Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 14, 2008 (12 weeks)
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-80361-01
BOTTLING GROUP, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-4042452 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
One Pepsi Way, Somers, New York | 10589 | |
(Address of Principal Executive Offices) | (Zip Code) |
914-767-6000
(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. YESþ NOo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ
Bottling Group, LLC
Index
Index
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
Condensed Consolidated Statements of Operations
in millions, unaudited
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
14, 2008 | 16, 2007 | 14, 2008 | 16, 2007 | |||||||||||||
Net revenues | $ | 3,522 | $ | 3,360 | $ | 6,173 | $ | 5,826 | ||||||||
Cost of sales | 1,916 | 1,825 | 3,398 | 3,168 | ||||||||||||
Gross profit | 1,606 | 1,535 | 2,775 | 2,658 | ||||||||||||
Selling, delivery and administrative expenses | 1,263 | 1,215 | 2,326 | 2,219 | ||||||||||||
Operating income | 343 | 320 | 449 | 439 | ||||||||||||
Interest expense | 52 | 55 | 99 | 108 | ||||||||||||
Interest income | 33 | 47 | 74 | 91 | ||||||||||||
Other non-operating income, net | (3 | ) | (3 | ) | (5 | ) | (2 | ) | ||||||||
Minority interest | 9 | 3 | 6 | 4 | ||||||||||||
Income before income taxes | 318 | 312 | 423 | 420 | ||||||||||||
Income tax expense | 21 | 11 | 28 | 17 | ||||||||||||
Net income | $ | 297 | $ | 301 | $ | 395 | $ | 403 | ||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
2
Table of Contents
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
24 Weeks Ended | ||||||||
June | June | |||||||
14, 2008 | 16, 2007 | |||||||
Cash Flows — Operations | ||||||||
Net income | $ | 395 | $ | 403 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 306 | 300 | ||||||
Deferred income taxes | 4 | (10 | ) | |||||
Share-based compensation | 27 | 29 | ||||||
Net other non-cash charges and credits | 89 | 91 | ||||||
Changes in operating working capital, excluding effects of acquisitions: | ||||||||
Accounts receivable, net | (410 | ) | (435 | ) | ||||
Inventories | (191 | ) | (193 | ) | ||||
Prepaid expenses and other current assets | (66 | ) | 41 | |||||
Accounts payable and other current liabilities | 135 | 260 | ||||||
Income taxes payable | 14 | 10 | ||||||
Net change in operating working capital | (518 | ) | (317 | ) | ||||
Other, net | (78 | ) | (31 | ) | ||||
Net Cash Provided by Operations | 225 | 465 | ||||||
Cash Flows — Investments | ||||||||
Capital expenditures | (398 | ) | (374 | ) | ||||
Acquisitions, net of cash acquired | (22 | ) | (49 | ) | ||||
Proceeds from sale of property, plant and equipment | 10 | 6 | ||||||
Notes receivable from PBG, net | (109 | ) | (331 | ) | ||||
Other investing activities, net | 4 | 6 | ||||||
Net Cash Used for Investments | (515 | ) | (742 | ) | ||||
Cash Flows — Financing | ||||||||
Short-term borrowings, net | 216 | 196 | ||||||
Payments of long-term debt | (6 | ) | (10 | ) | ||||
Other financing activities | 8 | — | ||||||
Net Cash Provided by Financing | 218 | 186 | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (3 | ) | 4 | |||||
Net Decrease in Cash and Cash Equivalents | (75 | ) | (87 | ) | ||||
Cash and Cash Equivalents — Beginning of Period | 459 | 441 | ||||||
Cash and Cash Equivalents — End of Period | $ | 384 | $ | 354 | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
3
Table of Contents
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
Condensed Consolidated Balance Sheets
in millions
(Unaudited) | ||||||||
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 384 | $ | 459 | ||||
Accounts receivable, net | 1,950 | 1,520 | ||||||
Inventories | 773 | 577 | ||||||
Prepaid expenses and other current assets | 377 | 308 | ||||||
Total Current Assets | 3,484 | 2,864 | ||||||
Property, plant and equipment, net | 4,173 | 4,071 | ||||||
Other intangible assets, net | 4,226 | 4,181 | ||||||
Goodwill | 1,536 | 1,533 | ||||||
Note receivable from PBG | 3,989 | 3,880 | ||||||
Other assets | 187 | 183 | ||||||
Total Assets | $ | 17,595 | $ | 16,712 | ||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable and other current liabilities | $ | 1,938 | $ | 1,829 | ||||
Short-term borrowings | 405 | 190 | ||||||
Current maturities of long-term debt | 1,304 | 6 | ||||||
Total Current Liabilities | 3,647 | 2,025 | ||||||
Long-term debt | 2,481 | 3,776 | ||||||
Other liabilities | 846 | 832 | ||||||
Deferred income taxes | 461 | 471 | ||||||
Minority interest | 428 | 379 | ||||||
Total Liabilities | 7,863 | 7,483 | ||||||
Owners’ Equity | ||||||||
Owners’ net investment | 9,840 | 9,418 | ||||||
Accumulated other comprehensive loss | (108 | ) | (189 | ) | ||||
Total Owners’ Equity | 9,732 | 9,229 | ||||||
Total Liabilities and Owners’ Equity | $ | 17,595 | $ | 16,712 | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
4
Table of Contents
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
Tabular dollars in millions
Note 1—Basis of Presentation
When used in these Condensed Consolidated Financial Statements, “Bottling LLC,” “we,” “our,” “us” and the “Company” each refers to Bottling Group, LLC.
Bottling Group, LLC is the principal operating subsidiary of The Pepsi Bottling Group, Inc. (“PBG”) and consists of substantially all of the operations and assets of PBG. Bottling Group, LLC, which is consolidated by PBG, has the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages, in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey.
We prepare our unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which requires us to make judgments, estimates and assumptions that affect the results of operations, financial position and cash flows of Bottling Group, LLC, as well as the related footnote disclosures. Actual results could differ from these estimates. These interim financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain information and disclosures required for comprehensive annual financial statements. Therefore, the Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 29, 2007 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation.
