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 March 20, 1999 (12 weeks)
------------------------------
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 April 16, 1999:
1,476,995,019
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of Income -
12 weeks ended March 20, 1999 and March 21, 1998 2
Condensed Consolidated Statement of Cash Flows -
12 weeks ended March 20, 1999 and March 21, 1998 3
Condensed Consolidated Balance Sheet -
March 20, 1999 and December 26, 1998 4-5
Condensed Consolidated Statement of Comprehensive Income -
12 weeks ended March 20, 1999 and March 21, 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Operations,
Cash Flows, Liquidity and Capital Resources, EURO and
Year 2000 10-22
Independent Accountants' Review Report 23
Part II Other Information and Signatures 24
-1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended
3/20/99 3/21/98
Net Sales.......................................
New PepsiCo.................................... $3,545 $2,902
Bottling operations............................ 1,569 1,451
------ ------
Total Net Sales............................... 5,114 4,353
Costs and Expenses, net
Cost of sales.................................. 2,140 1,750
Selling, general and administrative expenses... 2,250 1,969
Amortization of intangible assets.............. 64 44
Impairment and restructuring charge............ 65 -
------ ------
Total costs and expenses, net................. 4,519 3,763
Operating Profit
New PepsiCo.................................... 566 538
Bottling operations and equity investments..... 29 52
------ ------
Total Operating Profit........................ 595 590
Interest expense................................ (124) (76)
Interest income................................. 20 32
------ ------
Income Before Income Taxes...................... 491 546
Provision for Income Taxes...................... 158 169
------ ------
Net Income...................................... $ 333 $ 377
====== ======
Income Per Share - Basic........................ $ 0.23 $ 0.25
====== ======
Average Shares Outstanding - Basic.............. 1,474 1,496
Income Per Share - Assuming Dilution............ $ 0.22 $ 0.24
====== ======
Average Shares Outstanding - Assuming Dilution.. 1,510 1,539
Cash Dividends Declared Per Share............... $ 0.13 $0.125
See accompanying notes.
-2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
12 Weeks Ended
-------------------
3/20/99 3/21/98
--------- --------
Cash Flows - Operating Activities
Net income.................................... $ 333 $ 377
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.............. 301 246
Deferred income taxes...................... (9) 16
Other noncash charges and credits, net .... 70 73
Net change in operating working capital...... (394) (438)
-------- -------
Net Cash Provided by Operating Activities....... 301 274
-------- -------
Cash Flows - Investing Activities
Capital spending.............................. (210) (228)
Acquisitions and investments in unconsolidated
affiliates................................... (168) (192)
Short-term investments, by original maturity
More than three months - purchases........... (1,519) (170)
More than three months - maturities.......... 181 217
Three months or less, net.................... (1,277) 736
Other, net.................................... 117 (50)
-------- -------
Net Cash (Used for)/Provided by Investing
Activities.................................... (2,876) 313
-------- -------
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt..... 3,265 544
Payments of long-term debt.................... (135) (785)
Short-term borrowings, by original maturity
More than three months - proceeds............ 3,304 49
More than three months - payments............ (182) (22)
Three months or less, net.................... (1,756) (29)
Cash dividends paid........................... (191) (188)
Share repurchases............................. - (877)
Proceeds from exercises of stock options...... 82 192
------- -------
Net Cash Provided by/(Used for) Financing
Activities.................................... 4,387 (1,116)
------- -------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents.............................. 1 (1)
------- -------
Net Increase/(Decrease) in Cash and Cash
Equivalents................................... 1,813 (530)
Cash and Cash Equivalents - Beginning of year... 311 1,928
-------- ---------
Cash and Cash Equivalents - End of period....... $ 2,124 $ 1,398
======= =======
See accompanying notes.
-3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
(Unaudited)
3/20/99 12/26/98
Current Assets
Cash and cash equivalents......................... $2,124 $ 311
Short-term investments, at cost................... 2,698 83
------ ------
4,822 394
Accounts and notes receivable, less
allowance: 3/99 - $131, 12/98 - $127........... 2,380 2,453
Inventories
Raw materials and supplies...................... 473 506
Work-in-process................................. 137 70
Finished goods.................................. 486 440
------ -------
1,096 1,016
Prepaid expenses, deferred income taxes and
other current assets............................ 574 499
------ -------
Total Current Assets............................ 8,872 4,362
Property, Plant and Equipment...................... 13,061 13,110
Accumulated Depreciation........................... (5,868) (5,792)
------ -------
7,193 7,318
Intangible Assets, net
Goodwill........................................ 5,148 5,131
Reacquired franchise rights..................... 3,046 3,118
Other intangible assets......................... 787 747
------ -------
8,981 8,996
Other Assets....................................... 2,059 1,984
------ -------
Total Assets.................................. $27,105 $ 22,660
======= ========
Continued on next page.
