The Pepsi Bottling Group, Inc. Exhibit 13
MANAGEMENT'S FINANCIAL REVIEW
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
OVERVIEW
The Pepsi Bottling Group, Inc. (collectively referred to as "PBG", "we",
"our" and "us") is the world's largest manufacturer, seller and distributor of
carbonated and non-carbonated Pepsi-Cola beverages. We have the exclusive right
to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of
the United States, Canada, Spain, Greece, Russia, Turkey and, as a result of our
recent acquisition, Mexico. In 2002, approximately 82% of our net revenues were
generated in the United States with the remaining 18% generated outside the
United States. In 2003, we expect approximately 72% of our net revenues to come
from the U.S., 12% of our net revenues to come from our newly acquired
operations in Mexico, and the remaining 16% to come from operations outside the
U.S. and Mexico.
The brands we sell are some of the best recognized trademarks in the world
and include PEPSI-COLA, DIET PEPSI, MOUTAIN DEW, MOUTAIN DEW CODE RED, LIPTON
BRISK, MUG, AQUAFINA, DIET MOUNTAIN DEW, PEPSI TWIST, STARBUCKS FRAPPUCCINO,
SIERRA MIST, DOLE and SOBE, and outside the U.S., PEPSI-COLA, MIRANDA, 7 UP,
KAS, ELECTROPUA, AQUA MINERALE, MANZANITA SOL, SQUIRT, GARCI CRESPO, FIESTA,
PEPSI LIGHT, IVI, YEDIGUN, and FRUKO. In some of our U.S. territories, we also
have the right to manufacture, sell and distribute soft drink products of
companies other than PepsiCo. Inc., including DR PEPPER and All SPORT, and
through December 2002, 7 UP.
The following discussion and analysis covers the key drivers behind our
business performance in 2002 and is categorized into seven major sections. The
first four sections discuss application of critical accounting policies,
related party transactions, items that affect the comparability of historical
or future results and non-GAAP measures. The next two sections provide an
analysis of our results of operations and liquidity and financial condition.
The last section contains a discussion of our market risks and cautionary
statements. The discussion and analysis throughout Management's Financial
Review should be read in conjunction with the Consolidated Financial Statements
and the related accompanying notes.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of our 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 Consolidated Financial Statements and the related
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, based on the advice of external
experts and our knowledge of existing facts and circumstances and actions that
we may undertake in the future, in determining the estimates that affect our
Consolidated Financial Statements. For each of the critical accounting estimates
discussed below we have reviewed our policies, assumptions and related
disclosures with our Audit and Affiliated Transactions Committee.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - A portion of our accounts receivable
will not be collected due to customer issues and bankruptcies. We provide
reserves for these situations based on the evaluation of the aging of our trade
receivable portfolio and a customer-by-customer analysis of our high-risk
customers. Our reserves contemplate our historical loss rate on receivables,
specific customer situations and the economic environments in which we operate.
As of December 28, 2002, our allowance for doubtful accounts was $67
million and $42 million as of December 29, 2001 and December 30, 2000, which
represents management's best estimate of probable losses inherent in our
portfolio. While the overall quality of our receivable portfolio has remained
relatively stable, we continue to pay particular attention to those customers
that represent a higher potential risk. In 2002, as a result of the
deterioration of the financial condition of certain customers, we have recorded
additional reserves based upon estimates of uncollectibility. The following is
an analysis of the allowance for doubtful accounts for the fiscal years ended
December 28, 2002, December 29, 2001, and December 30, 2000:
The Pepsi Bottling Group, Inc.
ALLOWANCE FOR DOUBTFUL
----------------------
ACCOUNTS
--------
2002 2001 2000
---- ---- ----
Beginning of the year ................... $ 42 $ 42 $ 48
Bad debt expense ........................ 32 9 3
Additions from acquisitions ............. 14 -- --
Accounts written off .................... (22) (9) (8)
Foreign currency translation ............ 1 -- (1)
---- ---- ----
End of the year ......................... $ 67 $ 42 $ 42
==== ==== ====
18
Estimating an allowance for doubtful accounts requires significant
management judgment and is dependent upon the overall economic environment and
in particular, our customers' viability. We have effective credit controls in
place to manage these exposures and believe that our allowance for doubtful
accounts adequately provides for these risks.
RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE LIVES -
During 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment. Effective the first day of fiscal year 2002, we no longer amortize
goodwill and certain franchise rights, but evaluate them for impairment
annually.
Our identifiable intangible assets principally arise from the allocation
of the purchase price of businesses acquired, and consist primarily of franchise
rights. Our franchise rights are typically perpetual in duration, subject to
compliance with the underlying franchise agreement. The value and life of our
franchise rights are directly associated with the underlying portfolio of brands
that we are entitled to make, sell and distribute under applicable franchise
agreements. In considering whether franchise rights have an indefinite useful
life, we consider the nature and terms of the underlying franchise agreements;
our intent and ability to use the franchise rights; and the age and market
position of the products within the franchise as well as the historical and
projected growth of those products. We assign amounts to such identifiable
intangibles based on their estimated fair values at the date of acquisition.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 02-07,
"Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible
Assets," we evaluate our franchise rights with indefinite useful lives for
impairment annually as asset groups on a country-by-country basis ("asset
groups"). We measure the fair value of these asset groups utilizing discounted
estimated future cash flows, including a terminal value, which assumes the
franchise rights will continue in perpetuity. Our long-term terminal growth
assumptions reflect our current long-term view of the marketplace. Our discount
rate is based upon our weighted-average cost of capital plus an additional risk
premium to reflect the risk and uncertainty inherent in separately acquiring a
franchise agreement between a willing buyer and a willing seller. Each year we
re-evaluate our assumptions in our discounted cash flow model to address
changes in our business and marketplace conditions. Based upon our annual
impairment analysis, the estimated fair values of our franchise rights with
indefinite lives exceeded their carrying amounts in 2002.
In accordance with SFAS No. 142, we evaluate goodwill on a
country-by-country basis ("reporting unit") for impairment. We evaluate each
reporting unit for impairment based upon a two-step approach. First, we compare
the fair value of our reporting unit with its carrying value. Second, if the
carrying value of our reporting unit exceeds its fair value, we compare the
implied fair value of the reporting unit's goodwill to its carrying amount to
measure the amount of impairment loss. In measuring the implied fair value of
goodwill, we would allocate the fair value of the reporting unit to each of its
assets and liabilities (including any unrecognized intangible assets). Any
excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of goodwill.
We measure the fair value of a reporting unit as the discounted estimated
future cash flows, including a terminal value, which assumes the business
continues in perpetuity, less its respective minority interest and net debt (net
of cash and cash equivalents). Our long-term terminal growth assumptions reflect
our current long-term view of the marketplace. Our discount rate is based upon
our weighted average cost of capital. Each year we re-evaluate our assumptions
in our discounted cash flow model to address changes in our business and
marketplace conditions.
The Pepsi Bottling Group, Inc.
Based upon our annual impairment analysis in the fourth quarter of 2002, the
estimated fair value of our reporting units exceeded their carrying value and as
a result, we did not proceed to the second step of the impairment test.
Considerable management judgment is necessary to estimate discounted
future cash flows, which may be impacted by future actions taken by us and our
competitors and the volatility in the markets in which we conduct business. A
change in assumptions in our cash flows could have a significant impact on the
fair value of our reporting units, which could then result in a material
impairment charge to our results of operations.
PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other
postretirement benefit plans in various forms, covering employees who meet
specified eligibility requirements. We account for our defined benefit pension
plans and our postretirement benefit plans using actuarial models required by
SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The amounts
necessary to fund future payouts under these plans are subject to numerous
assumptions and variables including anticipated discount rate, expected rate of
return on plan assets and future compensation levels. We evaluate these
assumptions with our actuarial advisors on an annual basis and we believe that
they
19
The Pepsi Bottling Group, Inc.
are appropriate and within acceptable industry ranges, although an increase
or decrease in the assumptions or economic events outside our control could have
a material impact on reported net income.
