FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 13, 1998 (12 and 24 Weeks Ended)
--------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1183
[GRAPHIC OMITTED]
PEPSICO,INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) identification No.)
700 Anderson Hill Road, Purchase, New York
10577
(Address of principal executive offices) (Zip Code)
914-253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of Capital Stock outstanding as of July 10, 1998:
1,472,836,872
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I Financial Information
Condensed Consolidated Statement of Income -
12 and 24 weeks ended June 13, 1998
and June 14,1997 2
Condensed Consolidated Statement of Comprehensive
Income - 12 and 24 weeks ended June 13, 1998
and June 14, 1997 3
Condensed Consolidated Statement of Cash Flows -
24 weeks ended June 13, 1998 and June 14, 1997 4-5
Condensed Consolidated Balance Sheet -
June 13, 1998 and December 27, 1997 6-7
Notes to Condensed Consolidated Financial
Statements 8
Management's Discussion and Analysis of Operations,
Cash Flows and Liquidity and Capital Resources 9-19
Independent Accountants' Review Report 20
Part II Other Information and Signatures 21-22
-1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ ------------------
6/13/98 6/14/97 6/13/98 6/14/97
-------- -------- -------- --------
Net Sales............................. $5,258 $5,086 $9,611 $9,299
Costs and Expenses, net
Cost of sales....................... 2,148 2,069 3,898 3,790
Selling, general and administrative
expenses.......................... 2,286 2,205 4,255 4,094
Amortization of intangible assets... 46 50 90 94
Unusual items....................... - 326 - 304
-------- -------- -------- --------
Operating Profit...................... 778 436 1,368 1,017
Interest expense.................... (76) (120) (152) (235)
Interest income..................... 15 11 47 23
-------- -------- -------- --------
Income from Continuing Operations
Before Income Taxes................. 717 327 1,263 805
Provision for Income Taxes.......... 223 151 392 311
-------- -------- -------- --------
Income from Continuing Operations..... 494 176 871 494
Income from Discontinued Operations,
net of tax ($271 and $341)........... - 480 - 589
-------- -------- -------- --------
Net Income............................ $ 494 $ 656 $ 871 $1,083
======== ======== ======== ========
Income Per Share - Basic
Continuing Operations............... $ 0.33 $ 0.11 $ 0.58 $ 0.32
Discontinued Operations............. - 0.31 - 0.38
-------- -------- -------- --------
Net Income.......................... $ 0.33 $ 0.42 $ 0.58 $ 0.70
======== ======== ======== ========
Average shares outstanding.......... 1,485 1,534 1,491 1,539
Income Per Share - Assuming Dilution
Continuing Operations............... $ 0.33 $ 0.11 $ 0.57 $ 0.31
Discontinued Operations............. - 0.31 - 0.38
-------- -------- -------- --------
Net Income.......................... $ 0.33 $ 0.42 $ 0.57 $ 0.69
======== ======== ======== ========
Average shares outstanding.......... 1,530 1,575 1,534 1,579
Cash Dividends Declared Per Share..... $ 0.13 $0.125 $0.255 $ 0.24
See accompanying notes.
-2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ ------------------
6/13/98 6/14/97 6/13/98 6/14/97
-------- -------- -------- --------
Net Income............................ $494 $656 $871 $1,083
Other Comprehensive Income/(Loss)
Currency translation adjustment,
net of related taxes............... (53) 19 (72) (124)
Reclassification adjustment for
items realized in net income....... 9 (15) 9 14
--------- ------- -------- ---------
(44) 4 (63) (110)
--------- ------- -------- ---------
Comprehensive Income.................. $450 $660 $808 $ 973
======== ======== ======== ========
See accompanying notes.
-3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
24 Weeks Ended
------------------
6/13/98 6/14/97
------- ---------
Cash Flows - Operating Activities
Income From Continuing Operations...... $ 871 $ 494
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Depreciation and amortization......... 523 488
Noncash portion of unusual items...... - 220
Deferred income taxes................. 47 65
Other noncash charges and credits,
net ................................. 131 108
Changes in operating working capital,
excluding effects of acquisitions
and dispositions
Accounts and notes receivable........ (376) (264)
Inventories.......................... (133) (51)
Prepaid expenses, deferred income
taxes and other current assets...... (78) (67)
Accounts payable and other current
liabilities......................... (486) (196)
Income taxes payable................. 188 (26)
------- --------
Net change in operating working
capital.............................. (885) (604)
------- ---------
Net Cash Provided by Operating
Activities.............................. 687 771
------- ---------
Cash Flows - Investing Activities
Capital spending........................ (540) (621)
Acquisitions and investments in
unconsolidated affiliates.............. (552) (13)
Sales of businesses..................... - 85
Sales of property, plant and
equipment.............................. 37 19
Short-term investments, by original
maturity
More than three months - purchases.... (242) (47)
More than three months - maturities... 305 46
Three months or less, net............. 692 (25)
Other, net.............................. (48) 33
------- ---------
Net Cash Used for Investing Activities.... (348) (523)
-------- --------
Continued next page.
