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 endedSeptember 9, 2006 (36March 24, 2007 (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 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 October 6, 2006: 1,642,081,426April 13, 2007: 1,628,923,335
PEPSICO, INC. AND SUBSIDIARIES
| Page No. | ||
Part I Financial Information | ||
| 3 | ||
| 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 | 36 Weeks Ended | |||||||
| 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||
Net Revenue | $8,950 | $8,184 | $24,754 | $22,466 | ||||
Cost of sales | 4,030 | 3,515 | 11,018 | 9,699 | ||||
Selling, general and administrative expenses | 3,063 | 2,952 | 8,702 | 8,181 | ||||
Amortization of intangible assets | 41 | 37 | 108 | 103 | ||||
Operating Profit | 1,816 | 1,680 | 4,926 | 4,483 | ||||
Bottling equity income | 225 | 209 | 485 | 430 | ||||
Interest expense | (51) | (58) | (172) | (161) | ||||
Interest income | 39 | 37 | 110 | 88 | ||||
Income before income taxes | 2,029 | 1,868 | 5,349 | 4,840 | ||||
Provision for income taxes | 548 | 1,004 | 1,491 | 1,870 | ||||
Net Income | $1,481 | $ 864 | $ 3,858 | $ 2,970 | ||||
Net Income Per Common Share | ||||||||
Basic | $0.90 | $0.52 | $2.33 | $1.77 | ||||
Diluted | $0.88 | $0.51 | $2.28 | $1.74 | ||||
Cash Dividends Declared Per Common Share | $0.30 | $0.26 | $0.86 | $0.75 | ||||
| 12 Weeks Ended | ||||||||
| 3/24/07 | 3/25/06 | |||||||
Net Revenue | $ | 7,350 | $ | 6,719 | ||||
Cost of sales | 3,285 | 2,962 | ||||||
Selling, general and administrative expenses | 2,635 | 2,469 | ||||||
Amortization of intangible assets | 11 | 31 | ||||||
Operating Profit | 1,419 | 1,257 | ||||||
Bottling equity income | 74 | 75 | ||||||
Interest expense | (42 | ) | (62 | ) | ||||
Interest income | 22 | 45 | ||||||
Income before income taxes | 1,473 | 1,315 | ||||||
Provision for income taxes | 377 | 368 | ||||||
Net Income | $ | 1,096 | $ | 947 | ||||
Net Income Per Common Share | ||||||||
Basic | $ | 0.67 | $ | 0.57 | ||||
Diluted | $ | 0.65 | $ | 0.56 | ||||
Cash Dividends Declared Per Common Share | $ | 0.30 | $ | 0.26 | ||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
| 36 Weeks Ended | 12 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | 3/24/07 | 3/25/06 | |||||||||
Operating Activities | ||||||||||||
Net income | $ 3,858 | $ 2,970 | $ | 1,096 | $ | 947 | ||||||
Depreciation and amortization | 940 | 896 | 276 | 286 | ||||||||
Stock-based compensation expense | 191 | 215 | 63 | 67 | ||||||||
Excess tax benefits from share-based payment arrangements | (91) | – | (47 | ) | (34 | ) | ||||||
Cash payments for merger-related costs and restructuring charges | – | (21) | ||||||||||
Pension and retiree medical plan contributions | (90) | (104) | (34 | ) | (28 | ) | ||||||
Pension and retiree medical plan expenses | 371 | 306 | 118 | 120 | ||||||||
Bottling equity income, net of dividends | (409) | (345) | (57 | ) | (61 | ) | ||||||
Deferred income taxes and other tax charges and credits | 48 | 290 | 11 | 20 | ||||||||
Change in accounts and notes receivable | (785) | (751) | (377 | ) | (347 | ) | ||||||
Change in inventories | (246) | (104) | (134 | ) | (179 | ) | ||||||
Change in prepaid expenses and other current assets | 2 | 48 | (75 | ) | (39 | ) | ||||||
Change in accounts payable and other current liabilities | 263 | 163 | (413 | ) | (441 | ) | ||||||
Change in income taxes payable | 242 | 918 | 269 | (140 | ) | |||||||
Other, net | (2) | 77 | (70 | ) | 2 | |||||||
Net Cash Provided by Operating Activities | 4,292 | 4,558 | 626 | 173 | ||||||||
Investing Activities | ||||||||||||
Snack Ventures Europe (SVE) minority interest acquisition | – | (750) | ||||||||||
Capital spending | (1,130) | (796) | (267 | ) | (289 | ) | ||||||
Sales of property, plant and equipment | 37 | 65 | 4 | 6 | ||||||||
Investment in finance assets | (11) | – | ||||||||||
Other acquisitions and investments in noncontrolled affiliates | (444) | (302) | ||||||||||
Acquisitions and investments in noncontrolled affiliates | (431 | ) | (275 | ) | ||||||||
Cash proceeds from sale of The Pepsi Bottling Group (PBG) stock | 285 | 177 | 94 | 85 | ||||||||
Divestitures | 37 | 3 | ||||||||||
Short-term investments, by original maturity | ||||||||||||
More than three months – purchases | (17) | (82) | (13 | ) | – | |||||||
More than three months – maturities | 21 | 56 | 13 | 20 | ||||||||
Three months or less, net | 1,095 | (1,832) | 402 | 780 | ||||||||
Net Cash Used for Investing Activities | (127) | (3,461) | ||||||||||
Net Cash (Used for)/Provided by Investing Activities | (198 | ) | 327 | |||||||||
Financing Activities | ||||||||||||
Proceeds from issuances of long-term debt | 25 | 13 | ||||||||||
Payments of long-term debt | (136) | (145) | (26 | ) | (22 | ) | ||||||
Short-term borrowings, by original maturity | ||||||||||||
More than three months – proceeds | 127 | 51 | 1 | 10 | ||||||||
More than three months – payments | (256) | (66) | (8 | ) | (204 | ) | ||||||
Three months or less, net | (1,905) | 1,236 | 21 | (497 | ) | |||||||
Cash dividends paid | (1,359) | (1,209) | (498 | ) | (432 | ) | ||||||
Share repurchases – common | (2,157) | (2,085) | (882 | ) | (660 | ) | ||||||
Share repurchases – preferred | (7) | (14) | (2 | ) | (2 | ) | ||||||
Proceeds from exercises of stock options | 1,008 | 707 | 236 | 436 | ||||||||
Excess tax benefits from share-based payment arrangements | 91 | – | 47 | 34 | ||||||||
Net Cash Used for Financing Activities | (4,569) | (1,512) | (1,111 | ) | (1,337 | ) | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | 13 | (21) | (1 | ) | 5 | |||||||
Net Decrease in Cash and Cash Equivalents | (391) | (436) | (684 | ) | (832 | ) | ||||||
Cash and Cash Equivalents – Beginning of year | 1,716 | 1,280 | 1,651 | 1,716 | ||||||||
Cash and Cash Equivalents – End of period | $ 1,325 | $ 844 | $ | 967 | $ | 884 | ||||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
| (Unaudited) | ||||
| 9/9/06 | 12/31/05 | |||
Assets | ||||
Current Assets | ||||
Cash and cash equivalents | $ 1,325 | $ 1,716 | ||
Short-term investments | 2,075 | 3,166 | ||
Accounts and notes receivable, less | 4,154 | 3,261 | ||
Inventories | ||||
Raw materials | 855 | 738 | ||
Work-in-process | 172 | 112 | ||
Finished goods | 935 | 843 | ||
| 1,962 | 1,693 | |||
