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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 March 19, 2005 (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

 


 

LOGO

 

PEPSICO, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina   13-1584302

(State or Other Jurisdiction

of Incorporation 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 April 8, 2005: 1,674,557,428

 


 

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Table of Contents

PEPSICO, INC. AND SUBSIDIARIES

 

INDEX

 

     Page No.

Part I Financial Information

    

Item 1. Condensed Consolidated Financial Statements

    

Condensed Consolidated Statement of Income –
  12 Weeks Ended March 19, 2005 and March 20, 2004

   3

Condensed Consolidated Statement of Cash Flows –
  12 Weeks Ended March 19, 2005 and March 20, 2004

   4

Condensed Consolidated Balance Sheet –
  March 19, 2005 and December 25, 2004

   5-6

Condensed Consolidated Statement of Comprehensive Income –
  12 Weeks Ended March 19, 2005 and March 20, 2004

   7

Notes to Condensed Consolidated Financial Statements

   8-13

Item 2. Management’s Discussion and Analysis – Financial Review

   14-23

Report of Independent Registered Public Accounting Firm

   24

Item 4. Controls and Procedures

   25

Part II Other Information

    

Item 1. Legal Proceedings

   26

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

   27

Item 6. Exhibits

   27

 

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PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

PEPSICO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in millions except per share amounts, unaudited)

 

     12 Weeks Ended

 
     3/19/05

    3/20/04

 

Net Revenue

   $6,585     $6,131  

Cost of sales

   3,018     2,811  

Selling, general and administrative expenses

   2,291     2,161  

Amortization of intangible assets

   29     32  
    

 

Operating Profit

   1,247     1,127  

Bottling equity income

   65     39  

Interest expense

   (50 )   (35 )

Interest income

   23     10  
    

 

Income before income taxes

   1,285     1,141  

Provision for income taxes

   373     337  
    

 

Net Income

   $912     $804  
    

 

Net Income Per Common Share

            

Basic

   $  0.54     $  0.47  

Diluted

   $  0.53     $  0.46  

Cash Dividends Declared Per Common Share

   $  0.23     $  0.16  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, unaudited)

 

     12 Weeks Ended

 
     3/19/05

    3/20/04

 

Operating Activities

            

Net income

   $   912     $804  

Adjustments

            

Depreciation and amortization

   282     275  

Stock-based compensation expense

   77     91  

Cash payments for merger-related and other restructuring charges

   (14 )   (26 )

Bottling equity income, net of dividends

   (51 )   (36 )

Deferred income taxes

   (7 )   (34 )

Other, net

   185     164  

Net change in operating working capital

   (635 )   (526 )
    

 

Net Cash Provided by Operating Activities

   749     712  
    

 

Investing Activities

            

Snack Ventures Europe (SVE) minority interest acquisition

   (750 )   —    

Capital spending

   (181 )   (182 )

Sales of property, plant and equipment

   25     7  

Other acquisitions and investments in noncontrolled affiliates

   (41 )   (11 )

Cash proceeds from sale of The Pepsi Bottling Group (PBG) stock

   47     —    

Short-term investments, by original maturity

More than three months—purchases

   (17 )   (7 )

More than three months— maturities

   17     12  

Three months or less, net

   (528 )   47  
    

 

Net Cash Used for Investing Activities

   (1,428 )   (134 )
    

 

Financing Activities

            

Proceeds from issuances of long-term debt

   13     —    

Payments of long-term debt

   (3 )   (80 )

Short-term borrowings, by original maturity

More than three months—proceeds

   37     20  

More than three months—payments

   (2 )   (13 )

Three months or less, net

   698     (123 )

Cash dividends paid

   (387 )   (274 )

Share repurchases—common

   (494 )   (574 )

Share repurchases—preferred

   (6 )   (10 )

Proceeds from exercises of stock options

   233     431  
    

 

Net Cash Provided by (Used for) Financing Activities

   89     (623 )