-4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
3/20/99 12/26/98
-------- --------
Current Liabilities
Short-term borrowings............................ $7,086 $3,921
Accounts payable and other current liabilities... 3,571 3,870
Income taxes payable............................. 235 123
------- ------
Total Current Liabilities....................... 10,892 7,914
Long-term Debt..................................... 5,378 4,028
Other Liabilities.................................. 2,320 2,314
Deferred Income Taxes.............................. 1,963 2,003
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 3,600 shares, issued 3/99
and 12/98 - 1,726 shares........................ 29 29
Capital in excess of par value................... 1,141 1,166
Retained earnings................................ 12,942 12,800
Accumulated other comprehensive loss............. (1,161) (1,059)
------ ------
12,951 12,936
Less: Treasury Stock, at Cost:
3/99 - 250 shares, 12/98 - 255 shares............ (6,399) (6,535)
------ ------
Total Shareholders' Equity...................... 6,552 6,401
------ ------
Total Liabilities and Shareholders' Equity.... $27,105 $22,660
======= =======
See accompanying notes.
-5-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended
3/20/99 3/21/98
------- -------
Net Income......................................... $ 333 $ 377
Other Comprehensive (Loss)/Income
Currency translation adjustment, net of related
taxes........................................... (108) (19)
Reclassification adjustment for items realized in
net income...................................... 6 -
----- -----
(102) (19)
Comprehensive Income............................... $ 231 $ 358
===== =====
See accompanying notes.
-6-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Our Condensed Consolidated Balance Sheet at March 20, 1999 and the Condensed
Consolidated Statements of Income, Comprehensive Income and Cash Flows for the
12 weeks ended March 20, 1999 and March 21, 1998 have not been audited. These
financial statements have been prepared in conformity with the accounting
principles applied in our 1998 Annual Report on Form 10-K (Annual Report) for
the year ended December 26, 1998. 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 weeks are not necessarily indicative
of the results expected for the year.
(2) Our Board of Directors approved a plan in 1998 for the separation from
PepsiCo of certain wholly-owned bottling businesses located in the United
States, Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling
Group. On April 6, 1999, PBG completed the sale of approximately 60% of its
common shares through an initial public offering, with PepsiCo retaining a
noncontrolling ownership interest. The transaction will result in a pre-tax gain
to PepsiCo.
In 1998, we announced an agreement with the Whitman Corporation to realign
bottling territories. Subject to approval by Whitman shareholders, we plan to
combine certain bottling operations in the mid-western United States and Central
Europe (referred to as the PepsiCo Bottling Operations) with most of Whitman's
existing bottling businesses to create new Whitman. It is anticipated that upon
completion of the transaction, our noncontrolling ownership interest will be
approximately 40%. If approved, this transaction is expected to be completed in
the second quarter of 1999 and result in a pre-tax gain to PepsiCo which will be
dependent on the fair value of Whitman's stock at the date of the transaction.
In March 1999, we announced an agreement with PepCom Industries, Inc., a
Pepsi-Cola franchisee, to form a joint venture combining bottling businesses in
parts of North Carolina and New York. PepCom plans to contribute to the joint
venture bottling operations in central and eastern North Carolina and in Long
Island, New York. We plan to contribute our bottling operations in Winston-Salem
and Wilmington, North Carolina in exchange for a noncontrolling interest in the
joint venture. This transaction is expected to be completed at the end of the
second quarter of 1999.
(3) In 1998, we adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of a Business Enterprise and Related Information. In
contemplation of the separation from PepsiCo of our bottling operations, we
completed a reorganization of our Pepsi-Cola businesses in 1999. Our segment
disclosure presents the operating results consistent with the new Pepsi-Cola
organization. Accordingly, the results of consolidated bottling operations in
which we plan to own an equity interest after the consummation of the PBG, PBO
and PepCom transactions are presented separately with the equity income or loss
of unconsolidated bottling affiliates. Pepsi-Cola North America results
-7-
include the North American concentrate and fountain businesses. Pepsi-Cola
International results include the international concentrate business and other
consolidated international bottling operations. Prior year amounts have been
reclassified to conform with the 1999 presentation.