The significant accounting policies summarized in Note 2 to our audited consolidated financial statements for the fiscal year ended December 29, 2007 as presented in our Annual Report on Form 10-K have been followed in preparing the accompanying Condensed Consolidated Financial Statements with the exception of a change to our measurement date for our annual impairment test for goodwill and intangible assets with indefinite useful lives. For further information about this accounting policy change, see Note 6.
Our U.S. and Canadian operations report using a fiscal year that consists of fifty-two weeks, ending on the last Saturday in December. Every five or six years a fifty-third week is added. Fiscal years 2008 and 2007 consist of fifty-two weeks. Our remaining countries report using a calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
Quarter | U.S. & Canada | Mexico & Europe | ||
First Quarter | 12 weeks | January and February | ||
Second Quarter | 12 weeks | March, April and May | ||
Third Quarter | 12 weeks | June, July and August | ||
Fourth Quarter | 16 weeks | September, October, November and December |
In conjunction with PBG’s initial public offering and other subsequent transactions, PBG and PepsiCo, Inc. (“PepsiCo”) contributed bottling businesses and assets used in the bottling businesses to Bottling LLC. As a result of the contribution of these assets, PBG owns 93.4 percent of Bottling LLC and PepsiCo owns the remaining 6.6 percent as of June 14, 2008. In addition, PepsiCo has a 40 percent ownership interest in our Russian venture, PR Beverages Limited.
We consolidate in our financial statements entities in which we have a controlling financial interest, as well as variable interest entities where we are the primary beneficiary. Minority interest in earnings and ownership has been recorded for the percentage of these entities not owned by Bottling LLC. We have eliminated all intercompany accounts and transactions in consolidation.
5
Table of Contents
Note 2—Seasonality of Business
The results for the second quarter are not necessarily indicative of the results that may be expected for the full year because sales of our products are seasonal, especially in our Europe segment where sales tend to be more sensitive to weather conditions. The seasonality of our operating results arises from higher sales in the second and third quarters versus the first and fourth quarters of the year, combined with the impact of fixed costs, such as depreciation and interest, which are not significantly impacted by business seasonality. From a cash flow perspective, the majority of our cash flow from operations is generated in the third and fourth quarters.
Note 3—New Accounting Standards
SFAS No. 157
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for reporting fair value and expands disclosures about fair value measurements. The Company adopted SFAS 157 as it applies to financial assets and liabilities in our first quarter of 2008. The adoption of these provisions did not have a material impact on our Consolidated Financial Statements. For further information about the fair value measurements of our financial assets and liabilities see Note 7.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.
SFAS No. 158
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). Effective for the current fiscal year, the standard requires the measurement date for PBG sponsored plan assets and liabilities to coincide with our fiscal year-end. SFAS 158 provides two transition alternatives related to the change in measurement date provisions. We adopted the measurement date provisions of SFAS 158 on the first day of fiscal year 2008 using the “two-measurement” approach. As a result, we measured our plan assets and benefit obligations on December 30, 2007 and adjusted our opening balances of retained earnings and accumulated comprehensive loss for the change in net periodic benefit cost and fair value, respectively, from the previously used September 30 measurement date. The adoption of the measurement date provisions resulted in a net decrease in our pension and other postretirement medical benefit plans liability of $9 million, a net decrease in retained earnings of $27 million and a net decrease in accumulated comprehensive loss of $35 million. There was no impact on our results of operations.
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. SFAS 141(R) also establishes expanded disclosure requirements for business combinations. SFAS 141(R) will become effective beginning with our first quarter of 2009. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and reporting framework for minority interests by a parent company. SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary.
6
Table of Contents
SFAS 160 will become effective beginning with our first quarter of 2009. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures for derivative and hedging activities. SFAS 161 will become effective beginning with our first quarter of 2009. Early adoption is permitted. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
EITF Issue No. 07-1
In December 2007, the FASB ratified the EITF’s Consensus for Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will become effective beginning with our first quarter of 2009. We are currently evaluating the impact, if any, of this standard on our Consolidated Financial Statements.
Note 4—Share-Based Compensation
The total impact of share-based compensation recognized in our Condensed Consolidated Statements of Operations was $15 million for each of the 12 weeks ended June 14, 2008 and June 16, 2007, and $27 million and $29 million for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively.
During each of the 24 weeks ended June 14, 2008 and June 16, 2007, we granted approximately 3 million of PBG stock option awards at a weighted-average fair value of $7.11 and $8.17, respectively.
During each of the 24 weeks ended June 14, 2008 and June 16, 2007, we granted approximately 1 million of PBG restricted stock unit awards at a weighted-average fair value of $35.38 and $30.88, respectively.
Unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the incentive plans amounted to $103 million as of June 14, 2008. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Note 5—Balance Sheet Details
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
Accounts Receivable, net | ||||||||
Trade accounts receivable | $ | 1,740 | $ | 1,319 | ||||
Allowance for doubtful accounts | (65 | ) | (54 | ) | ||||
Accounts receivable from PepsiCo | 198 | 188 | ||||||
Other receivables | 77 | 67 | ||||||
$ | 1,950 | $ | 1,520 | |||||
Inventories | ||||||||
Raw materials and supplies | $ | 253 | $ | 195 | ||||
Finished goods | 520 | 382 | ||||||
$ | 773 | $ | 577 | |||||
7
Table of Contents
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
Prepaid Expenses and Other Current Assets | ||||||||
Prepaid expenses | $ | 323 | $ | 256 | ||||
Other current assets | 54 | 52 | ||||||
$ | 377 | $ | 308 | |||||
Property, Plant and Equipment, net | ||||||||
Land | $ | 330 | $ | 320 | ||||
Buildings and improvements | 1,571 | 1,484 | ||||||
Manufacturing and distribution equipment | 4,184 | 4,091 | ||||||
Marketing equipment | 2,434 | 2,389 | ||||||
Capital leases | 37 | 36 | ||||||
Other | 146 | 154 | ||||||
8,702 | 8,474 | |||||||
Accumulated depreciation | (4,529 | ) | (4,403 | ) | ||||
$ | 4,173 | $ | 4,071 | |||||
Industrial Revenue Bonds
Pursuant to the terms of an industrial revenue bond, we transferred title of certain fixed assets with a net book value as of June 14, 2008 of $63 million to a state governmental authority in the U.S. to receive a property tax abatement. The title to these assets will revert back to Bottling LLC upon retirement or cancellation of the bond. These fixed assets are still recognized in the Company’s Condensed Consolidated Balance Sheet as all risks and rewards remain with the Company.