The assets, liabilities and assumptions used to measure expense for any
fiscal year are determined as of September 30 of the preceding year
("measurement date"). The discount rate assumption used in our pension and
postretirement benefit plans' accounting is based on current interest rates for
high-quality, long-term corporate debt as determined on each measurement date.
The expected return on plan assets is based on our long-term historical
experience, our plan asset allocation and our expectations for long-term
interest rates and market performance. In evaluating our rate of return on
assets for a given fiscal year, we consider a 15 to 20 year time horizon for our
pension investment portfolio. In addition, we look at the return on asset
assumptions used by other companies in our industry as well as other large
companies. Over the past three fiscal years the composition of our plan assets
was approximately 70%-75% equity investments and 25%-30% fixed income
securities, which primarily consist of U.S. government and corporate bonds.
Differences between actual and expected returns are generally recognized in the
net periodic pension calculation over five years. To the extent the amount of
all unrecognized gains and losses exceeds 10% of the larger of the benefit
obligation or plan assets, such amount is amortized over the average remaining
service life of active participants. The rate of future compensation increases
is based upon our historical experience and management's best estimate regarding
future expectations. We amortize prior service costs on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
For our postretirement plans that provide medical and life insurance
benefits, we review external data and our historical health care cost trends
with our actuarial advisors to determine the health care cost trend rates.
During 2002, our defined benefit pension and postretirement expenses were
$41 million. We utilized the following weighted-average assumptions to compute
our pension and postretirement expense in 2002:
Discount rate ......................................................... 7.5%
Expected return on plan assets (net of administrative expenses) ....... 9.5%
Rate of compensation increase ......................................... 4.3%
In 2003 our defined benefit pension and postretirement expenses will
increase by $36 million due primarily to the following:
- A decrease in our net weighted-average expected return on plan
assets from 9.5% to 8.5% due to declines in the level of returns on
our plan assets over the last several years. Additionally,
amortization of asset losses resulting from differences between our
expected and actual return on plan assets will contribute to the
increase in our pension expense during 2003. These changes will
increase our 2003 defined benefit pension and postretirement expense
by approximately $15 million.
- A decrease in our weighted-average discount rate for our pension and
postretirement expense from 7.5% to 6.8%, reflecting declines in the
yields of long-term corporate bonds. This assumption change will
increase our defined benefit pension and postretirement expense by
approximately $15 million.
- Expiration of amortization credits, changes in demographics and
medical trend rates, and other plan changes will increase our
defined benefit pension and postretirement expense by approximately
$16 million; and
- Contributions of $151 million to our pension plan during 2002 will
reduce our 2003 defined benefit pension expense by approximately $10
million. Our plans have been funded to be in compliance with the
funding provisions of the Employee Retirement Income Security Act of
1974 and have been made in accordance with applicable tax
regulations that provide for current tax deductions for our
contributions and for taxation to the employee of plan benefits when
the benefits are received.
CASUALTY INSURANCE COSTS - Due to the nature of our business, we require
insurance coverage for certain casualty risks. Given the rapidly increasing
costs associated with obtaining third-party insurance coverage for our casualty
risks in the U.S., in 2002 we moved to a self-insurance program for these risks.
We are self-insured for workers' compensation, automobile, product and general
liability risks for occurrences up to $5 million. We purchase casualty insurance
from a third-party for losses per occurrence exceeding $5 million. The casualty
insurance costs for our self-insurance program represent the ultimate net cost
of all reported and estimated unreported losses incurred during the fiscal year.
We do not discount loss expense reserves.