(4) Asset Impairment and Restructuring
($ in millions) 12 Weeks Ended
--------------
3/20/99
Asset impairment charges
Held and used in the business
Property, plant and equipment $ 8
Held for disposal/abandonment
Property, plant and equipment 29
Total asset impairment 37
Restructuring charges
Employee related costs 19
Other charges 9
-----
Total impairment and restructuring charge $ 65
=====
After-tax $ 40
=====
Per share - assuming dilution $0.03
=====
Frito-Lay North America recognized an asset impairment and restructuring charge
of $65 million in the first quarter related to the closure of three plants and
impairment of equipment. This charge is the second phase of a productivity
improvement plan developed in the fourth quarter of 1998. The plan to close the
plants, which includes the consolidation of U.S. production to newer and more
efficient plants and streamlining logistics and transportation systems, was
approved by our Board of Directors and announced in the first quarter of 1999.
The asset impairment charges primarily reflect the reduction in the carrying
value of the land and buildings to their estimated fair market value based on
current selling prices for comparable real estate, less costs to sell, and the
write off of the net book value of equipment which cannot be redeployed. The
remaining carrying value of the land and buildings is $7 million. The plant
closures are expected to be completed by the end of the third quarter 1999. The
restructuring charges of $28 million primarily include severance costs for
approximately 860 employees and plant closing costs. Terminations of employees,
which were communicated during the first quarter, will occur in the second and
third quarter of 1999.
(5) No shares were repurchased during the 12 weeks ended March 20, 1999. From
March 21, 1999 through April 30, 1999, PepsiCo repurchased 2.4 million shares at
a cost of $89 million.
-8-
(6) Supplemental Cash Flow Information
12 Weeks Ended
3/20/99 3/21/98
------- -------
Cash Flow Data
Interest paid.................................... $ 83 $ 64
Income taxes paid................................ $ 101 $ 51
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS, CASH FLOWS, LIQUIDITY AND
CAPITAL RESOURCES, EURO AND YEAR 2000
General
Cautionary Statements
From time to time, in written reports and in oral statements, we discuss
expectations regarding our future performance, Year 2000 risks, transactions and
events, the impact of the Euro conversion and the impact of current global
macro-economic issues. 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 expectations.
All per share information is computed using average shares outstanding, assuming
dilution.
In the discussions below, the year-over-year dollar change in concentrate unit
sales to franchisees, including bottling operations in which we will own an
equity interest, and bottler case sales by company-owned bottling operations for
Pepsi-Cola and in pound or kilo sales of salty and sweet snacks for Frito-Lay is
referred to as volume. Price changes over the prior year and the impact of
product, package and country sales mix changes are referred to as effective net
pricing.
Unless otherwise noted, operating comparisons within the following discussions
are based on ongoing operating profit.
International Market Risks
The macro-economic conditions in Brazil, Mexico and across Asia Pacific have
negatively impacted our results. We have taken actions in these markets to
respond to these conditions, such as prudent pricing aimed at sustaining volume,
renegotiating terms with suppliers and securing local currency supply
alternatives. However, we expect that the macro-economic conditions,
particularly in Brazil, will continue to adversely impact our results in the
near term.
Analysis of Operations
Consolidated Operations
Net Sales
($ in millions) 12 Weeks Ended
------------------- %
3/20/99 3/21/98 Change B/(W)
------- ------- -----------
Net sales $5,114 $4,353 17
- ---------------------------------------------------------------------------
Net sales rose $761 million or 17% in 1999. This increase reflects net
contributions from acquisitions/divestitures, volume gains in worldwide
Frito-Lay and Pepsi-Cola North
-10-
America and net sales growth generated by our wholly-owned bottling operations.
See Management's Discussion and Analysis--Segments of the Business--Pepsi-Cola.
Net acquisitions/divestitures contributed 12 percentage points to the sales
growth and primarily reflects the inclusion of Tropicana. Excluding the negative
impact of Brazil, due primarily to macro-economic conditions, net sales would
have increased $809 million or 19%.
Operating Profit and Margin
($ in millions) 12 Weeks Ended
------------------
3/20/99 3/21/98 Change B/(W)
------- ------- -----------
Reported
Operating Profit $595 $590 1%
Operating Profit Margin 11.6% 13.6% (2.0)
Ongoing*
Operating Profit $660 $590 12%
Operating Profit Margin 12.9% 13.6% (0.7)
*Ongoing excludes the effect of an impairment and restructuring charge described
below.
- ---------------------------------------------------------------------------
Reported operating profit margin decreased 2 percentage points. Ongoing
operating profit margin decreased less than 1 percentage point primarily
reflecting the margin impact of the Tropicana acquisition, lower profitability
from bottling operations and increased advertising and marketing expense. These
declines were partially offset by the impact of higher effective net pricing.
A&M grew at a faster rate than sales reflecting higher spending at Pepsi-Cola
North America and at Frito-Lay North America. Operating profit in 1999 includes
a gain on the completion of the sale of the chocolate and biscuit businesses in
Poland which is comparable to 1998 nonoperating gains. Weaker foreign
currencies, primarily in Mexico, reduced ongoing operating profit by 3
percentage points. The negative impact of Brazil, due primarily to
macro-economic conditions, decreased ongoing operating profit by 3 percentage
points.