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
Accounts Payable and Other Current Liabilities | ||||||||
Accounts payable | $ | 668 | $ | 615 | ||||
Accounts payable to PepsiCo | 369 | 255 | ||||||
Trade incentives | 187 | 235 | ||||||
Accrued compensation and benefits | 223 | 276 | ||||||
Other accrued taxes | 134 | 139 | ||||||
Accrued interest | 47 | 47 | ||||||
Other current liabilities | 310 | 262 | ||||||
$ | 1,938 | $ | 1,829 | |||||
8
Table of Contents
Note 6—Other Intangible Assets, net and Goodwill
Other intangible assets, net
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
Intangibles subject to amortization: | ||||||||
Gross carrying amount: | ||||||||
Customer relationships and lists | $ | 57 | $ | 54 | ||||
Franchise and distribution rights | 46 | 46 | ||||||
Other identified intangibles | 34 | 30 | ||||||
137 | 130 | |||||||
Accumulated amortization: | ||||||||
Customer relationships and lists | (17 | ) | (15 | ) | ||||
Franchise and distribution rights | (32 | ) | (31 | ) | ||||
Other identified intangibles | (19 | ) | (17 | ) | ||||
(68 | ) | (63 | ) | |||||
Intangibles subject to amortization, net | 69 | 67 | ||||||
Intangibles not subject to amortization: | ||||||||
Carrying amount: | ||||||||
Franchise rights | 3,241 | 3,235 | ||||||
Licensing rights | 315 | 315 | ||||||
Distribution rights | 316 | 294 | ||||||
Trademarks | 225 | 213 | ||||||
Other identified intangibles | 60 | 57 | ||||||
Intangibles not subject to amortization | 4,157 | 4,114 | ||||||
Total other intangible assets, net | $ | 4,226 | $ | 4,181 | ||||
During the first quarter, PBG acquired Pepsi-Cola Batavia Bottling Corp, which was contributed to Bottling LLC. The Pepsi-Cola franchised bottler serves certain New York counties in whole or in part. The acquisition did not have a material impact on our Condensed Consolidated Financial Statements.
During the second quarter, PR Beverages Limited, our Russian venture, acquired Sobol-Aqua JSC (“Sobol”), a company that manufacturers Sobol brands and co-packs various Pepsi products in Siberia and Eastern Russia. The acquisition did not have a material impact on our Condensed Consolidated Financial Statements.
Intangible asset amortization
Intangible asset amortization expense was $2 million and $3 million for the 12 weeks ended June 14, 2008 and June 16, 2007, respectively. Intangible asset amortization expense was $4 million and $5 million for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively. Amortization expense for each of the next five years is estimated to be approximately $7 million or less.
9
Table of Contents
Goodwill
The changes in the carrying value of goodwill by reportable segment for the 24 weeks ended June 14, 2008 are as follows:
U.S. & | ||||||||||||||||
Canada | Europe | Mexico | Total | |||||||||||||
Balance at December 29, 2007 | $ | 1,290 | $ | 17 | $ | 226 | $ | 1,533 | ||||||||
Purchase price allocations relating to acquisitions | — | 9 | (1 | ) | 8 | |||||||||||
Impact of foreign currency translation | (18 | ) | 0 | 13 | (5 | ) | ||||||||||
Balance at June 14, 2008 | $ | 1,272 | $ | 26 | $ | 238 | $ | 1,536 | ||||||||
The purchase price allocations include goodwill allocations as a result of the Sobol acquisition and adjustments to goodwill as a result of changes in taxes associated with prior year acquisitions.
Accounting change
The Company completes its impairment testing of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” annually, or more frequently as indicators warrant. In previous years the Company completed this test during the fourth quarter using a measurement date of third quarter-end. During the quarter ended June 14, 2008, the Company changed its impairment testing to the third quarter, using a measurement date at the beginning of the third quarter, in order to move the testing outside of the normal year-end reporting process to a date when resources are less constrained and to align with the Company’s annual strategic planning calendar. The Company believes that the resulting change in accounting principle related to the annual impairment testing date will not delay, accelerate, or avoid an impairment charge. The Company determined that the change in accounting principle related to the impairment testing date is preferable under the circumstances and does not result in adjustments to the Company’s financial statements when applied retrospectively. Similarly, the Company changed its impairment testing of intangible assets with indefinite useful lives to the third quarter, using a measurement date at the beginning of the third quarter.
Note 7—Fair Value Measurements
SFAS 157 defines and establishes a framework for measuring fair value and expands disclosures about fair value measurements. In accordance with SFAS 157, we have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The three levels of the hierarchy are defined as follows:
Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities. We currently do not have any Level 1 financial assets or liabilities.
Level 2 —Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3— Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.
10
Table of Contents
The following table summarizes the financial assets and liabilities we measure at fair value on a recurring basis as of June 14, 2008:
Level 2 | ||||
Financial Assets: | ||||
Cash flow hedges(a) | $ | 19 | ||
Prepaid forward contract(b) | 15 | |||
Total | $ | 34 | ||
Financial Liabilities: | ||||
Unfunded deferred compensation liability(c) | $ | 70 | ||
Foreign currency hedges(d) | 4 | |||
Total | $ | 74 | ||
(a) | The fair value of our cash flow hedges is primarily based on the forward curves of the specific indices upon which settlement is based. | |
(b) | The fair value of our forward contract is primarily based on the current value of PBG’s stock price. | |
(c) | The fair value of our unfunded deferred compensation liability is primarily based on the market indices corresponding to employees’ investment selections for their deferred compensation accounts. | |
(d) | The fair value of our forward exchange contracts is primarily based on observable forward foreign exchange rates. |
Note 8—Pension and Postretirement Medical Benefit Plans
The assets, liabilities and expense associated with our international employee benefit plans were not significant to our results of operations and our financial position and are not included in the tables and discussion presented below.
