UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 4, 2004 (36 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
PEPSICO, INC.
(Exact name of registrant as specified in its charter)
| North Carolina | 13-1584302 | |
| (State or other jurisdiction of incorporate or organization) |
(I.R.S. Employer 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act.) YES x NO ¨
Number of shares of Common Stock outstanding as of September 24, 2004: 1,684,479,645
1
PEPSICO, INC. A ND SUBSIDIARIES
INDEX
2
| ITEM 1. | Financial Statements |
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||||
| 9/4/04 |
9/6/03 |
9/4/04 |
9/6/03 |
|||||||||||||
| Net Revenue |
$ | 7,257 | $ | 6,830 | $ | 20,458 | $ | 18,898 | ||||||||
| Cost of sales |
3,300 | 3,116 | 9,324 | 8,642 | ||||||||||||
| Selling, general and administrative expenses |
2,410 | 2,307 | 6,974 | 6,445 | ||||||||||||
| Amortization of intangible assets |
35 | 34 | 100 | 99 | ||||||||||||
| Merger-related costs |
— | 9 | — | 31 | ||||||||||||
| Operating Profit |
1,512 | 1,364 | 4,060 | 3,681 | ||||||||||||
| Bottling equity income |
147 | 136 | 292 | 246 | ||||||||||||
| Interest expense |
(41 | ) | (38 | ) | (113 | ) | (112 | ) | ||||||||
| Interest income |
15 | 8 | 37 | 30 | ||||||||||||
| Income before income taxes |
1,633 | 1,470 | 4,276 | 3,845 | ||||||||||||
| Provision for income taxes |
269 | 458 | 1,049 | 1,191 | ||||||||||||
| Net Income |
$ | 1,364 | $ | 1,012 | $ | 3,227 | $ | 2,654 | ||||||||
| Net Income Per Common Share |
||||||||||||||||
| Basic |
$ | 0.81 | $ | 0.59 | $ | 1.90 | $ | 1.54 | ||||||||
| Diluted |
$ | 0.79 | $ | 0.58 | $ | 1.86 | $ | 1.53 | ||||||||
| Cash Dividends Declared Per Common Share |
$ | 0.23 | $ | 0.16 | $ | 0.62 | $ | 0.47 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
| 36 Weeks Ended |
||||||
| 9/4/04 |
9/6/03 |
|||||
| Operating Activities |
||||||
| Net income |
$3,227 | $2,654 | ||||
| Adjustments |
||||||
| Depreciation and amortization |
863 | 816 | ||||
| Stock-based compensation expense |
261 | 289 | ||||
| Merger-related costs |
— | 31 | ||||
| Cash payments for merger-related and other restructuring charges |
(57 | ) | (81 | ) | ||
| Bottling equity income, net of dividends |
(248 | ) | (216 | ) | ||
| Deferred income taxes |
62 | 82 | ||||
| Other, net |
268 | 234 | ||||
| Net change in operating working capital |
(659 | ) | (282 | ) | ||
| Net Cash Provided by Operating Activities |
3,717 | 3,527 | ||||
| Investing Activities |
||||||
| Capital spending |
(700 | ) | (844 | ) | ||
| Sales of property, plant and equipment |
15 | 13 | ||||
| Acquisitions and investments in noncontrolled affiliates |
(28 | ) | (41 | ) | ||
| Divestitures |
— | 46 | ||||
| Short-term investments, by original maturity More than three months—purchases |
(28 | ) | (28 | ) | ||
| More than three months—maturities |
34 | 19 | ||||
| Three months or less, net |
(92 | ) | (157 | ) | ||
| Net Cash Used for Investing Activities |
(799 | ) | (992 | ) | ||
| Financing Activities |
||||||
| Proceeds from issuances of long-term debt |
504 | 53 | ||||
| Payments of long-term debt |
(175 | ) | (551 | ) | ||
| Short-term borrowings, by original maturity More than three months—proceeds |
94 | 156 | ||||
| More than three months—payments |
(111 | ) | (70 | ) | ||
| Three months or less, net |
32 | (117 | ) | |||
| Cash dividends paid |
(940 | ) | (795 | ) | ||
| Share repurchases—common |
(2,475 | ) | (1,045 | ) | ||
| Share repurchases—preferred |
(20 | ) | (10 | ) | ||
| Proceeds from exercises of stock options |
846 | 472 | ||||
| Net Cash Used for Financing Activities |
(2,245 | ) | (1,907 | ) | ||
| Effect of Exchange Rate Changes |
(12 | ) | (15 | ) | ||
| Net Increase in Cash and Cash Equivalents |
661 | 613 | ||||
| Cash and Cash Equivalents—Beginning of year |
820 | 1,638 | ||||
| Cash and Cash Equivalents—End of quarter |
$1,481 | $2,251 | ||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
| (Unaudited) 9/4/04 |
12/27/03 |
|||||
| Assets |
||||||
| Current Assets |
||||||
| Cash and cash equivalents |
$ 1,481 | $ 820 | ||||
| Short-term investments, at cost |
1,272 | 1,181 | ||||
| 2,753 | 2,001 | |||||
| Accounts and notes receivable, less allowance: 9/04—$93, 12/03—$105
Inventories |
3,372
|
2,830
|
||||
| Raw materials |
647 | 618 | ||||
| Work-in-process |
243 | 160 | ||||
| Finished goods |
708 | 634 | ||||
| 1,598 | 1,412 | |||||
| Prepaid expenses and other current assets |
621 | 687 | ||||
| Total Current Assets |
8,344 | 6,930 | ||||
| Property, Plant and Equipment |
15,197 | 14,755 | ||||
| Accumulated Depreciation |
(7,474 | ) | (6,927 | ) | ||
| 7,723 | 7,828 | |||||
| Amortizable Intangibles, net |
617 | 718 | ||||
| Goodwill |
3,786 | 3,796 | ||||
| Other Nonamortizable Intangibles |
864 | 869 | ||||
| 4,650 | 4,665 | |||||
| Investments in Noncontrolled Affiliates |
3,171 | 2,920 | ||||
| Other Assets |
2,099 | 2,266 | ||||
| Total Assets |
$26,604 | $25,327 | ||||
Continued on next page.