Impairment and restructuring charge of $65 million ($40 million after-tax or
$0.03 per share) relates to the consolidation of U.S. production to our most
modern and efficient plants and streamlining logistics and transportation
systems in Frito-Lay North America as part of the program to improve
productivity. The restructuring is expected to generate approximately $15
million in annual savings beginning in 2000 which we expect to reinvest back
into the business. See Note 4.
Interest expense, net of interest income, increased $60 million due to higher
average U.S. debt levels. The increased debt level reflects borrowings in the
second half of 1998 primarily used to finance the Tropicana acquisition as well
as the increase in debt during the first quarter in preparation for the IPO by
PBG.
-11-
Provision for Income Taxes
($ in millions) 12 Weeks Ended
------------------
3/20/99 3/21/98
------- -------
Reported
Provision for income taxes $158 $169
Effective tax rate 32.2% 31.0%
Ongoing*
Provision for income taxes $183 $169
Effective tax rate 33.0% 31.0%
*Ongoing excludes the tax effect of an impairment and restructuring charge
described above.
- ---------------------------------------------------------------------------
The reported effective tax rate increased 1.2 percentage points. The ongoing
effective tax rate increased 2 percentage points primarily due to the absence of
1998 reserve reversals related to settlement of prior years' audit issues.
Net Income and Net Income Per Share
($ in millions except per share amounts)
12 Weeks Ended
------------------ %
3/20/99 3/21/98 Change B/(W)
------- ------- -----------
Net income
Reported $333 $377 (12)
Ongoing* $373 $377 (1)
Net income per share
Reported $0.22 $0.24 (10)**
Ongoing* $0.25 $0.24 1**
* Ongoing excludes the effect of an impairment and restructuring charge
described on page 11.
** Based on unrounded amounts.
- ---------------------------------------------------------------------------
Reported net income decreased $44 million and the related net income per share
decreased $0.02. Ongoing net income decreased $4 million and the related net
income per share increased $0.01. The decrease in ongoing net income is due to
the increase in net interest expense and the higher effective tax rate,
substantially offset by increased operating profit. The increase in ongoing net
income per share reflects the benefit of a 2% reduction in average shares
outstanding.
-12-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (a)
($ in millions, unaudited)
Net Sales Operating Profit
---------------------- -------------------------
% %
12 Weeks Ended Change 12 Weeks Ended Change
3/20/99 3/21/98 B/(W) 3/20/99 3/21/98 B/(W)
------- ------- ---- ------- ------- -----
Pepsi-Cola
- - North America $ 613 $ 589 4 $172 $165 4
- - International 243 237 3 16 10 60
------ ------ ---- ----
856 826 4 188 175 7
Intercompany
Elimination (339) (313) (8)
------ ------
517 513 1
Frito-Lay
- - North America (b) 1,742 1,631 7 280 308 (9)
- - International 787 758 4 78 76 3
------ ------ ---- ----
2,529 2,389 6 358 384 (7)
Tropicana 499 - - 35 - -
------ ------ ---- ----
Combined Segments 3,545 2,902 22 581 559 4
Bottling Operations 1,569 1,451 8
------ ------
Total Net Sales $5,114 $4,353 17
====== ======
Corporate Unallocated (15) (21) 29
---- ----
New PepsiCo
Operating Profit 566 538 5
Bottling Operations
and Equity
Investments 29 52 (44)
---- ----
Total Operating
Profit $595 $590 1
==== ====
See accompanying notes.
-13-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (a)
($ in millions, unaudited)
Total Assets
-----------------
3/20/99 12/26/98
------- --------
Pepsi-Cola
- - North America $ 505 $ 393
- - International 1,355 1,177
Frito-Lay
- - North America 3,843 3,915
- - International 3,855 4,039
Tropicana 3,724 3,661
Bottling Assets and Equity
Investments 8,714 9,260
Corporate 5,109 215
------- -------
Total Assets $27,105 $22,660
======= ========
Notes:
(a) This schedule should be read in conjunction with Management's Discussion
and Analysis--Segments of the Business beginning on page 15. Certain
reclassifications were made to prior year amounts to conform with the 1999
presentation. See Note 3.
(b) Includes an asset impairment and restructuring charge of $65 million.
See Note 4.
-14-
Segments of the Business
Pepsi-Cola
Our Board of Directors approved a plan in 1998 for the separation from PepsiCo
of certain wholly-owned bottling businesses located in the United States,
Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling Group. On
April 6, 1999, PBG completed the sale of approximately 60% of its common shares
through an initial public offering, with PepsiCo retaining a noncontrolling
ownership interest. The transaction will result in a pre-tax gain to PepsiCo.
