10-QPeriod: Q3 FY2004

PEPSICO INC Quarterly Report for Q3 Ended Sep 4, 2004

Filed October 1, 2004For Securities:PEP

Summary

PepsiCo, Inc. reported strong financial performance for the 12 and 36 weeks ended September 4, 2004, demonstrating robust top-line growth and improved profitability. Net revenue saw a significant increase of 6% and 8% for the respective periods, driven by volume gains, favorable pricing, and positive foreign currency movements. This top-line growth translated into a substantial increase in operating profit, up 11% and 10% for the 12 and 36-week periods, respectively, with improved operating margins across key divisions. The company also highlighted a significant benefit from a lower effective tax rate, primarily due to tax benefits related to the resolution of foreign tax issues and prior U.S. tax settlements, which significantly boosted net income and earnings per share. Despite increased corporate unallocated expenses, particularly higher pension costs, PepsiCo's core business operations delivered impressive results, with substantial growth in key divisions like PepsiCo International and PepsiCo Beverages North America.

Key Highlights

  • 1Net revenue increased by 6% for the 12 weeks ended September 4, 2004, reaching $7.26 billion, and by 8% for the 36 weeks ended September 4, 2004, reaching $20.46 billion.
  • 2Operating profit showed strong growth, increasing by 11% for the 12 weeks ($1.51 billion) and 10% for the 36 weeks ($4.06 billion), with improved operating margins.
  • 3Net income saw a significant rise of 35% for the 12 weeks ($1.36 billion) and 22% for the 36 weeks ($3.23 billion), driven by strong operating performance and substantial income tax benefits.
  • 4Diluted earnings per share increased by 36% for the 12 weeks ($0.79) and 22% for the 36 weeks ($1.86).
  • 5PepsiCo International and PepsiCo Beverages North America divisions showed particularly strong performance, with double-digit growth in volume and revenue in many international markets and significant net revenue and operating profit increases in PBNA.
  • 6The company repurchased $2.5 billion of common stock and paid $940 million in dividends during the 36-week period, demonstrating a commitment to returning capital to shareholders.
  • 7A significant tax benefit of $221 million was recognized in the 12-week period, primarily from a reduction in foreign tax accruals and a refund claim, which significantly lowered the effective tax rate.

Frequently Asked Questions

Revenue growth was driven by a combination of factors, including volume gains (contributing approximately 3 percentage points for the 12-week period and 4 percentage points for the 36-week period), favorable effective net pricing (contributing over 2 percentage points for the 12-week period), and net favorable foreign currency movements (contributing nearly 1 percentage point for the 12-week period). Favorable product mix, particularly in beverages, also contributed significantly to the 36-week revenue growth.

The effective tax rate decreased substantially primarily due to income tax benefits of $221 million recognized in the 12-week period. These benefits stemmed from a reduction in foreign tax accruals following the resolution of certain tax issues with foreign tax authorities, and a refund claim related to prior U.S. tax settlements. These items accounted for a significant portion of the decrease in the tax rate for both the 12 and 36-week periods.

PepsiCo generated strong cash flow from operations, providing $3.7 billion for the 36-week period. The company strategically used this cash by investing $700 million in capital spending and returning approximately $3.4 billion to shareholders through common share repurchases ($2.5 billion) and dividend payments ($940 million). Management expects to continue returning substantially all of its management operating cash flows to shareholders.

All divisions demonstrated growth. Frito-Lay North America saw a 5% net revenue increase driven by volume and pricing. PepsiCo Beverages North America's net revenue grew 3% (12 weeks) and 7% (36 weeks), with strong non-carbonated beverage growth offsetting a slight decline in carbonated soft drinks. PepsiCo International reported robust 11% (12 weeks) and 14% (36 weeks) net revenue growth, fueled by strong volume increases across snacks and beverages in various regions. Quaker Foods North America's net revenue grew 5% (12 weeks) and 2% (36 weeks), supported by new product introductions and growth in oatmeal and cereal categories.