FORM 10-Q
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 endedJune 17,September 9, 2006 (24(36 weeks)
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number1-1183
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
Number of shares of Common Stock outstanding as of July 7,October 6, 2006: 1,648,680,0851,642,081,426
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No. | ||
Part I Financial Information | ||
Item 1. Condensed Consolidated Financial Statements | ||
3 | ||
4 | ||
Condensed Consolidated Balance Sheet – | 5-6 | |
7 | ||
Item 2. Management’s Discussion and Analysis – Financial Review | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||
6/17/06 | 6/11/05 | 6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||||||
Net Revenue | $8,599 | $7,697 | $15,804 | $14,282 | $8,950 | $8,184 | $24,754 | $22,466 | ||||||||
Cost of sales | 3,809 | 3,314 | 6,988 | 6,184 | 4,030 | 3,515 | 11,018 | 9,699 | ||||||||
Selling, general and administrative expenses | 2,992 | 2,790 | 5,639 | 5,229 | 3,063 | 2,952 | 8,702 | 8,181 | ||||||||
Amortization of intangible assets | 36 | 37 | 67 | 66 | 41 | 37 | 108 | 103 | ||||||||
Operating Profit | 1,762 | 1,556 | 3,110 | 2,803 | 1,816 | 1,680 | 4,926 | 4,483 | ||||||||
Bottling equity income | 176 | 156 | 260 | 221 | 225 | 209 | 485 | 430 | ||||||||
Interest expense | (59) | (53) | (121) | (103) | (51) | (58) | (172) | (161) | ||||||||
Interest income | 26 | 28 | 71 | 51 | 39 | 37 | 110 | 88 | ||||||||
Income before income taxes | 1,905 | 1,687 | 3,320 | 2,972 | 2,029 | 1,868 | 5,349 | 4,840 | ||||||||
Provision for income taxes | 547 | 493 | 943 | 866 | 548 | 1,004 | 1,491 | 1,870 | ||||||||
Net Income | $1,358 | $1,194 | $ 2,377 | $ 2,106 | $1,481 | $ 864 | $ 3,858 | $ 2,970 | ||||||||
Net Income Per Common Share | ||||||||||||||||
Basic | $0.82 | $0.71 | $1.43 | $1.25 | $0.90 | $0.52 | $2.33 | $1.77 | ||||||||
Diluted | $0.80 | $0.70 | $1.41 | $1.23 | $0.88 | $0.51 | $2.28 | $1.74 | ||||||||
Cash Dividends Declared Per Common Share | $0.30 | $0.26 | $0.56 | $0.49 | $0.30 | $0.26 | $0.86 | $0.75 |
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
24 Weeks Ended | 36 Weeks Ended | |||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||
Operating Activities | ||||||||
Net income | $ 2,377 | $ 2,106 | $ 3,858 | $ 2,970 | ||||
Depreciation and amortization | 610 | 588 | 940 | 896 | ||||
Stock-based compensation expense | 128 | 147 | 191 | 215 | ||||
Excess tax benefits from share-based payment arrangements | (64) | – | (91) | – | ||||
Cash payments for merger-related costs and restructuring charges | – | (19) | – | (21) | ||||
Pension and retiree medical plan contributions | (60) | (78) | (90) | (104) | ||||
Pension and retiree medical plan expenses | 248 | 204 | 371 | 306 | ||||
Bottling equity income, net of dividends | (220) | (159) | (409) | (345) | ||||
Deferred income taxes and other tax charges and credits | 14 | 66 | 48 | 290 | ||||
Change in accounts and notes receivable | (753) | (587) | (785) | (751) | ||||
Change in inventories | (396) | (282) | (246) | (104) | ||||
Change in prepaid expenses and other current assets | (29) | 12 | 2 | 48 | ||||
Change in accounts payable and other current liabilities | – | (206) | 263 | 163 | ||||
Change in income taxes payable | (6) | 549 | 242 | 918 | ||||
Other, net | (19) | 22 | (2) | 77 | ||||
Net Cash Provided by Operating Activities | 1,830 | 2,363 | 4,292 | 4,558 | ||||
Investing Activities | ||||||||
Snack Ventures Europe (SVE) minority interest acquisition | – | (750) | – | (750) | ||||
Capital spending | (708) | (478) | (1,130) | (796) | ||||
Sales of property, plant and equipment | 23 | 42 | 37 | 65 | ||||
Investment in finance assets | (11) | – | ||||||
Other acquisitions and investments in noncontrolled affiliates | (434) | (214) | (444) | (302) | ||||
Cash proceeds from sale of The Pepsi Bottling Group (PBG) stock | 180 | 107 | 285 | 177 | ||||
Divestitures | – | 3 | 37 | 3 | ||||
Short-term investments, by original maturity | ||||||||
More than three months – purchases | (9) | (42) | (17) | (82) | ||||
More than three months – maturities | 20 | 24 | 21 | 56 | ||||
Three months or less, net | 897 | (1,144) | 1,095 | (1,832) | ||||
Net Cash Used for Investing Activities | (31) | (2,452) | (127) | (3,461) | ||||
Financing Activities | ||||||||
Proceeds from issuances of long-term debt | 109 | 13 | 25 | 13 | ||||
Payments of long-term debt | (135) | (85) | (136) | (145) | ||||
Short-term borrowings, by original maturity | ||||||||
More than three months – proceeds | 14 | 44 | 127 | 51 | ||||
More than three months – payments | (229) | (10) | (256) | (66) | ||||
Three months or less, net | (1,285) | 902 | (1,905) | 1,236 | ||||
Cash dividends paid | (863) | (774) | (1,359) | (1,209) | ||||
Share repurchases – common | (1,469) | (1,240) | (2,157) | (2,085) | ||||
Share repurchases – preferred | (5) | (11) | (7) | (14) | ||||
Proceeds from exercises of stock options | 697 | 590 | 1,008 | 707 | ||||
Excess tax benefits from share-based payment arrangements | 64 | – | 91 | – | ||||
Net Cash Used for Financing Activities | (3,102) | (571) | (4,569) | (1,512) | ||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | 6 | (25) | 13 | (21) | ||||
Net Decrease in Cash and Cash Equivalents | (1,297) | (685) | (391) | (436) | ||||
Cash and Cash Equivalents – Beginning of year | 1,716 | 1,280 | 1,716 | 1,280 | ||||
Cash and Cash Equivalents – End of period | $ 419 | $ 595 | $ 1,325 | $ 844 | ||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
(Unaudited) | (Unaudited) | |||||||
6/17/06 | 12/31/05 | 9/9/06 | 12/31/05 | |||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ 419 | $ 1,716 | $ 1,325 | $ 1,716 | ||||
Short-term investments | 2,259 | 3,166 | 2,075 | 3,166 | ||||
Accounts and notes receivable, less | 4,104 | 3,261 | ||||||
Accounts and notes receivable, less | 4,154 | 3,261 | ||||||
Inventories | ||||||||
Raw materials | 865 | 738 | 855 | 738 | ||||
Work-in-process | 228 | 112 | 172 | 112 | ||||
Finished goods | 1,007 | 843 | 935 | 843 | ||||
2,100 | 1,693 | 1,962 | 1,693 | |||||
Prepaid expenses and other current assets | 648 | 618 | 623 | 618 | ||||
Total Current Assets | 9,530 | 10,454 | 10,139 | 10,454 | ||||
Property, Plant and Equipment | 17,821 | 17,145 | 18,220 | 17,145 | ||||
Accumulated Depreciation | (8,884) | (8,464) | (9,109) | (8,464) | ||||
8,937 | 8,681 | 9,111 | 8,681 | |||||
Amortizable Intangible Assets, net | 548 | 530 | 613 | 530 | ||||
Goodwill | 4,271 | 4,088 | 4,473 | 4,088 | ||||
Other Nonamortizable Intangible Assets | 1,156 | 1,086 | 1,164 | 1,086 | ||||
Nonamortizable Intangible Assets | 5,427 | 5,174 | 5,637 | 5,174 | ||||
Investments in Noncontrolled Affiliates | 3,509 | 3,485 | 3,626 | 3,485 | ||||
Other Assets | 3,475 | 3,403 | 3,140 | 3,403 | ||||
Total Assets | $31,426 | $31,727 | $32,266 | $31,727 | ||||
Continued on next page.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amounts)
(Unaudited) | (Unaudited) | |||||||
6/17/06 | 12/31/05 | 9/9/06 | 12/31/05 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities | ||||||||
Short-term obligations | $ 1,161 | $ 2,889 | $ 568 | $ 2,889 | ||||
Accounts payable and other current liabilities | 6,184 | 5,971 | 6,498 | 5,971 | ||||
Income taxes payable | 449 | 546 | 668 | 546 | ||||
Total Current Liabilities | 7,794 | 9,406 | 7,734 | 9,406 | ||||
