FORM 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 23, 1996 (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
PEPSICO, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Anderson Hill Road, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
Number of shares of Capital Stock outstanding as of April 19, 1996:
1,567,362,908 (Adjusted for two-for-one stock split, effective May 10,
1996.)
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information:
Condensed Consolidated Statement of
Income - 12 weeks ended March 23,
1996 and March 25, 1995 2
Condensed Consolidated Statement of
Cash Flows - 12 weeks ended
March 23, 1996 and March 25, 1995 3
Condensed Consolidated Balance Sheet -
March 23, 1996 and December 30, 1995 4-5
Notes to Condensed Consolidated
Financial Statements 6-8
Management's Analysis of Operations,
Cash Flows and Financial Condition 9-29
Independent Accountants' Review Report 30
Part II Other Information and Signatures 31-32
Exhibit 11 Computation of Net Income Per Share of
Capital Stock - Primary and Fully
Diluted 33-34
Exhibit 12 Computation of Ratio of Earnings to
Fixed Charges 35-36
Exhibit 15 Letter from KPMG Peat Marwick LLP regarding
Unaudited Interim Financial Information
(Accountants' Acknowledgment) 37-38
Exhibit 27 Financial Data Schedule 39
- -1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended
3/23/96 3/25/95
Net Sales $6,554 $6,157
Costs and Expenses, net
Cost of sales 3,206 3,022
Selling, general and administrative
expenses 2,575 2,437
Amortization of intangible assets 67 69
Operating Profit 706 629
Interest expense (141) (160)
Interest income 23 27
Income Before Income Taxes 588 496
Provision for Income Taxes 194 175
Net Income $ 394 $ 321
Net Income Per Share (a) $ 0.24 $ 0.20
Cash Dividends Declared Per Share (a) $ 0.10 $ 0.09
Average Shares Outstanding Used
To Calculate Net Income Per Share (a) 1,619 1,599
(a) Adjusted to reflect a two-for-one stock split described in Note 2 to
Condensed Consolidated Financial Statements.
See accompanying notes.
- -2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
12 Weeks Ended
3/23/96 3/25/95
Cash Flows - Operating Activities
Net income $ 394 $ 321
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 374 386
Deferred income taxes 6 1
Other noncash charges and credits, net 110 106
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable 15 (93)
Inventories (6) (14)
Prepaid expenses, taxes and other current
assets (73) (46)
Accounts payable (170) (240)
Income taxes payable 62 (6)
Other current liabilities (244) (202)
Net change in operating working capital (416) (601)
Net Cash Provided by Operating Activities 468 213
Cash Flows - Investing Activities
Acquisitions and investments in unconsolidated
affiliates (14) (44)
Capital spending (370) (399)
Sales of property, plant and equipment 13 14
Sales of restaurants 101 8
Short-term investments, by original maturity
More than three months - purchases (24) (47)
More than three months - maturities 45 33
Three months or less, net 33 11
Other, net (40) (56)
Net Cash Used for Investing Activities (256) (480)
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt 606 366
Payments of long-term debt (156) (48)
Short-term borrowings, by original maturity
More than three months - proceeds 248 520
More than three months - payments (956) (768)
Three months or less, net 482 395
Cash dividends paid (158) (140)
Purchases of treasury stock (331) (122)
Proceeds from exercises of stock options 110 38
Other, net (11) (10)
Net Cash (Used for) Provided by Financing Activities (166) 231
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (1) (6)
Net Increase (Decrease) in Cash and
Cash Equivalents 45 (42)
Cash and Cash Equivalents - Beginning of year 382 331
Cash and Cash Equivalents - End of period $ 427 $ 289
See accompanying notes.
- -3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
Unaudited
3/23/96 12/30/95
Current Assets
Cash and cash equivalents $ 427 $ 382
Short-term investments, at cost 1,062 1,116
1,489 1,498
Accounts and notes receivable, less
allowance: 3/96 - $158, 12/95 - $150 2,405 2,407
Inventories
Raw materials and supplies 520 550
Finished goods 538 501
1,058 1,051
Prepaid expenses, taxes and
other current assets 663 590
Total Current Assets 5,615 5,546
Investments in Unconsolidated Affiliates 1,631 1,635
Property, Plant and Equipment 16,886 16,751
Accumulated Depreciation (7,037) (6,881)
9,849 9,870
Intangible Assets, net 7,500 7,584
Other Assets 818 797
Total Assets $25,413 $25,432
Continued on next page.
- -4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
Unaudited
3/23/96 12/30/95
Current Liabilities
Accounts payable $ 1,384 $ 1,556
Short-term borrowings 1,250 706
Accrued compensation and benefits 727 815
Income taxes payable 570 387
Accrued marketing 388 469
Other current liabilities 1,247 1,297
Total Current Liabilities 5,566 5,230
Long-term Debt 8,208 8,509
Other Liabilities 2,385 2,495
Deferred Income Taxes 1,891 1,885
Shareholders' Equity
Capital stock, par value 1 2/3 cents
per share:
authorized 3,600 shares, issued 3/96
and 12/95 - 1,726 shares (a) 29 29
Capital in excess of par value (a) 1,111 1,045
Retained earnings 8,967 8,730
Currency translation adjustment (829) (808)
9,278 8,996
Less: Treasury Stock, at Cost:
3/96 - 152 shares, 12/95 - 150 shares (a) (1,915) (1,683)
Total Shareholders' Equity 7,363 7,313
Total Liabilities and
Shareholders' Equity $25,413 $25,432
(a) Adjusted to reflect a two-for-one stock split described in Note 2 to
Condensed Consolidated Financial Statements.
See accompanying notes.
- -5-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The Condensed Consolidated Balance Sheet at March 23, 1996 and the
Condensed Consolidated Statements of Income and Cash Flows for the 12 weeks
ended March 23, 1996 and March 25, 1995 have not been audited, but have
been prepared in conformity with the accounting principles applied in
PepsiCo, Inc. and Subsidiaries' (PepsiCo) 1995 Annual Report on Form 10-K
(Annual Report) for the year ended December 30, 1995, except as disclosed
in Notes (3) and (4) below. In the opinion of management, this information
includes all material adjustments, which are of a normal and recurring
nature, necessary for a fair presentation. The results for the 12 weeks
are not necessarily indicative of the results expected for the year.
(2) On May 1, 1996 PepsiCo's Board of Directors authorized a two-for-one
stock split of PepsiCo's capital stock effective for shareholders of record
at the close of business on May 10, 1996. The number of authorized shares
was also increased from 1.8 billion to 3.6 billion. The current and prior
period information in the Condensed Consolidated Financial Statements, as
well as all other share data in this report, have been adjusted to reflect
this stock split and the increase in authorized shares. The par value
remains 1 2/3 cents per share, with capital in excess of par value reduced
to reflect the total par value of the additional shares.
(3) Effective the beginning of the fourth quarter of 1995, PepsiCo adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which reduced the carrying amount of certain long-lived assets to be
held and used in the business. As a result, depreciation and amortization
expense in the first quarter of 1996 was reduced by $15 million ($10
million after-tax or $0.01 per share).
(4) Effective beginning fiscal year 1996, PepsiCo changed its
classification of certain U.S. beverage promotional programs. To conform
the first quarter 1995 results with those of 1996, a reclassification was
made within the 1995 results, decreasing both net sales and selling,
general and administrative expenses by $34 million. This reclassification
did not affect reported net income or net income per share.