In 1998, we announced an agreement with the Whitman Corporation to realign
bottling territories. Subject to approval by Whitman shareholders, we plan to
combine certain bottling operations in the mid-western United States and Central
Europe (referred to as the PepsiCo Bottling Operations) with most of Whitman's
existing bottling businesses to create new Whitman. It is anticipated that upon
completion of the transaction, our noncontrolling ownership interest will be
approximately 40%. If approved, this transaction is expected to be completed in
the second quarter of 1999 and result in a pre-tax gain to PepsiCo which will be
dependent on the fair value of Whitman's stock at the date of the transaction.
In March 1999, we announced an agreement with PepCom Industries, Inc., a
Pepsi-Cola franchisee, to form a joint venture combining bottling businesses in
parts of North Carolina and New York. PepCom plans to contribute to the joint
venture bottling operations in central and eastern North Carolina and in Long
Island, New York. We plan to contribute our bottling operations in Winston-Salem
and Wilmington, North Carolina in exchange for a noncontrolling interest in the
joint venture. This transaction is expected to be completed at the end of the
second quarter of 1999.
In contemplation of the separation from PepsiCo of our bottling operations, we
completed a reorganization of our Pepsi-Cola business in 1999. Our segment
disclosure presents the operating results consistent with the new Pepsi-Cola
organization. Accordingly, the results of consolidated bottling operations in
which we plan to own an equity interest after the consummation of the PBG, PBO
and PepCom transactions are presented separately with the equity income or loss
of unconsolidated bottling affiliates. Pepsi-Cola North America results include
the North American concentrate and fountain businesses. Pepsi-Cola International
results include the international concentrate business and other consolidated
international bottling operations. Prior year amounts have been reclassified to
conform to the 1999 presentation. The discussion that follows presents net sales
prior to the elimination of intercompany concentrate sales between Pepsi-Cola
North America and Pepsi-Cola International and those consolidated bottling
operations in which we plan to own an equity interest.
The standard volume measure is system bottler case sales. It represents
PepsiCo-owned brands as well as brands we have been granted the right to
produce, distribute and market nationally. First quarter BCS includes the months
of January, February and March. The net sales and operating profit of Pepsi-Cola
International include the operating results of January and February.
-15-
Pepsi-Cola North America
12 weeks ended %
($ in millions) 3/20/99 3/21/98 Change
------- ------- ------
Net Sales $ 613 $ 589 4
Intercompany Elimination (328) (303) (8)
----- -----
Reported $ 285 $ 286 -
===== =====
Operating Profit $ 172 $ 165 4
- --------------------------------------------------------------------------------
Reported net sales were flat over the prior year. Before the elimination of
intercompany concentrate sales, net sales increased $24 million due primarily to
volume growth. Higher concentrate pricing was substantially offset by increased
fountain customer support.
BCS increased 4.5% led by the inclusion of Pepsi One, mid-single digit growth of
our Mountain Dew brand and strong double digit growth of Aquafina bottled water,
Mug and Lipton Brisk. These gains were partially offset by low single digit
declines in Diet Pepsi and brand Pepsi. Concentrate shipments grew 2.6%.
Operating profit increased $7 million due to the volume growth and the net
benefit of the higher concentrate pricing. These gains were partially offset by
higher A&M expense led by Pepsi One. A&M grew faster than sales and at the same
rate as BCS volume.
Pepsi-Cola International
12 weeks ended %
($ in millions) 3/20/99 3/21/98 Change
------- ------- ------
Net Sales $ 243 $ 237 3
Intercompany Elimination (11) (10) (10)
----- -----
Reported $ 232 $ 227 2
===== =====
Operating Profit $ 16 $ 10 60
- --------------------------------------------------------------------------------
Reported net sales increased $5 million. Before the elimination of intercompany
concentrate sales, net sales increased $6 million or 3%. Excluding the negative
impact of Brazil, due primarily to macro-economic conditions, net sales
increased $10 million or 4%. This increase was primarily due to volume growth.
-16-
BCS increased 2%. This increase reflects strong double digit growth in China,
India and Saudi Arabia and mid-single digit growth in Mexico. These advances
were substantially offset by lower BCS in the Philippines, Brazil, Russia and
Thailand. Through February total concentrate shipments to franchisees, including
those wholly-owned bottlers in which we will own an equity interest, grew 3.0%
while their BCS decreased slightly for this period.
Operating profit increased $6 million reflecting the increased volume and lower
G&A expenses, partially offset by higher levels of A&M spending reflecting the
competitive global environment.