Long-term Debt Obligations | 2,542 | 2,313 | 2,528 | 2,313 | ||||
Other Liabilities | 4,430 | 4,323 | 4,534 | 4,323 | ||||
Deferred Income Taxes | 1,427 | 1,434 | 1,462 | 1,434 | ||||
Total Liabilities | 16,193 | 17,476 | 16,258 | 17,476 | ||||
Commitments and Contingencies | ||||||||
Preferred Stock, no par value | 41 | 41 | 41 | 41 | ||||
Repurchased Preferred Stock | (114) | (110) | (117) | (110) | ||||
Common Shareholders’ Equity | ||||||||
Common stock, par value 1 2/3 cents per share: | ||||||||
Authorized 3,600 shares, issued 6/06 and 12/05 – 1,782 shares | 30 | 30 | ||||||
Authorized 3,600 shares, issued 9/06 and 12/05 – 1,782 shares | 30 | 30 | ||||||
Capital in excess of par value | 552 | 614 | 527 | 614 | ||||
Retained earnings | 22,563 | 21,116 | 23,546 | 21,116 | ||||
Accumulated other comprehensive loss | (902) | (1,053) | (811) | (1,053) | ||||
22,243 | 20,707 | 23,292 | 20,707 | |||||
Less: repurchased common stock, at cost: | ||||||||
6/06 – 133 shares, 12/05 – 126 shares | (6,937) | (6,387) | ||||||
9/06 – 136 shares, 12/05 – 126 shares | (7,208) | (6,387) | ||||||
Total Common Shareholders’ Equity | 15,306 | 14,320 | 16,084 | 14,320 | ||||
Total Liabilities and Shareholders’ Equity | $31,426 | $31,727 | $32,266 | $31,727 | ||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||
6/17/06 | 6/11/05 | 6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||||||
Net Income | $1,358 | $1,194 | $2,377 | $2,106 | $1,481 | $864 | $3,858 | $2,970 | ||||||||
Other Comprehensive Income/(Loss) | ||||||||||||||||
Currency translation adjustment | 107 | (190) | 172 | (176) | 90 | 95 | 262 | (81) | ||||||||
Cash flow hedges, net of tax: | ||||||||||||||||
Net derivative (losses)/gains | (16) | 11 | (12) | 23 | (4) | 18 | (16) | 41 | ||||||||
Reclassification of (gains)/losses to net income | (1) | 1 | (7) | 9 | – | (4) | (7) | 5 | ||||||||
Unrealized loss on securities, net of tax | (3) | (1) | (6) | (4) | ||||||||||||
Unrealized gains/(losses) on securities, net of tax | 4 | – | (2) | (4) | ||||||||||||
Other | – | 2 | 4 | 4 | 1 | – | 5 | 4 | ||||||||
87 | (177) | 151 | (144) | 91 | 109 | 242 | (35) | |||||||||
Comprehensive Income | $1,445 | $1,017 | $2,528 | $1,962 | $1,572 | $973 | $4,100 | $2,935 | ||||||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
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 June 17,September 9, 2006, the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 2436 weeks ended June 17,September 9, 2006 and June 11,September 3, 2005, and the Condensed Consolidated Statement of Cash Flows for the 2436 weeks ended June 17,September 9, 2006 and June 11,September 3, 2005 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 fiscal year ended December 31, 2005. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 2436 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. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
Bottling equity income includes our share of the net income or loss of our noncontrolled bottling affiliates and the impact of any changes in our ownership interests in these affiliates. Bottling equity income includes pre-tax gains on our sale of PBG stock of $56$61 million and $106$167 million in the 12 and 2436 weeks ended June 17,September 9, 2006, respectively, and pre-tax gains of $35$41 million and $64$105 million in the 12 and 2436 weeks ended June 11,September 3, 2005, respectively.
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 2006 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||
6/17/06 | 6/11/05 | 6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||||||
Net Revenue | ||||||||||||||||
FLNA | $2,567 | $2,373 | $ 4,960 | $ 4,636 | $2,642 | $2,461 | $ 7,602 | $ 7,097 | ||||||||
PBNA | 2,505 | 2,218 | 4,496 | 4,002 | 2,608 | 2,520 | 7,104 | 6,522 | ||||||||
PI | 3,154 | 2,756 | 5,532 | 4,877 | 3,298 | 2,839 | 8,830 | 7,716 | ||||||||
QFNA | 373 | 350 | 816 | 767 | 402 | 364 | 1,218 | 1,131 | ||||||||
$8,599 | $7,697 | $15,804 | $14,282 | $8,950 | $8,184 | $24,754 | $22,466 | |||||||||
Operating Profit | ||||||||||||||||
FLNA | $ 634 | $ 594 | $1,203 | $1,133 | $ 694 | $ 655 | $1,897 | $1,788 | ||||||||
PBNA | 626 | 555 | 1,054 | 970 | 603 | 628 | 1,657 | 1,598 | ||||||||
PI | 546 | 452 | 917 | 759 | 554 | 473 | 1,471 | 1,232 | ||||||||
QFNA | 115 | 113 | 266 | 258 | 123 | 111 | 389 | 369 | ||||||||
Total division | 1,921 | 1,714 | 3,440 | 3,120 | 1,974 | 1,867 | 5,414 | 4,987 | ||||||||
Corporate | (159) | (158) | (330) | (317) | (158) | (187) | (488) | (504) | ||||||||
$1,762 | $1,556 | $3,110 | $2,803 | $1,816 | $1,680 | $4,926 | $4,483 | |||||||||
6/17/06 | 12/31/05 | 9/9/06 | 12/31/05 | |||||||||||||
Total Assets | ||||||||||||||||
FLNA | $ 6,257 | $ 5,948 | $ 6,235 | $ 5,948 | ||||||||||||
PBNA | 6,895 | 6,316 | 6,737 | 6,316 | ||||||||||||
PI | 10,920 | 9,983 | 10,984 | 9,983 | ||||||||||||
QFNA | 988 | 989 | 1,019 | 989 | ||||||||||||
Total division | 25,060 | 23,236 | 24,975 | 23,236 | ||||||||||||
Corporate | 3,188 | 5,331 | 3,986 | 5,331 | ||||||||||||
Investments in bottling affiliates | 3,178 | 3,160 | 3,305 | 3,160 | ||||||||||||
$31,426 | $31,727 | $32,266 | $31,727 | |||||||||||||
Intangible Assets
6/17/06 | 12/31/05 | 9/9/06 | 12/31/05 | |||||
Amortizable intangible assets, net | ||||||||
Brands | $1,130 | $1,054 | $1,219 | $1,054 | ||||
Other identifiable intangibles | 263 | 257 | 277 | 257 | ||||
1,393 | 1,311 | 1,496 | 1,311 | |||||
Accumulated amortization | (845) | (781) | (883) | (781) | ||||
$ 548 | $ 530 | $ 613 | $ 530 | |||||
The change in the book value of nonamortizable intangible assets is as follows:
| Balance 12/31/05 | Acquisitions | | Translation & Other | | Balance 6/17/06 | | Balance 12/31/05 | Acquisitions | | Translation & Other | | Balance 9/9/06 | |||||||||||
FLNA | ||||||||||||||||||||||||
Goodwill | $ | 145 | $ | – | $ | 6 | $ | 151 | $ | 145 | $ | 139 | $ | 6 | $ | 290 | ||||||||
PBNA | ||||||||||||||||||||||||
Goodwill | 2,164 | – | 3 | 2,167 | 2,164 | – | 2 | 2,166 | ||||||||||||||||
Brands | 59 | – | – | 59 | 59 | – | – | 59 | ||||||||||||||||
2,223 | – | 3 | 2,226 | 2,223 | – | 2 | 2,225 | |||||||||||||||||
PI | ||||||||||||||||||||||||
Goodwill | 1,604 | 104 | 70 | 1,778 | 1,604 | 160 | 78 | 1,842 | ||||||||||||||||
Brands | 1,026 | – | 70 | 1,096 | 1,026 | – | 78 | 1,104 | ||||||||||||||||
2,630 | 104 | 140 | 2,874 | 2,630 | 160 | 156 | 2,946 | |||||||||||||||||
QFNA | ||||||||||||||||||||||||
Goodwill | 175 | – | – | 175 | 175 | – | – | 175 | ||||||||||||||||
Corporate | ||||||||||||||||||||||||
Pension intangible | 1 | – | – | 1 | 1 | – | – | 1 | ||||||||||||||||
Total goodwill | 4,088 | 104 | 79 | 4,271 | 4,088 | 299 | 86 | 4,473 | ||||||||||||||||
Total brands | 1,085 | – | 70 | 1,155 | 1,085 | – | 78 | 1,163 | ||||||||||||||||
Total pension intangible | 1 | – | – | 1 | 1 | – | – | 1 | ||||||||||||||||
$ | 5,174 | $ | 104 | $ | 149 | $ | 5,427 | $ | 5,174 | $ | 299 | $ | 164 | $ | 5,637 | |||||||||
Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) 123R,Share-Based Payment, under the modified prospective method. Since we had previously accounted for our stock-based compensation plans under the fair value provisions of SFAS 123, our adoption did not significantly impact our financial position or our results of operations. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows.inflow.