Prepaid expenses and other current assets | 623 | 618 | ||
Total Current Assets | 10,139 | 10,454 | ||
Property, Plant and Equipment | 18,220 | 17,145 | ||
Accumulated Depreciation | (9,109) | (8,464) | ||
| 9,111 | 8,681 | |||
Amortizable Intangible Assets, net | 613 | 530 | ||
Goodwill | 4,473 | 4,088 | ||
Other Nonamortizable Intangible Assets | 1,164 | 1,086 | ||
Nonamortizable Intangible Assets | 5,637 | 5,174 | ||
Investments in Noncontrolled Affiliates | 3,626 | 3,485 | ||
Other Assets | 3,140 | 3,403 | ||
Total Assets | $32,266 | $31,727 | ||
(Unaudited) | ||||||
| 3/24/07 | 12/30/06 | |||||
Assets | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ 967 | $ 1,651 | ||||
Short-term investments | 770 | 1,171 | ||||
Accounts and notes receivable, less allowance: 3/07 - $74, 12/06 - $64 | 4,123 | 3,725 | ||||
Inventories | ||||||
Raw materials | 893 | 860 | ||||
Work-in-process | 168 | 140 | ||||
Finished goods | 1,013 | 926 | ||||
| 2,074 | 1,926 | |||||
Prepaid expenses and other current assets | 757 | 657 | ||||
Total Current Assets | 8,691 | 9,130 | ||||
Property, Plant and Equipment | 19,200 | 19,058 | ||||
Accumulated Depreciation | (9,469 | ) | (9,371 | ) | ||
| 9,731 | 9,687 | |||||
Amortizable Intangible Assets, net | 627 | 637 | ||||
Goodwill | 4,596 | 4,594 | ||||
Other Nonamortizable Intangible Assets | 1,213 | 1,212 | ||||
Nonamortizable Intangible Assets | 5,809 | 5,806 | ||||
Investments in Noncontrolled Affiliates | 3,676 | 3,690 | ||||
Other Assets | 1,296 | 980 | ||||
Total Assets | $29,830 | $29,930 | ||||
Continued on next page.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amounts)
| (Unaudited) | ||||
| 9/9/06 | 12/31/05 | |||
Liabilities and Shareholders’ Equity | ||||
Current Liabilities | ||||
Short-term obligations | $ 568 | $ 2,889 | ||
Accounts payable and other current liabilities | 6,498 | 5,971 | ||
Income taxes payable | 668 | 546 | ||
Total Current Liabilities | 7,734 | 9,406 | ||
Long-term Debt Obligations | 2,528 | 2,313 | ||
Other Liabilities | 4,534 | 4,323 | ||
Deferred Income Taxes | 1,462 | 1,434 | ||
Total Liabilities | 16,258 | 17,476 | ||
Commitments and Contingencies | ||||
Preferred Stock, no par value | 41 | 41 | ||
Repurchased Preferred Stock | (117) | (110) | ||
Common Shareholders’ Equity | ||||
Common stock, par value 1 2/3 cents per share: | ||||
Authorized 3,600 shares, issued 9/06 and 12/05 – 1,782 shares | 30 | 30 | ||
Capital in excess of par value | 527 | 614 | ||
Retained earnings | 23,546 | 21,116 | ||
Accumulated other comprehensive loss | (811) | (1,053) | ||
| 23,292 | 20,707 | |||
Less: repurchased common stock, at cost: | ||||
9/06 – 136 shares, 12/05 – 126 shares | (7,208) | (6,387) | ||
Total Common Shareholders’ Equity | 16,084 | 14,320 | ||
Total Liabilities and Shareholders’ Equity | $32,266 | $31,727 | ||
| (Unaudited) | ||||||
| 3/24/07 | 12/30/06 | |||||
Liabilities and Shareholders’ Equity | ||||||
Current Liabilities | ||||||
Short-term obligations | $ 1,002 | $ 274 | ||||
Accounts payable and other current liabilities | 6,207 | 6,496 | ||||
Income taxes payable | 313 | 90 | ||||
Total Current Liabilities | 7,522 | 6,860 | ||||
Long-term Debt Obligations | 1,807 | 2,550 | ||||
Other Liabilities | 4,805 | 4,624 | ||||
Deferred Income Taxes | 348 | 528 | ||||
Total Liabilities | 14,482 | 14,562 | ||||
Commitments and Contingencies | ||||||
Preferred Stock, no par value | 41 | 41 | ||||
Repurchased Preferred Stock | (122 | ) | (120 | ) | ||
Common Shareholders’ Equity | ||||||
Common stock, par value 1 2/3 cents per share: | ||||||
Authorized 3,600 shares, issued 3/07 and 12/06 – 1,782 shares | 30 | 30 | ||||
Capital in excess of par value | 479 | 584 | ||||
Retained earnings | 25,446 | 24,837 | ||||
Accumulated other comprehensive loss | (2,238 | ) | (2,246 | ) | ||
| 23,717 | 23,205 | |||||
Less: repurchased common stock, at cost: | ||||||
3/07 – 151 shares and 12/06 – 144 shares | (8,288 | ) | (7,758 | ) | ||
Total Common Shareholders’ Equity | 15,429 | 15,447 | ||||
Total Liabilities and Shareholders’ Equity | $29,830 | $29,930 | ||||
See accompanyingNotes to the Condensed Consolidated Financial Statements.
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
| 12 Weeks Ended | 36 Weeks Ended | |||||||
| 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||
Net Income | $1,481 | $864 | $3,858 | $2,970 | ||||
Other Comprehensive Income/(Loss) | ||||||||
Currency translation adjustment | 90 | 95 | 262 | (81) | ||||
Cash flow hedges, net of tax: | ||||||||
Net derivative (losses)/gains | (4) | 18 | (16) | 41 | ||||
Reclassification of (gains)/losses to net income | – | (4) | (7) | 5 | ||||
Unrealized gains/(losses) on securities, net of tax | 4 | – | (2) | (4) | ||||
Other | 1 | – | 5 | 4 | ||||
| 91 | 109 | 242 | (35) | |||||
Comprehensive Income | $1,572 | $973 | $4,100 | $2,935 | ||||
| 12 Weeks Ended | ||||||||
| 3/24/07 | 3/25/06 | |||||||
Net Income | $ | 1,096 | $ | 947 | ||||
Other Comprehensive Income | ||||||||
Currency translation adjustment | (32 | ) | 65 | |||||
Reclassification of pension and retiree medical losses to net income, net of tax | 32 | – | ||||||
Cash flow hedges, net of tax: | ||||||||
Net derivative gains | 3 | 4 | ||||||
Reclassification of losses/(gains) to net income | 3 | (6 | ) | |||||
Unrealized gains/(losses) on securities, net of tax | 2 | (3 | ) | |||||
Other | – | 4 | ||||||
| 8 | 64 | |||||||
Comprehensive Income | $ | 1,104 | $ | 1,011 | ||||
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 September 9, 2006,March 24, 2007 and the Condensed Consolidated Statements of Income, Cash Flows and Comprehensive Income for the 12 and 36 weeks ended September 9,March 24, 2007 and March 25, 2006 and September 3, 2005, and the Condensed Consolidated Statement of Cash Flows for the 36 weeks ended September 9, 2006 and 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, 2005.30, 2006. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 36 weeks are not necessarily indicative of the results expected for the year.
Our significant interim accounting policies include the recognition of 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 inof these affiliates. Bottling equity income includes pre-tax gains of $50 million on our sale of PBG stock in both the first quarter of $61 million2007 and $167 million2006.