-4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(in millions, unaudited)
24 Weeks Ended
----------------
6/13/98 6/14/97
------- -------
Cash Flows - Financing Activities
Proceeds from issuances of long-term
debt................................... 703 -
Payments of long-term debt.............. (1,111) (1,454)
Short-term borrowings, by original
maturity
More than three months - proceeds 110 50
More than three months - payments..... (52) (121)
Three months or less, net ............ 277 1,694
Proceeds from formation of REIT......... - 296
Cash dividends paid..................... (375) (342)
Share repurchases....................... (1,723) (890)
Proceeds from exercises of stock options 280 141
Other, net.............................. - 3
-------- -------
Net Cash Used for Financing Activities.... (1,891) (623)
-------- ------
Net Cash Provided by Discontinued
Operations................................ - 688
Effect of Exchange Rate Changes on Cash
and Cash Equivalents..................... (1) 5
-------- ------
Net (Decrease)/Increase in Cash and Cash
Equivalents.............................. (1,553) 318
Cash and Cash Equivalents - Beginning of
year..................................... 1,928 307
------- -------
Cash and Cash Equivalents - End of period. $ 375 $ 625
======= =======
See accompanying notes.
-5-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
(Unaudited)
6/13/98 12/27/97
Current Assets
Cash and cash equivalents......... $ 375 $ 1,928
Short-term investments, at cost... 201 955
-------- --------
576 2,883
Accounts and notes receivable, less
allowance: 6/98 and 12/97 - $125. 2,507 2,150
Inventories
Raw materials and supplies........ 451 400
Finished goods.................... 430 332
-------- --------
881 732
Prepaid expenses, deferred income
taxes and other current assets... 594 486
-------- --------
Total Current Assets............ 4,558 6,251
Property, Plant and Equipment....... 11,940 11,294
Accumulated Depreciation............ (5,387) (5,033)
-------- --------
6,553 6,261
Intangible Assets, net.............. 5,990 5,855
Investments in Unconsolidated
Affiliates ......................... 1,255 1,201
Other Assets........................ 537 533
-------- --------
Total Assets.................... $18,893 $20,101
======== ========
Continued on next page.
-6-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
6/13/98 12/27/97
Current Liabilities
Short-term borrowings................... $ 200 $ -
Accounts payable and other current
liabilities............................ 3,183 3,617
Income taxes payable.................... 683 640
-------- ---------
Total Current Liabilities............. 4,066 4,257
Long-term Debt............................ 4,679 4,946
Other Liabilities......................... 2,324 2,265
Deferred Income Taxes..................... 1,749 1,697
Shareholders' Equity
Capital stock, par value 1 2/3 cents
per share: authorized 3,600 shares,
issued 6/98 and 12/97 - 1,726 shares.. 29 29
Capital in excess of par value.......... 1,293 1,314
Retained earnings....................... 12,059 11,567
Currency Translation adjustment......... (1,051) (988)
--------- ---------
12,330 11,922
Less: Treasury Stock, at Cost:
6/98 - 250 shares, 12/97 - 224 shares.. (6,255) (4,986)
-------- ---------
Total Shareholders' Equity............ 6,075 6,936
-------- ---------
Total Liabilities and Shareholders'
Equity............................. $18,893 $20,101
======== =========
See accompanying notes.
-7-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all per share information is computed using average shares outstanding,
assuming dilution)
(1) Our Condensed Consolidated Balance Sheet at June 13, 1998 and the Condensed
Consolidated Statements of Income and Comprehensive Income for the 12 and 24
weeks ended June 13, 1998 and June 14, 1997 and the Condensed Consolidated
Statement of Cash Flows for the 24 weeks ended June 13, 1998 and June 14, 1997
have not been audited, and all have been prepared in conformity with the
accounting principles applied in our 1997 Annual Report on Form 10-K (Annual
Report) for the year ended December 27, 1997. The Condensed Consolidated
Statement of Comprehensive Income was prepared in conformity with the accounting
principles and was not required for 1997. In our opinion, this information
includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. The results for the 12 and 24 weeks are not
necessarily indicative of the results expected for the year.