(5) Significant debt issuances and repayments (exclusive of commercial
paper), including the related effects of any interest rate and/or foreign
currency swaps entered into concurrently with the debt, are listed below.
As disclosed in PepsiCo's 1995 Annual Report, PepsiCo enters into the swaps
to effectively change the interest rate and currency of specific debt
issuances with the objective of reducing borrowing costs.
- -6-
Weighted
Average
Principal Maturity Interest
Debt Issued (in millions) Date Rate
12 weeks ended March 23, 1996:
$490 1997 *
74 2000 *
25 2008 *
60 2011 *
$649
Subsequent to March 23, 1996:
$ 65 2001 *
50 2011 *
$115
Principal Interest
Debt Repayments (in millions) Rate
12 weeks ended March 23, 1996:
$245 *
25 7.1%
50 6.9%
$320
Subsequent to March 23, 1996 $ 85 *
75 8.0%
15 14.4%
$175
* Variable rate debt indexed to either LIBOR or commercial paper rates.
Additionally, during the quarter PepsiCo entered into three interest rate
swap agreements with an aggregate notional amount of $600 million which
effectively converted $600 million of variable rate debt indexed to either
LIBOR or commercial paper rates to fixed rate debt with a weighted average
interest rate of 5.4%. The variable rate debt represented original issue
fixed rate debt that was effectively converted to variable rate debt as a
result of interest rate swaps entered into concurrently with the fixed rate
debt issuance. The interest rate differential to be paid or received on
the three interest rate swaps will be recognized as an adjustment to
interest expense as the differential occurs. The interest rate swap
agreements mature in December 1996 at which time the underlying debt will
revert back to variable rate debt under the initial interest rate swaps.
(6) At March 23, 1996, $3.5 billion of short-term borrowings were included
in the Condensed Consolidated Balance Sheet under the caption "Long-term
Debt", reflecting PepsiCo's intent and ability, through the existence of
unused revolving credit facilities, to refinance these borrowings on a long-
term basis. At March 23, 1996, PepsiCo had unused revolving credit
facilities covering potential borrowings aggregating $3.5 billion which
expire in January 2001.
- -7-
(7) Through the first quarter ended March 23, 1996, PepsiCo repurchased
10.8 million shares of its capital stock at a cost of $331 million. For
the period March 24, 1996 through April 25, 1996, PepsiCo repurchased 10.0
million shares of its capital stock at a cost of $311 million.
(8) In January 1995, 22 million stock options were granted to senior
management in a biennial grant under PepsiCo's Long-Term Incentive Plan.
Of this amount, an immaterial number of options were subsequently converted
at a three-for-one rate to performance share units. The exercise price for
the grant was the fair market value of PepsiCo's capital stock on the date
of the grant.
(9) Supplemental Cash Flow Information
(in millions) 12 Weeks Ended
3/23/96 3/25/95
Cash Flow Data
Interest paid $162 $175
Income taxes paid 61 138
- -8-
MANAGEMENT'S ANALYSIS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION
As described in Note 2 to the Condensed Consolidated Financial Statements,
a two-for-one stock split has been authorized for shareholders of record at
the end of business on May 10, 1996. All share data in Management's
Analysis has been adjusted to reflect the stock split.
Analysis of Consolidated Operations
Net Sales
12 Weeks Ended
($ in millions) %
3/23/96 3/25/95 Change
U.S. $4,817 $4,470 8
International 1,737 1,687 3
$6,554 $6,157 6
_______________________________________________________________________________
Worldwide net sales rose $397 million or 6% in 1996. The sales growth
benefited from higher effective net pricing by each of our three business
segments and volume gains of $178 million, driven by worldwide snack foods.
The higher effective net pricing reflected significant increases in
international snack foods, driven by Mexico, and in worldwide restaurants,
reflecting a mix shift to higher-priced products, increased pricing and
reduced promotions. These benefits were partially offset by an unfavorable
currency translation impact, primarily from a weaker Mexican peso.
International net sales increased 3% and represented 27% of total net sales
in 1996 and 1995. As noted in the 1995 Annual Report and on page 15 of
this Form 10-Q, certain of our international beverage results are being
reported on a new basis in 1996. Although this change has no impact on
full-year results, we are reporting only two months of results in the first
quarter of this year from our franchise and administrative operations
compared to 12 weeks last year. While not practicable to quantify, this
change reduced sales growth.
Cost of Sales
12 Weeks Ended
($ in millions) 3/23/96 3/25/95
Cost of sales $3,206 $3,022
As a percent of net sales 48.9% 49.1%
_______________________________________________________________________________
The modest decrease in cost of sales as a percent of net sales reflected
lower raw material costs in U.S. beverages and higher effective pricing in
U.S. restaurants. These decreases were substantially offset by
international snack foods, where increased costs in Mexico were partially
mitigated by price increases, a mix shift to higher cost meals in
international restaurants and lower high-margin concentrate sales in
international beverages reflecting the change in reporting periods.
- -9-
Selling, General and Administrative Expenses (S,G&A)
12 Weeks Ended
($ in millions) 3/23/96 3/25/95
SG&A $2,575 $2,437
As a percent of net sales 39.3% 39.6%
_______________________________________________________________________________
SG&A is comprised of selling and distribution expenses (S&D), advertising
and marketing expenses (A&M), and general and administrative expenses (G&A)
which included gains on sales of assets, equity income (loss) as well as
other income and expense. SG&A grew at a slightly lower rate than sales,
to $2.6 billion in 1996. S&D grew at a slower rate than sales, primarily
reflecting increased effective pricing and lower depreciation and
amortization, primarily in U.S. restaurants, as a result of the reduced
carrying amount of assets in connection with the 1995 adoption of Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," partially offset by labor related increases in U.S. beverages. A&M
grew at a slower rate than sales reflecting a slower rate of spending in
international beverages, international snack foods and U.S. restaurants,
partially offset by a faster rate of spending in U.S. beverages. G&A grew
at a faster rate than sales reflecting a faster rate of spending in
worldwide snack foods and restaurants, partially offset by a slower rate of
spending in U.S. beverages. The increase in worldwide snack foods
reflected general business increases and, in the U.S., investment spending
on new products and on expanding distribution capabilities. The increase
in worldwide restaurants was mitigated by increased net refranchising gains
of $14 million attributable to sales of restaurants in excess of costs of
closing other restaurants and a 1996 charge for the disposal of
underperforming units at Hot `n Now. The slower rate of spending in U.S.
beverages primarily reflected a litigation settlement with a supplier for
prior year purchases and a gain on a sale of a bottling operation,
partially offset by several national initiatives to upgrade information
systems.
Amortization of intangible assets decreased 3% to $67 million in 1996 from
$69 million in 1995. This noncash expense reduced net income per share by
$0.03 in 1996 and 1995.
Operating Profit
12 Weeks Ended
($ in millions) %
3/23/96 3/25/95 Change
Operating Profit $706 $629 12
_____________________________________________________________________
Operating profit increased $77 million or 12%. The profit growth was
driven by combined segment ongoing operating profit growth of 15%, which
benefited from the higher effective net pricing, exceeding increased
operating costs, volume growth of $40 million and the net refranchising
gains. The volume growth was driven by worldwide snack foods and U.S.
beverages partially offset by international beverages due to the change in
- -10-
reporting periods. International segment profits increased 13% reflecting
increases in all three segments. International profits represented 15% and
16% of segment operating profit in 1996 and 1995, respectively. Not
included in segment operating profit was a net foreign exchange loss of $3
million in 1996 and net foreign exchange gain of $10 million in 1995.