5
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amounts)
| (Unaudited) | ||||||
| 9/4/04 |
12/27/03 |
|||||
| Liabilities and Shareholders’ Equity |
||||||
| Current Liabilities |
||||||
| Short-term borrowings obligations |
$ 253 | $ 591 | ||||
| Accounts payable and other current liabilities |
5,515 | 5,213 | ||||
| Income taxes payable |
205 | 611 | ||||
| Total Current Liabilities |
5,973 | 6,415 | ||||
| Long-term Debt Obligations |
2,409 | 1,702 | ||||
| Other Liabilities |
4,124 | 4,075 | ||||
| Deferred Income Taxes |
1,313 | 1,261 | ||||
| Total Liabilities |
13,819 | 13,453 | ||||
| Preferred Stock, no par value |
41 | 41 | ||||
| Repurchased Preferred Stock |
(83 | ) | (63 | ) | ||
| Common Shareholders’ Equity |
||||||
| Common stock, par value 1 2/3 cents per share: |
30 | 30 | ||||
| Capital in excess of par value |
532 | 548 | ||||
| Retained earnings |
18,133 | 15,961 | ||||
| Accumulated other comprehensive loss |
(1,327 | ) | (1,267 | ) | ||
| 17,368 | 15,272 | |||||
| Less: Repurchased shares, at cost: |
(4,541 | ) | (3,376 | ) | ||
| Total Common Shareholders’ Equity |
12,827 | 11,896 | ||||
| Total Liabilities and Shareholders’ Equity |
$26,604 | $25,327 | ||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||
| 9/4/04 |
9/6/03 |
9/4/04 |
9/6/03 |
|||||||||
| Net Income |
$1,364 | $1,012 | $3,227 | $2,654 | ||||||||
| Other Comprehensive Income/(Loss) |
||||||||||||
| Currency translation adjustment |
3 | (185 | ) | (73 | ) | 77 | ||||||
| Cash flow hedges, net of related taxes: |
||||||||||||
| Net derivative gains |
9 | 11 | 11 | — | ||||||||
| Reclassification of gains to net income |
(4 | ) | (1 | ) | — | (7 | ) | |||||
| Other |
— | — | 2 | 1 | ||||||||
| 8 | (175 | ) | (60 | ) | 71 | |||||||
| Comprehensive Income |
$1,372 | $ 837 | $3,167 | $2,725 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
7
PEPSICO, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation and Our Divisions
Basis of Presentation
Our Condensed Consolidated Balance Sheet as of September 4, 2004, the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 36 weeks ended September 4, 2004 and September 6, 2003, and the Condensed Consolidated Statement of Cash Flows for the 36 weeks ended September 4, 2004 and September 6, 2003 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 27, 2003. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 36 weeks are not necessarily indicative of the results expected for the year.
Our significant interim accounting policies include the recognition of marketplace spending during the year incurred, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate. In addition, we now recognize division-related stock-based compensation in division results as division management are held accountable for this expense. Prior year results have been adjusted for comparability.
The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted and are based on unrounded amounts. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2003 and, with respect to our long-term contractual commitments, with our Quarterly Report on Form 10-Q for the fiscal quarter ended June 12, 2004.
8
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||
| 9/4/04 | 9/6/03 | 9/4/04 | 9/6/03 | |||||||||
| NET REVENUE |
||||||||||||
| Frito-Lay North America |
$2,325 | $2,218 | $ 6,704 | $ 6,395 | ||||||||
| PepsiCo Beverages North America |
2,147 | 2,078 | 5,999 | 5,585 | ||||||||
| PepsiCo International |
2,430 | 2,196 | 6,719 | 5,898 | ||||||||
| Quaker Foods North America |
355 | 338 | 1,036 | 1,018 | ||||||||
| Division Net Revenue |
7,257 | 6,830 | 20,458 | 18,896 | ||||||||
| Divested businesses |
— | — | — | 2 | ||||||||
| $7,257 | $6,830 | $20,458 | $18,898 | |||||||||
| OPERATING PROFIT |
||||||||||||
| Frito-Lay North America |
$ 616 | $ 577 | $ 1,686 | $ 1,579 | ||||||||
| PepsiCo Beverages North America |
542 | 503 | 1,460 | 1,299 | ||||||||
| PepsiCo International |
370 | 287 | 995 | 778 | ||||||||
| Quaker Foods North America |
111 | 106 | 325 | 318 | ||||||||
| Division Operating Profit |
1,639 | 1,473 | 4,466 | 3,974 | ||||||||
| Corporate unallocated |
(127 | ) | (100 | ) | (406 | ) | (288 | ) | ||||
| Merger-related costs |
— | (9 | ) | — | (31 | ) | ||||||
| Divested businesses (a) |
— | — | — | 26 | ||||||||
| $1,512 | $1,364 | $ 4,060 | $ 3,681 | |||||||||
| 9/4/04 | 12/27/03 | |||||||||||
| TOTAL ASSETS |
||||||||||||
| Frito-Lay North America |
$ 5,397 | $ 5,332 | ||||||||||
| PepsiCo Beverages North America |
6,199 | 5,856 | ||||||||||
| PepsiCo International |
8,266 | 8,109 | ||||||||||
| Quaker Foods North America |
966 | 995 | ||||||||||
| Division Assets |
20,828 | 20,292 | ||||||||||
| Corporate |
2,908 | 2,384 | ||||||||||
| Bottling investments |
2,868 | 2,651 | ||||||||||
| $26,604 | $25,327 | |||||||||||
| (a) | Includes a gain of $25 million on the sale of Quaker Foods North America’s Mission pasta business. |
9
Intangible Assets
| 9/4/04 |
12/27/03 |
|||||
| Amortizable intangible assets, net |
||||||
| Brands |
$ 980 | $ 985 | ||||
| Other identifiable intangibles |
210 | 212 | ||||
| 1,190 | 1,197 | |||||
| Accumulated amortization |
(573 | ) | (479 | ) | ||
| $ 617 | $ 718 | |||||
The change in the book value of nonamortizable intangible assets is as follows:
| Balance 12/27/03 |
Acquisitions |
Translation & other |
Balance 9/4/04 | ||||||
| Frito-Lay North America |
|||||||||
| Goodwill |
$ 130 | — | — | $ 130 | |||||
| PepsiCo Beverages North America |
|||||||||
| Goodwill |
2,157 | — | 1 | 2,158 | |||||
| Brands |
59 | — | — | 59 | |||||
| 2,216 | — | 1 | 2,217 | ||||||
| PepsiCo International |
|||||||||
| Goodwill |
1,334 | 9 | (20 | ) | 1,323 | ||||
| Brands |
808 | — | (5 | ) | 803 | ||||
| 2,142 | 9 | (25 | ) | 2,216 | |||||
| Quaker Foods North America |
|||||||||
| Goodwill |
175 | — | — | 175 | |||||
| Corporate |
|||||||||
| Pension intangible |
2 | — | — | 2 | |||||
| Total goodwill |
$3,796 | 9 | (19 | ) | $3,786 | ||||
| Total brands |
867 | — | (5 | ) | 862 | ||||
| Total pension intangible |
2 | — | — | 2 | |||||
| $4,665 | 9 | (24 | ) | $4,650 | |||||
10
We account for stock options using the fair value method of accounting. For the 12 weeks, we recognized stock-based compensation expense of $86 million in 2004 and $89 million in 2003. For the 36 weeks, we recognized stock-based compensation of $261 million in 2004 and $289 million in 2003. These amounts are reflected in selling, general and administrative expenses.