(2) On July 20, 1998, we announced that we will purchase the Tropicana juice
business (Tropicana) from The Seagram Company Ltd. for $3.3 billion in cash.
Tropicana is the world's largest marketer and producer of branded juices. The
acquisition will be accounted for under the purchase method and the purchase
price will largely be funded by the issuance of commercial paper which may
result in an increase to our revolving credit facilities. The acquisition is
subject to regulatory approval and is expected to close at the end of August.
On July 23, 1998, we announced that our Board of Directors has authorized
a study of the feasibility of converting essentially all of our company-owned
bottling operations in North America and possibly some international bottling
operations to public ownership. The effect, if any, on our financial statements
is dependent on the ultimate outcome of the study and approval of any action by
our Board of Directors.
(3) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for fiscal year beginning 2000. We are evaluating SFAS 133 to
determine its impact on the consolidated financial statements.
(4) Through the 24 weeks ended June 13, 1998, we repurchased 45.6 million shares
of our capital stock at a cost of $1.7 billion. From June 14, 1998 through July
24, 1998, we repurchased 5.7 million shares at a cost of $237 million.
(5) Supplemental Cash Flow Information
24 Weeks Ended
($ in millions) ------------------
6/13/98 6/14/97
--------- -------
Interest paid....... $133 $246
Income taxes paid... $232 $201
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS, CASH FLOWS AND
LIQUIDITY AND CAPITAL RESOURCES
Cautionary Statements
From time to time, in written reports and oral statements, we discuss our
expectations regarding PepsiCo's future performance. These "forward-looking
statements" are based on currently available competitive, financial and economic
data and our operating plans. They are also inherently uncertain, and investors
must recognize that events could turn out to be significantly different from
what we expect.
General
All per share information is computed using average shares outstanding, assuming
dilution.
Volume is the estimated dollar effect of the year-over-year change in case sales
by company-owned bottling operations and concentrate unit sales to franchisees
in Beverages, and in pound or kilo sales of salty and sweet snacks in Snack
Foods.
Effective net pricing includes price changes and the effect of product, package
and country mix.
Ongoing amounts exclude net unusual charges of $326 million ($238 million after-
tax or $0.15 per share) and $304 million ($240 million after-tax or $0.15 per
share) in the quarter and year-to-date 1997, respectively.
Analysis of Consolidated Operations
Net sales rose 3% or $172 million and $312 million in the quarter and
year-to-date, respectively. The increases reflect volume gains in all businesses
and higher effective net pricing by Worldwide Snack Foods, partially offset by
an unfavorable foreign currency translation impact and the absence of sales in
1998 resulting from the refranchising of our Japanese bottler late in 1997.
Cost of sales as a percent of net sales remained relatively flat to the prior
year at 40.9% and 40.6% for the quarter and year-to-date, respectively. Higher
potato costs in Worldwide Snack Foods and new product start-up costs in North
American Snack Foods were offset by a favorable mix shift in International
Beverages and the higher effective net pricing. The favorable mix shift in
International Beverages to our higher margin concentrate business from packaged
products reflects, in part, the 1997 refranchising of our Japanese bottler.
Selling, general and administrative expenses (SG&A) comprises selling and
distribution expenses (S&D), advertising and marketing expenses (A&M), general
and administrative expenses (G&A), other income and expense and equity income or
loss from investments in unconsolidated affiliates. SG&A grew 4% or $81 million
and $161 million for the quarter and year-to-date, respectively, a slightly
faster rate than sales. This growth primarily reflects A&M growing at a
significantly faster rate than sales partially offset by S&D and year-to-date,
G&A growing slower than sales. For the quarter, G&A expenses were below the
prior year.
-9-
The A&M growth was led by Worldwide Beverages and year-to-date, North American
Snack Foods also contributed to the A&M growth. The slower rate of growth in S&D
is driven by the mix shift in International Beverages. The year-to-date growth
in G&A includes higher spending on information systems related to the Year 2000
and increased executive compensation expense resulting from our deferred
compensation liability, which is indexed to various investment options,
including PepsiCo capital stock.
Operating Profit
($ in millions) 12 Weeks Ended 24 Weeks Ended
-------------------------- ---------------------------
% %
6/13/98 6/14/97 Change 6/13/98 6/14/97 Change
-------- ------- ------- -------- -------- -------
Reported $778 $436 78 $1,368 $1,017 35
Ongoing* $778 $762 2 $1,368 $1,321 4
* Excludes the effect of unusual charges as described on page 9.