In the first quarter of 2007, the reporting calendars of certain operating units within PepsiCo International’s (“PI”) reporting segment were changed such that most PI operations will now report on a monthly calendar basis instead of a period reporting basis. Monthly reporting is preferable for our international businesses to facilitate local statutory reporting, which is generally based on monthly calendars. The change in reporting will substantially reduce the number of financial closings and reconciliations executed by the international operations, improving overall efficiency. As a result of this change, first quarter PepsiCo results primarily reflect international monthly results for the months of January and February. Prior period amounts have been adjusted to reflect this change.
In addition, in the 12first quarter of 2007, income for certain non-consolidated international bottling interests was reclassified from bottling equity income and 36 weeks ended September 9, 2006, respectively, and pre-tax gains of $41 million and $105 million in the 12 and 36 weeks ended September 3, 2005, respectively.corporate unallocated results to PI’s division operating results, to be consistent with PepsiCo’s internal management accountability. Prior period amounts have been adjusted to reflect this reclassification.
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 20062007 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.30, 2006.
| 12 Weeks Ended | 36 Weeks Ended | Net Revenue | Operating Profit | |||||||||||||||||||
| 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | 12 Weeks Ended | 12 Weeks Ended | |||||||||||||||||
Net Revenue | ||||||||||||||||||||||
FLNA | $2,642 | $2,461 | $ 7,602 | $ 7,097 | ||||||||||||||||||
PBNA | 2,608 | 2,520 | 7,104 | 6,522 | ||||||||||||||||||
PI | 3,298 | 2,839 | 8,830 | 7,716 | ||||||||||||||||||
QFNA | 402 | 364 | 1,218 | 1,131 | ||||||||||||||||||
| 3/24/07 | 3/25/06 | 3/24/07 | 3/25/06 | |||||||||||||||||||
| $8,950 | $8,184 | $24,754 | $22,466 | |||||||||||||||||||
Operating Profit | ||||||||||||||||||||||
FLNA | $ 694 | $ 655 | $1,897 | $1,788 | $ | 2,553 | $ | 2,393 | $ | 610 | $ | 569 | ||||||||||
PBNA | 603 | 628 | 1,657 | 1,598 | 2,086 | 1,991 | 425 | 428 | ||||||||||||||
PI | 554 | 473 | 1,471 | 1,232 | 2,248 | 1,892 | 372 | 288 | ||||||||||||||
QFNA | 123 | 111 | 389 | 369 | 463 | 443 | 156 | 151 | ||||||||||||||
Total division | 1,974 | 1,867 | 5,414 | 4,987 | 7,350 | 6,719 | 1,563 | 1,436 | ||||||||||||||
Corporate | (158) | (187) | (488) | (504) | – | – | (144 | ) | (179 | ) | ||||||||||||
| $1,816 | $1,680 | $4,926 | $4,483 | $ | 7,350 | $ | 6,719 | $ | 1,419 | $ | 1,257 | |||||||||||
| 9/9/06 | 12/31/05 | |||||||||||||||||||||
Total Assets | ||||||||||||||||||||||
FLNA | $ 6,235 | $ 5,948 | ||||||||||||||||||||
PBNA | 6,737 | 6,316 | ||||||||||||||||||||
PI | 10,984 | 9,983 | ||||||||||||||||||||
QFNA | 1,019 | 989 | ||||||||||||||||||||
Total division | 24,975 | 23,236 | ||||||||||||||||||||
Corporate | 3,986 | 5,331 | ||||||||||||||||||||
Investments in bottling affiliates | 3,305 | 3,160 | ||||||||||||||||||||
| $32,266 | $31,727 | |||||||||||||||||||||
FLNA PBNA PI QFNA Total division Corporate Investments in bottling affiliates Total Assets 3/24/07 12/30/06 $ 5,933 $ 5,969 7,201 6,567 11,665 11,274 994 1,003 25,793 24,813 707 1,739 3,330 3,378 $ 29,830 $ 29,930
Intangible Assets
| 9/9/06 | 12/31/05 | 3/24/07 | 12/30/06 | |||||||||
Amortizable intangible assets, net | ||||||||||||
Brands | $1,219 | $1,054 | $ | 1,286 | $ | 1,288 | ||||||
Other identifiable intangibles | 277 | 257 | 290 | 290 | ||||||||
| 1,496 | 1,311 | 1,576 | 1,578 | |||||||||
Accumulated amortization | (883) | (781) | (949 | ) | (941 | ) | ||||||
| $ 613 | $ 530 | $ | 627 | $ | 637 | |||||||
The change in the book value of nonamortizable intangible assets is as follows:
| | Balance 12/31/05 | Acquisitions | | Translation & Other | | Balance 9/9/06 | ||||||
FLNA | ||||||||||||
Goodwill | $ | 145 | $ | 139 | $ | 6 | $ | 290 | ||||
PBNA | ||||||||||||
Goodwill | 2,164 | – | 2 | 2,166 | ||||||||
Brands | 59 | – | – | 59 | ||||||||
| 2,223 | – | 2 | 2,225 | |||||||||
PI | ||||||||||||
Goodwill | 1,604 | 160 | 78 | 1,842 | ||||||||
Brands | 1,026 | – | 78 | 1,104 | ||||||||
| 2,630 | 160 | 156 | 2,946 | |||||||||
QFNA | ||||||||||||
Goodwill | 175 | – | – | 175 | ||||||||
Corporate | ||||||||||||
Pension intangible | 1 | – | – | 1 | ||||||||
Total goodwill | 4,088 | 299 | 86 | 4,473 | ||||||||
Total brands | 1,085 | – | 78 | 1,163 | ||||||||
Total pension intangible | 1 | – | – | 1 | ||||||||
| $ | 5,174 | $ | 299 | $ | 164 | $ | 5,637 | |||||
FLNA Goodwill PBNA Goodwill Brands PI Goodwill Brands QFNA Goodwill Total goodwill Total brands Balance
12/30/06 Acquisitions Translation
and Other Balance
3/24/07 $ 284 $ – $ 1 $ 285 2,203 – – 2,203 59 – – 59 2,262 – – 2,262 1,932 – 1 1,933 1,153 – 1 1,154 3,085 – 2 3,087 175 – – 175 4,594 – 2 4,596 1,212 – 1 1,213 $ 5,806 $ – $ 3 $ 5,809
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 operating cash 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 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 $64$63 million in 20062007 and $68$67 million in 2005, as well as related income tax benefits recognized in earnings of $18 million and $19 million, respectively. For the 36 weeks, we recognized stock-based compensation expense of $191 million in 2006 and $215 million in 2005, as well as related income tax benefits recognized in earnings of $54 million and $60 million, respectively.2006. For the 12 weeks, stock-based compensation costwe granted 11 million stock options and 2 million restricted stock units (RSU) at weighted average grant prices of less than $1 million in 2006$65.02 and $1 million in 2005 was capitalized in connection with$64.99, respectively, under the terms of our Business Process Transformation (BPT) initiative. For the 36 weeks, stock-based compensation cost of $2 million in 2006 and $3 million in 2005 was capitalized in connection with our BPT initiative.2003 Long-Term Incentive Plan (LTIP).