Our weighted average Black-Scholes fair value assumptions are as follows:
| 12 and 36 Weeks Ended |
||||||
| 9/4/04 |
9/6/03 |
|||||
| Expected life |
6 yrs. | 6 yrs. | ||||
| Risk free interest rate |
3.3 | % | 3.1 | % | ||
| Expected volatility |
26 | % | 27 | % | ||
| Expected dividend yield |
1.80 | % | 1.15 | % | ||
Pension and Retiree Medical Benefits
The components of net periodic benefit cost for pension and retiree medical plans are as follows:
| 12 Weeks Ended |
||||||||||||
| 9/4/04 |
9/6/03 |
9/4/04 |
9/6/03 |
|||||||||
| Pension |
Retiree Medical |
|||||||||||
| Service cost |
$51 | $41 | $ 9 | $ 7 | ||||||||
| Interest cost |
73 | 66 | 17 | 17 | ||||||||
| Expected return on plan assets |
(90 | ) | (83 | ) | — | — | ||||||
| Amortization of prior service cost |
2 | 2 | (2 | ) | (1 | ) | ||||||
| Amortization of experience loss |
21 | 11 | 4 | 3 | ||||||||
| 57 | 37 | 28 | 26 | |||||||||
| Special termination benefits |
— | 1 | — | — | ||||||||
| Total expense |
$57 | $38 | $28 | $26 | ||||||||
| 36 Weeks Ended |
||||||||||||
| 9/4/04 |
9/6/03 |
9/4/04 |
9/6/03 |
|||||||||
| Pension |
Retiree Medical |
|||||||||||
| Service cost |
$152 | $123 | $27 | $23 | ||||||||
| Interest cost |
219 | 197 | 50 | 51 | ||||||||
| Expected return on plan assets |
(269 | ) | (249 | ) | — | — | ||||||
| Amortization of prior service cost |
5 | 4 | (6 | ) | (3 | ) | ||||||
| Amortization of experience loss |
63 | 33 | 13 | 9 | ||||||||
| 170 | 108 | 84 | 80 | |||||||||
| Special termination benefits |
— | 3 | — | — | ||||||||
| Total expense |
$170 | $111 | $84 | $80 | ||||||||
11
Net Income Per Common Share
The computations of basic and diluted net income per common share are as follows:
| 12 Weeks Ended | ||||||||
| 9/4/04 |
9/6/03 | |||||||
| Income |
Shares (a) |
Income |
Shares (a) | |||||
| Net income |
$1,364 | $1,012 | ||||||
| Less: preferred dividends |
1 | 1 | ||||||
| Net income available for common shareholders |
$1,363 | 1,692 | $1,011 | 1,721 | ||||
| Basic net income per common share |
$ 0.81 | $ 0.59 | ||||||
| Net income available for common shareholders |
$1,363 | 1,692 | $1,011 | 1,721 | ||||
| Dilutive securities: |
||||||||
| Stock options and restricted stock units(b) |
— | 33 | — | 21 | ||||
| ESOP convertible preferred stock |
1 | 2 | 1 | 3 | ||||
| Diluted |
$1,364 | 1,727 | $1,012 | 1,745 | ||||
| Diluted net income per common share |
$ 0.79 | $ 0.58 | ||||||
| 36 Weeks Ended | ||||||||
| 9/4/04 |
9/6/03 | |||||||
| Income |
Shares (a) |
Income |
Shares (a) | |||||
| Net income |
$3,227 | $2,654 | ||||||
| Less: preferred dividends |
2 | 3 | ||||||
| Net income available for common shareholders |
$3,225 | 1,701 | $2,651 | 1,720 | ||||
| Basic net income per common share |
$ 1.90 | $ 1.54 | ||||||
| Net income available for common shareholders |
$3,225 | 1,701 | $2,651 | 1,720 | ||||
| Dilutive securities: |
||||||||
| Stock options and restricted stock units(b) |
— | 31 | — | 14 | ||||
| ESOP convertible preferred stock |
2 | 3 | 2 | 3 | ||||
| Diluted |
$3,227 | 1,735 | $2,653 | 1,737 | ||||
| Diluted net income per common share |
$ 1.86 | $ 1.53 | ||||||
| (a) | Weighted average common shares outstanding. |
| (b) | Options to purchase 0.5 million shares for the 12 weeks and 9.7 million shares for the 36 weeks in 2004 and 33.1 million shares for the 12 weeks and 57.5 million shares for the 36 weeks in 2003 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options were based upon average share prices of $51.98 for the 12 weeks and $51.70 for the 36 weeks in 2004 and $45.23 for the 12 weeks and $42.68 for the 36 weeks in 2003. |
Impairment and Restructuring Charges
In the fourth quarter of 2003, we incurred a charge of $147 million ($100 million after-tax or $0.06 per share) in conjunction with actions taken to streamline our North American divisions and PepsiCo International. All terminations related to these actions have occurred. As of September 4, 2004, $11 million of these costs remain payable and are included in other current liabilities.