- ---------------------------------------------------------------------------
Reported operating profit increased $342 million in the quarter and $351 million
year-to-date. Ongoing operating profit increased $16 million and $47 million in
the quarter and year-to-date, respectively, primarily reflecting segment
operating profit growth of $11 million and $44 million for the comparable
periods.
Interest expense, net of interest income declined 44% and 50% or $48 million and
$107 million for the quarter and year-to-date, respectively. The decline is
primarily due to lower average U.S. debt levels and higher average worldwide
investment levels, reflecting the significant cash flows received from
discontinued operations in the latter half of 1997. This was partially offset by
higher U.S. interest rates.
Provision for Income Taxes
($ in millions)
12 Weeks Ended 24 Weeks Ended
--------------- ----------------
6/13/98 6/14/97 6/13/98 6/14/97
------- ------ -------- -------
Reported
Provision for
Income Taxes $223 $151 $392 $311
Effective tax rate 31.1% 46.2% 31.0% 38.6%
Ongoing*
Provision for
Income Taxes $223 $239 $392 $375
Effective tax rate 31.1% 36.6% 31.0% 34.6%
* Excludes the effect of unusual charges as described on page 9.
- ---------------------------------------------------------------------------
Our reported effective tax rates decreased 15.1 points and 7.6 points in the
quarter and year-to-date, respectively. The ongoing effective tax rates declined
5.5 points in the quarter and 3.6 points year-to-date reflecting, in part,
favorable settlement of prior years' audit issues.
-10-
Income from Continuing Operations and Income Per Share
($ in millions expect per share amounts)
12 Weeks Ended 24 Weeks Ended
% %
6/13/98 6/14/97 Change 6/13/98 6/14/97 Change
Income from con-
tinuing operations
Reported $ 494 $ 176 NM $ 871 $ 494 76
Ongoing* $ 494 $ 414 19 $ 871 $ 734 19
Income per share
from continuing
operations
Reported $ 0.33 $ 0.11 NM $ 0.57 $ 0.31 81**
Ongoing* $ 0.33 $ 0.26 23** $ 0.57 $ 0.46 22**
* Excludes the effect of unusual charges as described on page 9.
** Based on unrounded amounts.
NM Not Meaningful.
- --------------------------------------------------------------------------------
Reported income from continuing operations increased $318 million and $377
million while income per share increased $0.22 and $0.26 for the quarter and
year-to-date, respectively. Ongoing income from continuing operations and income
per share for the quarter and year-to-date increased $80 million and $137
million and $0.07 and $0.11, respectively. The ongoing increases are due to the
lower net interest expense, the lower effective tax rate and year-to-date,
growth in operating profit. In addition, income per share benefited from a 3%
reduction in average shares outstanding for both the quarter and year-to-date.
-11-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
--------------------------- -----------------------------------
% % Change B/(W)
-----------------
12 Weeks Ended Change 12 Weeks Ended As
------------------ ----------------
6/13/98 6/14/97 B/(W) 6/13/98 6/14/97 Rept'd Adjusted
--------- -------- ------- ------- ------- ------ ---------
(b) (c)
Beverages
-North America $1,989 $1,900 5 $362 $334 8 (6)
-International 661 720 (8) 19 (172) NM NM
--------- --------- ------- --------
2,650 2,620 1 381 162 NM (3)
Snack Foods
-North America 1,802 1,668 8 351 312 13 9
-International 806 798 1 86 7 NM (5)
--------- -------- ------- -------
2,608 2,466 6 437 319 37 6
Combined
Segments $5,258 $5,086 3 818 481 70 1
========= ========
Unallocated
Expenses (40) (45) 11 11
-------- -------
Operating
Profit $778 $436 78 2
======= =======
NM - Not Meaningful.
Notes:
(a) This schedule should be read in conjunction with Management's Discussion and
Analysis beginning on page 14. Certain reclassifications were made to
prior year amounts to conform with the 1998 presentation.
(b) Includes the following unusual items:
1997
------
Beverages
- North America $ 52
- International 180
Snack Foods
- North America 10
- International 84
------
Net unusual charges $326
======
(c) Excludes the effects of unusual items described in note (b) above.
