289

)

Cash flow hedges, net of tax (b)

        

 

18

 

        

 

(18

)

              

Minimum pension liability adjustment, net of tax (b)

        

 

(99

)

        

 

(38

)

        

 

(2

)

Other (b)

        

 

(1

)

        

 

2

 

        

 

2

 

                                              

Balance, end of year

        

 

(1,672

)

        

 

(1,646

)

        

 

(1,374

)

          


        


        


Repurchased Common Stock

                                            

Balance, beginning of year

 

(26

)

  

 

(1,268

)

  

(280

)

 

 

(7,920

)

  

(271

)

 

 

(7,306

)

Share repurchases

 

(53

)

  

 

(2,192

)

  

(35

)

 

 

(1,716

)

  

(38

)

 

 

(1,430

)

Stock option exercises

 

19

 

  

 

931

 

  

20

 

 

 

751

 

  

29

 

 

 

816

 

Reissued shares

 

 

  

 

 

  

13

 

 

 

374

 

  

 

 

 

 

Shares issued to effect merger

 

 

  

 

 

  

256

 

 

 

7,243

 

  

 

 

 

 

Other

 

 

  

 

5

 

  

 

 

 

 

  

 

 

 

 

   

  


  

 


  

 


Balance, end of year

 

(60

)

  

 

(2,524

)

  

(26

)

 

 

(1,268

)

  

(280

)

 

 

(7,920

)

   

  


  

 


  

 


Total Common Shareholders’ Equity

        

$

9,298

 

        

$

8,648

 

        

$

7,604

 

          


        


        


 


(a)   Includes total tax benefit of $143 million in 2002, $212 million in 2001 and $177 million in 2000.
(b)   Combined these amounts represent total comprehensive income of $3,287 million in 2002, $2,390 million in 2001 and $2,254 million in 2000.

 

See accompanying notes to consolidated financial statements.

 

 

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Table of Contents

 

Notes to Consolidated Financial Statements

 

Note 1 – Basis of Presentation and Our Divisions

 

Basis of Presentation

 

Our financial statements include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates based on our ownership interest. We do not control these other affiliates as our ownership in these other affiliates is generally less than fifty percent. Our share of the net income of noncontrolled bottling affiliates is reported in our income statement as bottling equity income. See Note 8 for additional information on our noncontrolled bottling affiliates. Our share of other noncontrolled affiliates is included in division operating profit. As a result of changes in the operations of our European snack joint venture, Snack Ventures Europe (SVE), we determined that effective in 2002, consolidation was required. Therefore, SVE’s results of operations are consolidated with PepsiCo in 2002. Intercompany balances and transactions are eliminated.

 

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

 

Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every fifth or sixth year. The fiscal year ended December 30, 2000 consisted of fifty-three weeks.

 

The impact of the 53rd week and certain other items, such as merger-related costs (described in Note 3), the adoption of SFAS 142 (described in Note 4) and the SVE consolidation affect the comparability of our consolidated results. For additional unaudited information on these items, see “ Our Divisions” below and “ Items Affecting Comparability” in Management’s Discussion and Analysis.

 

Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Certain reclassifications were made to prior year amounts to conform to the 2002 presentation.

 

Our Divisions

LOGO

 

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Table of Contents

 

We manufacture, market and sell a variety of salty, sweet and grain-based snacks, carbonated and noncarbonated beverages, and foods through our North American and international business divisions. Our North American divisions include the United States and Canada. The accounting policies for the divisions are the same as those described in Note 2.

 

Division results are based on how our Chief Executive Officer manages our divisions. Beginning in 2003, we will combine our North American beverage businesses as PepsiCo Beverages North America and our international food and beverage businesses as PepsiCo International to reflect operating and management changes. Merger-related costs and significant other impairment and restructuring charges are not included in division results. In addition, prior year division results are adjusted to reflect the adoption of SFAS 142 and consolidation of SVE, and exclude divested businesses. For additional unaudited information on our divisions, see “ Our Operations” in Management’s Discussion and Analysis.