12
Supplemental Cash Flow Information
| 36 Weeks Ended |
||||||
| 9/6/04 | 9/6/03 | |||||
| Interest paid |
$ 91 | $108 | ||||
| Income taxes paid(a) |
$1,268 | $561 | ||||
| Acquisitions: |
||||||
| Fair value of assets acquired |
$ 30 | $102 | ||||
| Cash paid and debt assumed |
(28 | ) | (40 | ) | ||
| Liabilities assumed |
$ 2 | $ 62 | ||||
| (a) | 2004 includes approximately $760 million related to our 2003 settlement with the Internal Revenue Service. |
In the third quarter, we recognized $221 million of tax benefits related to a reduction in foreign tax accruals following the resolution of certain open tax issues with foreign tax authorities and a refund claim related to prior U.S. tax settlements.
Subsequent Event
On September 30, 2004, we announced plans to consolidate Frito-Lay North America’s (FLNA) manufacturing network in connection with FLNA’s ongoing productivity program. The number of FLNA plants will be reduced from 43 to 39 with production moved to other plants.
13
| ITEM 2. | Management’s Discussion and Analysis |
FINANCIAL REVIEW
Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Our Divisions in the Notes to the Condensed Consolidated Financial Statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Percentage changes and tax rates are based on unrounded amounts.
Our Critical Accounting Policies
In addition to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2003, the following should be considered.
Sales Incentives
We offer sales incentives through various programs to our customers and consumers. These incentives are recorded as a reduction of the sales price of our products. Certain sales incentives are recognized at the time of the sale while other incentives, such as bottler funding and customer volume rebates, are recognized during the year incurred, generally in proportion to revenue, based on annual targets. Anticipated payments are estimated based on historical experience with similar programs. In addition, certain marketing costs are also recognized during the year incurred, generally in proportion to revenue.
Effective Tax Rate
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Our estimated annual effective tax rate also reflects our best estimate of the ultimate outcome of tax audits. Significant or unusual items are separately recognized in the quarter in which they occur.
Stock-Based Compensation
We account for stock options using the fair value method of accounting. For the 12 weeks, we recognized stock-based compensation expense of $86 million in 2004 and $89 million in 2003. For the 36 weeks, we recognized stock-based compensation expense of $261 million in 2004 and $289 million in 2003. These amounts are reflected in selling, general and administrative expenses. The reduction in our expense is due to changes in our new executive compensation plan. However, total executive compensation expense, when considering all components, is not expected to significantly differ from 2003. See our 2003 Annual Report on Form 10-K for more information on our new executive compensation plan.
Beginning in 2004, our divisions planned for stock-based compensation in division results and senior management evaluates division performance on that basis. As a result, division-related stock-based compensation expense is allocated to our divisions as an incremental employee benefit cost, and prior
14
year division results have been adjusted for comparability. The expense allocated to our divisions excludes the impact of changes in our Black-Scholes assumptions which reflect market conditions over which division management has no control. Any variance between the allocated expense and our actual expense is recognized in corporate unallocated expenses. For our 2004 Black-Scholes assumptions, see Stock-based Compensation in the Notes to the Condensed Consolidated Financial Statements.
We discuss expectations regarding our future performance, such as business outlook, in our annual and quarterly reports, press releases, and other written and oral statements. These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations.
Our operations outside of the United States generate approximately 35% of our net revenue. As a result, we are exposed to foreign currency risks. During the 36 weeks, net favorable foreign currency, primarily increases in the British pound and euro, partially offset by declines in the Mexican peso, contributed over 1 percentage point to net revenue growth. We expect the impact from the British pound and euro to continue to moderate and the unfavorable impact from the Mexican peso to remain.
While there is continued pricing pressure on commodities, we expect to be able to mitigate this risk in the near term for the majority of our commodities through a combination of hedging programs, purchasing commitments and productivity initiatives. As a result, we expect our year-over-year costs for our most significant commodities in total to be roughly flat.
Cautionary statements regarding our trends and future results are included in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 27, 2003.
Results of Operations – Consolidated Review
In the discussions of net revenue and operating profit below, effective net pricing reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.
Items Affecting Comparability
The year-over-year comparisons of our financial results are affected by $221 million of tax benefits recognized in the 12 weeks ended September 4, 2004. See Income Taxes in the Notes to the Condensed Consolidated Financial Statements for a discussion of these benefits. In addition, the year-over-year comparisons are affected by prior year costs associated with our merger with Quaker of $9 million ($6 million after-tax) for the 12 weeks and $31 million ($25 million after-tax or $0.01 per share) for the 36 weeks ended September 6, 2003. In addition, we sold our Quaker Foods North America’s Mission pasta business. This transaction resulted in a net gain of $25 million ($16 million after-tax and $0.01 per share) in the first quarter of 2003 which was included in our divested business results.
15
Subsequent Event
On September 30, 2004, we announced plans to consolidate Frito-Lay North America’s (FLNA) manufacturing network in connection with FLNA’s ongoing productivity program. The number of FLNA plants will be reduced from 43 to 39 with production moved to other plants. The plant closures are expected to occur in October with approximately 780 jobs eliminated and 250 jobs added for the relocated production. We expect to incur a pre-tax charge of approximately $160 million, comprised of approximately $105 million of asset impairments, approximately $30 million of severance and other employee costs, and approximately $25 million of other costs. We will separately report these charges in our financial statements. These costs will largely be incurred in the fourth quarter, and the employee and other costs portions of the charge will be paid in cash during the fourth quarter and into 2005.