-12-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
--------------------------- -----------------------------------
% % Change B/(W)
-----------------
24 Weeks Ended Change 24 Weeks Ended As
------------------ ----------------
6/13/98 6/14/97 B/(W) 6/13/98 6/14/97 Rept'd Adjusted
--------- -------- ------- ------- ------- ------ ---------
(b) (c)
Beverages
-North America $3,642 $3,509 4 $ 620 $ 592 5 (4)
-International 972 1,081 (10) 1 (199) NM NM
--------- --------- ------- --------
4,614 4,590 1 621 393 58 (1)
Snack Foods
-North America 3,433 3,191 8 659 595 11 9
-International 1,564 1,518 3 162 106 53 (4)
--------- -------- ------- -------
4,997 4,709 6 821 701 17 6
Combined
Segments $9,611 $9,299 3 1,442 1,094 32 3
========= ========
Unallocated
Expenses (74) (77) 4 4
-------- -------
Operating
Profit $1,368 $1,017 35 4
======= =======
NM - Not Meaningful.
Notes:
(a) This schedule should be read in conjunction with Management's Discussion and
Analysis beginning on page 14. Certain reclassifications were made to prior
year amounts to conform with the 1998 presentation.
(b) Includes the following unusual items:
1997
------
Beverages
- North America $ 52
- International 180
Snack Foods
- North America 10
- International 62
------
Net unusual charges $304
======
(c) Excludes the effects of unusual items described in note (b) above.
-13-
Business Segments
Beverages
($ in millions)
12 Weeks Ended 24 Weeks Ended
--------------------------- -----------------------------
% %
6/13/98 6/14/97 Change 6/13/98 6/14/97 Change
--------- -------- ------- --------- --------- -------
Net Sales
North America $1,989 $1,900 5 $3,642 $3,509 4
International 661 720 (8) 972 1,081 (10)
--------- -------- --------- ---------
$2,650 $2,620 1 $4,614 $4,590 1
========= ======== ========= =========
Operating Profit
Reported
North America $ 362 $ 334 8 $ 620 $ 592 5
International 19 (172) NM 1 (199) NM
--------- -------- --------- --------
$ 381 $ 162 NM $ 621 $ 393 58
========= ======== ========= =========
Ongoing*
North America $ 362 $ 386 (6) $ 620 $ 644 (4)
International 19 8 NM 1 (19) NM
--------- -------- --------- ---------
$ 381 $ 394 (3) $ 621 $ 625 (1)
========= ======== ========= =========
* Ongoing amounts exclude net unusual charges in 1997 of $232 ($52-North
America, $180-International) in the quarter and year-to-date.
NM - Not Meaningful.
- -------------------------------------------------------------------------
System bottler case sales (BCS) is our standard volume measure. It represents
PepsiCo-owned brands as well as brands we have been granted the right to
produce, distribute and market nationally. Second quarter BCS includes the
months of April and May.
North America
Net sales increased $89 million and $133 million in the quarter and
year-to-date, respectively. The increases primarily reflect packaged products
volume growth.
BCS increased 7% in the quarter and 4% year-to-date, led by
high-single-digit growth by our Mountain Dew brand and mid-single-digit growth
in brand Diet Pepsi as well as single-digit growth in brand Pepsi in the
quarter. Non-carbonated soft drink products, led by Aquafina bottled water,
Lipton Brisk and Frappuccino coffee drink, grew at a double-digit rate. Our
concentrate shipments to franchisees grew at a significantly slower rate than
their BCS growth in the quarter.
-14-
Reported operating profit increased $28 million for both the quarter and
year-to-date. Ongoing operating profit declined $24 million for both the quarter
and year-to-date. The declines primarily reflect increased S&D, A&M and G&A
costs partially offset by volume growth. S&D grew faster than sales and
year-to-date, volume. The S&D growth reflects higher depreciation expense and
labor costs associated with cooler and vendor placements. A&M expenses grew
significantly faster than sales and volume. The G&A growth includes higher
spending on information systems related to the Year 2000. The current quarter
reflected the unfavorable effect of lapping a reversal of a restructuring
accrual in 1997.
International
Net sales declined $59 million and $109 million in the quarter and year-to-date,
respectively. The declines were primarily driven by the absence of sales in 1998
resulting from the refranchising of our Japanese bottler late in 1997. Volume
gains and higher effective net pricing were substantially offset by unfavorable
currency translation effects, led by Thailand, Spain and India.
