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Management's Discussion and Analysis
RESULTS OF OPERATIONS
Consolidated Review
General
In the discussions below, the year-over-year dollar change in bottler case sales by company-owned bottling operations and concentrate unit sales to franchisees for Pepsi-Cola, and in pound or kilo sales of salty and sweet snacks for Frito-Lay is referred to as volume. Price changes over the prior year and the impact of product, package and country sales mix changes are referred to as effective net pricing.
Net Sales
|
|
% Change B/(W)
|
|
($ in millions)
|
1998
|
1997
|
1996
|
1998
|
1997
|
|
|
|
|
|
|
Net Sales
|
$
|
22,348
|
$
|
20,917
|
$
|
20,337
|
7
|
3
|
|
Net sales rose $1.4 billion or 7% in 1998. Excluding foreign currency impact, net sales would have risen 8%. This increase reflects volume gains in all businesses, net contributions from acquisitions/divestitures and higher effective net pricing driven by a shift to higher-priced products in Frito-Lay North America. Volume gains contributed 4 percentage points of growth. Net acquisitions/divestitures contributed 3 percentage points to the sales growth and primarily reflect the acquisitions of Tropicana and certain North American bottlers partially offset by the absence of bottling sales as a result of refranchising a Japanese bottler late in 1997. In addition, net acquisitions/divestitures also include the addition of TSSC and certain other international salty snack food businesses which were partially offset by the loss of net sales from previously consolidated businesses contributed to a new Frito-Lay International joint venture in Central and South America. Weaker foreign currencies primarily in Canada, Thailand, Brazil, Poland and India led the unfavorable foreign currency impact.
Net sales rose $580 million or 3% in 1997. Excluding foreign currency impact, net sales would have risen 4%. This increase reflects volume gains in Frito-Lay Worldwide and Pepsi-Cola North America and higher effective net pricing. Weaker foreign currencies primarily in Spain, Japan, Germany and Hungary led the unfavorable foreign currency impact.
Operating Profit and Margin
|
|
% Change B/(W)
|
|
($ in millions)
|
1998
|
.
|
1997
|
1996
|
.
|
1998
|
.
|
1997
|
.
|
|
|
|
|
|
|
Reported |
.
|
.
|
.
|
.
|
|
|
Operating Profit
|
$
|
2,584
|
.
|
$
|
2,662
|
|
$
|
2,040
|
|
(3.0
|
) %
|
30
|
%
|
|
|
Operating Profit Margin
|
11.6
|
%
|
|
12.7
|
%
|
|
10.0
|
%
|
(1.1
|
)
|
2.7
|
|
|
Ongoing |
.
|
.
|
.
|
.
|
|
|
Operating Profit
|
$
|
2,872
|
.
|
$
|
2,952
|
|
$
|
2,616
|
|
(3.0
|
) %
|
13
|
%
|
|
|
Operating Profit Margin
|
12.9
|
%
|
|
14.1
|
%
|
|
12.9
|
%
|
(1.2
|
)
|
1.2
|
|
Ongoing excludes the effect in all years of impairment and other items affecting comparability (see Note 3).
|
In 1998, reported operating profit margin decreased over 1 percentage point. Ongoing operating profit margin declined over 1 percentage point primarily reflecting the margin impact of increased advertising and marketing (A&M) and selling and distribution (S&D) expenses and higher cost of sales partially offset by the impact of volume growth. A&M grew at a significantly faster rate than sales led by increases at Pepsi-Cola Worldwide which included the Pepsi One launch costs and increases at Frito-Lay North America for promotional allowances and ³WOW!² launch costs. S&D expenses grew at a slightly faster rate than sales primarily in Pepsi-Cola North America and in Frito-Lay North America, reflecting an increase in our sales forces and higher depreciation, maintenance and labor costs associated with Pepsi-Cola North America cooler and vendor placements. Cost of sales as a percentage of sales increased due to costs associated with new plants and lines related to "WOW!" and Doritos 3-D products at Frito-Lay North America and an unfavorable shift from higher-margin concentrate business to packaged products in Pepsi-Cola North America. Excluding foreign exchange losses, ongoing operating profit would have declined 1%. Foreign exchange losses, primarily in Russia and Asia, are reported as part of Corporate unallocated expenses. Information technology expense increased on year-over-year basis, despite $42 million of software costs that were capitalized as required by SOP 98-1, driven by our various productivity initiatives and Year 2000 remediation efforts.