Effect of Exchange Rate Changes on Cash and Cash Equivalents

   (9 )   (2 )
    

 

Net Decrease in Cash and Cash Equivalents

   (599 )   (47 )

Cash and Cash Equivalents—Beginning of year

   1,280     820  
    

 

Cash and Cash Equivalents—End of period

   $   681     $773  
    

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

 

     (Unaudited)        
     3/19/05

    12/25/04

 

Assets

            

Current Assets

            

Cash and cash equivalents

   $     681     $  1,280  

Short-term investments

   2,692     2,165  
    

 

     3,373     3,445  

Accounts and notes receivable, less allowance: 3/05—$72, 12/04—$97

   3,217     2,999  

Inventories

            

Raw materials

   660     665  

Work-in-process

   159     156  

Finished goods

   819     720  
    

 

     1,638     1,541  

Prepaid expenses and other current assets

   648     654  
    

 

Total Current Assets

   8,876     8,639  

Property, Plant and Equipment

   16,044     15,930  

Accumulated Depreciation

   (7,951 )   (7,781 )
    

 

     8,093     8,149  

Amortizable Intangible Assets, net

   600     598  

Goodwill

   3,924     3,909  

Other Nonamortizable Intangible Assets

   931     933  
    

 

     4,855     4,842  

Investments in Noncontrolled Affiliates

   3,294     3,284  

Other Assets

   2,953     2,475  
    

 

Total Assets

   $28,671     $27,987  
    

 

 

Continued on next page.

 

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PEPSICO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEET (continued)

(in millions except per share amounts)

 

     (Unaudited)        
     3/19/05

    12/25/04

 

Liabilities and Shareholders’ Equity

            

Current Liabilities

            

Short-term borrowings obligations

   $  1,804     $  1,054  

Accounts payable and other current liabilities

   5,093     5,599  

Income taxes payable

   297     99  
    

 

Total Current Liabilities

   7,194     6,752  

Long-term Debt Obligations

   2,390     2,397  

Other Liabilities

   3,962     4,099  

Deferred Income Taxes

   1,212     1,216  
    

 

Total Liabilities

   14,758     14,464  

Preferred stock, no par value

   41     41  

Repurchased Preferred Stock

   (96 )   (90 )

Common Shareholders’ Equity

            

Common stock, par value 1 2/3 cents per share:

  Authorized 3,600 shares, issued 3/05 and 12/04—1,782 shares

   30     30  

Capital in excess of par value

   627     618  

Retained earnings

   19,255     18,730  

Accumulated other comprehensive loss

   (853 )   (886 )
    

 

     19,059     18,492  

Less: Repurchased shares, at cost:

  3/05—105 shares, 12/04—103 shares

   (5,091 )   (4,920 )
    

 

Total Common Shareholders’ Equity

   13,968     13,572  
    

 

Total Liabilities and Shareholders’ Equity

   $28,671     $27,987  
    

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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PEPSICO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(in millions, unaudited)

 

     12 Weeks Ended

     3/19/05

    3/20/04

Net Income

   $912     $804

Other Comprehensive Income

          

Currency translation adjustment

   14     56

Cash flow hedges, net of related taxes:

          

Net derivative gains

   12     —  

Reclassification of losses to net income

   8     3

Other

   (1 )   2
    

 
     33     61
    

 

Comprehensive Income

   $945     $865
    

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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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 March 19, 2005 and the Condensed Consolidated Statements of Income, Cash Flows and Comprehensive Income for the 12 weeks ended March 19, 2005 and March 20, 2004 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 25, 2004. In the first quarter of 2005, we conformed our methodology for calculating our bad debt reserves across our divisions and modified our policy for recognizing revenue for products shipped to customers by third-party carriers, which reduced our net revenue by $30 million and our operating profit by $2 million. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 weeks are not necessarily indicative of the results expected for the year.