Our liability for casualty costs is estimated using individual case-based
valuations and statistical analyses and is based upon historical experience,
actuarial assumptions and professional judgment. These estimates are subject to
the effects of trends in loss severity and frequency and are based on the best
data
20
The Pepsi Bottling Group, Inc.
available to us. However, these estimates are also subject to a significant
degree of inherent variability. We evaluate these estimates with our actuarial
advisors on an annual basis and we believe that they are appropriate and within
acceptable industry ranges, although an increase or decrease in the estimates or
economic events outside our control could have a material impact on reported net
income. Accordingly, the ultimate settlement of these costs may vary
significantly from the estimates included in our financial statements.
INCOME TAXES - Our effective tax rate is based on income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. The tax bases of our assets and liabilities
reflect our best estimate of the ultimate outcome of our tax audits. Significant
management judgment is required in determining our effective tax rate and in
evaluating our tax position. We establish reserves when, despite our belief that
our tax return positions are supportable, we believe these positions may be
challenged. We adjust these reserves as warranted by changing facts and
circumstances. A change in our tax reserves could have a significant impact on
our results of operations.
Under our tax separation agreement with PepsiCo, Inc. ("PepsiCo"), PepsiCo
maintains full control and absolute discretion for any combined or consolidated
tax filings for tax periods ended on or before our initial public offering that
occurred in March 1999. However, PepsiCo may not settle any issue without PBG's
written consent, which consent cannot be unreasonably withheld. PepsiCo has
contractually agreed to act in good faith with respect to all tax audit matters
affecting us. In accordance with the tax separation agreement, we will bear our
allocable share of any risk or upside resulting from the settlement of tax
matters affecting us for these periods.
A number of years may elapse before a particular matter for which we have
established a reserve is audited and finally resolved. The number of years for
which we have audits that are open varies depending on the tax jurisdiction. The
U.S. Internal Revenue Service is currently examining our and PepsiCo's joint tax
returns for 1994 through 1997 and our tax returns for 1999 and 2000. While it is
often difficult to predict the final outcome or the timing of the resolution, we
believe that our reserves reflect the probable outcome of known tax
contingencies. Favorable resolutions would be recognized as a reduction of our
tax expense in the year of resolution. Unfavorable resolutions would be
recognized as a reduction of our reserves and a cash outlay for settlement.
RELATED PARTY TRANSACTIONS
PepsiCo is considered a related party due to the nature of our franchisee
relationship and its ownership interest in our company. Approximately 90% of
PBG's 2002 volume was derived from the sale of Pepsi-Cola beverages. At December
28, 2002, PepsiCo owned approximately 37.8% of our outstanding common stock and
100% of our outstanding class B common stock, together representing
approximately 42.9% of the voting power of all classes of our voting stock. In
addition, PepsiCo owns 6.8% of the equity of Bottling Group, LLC, our principal
operating subsidiary. We fully consolidate the results of Bottling Group, LLC
and present PepsiCo's share as minority interest in our Consolidated Financial
Statements.
The most significant agreements that govern our relationship with PepsiCo
consist of:
(1) The master bottling agreement for cola beverages bearing the
"Pepsi-Cola" and "Pepsi" trademark in the United States; master
bottling agreements and distribution agreements for non-cola
products in the United States, including Mountain Dew; and a master
fountain syrup agreement in the United States;
(2) Agreements similar to the master bottling agreement and the non-cola
agreements for each country, including Canada, Spain, Russia,
Greece, Turkey and Mexico, as well as a fountain syrup agreement
similar to the master syrup agreement for Canada;
(3) A shared services agreement whereby PepsiCo provides us or we
provide PepsiCo with certain support, including information
technology maintenance, procurement of raw materials, shared space,
employee benefits, credit and collection, international tax and
accounting services. The amounts paid or received under this
contract are equal to the actual costs incurred by the company
providing the service. Through 2001, a PepsiCo affiliate provided
casualty insurance to us; and
(4) Transition agreements that provide certain indemnities to the
parties, and provide for the allocation of tax and other assets,
liabilities, and obligations arising from periods prior to the
initial public offering. Under our tax separation agreement, PepsiCo
maintains full control and absolute discretion for any combined or
consolidated tax filings for tax periods ended on or before the
initial public offering. PepsiCo has contractually agreed to act in
good faith with respect to all
21
The Pepsi Bottling Group, Inc.
tax audit matters affecting us. In addition, PepsiCo has agreed to use its best
efforts to settle all joint interests in any common audit issue on a basis
consistent with prior practice.