BCS increased 8% in the quarter and 7% year-to-date reflecting
double-digit growth in Mexico, the Philippines and India. In addition, BCS more
than doubled in Venezuela reflecting the momentum gained by our joint venture as
it increases territories and capacity. These advances were partially offset by
significantly lower volumes in Japan, the absence of sales volume in South
Africa due to the cessation of our joint venture operation, and in the quarter,
a decline in Brazil resulting from the transition to the new bottler Brahma. The
decline in Japan reflects the elimination of certain of our brands, partially
offset by double-digit growth in those of our brands continuing to be sold by
our new bottler Suntory. Total concentrate shipments to franchisees for both the
quarter and year-to-date increased at a significantly faster rate than their
BCS.
Reported operating results increased $191 million and $200 million in the
quarter and year-to-date, respectively. Ongoing operating results increased $11
million in the quarter and $20 million year-to-date. The improved operating
results reflect the higher volumes and effective net pricing partially offset by
increases in A&M.
-15-
Snack Foods
($ in millions)
12 Weeks Ended 24 Weeks Ended
----------------------------- ---------------------------
% %
6/13/98 6/14/97 Change 6/13/98 6/14/97 Change
-------- -------- ------- -------- ------- -------
Net Sales
North America $1,802 $1,668 8 $3,433 $3,191 8
International 806 798 1 1,564 1,518 3
-------- -------- -------- -------
$2,608 $2,466 6 $4,997 $4,709 6
======== ======== ======== =======
Operating Profit
Reported
North America $ 351 $ 312 13 $ 659 $ 595 11
International 86 7 NM 162 106 53
-------- -------- -------- -------
$ 437 $ 319 37 $ 821 $ 701 17
======== ======== ======== =======
Ongoing*
North America $ 351 $ 322 9 $ 659 $ 605 9
International 86 91 (5) 162 168 (4)
-------- -------- -------- -------
$ 437 $ 413 6 $ 821 $ 773 6
======== ======== ======== =======
* Ongoing amounts exclude net unusual charges in 1997 of $94 ($10-North
America, $84-International) and $72 ($10-North America, $62-International)
in the quarter and year-to-date, respectively.
- ---------------------------------------------------------------------------
Pound and kilo sales are our standard volume measures. Pound and kilo growth are
reported on a systemwide and constant territory basis, which includes currently
consolidated businesses and unconsolidated affiliates reported for at least one
year.
North America
Net sales grew $134 million for the quarter and $242 million year-to-date. The
sales growth reflected increased volume and favorable mix shifts, including the
effect of our new "WOW" no-fat product introduction.
Pound volume advanced 5% and 6% for the quarter and year-to-date,
respectively. Volume gains were led by "WOW" products and solid double-digit
growth in Doritos brand tortilla chips. These gains were partially mitigated by
declines in our "Baked" products and the elimination of Doritos Reduced Fat.
Core potato chip pound volume (excluding low-fat and no-fat versions) declined
2% for the quarter due in part to an intentional reduction in production for two
weeks to ration potatoes given a poor spring crop in Florida.
-16-
Reported operating profit grew $39 million and $64 million for the quarter
and year-to-date, respectively. Ongoing operating profit grew $29 million and
$54 million for the quarter and year-to-date, respectively. The increase for the
quarter reflects the higher volume and favorable mix shifts, partially offset by
higher potato and manufacturing costs and increased A&M expense. The
year-to-date increase was driven by the higher volume, the favorable mix shifts
and by non-operating items, partially offset by increased A&M, higher
manufacturing costs and S&D expenses. Increased manufacturing costs are
attributable to the start-up of plants and lines related to "WOW" and Doritos
3-D products. Year-to-date, A&M grew at a higher rate than sales and volume due
to increased promotional allowances and "WOW" launch costs.
International
Net sales increased $8 million for the quarter and $46 million year-to-date. For
the quarter, contributions from acquisitions and higher effective net pricing
were substantially offset by the unfavorable impact of the stronger U.S. dollar.
Year-to-date, volume gains, higher effective net pricing and contributions from
acquisitions were partially offset by the unfavorable currency translation
impact.
Salty snack kilos increased 6% for the quarter and 8% year-to-date led by
strong double-digit growth at Snack Ventures Europe and Sabritas partially
offset by double-digit declines in Brazil. Sweet snack kilos declined 3% and 7%
for the quarter and year-to-date, respectively, reflecting continued market
softness at Gamesa. Including acquisitions/divestitures, salty snack kilos
increased 17% and 14% for the quarter and year-to-date, respectively, while
sweet snack kilos declined 9% and 10% for the same periods.
Reported operating profit increased $79 million and $56 million for the
quarter and year-to-date, respectively. Ongoing operating profit decreased $5
million for the quarter and $6 million year-to-date. A deterioration of
operating performance in Brazil and market softness at Gamesa were partially
offset by strong double-digit growth at Sabritas. Operating performance was also
impacted by increased raw material costs resulting from lower potato yields in
Europe.