Volume
Since our divisions each use different measures of physical unit volume, a common servings metric is used to reflect our consolidated physical unit volume. Total servings increased 4% for the 12 weeks, with worldwide beverages and worldwide snacks each growing 4%. For the 36 weeks, total division servings grew 6%, with worldwide beverages growing 7% and worldwide snacks growing almost 6%.
Consolidated Results
Total Net Revenue and Operating Profit
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||||||
| 9/4/04 | 9/6/03 | Change | 9/4/04 | 9/6/03 | Change | |||||||||||||
| Total net revenue |
$7,257 | $6,830 | 6 | % | $20,458 | $18,898 | 8 | % | ||||||||||
| Division operating profit |
$1,639 | $1,473 | 11 | % | $ 4,466 | $ 3,974 | 12 | % | ||||||||||
| Corporate unallocated |
(127 | ) | (100 | ) | 27 | % | (406 | ) | (288 | ) | 41 | % | ||||||
| Merger-related costs |
— | (9 | ) | — | (31 | ) | ||||||||||||
| Divested businesses |
— | — | — | 26 | ||||||||||||||
| Total operating profit |
$1,512 | $1,364 | 11 | % | $ 4,060 | $ 3,681 | 10 | % | ||||||||||
| Division operating profit margin |
22.6 | % | 21.6 | % | 1.0 | 21.8 | % | 21.0 | % | 0.8 | ||||||||
| Total operating profit margin |
20.8 | % | 20.0 | % | 0.8 | 19.8 | % | 19.5 | % | 0.3 | ||||||||
12 Weeks
Net revenue increased 6% primarily due to volume gains, favorable effective net pricing across all divisions, and net favorable foreign currency movements. The volume gains contributed almost 3 percentage points, favorable effective net pricing contributed over 2 percentage points and the net favorable foreign currency contributed nearly 1 percentage point to revenue growth.
16
Total operating profit increased 11% and margin increased 0.8 percentage point. Division operating profit increased 11% and margin increased 1.0 percentage point. These gains primarily reflect leverage from the revenue growth. Increased Corporate unallocated pension costs partially offset the revenue growth.
36 Weeks
Net revenue increased 8% primarily due to volume gains, favorable mix, primarily at PBNA, and net favorable foreign currency movements. The volume gains contributed 4 percentage points, the favorable mix contributed almost 2 percentage points, and the net favorable foreign currency contributed over 1 percentage point.
Total operating profit increased 10% and margin increased 0.3 percentage point. Division operating profit increased 12% and margin increased 0.8 percentage point. These gains primarily reflect leverage from the revenue growth. Increased Corporate unallocated expenses partially offset the revenue growth.
Corporate unallocated expenses increased 41% primarily reflecting higher pension costs of $52 million, higher costs related to our Business Process Transformation initiative, an unfavorable comparison to a prior year legal settlement gain, and foreign exchange losses compared to gains in the prior year.
Other Consolidated Results
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||||||||||
| 9/4/04 | 9/6/03 | Change | 9/4/04 | 9/6/03 | Change | |||||||||||||||||
| Bottling equity income |
$ | 147 | $ | 136 | 9 | % | $ | 292 | $ | 246 | 19 | % | ||||||||||
| Interest expense, net |
$ | (26 | ) | $ | (30 | ) | (10) | % | $ | (76 | ) | $ | (82 | ) | (6) | % | ||||||
| Tax rate |
16.5 | % | 31.1 | % | (14.6) | 24.5 | % | 31.0 | % | (6.5) | ||||||||||||
| Net income |
$ | 1,364 | $ | 1,012 | 35 | % | $ | 3,227 | $ | 2,654 | 22 | % | ||||||||||
| Net income per common share – diluted |
$ | 0.79 | $ | 0.58 | 36 | % | $ | 1.86 | $ | 1.53 | 22 | % | ||||||||||
12 Weeks
Bottling equity income increased 9% reflecting increased earnings from our anchor bottlers.
Interest expense, net of interest income, decreased 10% primarily reflecting favorable rates and higher average cash balances, largely offset by higher average debt balances.
17
The tax rate decreased 14.6 percentage points primarily due to income tax benefits of $221 million related to a reduction in foreign tax accruals following the resolution of certain open tax issues with foreign tax authorities and a refund claim related to prior U.S. tax settlements. These items accounted for 13.5 percentage points of the decrease in our rate. Increased benefit from our concentrate operations and favorable changes arising from agreements reached with the Internal Revenue Service in the fourth quarter of 2003 also contributed to the decline in rate.
Net income increased 35% and the related net income per share increased 36%. The tax benefits of $221 million contributed 22 percentage points of the increase in both net income and earnings per share with our solid operating results contributing the remainder of the increase.
36 Weeks
Bottling equity income increased 19% reflecting increased earnings from our anchor bottlers and favorable comparisons from our international bottling investments driven by a nationwide strike in Venezuela in early 2003.
Interest expense, net of interest income, decreased 6% reflecting favorable rates, partially offset by the unfavorable comparison to 2003 gains in the market value of investments used to economically hedge a portion of our deferred compensation liability.
The tax rate decreased 6.5 percentage points primarily due to the income tax benefits of $221 million discussed above. These items accounted for 5.2 percentage points of the decrease in our rate. Increased benefit from our concentrate operations and favorable changes arising from agreements reached with the Internal Revenue Service in the fourth quarter of 2003 also contributed to the decline in rate.
Net income and the related net income per share each increased 22%. These increases primarily reflect our solid operating results and the tax benefits of $221 million noted above. The tax benefits contributed 8 percentage points of the increase in both net income and earnings per share. Increased earnings from our bottling investments and the absence of merger-related costs in 2004 also contributed to the growth.
Results of Operations – Division Review
The results and discussions below are based on how our Chief Executive Officer evaluates the performance of our divisions. Prior year amounts exclude the results of divested businesses. For additional information on our divisions, see Our Divisions in the Notes to our Condensed Consolidated Financial Statements.