 

Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives, and certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

 

Bottling equity income includes our share of the net income or loss of our noncontrolled bottling affiliates and any changes in our ownership interests of these affiliates. In the first quarter of 2005, bottling equity income includes a $28 million pre-tax gain on our sale of PBG stock.

 

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. Certain reclassifications were made to prior year amounts to conform to the 2005 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 25, 2004.

 

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Our Divisions

 

 

LOGO

 

 

    

Net Revenue

12 Weeks Ended


  

Operating Profit

12 Weeks Ended


 
     3/19/05

   3/20/04

   3/19/05

    3/20/04

 

FLNA

   $2,263    $2,144    $   539     $   510  

PBNA

   1,784    1,718    415     384  

PI

   2,121    1,891    307     257  

QFNA

   417    378    145     123  
    
  
  

 

Total division

   6,585    6,131    1,406     1,274  

Corporate

   —      —      (159 )   (147 )
    
  
  

 

     $6,585    $6,131    $1,247     $1,127  
    
  
  

 

               Total Assets

 
               3/19/05

    12/25/04

 

FLNA

             $  5,484     $  5,476  

PBNA

             6,307     6,048  

PI

             9,519     8,921  

QFNA

             921     978  
              

 

Total division

             22,231     21,423  

Corporate

             3,451     3,569  

Investments in bottling affiliates

             2,989     2,995  
              

 

               $28,671     $27,987  
              

 

 

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Intangible Assets


 

     3/19/05

    12/25/04

 

Amortizable intangible assets, net

            

Brands

   $1,033     $1,008  

Other identifiable intangibles

   235     225  
    

 

     1,268     1,233  

Accumulated amortization

   (668 )   (635 )
    

 

     $   600     $   598  
    

 

 

The change in the book value of nonamortizable intangible assets is as follows:

 

     Balance
12/25/04


   Acquisitions

  

Translation

and Other


   

Balance

3/19/05


Frito-Lay North America

                    

Goodwill

   $   138    $—      $2     $   140
    
  
  

 

PepsiCo Beverages North America

                    

Goodwill

   2,161    —      1     2,162

Brands

   59    —      —       59
    
  
  

 
     2,220    —      1     2,221
    
  
  

 

PepsiCo International

                    

Goodwill

   1,435    10    2     1,447

Brands

   869    —      (2 )   867
    
  
  

 
     2,304    10    —       2,314
    
  
  

 

Quaker Foods North America

                    

Goodwill

   175    —      —       175
    
  
  

 

Corporate

                    

Pension intangible

   5    —      —       5
    
  
  

 

Total goodwill

   3,909    10    5     3,924

Total brands

   928    —      (2 )   926

Total pension intangible

   5    —      —       5
    
  
  

 
     $4,842    $  10    $3     $4,855
    
  
  

 

 

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Stock-Based Compensation


 

We account for employee stock options under the fair value method of accounting using a Black-Scholes valuation model. For the 12 weeks, we recognized stock-based compensation expense of $77 million in 2005 and $91 million in 2004. These amounts are reflected in selling, general and administrative expenses. We are currently evaluating the impact of Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment. We will adopt this Standard no later than in the first quarter of 2006. In addition, two of our anchor bottlers, PBG and PepsiAmericas, Inc., will adopt SFAS 123R no later than in the first quarter of 2006 which will impact our bottling equity income.

 

Our weighted average Black-Scholes fair value assumptions are as follows:

 

     3/19/05

    3/20/04

 

Expected life

   6 yrs.     6 yrs.  