-17-
Cash Flows
PepsiCo's 1998 consolidated cash and cash equivalents decreased $1.6 billion
compared to a $318 million increase in 1997. The unfavorable swing of $1.9
billion reflects the absence of cash provided by discontinued operations,
increased cash outflows for share repurchases, acquisitions and investments in
unconsolidated affiliates, and changes in operating working capital. The absence
of proceeds from the 1997 formation of a Real Estate Investment Trust (REIT) and
net debt repayments in 1998 compared to net proceeds in 1997 also contributed to
the unfavorable swing. These were partially offset by net proceeds from our
investment portfolios compared to a net use of cash for short-term investing
activities in the prior year.
Our share repurchase activity was as follows:
24 Weeks Ended
------------------
($ and shares in
millions) 6/13/98 6/14/97
--------- -------
Cost $1,723 $ 890
Number of shares
repurchased 45.6 26.7
% of shares
outstanding at
beginning of year 3.0% 1.7%
The increase in acquisitions and investments in unconsolidated affiliates
includes the purchase of a bottler in Canada, the Cracker Jack brand, the
remaining ownership interest in our snack food business Wedel in Poland and
various International salty snack food businesses in 1998.
The changes in operating working capital reflects a decline in accounts
payable and other current liabilities primarily due to higher accruals recorded
in 1997 and timing of payments, and growth in accounts and notes receivable due
to increased sales volume and timing of collections. These uses of cash were
partially offset by an increase in income taxes currently payable compared to a
decline in the prior year.
-18-
Liquidity and Capital Resources
On July 20, 1998 we announced our plan to purchase the Tropicana juice business
from The Seagram Company Ltd. for $3.3 billion in cash. This acquisition is
expected to close by the end of August and will be funded largely by the
issuance of commercial paper which may result in an increase to our revolving
credit facilities.
Please refer to our 1997 Annual Report on Form 10-K for further discussion
regarding our Liquidity and Capital Resources.
-19-
Independent Accountants' Review Report
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of June 13, 1998 and the related condensed
consolidated statements of income and comprehensive income for the twelve and
twenty-four weeks ended June 13, 1998 and June 14, 1997 and the condensed
consolidated statement of cash flows for the twenty-four weeks ended June 13,
1998 and June 14, 1997. These financial statements are the responsibility of
PepsiCo, Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries as
of December 27, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended not presented
herein; and in our report dated February 3, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 27, 1997, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Our report, referred to above, contains an explanatory paragraph that states
that PepsiCo, Inc. in 1995 adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
KPMG Peat Marwick LLP
New York, New York
July 16, 1998
-20-
PART II - OTHER INFORMATION AND SIGNATURES
Item 4. Submission of Matters to a Vote of Security Holders
(a)PepsiCo's Annual Meeting of Shareholders was held on
May 6, 1998.
(c)Certain proposals voted upon at the Annual Meeting, and the number
of votes cast for, against and abstentions with respect to each,
were as follows:
Description of Proposals Number of Shares (in millions)
For Against Abstain
Approval of the appointment
of KPMG Peat Marwick LLP as
independent auditors. 1,272 3 4
Shareholders' proposal
concerning the location of
the annual meeting. 48 973 25
Shareholders' proposal
concerning cumulative voting. 255 732 59
Shareholders' proposal
concerning a cap on non-
performance based executive
compensation. 68 958 20
Item 5. Other Information
Any shareholder proposal submitted with respect to PepsiCo's 1999
Annual Meeting of Shareholders, which proposal is submitted outside
the requirements of Rule 14a-8 under the Securities Exchange Act of
1934, will be considered untimely for purposes of Rules 14a-4 and
14a-5 if notice thereof is received by PepsiCo after February 10,
1999.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
See Index to Exhibits on page 23.
(b)Reports on Form 8-K
PepsiCo filed a current report on Form 8-K dated July 24, 1998
attaching the PepsiCo, Inc. press release of July 20, 1998
announcing the planned acquisition of the Tropicana juice business
from The Seagram Company Ltd.
-21-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
PEPSICO, INC.