Components of net pension expense
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
14, 2008 | 16, 2007 | 14, 2008 | 16, 2007 | |||||||||||||
Service cost | $ | 11 | $ | 12 | $ | 23 | $ | 25 | ||||||||
Interest cost | 23 | 21 | 46 | 42 | ||||||||||||
Expected return on plan assets — (income) | (26 | ) | (23 | ) | (53 | ) | (47 | ) | ||||||||
Amortization of net loss | 4 | 9 | 7 | 18 | ||||||||||||
Amortization of prior service costs | 2 | 2 | 4 | 3 | ||||||||||||
Net pension expense for the defined benefit plans | $ | 14 | $ | 21 | $ | 27 | $ | 41 | ||||||||
There were no contributions made to PBG U.S. pension plans for the 24 weeks ended June 14, 2008.
Components of postretirement medical expense
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
14, 2008 | 16, 2007 | 14, 2008 | 16, 2007 | |||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost | 5 | 4 | 10 | 9 | ||||||||||||
Amortization of net loss | 1 | 1 | 2 | 2 | ||||||||||||
Total postretirement medical expense | $ | 7 | $ | 6 | $ | 14 | $ | 13 | ||||||||
11
Table of Contents
Defined contribution expense
Defined contribution expense was $7 million for each of the 12 weeks ended June 14, 2008 and June 16, 2007 and $15 million and $13 million for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively.
Note 9—Income Taxes
We currently have on-going income tax audits in some of our major tax jurisdictions, some of which may come to a resolution within the next twelve months and could result in a material change in our unrecognized tax benefits. We cannot reasonably estimate the potential change in unrecognized tax benefits at this time.
Note 10—Segment Information
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all of our segments derive revenue from these products. We conduct business in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. Bottling LLC manages and reports operating results through three reportable segments — U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. The operating segments of the U.S. and Canada are aggregated into a single reportable segment due to their economic similarity as well as similarity across products, manufacturing and distribution methods, types of customers and regulatory environments.
Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment. We evaluate the performance of these segments based on operating income or loss. Operating income or loss is exclusive of net interest expense, minority interest, foreign exchange gains and losses and income taxes.
The following tables summarize select financial information related to our reportable segments:
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
14, 2008 | 16, 2007 | 14, 2008 | 16, 2007 | |||||||||||||
Net Revenues | ||||||||||||||||
U.S. & Canada | $ | 2,536 | $ | 2,527 | $ | 4,743 | $ | 4,629 | ||||||||
Europe | 592 | 468 | 828 | 644 | ||||||||||||
Mexico | 394 | 365 | 602 | 553 | ||||||||||||
Worldwide net revenues | $ | 3,522 | $ | 3,360 | $ | 6,173 | $ | 5,826 | ||||||||
Operating Income (Loss) | ||||||||||||||||
U.S. & Canada | $ | 269 | $ | 284 | $ | 403 | $ | 426 | ||||||||
Europe | 45 | 14 | 14 | (11 | ) | |||||||||||
Mexico | 29 | 22 | 32 | 24 | ||||||||||||
Worldwide operating income | 343 | 320 | 449 | 439 | ||||||||||||
Interest expense | 52 | 55 | 99 | 108 | ||||||||||||
Interest income | 33 | 47 | 74 | 91 | ||||||||||||
Other non-operating income, net | (3 | ) | (3 | ) | (5 | ) | (2 | ) | ||||||||
Minority interest | 9 | 3 | 6 | 4 | ||||||||||||
Income before income taxes | $ | 318 | $ | 312 | $ | 423 | $ | 420 | ||||||||
12
Table of Contents
June | December | |||||||
14, 2008 | 29, 2007 | |||||||
Total Assets | ||||||||
U.S. & Canada | $ | 13,712 | $ | 13,334 | ||||
Europe | 2,094 | 1,671 | ||||||
Mexico | 1,789 | 1,707 | ||||||
Worldwide total assets | $ | 17,595 | $ | 16,712 | ||||
Note 11—Comprehensive Income
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
14, 2008 | 16, 2007 | 14, 2008 | 16, 2007 | |||||||||||||
Net income | $ | 297 | $ | 301 | $ | 395 | $ | 403 | ||||||||
Net currency translation adjustment | 43 | 133 | 21 | 99 | ||||||||||||
Cash flow hedge adjustment(a) (b) | 7 | 0 | 12 | 1 | ||||||||||||
Amortization of prior service cost and net loss in net periodic pension / postretirement cost to expense | 6 | 12 | 12 | 23 | ||||||||||||
Pension liability adjustment(c) | — | — | — | 5 | ||||||||||||
Comprehensive income | $ | 353 | $ | 446 | $ | 440 | $ | 531 | ||||||||
(a) | Net of taxes of $0 million and $2 million for the 12 weeks ended June 14, 2008 and June 16, 2007, respectively. | |
(b) | Net of taxes of $1 million and $0 million for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively. | |
(c) | Net of taxes of $3 million for the 24 weeks ended June 16, 2007. |
Note 12—Full Service Vending Rationalization and Restructuring Charges
Full Service Vending Rationalization
During 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan, which we completed in the second quarter of 2008, to rationalize our vending asset base in our U.S. & Canada segment by disposing older underperforming assets and redeploying certain assets to higher return accounts. Our FSV business portfolio consists of accounts where we stock and service vending equipment.
Over the course of the FSV Rationalization plan, we incurred a pre-tax charge of approximately $25 million, the majority of which was non-cash, including costs associated with the removal of these assets from service, disposal costs and redeployment expenses. We recorded approximately $2 million of this pre-tax charge during 2008. This pre-tax charge is recorded in selling, delivery and administrative expenses.
Restructuring Charges
In the third quarter of 2007, we announced a restructuring program (the “Organizational Realignment”) to realign the Company’s organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the growth potential of the Company’s product portfolio. We substantially completed the Organizational Realignment during the first quarter of 2008. Over the course of the program we incurred a pre-tax charge of approximately $29 million, including $3 million which was recorded through the second quarter of 2008 primarily for relocation expenses in our U.S. & Canada segment. Of the total cost of the program, approximately $25 million has been paid or settled, including $11 million paid during 2008. The remaining amount accrued will primarily be paid out in the second half of 2008.