Risk free interest rate

   3.8 %   3.3 %

Expected volatility

   24 %   26 %

Expected dividend yield

   1.8 %   1.8 %

 

Pension and Retiree Medical Benefits


 

The components of net periodic benefit cost for pension and retiree medical plans are as follows:

 

     3/19/05

    3/20/04

    3/19/05

    3/20/04

 
     Pension

    Retiree Medical

 

Service cost

   $57     $50     $  9     $  9  

Interest cost

   82     73     18     16  

Expected return on plan assets

   (97 )   (89 )   —       —    

Amortization of prior service cost/(benefit)

   1     1     (2 )   (2 )

Amortization of experience loss

   28     21     6     5  
    

 

 

 

Total expense

   $71     $56     $31     $28  
    

 

 

 

 

 

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Net Income Per Common Share


 

The computations of basic and diluted net income per common share are as follows:

 

     12 Weeks Ended

     3/19/05

   3/20/04

     Income

    Shares(a)

   Income

    Shares(a)

Net income

   $ 912          $ 804      

Preferred shares:

                     

Dividends

   (1 )        (1 )    

Redemption premium

   (4 )        (8 )    
    

      

   

Net income available for common shareholders

   $ 907     1,678    $ 795     1,707
    

      

   

Basic net income per common share

   $0.54          $0.47      
    

      

   

Net income available for common shareholders

   $ 907     1,678    $ 795     1,707

Dilutive securities:

                     

Stock options and restricted stock units (b)

   —       33    —       26

ESOP convertible preferred stock

   5     2    9     3
    

 
  

 

Diluted

   $ 912     1,713    $ 804     1,736
    

 
  

 

Diluted net income per common share

   $0.53          $0.46      
    

      

   

 

(a) Weighted average common shares outstanding.
(b) Options to purchase 12 million shares in 2005 and 28 million shares in 2004 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options had average exercise prices of $53.77 in 2005 and $50.02 in 2004.

 

Impairment and Restructuring Charges


 

In the fourth quarter of 2004, we incurred a charge of $150 million ($96 million after-tax or $0.06 per share) in conjunction with the consolidation of FLNA’s manufacturing network as part of its ongoing productivity program. As of March 19, 2005, $9 million of these costs remain payable and are included in other current liabilities.

 

 

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Supplemental Cash Flow Information


 

     12 Weeks Ended

 
     3/19/05

    3/20/04

 

Interest paid

   $  44     $  44  

Income taxes paid, net of refunds

   $  86     $171  

Acquisitions(a):

            

Fair value of assets acquired

   $602     $  29  

Less: Cash paid and debt assumed

   (791 )   (11 )

Add: Minority interest eliminated

   221     —    
    

 

Liabilities assumed

   $  32     $  18  
    

 

 

(a) In 2005, these amounts include the impact of our first quarter acquisition of General Mills, Inc.’s 40.5% ownership interest in SVE for $750 million. The excess of our purchase price over the preliminary estimate of the fair value of net assets acquired is $529 million. This amount is reflected in Other Assets in our Condensed Consolidated Balance Sheet as of March 19, 2005, pending finalization of our purchase accounting later this year.

 

 

Income Taxes


 

As noted in our 2004 Form 10-K, the American Jobs Creation Act of 2004 (AJCA) was signed by the President on October 22, 2004. The AJCA creates a temporary incentive for U.S. corporations to repatriate undistributed international earnings by providing an 85% dividends received deduction. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret certain provisions in the AJCA. Therefore, we have not decided on whether, or to what extent, we might repatriate undistributed foreign earnings to the U.S. Until further guidance is available from the Treasury Department, or possibly from Congress, it is difficult to fully quantify the impact of the AJCA if we were to take advantage of that legislation. Based on our analysis to date, however, the maximum amount that we can repatriate under the AJCA is $7.5 billion, which would result in a tax liability of approximately $475 million based on our expectation of how the AJCA will be interpreted. We expect to finalize our assessment of the opportunity presented by the AJCA as soon as further guidance is available, which could be in the second quarter of 2005.

 

 

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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 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 25, 2004, the following should be considered. In addition, in the first quarter of 2005, we conformed our methodology for calculating our bad debt reserves across our divisions and modified our policy for recognizing revenue for products shipped to customers by third-party carriers, which reduced our net revenue by $30 million and our operating profit by $2 million.