 

   

2002

 

2001

   

2000

    

2002

    

2001

    

2000

 

   

Net Sales


    

Operating Profit


 

Snacks

                                    

– FLNA

 

$  8,565

 

$  8,216

 

 

$  7,769

 

  

$2,216

 

  

$2,056

 

  

$1,875

 

– FLI

 

5,713

 

5,492

 

 

5,172

 

  

781

 

  

651

 

  

577

 

Beverages

                                    

– PCNA

 

3,365

 

3,189

 

 

2,657

 

  

987

 

  

881

 

  

820

 

– GTNA

 

3,835

 

3,699

 

 

3,514

 

  

590

 

  

585

 

  

554

 

– PBI

 

2,036

 

2,012

 

 

1,981

 

  

261

 

  

212

 

  

161

 

QFNA

 

1,491

 

1,466

 

 

1,453

 

  

481

 

  

399

 

  

369

 

   
 

 

  

  

  

Total division

 

25,005

 

24,074

 

 

22,546

 

  

5,316

 

  

4,784

 

  

4,356

 

Divested businesses

 

107

 

144

 

 

145

 

  

15

 

  

29

 

  

36

 

Corporate

                  

(377

)

  

(371

)

  

(331

)

   
 

 

  

  

  

   

25,112

 

24,218

 

 

22,691

 

  

4,954

 

  

4,442

 

  

4,061

 

Merger-related costs

 

 

 

 

 

  

(224

)

  

(356

)

  

 

Other impairment and restructuring charges

 

 

 

 

 

  

 

  

(31

)

  

(184

)

Other

 

 

 

 

 

  

 

  

2

 

  

(17

)

SVE consolidation

 

 

(706

)

 

(648

)

  

 

  

(13

)

  

(16

)

SFAS 142 adoption

 

 

 

 

 

  

 

  

(23

)

  

(88

)

53rd week in 2000

 

 

 

 

294

 

  

 

  

 

  

62

 

   
 

 

  

  

  

Total

 

$25,112

 

$23,512

 

 

$22,337

 

  

$4,730

 

  

$4,021

 

  

$3,818

 

   
 

 

  

  

  

 

LOGO

           

LOGO

 

 

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Table of Contents

Divested Businesses – During 2002, we sold our Quaker Foods North America bagged cereal business and our Frito-Lay International food businesses in Colombia and Venezuela. A net loss of $5 million was recorded on the sale of these businesses. The net loss and results prior to the divestitures are presented as divested businesses. Prior year division operating results have been reclassified as follows:

 

    

2001

  

2000

  

2001

  

2000


    

Net Sales


  

Operating Profit


Frito-Lay International

  

$  44

  

$  41

  

$  6

  

$  6

Quaker Foods North America

  

100

  

104

  

23

  

30

    
  
  
  
    

$144

  

$145

  

$29

  

$36

    
  
  
  

 

Corporate – Corporate includes costs of our corporate headquarters, centrally managed initiatives, unallocated insurance and benefit programs, foreign exchange transaction gains and losses and certain one-time charges.

 

Merger-Related Costs – See Note 3.

 

Other Impairment and Restructuring Charges – We incurred other impairment and restructuring costs for Quaker’s supply chain reconfiguration and manufacturing and distribution optimization project initiated in 1999. Approximately $14 million of these costs remain payable at December 28, 2002 and $23 million was payable at December 29, 2001.

 

Other – This adjustment primarily reflects the reclassification of our prepaid forward contracts. For more unaudited information on these prepaid forward contracts, see “ Items Affecting Comparability” in Management’s Discussion and Analysis.

 

The following items are necessary to reconcile division results to consolidated results since, as noted above, division results are presented as managed.