Bottling Operations and Equity Investments
($ in millions) 3/20/99 3/21/98 Change
------- ------- ------
Net Sales
Bottling Operations $1,569 $1,451 8
Operating Profit
Bottling Operations
and Equity Investments $ 29 $ 52 (44)
- --------------------------------------------------------------------------------
Revenue from bottling operations increased $118 million led by PBG North America
reflecting the impact of acquisitions and higher volume.
Operating profit from bottling operations and equity investments decreased $23
million primarily due to lower PBG profit as a result of higher overhead costs
incurred in preparation for operating as a separate public company and net
equity losses in 1999 compared to equity income in 1998.
-17-
Frito-Lay
The standard volume measure is pounds for North America and kilos for
International. Pound and kilo growth are reported on a systemwide and constant
territory basis, which includes currently consolidated businesses and
unconsolidated affiliates reported for at least one year.
Frito-Lay North America
12 weeks ended %
($ in millions) 3/20/99 3/21/98 Change
------- ------- ------
Net Sales $1,742 $1,631 7
Operating Profit
Reported $ 280 $ 308 (9)
Ongoing $ 345 $ 308 12
Ongoing excludes an impairment and restructuring charge of $65 in 1999 described
on page 11.
- --------------------------------------------------------------------------------
Net sales grew $111 million due to increased volume and a favorable mix shift to
higher-priced products.
Pound volume advanced 5% led by double digit growth in the tortilla chip
category and Cheetos brand cheese puffs and the inclusion of "WOW!" and the
Cracker Jack brand products. These gains were partially offset by declines in
Lay's and Ruffles brand potato chips and " Baked" Lay's and "Baked" Tostitos
brand products.
Reported operating profit decreased $28 million. Ongoing operating profit
increased $37 million reflecting the favorable mix shift and the higher volume
partially offset by increased A&M. A&M grew at a faster rate than sales and
volume due to increased promotional allowances. S&D grew at a slower rate than
sales and at the same rate as volume.
-18-
Frito-Lay International
12 weeks ended %
($ in millions) 3/20/99 3/21/98 Change
------- ------- ------
Net Sales $787 $758 4
Operating Profit $78 $76 3
- --------------------------------------------------------------------------------
Net sales increased $29 million or 4%. Excluding the negative impact of Brazil,
due primarily to macro-economic conditions, net sales increased $73 million or
11% reflecting net contributions from acquisitions/divestitures, higher volume
and higher effective net pricing. Net acquisitions/divestitures contributed 6
percentage points to the 11% sales growth. The impact of weaker foreign
currencies, primarily in Mexico, reduced net sales by 6 percentage points.
Salty snack kilos increased 6%. Excluding Brazil, salty snack kilos increased
8%, led by solid double digit growth at Walkers in the United Kingdom and
mid-single digit growth at Sabritas in Mexico and the Snack Ventures Europe
joint venture. Including acquisitions/divestitures, salty snack kilos increased
an additional 8 percentage points to 16% driven primarily by acquisitions and
mergers of salty snack food businesses in Central and South America and the
acquisition in Australia. Sweet snack kilos increased 1% reflecting a mid-single
digit growth at Gamesa in Mexico offset by a double digit decline in Poland.
Sweet snack kilos, including the effect of acquisitions/divestitures, increased
2%.
Reported operating profit increased $2 million or 3%. Excluding Brazil,
operating profit increased $20 million or 35% driven by strong operating
performances at Walkers, Gamesa and Sabritas. The impact of weaker foreign
currencies, primarily in Mexico, reduced operating profit by $6 million.
We completed the sale of the chocolate and biscuit businesses in Poland at the
end of the first quarter as part of our global strategy to focus on our core
business.
Tropicana
Net sales were $499 million and operating profit was $35 million. Net sales and
operating profit reflect higher pricing taken to offset increases in the cost of
oranges resulting from a supply shortage last fall.
-19-
Cash Flows
Our 1999 consolidated cash and cash equivalents increased $1.8 billion compared
to a $530 million decrease in 1998. The change in cash flow primarily reflects
net proceeds from the issuance of debt in preparation for the PBG IPO and the
absence of share repurchase activity in the first quarter of 1999 partially
offset by the use of these proceeds to purchase short-term investments compared
to the liquidation of our investment portfolios in 1998.
Liquidity and Capital Resources
As of year end 1998, we maintained $4.75 billion of revolving credit facilities.
Of the $4.75 billion total, $3.1 billion expired March 26, 1999 and was not
renewed due to our reduced borrowing needs. The remaining $1.65 billion expires
March 2003 and exists largely to support issuances of short-term debt. Annually,
these facilities can be extended an additional year upon the mutual consent of
PepsiCo and the lending institutions.