 

 

Sales Incentives and Advertising and Marketing Costs

 

We offer sales incentives through various programs to our customers and to consumers. These incentives are recorded as a reduction of the sales price of our products. Certain sales incentives are recognized at the time of 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 and require management judgment with respect to estimating customer participation and performance levels. In addition, certain advertising and 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.

 

Also see Income Taxes in the Notes to the Condensed Consolidated Financial Statements for a discussion regarding the potential impact of the AJCA on our 2005 financial statements.

 

 

Stock-Based Compensation

 

We account for stock options under the fair value method of accounting using a Black-Scholes valuation model. For the 12 weeks, we recognized stock-based compensation of $77 million in 2005 and $91 million in 2004. These amounts are reflected in selling, general and administrative expenses.

 

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For our 2005 Black-Scholes assumptions, see Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements. We are currently evaluating the potential impact that SFAS 123R could have on our financial statements. We will adopt this Standard no later than in the first quarter of 2006. In addition, two of our anchor bottlers, PBG and PepsiAmericas, Inc., will adopt SFAS 123R no later than in the first quarter of 2006. Their adoption will impact our bottling equity income.

 

Our Business Risks


 

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

 

Our operations outside of the United States generate over a third of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the quarter, net favorable foreign currency, primarily increases in the Canadian dollar, euro, British pound and Brazilian real, partially offset by declines in the Mexican peso, contributed 1 percentage point to net revenue growth. Declines in these currencies which are not offsetting could adversely impact our future results.

 

While there is continued pricing pressure on energy costs and certain raw materials, we expect to be able to mitigate this risk in the near term for the majority of these costs through a combination of hedging programs, purchasing commitments and productivity initiatives.

 

Cautionary statements regarding our trends and future results were included in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 25, 2004.

 

 

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.

 

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Volume

 

Since our divisions each use different measures of physical unit volume, a common servings metric is necessary to reflect our consolidated physical unit volume. Total servings increased 4% for the 12 weeks, with worldwide beverages and worldwide snacks growing 4% and 3%, respectively.

 

We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8 ounce case metric. A portion of our volume is sold by our bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our shipments to customers. BCS is reported to us by our bottlers on a monthly basis. Our first quarter beverage volume includes PBNA bottler sales for January, February and March and PI bottler sales for January and February.

 

 

Consolidated Results

 

Total Net Revenue and Operating Profit

 

     12 Weeks Ended

       
     3/19/05

    3/20/04

    Change

 

Total net revenue

   $6,585     $6,131     7 %

Division operating profit

   $1,406     $1,274     10 %

Corporate unallocated

   (159 )   (147 )   8 %
    

 

     

Total operating profit

   $1,247     $1,127     11 %
    

 

     

Division operating profit margin

   21.4 %   20.8 %   0.6  

Total operating profit margin

   18.9 %   18.4 %   0.6  

 

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Net revenue increased 7% primarily due to effective net pricing across all divisions, increased volume, and net favorable foreign currency movements. The effective net pricing and volume gains each contributed 3 percentage points, and the net favorable foreign currency movements contributed one percentage point to the net revenue growth.

 

Total operating profit increased 11% and total margin increased 0.6 percentage points. Division operating profit increased 10% and division margin increased 0.6 percentage points. These gains reflect leverage from the revenue growth, partially offset by increased selling and delivery (S&D) expenses and cost of sales, largely due to higher energy costs and higher S&D labor costs.

 

Corporate unallocated expenses increased 8%. This increase primarily reflects higher costs associated with our Business Process Transformation initiative and the timing of Corporate departmental expenses, partially offset by favorable comparisons due to higher stock-based compensation in the prior year.