13
Table of Contents
Note 13—Contingencies
We are subject to various claims and contingencies related to lawsuits, environmental and other matters arising from the normal course of business. We believe that the ultimate liability arising from such claims or contingencies, if any, in excess of amounts already recognized is not likely to have a material adverse effect on our results of operations, financial condition or liquidity.
Note 14—Supplemental Cash Flow Information
The table below presents the Company’s supplemental cash flow information:
24 Weeks Ended | ||||||||
June | June | |||||||
14, 2008 | 16, 2007 | |||||||
Interest paid | $ | 97 | $ | 111 | ||||
Income taxes paid | 10 | 17 | ||||||
Non-cash investing and financing activities: | ||||||||
Decrease in accounts payable related to capital expenditures | (44 | ) | (32 | ) | ||||
Capital lease additions | 2 | 2 | ||||||
Acquisition of intangible asset | — | 315 | ||||||
Contribution of acquired entity by PBG | 26 | — | ||||||
Liabilities assumed in conjunction with acquisition of bottlers | 9 | — | ||||||
Capital-in-kind contributions(a) | 24 | — |
(a) | On March 1, 2007, together with PepsiCo we formed PR Beverages Limited, our Russian venture. In connection with the formation of this venture, PepsiCo agreed to contribute an additional $83 million plus accrued interest to the venture in the form of property, plant and equipment. During the first half of 2008, PepsiCo contributed $24 million in regards to this note. The remaining balance to be contributed to the venture is $48 million as of June 14, 2008. |
Note 15—Guarantees
PBG has a committed revolving credit facility of $1.2 billion which expires in October 2012. This committed credit facility is guaranteed by us and supports PBG’s $1.2 billion commercial paper program. PBG had $460 million and $50 million of outstanding commercial paper at June 14, 2008 and December 29, 2007, respectively.
In March 1999, PBG issued $1 billion of 7% senior notes due 2029, which are guaranteed by us. We also guarantee that to the extent there is available cash, we will distribute pro rata to PBG and PepsiCo sufficient cash such that the aggregate cash distributed to PBG will enable PBG to pay its taxes, share repurchases, dividends and make interest payments for its internal and external debt.
14
Table of Contents
Item 2.
MANAGEMENT’S FINANCIAL REVIEW
Tabular dollars in millions
OUR BUSINESS
Bottling Group, LLC (referred to as “Bottling LLC,” “we,” “our,” “us” and “Company”) is the principal operating subsidiary of The Pepsi Bottling Group, Inc. (“PBG”) and consists of substantially all of the operations and the assets of PBG. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey.
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all of our segments derive revenue from these products. We manage and report operating results through three reportable segments — U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment.
Management’s Financial Review should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the accompanying notes and our Annual Report on Form 10-K for the fiscal year ended December 29, 2007, which include additional information about our accounting policies, practices and the transactions that underlie our financial results. The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts in our Condensed Consolidated Financial Statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. We use our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future, in determining the estimates that affect our Condensed Consolidated Financial Statements. Actual results may differ from these estimates.
OUR CRITICAL ACCOUNTING POLICIES
As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, management believes the following policies to be the most critical to the portrayal of Bottling LLC’s financial condition and results of operations and require the use of estimates, assumptions and the application of judgment:
• | Other Intangible Assets, net and Goodwill; | |
• | Pension and Postretirement Medical Benefit Plans; and | |
• | Income Taxes. |
Critical Accounting Policy Update—Other Intangible Assets, net and Goodwill
The Company completes its impairment testing of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” annually, or more frequently as indicators warrant. In previous years the Company completed this test in the fourth quarter using a measurement date of third quarter-end. During the quarter ended June 14, 2008, the Company changed its impairment testing to the third quarter, using a measurement date at the beginning of the third quarter, in order to move the testing outside of the normal year-end reporting process to a date when resources are less constrained and to align with the Company’s annual strategic planning calendar. Similarly, the Company changed its impairment testing of intangible assets with indefinite useful lives to the third quarter, using a measurement date at the beginning of the third quarter. For further information about this accounting change see Note 6 in the Notes to Condensed Consolidated Financial Statements.
15
Table of Contents
OUR FINANCIAL RESULTS
ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS
The year-over-year comparisons of our financial results are affected by the following items included in our reported results:
12 Weeks Ended June | 24 Weeks Ended June | |||||||
Income/(Expense) | 14, 2008 | 14, 2008 | ||||||
Gross Profit | ||||||||
PR Beverages | $ | — | $ | (4 | ) | |||
Operating income | ||||||||
PR Beverages | — | (4 | ) | |||||
Restructuring and Full Service Vending Rationalization charges | (2 | ) | (5 | ) |
2008 Items
PR Beverages Limited (“PR Beverages”)
On March 1, 2007, together with PepsiCo we formed PR Beverages, a venture that will enable us to strategically invest in Russia to accelerate our growth. We contributed our business in Russia to PR Beverages and PepsiCo entered into bottling agreements with PR Beverages for PepsiCo beverage products sold in Russia on the same terms as in effect for the Company immediately prior to the venture. PepsiCo also granted PR Beverages an exclusive license to manufacture and sell the concentrate for such products.
Beginning in the second quarter of 2007, we fully consolidate PR Beverages into our financial statements and record minority interest for PepsiCo’s 40 percent ownership interest. The negative impact on operating income of $4 million incurred during the first quarter of 2008 resulting from the consolidation of the venture is offset in minority interest. Minority interest is recorded below operating income.
Restructuring Charges
In the third quarter of 2007, we announced a restructuring program (the “Organizational Realignment”) to realign the Company’s organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the growth potential of the Company’s product portfolio. Over the course of the program we incurred a pre-tax charge of approximately $29 million. Of this amount, we recorded $2 million in the first quarter of 2008 and $1 million in the second quarter of 2008, primarily relating to relocation expenses in our U.S. & Canada segment. We substantially completed the Organizational Realignment during the first quarter of 2008, which resulted in the elimination of approximately 800 positions and we expect to recognize annual cost savings of about $30 million as a result of the program.