We account for our employee stock options, which include grants under our executive program and broad-based SharePower program, under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. The fair value of stock option grants is amortized to expense over the vesting period, generally three years. Executives who are awarded long-term incentives based on their performance are offered the choice of stock options or restricted stock units (RSUs). Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Senior officers do not have a choice and are granted 50% stock options and 50% RSUs. RSU expense is based on the fair value of PepsiCo stock on the date of grant and is amortized over the vesting period, generally three years. Each RSU is settled in a share of our stock after the vesting period. Vesting of RSU awards for senior officers is contingent upon the achievement of pre-established performance targets. As of June 17,September 9, 2006, 37 million shares were available for future stock-based compensation grants.
For the 12 weeks, we recognized stock-based compensation expense of $60$64 million in 2006 and $70$68 million in 2005, as well as related income tax benefits recognized in earnings of $17$18 million and $20$19 million, respectively. For the 2436 weeks, we recognized stock-based compensation expense of $128$191 million in 2006 and $147$215 million in 2005, as well as related income tax benefits recognized in earnings of $36$54 million and $41$60 million, respectively. For the 12 weeks, stock-based compensation cost of less than $1 million in 2006 and $1 million in 2005 was capitalized in connection with our Business Process Transformation (BPT) initiative. For the 2436 weeks, stock-based compensation cost of $2 million in 2006 and $2$3 million in 2005 was capitalized in connection with our BPT initiative.
Our weighted average Black-Scholes fair value assumptions are as follows:
24 Weeks Ended | 36 Weeks Ended | |||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||
Expected life | 6 yrs. | 6 yrs. | 6 yrs. | 6 yrs. | ||||
Risk free interest rate | 4.5% | 3.8% | 4.5% | 3.8% | ||||
Expected volatility(a) | 18% | 24% | 18% | 24% | ||||
Expected dividend yield | 1.9% | 1.8% | 1.9% | 1.8% |
(a) | Reflects movements in our stock price over the most recent historical period equivalent to the |
| expected life. |
A summary of option activity for the 2436 weeks ended June 17,September 9, 2006 is presented below:
Our Stock Option Activity(a)
Options | Average Price(b) | Average Life (years)(c) | Aggregate Intrinsic | Options(a) | Average Price(b) | Average Life (years)(c) | Aggregate Intrinsic Value(d) | |||||||||
Outstanding at January 1, 2006 | 150,149 | $42.03 | 150,149 | $42.03 | ||||||||||||
Granted | 11,786 | 57.50 | 11,786 | 57.50 | ||||||||||||
Exercised | (11,438) | 38.18 | (11,438) | 38.18 | ||||||||||||
Forfeited/expired | (845) | 47.40 | (845) | 47.40 | ||||||||||||
Outstanding at March 25, 2006 | 149,652 | 43.48 | 149,652 | 43.48 | ||||||||||||
Granted | 166 | 57.81 | 166 | 57.81 | ||||||||||||
Exercised | (6,965) | 37.54 | (6,965) | 37.54 | ||||||||||||
Forfeited/expired | (750) | 49.02 | (750) | 49.02 | ||||||||||||
Outstanding at June 17, 2006 | 142,103 | $43.80 | 5.75 | $2,254,878 | 142,103 | 43.80 | ||||||||||
Granted | 223 | 61.60 | ||||||||||||||
Exercised | (8,211) | 38.87 | ||||||||||||||
Forfeited/expired | (1,440) | 48.42 | ||||||||||||||
Exercisable at June 17, 2006 | 102,894 | $40.71 | 4.78 | $1,948,253 | ||||||||||||
Outstanding at September 9, 2006 | 132,675 | $44.07 | 5.67 | $2,734,830 | ||||||||||||
Exercisable at September 9, 2006 | 95,759 | $40.94 | 4.63 | $2,273,435 |
(a) | Options are in thousands and include options previously granted under Quaker plans. No additional options or shares may be granted under the Quaker plans. | |
(b) | Weighted-average exercise price. | |
(c) | Weighted-average contractual life remaining. | |
(d) | In thousands. |
A summary of RSU activity for the 2436 weeks ended June 17,September 9, 2006 is presented below:
Our RSU Activity(a)
RSUs | Average Intrinsic Value(b) | Average Life (years)(c) | Aggregate Intrinsic | RSUs(a) | Average Intrinsic Value(b) | Average Life (years)(c) | Aggregate Intrinsic Value(d) | |||||||||
Outstanding at January 1, 2006 | 5,669 | $50.70 | 5,669 | $50.70 | ||||||||||||
Granted | 2,576 | 57.54 | 2,576 | 57.54 | ||||||||||||
Converted | (62) | 49.70 | (62) | 49.70 | ||||||||||||
Forfeited/expired | (159) | 50.30 | (159) | 50.30 | ||||||||||||
Outstanding at March 25, 2006 | 8,024 | 52.88 | 8,024 | 52.88 | ||||||||||||
Granted | 103 | 58.27 | 103 | 58.27 | ||||||||||||
Converted | (54) | 49.85 | (54) | 49.85 | ||||||||||||
Forfeited/expired | (151) | 52.54 | (151) | 52.54 | ||||||||||||
Outstanding at June 17, 2006 | 7,922 | $53.01 | 1.85 | $472,967 | 7,922 | 53.01 | ||||||||||
Granted | – | – | ||||||||||||||
Converted | (41) | 50.91 | ||||||||||||||
Forfeited/expired | (180) | 56.12 | ||||||||||||||
Outstanding at September 9, 2006 | 7,701 | $52.94 | 1.57 | $498,499 | ||||||||||||
(a) | RSUs are in thousands. |
(b) | Weighted-average intrinsic value at grant date. |
(c) | Weighted-average contractual life remaining. |
(d) | In thousands. |
Other Stock-Based Compensation Data
12 Weeks Ended | 24 Weeks Ended | |||||||
6/17/06 | 6/11/05 | 6/17/06 | 6/11/05 | |||||
Stock Options | ||||||||
Weighted-average fair value of options granted | $13.06 | $13.76 | $12.77 | $13.48 | ||||
Total intrinsic value of options exercised(a) | $153,585 | $198,340 | $389,655 | $337,876 | ||||
RSUs | ||||||||
Total intrinsic value of RSUs converted(a) | $3,194 | $1,418 | $6,873 | $2,648 |
__________________________ |
(a) | In thousands. |
As of June 17,September 9, 2006, there was $431$360 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of 1.71.6 years.