BOTTLER INCENTIVES AND OTHER ARRANGEMENTS - We share a business objective
with PepsiCo of increasing the availability and consumption of Pepsi-Cola
beverages. Accordingly, PepsiCo, at its discretion, provides us with various
forms of bottler incentives to promote its beverages. These incentives cover a
variety of initiatives, including direct marketplace support, capital equipment
funding and advertising support. Based on the objective of the programs and
initiatives, we record bottler incentives as an adjustment to net revenues or as
a reduction of selling, delivery and administrative expenses. Direct marketplace
support represents PepsiCo's funding to assist us in offering sales and
promotional discounts to retailers and is recorded as an adjustment to net
revenues. Capital equipment funding is designed to help offset the costs of
purchasing and installing marketing equipment, such as vending machines and
glass door coolers at customer locations and is recorded as a reduction of
selling, delivery and administrative expenses. Advertising support represents
the cost of media time, promotional materials, and other advertising and
marketing costs that are funded by PepsiCo and is recorded as a reduction to
advertising and marketing expenses within selling, delivery and administrative
expenses. In addition, PepsiCo may share certain media costs with us due to our
joint objective of promoting PepsiCo brands. There are no conditions or other
requirements that could result in a repayment of the bottler incentives
received. Bottler incentives received from PepsiCo, including media costs shared
by PepsiCo, were $560 million, $554 million and $524 million for 2002, 2001 and
2000, respectively. Of these amounts, we recorded $257 million, $262 million and
$244 million for 2002, 2001 and 2000, respectively, in net revenues, and the
remainder as a reduction of selling, delivery and administrative expenses.
PURCHASES OF CONCENTRATE AND FINISHED PRODUCT - We purchase concentrate
from PepsiCo, which is the critical flavor ingredient used in the production of
carbonated soft drinks and other ready-to-drink beverages. PepsiCo determines
the price of concentrate annually at its discretion. We also pay a royalty fee
to PepsiCo for the Aquafina trademark. Amounts paid or payable to PepsiCo and
its affiliates for concentrate and royalty fees were $1,699 million, $1,584
million and $1,507 million in 2002, 2001 and 2000, respectively.
We also produce or distribute other products and purchase finished goods
and concentrate through various arrangements with PepsiCo or PepsiCo joint
ventures. During 2002, 2001 and 2000, total amounts paid or payable to PepsiCo
for these transactions were $464 million, $375 million and $155 million,
respectively.
We provide manufacturing services to PepsiCo and PepsiCo affiliates in
connection with the production of certain finished beverage products. During
2002, 2001 and 2000, total amounts paid or payable by PepsiCo for these
transactions were $10 million, $32 million and $36 million, respectively.
FOUNTAIN SERVICE FEE - We manufacture and distribute fountain products and
provide fountain equipment service to PepsiCo customers in some territories in
accordance with the Pepsi beverage agreements. Amounts received from PepsiCo for
these transactions are offset by the cost to provide these services and are
reflected in our Consolidated Statements of Operations in selling, delivery and
administrative expenses. Net amounts paid or payable by PepsiCo to us for these
services were approximately $200 million, $185 million and $189 million, in
2002, 2001 and 2000, respectively.
OTHER TRANSACTIONS - Prior to 2002, Hillbrook Insurance Company, Inc., a
subsidiary of PepsiCo, provided insurance and risk management services to us
pursuant to a contractual agreement. Total premiums paid to Hillbrook Insurance
Company, Inc. during 2001 and 2000 were $58 million and $62 million,
respectively.
We provide PepsiCo and PepsiCo affiliates or PepsiCo provides us various
services pursuant to a shared services agreement and other arrangements,
including information technology maintenance, procurement of raw materials,
shared space, employee benefits, credit and collection, international tax and
accounting services. Total net expenses incurred were approximately $57 million,
$133 million and $117 million during 2002, 2001 and 2000, respectively.