Reported operating profit margin increased over 2 1/2 percentage points in 1997. Ongoing operating profit margin increased over 1 percentage point due to the margin impact of volume growth in all businesses, equity income from investments in unconsolidated affiliates compared to losses in 1996 and lower cost of sales. The impact of these advances were partially offset by the impact of higher S&D and G&A. The change in equity income primarily reflects the absence of losses in 1997 from our Latin American bottler, Buenos Aires Embotelladora S.A. (BAESA). Cost of sales as a percentage of sales decreased due to favorable raw material costs in Pepsi-Cola International and the favorable effect of higher pricing partially offset by increased costs for new plant capacity and the planned introduction of new products in 1998 by Frito-Lay North America. The higher S&D was driven by increased distribution costs to meet demand. The increase in G&A is due to information systems-related expenses, customer focus leadership training and infrastructure costs related to our new fountain beverage sales team. These increased G&A expenses were partially offset by savings from a prior year restructuring and the consolidation of certain administrative functions. Ongoing operating profit margin was also reduced by the absence of 1996 gains from the sale of an investment in a U.S. bottling cooperative, a settlement with a Pepsi-Cola North America supplier and the sale of a non-core business at Frito-Lay North America.
Interest Expense, net
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|
% Change B/(W)
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|
($ in millions)
|
1998
|
.
|
1997
|
.
|
1996
|
.
|
1998
|
.
|
1997
|
|
|
|
|
|
|
Interest expense
|
$
|
(395
|
)
|
$
|
(478
|
)
|
$
|
(565
|
)
|
17
|
.
|
15
|
|
Interest income
|
74
|
.
|
125
|
91
|
.
|
(41
|
)
|
37
|
|
|
|
. |
. |
. |
Interest expense, net
|
$
|
(321
|
)
|
$
|
(353
|
)
|
$
|
(474
|
)
|
9
|
.
|
26
|
|
|
|
. |
. |
. |
|
Interest expense, net of interest income, declined $32 million in 1998. The decline in interest expense was primarily due to lower average U.S. debt levels, as a result of using cash flows received from discontinued operations in the latter half of 1997 to repay debt. The lower U.S. debt levels were maintained until the end of the third quarter when the debt level increased to finance several acquisitions (see Management's Discussion and Analysis - Acquisitions on page 13). This decline was partially offset by higher average interest rates on the remaining debt. Interest income declined $51 million reflecting lower U.S. and international investment levels as a result of utilizing investment balances to make acquisitions and repay debt. See Management's Discussion and Analysis - Liquidity and Capital Resources on page 21 for disclosure related to 1999 debt offerings.
In 1997 interest expense, net of interest income, declined $121 million. Interest expense declined $87 million primarily reflecting lower average U.S. debt levels. Debt levels were reduced by using a portion of the cash flows provided by discontinued operations and from proceeds repatriated from our investments in Puerto Rico. The repatriation of funds resulted from a 1996 change in tax law which eliminated a tax exemption on investment income in Puerto Rico. Interest income increased $34 million reflecting higher investment levels, which also benefited from the cash flows provided by discontinued operations.
Provision for Income Taxes
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($ in millions)
|
1998
|
.
|
1997
|
1996
|
.
|
|
|
|
|
Reported |
.
|
.
|
|
|
Provision for income taxes
|
$
|
270
|
.
|
$
|
818
|
|
$
|
624
|
|
|
|
Effective tax rate
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11.9
|
%
|
|
35.4
|
%
|
|
39.8
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%
|
|
Ongoing |
.
|
.
|
|
|
Provision for income taxes
|
$
|
791
|
.
|
$
|
869
|
|
$
|
673
|
|
|
|
Effective tax rate
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31.0
|
%
|
|
33.4
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%
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|
31.4
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%
|
Ongoing excludes the effect in all years of impairment and other items affecting comparability (see Note 3).