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Frito-Lay North America
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||
| 9/4/04 | 9/6/03 | Change | 9/4/04 | 9/6/03 | Change | |||||||||
| Net revenue |
$2,325 | $2,218 | 5 | % | $6,704 | $6,395 | 5 | % | ||||||
| Operating profit |
$ 616 | $ 577 | 7 | % | $1,686 | $1,579 | 7 | % | ||||||
12 Weeks
Net revenue grew 5% reflecting volume growth of 2% and positive effective net pricing, primarily as a result of salty snack pricing actions. Declines in Quaker snacks reduced volume by approximately 1 percentage point and net revenue growth by about 0.5 percentage point. Pound volume grew primarily due to double-digit growth in Tostitos, the late third quarter 2003 introduction of Lay’s Stax, double-digit growth in Variety Pack, and single-digit growth in Lay’s Classic potato chips and branded dips. These gains were partially offset by single-digit declines in Doritos and double-digit declines in Rold Gold and Quaker Toastables.
Operating profit grew 7% primarily reflecting the pricing actions. Cost leverage generated from ongoing productivity initiatives was largely offset by higher commodity costs, driven by corn oil.
On September 1, 2004, we introduced our new “Smart Spot” program which helps consumers identify products in our portfolio that contribute to a healthier lifestyle. Approximately 10% of net revenue meets the new Smart Spot criteria. These products experienced high single-digit revenue growth in the third quarter and the balance of the portfolio had mid single-digit revenue growth. See our website at www.smartspot.com for additional information on our new Smart Spot program.
36 Weeks
Net revenue grew 5% reflecting volume growth of 2% and positive effective net pricing due to salty snack pricing actions and favorable mix. Declines in Quaker snacks reduced volume by approximately 1 percentage point and net revenue growth by about 0.5 percentage point. Pound volume grew primarily due to new products, single-digit growth in Lay’s Classic potato chips and Tostitos, and strong double-digit growth in Variety Pack and Munchies snack mix. Lay’s Stax and Doritos Rollitos led the new product growth. These gains were partially offset by single-digit declines in Doritos and Fritos and double-digit declines in Rold Gold and Quaker Toastables.
Operating profit grew 7% reflecting the pricing actions. Cost leverage generated from ongoing productivity initiatives was largely offset by higher commodity costs, driven by corn oil.
Products qualifying for our new Smart Spot program represented approximately 10% of net revenue. These products experienced low double-digit revenue growth and the balance of the portfolio had mid single-digit revenue growth.
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PepsiCo Beverages North America
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||
| 9/4/04 | 9/6/03 | Change | 9/4/04 | 9/6/03 | Change | |||||||||
| Net revenue |
$2,147 | $2,078 | 3 | % | $5,999 | $5,585 | 7 | % | ||||||
| Operating profit |
$ 542 | $ 503 | 8 | % | $1,460 | $1,299 | 12 | % | ||||||
12 Weeks
Volume decreased 1% reflecting a 4% decline in our bottlers’ sales of carbonated soft drinks, partially offset by non-carbonated beverage growth of 5%. The key factors contributing to the decline in our carbonated soft drinks are the timing of the Labor Day and Memorial Day holidays, an unfavorable comparison due to new product introductions in the prior year, and a significant increase in retail pricing. Our bottlers’ sales of our carbonated soft drinks are reported on a monthly basis, with the third quarter comprising June, July and August. As a result of this timing, the sales week leading up to Labor Day occurred in the fourth quarter this year versus the third quarter last year. Also, the post Memorial Day week, when volumes tend to be lower, occurred in the third quarter this year versus the second quarter last year. These holiday timing differences shifted approximately one percentage point of volume out of the third quarter.
The carbonated soft drink performance reflects declines in both Trademark Pepsi and Trademark Mountain Dew, partially offset by growth in Trademark Sierra Mist. Trademark Pepsi declined in the mid single-digits primarily due to a decline in regular Pepsi and an unfavorable comparison due to the third quarter 2003 national launch of Pepsi Vanilla, partially offset by growth in Diet Pepsi and the introduction of Pepsi Edge in the third quarter. Trademark Mountain Dew declined in the mid single-digits reflecting declines in both Mountain Dew Code Red and LiveWire, partially offset by growth in Diet Mountain Dew and the third quarter introduction of Mountain Dew Pitch Black. Sierra Mist grew in the low single-digits for the quarter. The non-carbonated beverage growth was fueled by bottler-distributed Tropicana juice drinks which were introduced in the first quarter, high single-digit growth in Gatorade, and double-digit growth in Propel. Tropicana Pure Premium and Aquafina also contributed to growth. Aquafina’s low single-digit growth reflected a competitive pricing environment.
Net revenue increased 3%. Favorable product mix shift contributed 2 percentage points of growth, and our total shipments, which were not impacted by the holiday timing issue discussed above, contributed one percentage point. The mix benefit primarily reflects the migration to non-carbonated beverages. The benefit from concentrate and fountain price increases taken in the first quarter was largely offset by increased promotional spending. Operating profit increased 8% primarily reflecting the net revenue growth.
Products qualifying for our new Smart Spot program represented nearly two thirds of net revenue. These products, as well as the balance of the portfolio, grew in line with overall division revenue growth.
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36 Weeks
Net revenue increased 7% and volume increased 3%. The volume increase reflects non-carbonated beverage growth of 10%, partially offset by a marginal decline in carbonated soft drinks. The non-carbonated beverage growth was fueled by the bottler-distributed Tropicana juice drinks, as well as double-digit growth in Gatorade, Aquafina and Propel. Tropicana Pure Premium increased slightly for the period. The carbonated soft drink performance reflects low single-digit declines in both Trademark Mountain Dew and Trademark Sierra Mist, partially offset by a marginal increase in Trademark Pepsi. The decline in Trademark Mountain Dew reflects declines in both Mountain Dew Code Red and LiveWire, mostly offset by growth in Diet Mountain Dew, the introduction of Mountain Dew Pitch Black, and growth in regular Mountain Dew. The performance of Trademark Pepsi reflects growth in Diet Pepsi and the benefit from the third quarter 2003 introduction of Pepsi Vanilla, mostly offset by declines in both regular Pepsi and Pepsi Twist. Favorable product mix shift contributed 3 percentage points to net revenue growth. This mix benefit primarily reflects a migration to non-carbonated beverages. The benefit from concentrate and fountain price increases taken in the first quarter was partially offset by increased promotional spending.