Substantially all costs associated with the Organizational Realignment required or will require cash payments. The total cash expenditures, including payments made pursuant to existing unfunded indemnity plans, are expected to be approximately $32 million, of which $27 million has been paid since the inception of the program and through June 14, 2008. The remaining expenditures will primarily be paid in the second half of 2008.
Full Service Vending Rationalization
During 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan, which we completed in the second quarter of 2008, to rationalize our vending asset base in our U.S. & Canada segment by disposing older underperforming assets and redeploying certain assets to higher return accounts. Our FSV business portfolio consists of accounts where we stock and service vending equipment. Over the course of the FSV Rationalization plan, we incurred a pre-tax charge of approximately $25 million, the majority of which is non-cash, including costs associated with the removal of these assets from service, disposal costs and redeployment expenses. This plan is part of the Company’s broader initiative designed to improve operating income margins of our FSV business.
16
Table of Contents
We incurred a pre-tax charge of approximately $1 million associated with the FSV Rationalization plan in each of the first and second quarters of 2008. These charges are recorded in selling, delivery and administrative expenses.
For further information about our restructuring charges and FSV Rationalization see Note 12 in the Notes to Condensed Consolidated Financial Statements.
FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||||||||||
June | June | % | June | June | % | |||||||||||||||||||
14, 2008 | 16, 2007 | Change | 14, 2008 | 16, 2007 | Change | |||||||||||||||||||
Net revenues | $ | 3,522 | $ | 3,360 | 5 | % | $ | 6,173 | $ | 5,826 | 6 | % | ||||||||||||
Cost of sales | 1,916 | 1,825 | 5 | 3,398 | 3,168 | 7 | ||||||||||||||||||
Gross profit | 1,606 | 1,535 | 5 | 2,775 | 2,658 | 4 | ||||||||||||||||||
Selling, delivery and administrative expenses | 1,263 | 1,215 | 4 | 2,326 | 2,219 | 5 | ||||||||||||||||||
Operating income | 343 | 320 | 7 | 449 | 439 | 2 | ||||||||||||||||||
Net income | 297 | 301 | (1 | ) | 395 | 403 | (2 | ) |
Worldwide Financial Highlights for the 12 Weeks Ended June 14, 2008
The impact of foreign currency translation, driven by the strength of all our foreign functional currencies, contributed approximately three-percentage points of growth in worldwide net revenues, cost of sales, gross profit and selling, delivery and administrative expenses and contributed two-percentage points to worldwide operating income.
Net revenues —Growth of five percent includes an eight-percent increase in net revenue per case driven by pricing gains in each of our countries and by foreign currency translation, partially offset by a decrease in worldwide volume growth.
Cost of sales —Increase of five percent includes an eight-percent increase in cost of sales per case primarily attributable to higher raw material costs as well as foreign currency translation, partially offset by volume declines.
Gross profit —Growth of five percent includes an eight-percent increase in gross profit per case due to rate increases to mitigate higher worldwide raw material costs coupled with the positive impact of foreign currency translation.
Selling, delivery and administrative (“SD&A”) expenses —Increase of four percent includes additional costs associated with our investment in Europe coupled with the negative impact from foreign currency translation. These increases were mitigated by continued cost productivity improvements and disciplined cost management, driven primarily by the U.S. & Canada segment.
Operating income —Increase of seven percent was driven primarily by strong growth in our Europe and Mexico segments, partially offset by a decline in our U.S. & Canada segment. Overall, operating income growth was due to strong net revenue per case performance, cost productivity improvements across all segments, and the positive impact from foreign currency translation. This was partially offset by higher raw material costs worldwide and volume declines.
Net income— Decrease of one percent reflects operating income growth that was offset by higher minority interest due to growth in the PR Beverages venture and lower interest income generated from loans with PBG.
17
Table of Contents
\
2008 RESULTS OF OPERATIONS
Tables and discussion are presented as compared to the similar periods in the prior year. Growth rates are rounded to the nearest whole percentage.
Volume
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||||||||||||||||||
June 14, 2008 vs. June 16, 2007 | June 14, 2008 vs. June 16, 2007 | |||||||||||||||||||||||||||||||
Worldwide | U.S. & Canada | Europe | Mexico | Worldwide | U.S. & Canada | Europe | Mexico | |||||||||||||||||||||||||
Total volume change | (3 | )% | (4 | )% | 1 | % | (3 | )% | (1 | )% | (2 | )% | 3 | % | (1 | )% | ||||||||||||||||
Our worldwide physical case volume decreased three percent in the second quarter and one percent for the first 24 weeks of 2008. The decrease in worldwide volume for the quarter was primarily driven by the overall weakness in the liquid refreshment beverage category in the U.S., coupled with a one-percentage point negative impact from the shift of the Easter holiday into the first quarter in 2008 versus the second quarter in 2007 (“Easter shift”) in our U.S. & Canada segment. The decrease for the year-to-date period was primarily due to declines in our U.S. & Canada segment partially offset by growth in Europe.
In our U.S. & Canada segment, volume decreased four-percentage points in the second quarter and two-percentage points for the first 24 weeks of 2008. The decrease in volume for the quarter was a result of a two-percentage point impact from the Easter shift and the macroeconomic factors negatively impacting the liquid refreshment beverage category. On a year-to-date basis, volume declines were driven by a two- percentage point decline in the cold drink channel and one-percentage point decline in our take home channel. Declines in our small format and foodservice channels, including restaurants, travel and leisure and workplace have been particularly impacted by the economic downturn in the U.S.
In our Europe segment, volume grew one percent for the quarter and three percent for the year-to-date period, driven by strong growth in Russia and Turkey, partially offset by volume declines in Spain. Russia continues to lead Europe with volume growth of six percent for the quarter and seven percent for the year-to-date period, reflecting a strong performance in our non-carbonated beverages.
In our Mexico segment, volume decreased three percent for the quarter and one percent for the year-to-date period, due in part to the Company’s pricing actions to drive improved margins across its portfolio.