Pension and Retiree Medical Benefits
The components of net periodic benefit cost for pension and retiree medical plans are as follows:
12 Weeks Ended | 12 Weeks Ended | |||||||||||||||||||||||
Pension | Retiree Medical | Pension | Retiree Medical | |||||||||||||||||||||
6/17/06 6/11/05 | 6/17/06 6/11/05 | 6/17/06 6/11/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | |||||||||||||||||||
U.S. | International | U.S. | International | |||||||||||||||||||||
Service cost | $ 56 | $ 49 | $ 14 | $ 8 | $11 | $ 9 | $ 56 | $ 49 | $ 12 | $ 8 | $11 | $ 9 | ||||||||||||
Interest cost | 73 | 67 | 15 | 14 | 17 | 18 | 73 | 68 | 15 | 13 | 17 | 18 | ||||||||||||
Expected return on plan assets | (90) | (79) | (18) | (17) | – | – | (90) | (78) | (18) | (18) | – | – | ||||||||||||
Amortization of prior service | 1 | 1 | – | – | (3) | (2) | 1 | 1 | – | – | (3) | (2) | ||||||||||||
Amortization of experience | 38 | 24 | 6 | 4 | 5 | 6 | 38 | 24 | 6 | 4 | 5 | 6 | ||||||||||||
Total expense | $ 78 | $ 62 | $ 17 | $ 9 | $30 | $31 | $ 78 | $ 64 | $ 15 | $ 7 | $30 | $ 31 | ||||||||||||
24 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||||
Pension | Retiree Medical | Pension | Retiree Medical | |||||||||||||||||||||
6/17/06 6/11/05 | 6/17/06 6/11/05 | 6/17/06 6/11/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | |||||||||||||||||||
U.S. | International | U.S. | International | |||||||||||||||||||||
Service cost | $ 112 | $ 98 | $ 26 | $ 16 | $22 | $18 | $ 168 | $ 147 | $ 38 | $ 24 | $33 | $27 | ||||||||||||
Interest cost | 146 | 135 | 30 | 28 | 34 | 36 | 219 | 203 | 45 | 41 | 51 | 54 | ||||||||||||
Expected return on plan assets | (180) | (159) | (36) | (34) | – | – | (270) | (237) | (54) | (52) | – | – | ||||||||||||
Amortization of prior service | 2 | 2 | – | – | (6) | (4) | 3 | 3 | – | – | (9) | (6) | ||||||||||||
Amortization of experience | 76 | 48 | 12 | 8 | 10 | 12 | 114 | 72 | 18 | 12 | 15 | 18 | ||||||||||||
Total expense | $ 156 | $ 124 | $ 32 | $ 18 | $60 | $62 | $ 234 | $ 188 | $ 47 | $ 25 | $90 | $93 | ||||||||||||
Net Income Per Common Share
The computations of basic and diluted net income per common share are as follows:
12 Weeks Ended | 12 Weeks Ended | |||||||||||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||||||||||
Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | |||||||||
Net income | $1,358 | $1,194 | $1,481 | $864 | ||||||||||||
Preferred shares: | ||||||||||||||||
Dividends | (1) | – | – | (1) | ||||||||||||
Redemption premium | (2) | (5) | (3) | (2) | ||||||||||||
Net income available for common shareholders | $1,355 | 1,652 | $1,189 | 1,676 | $1,478 | 1,648 | $861 | 1,668 | ||||||||
Basic net income per common share | $0.82 | $0.71 | $0.90 | $0.52 | ||||||||||||
Net income available for common shareholders | $1,355 | 1,652 | $1,189 | 1,676 | $1,478 | 1,648 | $861 | 1,668 | ||||||||
Dilutive securities: | ||||||||||||||||
Stock options and RSUs(b) | – | 35 | – | 34 | – | 38 | – | 33 | ||||||||
ESOP convertible preferred stock | 3 | 2 | 5 | 2 | 3 | 2 | 3 | 2 | ||||||||
Diluted | $1,358 | 1,689 | $1,194 | 1,712 | $1,481 | 1,688 | $864 | 1,703 | ||||||||
Diluted net income per common share | $0.80 | $0.70 | $0.88 | $0.51 | ||||||||||||
24 Weeks Ended | 36 Weeks Ended | |||||||||||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||||||||||
Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | |||||||||
Net income | $2,377 | $2,106 | $3,858 | $2,970 | ||||||||||||
Preferred shares: | ||||||||||||||||
Dividends | (1) | (1) | (1) | (2) | ||||||||||||
Redemption premium | (4) | (9) | (7) | (11) | ||||||||||||
Net income available for common shareholders | $2,372 | 1,654 | $2,096 | 1,677 | $3,850 | 1,652 | $2,957 | 1,674 | ||||||||
Basic net income per common share | $1.43 | $1.25 | $2.33 | $1.77 | ||||||||||||
Net income available for common shareholders | $2,372 | 1,654 | $2,096 | 1,677 | $3,850 | 1,652 | $2,957 | 1,674 | ||||||||
Dilutive securities: | ||||||||||||||||
Stock options and RSUs(b) | – | 36 | – | 33 | – | 36 | – | 33 | ||||||||
ESOP convertible preferred stock | 5 | 2 | 10 | 2 | 8 | 2 | 13 | 2 | ||||||||
Diluted | $2,377 | 1,692 | $2,106 | 1,712 | $3,858 | 1,690 | $2,970 | 1,709 | ||||||||
Diluted net income per common share | $1.41 | $1.23 | $2.28 | $1.74 | ||||||||||||
(a) Weighted average common shares outstanding. (b)Out-of-the-money options for the 12 and 36 weeks in 2006 and for the 12 weeks in 2005 were nominal. Options to purchase 4.0 million shares for the 36 weeks in 2005 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options had an average exercise price of $63.00 for both the 12 and 36 weeks in 2006. Out-of-the-money options had average exercise prices of $54.75 for the 12 weeks and $53.77 for the 36 weeks in 2005. |
Debt Obligations and Commitments
In the second quarter of 2006, we entered into a new unsecured revolving credit agreement which enables us to borrow up to $1.5 billion subject to customary terms and conditions. Funds borrowed under this agreement may be used for general corporate purposes, including supporting our outstanding commercial paper issuances. The agreement terminates in May 2011 and replaces our previous $2.1 billion of credit facilities. As of June 17,September 9, 2006, we have reclassified $1.4$1.5 billion of short-term debt to long-term based on our intent and ability to refinance on a long-term basis.
In the third quarter of 2006, we entered into a U.S. $2.5 billion euro medium term note program. Under the program, we may issue unsecured notes under mutually agreed upon terms with the purchasers of the notes. Proceeds from any issuance of notes may be used for general corporate purposes, except as otherwise specified in the related prospectus. As of September 9, 2006, we have no outstanding notes under the program.
Additionally, in the fourth quarter of 2006, we entered into a long-term non-cancelable contract to purchase cooking oil. The total minimum commitment value of this contract is approximately $1.1 billion, of which $26 million is due in 2006, $308 million is due in 2007-2008, $308 million is due in 2009-2010 and $436 million is due in 2011-2013.
Supplemental Cash Flow Information
24 Weeks Ended | 36 Weeks Ended | |||||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||||
Interest paid | $113 | $88 | $154 | $133 | ||||||
Income taxes paid, net of refunds | $935 | $252 | $1,203 | $668 | ||||||
Acquisitions(a): | ||||||||||
Fair value of assets acquired | $492 | $ 784 | $ 574 | $ 929 | ||||||
Less: Cash paid and debt assumed | (434) | (964) | (444) | (1,052) | ||||||
Add: Minority interest eliminated | – | 208 | – | 216 | ||||||
Liabilities assumed | $ 58 | $ 28 | $ 130 | $ 93 | ||||||
(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. |
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48),which clarifies the accounting for uncertainty in tax positions. This InterpretationFIN 48 requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the end of our 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. We are currently evaluating the impact of adopting SAB 108 on our financial statements.
In September 2006, the FASB issued SFAS 157Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.
In September 2006, the FASB issued SFAS 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans (our Plans) as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. We estimate the impact of adopting SFAS 158 to be approximately $2 billion, reflected as a reduction in net assets on our balance sheet, with no impact to our statements of income or cash flows. SFAS 158 also requires us to measure the funded status of our Plans as of our year-end balance sheet date no later than 2008. We do not expect the impact of the change in measurement date to have a material impact on our financial statements.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL REVIEW
Our discussion and analysis is an integral part of understanding our financial results. Also refer toBasis 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
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. Differences between estimated expenses and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also recognized during the year incurred, generally in proportion to revenue.
Income Taxes
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. The IRS audits of our tax returns for the years 1998 through 2002 may be concluded in 2006. SignificantIn accordance with our income tax policy, significant or unusual items are separately recognized in the quarter in which they occur.
On January 1, 2006, we adopted SFAS 123R under the modified prospective method. Since we had previously accounted for our stock-based compensation plans under the fair value provisions of SFAS 123, our adoption did not significantly impact our financial position or our results of operations. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows.inflow.
We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. The fair value of stock option grants is amortized to expense over the vesting period, generally three years. RSU expense is based on the fair value of
PepsiCo stock on the date of grant and is amortized over the vesting period, generally three years.
Expected volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life.
For our 2006 Black-Scholes assumptions and other stock-based compensation required disclosures, seeStock-Based Compensationin the Notes to the Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48,which clarifies the accounting for uncertainty in tax positions. This InterpretationFIN 48 requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
In September 2006, the SEC issued SAB 108 to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the end of our 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. We are currently evaluating the impact of adopting SAB 108 on our financial statements.
In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.
In September 2006, the FASB issued SFAS 158 which requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans (our Plans) as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. We estimate the impact of adopting SFAS 158 to be approximately $2 billion, reflected as a reduction in net assets on our balance sheet, with no impact to our statements of income or cash flows. SFAS 158 also requires us to measure the funded status of our Plans as of our year-end balance sheet date no later than 2008. We do not expect the impact of the change in measurement date to have a material impact on our financial statements.
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. We undertake no obligation to update any forward-looking statement.
Our operations outside of the United States generate approximately 40% of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 2436 weeks, net favorable foreign currency contributed slightly0.5 percentage points to net revenue growth, primarily due to increases in the Canadian dollar, Brazilian real and the Mexican peso, partially offset by declines in the euro and the British pound.dollar. Currency declines which are not offset could adversely impact our future results.
While there is continued pricing pressure on our raw materials and energy costs, weWe expect to be able to mitigate the impact of these increasedincreases in our raw material and energy costs through our hedging strategies and ongoing productivity initiatives.
Cautionary statements included in Management’s Discussion and Analysis and in Item 1A. in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 should be considered when evaluating our trends and future results.
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.
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. For the 12 weeks, total servings increased 9%6%, with worldwide beverages growing 10%nearly 6% and worldwide snacks growing almost 8%. For the 2436 weeks, total servings increased 8%7%, with worldwide beverages growing 9%nearly 8% and worldwide snacks growing over 6%.
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 secondthird quarter beverage volume includes PBNA bottler sales for AprilJune, July and May and PI bottler sales for March, April, and May.August.