 

SVE Consolidation – We have consolidated SVE in 2002. As a result, prior period amounts were adjusted to include SVE for planning and performance measurement purposes as follows:

 

      

2001

      

2000

 

Frito-Lay International net sales

    

$706

 

    

$648

 

Frito-Lay International operating profit

    

$14

 

    

$17

 

Corporate

    

$(1

)

    

$(1

)

 

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Table of Contents

 

SFAS 142 Adoption – In 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets, which eliminated amortization of goodwill and perpetual brands, and resulted in an acceleration of the amortization of certain of our other intangibles. See Note 4 for additional information, and the after-tax impact. After adoption, prior period division results were adjusted for planning and performance measurement purposes as follows:

 

      

2001

      

2000

 

Frito-Lay International

    

$ 18

 

    

$ 32

 

Pepsi-Cola North America

    

(50

)

    

 

PepsiCo Beverages International

    

(21

)

    

(20

)

Gatorade/Tropicana North America

    

69

 

    

69

 

Quaker Foods North America

    

7

 

    

7

 

      

    

      

$ 23

 

    

$ 88

 

      

    

 

53rd Week in 2000 – Since we manage our results on a fifty-two week basis, the impact of the 53rd week in 2000 is excluded as follows:

 

    

Net

Sales

    

Operating

Profit


Frito-Lay North America

  

$164

    

  $40

Frito-Lay International

  

61

    

    10

Pepsi-Cola North America

  

36

    

    13

Gatorade/Tropicana North America

  

     33

    

      5

    
    
    

$294

    

    68

    
      

Corporate

         

    (6)

           
           

  $62

           

 

42


Table of Contents

 

Other Division Information

 

      

2002

  

2001

  

2000

  

2002

  

2001

  

2000


      

Total Assets


  

Capital Spending


Snacks

                               

– FLNA

    

$  5,099

  

$  4,623

  

$  4,282

  

$   523

  

$   514

  

$   524

– FLI (a)

    

5,131

  

4,321

  

4,278

  

337

  

290

  

276

Beverages

                               

– PCNA

    

1,380

  

1,325

  

836

  

135

  

70

  

59

– GTNA

    

4,311

  

4,078

  

3,893

  

232

  

289

  

261

– PBI

    

2,144

  

2,038

  

2,202

  

136

  

95

  

98

QFNA

    

1,001

  

878

  

917

  

50

  

55

  

95

      
  
  
  
  
  

Total division

    

19,066

  

17,263

  

16,408

  

1,413

  

1,313

  

1,313

Divested businesses

    

          –

  

58

  

80

  

1

  

3

  

3

Corporate (b)

    

2,072

  

1,927

  

1,737

  

23

  

8

  

36

Investments in bottling affiliates

    

2,336

  

2,447

  

2,532

  

  

  

      
  
  
  
  
  
      

$23,474

  

$21,695

  

$20,757

  

$1,437

  

$1,324

  

$1,352

      
  
  
  
  
  

 

LOGO

           

LOGO

 

    

2002

  

2001

    

2000

    

2002

    

2001

      

2000

 

    

Amortization of

Intangible Assets


    

Depreciation and Other Amortization


 

Snacks

                                         

– FLNA

  

$    3

  

$    7

 

  

$    7

    

$399

    

$377

 

    

$374

 

– FLI

  

27

  

    31

 

  

    13

    

219

    

211

 

    

206

 

Beverages

                                         

– PCNA

  

70

  

    69

 

  

      2

    

69

    

64

 

    

94

 

– GTNA

  

  

     –

 

  

     –

    

137

    

129

 

    

118

 

– PBI

  

37

  

    37

 

  

    36

    

81

    

99

 

    

111

 

QFNA

  

1

  

      1

 

  

      1

    

37

    

41

 

    

49

 

    
  

  
    
    

    

Total division

  

138

  

 145

 

  

    59

    

942

    

921

 

    

952

 

Divested businesses

  

  

     –

 

  

     –

    

3

    

4

 

    

3

 

Corporate

  

  

     –

 

  

     –

    

29

    

18

 

    

16

 

SVE consolidation

  

  

(3

)