We purchase snack food products from Frito-Lay, Inc., a subsidiary of
PepsiCo, for sale and distribution in all of Russia except Moscow. Amounts paid
or payable to PepsiCo and its affiliates for snack food products were $44
million, $27 million and $24 million in 2002, 2001 and 2000, respectively.
22
The Pepsi Bottling Group, Inc.
The Consolidated Statements of Operations include the following income
(expense) amounts as a result of transactions with PepsiCo and its affiliates:
2002 2001 2000
------- ------- -------
Net revenues:
Bottler incentives ................................... $ 257 $ 262 $ 244
======= ======= =======
Cost of sales:
Purchases of concentrate and finished products,
and Aquafina royalty fees ........................ $(2,163) $(1,959) $(1,662)
Manufacturing and distribution service reimbursements 10 32 36
------- ------- -------
$(2,153) $(1,927) $(1,626)
======= ======= =======
Selling, delivery and administrative expenses:
Bottler incentives ................................... $ 303 $ 292 $ 280
Fountain service fee ................................. 200 185 189
Frito-Lay purchases .................................. (44) (27) (24)
Insurance costs ...................................... -- (58) (62)
Shared services ...................................... (57) (133) (117)
------- ------- -------
$ 402 $ 259 $ 266
======= ======= =======
We are not required to pay any minimum fees to PepsiCo, nor are we
obligated to PepsiCo under any minimum purchase requirements.
As part of our acquisition in Turkey, PBG paid PepsiCo $8 million for its
share of Fruko Mesrubat Sanayii A.S. and related entities. In addition, we sold
certain brands to PepsiCo from the net assets acquired for $16 million.
As part of our acquisition of Pepsi-Gemex, S.A. de C.V. ("Gemex") of
Mexico, PepsiCo received $297 million for the tender of its shares for its 34.4%
ownership in the outstanding capital stock of Gemex. In addition, PepsiCo made a
payment to us for $17 million, to facilitate the purchase and ensure a smooth
ownership transition of Gemex.
We paid PepsiCo $10 million and $9 million during 2002 and 2001,
respectively, for distribution rights relating to the SoBe brand in certain
PBG-owned territories in the U.S. and Canada.
In connection with PBG's acquisition of Pepsi-Cola Bottling of Northern
California in 2001, PBG paid $10 million to PepsiCo for its equity interest in
Northern California.
With respect to PepsiCo's 6.8% ownership in Bottling Group, LLC, our
principal operating subsidiary, Bottling Group, LLC will distribute pro rata to
PepsiCo and us sufficient cash such that aggregate cash distributed to us will
enable us to pay our income taxes and interest on our $1 billion 7% senior notes
due 2029. PepsiCo's pro rata cash distribution during 2002 from Bottling Group,
LLC was $11 million.
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8%
senior notes issued on February 9, 1999, by our subsidiary Bottling Group, LLC
are guaranteed by PepsiCo. In addition, the $1.0 billion of 4 5/8% senior notes
issued on November 15, 2002, also by Bottling Group, LLC, will be guaranteed by
PepsiCo in accordance with the terms set forth in the related indenture.
Amounts payable to PepsiCo and its affiliates were $26 million and $17
million at December 28, 2002 and December 29, 2001, respectively. Such amounts
are recorded within accounts payable and other current liabilities in our
Consolidated Balance Sheets.
Board of Directors
Two of our board members are employees of PepsiCo. Neither of these board
members serves on our Audit and Affiliated Transactions Committee. In addition,
one of our managing directors of Bottling Group, LLC, our principal operating
subsidiary, is an employee of PepsiCo.