Operating profit increased 12% reflecting the net revenue growth, partially offset by additional costs related to our restructuring actions initiated in the fourth quarter of 2003 and higher advertising and marketing costs.
Products qualifying for our new Smart Spot program represented nearly two thirds of net revenue. These products, as well as the balance of the portfolio, grew in line with overall division growth.
PepsiCo International
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||||||
| 9/4/04 |
9/6/03 |
Change |
9/4/04 |
9/6/03 |
Change |
|||||||||||||
| Net revenue |
$ | 2,430 | $ | 2,196 | 11 | % | $ | 6,719 | $ | 5,898 | 14 | % | ||||||
| Operating profit |
$ | 370 | $ | 287 | 29 | % | $ | 995 | $ | 778 | 28 | % | ||||||
12 Weeks
International snacks volume grew almost 7%, comprised of 6% in our Latin America region, 6% in our Europe, Middle East and Africa region and 14% in our Asia Pacific region. These gains were driven by successful local innovation and promotional initiatives resulting in high single-digit growth at Sabritas in Mexico, double-digit growth in India, Venezuela, Turkey and Egypt, and continued growth at Gamesa in Mexico. This growth was partially offset by a slight decline in Walkers in the U.K. as a result of weak performance in wholesale and convenience channels.
Beverage volume grew 11%, comprised of 10% in our Europe, Middle East and Africa region, 16% in our Asia Pacific region and 9% in our Latin America region. Broad-based increases were led by double-digit growth in the Middle East, China, Mexico, Russia, Japan and India. Both carbonated soft drink and non-carbonated beverages grew at double-digit rates.
21
Net revenue grew 11% driven by the broad-based volume increases and favorable mix. Foreign currency contributed 2 percentage points of growth driven by the favorable British pound and euro, partially offset by the unfavorable Mexican peso.
Operating profit grew 29% driven largely by the volume and favorable mix. The favorable comparison of reserve actions taken in 2003 on potentially unrecoverable beverage assets contributed 10 percentage points of growth. Unfavorable foreign currency reduced operating profit growth by less than 1 percentage point driven by the unfavorable Mexican peso partially offset by the favorable British pound and Euro.
36 Weeks
International snacks volume grew 9%, comprised of 8% in our Latin America region, 7% in our Europe, Middle East and Africa region and 20% in our Asia Pacific region. These gains were driven by double-digit snack growth at Sabritas in Mexico and in Brazil in large part driven by successful Yu-Gi-Oh promotions and innovation initiatives. Other contributors to snack growth were strong double-digit advances in India and Egypt, low single-digit growth at Gamesa in Mexico, double-digit growth in Turkey and Venezuela, along with low single-digit growth at Walkers in the U.K.
Beverage volume grew 12%, comprised of 13% in our Europe, Middle East and Africa region, 15% in our Asia Pacific region and 9% in our Latin America region. Broad-based increases were led by double-digit growth in the Middle East and China, high single-digit growth in Mexico and double-digit growth in India, Russia, Venezuela and Germany. Favorable comparisons to the 2003 national strike in Venezuela and German deposit law impact contributed to the growth in Venezuela and Germany. Both carbonated soft drink and non-carbonated beverages grew at double-digit rates.
Net revenue grew 14% driven by the broad-based volume growth. Foreign currency contributed almost 4 percentage points of growth primarily driven by the favorable British pound and euro, partially offset by the unfavorable Mexican peso.
Operating profit grew 28% driven largely by the volume. The favorable comparison of certain reserve actions taken in 2003 on potentially unrecoverable beverage assets contributed 4 percentage points of growth. Foreign currency contributed nearly 2 percentage points of growth primarily driven by the favorable British pound and euro, partially offset by the unfavorable Mexican peso.
22
Quaker Foods North America
| 12 Weeks Ended |
36 Weeks Ended |
|||||||||||||
| 9/4/04 |
9/6/03 |
Change |
9/4/04 |
9/6/03 |
Change |
|||||||||
| Net revenue |
$355 | $338 | 5 | % | $1,036 | $1,018 | 2 | % | ||||||
| Operating profit |
$111 | $106 | 4 | % | $ 325 | $ 318 | 2 | % | ||||||
12 Weeks
Net revenue increased 5% and volume increased 3%. The volume increase was driven by high single-digit growth in both Oatmeal and Life cereal and double-digit growth in Rice-A-Roni, partially offset by a mid single-digit decline in Cap’n Crunch. The strong performances in Oatmeal and Rice-A-Roni were largely due to new product introductions.
Operating profit increased 4% reflecting the net revenue growth, partially offset by higher advertising and marketing costs.
Products qualifying for our new Smart Spot program represented approximately 40% of net revenue and had double-digit revenue growth. The balance of the portfolio experienced low single-digit revenue growth.
36 Weeks
Net revenue increased 2% and volume increased 1%. The volume increase reflects mid single-digit growth in Oatmeal and double-digit growth in Life cereal, partially offset by a high single-digit decline in Cap’n Crunch. Favorable Canadian exchange rates also contributed 1% to revenue growth.
Operating profit grew 2% reflecting the increased volume and a favorable shift to higher margin products, partially offset by an unfavorable cost of sales comparison.
Products qualifying for our new Smart Spot program represented approximately 40% of net revenue and had high single-digit revenue growth. The balance of the portfolio experienced a low single-digit revenue decline.
OUR LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During the 36 weeks, our operations provided $3.7 billion of cash reflecting our solid business results and working capital management, partially offset by a significant tax payment. As a result of our 2003 settlement with the IRS, we paid taxes of approximately $760 million in the second quarter of 2004. A portion of this payment represented deductible interest, which will lower our estimated tax payments during 2004 by approximately $150 million.
23
Investing Activities
During the 36 weeks, we used $799 million, primarily reflecting capital spending of $700 million. Capital spending was lower than in the prior year due to 2003 spending for Lay’s Stax production capacity and our new concentrate plant. We expect full year capital spending to be less than $1.5 billion.