  

     –

    

    

(26

)

    

(25

)

SFAS 142 adoption

  

  

    23

 

  

    88

    

    

 

    

 

    
  

  
    
    

    

    

$138

  

$165

 

  

$147

    

$974

    

$917

 

    

$946

 

    
  

  
    
    

    

 

43


Table of Contents
    

2002

  

2001

  

2000

  

2002

  

2001

  

2000


    

Net Sales


  

Long-Lived Assets(c)


United States

  

$16,588

  

$15,976

  

$15,076

  

$

9,767

  

$

9,439

  

$

9,035

Mexico

  

2,686

  

2,609

  

2,404

  

 

764

  

 

1,065

  

 

934

United Kingdom

  

1,106

  

954

  

946

  

 

1,529

  

 

1,104

  

 

1,156

Canada

  

967

  

896

  

866

  

 

410

  

 

375

  

 

367

All other countries

  

3,765

  

3,077

  

3,045

  

 

2,750

  

 

2,605

  

 

2,759

    
  
  
  

  

  

    

$25,112

  

$23,512

  

$22,337

  

$

15,220

  

$

14,588

  

$

14,251

    
  
  
  

  

  

LOGO

           

LOGO

 


(a)   Frito-Lay International assets include investments in noncontrolled affiliates, principally Productos SAS, of $145 million in 2002 and $155 million in 2001.
(b)   Corporate assets consist principally of cash and cash equivalents, short-term investments primarily held outside the United States and property, plant and equipment.
(c)   Long-lived assets represent net property, plant and equipment, nonamortizable and net amortizable intangible assets and investments in noncontrolled affiliates.

 

Note 2 – Our Significant Accounting Policies

 

Revenue Recognition

 

We recognize revenue upon delivery to our customers in accordance with written sales terms that do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace out-of-date products from store shelves to ensure that our consumers receive the product quality and freshness that they expect. Based on our historical experience with this practice, we have reserved for anticipated out-of-date product. For additional unaudited information on our revenue recognition and related policies, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.

 

Sales Incentives and Other Marketplace Spending

 

We offer sales incentives through various programs to our customers, consumers and, for PCNA, directly to certain retailers. Sales incentives are accounted for as a reduction to sales and totaled $5.5 billion in 2002, $4.7 billion in 2001 and $4.3 billion in 2000. These sales incentives include the impact of adopting EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products, which reduced

 

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our net sales by $3.4 billion in 2001 and $3.1 billion in 2000, with selling, general and administrative expenses reduced by the same amounts. Most of these incentive arrangements have terms of no more than one year. However, we have arrangements, such as fountain pouring rights, which extend up to twelve years. Costs incurred to obtain these rights are expensed over the contract period and the remaining balance of $349 million at December 28, 2002 and $374 million at December 29, 2001 is primarily reported in other assets in the Consolidated Balance Sheet. For additional unaudited information on our sales incentives, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.

 

Other marketplace spending includes the costs of advertising and other marketing activities and is reported as selling, general and administrative expenses. Advertising expenses were $1.5 billion in 2002 and $1.7 billion in 2001 and 2000. Deferred advertising costs are not expensed until the year first used and consist of:

 

    media and personal service prepayments,
    promotional materials in inventory, and
    production costs of future media advertising.

 

Deferred advertising costs of $147 million at year-end 2002 and $111 million at year-end 2001 are classified as prepaid expenses in the Consolidated Balance Sheet.

 

Distribution Costs

 

Distribution costs, including the costs of shipping and handling activities, are reported as selling, general and administrative expenses for direct-store-delivery distribution systems. For our other distribution systems, these costs are reported in cost of sales. Shipping and handling expenses classified as selling, general and administrative expenses were $2.8 billion in 2002, $2.6 billion in 2001 and $2.5 billion in 2000.

 

Cash Equivalents

 

Cash equivalents are investments with original maturities of three months or less.

 

Commitments and Contingencies

 

We are subject to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commitments and other contractual and commercial obligations, see Note 9.

