Pepsico - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

PEPSICO, INC.

(Exact name of registrant as specified in its charter)

914-253-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,

if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act.)  YES  x    NO  ¨

Number of shares of Common Stock outstanding as of April 18, 2003: 1,718,107,597

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PEPSICO, INC. AND SUBSIDIARIES

INDEX

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FINANCIAL REVIEW

Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Our Divisions in 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

See Our Critical Accounting Policies in the Notes to the Condensed Consolidated Financial Statements.

Our Business Risks

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

Our operations outside of North America generate approximately 30% of our net revenue. As a result, we are exposed to foreign currency risks. During the quarter, declines in the Mexican peso more than offset increases in the British pound and the euro. For 2003, the unfavorable impact of the Mexican peso is expected to be partially offset by the favorable impact of the British pound and euro, however, continued weakness in the Mexican peso could adversely affect our future results.

Cautionary statements regarding our trends and future results were included in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 28, 2002. In particular, you should consider the following factors in 2003:

Recent retailer bankruptcies are not expected to materially impact our future results.

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in millions except per share amounts, unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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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 incentives and mix resulting from selling varying products in different package sizes and in different countries.

Items Affecting Comparability

We incurred costs associated with our merger with The Quaker Oats Company (Quaker) of $11 million ($10 million after-tax) for the 12 weeks ended March 22, 2003 and $36 million ($30 million after-tax and $0.02 per share) for the 12 weeks ended March 23, 2002. See Merger-Related Costs in the Notes to the Condensed Consolidated Financial Statements.

During the quarter, we sold our Quaker Foods North America’s Mission pasta business. The transaction resulted in a net gain of $25 million ($16 million after-tax and $0.01 per share). This gain has been included in our divested business results.

Volume

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

Consolidated Results

Total Net Revenue and Operating Profit

Net revenue increased 4% and operating profit increased 13% primarily due to volume gains across all divisions and higher effective net pricing. The volume gains contributed approximately 4 percentage points to the revenue growth. Revenue growth was reduced by an unfavorable foreign currency impact which lowered net revenue growth by 1 percentage point.

Operating profit margin increased 1.6 percentage points primarily due to the impact of higher division operating profit margins, as well as the margin impact of lower merger-related costs and the gain on the sale of our Mission pasta business.

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Other Consolidated Results

Bottling equity income decreased 44% primarily due to lower earnings from our U.S. anchor bottlers.

Interest expense, net of interest income, increased 58% primarily reflecting higher average net debt levels and lower average investment rates.

The tax rate decreased 1.1 percentage points compared to prior year. The lower tax rate associated with our new concentrate plant contributed 0.7 percentage points, and a reduction in merger-related costs with lower tax benefit contributed 0.4 percentage points to this decline. Excluding merger-related costs, the provision for income taxes reflects the application of an effective tax rate of 30.5% to pretax income.

Net income increased 13% and the related net income per share increased 17%. These increases primarily reflect the strong operating results, the lower merger-related costs, the gain on the Mission pasta divestiture and the lower tax rate. This favorability was partially offset by lower bottling equity income and the higher net interest expense. Net income per common share also reflects the benefit of a reduction in average shares outstanding primarily as a result of our share buyback program. The reduction in merger-related costs contributed 4 percentage points to earnings per share growth and the gain on the Mission pasta divestiture contributed 2 percentage points.

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Results of Operations—Division Review

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Prior year amounts exclude the results of divested businesses. For additional information on our divisions, seeOur Divisions in the Notes to our Condensed Consolidated Financial Statements.

Frito-Lay North America

Pound volume grew 4% primarily due to new products, strong growth in branded dips and snack mix, double-digit growth in Cheetos and Quaker Chewy Granola bars, and single-digit growth in Doritos. Toastables and Baked Doritos significantly contributed to the new product growth and Munchies drove the branded snack mix growth. These gains were partially offset by single-digit declines in Ruffles and double-digit declines in Bistro Lays and 3D Ruffles.