Our weighted average Black-Scholes fair value assumptions are as follows:
| 36 Weeks Ended | ||||||||||
| 9/9/06 | 9/3/05 | |||||||||
| 3/24/07 | 3/25/06 | |||||||||
Expected life | 6 yrs. | 6 yrs. | 6 yrs. | 6 yrs. | ||||||
Risk free interest rate | 4.5% | 3.8% | 4.8 | % | 4.5 | % | ||||
Expected volatility(a) | 18% | 24% | 15 | % | 18 | % | ||||
Expected dividend yield | 1.9% | 1.8% | 1.9 | % | 1.9 | % | ||||
(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 36 weeks ended September 9, 2006 is presented below:
Our Stock Option Activity
| Options(a) | Average Price(b) | Average Life (years)(c) | Aggregate Intrinsic Value(d) | |||||
Outstanding at January 1, 2006 | 150,149 | $42.03 | ||||||
Granted | 11,786 | 57.50 | ||||||
Exercised | (11,438) | 38.18 | ||||||
Forfeited/expired | (845) | 47.40 | ||||||
Outstanding at March 25, 2006 | 149,652 | 43.48 | ||||||
Granted | 166 | 57.81 | ||||||
Exercised | (6,965) | 37.54 | ||||||
Forfeited/expired | (750) | 49.02 | ||||||
Outstanding at June 17, 2006 | 142,103 | 43.80 | ||||||
Granted | 223 | 61.60 | ||||||
Exercised | (8,211) | 38.87 | ||||||
Forfeited/expired | (1,440) | 48.42 | ||||||
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 | ||||
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A summary of RSU activity for the 36 weeks ended September 9, 2006 is presented below:
Our RSU Activity
| RSUs(a) | Average Intrinsic Value(b) | Average Life (years)(c) | Aggregate Intrinsic Value(d) | |||||
Outstanding at January 1, 2006 | 5,669 | $50.70 | ||||||
Granted | 2,576 | 57.54 | ||||||
Converted | (62) | 49.70 | ||||||
Forfeited/expired | (159) | 50.30 | ||||||
Outstanding at March 25, 2006 | 8,024 | 52.88 | ||||||
Granted | 103 | 58.27 | ||||||
Converted | (54) | 49.85 | ||||||
Forfeited/expired | (151) | 52.54 | ||||||
Outstanding at June 17, 2006 | 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 | ||||
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Other Stock-Based Compensation Data
| 12 Weeks Ended | 36 Weeks Ended | |||||||
| 9/9/06 | 9/3/05 | 9/9/06 | 9/3/05 | |||||
Stock Options | ||||||||
Weighted-average fair value of options granted | $13.31 | $11.80 | $12.78 | $13.45 | ||||
Total intrinsic value of options exercised(a) | $195,360 | $66,895 | $585,015 | $404,770 | ||||
RSUs | ||||||||
Total intrinsic value of RSUs converted(a) | $2,461 | $1,099 | $9,334 | $3,747 | ||||
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As of September 9, 2006, there was $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 1.6 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 | ||||||||||||
| Pension | Retiree Medical | |||||||||||
| 9/9/06 9/3/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | ||||||||||
| U.S. | International | |||||||||||
Service cost | $ 56 | $ 49 | $ 12 | $ 8 | $11 | $ 9 | ||||||
Interest cost | 73 | 68 | 15 | 13 | 17 | 18 | ||||||
Expected return on plan assets | (90) | (78) | (18) | (18) | – | – | ||||||
Amortization of prior service | 1 | 1 | – | – | (3) | (2) | ||||||
Amortization of experience | 38 | 24 | 6 | 4 | 5 | 6 | ||||||
Total expense | $ 78 | $ 64 | $ 15 | $ 7 | $30 | $ 31 | ||||||
| 36 Weeks Ended | ||||||||||||
| Pension | Retiree Medical | |||||||||||
| 9/9/06 9/3/05 | 9/9/06 9/3/05 | 9/9/06 9/3/05 | ||||||||||
| U.S. | International | |||||||||||
Service cost | $ 168 | $ 147 | $ 38 | $ 24 | $33 | $27 | ||||||
Interest cost | 219 | 203 | 45 | 41 | 51 | 54 | ||||||
Expected return on plan assets | (270) | (237) | (54) | (52) | – | – | ||||||
Amortization of prior service | 3 | 3 | – | – | (9) | (6) | ||||||
Amortization of experience | 114 | 72 | 18 | 12 | 15 | 18 | ||||||
Total expense | $ 234 | $ 188 | $ 47 | $ 25 | $90 | $93 | ||||||
Service cost Interest cost Expected return on plan assets Amortization of prior service cost/(benefit) Amortization of experience loss Total expense 12 Weeks Ended Pension Retiree Medical 3/24/07 3/25/06 3/24/07 3/25/06 3/24/07 3/25/06 U.S. International $ 56 $ 56 $ 10 $ 9 $ 11 $ 11 78 73 14 12 18 17 (92 ) (90 ) (17 ) (14 ) – – 1 1 1 – (3 ) (3 ) 32 38 5 5 4 5 $ 75 $ 78 $ 13 $ 12 $ 30 $ 30
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 | |||||||||||||||||||
| 9/9/06 | 9/3/05 | 3/24/07 | 3/25/06 | |||||||||||||||||
| Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | Income | Shares(a) | |||||||||||||
Net income | $1,481 | $864 | $ | 1,096 | $ | 947 | ||||||||||||||
Preferred shares: | ||||||||||||||||||||
Dividends | – | (1) | ||||||||||||||||||
Redemption premium | (3) | (2) | (3 | ) | (2 | ) | ||||||||||||||
Net income available for common shareholders | $1,478 | 1,648 | $861 | 1,668 | $ | 1,093 | 1,637 | $ | 945 | 1,656 | ||||||||||
Basic net income per common share | $0.90 | $0.52 | $ | 0.67 | $ | 0.57 | ||||||||||||||
Net income available for common shareholders | $1,478 | 1,648 | $861 | 1,668 | $ | 1,093 | 1,637 | $ | 945 | 1,656 | ||||||||||
Dilutive securities: | ||||||||||||||||||||
Stock options and RSUs(b) | – | 38 | – | 33 | – | 35 | – | 37 | ||||||||||||
ESOP convertible preferred stock | 3 | 2 | 3 | 2 | 3 | 1 | 2 | 2 | ||||||||||||
Diluted | $1,481 | 1,688 | $864 | 1,703 | $ | 1,096 | 1,673 | $ | 947 | 1,695 | ||||||||||
Diluted net income per common share | $0.88 | $0.51 | $ | 0.65 | $ | 0.56 | ||||||||||||||
| 36 Weeks Ended | ||||||||||||||||||||
| 9/9/06 | 9/3/05 | |||||||||||||||||||
| Income | Shares(a) | Income | Shares(a) | |||||||||||||||||
Net income | $3,858 | $2,970 | ||||||||||||||||||
Preferred shares: | ||||||||||||||||||||
Dividends | (1) | (2) | ||||||||||||||||||
Redemption premium | (7) | (11) | ||||||||||||||||||
Net income available for common shareholders | $3,850 | 1,652 | $2,957 | 1,674 | ||||||||||||||||
Basic net income per common share | $2.33 | $1.77 | ||||||||||||||||||
Net income available for common shareholders | $3,850 | 1,652 | $2,957 | 1,674 | ||||||||||||||||
Dilutive securities: | ||||||||||||||||||||
Stock options and RSUs(b) | – | 36 | – | 33 | ||||||||||||||||
ESOP convertible preferred stock | 8 | 2 | 13 | 2 | ||||||||||||||||
Diluted | $3,858 | 1,690 | $2,970 | 1,709 | ||||||||||||||||
Diluted net income per common share | $2.28 | $1.74 | ||||||||||||||||||
(a) | Weighted average common shares outstanding. |
(a) Weighted average common shares outstanding.