Interest Expense, net
12 Weeks Ended
($ in millions) %
3/23/96 3/25/95 Change
Interest expense $(141) $(160) (12)
Interest income 23 27 (15)
Interest expense, net $(118) $(133) (11)
_______________________________________________________________________________
The 11% decline in interest expense, net primarily reflected lower interest
rates on debt, primarily international, and reduced debt levels.
Provision for Income Taxes
12 Weeks Ended
($ in millions) 3/23/96 3/25/95
Provision for Income Taxes $194 $175
Effective tax rate 33.0% 35.3%
_____________________________________________________________________________
The 1996 effective tax rate decreased 2.3 points to 33.0% primarily
reflecting the effect of reversals in 1996 of prior year accruals no longer
required as a result of the current year resolution of certain prior years'
audit issues and prior year valuation allowances no longer required on
state deferred tax assets. Both reversals adjusted the full-year forecast
of the 1996 effective tax rate.
Net Income
($ in millions except ________12 Weeks Ended____
per share amounts) %
3/23/96 3/25/95 Change
Net Income $394 $ 321 23
Net Income Per Share $.24 $ .20 20
Average Shares Outstanding
Used to Calculate Net
Income Per Share 1,619 1,599 1
______________________________________________________________________________
Impairment of Long-Lived Assets
As discussed in our 1995 Annual Report, PepsiCo historically evaluated and
measured impairment of long-lived assets held and used in the business on
a total division basis. As a result of adopting SFAS 121, PepsiCo now
evaluates impairment in the restaurant segment by individual restaurant
and, for each of the snack food and beverage segments, assets are
generally grouped at the country level. Absent a significant change in
11-
circumstances that would require an immediate evaluation for impairment,
PepsiCo intends to perform impairment recognition and measurement tests in
the second and fourth quarters of 1996. Due to the complex analyses and
calculations associated with this evaluation, along with the large size of
our restaurant portfolio, management believes this approach results in a
reasonable application of the requirements of SFAS 121. The second
quarter evaluation will include two categories of assets: those assets
previously evaluated for impairment where, due to changes in
circumstances, a current forecast of future cash flows would be expected
to be significantly lower than the forecast used in the prior evaluation,
and those assets that in the first half of 1996 initially meet the
"history of operating losses" impairment indicator we use to identify
potentially impaired assets. Management believes that impairment charges
are probable in 1996, particularly in the restaurant segment, but
anticipates that such impairment charges will be more than offset by
refranchising gains net of costs of closing other stores.
- -12-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
12 Weeks Ended % 12 Weeks Ended %
3/23/96 3/25/95 Change 3/23/96 3/25/95 Change
Beverages
- -U.S. $1,439 $1,363 6 $244 $209 17
- -International 524 570 (8) 12 2 500
1,963 1,933 2 256 211 21
Snack Foods
- -U.S. 1,345 1,176 14 247 232 6
- -International 711 648 10 73 71 3
2,056 1,824 13 320 303 6
Restaurants
- -U.S. 2,033 1,931 5 148 112 32
- -International 502 469 7 31 30 3
2,535 2,400 6 179 142 26
Total
- -U.S. 4,817 4,470 8 639 553 16
- -International 1,737 1,687 3 116 103 13
$6,554 $6,157 6 755 656 15
Equity Loss (3) (2) 50
Unallocated Expenses, net (b) (46) (25) 84
Operating Profit $706 $629 12
By U.S. Restaurant Chain (c)
Pizza Hut $ 905 $ 845 7 $106 $ 65 63
Taco Bell 742 728 2 22 33 (33)
KFC 386 358 8 20 14 43
$2,033 $1,931 5 $148 $112 32
NOTES:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 14.
(b) Includes corporate headquarters expenses, minority interests, foreign
exchange translation and transaction gains and losses and other items
not allocated to the business segments. A net foreign exchange loss
of $3 and gain of $10 were included in 1996 and 1995, respectively.
(c) PepsiCo has historically provided results for each of its three major
restaurant concepts (which included the results of other U.S. concepts
managed by Taco Bell and Pizza Hut) on a worldwide basis. Beginning
with the fourth quarter of 1995, PepsiCo changed the presentation of
the restaurant results to more closely reflect how we currently manage
the business. Net sales and operating profit are now provided for
each of PepsiCo's three major U.S. concepts (including the results of
the other concepts managed by Taco Bell and Pizza Hut) and in total
for the international restaurant operations. Previously reported
amounts have been restated to conform to the current presentation.
- -13-
Segments Of The Business
Beverages
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales
U.S. $1,439 $1,363* 6
International 524 570 (8)
$1,963 $1,933 2
Operating Profit
U.S. $ 244 $ 209 17
International 12 2 500
$ 256 $ 211 21
* U.S. net sales have been restated to conform to the 1996 presentation.
See Note 4 to Condensed Consolidated Financial Statements.
_______________________________________________________________________________
Sales in the U.S. rose $76 million or 6%. Volume growth contributed $35
million, led by carbonated soft drink (CSD) packaged products. The sales
growth also reflected higher pricing on most CSD packages, led by single-
serve packages, as well as increased fountain syrup and concentrate
pricing.
System bottler case sales of Pepsi Corporate brands (BCS) consists of
sales of packaged products to retailers and through vending machines and
fountain syrup by company-owned and franchised bottlers. BCS in the U.S.
increased more than 4%, reflecting high single-digit growth in the Mountain
Dew brand and solid increases in Brand Pepsi. BCS growth also benefited
from increased sales of Mug brand root beer, reflecting the expansion of
Mug to more than 90% of our distribution system. Total alternative
beverages, which include Lipton brand ready-to-drink tea and All Sport
products, grew at a strong double-digit rate, primarily reflecting growth
in both brands. The growth in Lipton, which represents approximately 70%
of our alternative beverages BCS, was due to volume gains from Lipton Brisk
and fountain syrup which more than offset lower volume of the premium-
priced Lipton Original. Lipton Original has been reintroduced with new
packaging and a new name, Lipton's Brew, in the second quarter of this
year. Excluding the alternative beverages, BCS growth was almost 4%.
Fountain syrup BCS grew at a faster rate than packaged products.
Profit in the U.S. increased $35 million or 17%. Profit growth
reflected the higher pricing and $20 million of volume gains. Advertising
and marketing grew at a double-digit rate primarily due to the Pepsi Stuff
promotion campaign. Selling and distribution expenses grew at about the
same rate as sales, though at a faster rate than volume, reflecting
increased salaries and wages. Administrative expenses increased,
reflecting costs incurred in connection with national initiatives to
upgrade information systems. Profit growth was favorably impacted by a $7
million litigation settlement with a supplier for purchases made in prior
years and a $3 million gain on the sale of a bottling business. The profit
margin increased more than 1 1/2 points to 17.0%.
- -14-
As previously disclosed in PepsiCo's 1995 Annual Report, 1996
quarterly results for international beverages will not be comparable to
1995's because its results, except for Canada, will be reported on a
monthly basis. For 1995, generally only the company-owned bottling
operations reported results on a monthly basis. As a result, the franchise
and administrative operations are reporting only 2 months of results in the
first quarter of 1996 compared to 3 periods (12 weeks) last year, a
difference of 25 days. The 25 days will reverse over the remaining
quarters in 1996 and accordingly, full-year results will be comparable.