As discussed in Management's Discussion and Analysis - Segments of the Business
- - Pepsi-Cola, our Board of Directors approved a plan in 1998 for the separation
from PepsiCo of PBG. PBG completed an IPO on April 6, 1999, the closing date. In
preparation for the IPO, PBG and its principal operating subsidiary, Bottling
LLC incurred, in February and March of 1999, $6.55 billion of indebtedness. Of
the $6.55 billion, $3.25 billion was temporary and has been repaid by PBG with
the proceeds of the IPO and the issuance of long-term debt. PepsiCo has
unconditionally guaranteed $2.3 billion of the remaining $3.3 billion of PBG's
long-term debt. We received $5.5 billion of the debt proceeds obtained by PBG as
settlement of pre-existing intercompany amounts due to us during the first
quarter. These proceeds were partially used to repay a portion of our short-term
borrowings and the remaining amount was invested in cash equivalents and
short-term investments. We plan to use these investments for general corporate
purposes, including future debt repayments, acquisitions and share repurchases.
An accounting gain on this transaction will be reported in the second quarter
after the closing date balance sheet is completed, all intercompany balances as
of that date are settled and the tax accounting is finalized. Although we do not
expect to pay any material amount of taxes on this transaction for the
foreseeable future, for accounting purposes, the gain will be reported net of
deferred taxes.
We expect to generate net cash proceeds of $300 million as a result of the
Whitman transaction. We do not expect to pay any material amount of taxes on
this transaction for the foreseeable future. However, for accounting purposes,
this transaction will be reported net of deferred taxes.
Our strong cash-generating capability and financial condition give us ready
access to capital markets throughout the world.
-20-
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency-the EURO. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminated currency
exchange rate risk between the member countries. Beginning in January 2002, new
EURO-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. Our operating subsidiaries affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, such as
vending machines, to accommodate EURO-denominated transactions and the impact of
one common currency on pricing. Since financial systems and processes currently
accommodate multiple currencies, the plans contemplate conversion by the middle
of 2001 if not already addressed in conjunction with Year 2000 remediation. We
do not expect the system and equipment conversion costs to be material. Due to
numerous uncertainties, we cannot reasonably estimate the long-term effects one
common currency will have on pricing and the resulting impact, if any, on
financial condition or results of operations.
Year 2000
Each of PepsiCo's business segments and corporate headquarters have teams in
place to identify and address Year 2000 compliance issues. Information
technology systems with non-compliant code are being modified or replaced with
systems that are Year 2000 compliant. Similar actions are being taken with
respect to non-IT systems, primarily systems embedded in manufacturing and other
facilities. The teams are also charged with investigating the Year 2000
readiness of suppliers, customers, franchisees, financial institutions and other
third parties and with developing contingency plans where necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are well underway with work on
approximately 85% of the systems already completed and the systems back in
operation. This percentage is expected to increase to approximately 98% by the
end of the second quarter of 1999 with compliance planned by the fourth quarter
of 1999. Inventories and assessments of non-IT systems have been completed and
remediation activities are under way with a mid-year 1999 target completion
date.
Independent consultants continue to monitor progress of remediation programs at
selected businesses and perform testing at certain key locations. In addition,
other experts are performing independent verification and validation audits of a
sample of remediated systems with satisfactory results. Progress is also
monitored by senior management, and regularly reported to PepsiCo's Board of
Directors.
During 1998, we identified critical suppliers, customers, financial
institutions, and other third parties and surveyed their Year 2000 remediation
programs. Risk assessments and
-21-
contingency plans, where necessary, will be finalized in the first half of 1999
and tested where feasible in the second half of 1999.
In addition, independent consultants completed in 1998 a survey of the state of
readiness of our significant bottling franchisees. Such surveys identified
readiness issues for certain international bottlers and, therefore, potential
risk to us. Our current assessment of international bottlers comprising
approximately 92% of international volume indicates that bottlers representing
17% of the international volume are currently at risk. Divisional personnel are
providing these bottlers with self assessment tools to identify areas still
needing attention. We are also providing assistance to the franchisees with
processes and with certain manufacturing equipment compliance data. Our
contingency planning will include specific focus on those bottlers that remain
at risk at the end of the second quarter.
Incremental costs directly related to Year 2000 issues are estimated to be $141
million from 1998 to 2000, of which $75 million or 53% has been spent to date.
Currently, approximately 26% of the total estimated spending represents costs to
repair systems while approximately 48% represents costs to replace and rewrite
software. This estimate assumes that we will not incur significant Year 2000
related costs on behalf of our suppliers, customers, franchisees, financial
institutions or other third parties. Costs incurred prior to 1998 were
immaterial. Excluded from the estimated incremental costs are approximately $49
million of internal recurring costs for the 3 year period related to our Year
2000 efforts.