 

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Other Significant Accounting Policies

 

Our other significant accounting policies are disclosed as follows:

    Income Taxes –  Note 5 and, for additional unaudited information, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.
    Pension and Retiree Medical Plans –  Note 6 and, for additional unaudited information, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.
    Employee Stock Options –  Note 7.
    Risk Management –  Note 10 and, for additional unaudited information, see “ Our Market Risks” in Management’s Discussion and Analysis.
    Property, Plant and Equipment and Intangible Assets –  Note 4 and, for additional unaudited information on brands and goodwill, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.

 

Pending Accounting Changes

 

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets. It requires that we recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We currently have no significant asset retirement obligations, and therefore, adoption will have no impact on our consolidated financial statements.

 

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the accounting and reporting for costs associated with restructuring activities. This new standard changes the timing of the recognition of restructuring charges. Liabilities for restructuring costs will be required to be recognized when the liability is incurred rather than when we commit to the plan. SFAS 146 is effective for restructuring activity initiated after December 31, 2002.

 

Note 3 – Our Merger with Quaker

 

On August 2, 2001, we completed our merger with Quaker. Under the terms of the merger agreement, we issued approximately 306 million shares of our common stock in exchange for all the outstanding common stock of Quaker.

 

The merger was accounted for as a tax-free transaction and as a pooling-of-interests. As a result, all prior period consolidated financial statements presented have been restated to include the results of operations, financial position and cash flows of both companies as if they had always been combined. Certain reclassifications were made to conform the presentation of the financial statements, and the fiscal calendar and certain interim reporting policies were also conformed. There were no material transactions between pre-merger PepsiCo and Quaker.

 

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We have recognized the following costs associated with our merger with Quaker:

 

    

2002

  

2001


Transaction costs

  

$   – 

  

$117

Integration and restructuring costs

  

224

  

239

    
  

Total merger-related costs

  

$224

  

$356

    
  

After-tax

  

$190

  

$322

    
  

Per share

  

$0.11

  

$0.18

    
  

 

Transaction costs were incurred to complete the merger and consist primarily of fees and expenses for investment bankers, attorneys and accountants, SEC filing fees, stock exchange listing fees and financial printing and other related charges.

 

Integration and restructuring costs represent incremental one-time merger-related costs. Such costs include consulting fees and expenses, employee-related costs, information system integration costs, asset impairments and other costs related to the integration of Quaker. Employee-related costs include retirement benefit and severance costs and expenses related to change-in-control provisions of pre-merger employment contracts. As of December 28, 2002, an accrual has been recorded for costs associated with the termination of approximately 1,100 corporate, sales, distribution, manufacturing, research, information technology and marketing employees, a majority of which have occurred. We expect to incur additional costs in 2003 to integrate the two companies.

 

Merger-related integration and restructuring reserves are included within accounts payable and other current liabilities in the Consolidated Balance Sheet.

 

Merger-related integration and restructuring reserves:

 

      

Integration

      

Employee Related

      

Asset Impairment

      

Facility and Other Exit

    

Total

 

2001 costs

    

$124

 

    

$106

 

    

$   1

 

    

$   8

 

  

$

239

 

Cash payments

    

(80

)

    

(33

)

    

 

    

(2

)

  

 

(115

)

Reclassification to retiree medical/ postemployment liabilities

    

 

    

(22

)

    

 

    

 

  

 

(22

)

Other noncash utilization

    

(22

)

    

 

    

(1

)

    

(2

)

  

 

(25

)

      

    

    

    

  


Reserves, December 29, 2001

    

22

 

    

51

 

    

 

    

4

 

  

 

77

 

2002 costs

    

90

 

    

53

 

    

56

 

    

25

 

  

 

224

 

Cash payments

    

(62

)

    

(43

)

    

 

    

(13

)

  

 

(118

)

Reclassification to retiree medical/ postemployment liabilities

    

(7

)