Net Revenues
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||||||||||||||||||
June 14, 2008 vs. June 16, 2007 | June 14, 2008 vs. June 16, 2007 | |||||||||||||||||||||||||||||||
Worldwide | U.S. & Canada | Europe | Mexico | Worldwide | U.S. & Canada | Europe | Mexico | |||||||||||||||||||||||||
Volume impact | (3 | )% | (4 | )% | 1 | % | (3 | )% | (1 | )% | (2 | )% | 3 | % | (1 | )% | ||||||||||||||||
Net price per case impact (rate/mix) | 5 | 4 | 12 | 7 | 4 | 3 | 12 | 7 | ||||||||||||||||||||||||
Currency translation | 3 | 1 | 13 | 4 | 3 | 1 | 13 | 3 | ||||||||||||||||||||||||
Total net revenues change | 5 | % | 0 | %* | 27 | %* | 8 | % | 6 | % | 2 | % | 29 | %* | 9 | % | ||||||||||||||||
* | Does not add due to rounding to the whole percent. |
Worldwide net revenues were $3.5 billion in the second quarter of 2008 and $6.2 billion in the first 24 weeks of 2008, increasing five percent and six percent, respectively. Increases for the quarter and year-to-date periods reflect growth in net price per case in each of our segments and contributions from foreign currency translation, partially offset by volume declines in our U.S. & Canada and Mexico segments.
In our U.S. & Canada segment, net revenues growth was flat in the quarter and increased two percent for the year-to-date period. The second quarter and year-to-date performance was primarily due to net price per case improvement and the positive impact from foreign currency translation, partially offset by volume
18
Table of Contents
declines. The increases in net price per case for both the quarter and year-to-date periods were primarily driven by rate improvements across our portfolio to offset rising raw material costs.
In our Europe segment, growth in net revenues in the quarter and year-to-date periods reflects increases in net price per case in each of our countries, coupled with volume growth and the positive impact of foreign currency translation. Growth in net price per case was driven primarily by rate increases.
In our Mexico segment, growth in net revenues in the quarter and year-to-date periods reflects strong increases in net price per case and the positive impact of foreign currency translation, partially offset by declines in volume. Growth in net price per case was primarily due to rate increases taken within our multi-serve carbonated soft drinks jugs and bottled water packages, driving increased margin improvement.
In the second quarter, our U.S. & Canada segment generated approximately 72 percent of our worldwide net revenues. Our Europe segment generated 17 percent of our net revenues and Mexico generated the remaining 11 percent. On a year-to-date basis, approximately 77 percent of our net revenues were generated in our U.S. & Canada segment, 13 percent was generated by Europe and the remaining 10 percent was generated by Mexico.
Cost of Sales
12 Weeks Ended | 24 Weeks Ended | |||||||
June 14, 2008 vs. | June 14, 2008 vs. | |||||||
June 16, 2007 | June 16, 2007 | |||||||
Worldwide | Worldwide | |||||||
Volume impact | (3 | )% | (1 | )% | ||||
Cost per case impact | 5 | 5 | ||||||
Currency translation | 3 | 3 | ||||||
Total cost of sales change | 5 | % | 7 | % | ||||
Worldwide cost of sales were $1.9 billion in the second quarter of 2008 and $3.4 billion for the first 24 weeks of 2008, increasing five percent and seven percent, respectively. The increases in cost of sales for both the quarter and year-to-date periods were mainly due to higher raw material costs worldwide and the negative impact of foreign currency translation. These increases were partially offset by a decrease in volume in our U.S. & Canada and Mexico segments for both the quarter and year-to-date periods.
Selling, Delivery and Administrative Expenses
12 Weeks Ended | 24 Weeks Ended | |||||||
June 14, 2008 vs. | June 14, 2008 vs. | |||||||
June 16, 2007 | June 16, 2007 | |||||||
Worldwide | Worldwide | |||||||
Cost impact | 1 | % | 1 | % | ||||
Restructuring and Full Service Vending Rationalization charges | 0 | 0 | ||||||
Currency translation | 3 | 3 | ||||||
Total SD&A change | 4 | % | 5 | %* | ||||
* | Does not add due to rounding to the whole percent. |
Worldwide SD&A expenses were $1.3 billion in the second quarter of 2008 and $2.3 billion in the first 24 weeks of 2008, increasing four percent and five percent, respectively. Increases in worldwide SD&A expenses for the quarter and year-to-date periods reflect additional costs associated with the continued investment in Europe and the negative impact of foreign currency translation. These increases were partially offset by continued cost productivity improvements and disciplined cost management across all our segments and volume declines. Total SD&A costs in the U.S. decreased two percent in the quarter and one percent for the year-to-date period, largely driven by our cost saving initiatives.
19
Table of Contents
Operating Income
Worldwide operating income was $343 million in the second quarter of 2008 and $449 million for the first 24 weeks of 2008, increasing seven percent for the quarter and two percent for the year-to-date period. Results were driven by strong net revenue per case performance, cost productivity improvements across all segments, and the positive impact from foreign currency translation, partially offset by higher raw materials costs and declines in volume. On a year-to-date basis, the Restructuring and FSV Rationalization charges and the consolidation of PR Beverages negatively impacted operating income growth by two-percentage points. For further information on each of these items see section entitled “Items Affecting Comparability of Our Financial Results.”
In our U.S. & Canada segment, operating income decreased six percent for the quarter and year-to-date periods primarily due to higher raw material costs and lower volume in the U.S. These declines were partially offset by rate increases, cost productivity improvements and a one-percentage point positive impact from foreign currency translation. Additionally, the restructuring and FSV Rationalization charges had a one-percentage point negative impact for both the quarter and year-to-date periods.
In our Europe segment, operating income tripled for the quarter and increased $25 million on a year-to-date basis, reflecting strong growth in Russia and Turkey. Increase in operating income for the quarter reflects growth in net price per case to mitigate higher raw material costs, good cost performance in Spain and a $3 million positive impact from foreign currency translation. On a year-to-date basis, operating income benefited from growth in Russia and Turkey, coupled with good cost performance in Spain. This was partially offset by a $1 million negative impact from foreign currency translation and a $4 million negative impact in the first quarter from the consolidation of PR Beverages.