 

Other Consolidated Results

 

     12 Weeks Ended

       
     3/19/05

    3/20/04

    Change

 

Bottling equity income

   $   65     $   39     67 %

Interest expense, net

   $  (27 )   $  (25 )   8 %

Tax rate

   29.0 %   29.5 %      

Net income

   $ 912     $ 804     13 %

Net income per common share—diluted

   $0.53     $0.46     15 %

 

Bottling equity income increased 67% primarily reflecting a $28 million pre-tax gain on our sale of PBG stock, partially offset by slightly weaker bottler results.

 

Net interest expense increased 8% primarily due to a loss in 2005 in the market value of investments used to economically hedge a portion of our deferred compensation liability compared to a gain in 2004. The related deferred compensation costs are reported in corporate unallocated expenses within selling, general and administrative expenses. The impact of higher debt balances was fully offset by the impact of lower debt rates and higher investment balances and rates.

 

The tax rate decreased 0.5 percentage points compared to prior year primarily reflecting increased international profit which is taxed at a lower rate.

 

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Net income increased 13% and the related net income per share increased 15%. These increases primarily reflect our solid operating profit growth, as well as the gain on our sale of PBG stock, and for net income per share, the impact of our share repurchases.

 

 

Results of Operations—Division Review

 

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. For additional information on our divisions, see Our Divisions in the Notes to the Condensed Consolidated Financial Statements.

 

 

Division Net Revenue

 

     FLNA

    PBNA

    PI

    QFNA

    Total

 

Q1, 2005

   $2,263     $1,784     $2,121     $417     $6,585  

Q1, 2004

   $2,144     $1,718     $1,891     $378     $6,131  

% Impact of:

                              

Volume

   3 %   (1 )%   5 %   6 %   3 %

Effective net pricing

   3     4     4     3     3  

Foreign exchange

   —       —       2     1     1  

Acquisitions/divestitures

   —       —       1     —       —    

% Change

   6 %   4 %   12 %   10 %   7 %

 

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Frito-Lay North America

 

     12 Weeks Ended

  

Change


 
     3/19/05

   3/20/04

  

Net revenue

   $2,263    $2,144    6 %

Operating profit

   $   539    $   510    6 %

 

Net revenue grew 6% reflecting volume growth of 3% and positive effective net pricing due to salty snack pricing actions and favorable mix. Pound volume grew primarily due to mid single-digit growth in Lay’s Classic potato chips, high single-digit growth in Tostitos, double-digit growth in Dips and Santitas, and high single-digit growth in Fritos. These gains were partially offset by double-digit declines in Toastables, which has been discontinued, Chewy Granola and Doritos Rollitos.

 

Operating profit grew 6% reflecting the revenue growth, offset by higher cost of sales, driven by energy and freight, and higher S&D costs reflecting higher fuel costs and increased labor and benefit charges.

 

Products qualifying for our new Smart Spot program represented approximately 12% of net revenue. These products experienced 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

  

Change


 
     3/19/05

   3/20/04

  

Net revenue

   $1,784    $1,718    4 %

Operating profit

   $   415    $   384    8 %

 

BCS volume increased 1.5% while our concentrate shipments and equivalents (CSE) volume, on which our revenue is based, declined 1%. The decline in CSE was primarily driven by timing of shipments, due in part to prior year product introductions. BCS volume benefited from the timing of Easter which contributed approximately 0.5 percentage points to BCS volume growth.

 

The BCS volume increase reflects non-carbonated beverage growth of 8%, partially offset by a decline in carbonated soft drinks of 1%. The non-carbonated beverage growth was fueled by double-digit growth in Gatorade, Trademark Aquafina and Propel. The Aquafina growth benefited from the introduction of Aquafina FlavorSplash and Sparkling in the quarter. Tropicana Pure Premium experienced a mid single-digit decline as a result of price increases. The carbonated soft drink performance reflects a low single-digit decline in Trademark Pepsi, partially offset by a low single-digit increase in Trademark Sierra Mist. Trademark Mountain Dew volume was flat. Across the trademarks, a low single-digit decline in regular CSDs was partially offset by mid single-digit diet CSD growth.