Growth in net revenue of 5% and operating profit of 6% reflect the increased volume and positive net effective pricing. Higher priced innovation and better-for-you products contributed to the positive net effective pricing. Increased commodity costs, driven by vegetable oils and energy costs, dampened the operating profit growth.

Better-for-you products are expected to contribute an increasing percentage of FLNA’s volume and net revenue growth. Operating margins are expected to continue to improve as a result of ongoing productivity initiatives.

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PepsiCo Beverages North America

Volume increased approximately one half of a percentage point compared to the prior year reflecting noncarbonated beverage growth of 8% substantially offset by carbonated beverage declines of 2%. Double-digit growth in Aquafina, the successful introduction of new ICE and Fierce Gatorade flavors and strong growth in Lipton Brisk Lemonade fueled the noncarbonated growth. Propel fitness water also contributed to the volume growth reflecting the launch of two new flavors during the quarter, as did Tropicana Pure Premium with mid single-digit growth driven by nutritionals. A mid single-digit decline in trademark Pepsi, principally brand Pepsi and Pepsi Twist offset by growth in diet Pepsi, and a high single-digit decline in trademark Mountain Dew drove the carbonated beverages performance. Strong growth in Sierra Mist, reflecting its expanded distribution, partially offset these declines.

Net revenue increased 4% and operating profit increased 5%. These increases are due to the increased volume, higher effective net pricing reflecting concentrate price increases, partially offset by increased promotional spending. Selling, general and administrative expenses grew at a faster rate than revenue, and advertising and marketing expenses grew at a slightly slower rate.

Quaker Foods North America

Volume increased 5% as a result of oatmeal and ready-to-eat cereals growth reflecting a combined promotional event across our breakfast portfolio. Colder weather also contributed to the volume growth.

Net revenue increased 4% and operating profit increased 7% due to the volume growth, partially offset by increased promotional spending for the “breakfast” event. In addition, operating profit benefited from lower manufacturing costs.

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PepsiCo International

International snacks volume grew 3% primarily due to flat salty growth and double-digit sweet growth at Gamesa in Mexico. The flat salty kilos growth reflects single-digit growth at Walkers in the United Kingdom offset by a slight decline at Sabritas in Mexico and double-digit declines in Venezuela, Brazil and Argentina. The national strike in Venezuela and weak macroeconomic conditions caused the declines in Latin America. International beverages volume grew 7% led by strong double-digit growth in Brazil, China and India and single-digit growth in Mexico. Volume gains in India were driven by competitive pricing actions. These advances were partially offset by double-digit declines in Venezuela due to the national strike, and in Germany due to the new one-way bottle deposit requirement.

Growth in net revenue of 5% and operating profit of 12% primarily reflects the volume growth, as well as higher net effective pricing primarily in Mexico. The acquisition of the Wotsits snack brand in the United Kingdom contributed 1 percentage point to net revenue growth and nearly 3 percentage points to operating profit growth. These gains were partially offset by the impact of net unfavorable foreign currencies and inflation from U.S. dollar denominated costs in Mexico.

Foreign currency changes reduced revenue growth by 4 percentage points and operating profit growth by 6 percentage points. Unfavorable foreign currencies in Mexico, Brazil and Argentina reduced net revenue growth by 9 percentage points and operating profit growth by 13 percentage points. The favorable British pound and euro offset 5 percentage points of this impact on net revenue and 7 percentage points of this impact on operating profit.

PepsiCo International has significant businesses operating in Mexican peso, British pound and euro currencies. The combined impact of these currencies is expected to be partially offsetting. However, additional weakness in the Mexican peso could adversely affect PepsiCo International’s results. Weak macroeconomic conditions and political uncertainties are expected to continue in Latin America and portions of the Middle East.

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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Our Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities of $422 million reflects our solid business results offset by an increase in working capital. The working capital increase is primarily due to seasonal increases in accounts receivables and inventories, and decreases in current payables reflecting the timing of payments. These uses of working capital were offset by an increase in income taxes payable. Quaker integration and restructuring costs of $48 million were paid during the quarter ended March 22, 2003.