(Registrant)
Date: July 27, 1998 Sean F. Orr
Senior Vice President and
Controller
Date: July 27, 1998 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
-22-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 11 Computation of Net Income Per Share of Capital Stock -
Basic and Assuming Dilution
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG Peat Marwick LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27.1 Financial Data Schedule 24 weeks ended June 13, 1998
Exhibit 27.2 Financial Data Schedule 24 weeks ended June 14, 1997
-23-
EXHIBIT 11
PEPSICO, INC. AND SUBSIDIARIES
Computation of Net Income Per Share of Capital Stock
(in millions except per share amounts, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ -------------------
6/13/98 6/14/97 6/13/98 6/14/97
-------- -------- --------- --------
Shares outstanding at
beginning of period.......... 1,491 1,539 1,502 1,545
Weighted average of shares
issued during the period for
exercise of stock options... 3 3 12 6
Weighted average shares
repurchased.................. (9) (8) (23) (12)
------ ------- --------- ---------
Average shares outstanding -
Basic........................ 1,485 1,534 1,491 1,539
Effect of dilutive securities
Dilutive shares contingently
issuable upon the exercise
of stock options........... 155 152 158 152
Shares assumed to have been
purchased for treasury with
assumed proceeds from the
exercise of stock options... (110) (111) (115) (112)
------ -------- --------- --------
Average shares outstanding -
Assuming dilution........... 1,530 1,575 1,534 1,579
====== ======= ========= ========
Income from Continuing
Operations................... $494 $176 $871 $ 494
Income from Discontinued
Operations.................... - 480 - 589
------ ------- --------- --------
Net Income.................... $494 $656 $871 $1,083
====== ======= ========= ========
Income per share - Basic
Continuing Operations....... $0.33 $0.11 $0.58 $0.32
Discontinued Operations..... - 0.31 - 0.38
------ ------- --------- --------
Net Income.................. $0.33 $0.42 $0.58 $0.70
====== ======= ========= ========
Income per share -
Assuming dilution
Continuing Operations....... $0.33 $0.11 $0.57 $0.31
Discontinued Operations..... - 0.31 - 0.38
------ ------- --------- --------
Net Income.................. $0.33 $0.42 $0.57 $0.69
====== ======= ========= ========
-24-
EXHIBIT 12
PEPSICO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio amounts, unaudited)
24 Weeks Ended
----------------
6/13/98 6/14/97
------- -------
Earnings: (a)
Income from continuing operations
before income taxes.......... $1,263 $ 805
Joint ventures and minority
interests, net................ 1 8
Amortization of capitalized
interest...................... 3 2
Interest expense............... 152 235
Interest portion of rent
expense (b)................... 21 20
------- -------
Earnings available for fixed
charges....................... $1,440 $1,070
======= =======
Fixed Charges:
Interest expense.............. $ 152 $ 235
Capitalized interest.......... 6 4
Interest portion of rent
expense (b)................... 21 20
------- -------
Total fixed charges.......... $ 179 $ 259
======= =======
Ratio of Earnings to Fixed
Charges....................... 8.04 4.13
======= =======
(a) Included $304 of unusual charges in 1997. Excluding the unusual charges, the
ratio of earnings to fixed charges for the 24 weeks ended June 14, 1997
would have been 5.31.
(b) One-third of net rent expense is the portion deemed representative of the
interest factor.
-25-
EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
PepsiCo, Inc.
We hereby acknowledge our awareness of the use of our report dated July 16, 1998
included within the Quarterly Report on Form 10-Q of PepsiCo, Inc. for the
twelve and twenty-four weeks ended June 13, 1998, and incorporated by reference
in the following Registration Statements and in the related Prospectuses:
Registration
Description Statement Number
Form S-3
PepsiCo SharePower Stock Option Plan for PCDC
Employees 33-42121
$32,500,000 Puerto Rico Industrial, Medical and
Environmental Pollution Control Facilities
Financing Authority Adjustable Rate Industrial
Revenue Bonds 33-53232
Extension of the PepsiCo SharePower Stock Option
Plan to Employees of Snack Ventures Europe, a
joint venture between PepsiCo Foods International
and General Mills, Inc. 33-50685
$4,587,000,000 Debt Securities and Warrants 33-64243
Form S-8
PepsiCo SharePower Stock Option Plan 33-35602, 33-29037,
33-42058, 33-51496,
33-54731 & 33-66150
1988 Director Stock Plan 33-22970
1979 Incentive Plan and the 1987 Incentive Plan 33-19539
1994 Long-Term Incentive Plan 33-54733
1995 Stock Option Incentive Plan 33-61731 & 333-09363
1979 Incentive Plan 2-65410
PepsiCo, Inc. Long Term Savings Program 2-82645, 33-51514 &
33-60965
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
New York, New York
July 27, 1998
-26-
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