Consolidated Results
Total Net Revenue and Operating Profit
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||||||||
Total net revenue | $8,599 | $7,697 | 12% | $15,804 | $14,282 | 11% | $8,950 | $8,184 | 9% | $24,754 | $22,466 | 10% | ||||||||||||
Operating profit | ||||||||||||||||||||||||
FLNA | $ 634 | $ 594 | 7% | $1,203 | $1,133 | 6% | $ 694 | $ 655 | 6% | $1,897 | $1,788 | 6% | ||||||||||||
PBNA | 626 | 555 | 13% | 1,054 | 970 | 9% | 603 | 628 | (4)% | 1,657 | 1,598 | 4% | ||||||||||||
PI | 546 | 452 | 21% | 917 | 759 | 21% | 554 | 473 | 17% | 1,471 | 1,232 | 19% | ||||||||||||
QFNA | 115 | 113 | 2% | 266 | 258 | 3% | 123 | 111 | 11% | 389 | 369 | 5.5% | ||||||||||||
Corporate unallocated | (159) | (158) | 1% | (330) | (317) | 4% | (158) | (187) | (15)% | (488) | (504) | (3)% | ||||||||||||
Total operating profit | $1,762 | $1,556 | 13% | $3,110 | $2,803 | 11% | $1,816 | $1,680 | 8% | $4,926 | $4,483 | 10% | ||||||||||||
Total operating profit margin | 20.5% | 20.2% | 0.3 | 19.7% | 19.6% | 0.1 | 20.3% | 20.5% | (0.2) | 19.9% | 20.0% | (0.1) |
12 Weeks
Net revenue increased 12%9% primarily reflecting higher volume and positive effective net pricing across all divisions. The volume gains contributed over 64 percentage points to net revenue growth and the effective net pricing contributed 43 percentage points. The impact of acquisitionsAcquisitions and foreign exchange each contributed 1 percentage point to net revenue growth.
Total operating profit increased 13%8% and margin increased 0.3decreased 0.2 percentage points. The operating profit performance reflects leverage from the net revenue growth, partially offset by the impact of higher raw material and energy costs.costs across all divisions.
Corporate unallocated expenses increased 1%.decreased $29 million. This increasedecrease primarily reflects the absence of two prior year items: (1) conforming our method of accounting across all divisions for certain freight, distribution, and employee benefits costs in 2005, which contributed $45 million to the decrease, partially offset by (2) the 2005 settlement of a class action lawsuit related to our purchases of high fructose corn syrup from 1991 to 1995, which decreased corporate unallocated expenses by $23 million in 2005. In 2006, higher costs associated with our BPT initiative which contributed 6 percentage points, partiallyof $13 million and higher employee-related costs of $9 million, were fully offset by lower
employee-related costs and net gains fromthe favorable impact of certain mark-to-market derivatives which reducedother corporate unallocated expenses by 3 percentage points and 2 percentage points, respectively.items. Corporate departmental expenses contributed almost 1 percentage point to the increase.were essentially flat.
2436 Weeks
Net revenue increased 11%10% primarily reflecting higher volume and positive effective net pricing across all divisions. The volume gains contributed 65 percentage points to net revenue growth and the effective net pricing contributed over 3 percentage points. The impact of acquisitionsAcquisitions and foreign exchange contributed 1 percentage point and 0.5 percentage points to net revenue growth.growth, respectively.
Total operating profit increased 11%10% and margin increaseddecreased 0.1 percentage points. The operating profit performance reflects leverage from the net revenue growth, partially offset by the impact of higher raw material and energy costs.costs across all divisions.
Corporate unallocated expenses increased 4%.decreased $16 million. This increasedecrease primarily reflects the absence of three prior year items: (1) conforming our method of accounting across all divisions for certain freight, distribution, and employee benefits costs in 2005, which contributed $45 million to the decrease, (2) 2005 foundation contributions, which contributed $10 million to the decrease, partially offset by (3) the 2005 settlement of a class action lawsuit related to our purchases of high fructose corn syrup from 1991 to 1995, which decreased corporate unallocated expenses by $23 million in 2005. In 2006, higher costs associated with our BPT initiative which contributed 5 percentage points,of $28 million and higher employee-related costs which contributed 3 percentage points, and net losses from certain mark-to-market derivatives which contributed 2 percentage points to the increase. These increasesof $19 million, were partially offset by the absencefavorable impact of foundation contributions made in the prior year which reducedcertain other corporate unallocated expenses by 3 percentage points. In 2006, corporateitems. Corporate unallocated expenses also reflect a gain of $11 million in the first quarter of 2006 related to the revaluation of an asset held for sale. Corporate departmental expenses were flat.increased $5 million.
Other Consolidated Results
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||||||||
Bottling equity income | $176 | $156 | 13% | $260 | $221 | 18% | $225 | $209 | 7% | $485 | $430 | 13% | ||||||||||||
Interest expense, net | $(33) | $(25) | 32% | $(50) | $(52) | (4)% | $(12) | $(21) | (43)% | $(62) | $(73) | (15)% | ||||||||||||
Tax rate | 28.7% | 29.3% | 28.4% | 29.1% | 27.0% | 53.8% | 27.9% | 38.6% | ||||||||||||||||
Net income | $1,358 | $1,194 | 14% | $2,377 | $2,106 | 13% | $1,481 | $864 | 71% | $3,858 | $2,970 | 30% | ||||||||||||
Net income per common share – diluted | $0.80 | $0.70 | 15% | $1.41 | $1.23 | 14% | $0.88 | $0.51 | 73% | $2.28 | $1.74 | 31% |
12 Weeks
Bottling equity income increased 13%7% primarily reflecting a $56$61 million pre-tax gain on our sale of PBG stock in the quarter, which compared favorably to a $35$41 million pre-tax gain in the prior year.
Net interest expense increased 32%decreased 43% primarily reflecting higher average rates on our investments, as well as lower cashdebt balances, partially offset by lower investment balances and higher average rates on our borrowings, partially offset by the impact of higher interest rates on our investments.borrowings.
The tax rate decreased 0.626.8 percentage points compared to prior year primarily reflecting the absence of the $468 million tax charge recorded in the third quarter of 2005 related to our repatriation of undistributed international earnings in connection with the American Jobs Creation Act (the 2005 AJCA tax charge). The tax rate in the current year also benefited from changes in our concentrate sourcing around the world, which is taxed at lower rates.rates, as well as from the resolution of certain state income tax audits in the third quarter.
Net income increased 14%71% and the related net income per share increased 15%73%. These increases primarily reflect the absence of the AJCA tax charge, our solid operating profit growth, the decrease in our effective tax rate and the increased gains on our sale of PBG stock and the decrease in our effective tax rate.stock. Net income per share was also favorably impacted by our share repurchases.
2436 Weeks
Bottling equity income increased 18%13% primarily reflecting a $106$167 million pre-tax gain on our sale of PBG stock, which compared favorably to a $64$105 million pre-tax gain in the prior year.
Net interest expense decreased 4%15% primarily reflecting higher interestaverage rates on our investments, mostlyas well as lower debt balances, partially offset by the impact of lower investment balances and higher average rates on our borrowings.borrowings and lower investment balances.
The tax rate decreased 0.710.7 percentage points compared to prior year primarily reflecting the absence of the 2005 AJCA tax charge. The tax rate in the current year also benefited from changes in our concentrate sourcing around the world, which is taxed at lower rates.rates, as well as from the resolution of certain state income tax audits in the third quarter.
Net income increased 13%30% and the related net income per share increased 14%31%. These increases primarily reflect the absence of the AJCA tax charge, our solid operating profit growth, the decrease in our effective tax rate and the increased gains on our sale of PBG stock and the decrease in our effective tax rate.stock. Net income per share was also favorably impacted by 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, seeOur Divisionsin the Notes to the Condensed Consolidated Financial Statements.