Contingency plans for Year 2000 related interruptions are being developed and
will include, but not be limited to, the development of emergency backup and
recovery procedures, the staffing of a centralized team to react to unforeseen
events, remediation of existing systems parallel with installation of new
systems, replacement of electronic applications with manual processes,
identification of alternate suppliers and increases in raw material and finished
goods inventory levels. The potential failure of a power grid or public
telecommunication system, particularly internationally, will be considered in
our contingency planning. All plans are expected to be completed by the end of
the second quarter in 1999.
Our most likely worst case scenarios would involve the temporary inability of
bottling franchisees to manufacture or bottle some products in certain
locations, of suppliers to provide raw materials on a timely basis and of some
customers to order and pay on a timely basis.
Our Year 2000 efforts are ongoing and our overall plan, including our
contingency plans, will continue to evolve as new information becomes available.
While we anticipate no major interruption of our business activities, that will
be dependent in part upon the ability of third parties, particularly bottling
franchisees, to be Year 2000 compliant. Although we have implemented the actions
described above to address third party issues, we are not able to require the
compliance actions by such parties. Accordingly, while we believe our actions in
this regard should have the effect of mitigating Year 2000 risks, we are unable
to eliminate them or to estimate the ultimate effect Year 2000 risks will have
on our operating results.
-22-
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 March 20, 1999 and the related condensed
consolidated statements of income, comprehensive income and cash flows for the
twelve weeks ended March 20, 1999 and March 21, 1998. 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 26, 1998, 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 1, 1999, except as to Note 18 which is
as of March 8, 1999, 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 26, 1998, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
New York, New York
April 22, 1999
-23-
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 26.
(b) Reports on Form 8-K
We filed a current report on Form 8-K dated January 26, 1999
attaching our press release of January 25, 1999 announcing the
agreement reached with the Whitman Corporation and preliminary
fourth quarter results.
We filed a current report on Form 8-K dated February 3, 1999
attaching our 1998 earnings release of February 1, 1999.
-24-
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: May 4, 1999 Sean F. Orr
Senior Vice President and
Controller
Date: May 4, 1999 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
-25-
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 LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27.1 Financial Data Schedule 12 weeks ended March 20, 1999
-26-
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
3/20/99 3/21/98
------- -------
Shares outstanding at beginning of period. 1,471 1,502
Weighted average of shares issued during
the period for exercise of stock options. 3 6
Weighted average shares repurchased........ - (12)
------ ------
Average shares outstanding - Basic......... 1,474 1,496
Effect of dilutive securities
Dilutive shares contingently issuable
upon the exercise of stock options...... 161 162
Shares assumed to have been purchased
for treasury with assumed proceeds
from the exercise of stock options...... (125) (119)
------ ------
Average shares outstanding - Assuming dilution 1,510 1,539
====== ======
Net Income................................. $333 $377
====== ======
Net Income per share - Basic............... $ 0.23 $ 0.25
====== ======
Net Income per share - Assuming dilution... $ 0.22 $ 0.24
====== ======
-27-
EXHIBIT 12
PEPSICO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio amounts, unaudited)
12 Weeks Ended
3/20/99 3/21/98
------- -------
Earnings: (b)
Income before income taxes................... $ 491 $ 546
Joint ventures and minority interests, net... 2 3
Amortization of capitalized interest......... 6 1
Interest expense............................. 124 76
Interest portion of rent expense (a)......... 11 11
----- -----
Earnings available for fixed charges....... $ 634 $ 637
===== =====
Fixed Charges:
Interest expense............................. $ 124 $ 76
Capitalized interest......................... 2 4
Interest portion of rent expense (a)......... 11 11
----- -----
Total fixed charges........................ $ 137 $ 91
===== =====
Ratio of Earnings to Fixed Charges........... 4.63 7.00
===== =====
(a) One-third of net rent expense is the portion deemed representative of the
interest factor.
(b) Includes the impact of an asset impairment and restructuring charge of $65.
Excluding the charge, the ratio of earnings to fixed charges would have
been 5.10.
-28-
EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
PepsiCo, Inc.
We hereby acknowledge our awareness of the use of our report dated April 22,
1999 included within the Quarterly Report on Form 10-Q of PepsiCo, Inc. for the
twelve weeks ended March 20, 1999, 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 LLP
New York, New York
May 4, 1999
-29-
5
0000077476
PepsiCo, Inc.
1,000,000
Dec-25-1999
Mar-20-1999
3-MOS
2,124
2,698
2,511
131
1,096
8,872
13,061
5,868
27,105
10,892
5,378
29
0
0
6,523
27,105
5,114
5,114
2,140
2,140
0
5
124
491
158
333
0
0
0
333
0.23
0.22