In our Mexico segment, operating income increased approximately 32 percent in the quarter and 35 percent for the year-to-date period, due primarily to strong gross profit improvement resulting from rate increases and a five-percentage point positive impact from foreign currency translation for both the quarter and year-to-date periods.
Interest Expense
Interest expense decreased approximately $3 million in the second quarter and $9 million on a year-to-date basis versus the prior year, largely due to lower effective interest rates on our variable rate debt.
Interest Income
Interest income decreased approximately $14 million in the second quarter and $17 million on a year-to-date basis versus the prior year, largely due to lower effective interest rates on loans made to PBG.
Other Non-operating Income, net
Other net non-operating income, consisting principally of foreign currency transactional gains, was flat in the second quarter and increased $3 million on a year-to-date basis. The year-to-date increase was driven by foreign currency transactional gains resulting from the strength of our foreign currencies.
Minority Interest
Minority interest primarily reflects PepsiCo’s 40 percent ownership in the PR Beverages venture. The remaining balance represents minority interest for entities consolidated by Bottling LLC. The $6 million increase in the second quarter and $2 million increase on a year-to-date basis is primarily driven by growth in our Russian operating venture.
20
Table of Contents
Income Tax Expense
We are a limited liability company, classified as a partnership for U.S. tax purposes and, as such, generally will pay limited U.S. federal, state and local income taxes. Our federal and state distributive shares of income, deductions and credits are allocated to our owners based on their percentage of ownership. However, certain domestic and foreign affiliates pay taxes in their respective jurisdictions and record related deferred income tax assets and liabilities.
Our effective tax rate for the 24 weeks ended June 14, 2008 was 6.6 percent compared with our effective tax rate of 4.2 percent for the 24 weeks ended June 16, 2007. The increase in our effective tax rate is primarily driven by the timing of recording discrete items in 2007.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows
24 Weeks Ended June 14, 2008 vs. June 16, 2007
Bottling LLC generated $225 million of net cash from operations, a decrease of $240 million from 2007. The decrease in net cash provided by operations was driven primarily by lower interest income received from PBG and timing of payments related to promotional activities and compensation arrangements.
Net cash used for investments was $515 million, a decrease of $227 million from 2007. The decrease in cash used for investments reflects lower net issuances of notes receivable from PBG.
Net cash provided by financing activities was $218 million, an increase of $32 million versus prior year. The increase in cash from financing reflects higher short term borrowings. Also reflected in financing activities was $8 million of cash received from PepsiCo for their proportional share in the acquisition of Sobol-Aqua JSC, a venture in eastern Russia.
Liquidity and Capital Resources
Our principal sources of cash come from our operating activities and the issuance of debt and bank borrowings. We believe that these cash inflows will be sufficient to fund capital expenditures, benefit plan contributions, acquisitions and working capital requirements for PBG and us for the foreseeable future. Our liquidity has not been materially impacted by the current credit environment.
Our $1.3 billion of 5.63 percent senior notes will become due in February 2009. We plan to refinance these notes.
On March 20, 2008, together with PepsiCo, we announced the joint acquisition of 75.5 percent in Russia’s leading branded juice company JSC Lebedyansky (“Lebedyansky”) for $1.4 billion, excluding the company’s baby food and mineral water business. As announced, PepsiCo will acquire 75 percent and we will acquire 25 percent of the 75.5 percent stake. We plan to fund the acquisition using money loaned from PBG’s commercial paper program and cash provided by our operations. The acquisition is expected to be completed during the second half of our fiscal year 2008 and is subject to normal local regulatory approvals and the de-merger of the baby food business. The de-merger of the baby food business has been approved by Lebedyansky’s shareholders. Additionally, together with PepsiCo, we expect to tender for the remaining 24.5 percent ownership of Lebedyansky’s juice business. Our and PepsiCo’s tender for Lebedyansky’s remaining shares will continue to be purchased 25 percent and 75 percent, respectively.
Contractual Obligations
As of June 14, 2008, there have been no material changes outside the normal course of business in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the caption “Contractual Obligations”.
21
Table of Contents
Off-Balance Sheet Arrangements
For information about our off-balance sheet arrangements see Note 15 in the Notes to Condensed Consolidated Financial Statements.
CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available competitive, financial and economic data and our operating plans. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different.
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 29, 2007 should be considered when evaluating our trends and future results.
22
Table of Contents
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risks as disclosed in Item 7 to our Annual Report on Form 10-K for the year ended December 29, 2007.
Item 4.
CONTROLS AND PROCEDURES
Bottling LLC’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Based upon this evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to Bottling LLC and its consolidated subsidiaries required to be disclosed in our Exchange Act reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Bottling LLC’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In addition, Bottling LLC’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Principal Executive Officer and our Principal Financial Officer, of changes in Bottling LLC’s internal control over financial reporting. Based on this evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
23
Table of Contents
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are party to a variety of legal proceedings arising in the normal course of 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.
Item 1A. 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 29, 2007.
Item 6.
EXHIBITS
EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |||
3.3 | Amendment No. 1 to Bottling Group, LLC’s Amended and Restated Limited Liability Company Agreement | |||
10.1 | Insurance Policy between Bottling LLC and Woodlands Insurance Company, Inc. | |||
10.2 | Form of Promissory Note between The Pepsi Bottling Group, Inc. and Bottling LLC | |||
18 | Letter regarding change in accounting principles | |||
31.1 | Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002 | |||
31.2 | Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002 | |||
32.1 | Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 | |||
32.2 | Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 | |||
99.1 | The Pepsi Bottling Group, Inc. Form 10-Q for the quarterly period ended June 14, 2008, as required by the SEC as a result of our guarantee of up to $1,000,000,000 aggregate principal amount of PBG’s 7% Senior Notes due in 2029 |
24
Table of Contents
SIGNATURES
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 thereunto duly authorized.
BOTTLING GROUP, LLC (Registrant) | ||||
Date: July 21, 2008 | /s/ Thomas M. Lardieri | |||
Thomas M. Lardieri | ||||
Principal Accounting Officer and Managing Director | ||||
Date: July 21, 2008 | /s/ Alfred H. Drewes | |||
Alfred H. Drewes | ||||
Principal Financial Officer | ||||