 

Net revenue increased 4%, primarily reflecting favorable product mix which contributed over 2 percentage points to net revenue growth, and price increases taken in the first quarter which contributed another 2 percentage points. The improved product mix primarily reflects the continued migration to non-carbonated beverages.

 

Operating profit increased 8% reflecting the revenue gain and the favorable resolution of prior year estimated accruals, primarily marketing. The increase was partially offset by higher energy and raw material costs. The net impact of the accrual adjustments contributed 4 points to PBNA operating profit growth and 1 point to total division operating profit growth.

 

Products qualifying for our new Smart Spot program represented over two thirds of net revenue. These products experienced double-digit revenue growth, and the balance of the portfolio experienced a high single-digit decline.

 

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PepsiCo International

 

     12 Weeks Ended

  

Change


 
     3/19/05

   3/20/04

  

Net revenue

   $2,121    $1,891    12 %

Operating profit

   $   307    $   257    20 %

 

International snacks volume grew 4%, comprised of 5% in our Latin America region, 3% in our Europe, Middle East & Africa region and 1% in our Asia Pacific region. The gains were driven by single-digit growth at Gamesa and Sabritas in Mexico and double-digit growth in Brazil, Egypt, Turkey and India, partially offset by a decline of nearly 10% at Walkers in the United Kingdom and the net impact from the divestiture and acquisition activity. The Walkers volume decline primarily resulted from an overall category decline. Also impacting volume growth were both the divestiture of our interest in a Korea joint venture and the acquisition of a business in Romania in the fourth quarter 2004. The divestiture reduced Asia Pacific Region volume growth by 19 percentage points and the acquisition increased the Europe, Middle East & Africa Region volume growth by 2 percentage points.

 

Beverage volume grew 9%, comprised of 17% in our Asia Pacific region, 11% in our Europe, Middle East & Africa region, and 1% in our Latin America region. Broad-based increases were led by double-digit growth in China, the Middle East, Argentina and India, partially offset by double-digit volume declines in Peru and single-digit volume declines in Mexico. Carbonated soft drinks grew at a high single-digit rate while non-carbonated beverages grew at a double-digit rate.

 

Net revenue grew 12% driven by the broad-based volume growth and favorable effective net pricing. Foreign currency impact contributed 2 percentage points of growth driven by the favorable euro, British pound and Brazilian real, partially offset by the unfavorable Mexican peso.

 

Operating profit grew 20% driven largely by the volume and favorable effective net pricing. Foreign currency impact contributed 1 percentage point of growth driven by the favorable British pound, Brazilian real and euro, partially offset by the unfavorable Mexican peso.

 

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Quaker Foods North America

 

     12 Weeks Ended

  

Change


 
     3/19/05

   3/20/04

  

Net revenue

   $417    $378    10 %

Operating profit

   $145    $123    18 %

 

Net revenue increased 10% and volume increased 6%. The volume increase reflects double-digit growth in Oatmeal, Cap’n Crunch cereal and Rice-A-Roni, all driven by innovation. Additionally, Aunt Jemima experienced high single-digit growth. These gains were partially offset by a high single-digit decline in Life cereal, reflecting an unfavorable comparison to last year’s introduction of Honey Graham Life cereal. Favorable product mix, favorable Canadian foreign exchange rates, and price increases on ready-to-eat cereals taken in the third quarter of 2004, each contributed approximately 1 percentage point to net revenue growth.

 

Operating profit increased 18% reflecting the net revenue growth, partially offset by increased advertising and marketing costs behind current year innovation and programs.

 

Products qualifying for our new Smart Spot program represented over 60% of net revenue and had double-digit revenue growth. The balance of the portfolio experienced mid single-digit growth.