    

(9

)

    

 

    

 

  

 

(16

)

Other noncash utilization

    

 

    

(4

)

    

(56

)

    

(10

)

  

 

(70

)

      

    

    

    

  


Reserves, December 28, 2002

    

$  43

 

    

$  48

 

    

$   –

 

    

$   6

 

  

$

97

 

      

    

    

    

  


 

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Note 4 – Property, Plant and Equipment and Intangible Assets

 

    

Useful Life

  

2002

 

  

2001

 

  

2000


Property, plant and equipment, net

                       

Land and improvements

       

$     504

 

  

$     464

 

    

Buildings and improvements

  

20 – 40

  

3,119

 

  

2,846

 

    

Machinery and equipment, including fleet

  

5 – 15

  

9,005

 

  

8,135

 

    

Construction in progress

       

767

 

  

735

 

    
         

  

    
         

13,395

 

  

12,180

 

    

Accumulated depreciation

       

(6,005

)

  

(5,304

)

    
         

  

    
         

$  7,390

 

  

$  6,876

 

    
         

  

    

Depreciation expense

       

$929

 

  

$843

 

  

$840

         

  

  

Amortizable intangible assets, net

                       

Brands

  

5 – 40

  

$   938

 

  

$   869

 

    

Other identifiable intangibles

  

3 – 15

  

203

 

  

207

 

    
         

  

    
         

1,141

 

  

1,076

 

    

Accumulated amortization

       

(340

)

  

(201

)

    
         

  

    
         

$   801

 

  

$   875

 

    
         

  

    

Amortization expense

       

$138

 

  

$165

 

  

$147

         

  

  

 

Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. Land is not depreciated and construction in progress is not depreciated until ready for service. Amortization for each of the next five years, based on existing intangible assets and 2002 foreign exchange rates, is expected to be $138 million in 2003, $129 million in 2004 and 2005 and $19 million thereafter.

 

No impairment charges resulted from the adoption of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Depreciable and amortizable assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need to revise the useful lives. For additional unaudited information on our amortizable brand policies, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.

 

Nonamortizable Intangible Assets

 

Perpetual brands and goodwill are assessed for impairment at least annually to ensure that future cash flows continue to exceed the related book value. A perpetual brand is impaired if its book value exceeds its fair value. Goodwill is evaluated for impairment if the book value of its reporting unit

 

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exceeds its fair value. A reporting unit can be a division or business. If the fair value of an evaluated asset is less than its book value, the asset is written down based on its discounted future cash flows to fair value. No impairment charges resulted from the required impairment evaluations in 2002. The change in the book value of nonamortizable intangible assets during 2002 is as follows:

 

    

Balance, Beginning of Year

  

Acquisitions

  

Translation and Other

  

Balance, End of Year


Frito-Lay North America

                   

Goodwill

  

$   107

  

$    –

  

$    2

  

$   109

    
  
  
  

Frito-Lay International (a)

                   

Goodwill

  

     788

  

    39

  

  109

  

     936

Brands

  

     427

  

  248

  

    45

  

     720

    
  
  
  
    

  1,215

  

  287

  

  154

  

  1,656

    
  
  
  

Gatorade/Tropicana North America

                   

Goodwill

  

  2,148

  

      –

  

      1

  

  2,149

Brands

  

       59

  

      –

  

     –

  

       59

    
  
  
  
    

  2,207

  

      –

  

      1

  

  2,208

    
  
  
  

PepsiCo Beverages International

                   

Goodwill

  

     250

  

      –

  

     –

  

     250

    
  
  
  

Quaker Foods North America

                   

Goodwill

  

     187

  

      –

  

     –

  

     187

    
  
  
  

Corporate

                   

Pension intangible

  

         –

  

      –

  

      8

  

         8

    
  
  
  

Total goodwill

  

  3,480

  

    39

  

  112

  

  3,631

Total brands

  

     486

  

  248

  

    45

  

     779

Total pension intangible

  

         –

  

      –

  

      8

  

         8

    
  
  
  
    

$3,966

  

$287

  

$165

  

$4,418

    
  
  
  

 


(a)   Beginning of year balance includes the impact of consolidating Snack Ventures Europe in 2002 for Frito-Lay International.