Financing Activities
During the 36 weeks, we used $2.2 billion, primarily reflecting common share repurchases of $2.5 billion and dividend payments of $940 million, partially offset by proceeds from the exercise of stock options of $846 million and proceeds from the issuance of long-term debt of $504 million. For the full year, we expect to spend approximately $3.0 billion on share repurchases.
Management Operating Cash Flow
Management operating cash flow is the primary measure management uses to monitor cash flow performance. It is not a measure calculated under generally accepted accounting principles in the United States. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. The table below reconciles net cash provided by operating activities as reflected in our Condensed Consolidated Statement of Cash Flows to our management operating cash flow.
| 36 Weeks Ended |
||||||
| 9/4/04 |
9/6/03 |
|||||
| Net cash provided by operating activities |
$3,717 | $3,527 | ||||
| Capital spending |
(700 | ) | (844 | ) | ||
| Sales of property, plant and equipment |
15 | 13 | ||||
| Management operating cash flow |
$3,032 | $2,696 | ||||
Management operating cash flow, inclusive of the second quarter tax payment, increased 12% from the prior year and was driven by our solid results, working capital management, and lower capital spending, and was used primarily to repurchase shares and pay dividends. For the full year, we expect management operating cash flow to grow driven by the strength of our underlying business performance. As expected, in mid-September, we made a $400 million discretionary contribution to our U.S. pension plans. We currently expect to continue to return approximately all of our management operating cash flows to our shareholders through share repurchases and dividends. See Our Business Risks for certain factors that may impact our operating cash flows.
24
Report of Independent Registered Public Accounting Firm
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying Condensed Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of September 4, 2004 and the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and thirty-six weeks ended September 4, 2004 and September 6, 2003 and the Condensed Consolidated Statement of Cash Flows for the thirty-six weeks ended September 4, 2004 and September 6, 2003. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 27, 2003, and the related Consolidated Statements of Income, Common Shareholders’ Equity and Cash Flows for the year then ended not presented herein; and in our report dated February 9, 2004, 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, 2003, 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
September 30, 2004
25
| ITEM 4. | Controls and Procedures |
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in our periodic filings with the SEC.
In addition, there were no significant changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting during the period covered by this report.
26
PART II OTHER INFORMATION AND SIGNATURES
| ITEM 1. | Legal Proceedings |
We are party to a variety of legal proceedings arising in the normal course of business, including the matters discussed below. While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, results of operations or cash flows.
On November 5, 2003, we announced that Frito-Lay, Inc. received notification from the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicating that the Staff was considering recommending that the SEC bring a civil injunctive action against Frito-Lay and one of its non-executive sales employees who signed documents requested by The Fleming Companies in 2001-2002 involving payments of $400,000, which Fleming allegedly used to accelerate its revenue recognition.
On April 30, 2004, we announced that Frito-Lay and Pepsi-Cola Company received notification from the SEC indicating that the Staff was proposing to recommend that the SEC bring a civil action alleging that a non-executive employee at Pepsi-Cola and another at Frito-Lay signed documents in early 2001 prepared by Kmart acknowledging payments in the amount of $3 million from Pepsi-Cola and $2.8 million from Frito-Lay. Kmart allegedly used these documents to prematurely recognize the $3 million and $2.8 million in revenue.
Frito-Lay and Pepsi-Cola are cooperating fully with the investigations and have provided written responses to the SEC Staff notices setting forth the factual and legal bases for their belief that no enforcement actions should be brought against them. Based on an internal review of these matters, no officers of PepsiCo, Pepsi-Cola or Frito-Lay are involved. None of these matters involve any allegations regarding PepsiCo’s accounting for its transactions with The Fleming Companies or Kmart or PepsiCo’s financial statements.
27
| ITEM 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
A summary of our repurchases (in millions, except average price per share) during the quarter under the $7 billion repurchase program authorized by our Board of Directors and publicly announced on March 29, 2004, and expiring on March 31, 2007, is as follows:
| Shares Repurchased |
Average Price Per Share |
Authorization Remaining |
|||||
| 6/12/04 |
$6,148 | ||||||
| 6/13/04—7/10/04 |
5.7 | 54.27 | (309 | ) | |||
| 5,839 | |||||||
| 7/11/04—8/7/04 |
4.7 | 51.47 | (242 | ) | |||
| 5,597 | |||||||
| 8/8/04—9/4/04 |
3.6 | 50.17 | (182 | ) | |||
| 14.0 | 52.27 | $5,415 | |||||
| ITEM 6. | Exhibits and Reports on Form 8-K |
| (a) | Exhibits – See Index to Exhibits on page 30. |
| (b) | Reports on Form 8-K |
| 1. | On July 15, 2004, we furnished a Current Report on Form 8-K pursuant to Item 12. Results of Operations and Financial Condition attaching our press release dated July 15, 2004 announcing our financial results for the second quarter of 2004. |
| 2. | On September 2, 2004, we furnished a Current Report on Form 8-K pursuant to Item 7.01. Regulation FD Disclosure attaching our press release dated September 1, 2004 announcing our expected results for the third quarter of 2004. |
| 3. | On September 3, 2004, we filed a Current Report on Form 8-K pursuant to Item 1.01. Entry into a Material Definitive Agreement announcing PepsiCo’s agreement with Al E. Bru and Item 5.02. Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers attaching our press release dated September 1, 2004 announcing the retirement of Al E. Bru as Chairman and Chief Executive Officer of Frito-Lay and the appointment of Irene B. Rosenfeld as Chairman and Chief Executive Officer of Frito-Lay. |
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Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.
| PepsiCo, Inc. | ||
| (Registrant) | ||
| Date: October 1, 2004 |
/S/ PETER A. BRIDGMAN | |
| Peter A. Bridgman | ||
| Senior Vice President and | ||
| Controller | ||
| Date: October 1, 2004 |
/S/ ROBERT E. COX | |
| Robert E. Cox | ||
| Vice President, Deputy General | ||
| Counsel and Assistant Secretary | ||
29
ITEM 6 (a)
30