 

 

OUR LIQUIDITY AND CAPITAL RESOURCES

 

Operating Activities

 

In the first quarter 2005 and 2004, our operations provided $749 million and $712 million in cash, respectively, primarily reflecting our solid business results in both periods. In addition, seasonality contributed to the use of cash in operating working capital accounts in both periods.

 

 

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Investing Activities

 

During the quarter, we used $1.4 billion, primarily reflecting the $750 million acquisition of SVE, purchases of short-term investments of $528 million, primarily internationally, and capital spending of $181 million. These amounts were partially offset by the proceeds from our sale of PBG stock of $47 million. We continue to expect full year capital spending to approximate 5% of net revenue.

 

 

Financing Activities

 

During the quarter, our financing activities provided $89 million. This source of cash primarily reflected net proceeds from short-term borrowings of $733 million, primarily in the U.S., and stock option proceeds of $233 million, substantially offset by common share repurchases of $494 million and dividend payments of $387 million.

 

Management Operating Cash Flow

 

Management operating cash flow is the primary measure management uses to monitor cash flow performance. However, it is not a measure provided by accounting principles generally accepted in the U.S. 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.

 

     12 Weeks Ended

 
     3/19/05

    3/20/04

 

Net cash provided by operating activities

   $749     $712  

Capital spending

   (181 )   (182 )

Sales of property, plant and equipment

   25     7  
    

 

Management operating cash flow

   $593     $537  
    

 

 

Management operating cash flow was used primarily to repurchase shares and pay dividends, and we expect to continue to return approximately all of our management operating cash flow to our shareholders. We also continue to expect management operating cash flow for the full year to exceed $4.1 billion reflecting our underlying business growth, and expect our share repurchases to range from $2.5 billion to $3.0 billion this year. See Our Business Risks for certain factors that may impact our operating cash flows.

 

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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 March 19, 2005 and the related Condensed Consolidated Statements of Income, Comprehensive Income and Cash Flows for the twelve weeks ended March 19, 2005 and March 20, 2004. 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 25, 2004, 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 24, 2005, 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 25, 2004, 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 14, 2005

 

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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 information required to be included in our submissions and filings with the SEC.

 

In addition, there were no changes in our internal control over financial reporting during our first fiscal quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II OTHER INFORMATION

 

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 April 30, 2004, we announced that Frito-Lay and Pepsi-Cola Company received notification from the Securities and Exchange Commission (the “SEC”) indicating that the SEC 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 have cooperated fully with this investigation and 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 Frito-Lay or Pepsi-Cola.

 

Based on an internal review of the Kmart matters, no officers of PepsiCo, Pepsi-Cola or Frito-Lay are involved. Neither of these matters involves any allegations regarding PepsiCo’s accounting for its transactions with Kmart or PepsiCo’s financial statements.

 

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ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

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


 

12/25/04

             $4,870  

12/26/04—1/22/05

   4.6    $52.77    (245 )
              

               4,625  

1/23/05—2/19/05

   3.0      53.82    (163 )
              

               4,462  

2/20/05—3/19/05

   1.8      53.18    (94 )
    
       

     9.4    $53.18    $4,368  
    
  
  

 

ITEM 6. Exhibits

 

See Index to Exhibits on page 29.

 

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Pursuant to the requirements 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:

 

    April 15, 2005

     

/S/    PETER A. BRIDGMAN

           

Peter A. Bridgman

           

Senior Vice President and

           

Controller

Date:

 

    April 15, 2005

     

/S/    ROBERT E. COX

           

Robert E. Cox

           

Vice President, Deputy General

           

Counsel and Assistant Secretary

           

(Duly Authorized Officer)

 

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INDEX TO EXHIBITS

ITEM 6 (a)

 

EXHIBITS

    

Exhibit 12  

   Computation of Ratio of Earnings to Fixed Charges

Exhibit 15

   Letter re: Unaudited Interim Financial Information

Exhibit 31

   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32

   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

29