Net Revenue 12 Weeks Ended | FLNA | PBNA | PI | QFNA | Total | FLNA | PBNA | PI | QFNA | Total | ||||||||||
Q2, 2006 | $2,567 | $2,505 | $3,154 | $373 | $8,599 | |||||||||||||||
Q2, 2005 | $2,373 | $2,218 | $2,756 | $350 | $7,697 | |||||||||||||||
Q3, 2006 | $2,642 | $2,608 | $3,298 | $402 | $8,950 | |||||||||||||||
Q3, 2005 | $2,461 | $2,520 | $2,839 | $364 | $8,184 | |||||||||||||||
% Impact of: | ||||||||||||||||||||
Volume | 3% | 8%(a) | 8%(a) | 3% | 6% | 3% | 1%(a) | 7%(a) | 8% | 4% | ||||||||||
Effective net pricing | 3 | 4 | 4 | 3 | 4 | 3 | 2 | 5 | 1 | 3 | ||||||||||
Foreign exchange | 1 | 1 | – | 1 | – | 1 | 0.5 | 1 | 1 | 1 | ||||||||||
Acquisitions/divestitures | 1 | – | 3 | – | 1 | 0.5 | – | 3 | – | 1 | ||||||||||
% Change(b) | 8% | 13% | 14% | 7% | 12% | 7% | 3.5% | 16% | 10% | 9% |
(a) | For beverages sold to our bottlers, net revenue volume growth is based on our concentrate shipments and equivalents. |
(b) | Amounts may not sum due to rounding. |
Net Revenue 24 Weeks Ended | FLNA | PBNA | PI | QFNA | Total | ||||||||||||||||
Q2, 2006 | $4,960 | $4,496 | $5,532 | $816 | $15,804 | ||||||||||||||||
Q2, 2005 | $4,636 | $4,002 | $4,877 | $767 | $14,282 | ||||||||||||||||
Net Revenue 36 Weeks Ended | FLNA | PBNA | PI | QFNA | Total | ||||||||||||||||
Q3, 2006 | $7,602 | $7,104 | $8,830 | $1,218 | $24,754 | ||||||||||||||||
Q3, 2005 | $7,097 | $6,522 | $7,716 | $1,131 | $22,466 | ||||||||||||||||
% Impact of: | |||||||||||||||||||||
Volume | 2.5 | % | 8%(a) | 8%(a) | 3% | 6% | 3% | 6%(a) | 8%(a) | 4.5% | 5% | ||||||||||
Effective net pricing | 3 | 4 | 3 | 3 | 3 | 3 | 3 | 4 | 2 | 3 | |||||||||||
Foreign exchange | 1 | 0.5 | – | 1 | – | 1 | 0.5 | – | 1 | 0.5 | |||||||||||
Acquisitions/divestitures | 0.5 | – | 2 | – | 1 | 0.5 | – | 3 | – | 1 | |||||||||||
% Change(b) | 7 | % | 12% | 13% | 7% | 11% | 7% | 9% | 14% | 8% | 10% |
(a) | For beverages sold to our bottlers, net revenue volume growth is based on our concentrate shipments and equivalents. |
(b) | Amounts may not sum due to rounding. |
Frito-Lay North America
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||||||||
Net revenue | $2,567 | $2,373 | 8% | $4,960 | $4,636 | 7% | $2,642 | $2,461 | 7% | $7,602 | $7,097 | 7% | ||||||||||||
Operating profit | $634 | $594 | 7% | $1,203 | $1,133 | 6% | $694 | $655 | 6% | $1,897 | $1,788 | 6% |
12 Weeks
Net revenue grew 8%7% reflecting volume growth of 4%3% and positive effective net pricing due to salty snack pricing actions and favorable mix. Favorable Canadian exchange rates also contributed almost 1 percentage point to net revenue growth. Pound volume grew primarily due to double-digit growth in Dips, Sun ChipsSunChips and Chewy granola bars, high-single-digitMultipack, and mid-single-digit growth in trademark Tostitos and low-single-digit growth in trademark Lay’s potato chips. These volume gains wereFritos, partially offset by a mid-single-digitlow-single-digit decline in trademark Doritos. Overall, salty snacks revenue grew 7% with volume growth of 3.5%3%, and other macro snacks revenue grew 16%10% with volume growth of 10%5%. The Stacy’s Pita Chip Company (Stacy’s) acquisition contributed overapproximately 0.5 percentage points to volume growthboth revenue and almost 1 percentage point to revenuevolume growth.
Operating profit grew 7%6% primarily reflecting the revenue growth. This growth was partially offset by higher commodity costs, primarily cooking oil and energy and the impact of a favorable casualty insurance actuarial adjustment recorded in the prior year.cooking oil.
Smart Spot eligible products represented approximately 16%15% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio had mid-single-digit revenue growth.
2436 Weeks
Net revenue grew 7% reflecting volume growth of 3% and positive effective net pricing due to salty snack pricing actions and favorable mix. Favorable Canadian exchange rates also contributed almost 1 percentage point to net revenue growth. Pound volume grew primarily due to double-digit
growth in SunChips, Chewy granola bars and Sun Chips, high-single-digitMultipack, and mid-single-digit growth in Dips mid-single-digit growth inand trademark Tostitos and double-digit growth in Quakes rice cakes and Multipack.Tostitos. These
volume gains were partially offset by a mid-single-digit decline in trademark Doritos. Overall, salty snacks revenue grew 6%7% with volume growth of 2%3%, and other macro snacks revenue grew 14%13% with volume growth of 11%9%. The Stacy’s acquisition contributed approximately 0.5 percentage points to both revenue and volume growth.
Operating profit grew 6% primarily reflecting the revenue growth. This growth was partially offset by higher commodity costs, primarily cooking oil and energy, and the impact of a favorable casualty insurance actuarial adjustment recorded in the prior year.energy.
Smart Spot eligible products represented approximately 16%15% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio had mid-single-digit revenue growth.
PepsiCo Beverages North America
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||||||||
Net revenue | $2,505 | $2,218 | 13% | $4,496 | $4,002 | 12% | $2,608 | $2,520 | 3.5% | $7,104 | $6,522 | 9% | ||||||||||||
Operating profit | $626 | $555 | 13% | $1,054 | $970 | 9% | $603 | $628 | (4)% | $1,657 | $1,598 | 4% |
12 Weeks
Net revenue grew 13%3.5% and BCS volume grew 8%4%. The volume increase was driven by a 23%13% increase in non-carbonated beverages, partially offset by a 1%2% decline in carbonated soft drinks (CSDs). The non-carbonated portfolio performance was driven by double-digit growth in trademark Aquafina and Lipton ready-to-drink teas, high-single digit growth in Gatorade, and double-digit growth in Tropicana juice drinks and Propel. Tropicana Pure Premium volume was flat. The decline in CSDs reflects a low-single-digit decline in trademark Pepsi, partially offset by a slight increase in trademark Mountain Dew and a low-single-digit increase in trademark Sierra Mist. Across the brands, regular CSDs experienced a low-single-digit decline, which was partially offset by a slight increase in diet CSDs. CSE lagged BCS volume growth by 2 percentage points due to the timing of shipments earlier in the year.
Net revenue also benefited from positive mix, reflecting the strength of non-carbonated beverages, and price increases taken in the first quarter of 2006, primarily on concentrate and fountain. These gains were partially offset by higher trade spending. Favorable Canadian foreign exchange rates contributed approximately 0.5 percentage points to net revenue growth.
Operating profit declined 4%, reflecting higher raw material costs, primarily oranges, increased supply chain costs in Gatorade and higher energy costs. Increased trade spending was partially offset by lower advertising and marketing expenses.
Smart Spot eligible products represented approximately 75% of net revenue. These products experienced high-single-digit revenue growth, while the balance of the portfolio declined in the mid-single-digit range.
36 Weeks
Net revenue grew 9% and BCS volume grew 5%. The volume increase was driven by a 17% increase in non-carbonated beverages, partially offset by a 2% decline in CSDs. The non-carbonated portfolio performance was driven by double-digit growth in Gatorade, trademark Aquafina, Lipton ready-to-drink teas, Tropicana juice drinks and Propel. Tropicana Pure Premium experienced a mid-single-digit increase in volume. The decline in CSDs reflects a low-single-digit decline in trademark Pepsi, partially offset by a low-single-digit increase in trademark Mountain Dew and a mid-single-digit increase in trademark Sierra Mist. Across the brands, both regular and diet CSDs experienced low-single-digit declines.
Net revenue also benefited from positive effective net pricing which reflected the strength of non-carbonated beverages, partially offset by more-favorable settlements of trade spending accruals in 2005. Favorable Canadian foreign exchange rates contributed nearly one percentage point to net revenue growth.
Operating profit increased 13% which reflects the net revenue growth, partially offset by higher energy and raw material costs, primarily orange juice and PET resin.The impact of a favorable insurance settlement of $29 million was mostly offset by the more-favorable settlements of trade spending accruals in 2005.
Smart Spot eligible products represented over 70% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio grew in the low-single-digit range.
24 Weeks
Net revenue grew 12% and BCS volume grew 6%. The volume increase was driven by a 21% increase in non-carbonated beverages, partially offset by a 1% decline in CSDs. The non-
carbonated portfolio performance was driven by double-digit growth in Gatorade, trademark Aquafina, Tropicana juice drinks, Lipton ready-to-drink teas and Propel. Tropicana Pure Premium experienced a low-single-digit increase in volume. The decline in CSDs reflects a low-single-digit decline in trademark Pepsi, partially offset by low-single-digit increases in both trademark Mountain Dew and trademark Sierra Mist. Across the brands, both regular and diet CSDs experienced low-single-digit declines.
Net revenue also benefited from positive effective net pricing which reflectedmix, primarily reflecting the strength of non-carbonated beverages, and price increases taken in the first quarter of 2006, primarily on concentrate and fountain. These gains were partially offset by more-favorable settlements ofhigher trade spending accruals in 2005.spending. Favorable Canadian foreign exchange rates contributed approximately one-half of a0.5 percentage pointpoints to net revenue growth.
Operating profit increased 9%4%, which reflectsreflecting the net revenue growth partially offset by higher energy and raw material costs, primarily orange juiceoranges, increased supply chain costs in Gatorade and PET resin.Thehigher energy costs. Increased trade spending was partially offset by lower advertising and marketing expenses. Additionally, the impact of a favorable insurance settlement of $29 million in 2006 was fully offset by the more-favorable settlements of trade spending accruals in 2005.