(b) | Options to purchase 11 million shares in 2007 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 $65.01 in 2007. There were no out-of-the-money options in 2006. |
(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 September 9, 2006, we have reclassified $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
| 36 Weeks Ended | ||||||
| 9/9/06 | 9/3/05 | |||||
Interest paid | $154 | $133 | ||||
Income taxes paid, net of refunds | $1,203 | $668 | ||||
Acquisitions(a): | ||||||
Fair value of assets acquired | $ 574 | $ 929 | ||||
Less: Cash paid and debt assumed | (444) | (1,052) | ||||
Add: Minority interest eliminated | – | 216 | ||||
Liabilities assumed | $ 130 | $ 93 | ||||
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| 12 Weeks Ended | ||||||||
| 3/24/07 | 3/25/06 | |||||||
Interest paid | $ | 38 | $ | 54 | ||||
Income taxes paid, net of refunds | $ | 95 | $ | 517 | ||||
Acquisitions: | ||||||||
Fair value of assets acquired | $ | 462 | $ | 287 | ||||
Less: Cash paid and debt assumed | (431 | ) | (275 | ) | ||||
Liabilities assumed | $ | 31 | $ | 12 | ||||
Recent Accounting PronouncementsIncome Taxes
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48),which clarifies the accounting for uncertainty in tax positions. FIN 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. TheWe adopted the provisions of FIN 48 as of the beginning of our 2007 fiscal year. As a result of our adoption of FIN 48, we recognized a $7 million decrease to reserves for income taxes, with a corresponding increase to retained earnings, as of the beginning of our 2007 fiscal year.
As of the beginning of our 2007 fiscal year, the total gross amount of reserves for income taxes, which is reported in other liabilities, is $1.3 billion. Of that amount, $1.2 billion, if recognized, would affect our effective tax rate. Any prospective adjustments to our reserves for income taxes will be recorded as an increase or decrease to provision for income taxes and would impact our effective tax rate. In addition, we accrue interest related to reserves for income taxes in provision for income taxes and any associated penalties are effectiverecorded in selling, general and administrative expenses. The gross amount of interest accrued as of the beginning of our 2007 fiscal year withis $0.3 billion.
We file income tax returns in the cumulative effectU.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the changefinal outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most probable outcome. We adjust these reserves, as well as the related interest, in accounting principle recordedlight of changing facts and circumstances. Settlement of any particular position would usually require the use of cash. The resolution of a matter would be recognized as an adjustment to opening retained earnings.our provision for income taxes and our effective tax rate in the period of resolution.
The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the U.S., Mexico, the United Kingdom and Canada. In the U.S, the Internal Revenue Service (IRS), in the fourth quarter of 2006, issued a Revenue Agent’s Report (RAR) related to the years 1998 through 2002. We are currently evaluatingin agreement with their conclusion, except for one matter which we continue to dispute. We made the impactappropriate cash payment during the fourth quarter of adopting FIN 48 on2006 to settle the agreed-upon issues, and we do not anticipate the
resolution of the open matter will significantly impact 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 The IRS has initiated their impact on eachaudit of our U.S. tax returns for the years 2003 through 2005 during the first quarter of 2007. In Mexico, during 2006, we completed and agreed with the conclusions of an audit of our tax returns for the years 2001 through 2005. In the United Kingdom, our 1999 tax year is currently under audit and all subsequent years remain open. We do not anticipate the resolution of the 1999 tax year or open subsequent years will significantly impact our financial statementsstatements. In Canada, audits have been completed for all taxable years prior to 2004. We are disputing some of the adjustments for the years 1999 through 2003. We do not anticipate the resolution of the 1999 through 2003 tax years will significantly impact our financial statements. The Canadian tax return for 2004 is currently under audit and related disclosures. SAB 108 is effectiveno adjustments are expected to significantly impact our financial statements.
Recent Accounting Pronouncements
We adopted FIN 48 as of the endbeginning of our 20062007 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.year. SeeIncome Taxes.
In September 2006, the FASB issued SFAS 157,Fair Value Measurements(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,February 2007, the FASB issued SFAS 158,159,Employer’s AccountingThe Fair Value Option for Defined Benefit PensionFinancial Assets and Other Postretirement Plans –Financial Liabilities Including an amendment of FASB StatementsStatement No. 87, 88, 106,115(SFAS 159), which permits entities to choose to measure many financial instruments and 132(R).SFAS 158 requires that we recognizecertain other items at fair value. The provisions of SFAS 159 are effective as of the overfunded or underfunded statusbeginning 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.2008 fiscal year. We estimateare currently evaluating 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 impact159 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 and discounts through various programs to our customers and to consumers. These incentives are recordedaccounted for as a reduction of the sales price of our products.revenue. 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 expensesexpense 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.
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 auditsoperate.Our estimated annual effective tax rate also reflects our best estimate of ourthe ultimate outcome of tax returns for the years 1998 through 2002 may be concluded in 2006.audits. In 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 operating cash 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. 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 volatilityVolatility reflects movements in our stock price over the most recent historical period equivalent to the expected life.
For our 20062007 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 issuedWe adopted FIN 48,which clarifies the accounting for uncertainty in tax positions. FIN 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, withyear. SeeIncome Taxes in our Notes to 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.Condensed Consolidated 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,February 2007, the FASB issued SFAS 158159, which requires that we recognizepermits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective as of the overfunded or underfunded statusbeginning 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.2008 fiscal year. We estimateare currently evaluating 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 impact159 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 obligationobligations to update any forward-looking statement.
Our operations outside of the United States generate approximately 40%over a third of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 36 weeks,quarter, net favorable foreign currency contributed 0.5nearly 1 percentage pointspoint to net revenue growth, primarily due to increasesappreciation in the Canadian dollar.British pound and the euro, partially offset by declines in the Mexican peso. Currency declines which are not offset could adversely impact our future results.
We expect to be able to mitigatecontinue to reduce the impact of increases 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, 200530, 2006 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. ForIn 2007, total servings increased over 4% for the 12 weeks, total servings increased 6%, with worldwide beverages growing nearly 6%3.5% and worldwide snacks growing almost 8%. For the 36 weeks, total servings increased 7%, with worldwide beverages growing 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 case8-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.retailers and independent distributors. BCS is reported to us by our bottlers on a monthly basis. Our thirdfirst quarter beverage volume includes PBNA bottler sales for June, JulyJanuary, February and August.March and PI bottler sales for January and February. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.
Consolidated Results
Total Net Revenue and Operating Profit
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||
Total net revenue | $8,950 | $8,184 | 9% | $24,754 | $22,466 | 10% | ||||||
Operating profit | ||||||||||||
FLNA | $ 694 | $ 655 | 6% | $1,897 | $1,788 | 6% | ||||||
PBNA | 603 | 628 | (4)% | 1,657 | 1,598 | 4% | ||||||
PI | 554 | 473 | 17% | 1,471 | 1,232 | 19% | ||||||
QFNA | 123 | 111 | 11% | 389 | 369 | 5.5% | ||||||
Corporate unallocated | (158) | (187) | (15)% | (488) | (504) | (3)% | ||||||
Total operating profit | $1,816 | $1,680 | 8% | $4,926 | $4,483 | 10% | ||||||
Total operating profit margin | 20.3% | 20.5% | (0.2) | 19.9% | 20.0% | (0.1) | ||||||
12 Weeks
| 12 Weeks Ended | |||||||||||
| 3/24/07 | 3/25/06 | Change | |||||||||
Total net revenue | $ | 7,350 | $ | 6,719 | 9 | % | |||||
Operating profit | |||||||||||
FLNA | $ | 610 | $ | 569 | 7 | % | |||||
PBNA | 425 | 428 | (1 | )% | |||||||
PI | 372 | 288 | 29 | % | |||||||
QFNA | 156 | 151 | 3 | % | |||||||
Corporate unallocated | (144 | ) | (179 | ) | (20 | )% | |||||
Total operating profit | $ | 1,419 | $ | 1,257 | 13 | % | |||||
Total operating profit margin | 19.3 | % | 18.7 | % | 0.6 | ||||||
Net revenue increased 9% primarily reflecting higherour volume andgrowth, as well as positive effective net pricing across all divisions. The volume gains contributed 4 percentage points to net revenue growth and the effective net pricing contributed over 3 percentage points. Acquisitions and foreign exchange eachThe impact of acquisitions contributed 1almost 2 percentage pointpoints to net revenue growth. Foreign currency contributed nearly 1 percentage point.