 

We adopted SFAS 142, Goodwill and Other Intangible Assets, in 2002. Prior to the adoption of SFAS 142, our nonamortizable intangible assets had useful lives ranging from 20 to 40 years. The following table provides pro forma disclosure of the elimination of goodwill and perpetual brands amortization and the acceleration of certain other amortization as if SFAS 142 had been adopted in 2000:

 

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Table of Contents

 

   

    2001


 

    2000


Reported net income

 

$2,662

 

$2,543

Cease goodwill amortization

 

     112

 

     112

Adjust brands amortization

 

       (67)

 

       (22)

Cease equity investee goodwill amortization

 

         57

 

        61

   
 

Adjusted net income

 

$2,764

 

$2,694

   
 

Reported earnings per common share – basic

 

$  1.51

 

$  1.45

Cease goodwill amortization

 

    0.06

 

    0.06

Adjust brands amortization

 

    (0.03)

 

    (0.01)

Cease equity investee goodwill amortization

 

     0.03

 

    0.03

   
 

Adjusted earnings per common share – basic

 

$  1.57

 

$  1.53

   
 

Reported earnings per common share – diluted

 

$  1.47

 

$  1.42

Cease goodwill amortization

 

    0.06

 

    0.06

Adjust brands amortization

 

    (0.03)

 

    (0.01)

Cease equity investee goodwill amortization

 

     0.03

 

    0.03

   
 

Adjusted earnings per common share – diluted

 

$  1.53

 

$  1.50

   
 

 

For additional unaudited information on our goodwill and nonamortizable brand policies, see “ Our Critical Accounting Policies” in Management’s Discussion and Analysis.

 

Note 5 – Income Taxes

 

    

    2002

  

    2001

    

    2000

 

Income before income taxes

                  

U.S.

  

$3,516

  

$2,922

 

  

$2,574

 

Foreign

  

  1,352

  

1,107

 

  

1,187

 

    
  

  

    

$4,868

  

$4,029

 

  

$3,761

 

    
  

  

Provision for income taxes

                  

Current:   U.S. Federal

  

$   956

  

$   926

 

  

$   958

 

                 Foreign

  

     256

  

226

 

  

165

 

                 State

  

       55

  

53

 

  

62

 

    
  

  

    

  1,267

  

1,205

 

  

1,185

 

    
  

  

Deferred: U.S. Federal

  

     255

  

159

 

  

31

 

                 Foreign

  

       11

  

(8

)

  

(7

)

                 State

  

       22

  

11

 

  

9

 

    
  

  

    

     288

  

162

 

  

33

 

    
  

  

    

$1,555

  

$1,367

 

  

$1,218

 

    
  

  

 

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Table of Contents
    

2002

 

  

2001

 

  

2000

 


Tax rate reconciliation

                    

U.S. Federal statutory tax rate

  

35.0

%

  

35.0

%

  

35.0

%

State income tax, net of U.S. Federal tax benefit

  

1.0

 

  

1.0

 

  

1.2

 

Lower taxes on foreign results

  

(3.9

)

  

(4.3

)

  

(2.9

)

Merger-related costs and other impairment and restructuring charges

  

0.9

 

  

2.3

 

  

(0.2

)

Other, net

  

(1.1

)

  

(0.1

)

  

(0.7

)

    

  

  

Effective tax rate

  

31.9

%

  

33.9

%

  

32.4

%

    

  

  

Deferred tax liabilities

                    

Investments in noncontrolled affiliates

  

$   753

 

  

$   702

 

      

Property, plant and equipment

  

746

 

  

804

 

      

Safe harbor leases

  

57

 

  

82

 

      

Zero coupon notes

  

61

 

  

68