Smart Spot eligible products represented over 70% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio grewincreased in the mid-single-digitlow-single-digit range.
PepsiCo International
12 Weeks Ended | 24 Weeks Ended | 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||||||||
Net revenue | $3,154 | $2,756 | 14% | $5,532 | $4,877 | 13% | $3,298 | $2,839 | 16% | $8,830 | $7,716 | 14% | ||||||||||||
Operating profit | $546 | $452 | 21% | $917 | $759 | 21% | $554 | $473 | 17% | $1,471 | $1,232 | 19% |
12 Weeks
International snacks volume grew 11%12%, reflecting broad-based gains led by high-single-digit growth of 18%at Sabritas in Mexico and double-digit growth in Russia, Turkey and Egypt. Overall, the Europe, Middle East & Africa region 6% ingrew 20%, the Latin America region grew 5% and 14% in the Asia Pacific region. The acquisitionregion grew 14%. Acquisitions of a businesstwo businesses in PolandEurope in early 2006 increased the Europe, Middle East & Africa region volume growth by 47 percentage points. The acquisition of a business in Australia increased the Asia Pacific region volume by 2 percentage points. Cumulatively,In aggregate, acquisitions contributed 23 percentage points to the reported total PepsiCo International snack volume growth rate. Broad-based gains reflected high-single-digit growth at Sabritas in Mexico and double-digit growth in Russia, Turkey, Egypt and Australia.
Beverage volume grew 10%8%, reflecting growth of 12% in the Europe, Middle East & Africa region, 11% in the Asia Pacific region and 7% in the Latin America region. Acquisitions contributed 1 percentage point to the Europe, Middle East & Africa region volume growth rate and almost 1 percentage point to the reported total PepsiCo International beverage volume growth rate. Broad-basedbroad-based increases which were led by double-digit growth in the Middle East, China, Argentina, Thailand and Russia and mid-single-digitArgentina. Overall, the Europe, Middle East & Africa region
grew 11%, the Latin America region grew 5.5% and the Asia Pacific region grew 5%. Acquisitions had no impact on the reported total PepsiCo International beverage volume growth in Mexico.rate. CSDs grew at a high-single-digitmid-single-digit rate while non-carbonated beverages grew at a double-digit rate.
Net revenue grew 14%16%, primarily as a result of the broad-based volume growth and favorable effective net pricing. Acquisitions contributed 3 percentage points of growth. Foreign currency had no impactcontributed 1 percentage point of growth based on the growth rate.favorable euro and British pound, partially offset by the unfavorable Mexican peso.
Operating profit grew 21%17%, driven primarily by the net revenue growth, slightlypartially offset by increased raw material and energy costs. In addition, the net gain from the sale of non-core cereal brands and a plant in the United Kingdom in the quarter contributed 4 percentage points of growth. Acquisitions and foreign currency had noa slightly favorable impact on the growth rate. Foreign currency contributed 1 percentage point of growth based on the favorable British pound and euro, partially offset by the unfavorable Mexican peso.
2436 Weeks
International snacks volume grew 9%10%, reflecting growth of 17% in the Europe, Middle East & Africa region, 4% in the Latin America region and 15% in the Asia Pacific region. The acquisition of a business in Poland in early 2006 increased the Europe, Middle East & Africa region volume growth by 4 percentage points. The acquisition of a business in Australia increased the Asia region volume by 2 percentage points. Cumulatively, acquisitions contributed 1 percentage point to the reported total PepsiCo International snack volume growth rate. The overall gains reflected mid-single-digit growth at both Sabritas in Mexico and Walkers in the United Kingdom, and double-digit growth in Russia, Turkey Egypt and Australia.
Beverage volume grew 12%, reflecting growth of 13% inEgypt. Overall, the Europe, Middle East & Africa region 15% ingrew 18%, the Latin America region grew 4% and the Asia Pacific region grew 15%. Acquisitions of two businesses in Europe in 2006 increased the Europe, Middle East & Africa region volume growth by 5 percentage points. The acquisition of a business in Australia increased the Asia Pacific region volume by 2 percentage points. In aggregate, acquisitions contributed 2 percentage points to the reported total PepsiCo International snack volume growth rate.
Beverage volume grew 10%, reflecting broad-based increases led by double-digit growth in the Middle East, China, Argentina, Russia and 9%Venezuela, and low-single-digit growth in Mexico. Overall, the Europe, Middle East & Africa region grew 12%, the Asia Pacific region grew 11% and the Latin America region.region grew 7%. Acquisitions contributed 1.51 percentage pointspoint to the Europe, Middle East & Africa region volume growth rate and almost 1 percentage pointcontributed slightly to the reported total PepsiCo International beverage volume growth rate. Broad-based increases were led by double-digit growth in China, the Middle East, Argentina, Thailand and Venezuela, and mid-single-digit growth in Mexico. CSDs andgrew at a high-single-digit rate while non-carbonated beverages each grew at a double-digit rate.
Net revenue grew 13%14%, primarily as a result of the broad-based volume growth and favorable effective net pricing. Acquisitions contributed 2nearly 3 percentage points of growth. Foreign currency had no impact on the growth rate.
Operating profit grew 21%19%, driven primarily by the net revenue growth, slightlypartially offset by increased raw material and energy costs. In addition, the net gain from the sale of non-core cereal brands and a plant in the United Kingdom in the third quarter contributed nearly 2 percentage points of growth. Acquisitions and foreign currency each had a slightly favorable impact on the growth rate.
Quaker Foods North America
12 Weeks Ended | 24 Weeks Ended | |||||||||||
6/17/06 | 6/11/05 | Change | 6/17/06 | 6/11/05 | Change | |||||||
Net revenue | $373 | $350 | 7% | $816 | $767 | 7% | ||||||
Operating profit | $115 | $113 | 2% | $266 | $258 | 3% |
Net revenue Operating profit 12 Weeks Ended 36 Weeks Ended 9/9/06 9/3/05 Change 9/9/06 9/3/05 Change $402 $364 10% $1,218 $1,131 8% $123 $111 11% $389 $369 5.5%
12 Weeks
Net revenue increased 7%10% and volume increased 3%8%. The volume increase primarily reflects double-digit growth in Oatmeal, high-single-digit growth in Oatmeal, double-digitAunt Jemima syrup and mix, and mid-single-digit growth in Life cereal and high-single-digit growth in Cap’n Crunch cereal. This increase was partially offset by a high-single-digit decline in Rice-A-Roni.ready-to-eat cereals. Higher effective net pricing contributed nearly 31 percentage points ofpoint to net revenue growth, reflecting favorable product mix and price increases taken earlier in the year, partially offset by the impact of more favorable settlements ofincreased trade spending accruals in 2005.spending. Favorable Canadian foreign exchange rates also contributed approximately 1 percentage point to net revenue growth.
Operating profit increased 2% primarily reflecting the net revenue growth. This growth was partially offset by increased cost of sales, primarily due to higher raw material and energy costs, as well as the impact of more favorable settlements of trade spending accruals in 2005.
Smart Spot eligible products represented approximately half of net revenue and had double-digit revenue growth. The balance of the portfolio experienced a low-single-digit decline.
24 Weeks
Net revenue grew 7% and volume increased almost 3%. The volume increase reflects mid-single-digit growth in Oatmeal, double-digit growth in Life cereal and low-single-digit growth in Cap’n Crunch cereal, Pasta Roni and Rice-A-Roni. Higher effective net pricing contributed approximately 3 percentage points of growth primarily reflecting favorable product mix. Favorable Canadian foreign exchange rates contributed approximately 1 percentage point to net revenue growth.
Operating profit increased 3%11% primarily reflecting the net revenue growth. This growth was partially offset by increased cost of sales, primarily due to higher raw material and energy costs.
Smart Spot eligible products represented approximately half of net revenue and had double-digit revenue growth. The balance of the portfolio experienced amid-single-digit growth.
36 Weeks
Net revenue grew 8% and volume increased 4.5%. The volume increase primarily reflects high-single-digit growth in Oatmeal, double-digit growth in Life cereal and low-single-digit increase.growth in Aunt Jemima syrup and mix. Higher effective net pricing contributed over 2 percentage points to net revenue growth, primarily reflecting favorable product mix. Favorable Canadian foreign exchange rates contributed approximately 1 percentage point to net revenue growth.
Operating profit increased 5.5% primarily reflecting the net revenue growth. This growth was partially offset by increased cost of sales, primarily due to higher raw material and energy costs.
Smart Spot eligible products represented approximately half of net revenue and had double-digit revenue growth. The balance of the portfolio experienced low-single-digit growth.
OUR LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During the 2436 weeks, our operations provided $1.8$4.3 billion of cash primarily reflecting our solid business results. Our operating cash flow in 2006 also reflects a tax payment of $420 million related to our repatriation of international cash in 2005 in connection with the American Jobs Creation Act (AJCA).AJCA.