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In 1998, the reported effective tax rate decreased 23.5 percentage points primarily as a result of a tax benefit of $494 million (or $0.32 per share). The tax benefit reflects a final agreement with the Internal Revenue Service to settle substantially all remaining aspects of a tax case relating to our concentrate operations in Puerto Rico. The ongoing effective tax rate declined 2.4 percentage points attributable to favorable settlement of prior years' audit issues, including issues related to the deductibility of purchased franchise rights.
For 1997, the reported effective tax rate decreased 4.4 percentage points to 35.4%. The ongoing effective tax rate increased 2.0 percentage points to 33.4%, primarily reflecting the absence of cumulative tax credits recognized in 1996 that related to prior years and lower benefits in 1997 from the resolution of prior years' audit issues.
Income from Continuing Operations and Income Per Share
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|
% Change B/(W)
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|
($ in millions except per share amounts)
|
1998
|
1997
|
1996
|
.
|
1998
|
1997
|
.
|
|
|
|
|
|
|
Income from continuing |
.
|
.
|
.
|
.
|
|
.
|
operations
|
.
|
.
|
.
|
.
|
|
.
|
.
|
Reported
|
$
|
1,993
|
$
|
1,491
|
$
|
942
|
|
34
|
58
|
.
|
|
.
|
.
|
Ongoing
|
$
|
1,760
|
$
|
1,730
|
$
|
1,469
|
|
2
|
18
|
.
|
|
Income per share from |
.
|
.
|
.
|
.
|
|
.
|
continuing operations |
.
|
.
|
.
|
.
|
|
.
|
Reported
|
$
|
1.31
|
$
|
0.95
|
$
|
0.59
|
|
38
|
62
|
*
|
|
.
|
Ongoing
|
$
|
1.16
|
$
|
1.10
|
$
|
0.92
|
|
5
|
20
|
.
|
Ongoing excludes the effect in all years of impairment and other items affecting comparability (see Note 3).
* Based on unrounded amounts.
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For 1998, reported income from continuing operations increased $502 million while income per share increased $0.36. Ongoing income from continuing operations and income per share increased $30 million and $0.06, respectively. The ongoing increases are due to the lower effective tax rate and the benefit from a 3% reduction in average shares outstanding, partially offset by lower operating profit.
For 1997, reported income from continuing operations increased $549 million while income per share increased $0.36. Ongoing income from continuing operations and income per share increased $261 million and $0.18, respectively. The ongoing increases are due to the increase in operating profit and the lower net interest expense, partially offset by the higher effective tax rate. In addition, income per share also benefited from a 2% reduction in average shares outstanding.
Net Income and Net Income Per Share
|
|
% Change B/(W)
|
|
($ in millions except per share amounts)
|
1998
|
1997
|
1996
|
.
|
1998
|
.
|
1997
|
.
|
|
|
|
|
|
|
Net income
|
$
|
1,993
|
$
|
2,142
|
$
|
1,149
|
.
|
(7
|
)
|
86
|
.
|
|
Net income per share
|
$
|
1.31
|
$
|
1.36
|
$
|
0.72
|
.
|
(4
|
)
|
91
|
*
|
|
Average shares outstanding used
|
.
|
.
|
.
|
.
|
|
.
|
to calculate net income per share
|
.
|
1,519
|
1,570
|
1,606
|
.
|
3
|
.
|
2
|
.
|
* Based on unrounded amounts.
|
For 1997 and 1996, Net Income and Income Per Share include the results of income from discontinued operations, which primarily reflects the operating results of TRICON's core restaurant businesses through October 6, 1997 and the operating results and a gain on sale of the restaurant distribution operation sold in the second quarter of 1997. Discontinued operations also include the expenses associated with the spin-off and interest expense directly related to the restaurants segment.
[Introduction]
[Business Segments]
|