International sales declined $46 million or 8% primarily due to the
change in reporting periods.
International BCS grew 3%, led by Growth Markets (primarily Brazil,
China, Eastern Europe and India, where we are investing heavily because we
believe they have high growth potential) which, on a combined basis, grew
nearly 20%. The BCS increase in our Growth Markets reflected strong double-
digit growth in China, India and the Czech and Slovak Republics as well as
solid growth in Brazil. The international BCS growth also reflected triple-
digit growth in South Africa, albeit on a small base, as well as a strong
increase in Thailand. These advances were partially offset by declines in
Mexico, our largest international BCS market, and Argentina, reflecting
adverse economic conditions and increased competition in these countries.
International profit increased $10 million or 500%, due in part to
lapping weak results in the first quarter of last year. The profit
increase was primarily due to increased profitability in our Canadian
bottling operations and a benefit from a $4 million settlement received
from the distributor of Stolichnaya vodka for the reduction in the 1996
volume commitment under a take-or-pay contract. These gains were partially
offset by lapping a first quarter 1995 reversal of the remaining $3 million
of a restructuring accrual originally recorded in 1992. The profit margin
increased nearly 2 points to 2.3%.
- -15-
Snack Foods
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales
U.S. $1,345 $1,176 14
International 711 648 10
$2,056 $1,824 13
Operating
Profit
U.S. $ 247 $ 232 6
International 73 71 3
$ 320 $ 303 6
___________________________________________________________________________
Sales in the U.S. grew $169 million or 14%. The sales increase reflected
volume growth of $119 million, the effects of increased pricing taken in
the latter half of 1995 across all major brands, and to a lesser extent, a
favorable sales mix shift to low-fat and no-fat products. The volume
growth reflected gains in almost all major brands, led by low-fat and no-
fat snacks, which accounted for about 40% of the sales growth.
Pound volume in the U.S. advanced 10%, reflecting exceptional
performance from the low-fat and no-fat categories. These categories
contributed over 35% of the total pound growth, driven by Baked Lay's brand
potato chips, Baked Tostitos brand tortilla chips, Tostitos brand salsa and
Ruffles Light. Rold Gold brand pretzels volume declined slightly
reflecting the absence of national advertising. Doritos brand tortilla
chips, driven by new flavor extensions such as Doritos brand Pizza Craver's
and Taco Supreme, and a national advertising campaign, had solid single-
digit pound growth. Strong double-digit growth of Tostitos brand tortilla
chips, excluding Baked Tostitos, was fueled by the exclusive sponsorship of
the Tostitos Fiesta Bowl. Other Ruffles brand potato chips grew double-
digits, benefiting from new flavor extensions like Ruffles KC Masterpiece
Barbecue Flavor brand potato chips and French Onion Flavored Ruffles.
Other Lay's brand potato chips grew single-digit driven by Lay's Salsa &
Cheese Flavored brand potato chips. Fritos brand corn chips grew a strong
single-digit reflecting higher promotional spending. Chee.tos brand cheese
flavored snacks had strong single-digit growth aided by a national
advertising campaign supporting the introduction of Chee.tos Checkers.
Profit in the U.S. grew $15 million or 6%. The profit increase
reflected strong volume growth, which contributed $56 million, the higher
pricing that exceeded increased promotional price allowances and
merchandising support, and the mix shift to higher-margin low-fat and no-
fat products. This profit growth was offset by higher manufacturing costs,
reflecting increased capacity costs, and increased selling, and
distribution and administrative expenses. The higher administrative
expenses reflected investment spending to sustain strong volume growth,
including improved delivery systems, costs associated with development of
new products using the recently approved fat-replacer, Olean, and costs
related to new single-serve sweet snack products produced under a joint
venture arrangement with Sara Lee Bakery. Also contributing to the
- -16-
increased expenses were costs incurred in an effort to capture volume that
has become available as a result of a recent decision by Anheuser-Busch to
exit the salty snack food business. Favorable oil, potato and packaging
prices were substantially offset by unfavorable corn prices. Although
difficult to forecast, our 1996 commodity costs are expected to increase
modestly over 1995. Potato prices are anticipated to increase slightly in
the second quarter due to weather related problems, with full-year prices
expected to remain about even with 1995, while prices of corn and potato
flakes, used in Baked Lay's, are expected to increase. Carton and
packaging prices in 1996 are expected to be modestly lower than 1995. The
profit margin decreased over 1 point to 18.4%.
Mexico's results in 1995 had been adversely impacted by economic
difficulties resulting from the significant devaluation of the Mexican peso
late in 1994. Although the affects of the devaluation of the peso
continues into 1996, the impact on 1996 results is far less significant as
we began to lap the 1994 devaluation. In the first quarter of 1996, net
sales in Mexico increased 3%, while operating profit increased 12%.
Sabritas and Gamesa, our operations in Mexico, are discussed separately
below.
International sales increased $63 million or 10%. The sales increase
reflected higher pricing, primarily the effect of 1995 pricing actions in
Mexico, and increased volume growth of $40 million, partially offset by a
net unfavorable currency translation impact of the Mexican peso.
International kilo growth is reported on a systemwide basis, which
includes both consolidated businesses and joint ventures operating for at
least one year. Salty snack kilos rose 7%, reflecting double-digit volume
growth in the U.K., Brazil and Canada; Korea and the Netherlands also
achieved strong double-digit growth fueled, in part, by in-bag promotions.
These gains were partially offset by a double-digit decline in Spain
reflecting the lapping of a 1995 successful in-bag promotion. Sweet snack
kilos grew 5%, reflecting strong double-digit advances in Poland and low
single-digit growth at Gamesa, partially offset by a double-digit decrease
at the Alegro sweet snack division of Sabritas, due to lapping a successful
1995 promotion.
International operating profit increased $2 million or 3%. The
operating profit growth reflected the higher pricing and increased volumes
of $7 million, which were substantially offset by higher operating costs, a
net unfavorable currency translation impact, primarily in Mexico, and
increased administrative expenses. The growth in operating costs reflected
increased manufacturing costs primarily due to higher commodity prices and
selling and distribution expenses. The increased administrative costs
reflected general business growth. The profit margin declined over one-
half point to 10.3%.
The following are discussions by key business.
Operating profit declined about 5% at Sabritas reflecting an increase
in operating costs and an unfavorable currency translation impact, which
were almost entirely offset by higher pricing resulting primarily from the
1995 increases. The increased operating costs reflected significantly
higher manufacturing costs due to higher ingredient prices as well as
increased selling and distribution expenses. Lower-margin sweet snack kilo
volume from the Alegro division decreased 10% lapping the successful 1995
promotion. Higher-margin salty snack kilos were about even with 1995.
Gamesa's profit grew about 75%, despite the effects of the economic
difficulties resulting from the late 1994 devaluation of the Mexican peso,
as higher pricing, primarily the effect of the 1995 increases, more than
offset higher operating costs and the unfavorable currency translation
impact. The increased operating costs primarily reflected higher
manufacturing costs due to higher ingredient prices and increased selling
and distribution expenses, reflecting route expansion. Sweet snack kilos
- -17-
grew 3%, driven by the route expansion. The very high profit growth
experienced this quarter is not expected to continue because Gamesa does
not expect to be able to continue to aggressively increase pricing ahead of
cost increases.