Total operating profit increased 8%13% and margin decreased 0.2increased 0.6 percentage points. The operating profit performance reflects leverage from the net revenue growth, partially offset byas well as the impact of higher raw material and energy costs across all divisions.costs.
Corporate unallocated expenses decreased $29 million.20%. This decrease primarily reflects the absencenet gains of two $17 million from certain energy-related mark-to-market derivatives, compared to net losses of $10 million in the
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 of $13 million and higheras well as lower employee-related costs of $9 million, were fully offset by the favorable impact of certain other corporate items. Corporate departmental expenses were essentially flat.
36 Weeks
Net revenue increased 10% primarily reflecting higher volume and positive effective net pricing across all divisions. The volume gains contributed 5 percentage points to net revenue growth and the effective net pricing contributed over 3 percentage points. Acquisitions and foreign exchange contributed 1 percentage point and 0.5 percentage points to net revenue growth, respectively.
Total operating profit increased 10% and margin decreased 0.1 percentage points. The operating profit performance reflects the net revenue growth, partially offset by the impact of higher raw material and energy costs across all divisions.
Corporate unallocated expenses decreased $16$13 million. This decrease 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 of $28 million and higher employee-related costs of $19 million, were partially offset by the favorable impact of certain other corporate items. 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 increased $5 million.were flat.
Other Consolidated Results
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||
Bottling equity income | $225 | $209 | 7% | $485 | $430 | 13% | ||||||
Interest expense, net | $(12) | $(21) | (43)% | $(62) | $(73) | (15)% | ||||||
Tax rate | 27.0% | 53.8% | 27.9% | 38.6% | ||||||||
Net income | $1,481 | $864 | 71% | $3,858 | $2,970 | 30% | ||||||
Net income per common share – diluted | $0.88 | $0.51 | 73% | $2.28 | $1.74 | 31% | ||||||
12 Weeks
| 12 Weeks Ended | |||||||||||
| 3/24/07 | 3/25/06 | Change | |||||||||
Bottling equity income | $ | 74 | $ | 75 | (0.5 | )% | |||||
Interest expense, net | $ | (20 | ) | $ | (17 | ) | 24 | % | |||
Tax rate | 25.6 | % | 28.0 | % | |||||||
Net income | $ | 1,096 | $ | 947 | 16 | % | |||||
Net income per common share - diluted | $ | 0.65 | $ | 0.56 | 17 | % | |||||
Bottling equity income increased 7% primarilydecreased 0.5% reflecting a $61 million pre-tax gain on our sale ofreduced ownership percentage in PBG stock in the quarter, which compared favorably(from 44.5% to a $41 million pre-tax gain in the prior year.41.9%), offset by higher earnings from our anchor bottlers.
Net interest expense decreased 43% primarilyincreased 24% reflecting higher average rates on our investments, as well as lower debt balances, partially offset by lower investment balances, lower gains in the market value of investments used to economically hedge a portion of our deferred compensation liability, and higher average rates on our borrowings. This increase was mostly offset by lower debt balances.
The tax rate decreased 26.82.4 percentage points compared to the prior year primarily reflectingdue to the absencetiming of the $468 million tax charge recorded in the third quarter of 2005certain items 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, as well as from the resolution of certain state income tax audits in the third quarter.planning initiatives and audit settlements.
Net income increased 71%16% and the related net income per share increased 73%17%. These increases primarily reflect the absence of the AJCA tax charge, our solid operating profit growth and the decrease in our effective tax rate and the increased gains on our sale of PBG stock.rate. Net income per share was also favorably impacted by our share repurchases.
36 Weeks
Bottling equity income increased 13% primarily reflecting a $167 million pre-tax gain on our sale of PBG stock, which compared favorably to a $105 million pre-tax gain in the prior year.
Net interest expense decreased 15% primarily reflecting higher average rates on our investments, as well as lower debt balances, partially offset by the impact of higher average rates on our borrowings and lower investment balances.
The tax rate decreased 10.7 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, as well as from the resolution of certain state income tax audits in the third quarter.
Net income increased 30% and the related net income per share increased 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. 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 | |||||||||||||||||||||||||
Q3, 2006 | $2,642 | $2,608 | $3,298 | $402 | $8,950 | |||||||||||||||||||||||||
Q3, 2005 | $2,461 | $2,520 | $2,839 | $364 | $8,184 | |||||||||||||||||||||||||
Net Revenue | FLNA | PBNA | PI | QFNA | Total | |||||||||||||||||||||||||
Q1, 2007 | $ | 2,553 | $ | 2,086 | $ | 2,248 | $ | 463 | $ | 7,350 | ||||||||||||||||||||
Q1, 2006 | $ | 2,393 | $ | 1,991 | $ | 1,892 | $ | 443 | $ | 6,719 | ||||||||||||||||||||
% Impact of: | ||||||||||||||||||||||||||||||
Volume | 3% | 1%(a) | 7%(a) | 8% | 4% | 3.5 | % | (3 | )%(a) | 11 | %(a) | 5 | % | 4 | % | |||||||||||||||
Effective net pricing | 3 | 2 | 5 | 1 | 3 | 3 | 5 | 2 | – | 3 | ||||||||||||||||||||
Foreign exchange | 1 | 0.5 | 1 | 1 | 1 | – | – | 2.5 | – | 1 | ||||||||||||||||||||
Acquisitions/divestitures | 0.5 | – | 3 | – | 1 | – | 2.5 | 3 | – | 2 | ||||||||||||||||||||
% Change(b) | 7% | 3.5% | 16% | 10% | 9% | 7 | % | 5 | % | 19 | % | 5 | % | 9 | % | |||||||||||||||
(a) |
|
|
|
Net Revenue 36 Weeks Ended Q3, 2006 Q3, 2005 % Impact of: Volume Effective net pricing Foreign exchange Acquisitions/divestitures % Change(b) FLNA PBNA PI QFNA Total $7,602 $7,104 $8,830 $1,218 $24,754 $7,097 $6,522 $7,716 $1,131 $22,466 3% 6%(a) 8%(a) 4.5% 5% 3 3 4 2 3 1 0.5 – 1 0.5 0.5 – 3 – 1 7% 9% 14% 8% 10%
|
|
(b) | Amounts may not sum due to rounding. |
Frito-Lay North America
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||
Net revenue | $2,642 | $2,461 | 7% | $7,602 | $7,097 | 7% | ||||||
Operating profit | $694 | $655 | 6% | $1,897 | $1,788 | 6% | ||||||
12 Weeks
| 12 Weeks Ended | % | |||||||
| 3/24/07 | 3/25/06 | Change | ||||||
Net revenue | $ | 2,553 | $ | 2,393 | 7 | |||
Operating profit | $ | 610 | $ | 569 | 7 | |||
Net revenue grew 7% reflecting volume growth of 3%3.5% and positive effective net pricing due to 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 trademark Doritos and SunChips, and Multipack, and mid-single-digithigh-single-digit growth in trademark Tostitosdips and Fritos, partially offset by a low-single-digit decline in trademark Doritos. Overall, salty snacks revenue grew 7% with volume growth of 3%, and other macro snacks revenue grew 10% with volume growth of 5%. The Stacy’s Pita Chip Company (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 energy and cooking oil.