Investing Activities

Net cash used for investing activities of $347 million primarily reflects our capital spending of $305 million. Capital spending was $118 million higher than the first quarter in 2002 primarily due to the construction of our new concentrate plant. We expect capital spending for the full year to continue to be between 5.5% to 6% of revenue or approximately $1.5 billion.

Financing Activities

Net cash used for financing activities of $796 million primarily reflects payments of long-term debt of $349 million, share repurchases of $295 million and dividend payments of $260 million.

During the quarter, we repurchased 7.4 million shares at a cost of $306 million. Through April 15, 2003, we repurchased 8.6 million shares at a cost of $353 million. We expect to spend between $1 billion and $2 billion to buy back shares during 2003.

Management Operating Cash Flow

Management operating cash flow is the measure management uses to monitor cash flow performance, and is not a U.S. generally accepted accounting principle measure. The most significant difference is capital spending which we believe is a recurring and essential use of cash necessary to maintain our operating capabilities. 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.

Management operating cash flow for the 12 weeks ended March 22, 2003 was $160 million compared with $556 million for the same period in 2002. This comparative decrease primarily reflects changes in working capital and increased capital spending.

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

Continued on next page.

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (continued)

(in millions except per share amounts)

LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying Notes to the Condensed Consolidated Financial Statements.

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PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(in millions, unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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PEPSICO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation and Our Divisions

Basis of Presentation

Our Condensed Consolidated Balance Sheet at March 22, 2003 and the Condensed Consolidated Statements of Income, Cash Flows and Comprehensive Income for the 12 weeks ended March 22, 2003 and March 23, 2002 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 28, 2002. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 weeks are not necessarily indicative of the results expected for the year.

As of the beginning of 2003, the Quaker businesses in the United States (Gatorade and Quaker snacks and foods) changed their reporting calendar from months to fiscal periods to conform to PepsiCo’s calendar. As a result of this change, prior year quarterly results have been adjusted. This change did not impact full year results.

The Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation requires consolidation of existing noncontrolled affiliates if the affiliate is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. We do not expect any noncontrolled affiliates to require consolidation under FIN 46.

The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted and are based on unrounded amounts. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2002.

Our Divisions

Division results are based on how our Chief Executive Officer manages our business. Beginning in 2003, we combined our North American beverage businesses as PepsiCo Beverages North America and our international snack, food and beverage businesses as PepsiCo International to reflect operating management changes. Prior year results have been restated to reflect this change.

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Our Critical Accounting Policies

In addition to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2002, an understanding of our interim sales incentives and effective tax rate policies is necessary to analyze our quarterly financial results. As a results of these policies, estimates are included in and may significantly impact our quarterly results.

Sales Incentives

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 promotional allowances are recognized at the time of the sale while other incentives, such as bottler funding and customer volume rebates, are recognized during the year incurred generally in proportion to revenue, based on anticipated final payment which is estimated from historical experience with similar programs.

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Effective Tax Rate

Our quarterly provision for income taxes is based on our annual expected income, statutory rates and tax planning opportunities. Our effective tax rate reflects our best estimate of the ultimate outcome of tax audits. Significant or unusual items, such as the tax benefits from merger-related costs and taxes related to the sales of businesses, are separately recognized in the quarter in which they occur.

Intangible Assets

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

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Employee Stock Options

We account for employee stock options using the intrinsic value method. We have no current plans to change our accounting. If the fair value method of accounting had been applied, our results would have been:

Merger-Related Costs

We recognized employee-related and information systems integration costs of $11 million ($10 million after-tax) for the 12 weeks ended March 22, 2003 associated with our merger with The Quaker Oats Company (Quaker). For the 12 weeks ended March 23, 2002, we recognized $36 million ($30 million after-tax or $0.02 per share).

Analysis of merger-related integration and restructuring reserves which are included in accounts payable and other current liabilities in the Condensed Consolidated Balance Sheet:

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Net Income Per Common Share

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