Walkers' profit increased modestly. Higher pricing, due to a 1995
fourth quarter price increase, and increased volume, reflecting the
continued strength of Walkers crisps and Doritos brand tortilla chips, new
packaging and increased promotions, were substantially offset by an
unfavorable mix shift to lower-margin multi-packs and higher operating
costs.
Brazil's profit increased about 10%. Increased volume of core brands,
and lower manufacturing costs, primarily lower packaging and potato prices,
were almost entirely offset by an unfavorable mix shift to lower-margin
packages. Brazil is operating at maximum capacity and investments are
being made to expand production capacity to meet the strong consumer
demand. The most significant portion of the expanded production capacity
is expected to be available in mid-1996.
- -18-
Restaurants
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales
U.S. $2,033 $1,931 5
International 502 469 7
$2,535 $2,400 6
Operating
Profit
U.S. $ 148 $ 112 32
International 31 30 3
$ 179 $ 142 26
___________________________________________________________________________
Net sales by PFS, PepsiCo's restaurant distribution operation, to the
franchisee and licensee operations of each restaurant chain and the related
estimated operating profit have been allocated to each restaurant chain.
Also, restaurant units constructed or acquired, principally from
franchisees (collectively "new units"), are treated the same for purposes
of the Restaurants analysis. These new units, net of units closed or
refranchised (company-operated restaurants sold to existing or new
franchisees) are collectively referred to as "additional units".
In 1996 PepsiCo refranchised and closed 302 units and opened 77 new
units. The effect of these kinds of unit-related actions increased
worldwide restaurant sales and operating profit by an estimated $30 million
and $31 million, respectively. The sales growth reflected an estimated
$107 million from the combined impact of new units, and increased PFS sales
and initial franchise fee income, both related to refranchised units,
partially offset by an estimated $77 million from the absence of 1995 sales
from units refranchised or closed. The profit growth reflected an
estimated $20 million from the combined impact of new units, and increased
PFS operating profit and initial franchise fee income, both related to
refranchised units, partially offset by an estimated $3 million from the
absence of 1995 profit from units refranchised or closed. In addition,
profit growth included $14 million of increased net refranchising gains
reflecting a net gain of $17 million in 1996 ($41 million of refranchising
gains offset by $24 million of costs of closing other restaurants and a
charge for the disposal of underperforming units at Hot `n Now) as compared
to a net gain of $3 million in 1995 ($7 million of refranchising gains
offset by $4 million of costs of closing other restaurants.)
- -19-
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
Worldwide Restaurants
Beginning of Year 12,819 1,004 12,025 2,748 28,596
New Builds &
Acquisitions 77 14 152 274 517
Refranchising &
Licensing (182) - 182 - -
Closures (120) (2) (59) (75) (256)
March 23, 1996 12,594 1,016 12,300 2,947 28,857
U.S. Restaurants*
Beginning of Year 10,365 78 7,599 2,551 20,593
New Builds &
Acquisitions 56 - 39 257 352
Refranchising &
Licensing (153) - 153 - -
Closures (109) (1) (15) (71) (196)
March 23, 1996 10,159 77 7,776 2,737 20,749
* The U.S. joint venture units represent California Pizza Kitchen.
_______________________________________________________________________________
[Note: A summary of the 1996 restaurant unit activity for each U.S.
concept and for international restaurant operations is included in each of
the following discussions.]
Restaurant operating profit also included a $13 million benefit from
lower depreciation and amortization expense. This resulted from the
reduced carrying amount of certain long-lived assets to be held and used in
the business in connection with the adoption of Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of the
beginning of the fourth quarter of 1995.
As discussed in more detail on page 11, PepsiCo intends to perform the
impairment recognition and measurement tests required by SFAS 121 for
company-operated restaurants in the second and fourth quarters of this
year. Management currently anticipates that any 1996 impairment charges
will be more than offset by refranchising gains net of costs of closing
other restaurants.
- -20-
Pizza Hut - U.S.
The tables of operating results and unit activity presented below include
Pizza Hut as well as D'Angelo Sandwich Shops (D'Angelo) and East Side
Mario's concepts, which are managed by Pizza Hut. As Pizza Hut and
D'Angelo are generally integrated, the elements in the year-over-year
discussion of net sales and operating profit that follows include both
Pizza Hut and D'Angelo but exclude East Side Mario's, unless otherwise
indicated.
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales $905 $845 7
Operating Profit $106 $ 65 63
_______________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
Beginning of Year 5,201 2,819 863 8,883
New Builds &
Acquisitions 30 15 46 91
Refranchising &
Licensing (75) 75 - -
Closures (84) (8) (8) (100)
March 23, 1996 5,072 2,901 901 8,874
_______________________________________________________________________________
Net sales increased $60 million or 7%. The sales growth was driven by an
8% increase in same store sales for company-operated units and $28 million
from the combined impact of sales related to new units, and increased PFS
sales and initial franchise fee income, both related to refranchised units,
partially offset by the absence of $35 million of 1995 sales associated
with company-operated units that were closed or refranchised. The improved
same store sales performance was fueled by a higher average guest check,
driven by TripleDecker Pizza, introduced nationally early in the first
quarter, less promotional pricing than in 1995, and increased volume of $8
million. Same store sales reflected double-digit growth in carryout and
delivery, and solid growth in dine-in. Sales growth also benefited from
increased pricing by PFS.
Operating profit increased $41 million or 63%, led by refranchising
gains of $27 million in 1996 as compared to $4 million of net refranchising
gains in 1995 ($7 million of refranchising gains offset by $3 million of
costs of closing other restaurants). Profit growth also reflected the
lower promotional pricing, the strong performance of TripleDecker Pizza and
increased franchise royalty revenues. These benefits were partially offset
by higher store operating costs and increased field and headquarters
overhead. The increased store operating costs primarily reflected higher
cheese, wheat and meat prices, partially offset by lower depreciation and
amortization expense as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121.
Operating profit from new units, and increased PFS operating profit and
initial franchise fee income, both related to the refranchised units,
slightly exceeded the absence of 1995 operating profit from units
refranchised or closed. The operating profit margin increased 4 points to
11.7%, primarily reflecting the benefits of the net refranchising gains.
- -21-
Taco Bell - U.S.
The tables of operating results and unit activity presented below include
Taco Bell as well as the Hot `n Now (HNN) and Chevys concepts, which are
managed by Taco Bell. The elements in the year-over-year discussion of net
sales and operating profit that follows do not include HNN and Chevys,
unless otherwise indicated.
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales $742 $728 2
Operating Profit $ 22 $ 33 (33)
_______________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
Beginning of Year 3,133 1,779 1,578 6,490
New Builds &
Acquisitions 22 19 206 247
Refranchising &
Licensing (78) 78 - -
Closures (7) (2) (57) (66)
March 23, 1996 3,070 1,874 1,727 6,671
_______________________________________________________________________________
Net sales increased $14 million or 2%. The sales growth was led by higher
effective net pricing, reflecting increased pricing and lower promotional
activity, and increased franchise royalty revenues and license fees. A
decline in restaurant volume of $18 million was offset by increased PFS
sales to franchisees of $8 million. Same store sales for company-operated
units declined 1%, though volume decreased at a faster rate. Sales growth
benefited by $43 million from the combined effect of sales associated with
new units, increased PFS sales and initial franchise fee income, both
related to the refranchised units, partially offset by the absence of $30
million of 1995 sales associated with company-operated units that were
closed or refranchised. Increased sales at Chevys, primarily reflecting
additional units, were substantially offset by a decline in sales at HNN,
primarily reflecting the absence of 1995 sales associated with company-
operated units licensed after the first quarter of 1995.