Smart Spot eligible products represented approximately 15% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio had mid-single-digit revenue growth.
36 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 Multipack, and mid-single-digit growth in Dips and trademark Tostitos.multipack. These volume gains were partially offset by a mid-single-digit declinedeclines in trademark Doritos.Lay’s. Overall, salty snacks revenue grew 7%6% with volume growth of 3%, and other macro snacks revenue grew 13% with volume growth of 9%. The Stacy’s acquisition contributed approximately 0.5 percentage points to both revenue and volume growth.
Operating profit grew 6%7% primarily reflecting the net revenue growth. This growth, was partially offset by higher commodity costs, primarily cooking oilincreased advertising and energy.marketing expenses.
Smart Spot eligible products represented approximately 15%17% of net revenue. These products experienced double-digit net revenue growth, while the balance of the portfolio hadgrew in the mid-single-digit revenue growth.range.
PepsiCo Beverages North America
| 12 Weeks Ended | 36 Weeks Ended | ||||||||||||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | 12 Weeks Ended | % | ||||||||||||||
| 3/24/07 | 3/25/06 | Change | |||||||||||||||||||
Net revenue | $2,608 | $2,520 | 3.5% | $7,104 | $6,522 | 9% | $ | 2,086 | $ | 1,991 | 5 | ||||||||||
Operating profit | $603 | $628 | (4)% | $1,657 | $1,598 | 4% | $ | 425 | $ | 428 | (1 | ) | |||||||||
12 Weeks
Net revenue grew 3.5% and BCS volume grew 4%. The volume increase was1% driven by a 13%an 8% increase in non-carbonated beverages, partially offset by a 2%3% decline in carbonated soft drinks (CSDs)(CSD). The non-carbonated portfolio performance was driven byby: double-digit growth in trademarkwaters and enhanced waters under the Aquafina, Propel and Lipton ready-to-drink teas, high-single digit growth in Gatorade, andSoBe trademarks; double-digit growth in Tropicana juice drinksLipton ready-to-drink teas; and Propel.a low-single-digit increase in Gatorade. Tropicana Pure Premium volume was flat.experienced a double-digit decline driven by a significant price increase. The decline in CSDs reflects a mid-single-digit decline in trademark Pepsi and a low-single-digit decline in trademark Pepsi,Mountain Dew, 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-digitmid-single-digit decline which wasand diet CSDs declined slightly.
Net revenue grew 5% driven by positive effective net pricing, primarily reflecting the price increases on Tropicana Pure Premium, as well as on CSD concentrate, and the continuing migration from CSDs to higher-priced non-carbonated beverages. Acquisitions contributed 2.5 percentage points to growth. These net revenue gains were partially offset by a slight increaseCSE volume which declined 1% in diet CSDs. CSEthe quarter and lagged BCS volume growth by 2 percentage points due to the timing of shipments earlier in the year.shipments.
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%,decreased 1% primarily reflecting higher raw materialcost of sales, due mainly to higher fruit and juice costs primarily oranges,and increased supply chain costs in Gatorade and higher energy costs. Increased trade spendingat Gatorade. The operating profit decline was partiallymostly offset by the net revenue gains, as well as the absence of amortization expense recorded in 2006 related to a prior acquisition and 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 wasexpenses, 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 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 mix, 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 higher trade spending. Favorable Canadian foreign exchange rates contributed approximately 0.5 percentage points to net revenue growth.
Operating profit increased 4%, reflecting the net revenue growth partially offset by 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. Additionally, the impact of a favorable insurance settlement of $29 million in 2006 was fully offset by more-favorable settlements of trade spending accruals in 2005.timing.
Smart Spot eligible products represented over 70% of net revenue. These products experienced double-digithigh-single-digit net revenue growth, while the balance of the portfolio increaseddeclined in the low-single-digit range.
PepsiCo International
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||
Net revenue | $3,298 | $2,839 | 16% | $8,830 | $7,716 | 14% | ||||||
Operating profit | $554 | $473 | 17% | $1,471 | $1,232 | 19% | ||||||
12 Weeks
| 12 Weeks Ended | % | |||||||
| 3/24/07 | 3/25/06 | Change | ||||||
Net revenue | $ | 2,248 | $ | 1,892 | 19 | |||
Operating profit | $ | 372 | $ | 288 | 29 | |||
International snacks volume grew 12%13%, reflecting broad-based gains led by high-single-digitdouble-digit growth at SabritasGamesa in Mexico, andas well as double-digit growth in Russia, TurkeyVenezuela, South Africa and Egypt.Turkey. Additionally, Brazil grew in the mid-single-digit range. Overall, both the Latin America and the Europe, Middle East & Africa regionregions grew 20%12%, the Latin America region grew 5% and the Asia Pacific region grew 14%19%. AcquisitionsThe acquisition of two businessesa business in Europe in the third quarter of 2006 increased the Europe, Middle East & Africa
region volume growth by 73 percentage points. The acquisition of a business in AustraliaNew Zealand in 2007 increased the Asia Pacific region volume by 2 percentage points. In aggregate, acquisitions contributed 3 percentage points to the reported total PepsiCo International snack volume growth rate.
Beverage volume grew 8%, reflecting broad-based increases which were led by double-digit growth in the Middle East, China, Russia and Argentina. 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 rate. CSDs grew at a mid-single-digit rate while non-carbonated beverages grew at a double-digit rate.
Net revenue grew 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 contributed 1 percentage point of growth based on the favorable euro and British pound, partially offset by the unfavorable Mexican peso.
Operating profit grew 17%, driven primarily by the net revenue growth, partially 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 had a 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.
36 Weeks
International snacks volume grew 10%, reflecting mid-single-digit growth at both Sabritas in Mexico and Walkers in the United Kingdom, and double-digit growth in Russia, Turkey and Egypt. Overall, the Europe, Middle East & Africa region grew 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 26 percentage points. In aggregate, acquisitions contributed 2 percentage points to the reported total PepsiCo International snack volume growth rate. Additional trading days in Mexico in the quarter contributed approximately 1 percentage point to the volume growth rate.
Beverage volume grew 10%7%, reflecting broad-based increases led by double-digit growth in Venezuela, Russia, Argentina and Brazil, partially offset by single-digit declines in Mexico and Thailand. Additionally, China grew in the Middle East, China, Argentina, Russia and Venezuela, and low-single-digit growth in Mexico. Overall, thehigh-single-digit range. The Europe, Middle East & Africa region grew 12%9%, the Latin America region grew 8% and the Asia Pacific region grew 11% and the Latin America region grew 7%6%. Acquisitions contributed 1 percentage point tohad no impact on the Europe, Middle East & Africa region volume growth rate and contributed slightly to the reported total PepsiCo International beverage volume growth rate.rates. CSDs grew at a high-single-digitmid-single-digit rate while non-carbonated beverages grew at a double-digit rate.