We make periodic regulatory contributions to our qualified pension plans during the course of the year. We also make annual discretionary contributions to these plans to maintain fully funded status
on an accumulated benefit obligation (ABO) basis. For the full year 2006, we expect to make contributions to these plans of up to $50 million, all of which will be non-discretionary. As a result of these contributions, we expect the assets for these plans to meet or exceed the liabilities for service to date as of September 30, 2006.
Investing Activities
During the 2436 weeks, we used $31$127 million for our investing activities, driven by capitalactivities. Capital spending of $708 million$1.1 billion and acquisitions of $434$444 million which were mostly offset by net sales of short-term investments of $908 million$1.1 billion and proceeds from our sale of PBG stock of $180$285 million. CapitalThe increase in capital spending over the prior year primarily reflects our increased investments in support of our ongoing BPT initiative and our North
American Gatorade business and at PepsiCo International, as well as increased investments in manufacturing capacity to support growth inbehind our China snack and beverage operations.
ongoing BPT initiative. We anticipate net capital spending of approximately $2.2 billion in 2006, which is above our long-term target of approximately 5% of net revenue.2006.
Financing Activities
During the 2436 weeks, we used $3.1$4.6 billion for our financing activities, primarily reflecting the return of operating cash flow to our shareholders through common share repurchases of $2.2 billion and netdividend payments of $1.4 billion. Net repayments of short-term borrowings of $1.5$2.0 billion each. Dividend payments of $863 million were largelypartially offset by stock option proceeds of $697 million.$1.0 billion.
Management Operating Cash Flow
We focus on management operating cash flow as a key element in achieving maximum shareholder value, and it is the primary measure we use 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.
24 Weeks Ended | 36 Weeks Ended | |||||||
6/17/06 | 6/11/05 | 9/9/06 | 9/3/05 | |||||
Net cash provided by operating activities | $1,830 | $2,363 | $4,292 | $4,558 | ||||
Capital spending | (708) | (478) | (1,130) | (796) | ||||
Sales of property, plant and equipment | 23 | 42 | 37 | 65 | ||||
Management operating cash flow | $1,145 | $1,927 | $3,199 | $3,827 | ||||
In the current year, management operating cash flow reflects our tax payment of $420 million related to our repatriation of international cash in 2005 in connection with the AJCA, as well as increased capital spending. During 2006, we expect to return approximately all of our management operating cash flow to our shareholders through dividends and share repurchases. However, see “Risk Factors” in Item 1A. and “Our Business Risks” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for certain factors that may impact our operating cash flows.
Debt Obligations and Commitments
SeeDebt Obligations and Commitments in the Notes to the Condensed Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PepsiCo, Inc.:
We have reviewed the accompanying Condensed Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of June 17,September 9, 2006, the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and twenty-fourthirty-six weeks ended June 17,September 9, 2006 and June 11,September 3, 2005, and the Condensed Consolidated Statements of Cash Flows for the twenty-fourthirty-six weeks ended June 17,September 9, 2006 and June 11,September 3, 2005. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.’s management.
We conducted our reviews 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 (United States), 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 31, 2005, 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, 2006, 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 31, 2005, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
July 13,October 12, 2006
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, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In addition, there were no changes in our internal control over financial reporting during our secondthird fiscal quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter, we completed our $7 billion repurchase program announced on March 29, 2004 and expiring on March 31, 2007. On May 3, 2006, our Board of Directors authorized and publicly announced our new $8.5 billion repurchase program, which expires on June 30, 2009. A summary of our common stock repurchases (in millions, except average price per share) during the secondthird 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 set forth in the following table. All such shares of common stock were repurchased pursuant to open market transactions.
Issuer Purchases of Common Stock
Period | (a) Total Number of Shares Repurchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs | ||||
3/25/06 | $1,175 | |||||||
3/26/06 – 4/22/06 | 4.6 | $58.00 | 4.6 | (269) | ||||
906 | ||||||||
4/23/06 – 5/20/06 | 5.3 | 58.58 | 5.3 | (306) | ||||
600 | ||||||||
5/21/06 – 6/17/06 | 3.8 | 59.94 | 3.8 | (230) | ||||
Total | 13.7 | $58.76 | 13.7 | $370 | ||||
Period | (a) Total Number of Shares Repurchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs | ||||
2004 Repurchase program | ||||||||
6/17/06 | $370 | |||||||
6/18/06 – 7/15/06 | 3.6 | $60.29 | 3.6 | (217) | ||||
153 | ||||||||
7/16/06 – 8/2/06 | 2.4 | 62.95 | 2.4 | (153) | ||||
– | ||||||||
2006 Repurchase program | 8,500 | |||||||
8/2/06 – 8/12/06 | 1.4 | 63.21 | 1.4 | (88) | ||||
8,412 | ||||||||
8/13/06 – 9/9/06 | 3.8 | 64.59 | 3.8 | (247) | ||||
Total | 11.2 | $62.69 | 11.2 | $8,165 | ||||
In addition, PepsiCo repurchases shares of its convertible preferred stock from an employee stock ownership plan (ESOP) fund established by Quaker in connection with share redemptions by ESOP participants. The following table summarizes our convertible preferred share repurchases during the secondthird quarter:
Issuer Purchases of Convertible Preferred Stock
Period | (a) Total Number of Shares Repurchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs | ||||
3/25/06 | ||||||||
3/26/06 – 4/22/06 | – | $ – | N/A | N/A | ||||
4/23/06 – 5/20/06 | 4,100 | 291.73 | N/A | N/A | ||||
5/21/06 – 6/17/06 | 3,900 | 300.53 | N/A | N/A | ||||
Total | 8,000 | $296.02 | N/A | N/A | ||||
Period | (a) Total Number of Shares Repurchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs | ||||
6/17/06 | ||||||||
6/18/06 – 7/15/06 | 3,400 | $301.32 | N/A | N/A | ||||
7/16/06 – 8/12/06 | 700 | 317.81 | N/A | N/A | ||||
8/13/06 – 9/9/06 | 7,000 | 321.60 | N/A | N/A | ||||
Total | 11,100 | $315.15 | N/A | N/A | ||||
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at PepsiCo’s Annual Meeting of Shareholders held on May 3, 2006.
Election of Directors
Nominee | For | Withheld | ||
John F. Akers | 1,395,181,699 | 39,744,822 | ||
Robert E. Allen | 1,395,136,840 | 39,789,681 | ||
Dina Dublon | 1,411,648,847 | 23,277,674 | ||
Victor J. Dzau, MD | 1,412,091,447 | 22,835,074 | ||
Ray L. Hunt | 1,407,540,019 | 27,386,502 | ||
Alberto Ibargüen | 1,412,270,652 | 22,655,869 | ||
Arthur C. Martinez | 1,408,345,280 | 26,581,241 | ||
Indra K. Nooyi | 1,365,167,195 | 69,759,326 | ||
Steven S Reinemund | 1,396,791,262 | 38,135,259 | ||
Sharon Percy Rockefeller | 1,396,325,381 | 38,601,140 | ||
James J. Schiro | 1,412,667,781 | 22,258,740 | ||
Franklin A. Thomas | 1,397,425,694 | 37,500,827 | ||
Cynthia M. Trudell | 1,412,483,092 | 22,443,429 | ||
Daniel Vasella | 1,412,467,677 | 22,458,844 | ||
Michael D. White | 1,399,292,660 | 35,633,861 |
The fifteen directors listed above were elected to a one-year term expiring in 2007.
Description of Proposals
For | Against | Abstain | Broker Non- Votes | |||||
Ratification of appointment of KPMG LLP as | 1,399,607,964 | 25,516,845 | 9,801,712 | |||||
Political Contributions | 34,560,413 | 1,022,017,322 | 108,686,358 | 269,662,428 | ||||
Charitable Contributions | 61,689,445 | 998,868,523 | 104,706,125 | 269,662,428 |
SeeIndex to Exhibits on page 34.36.
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: | /S/ PETER A. BRIDGMAN | |
Peter A. Bridgman | ||
Senior Vice President and | ||
Controller | ||
Date: | /S/ | |
| ||
Vice President, Deputy General | ||
Counsel and Assistant Secretary | ||
(Duly Authorized Officer) |
ITEM 6 (a)
EXHIBITS
Exhibit 1.1 | Programme Agreement dated July 21, 2006 between PepsiCo, Inc. and the Dealers named therein | |
Exhibit 3.2 | By-laws of PepsiCo, Inc. as amended effective October 1, 2006 | |
Exhibit 4.1 | Agency Agreement dated July 21, 2006, by and among PepsiCo, Inc., JPMorgan Chase Bank and J.P. Morgan Bank Luxembourg S.A. | |
Exhibit 4.2 | Deed of Covenant dated July 21, 2006 made by PepsiCo, Inc. | |
Exhibit 10.1 |
| |
Exhibit 10.2 | Form of Non-Employee Director Long-Term Incentive Award Agreement | |
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 |
3436