Operating profit declined $11 million or 33%, driven by significantly
increased losses from HNN, primarily reflecting a $25 million charge
discussed below. Core Taco Bell business operating profit growth benefited
from refranchising gains of $12 million, the higher net pricing and
increased franchise royalty revenues and license fees. These benefits were
partially offset by volume declines of $8 million, a net unfavorable
product mix shift to lower-margin products and higher store operating
costs. The higher store operating costs reflected an increase in labor
costs as a result of an initiative to increase management in the
restaurants, higher repairs and maintenance expenses and increased local
store marketing costs, partially offset by favorable food costs and lower
depreciation and amortization expense as a result of the reduced carrying
amount of restaurant assets in connection with the 1995 adoption of SFAS
121. The lower food costs were led by lower beef prices, partially offset
by higher chicken and cheese prices. Operating profit from new units, and
- -22-
initial franchise fee income and increased PFS operating profit, both
related to the refranchised units, slightly exceeded the absence of 1995
operating profit from units refranchised or closed.
Chevys reported a small operating profit compared to an operating loss
in 1995. The improvement reflected the benefit of a margin improvement
program and additional units. HNN's losses increased significantly,
reflecting the $25 million charge related to the write-down of assets held
for disposal and additional store closure costs, partially offset by the
absence of 1995 operating losses associated with licensed or closed units
and reduced depreciation and amortization expense as a result of the
reduced carrying amount of restaurant assets in connection with the 1995
adoption of SFAS 121. During the first quarter, our two largest licensees
closed and returned 36 units. All of these units were de-identified as HNN
units and are held for sale. It is reasonably possible that some or all of
the remaining 32 licensed units may be sold to an existing licensee or
closed and returned during 1996. Taco Bell is continuing its efforts to
sell the remaining company-operated HNN units, all closed units and
undeveloped sites.
The Taco Bell operating profit margin declined 1 1/2 points to 3.0%,
reflecting the unfavorable impact of the $25 million charge at HNN,
partially offset by the $12 million of refranchising gains.
- -23-
KFC - U.S.
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales $386 $358 8
Operating Profit $ 20 $ 14 43
_______________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
Beginning of Year 2,031 3,001 110 5,142
New Builds &
Acquisitions 4 5 5 14
Refranchising &
Licensing - - - -
Closures (18) (5) (6) (29)
End of Year 2,017 3,001 109 5,127
_______________________________________________________________________________
Net sales rose $28 million or 8%. The sales growth was driven by a 7%
increase in same store sales for company-operated units, driven by a higher
average guest check primarily resulting from increased pricing and a
favorable mix shift. New product offerings introduced in the latter half
of 1995 such as Colonel's Crispy Strips and Chunky Chicken Pot Pies and
increases attributable to combined KFC and Taco Bell stores and home
delivery stores also contributed to the sales growth. These gains were
partially offset by base business volume declines.
Operating profit increased $6 million or 43%. The profit growth
primarily reflected the increased pricing and mix shift partially offset by
increased store operating and overhead costs. The higher store operating
costs reflected increased food costs and higher labor costs, resulting from
efforts to improve restaurant quality and service, partially offset by
lower depreciation and amortization expense as a result of the reduced
carrying amount of restaurant assets in connection with the 1995 adoption
of SFAS 121. The increased food costs primarily reflected higher chicken
prices. The profit margin increased over 1 point to 5.2%.
- -24-
International
12 Weeks Ended
%
3/23/96 3/25/95 Change
($ in millions)
Net Sales $502 $469 7
Operating Profit $ 31 $ 30 3
_______________________________________________________________________________
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
Beginning of Year 2,454 926 4,426 197 8,003
New Builds &
Acquisitions 21 14 113 17 165
Refranchising
Licensing (29) - 29 - -
Closures (11) (1) (44) (4) (60)
March 23, 1996 2,435 939 4,524 210 8,108
______________________________________________________________________________
The KFC, Pizza Hut and Taco Bell concepts represented approximately 50%,
45% and 5%, respectively, of total international restaurant sales in 1996
and 1995.
Net sales increased $33 million or 7%, with Pizza Hut representing
approximately 55% of the increased sales. The sales increase primarily
reflected additional units which contributed $21 million, higher effective
net pricing and increased franchise royalty revenues, partially offset by
net unfavorable currency translation effects. The increased franchise
royalty revenues primarily reflected lapping the effect of one less
reporting period for KFC franchise results in 1995.
Operating profit increased $1 million or 3%. Concept contribution, as
measured by store level contribution and franchise royalty revenues, was
led by Pizza Hut, while KFC and Taco Bell were about even with last year.
The profit growth reflected higher effective net pricing, additional units
which contributed $5 million, the increased franchise royalty revenues and
net favorable currency translation impacts. Profit growth also benefited
from $2 million of Pizza Hut refranchising gains. These gains were offset
by higher store operating costs, led by increased food prices, partially
offset by lower depreciation and amortization expense as a result of the
reduced carrying amount of restaurant assets in connection with the 1995
adoption of SFAS 121, and increased administrative and support costs. The
increased administrative and support costs primarily reflected project
spending, and lapping the effect of one less reporting period for KFC
headquarters expenses in 1995, partially offset by savings from the 1995
consolidation of separate regional and country offices supporting KFC and
Pizza Hut operations. The operating profit margin declined slightly to
6.2%.
Following is a discussion of operating profit by key international
market. A double-digit profit decline in Australia, our largest
international sales market, was primarily driven by promoted product
offerings, partially offset by reduced administrative costs resulting from
the consolidation of KFC and Pizza Hut country offices. Profit growth in
Canada, our second largest international sales market, benefited from the
- -25-
introduction of TripleDecker Pizza and a lower level of promotional
activity. Double-digit profit gains in Korea, our largest international
profit market, primarily reflected additional units and higher net pricing,
partially offset by volume declines and increased labor costs.
- -26-
Cash Flows and Financial Condition
Summary of Cash Flows
In the first quarter of 1996, net cash provided by operating activities,
debt activities, stock option exercises and sales of restaurants of $468
million, $224 million, $110 million and $101 million, respectively, funded
capital spending, share repurchases and dividend payments of $370 million,
$331 million and $158 million, respectively.
Summary of Operating Activities
($ in millions) 12 Weeks Ended
3/23/96 3/25/95
Net income $ 394 $ 321
Noncash charges and credits, net 490 493
Income before noncash charges and credits 884 814
Net change in operating working capital (416) (601)
Net Cash Provided by Operating Activities $ 468 $ 213
_________________________________________________________________________
Net cash provided by operating activities rose $255 million or 120% from
1995, reflecting a reduction in working capital outflows of $185 million
and a $73 million increase in net income. The reduction in working capital
net outflows primarily reflected a reduction in accounts and notes
receivable in 1996 as compared to an increase in 1995, a smaller seasonal
decline in accounts payable and an increase in income taxes payable in
1996, due to lower tax payments, partially offset by a greater decline in
other current liabilities. The cash inflows from accounts and notes
receivable was driven by a sale of $110 million of trade accounts
receivable during the first quarter of 1996 to take advantage of favorable
effective financing rates implicit in the transaction, as compared to
commercial paper financing.