Net revenue grew 14%19%, primarily as a result of the broad-based volume growth and favorable effective net pricing. AcquisitionsThe net impact of acquisitions and divestitures contributed nearly 3 percentage points ofto net revenue growth. Foreign currency had no impact oncontributed 2.5 percentage points of growth primarily reflecting the growth rate.favorable British pound and euro, partially offset by the unfavorable Mexican peso.
Operating profit grew 19%,29% driven primarily by the net revenue growth, partially 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 quarterForeign currency contributed nearly 2 percentage points of growth. The absence of amortization expense recorded in 2006 related to prior acquisitions and the additional trading days in the quarter collectively contributed 4 percentage points to operating profit growth. Acquisitions and foreign currency eachdivestitures had a slightly favorableno net impact on the growth rate.operating profit growth.
Quaker Foods North America
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | Change | 9/9/06 | 9/3/05 | Change | |||||||
Net revenue | $402 | $364 | 10% | $1,218 | $1,131 | 8% | ||||||
Operating profit | $123 | $111 | 11% | $389 | $369 | 5.5% | ||||||
12 Weeks
| 12 Weeks Ended | % | |||||||
| 3/24/07 | 3/25/06 | Change | ||||||
Net revenue | $ | 463 | $ | 443 | 5 | |||
Operating profit | $ | 156 | $ | 151 | 3 | |||
Net revenue increased 10% and volume each increased 8%5%. The volume increase primarily reflects double-digithigh-single-digit growth in Oatmeal, high-single-digitmid-single-digit growth in Aunt Jemima syrup and mix, and mid-single-digitlow-single-digit growth in ready-to-eat cereals. Higher effective net pricing contributed 1 percentage point toCap’n Crunch cereal. These increases were partially offset by a mid-single-digit decline in Life cereal. The net revenue growth reflecting favorable product mix and price increases taken earlier inwas primarily driven by the year, partially offset by increased trade spending. Favorable Canadian foreign exchange rates also contributed approximately 1 percentage point to net revenuevolume growth.
Operating profit increased 11% primarily3% reflecting the net revenue growth. This growth and lower advertising and marketing expenses. The operating profit increase was partially offset by increased cost of sales, primarily due to higher raw material and energy costs.
Smart Spot eligible products represented approximately half60% of net revenue and had double-digitexperienced mid-single-digit net revenue growth. The balance of the portfolio experiencedalso grew in the mid-single-digit growth.range.
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 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
DuringIn the 36 weeks,first quarter of 2007, our operations provided $4.3 billion of$626 million in cash primarily reflecting our solid business results. Ourcompared to $173 million in the prior year. The operating cash flow in the first quarter of 2006 also reflects a tax payment of $420 million related to our repatriation of international cash in 2005 in connection with the AJCA.
We make periodic regulatory contributionsAmerican Jobs Creation Act (AJCA). Seasonality contributed to our qualified pension plans during the coursea use 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.cash in operating working capital accounts in both periods.
Investing Activities
During the 36 weeks,quarter, we used $127$198 million for our investing activities. Capitalactivities reflecting acquisitions of $431 million, primarily the Naked Juice Company and Bluebird Foods, and capital spending of $1.1 billion and acquisitions of $444$267 million, were mostlypartially offset by net sales of short-term investments of $1.1 billion$402 million and proceeds from our sale of PBG stock of $285$94 million. The increase in capital spending over the prior year primarily reflects increased investments in our North American Gatorade business and at PepsiCo International, as well as increased support behind our ongoing BPT initiative.
We anticipate net capital spending of approximately $2.2$2.6 billion in 2006.2007, which is expected to be within our net capital spending target of approximately 5% to 7% of net revenue in each of the next few years.
Financing Activities
During the 36 weeks,quarter, we used $4.6$1.1 billion for our financing activities, primarily reflecting the return of operating cash flow to our shareholders through common share repurchases of $2.2 billion$882 million and dividend payments of $1.4 billion. Net repayments of short-term borrowings of $2.0 billion were$498 million, partially offset by stock option proceeds of $1.0 billion.$236 million.
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 the net cash provided by operating activities as reflected in our Condensed Consolidated Statement of Cash Flows to our management operating cash flow.
| 36 Weeks Ended | 12 Weeks Ended | |||||||||||
| 9/9/06 | 9/3/05 | 3/24/07 | 3/25/06 | |||||||||
Net cash provided by operating activities | $4,292 | $4,558 | $ | 626 | $ | 173 | ||||||
Capital spending | (1,130) | (796) | (267 | ) | (289 | ) | ||||||
Sales of property, plant and equipment | 37 | 65 | 4 | 6 | ||||||||
Management operating cash flow | $3,199 | $3,827 | $ | 363 | $ | (110 | ) | |||||
In the current year,first quarter of 2006, 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.AJCA. During 2006,2007, we expect to continue to return approximately all of our management operating cash flow to our shareholders through dividends and share repurchases. However, see “Risk Factors”“Risk Factors” in Item 1A. and “Our“Our Business Risks”Risks” in our Annual Report on Form 10-K for the fiscal year ended December 31, 200530, 2006 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 September 9, 2006,March 24, 2007, and the related Condensed Consolidated Statements of Income, and Comprehensive Income for the twelve and thirty-six weeks ended September 9, 2006 and September 3, 2005, and the Condensed Consolidated Statements of Cash Flows for the thirty-sixtwelve weeks ended September 9, 2006March 24, 2007 and September 3, 2005.March 25, 2006. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.’s management.
We conducted our reviewsreview 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, 2005,30, 2006, 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, 2006,16, 2007, 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, 2005,30, 2006, 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 |
April 25, 2007 |
New York, New York
October 12, 2006
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 thirdfirst fiscal quarter of 20062007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Legal Proceedings |
We are party to a variety of legal proceedings arising in the normal course of business, including the matters discussed below.business. 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.
Risk Factors |
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, 2005.30, 2006.
Unregistered Sales of Equity Securities and Use of Proceeds |
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 thirdfirst quarter under the $8.5 billion repurchase program authorized by our Board of Directors and publicly announced on May 3, 2006, and expiring on June 30, 2009, 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 | ||||
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 | ||||
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 | |||||||
12/30/06 | $ | 7,375 | |||||||||
12/31/06 – 1/27/07 | 3.6 | $ | 64.14 | 3.6 | (229 | ) | |||||
| 7,146 | |||||||||||
1/28/07 – 2/24/07 | 3.2 | 64.56 | 3.2 | (205 | ) | ||||||
| 6,941 | |||||||||||
2/25/07 – 3/24/07 | 8.0 | 63.16 | 8.0 | (510 | ) | ||||||
| 14.8 | $ | 63.70 | 14.8 | $ | 6,431 | ||||||
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 thirdfirst 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 | ||||
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 | ||||
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 | |||||
12/30/06 | |||||||||
12/31/06 – 1/27/07 | 4,000 | $ | 320.70 | N/A | N/A | ||||
1/28/07 – 2/24/07 | 2,700 | 317.56 | N/A | N/A | |||||
2/25/07 – 3/24/07 | 2,700 | 319.51 | N/A | N/A | |||||
| 9,400 | $ | 319.46 | N/A | N/A | |||||
SeeIndex to Exhibits on page 36.29.
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/ THOMAS H. TAMONEY, JR. | |
Thomas H. Tamoney, Jr. | ||
Vice President, Deputy General | ||
Counsel and Assistant Secretary | ||
(Duly Authorized Officer) | ||
ITEM 6 (a)
EXHIBITS
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Exhibit 12 | Computation of Ratio of Earnings to Fixed Charges | |
Exhibit 15 | Letter re: Unaudited Interim Financial Information | |
Exhibit 18 | Letter re: Change in Accounting Principles | |
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 | |
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