Summary of Investing Activities
($ in millions) 12 Weeks Ended
3/23/96 3/25/95
Acquisitions and investments
in unconsolidated affiliates $ (14) $ (44)
Capital spending (370) (399)
Sales of restaurants 101 8
Net short-term investments 54 (3)
Other investing activities, net (27) (42)
Net Cash Used for Investing Activities $(256) $(480)
_________________________________________________________________________
The decreased net cash outflows for investing activities principally
reflected increased proceeds from sales of restaurants and short-term
investment portfolios of $93 million and $57 million, respectively, as well
as reduced acquisition and investment activity and capital spending of $30
million and $29 million, respectively. The proceeds from the sales of
restaurants are part of management's strategy to improve restaurant
- -27-
operating results and investment returns as outlined in our 1995 Annual
Report. With respect to short-term investment portfolios, which are
primarily held outside the U.S., PepsiCo continually reassesses its
alternatives to redeploy them considering investment opportunities and
risks, tax consequences and overall financing strategies. The decline in
capital spending primarily reflected decreased spending in restaurants of
$60 million, partially offset by increased U.S. snack food spending of $34
million, primarily for capacity expansion for both established and new
products. For the full year, acquisition and investment activity is
expected to be substantially lower than in 1995.
Summary of Financing Activities
($ in millions) 12 Weeks Ended
3/23/96 3/25/95
Net short and long-term debt $ 224 $ 465
Cash dividends paid (158) (140)
Purchases of treasury stock (331) (122)
Proceeds from exercises of stock options 110 38
Other, net (11) (10)
Net Cash (Used for) Provided by
Financing Activities $(166) $ 231
_________________________________________________________________________
The $397 million decline in cash flows from financing activities
principally reflected reduced proceeds from debt activity of $241 million
and increased share repurchases of $209 million, partially offset by
increased proceeds of $72 million from stock option exercises.
See Note 5 to Condensed Consolidated Financial Statements for details
of debt issuances and repayments during the quarter. As part of managing
our overall interest cost, during the quarter PepsiCo entered into three
interest rate swaps with an aggregate notional amount of $600 million that
have been layered onto existing positions. The three swaps effectively
converted $600 million of variable rate debt to fixed rate debt for the
balance of 1996. See Note 5 to Condensed Consolidated Financial Statements
for more information.
Through April 25, 1996, PepsiCo has repurchased 20.8 million treasury
shares, or 1.3% of the shares outstanding at the beginning of the year, at
a cost of $642 million since fiscal year-end 1995. Of the 20.8 million
shares, 5.6 million were purchased under the share repurchase authority
granted by PepsiCo's Board of Directors in July 1993. The remaining 15.2
million shares were purchased under a new share repurchase authority
granted by PepsiCo's Board of Directors in February 1996 leaving 84.8
million shares available under the new repurchase authority. This new
authority replaced the repurchase authority remaining under the July 1993
resolution.
Financial Condition
At March 23, 1996 and December 30, 1995, $3.5 billion of short-term
borrowings were classified as long-term, reflecting PepsiCo's intent and
ability, through the existence of its unused revolving credit facilities,
to refinance these borrowings on a long-term basis. PepsiCo's unused
credit facilities with lending institutions, which exist largely to support
the issuances of short-term borrowings, were $3.5 billion at March 23, 1996
and December 30, 1995.
- -28-
As described in PepsiCo's 1995 Annual Report, PepsiCo measures
financial leverage on a market value basis as well as a historical cost
basis. PepsiCo's market value ratio was 17% at March 23, 1996 and 18% at
December 30, 1995. The decrease was primarily due to a 13% increase in
PepsiCo's stock price. PepsiCo's historical cost ratio of net debt to net
capital employed was 47% at March 23, 1996 and 46% at December 30, 1995.
The increase primarily reflected a 2% increase in net debt.
PepsiCo's operating working capital position, which excludes short-
term investments and short-term borrowings, was a positive $237 million at
March 23, 1996 as compared to a negative $94 million at December 30, 1995
and a negative $203 million at March 25, 1995. PepsiCo has historically
had a negative operating working capital position, which principally
reflects the cash sales nature of its restaurant operations. This
condition effectively provided additional capital for investment. The
positive working capital position at the end of the first quarter compared
to the first quarter 1995 negative working capital reflects PepsiCo's
continued trend of increased investments in its more working capital
intensive bottling and snack food businesses combined with a decline in the
number of company-operated restaurants. The $331 million increase in
working capital compared to the amount at December 30, 1995 was primarily
due to lower accounts payable, led by the U.S. restaurant businesses,
reduced accrued compensation and benefits, lower accrued marketing,
primarily U.S. beverages and snack foods, and increased prepaid expenses,
taxes and other current assets. These increases in working capital were
partially offset by a reclassification from long-term to current
liabilities.
Shareholders' equity increased $50 million as net income of $394
million and a $66 million increase in capital in excess of par value were
partially offset by $157 million of dividends declared, a $232 million
increase in treasury stock and a $21 million net unfavorable change in the
currency translation account.
Forward-Looking Statements - Safe Harbor
From time to time, in both written reports and oral statements by PepsiCo
senior management, we may express our expectations regarding future
performance of the Company. These "forward-looking statements" are
inherently uncertain, and investors must recognize that events could turn
out to be other than what senior management expected. Key factors
impacting current and future performance are described in PepsiCo's 1995
Annual Report in Management's Analysis - Worldwide Marketplace on page 14.
- -29-
<PAGE>
<audit-report>
Independent Accountants' Review Report
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of March 23, 1996 and the related
condensed consolidated statements of income and cash flows for the twelve
weeks ended March 23, 1996 and March 25, 1995. These financial statements
are the responsibility of PepsiCo, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries
as of December 30, 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended not presented
herein; and in our report dated February 6, 1996, 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 30, 1995, is fairly presented, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Our report, referred to above, contains an explanatory paragraph that
states that PepsiCo, Inc. in 1995 adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," and in 1994 adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" and
changed its method for calculating the market-related value of pension plan
assets used in the determination of pension expense.
KPMG Peat Marwick LLP
New York, New York
April 30, 1996
- -30-
</audit-report>
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 11 - Computation of Net Income Per Share
of Capital Stock - Primary and Fully Diluted
Exhibit 12 - Computation of Ratio of Earnings to
Fixed Charges
Exhibit 15 - Letter from KPMG Peat Marwick LLP regarding
Unaudited Interim Financial Information
(Accountants' Acknowledgment)
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
PepsiCo filed a Current Report on Form 8-K dated January 10,
1996 attaching the PepsiCo, Inc. press release of January 9,
1996 which announced its adoption in 1995 of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
PepsiCo filed a Current Report on Form 8-K dated February 7,
1996 attaching PepsiCo, Inc.'s 1995 earnings release of
February 6, 1996.
- -31-
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned.
PEPSICO, INC.
(Registrant)
Date May 9, 1996 Robert G. Dettmer
Executive Vice President and
Chief Financial Officer
Date May 9, 1996 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
- -32-
EXHIBIT 11
PEPSICO, INC. AND SUBSIDIARIES
Computation of Net Income Per Share of Capital Stock - Primary (a)
(in millions except per share amounts, unaudited)
12 Weeks Ended
3/23/96 3/25/95
Shares outstanding at beginning
of period 1,576 1,580
Weighted average of shares issued
during the period for exercise of
stock options, conversion of
debentures and payment of compensation
awards 4 2
Shares repurchased (weighted) (5) (5)
Dilutive shares contingently issuable
upon exercise of stock options,
conversion of debentures and
payment of compensation awards,
net of shares assumed to have been
purchased for treasury (at the
average price) with assumed proceeds
from exercise of stock options and
compensation awards 44 22
Total shares - primary 1,619 1,599
Net income $ 394 $ 321
Net income per share - primary $ 0.24 $ 0.20
(a) Adjusted to reflect a two-for-one stock split described in Note 2 to
Condensed Consolidated Financial Statements.
- -33-
PEPSICO, INC. AND SUBSIDIARIES
Computation of Net Income Per Share of Capital Stock - Fully Diluted (a)
(in millions except per share amounts, unaudited)
12 Weeks Ended
3/23/96 3/25/95
Shares outstanding at beginning
of period 1,576 1,580
Shares issued during the period for
exercise of stock options, conversion
of debentures and payment of
compensation awards 9 4
Shares repurchased (weighted) (5) (5)
Dilutive shares contingently issuable
upon exercise of stock options,
conversion of debentures and payment
of compensation awards, net of
shares assumed to have been
purchased for treasury (at the
higher of average or quarter-end
price) with assumed proceeds from
exercise of stock options and
compensation awards 44 26
Total shares - fully diluted 1,624 1,605
Net income $ 394 $ 321
Net income per share - fully diluted $ 0.24 $ 0.20
(a) Adjusted to reflect a two-for-one stock split described in Note 2 to
Condensed Consolidated Financial Statements.
- -34-
EXHIBIT 12
PEPSICO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges (page 1 of 2)
(in millions except ratio amounts, unaudited)
12 Weeks Ended
3/23/96 3/25/95
Earnings:
Income before
income taxes $588 $496
Joint ventures and
minority interests,
net 10 5
Amortization of
capitalized interest 1 1
Interest expense 141 160
Interest portion
of net rent expense (a) 39 38
Earnings available
for fixed charges $779 $700
Fixed Charges:
Interest expense $141 $160
Capitalized interest 3 1
Interest portion of net
rent expense (a) 39 38
Total fixed charges $183 $199
Ratio of Earnings
to Fixed Charges 4.26 3.52
(a) One-third of net rent expense is the portion deemed representative of
the interest factor.
- -35-
PEPSICO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges (page 2 of 2)
(in millions except ratio amounts, unaudited)
52 Weeks 53 Weeks
Ended Ended 52 Weeks Ended
12/30/95 12/31/94 12/25/93 12/26/92 12/28/91
Earnings: (a)
Income before income
taxes and cumulative
effect of accounting
changes $2,432 $2,664 $2,423 $1,899 $1,660
Joint ventures and
minority interests, net 11 (19) (6) (1) (6)
Amortization of
capitalized interest 6 5 5 5 5
Interest expense 682 645 573 586 614
Interest portion of net
rent expense (b) 156 150 134 122 103
Earnings available for
fixed charges $3,287 $3,445 $3,129 $2,611 $2,376
Fixed Charges:
Interest expense $ 682 $ 645 $ 573 $ 586 $ 614
Capitalized interest 10 5 7 7 10
Interest portion of net
rent expense (b) 156 150 134 122 103
Total fixed charges $ 848 $ 800 $ 714 $ 715 $ 727
Ratio of Earnings
to Fixed Charges 3.88 4.31 4.38 3.65 3.27
(a) To improve comparability, the 1991 amounts have been restated to
report, under the equity method of accounting, the results of
previously consolidated snack food businesses in Spain, Portugal and
Greece, which were contributed to the new Snack Ventures Europe joint
venture with General Mills, Inc. in late 1992.
(b) One-third of net rent expense is the portion deemed representative of
the interest factor.
- -36-
EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
PepsiCo, Inc.
We hereby acknowledge our awareness of the use of our report dated April
30, 1996 included within the Quarterly Report on Form 10-Q of PepsiCo, Inc.
for the twelve weeks ended March 23, 1996, and incorporated by reference in
the following Registration Statements and in the related Prospectuses:
Registration
Description Statement Number
Form S-3
Pizza Hut Cincinnati, Inc. and Tri-L Pizza Huts,
Inc. acquisitions 33-37271
PepsiCo SharePower Stock Option Plan for Employees
of Monsieur Henri Wines, Ltd. 33-35601, 33-42122,
33-56666 & 33-66146
PepsiCo SharePower Stock Option Plan for Opco
Employees 33-30658 & 33-38014
PepsiCo SharePower Stock Option Plan for PCDC
Employees 33-42121
PepsiCo SharePower Stock Option Plan for Employees
of Chevys, Inc. 33-66144
PepsiCo SharePower Stock Option Plan for Employees of
Southern Tier Pizza Hut, Inc. and STPH Delco, Inc. 33-66148
Pepsi-Cola Bottling Company Annapolis acquisition 33-30372
$500,000,000 Euro-Medium-Term Notes 33-8677
$2,500,000,000 Debt Securities and Warrants 33-39283
Semoran Management Corporation acquisition 33-47527
$32,500,000 Puerto Rico Industrial, Medical and
Environmental Pollution Control Facilities
Financing Authority Adjustable Rate Industrial
Revenue Bonds 33-53232
$3,322,000,000 Debt Securities and Warrants 33-57181
$2,500,000,000 Debt Securities and Warrants 33-51389
Extension of the PepsiCo SharePower Stock Option
Plan to Employees of Snack Ventures Europe, a
joint venture between PepsiCo Foods International
and General Mills, Inc. 33-50685
$4,587,000,000 Debt Securities and Warrants 33-64243
Form S-4
Erin Investment Corp. acquisition 33-31844
A&M Food Services, Inc. acquisition 33-4635
Pizza Hut Titusville, Inc. acquisition 33-21607
U.S. Kentucky Fried Chicken operations of Collins
Foods International, Inc. acquisition 33-37978
Pizza Management, Inc. acquisition 33-47314
- -37-
Form S-8
PepsiCo SharePower Stock Option Plan 33-35602, 33-29037,
33-42058, 33-51496, 33-54731 & 33-66150
PepsiCo SharePower Stock Option Plan for Opco
Employees 33-43189
1988 Director Stock Plan 33-22970
1979 Incentive Plan and the 1987 Incentive Plan 33-19539
1994 Long-Term Incentive Plan 33-54733
1995 Stock Option Incentive Plan 33-61731
1979 Incentive Plan 2-65410
PepsiCo, Inc. Long Term Savings Program 2-82645, 33-51514 &
33-60965
Long Term Savings Programs of Taco Bell Corp.,
Pizza Hut, Inc. and Kentucky Fried
Chicken Corporation, respectively 2-93163, 2-99532 &
33-10488
Restaurant Deferred Compensation Plan 333-01377
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
New York, New York
May 6, 1996
- -38-
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM PEPSICO, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE 12 WEEKS
ENDED MARCH 23, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> PepsiCo, Inc.
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<FISCAL-YEAR-END> Dec-26-1996
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0
<OTHER-SE> 7,334
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<INCOME-PRETAX> 588
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