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
Gemex Acquisition
In November 2002, we acquired all of the outstanding capital stock of
Gemex. Our total acquisition cost consisted of a net cash payment of $871
million and assumed debt of approximately $305 million. The Gemex acquisition
was made to allow us to increase our markets outside the United States. Gemex is
the largest Pepsi-Cola bottler in Mexico and the largest bottler outside the
United States of Pepsi-Cola soft drink products based on sales volume. Gemex
produces, sells and distributes a variety of soft drink products under the
PEPSI-COLA, PEPSI LIGHT, PEPSI MAX, PEPSI LIMON, MIRINDA, 7 UP, DIET 7 UP, KAS,
MOUNTAIN DEW, POWER PUNCH and MANZANITA SOL trademarks, under exclusive
franchise and bottling arrangements with PepsiCo and certain affiliates of
PepsiCo. Gemex also
23
The Pepsi Bottling Group, Inc.
has rights to produce, sell and distribute in Mexico soft drink products of
other companies and it produces, sells and distributes purified and mineral
water in Mexico under the trademarks ElECTROPURA and GARCI CRESPO, respectively.
As a result of the acquisition of Gemex, we own the Electropura and Garci Crespo
brands.
New Accounting Standards
During 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001, and SFAS No. 142,
"Goodwill and Other Intangible Assets," which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment. Effective the first day of fiscal year 2002, we
no longer amortize goodwill and certain franchise rights, but evaluate them for
impairment annually. Based on our annual impairment review, we have determined
that our intangible assets are not impaired. If we had adopted SFAS No. 142 at
the beginning of 2000 our amortization expense would have been reduced by
approximately $129 million in each of 2001 and 2000. In addition, net income
would have increased by approximately $91 million (or $0.31 per diluted share)
to $396 million (or $1.34 per diluted share) in 2001 and $90 million (or $0.30
per diluted share) to $319 million (or $1.07 per diluted share) in 2000.
During 2002, the EITF addressed various issues related to the income
statement classification of certain payments received by a customer from a
vendor. In November 2002, the EITF reached a consensus on Issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," addressing the recognition and
income statement classification of various consideration given by a vendor to a
customer. Among its requirements, the consensus requires that certain cash
consideration received by a customer from a vendor is presumed to be a reduction
of the price of the vendor's products, and therefore should be characterized as
a reduction of cost of sales when recognized in the customer's income statement,
unless certain criteria are met. EITF Issue No. 02-16 will be effective
beginning in our fiscal year 2003. We currently classify bottler incentives
received from PepsiCo and other brand owners as adjustments to net revenues and
selling, delivery and administrative expenses. In accordance with EITF Issue No.
02-16, we will classify certain bottler incentives as a reduction of cost of
sales beginning in 2003. We are currently assessing the transitional guidance
released by the EITF to determine the net impact to our Consolidated Financial
Statements.
Stock Split
On November 27, 2001, our shareholders approved an amendment to our
Certificate of Incorporation, increasing the authorized shares of PBG common
stock from 300 million to 900 million facilitating a two-for-one stock split of
issued common stock. The stock split was effected in the form of a 100% stock
dividend paid to our shareholders of record on November 27, 2001. As a result of
the stock split, the accompanying Management's Financial Review and Consolidated
Financial Statements reflect an increase in the number of outstanding shares of
common stock and shares of treasury stock and the transfer of the par value of
these incremental shares from additional-paid-in-capital to common stock. All
PBG share and per share data were restated to reflect the split.
Fiscal Year
Our fiscal year ends on the last Saturday in December and, as a result, a
53rd week is added every five or six years. Fiscal years 2002 and 2001 consisted
of 52 weeks, while fiscal year 2000 consisted of 53 weeks. The following table
illustrates the approximate dollar and percentage point impacts that the extra
week had on our operating results:
dollars in millions, except per share amounts PERCENTAGE POINTS
-------------
DOLLARS 2001 VS. 2000
------- -------------
Volume ...................................... N/A (2)
Net Revenues ................................ $ 113 (1)
Diluted Earnings per Share .................. $0.02 (4)
24
Concentrate Supply
We buy concentrate, the critical flavor ingredient for our products, from
PepsiCo, its affiliates and other brand owners who are the sole authorized
suppliers. Concentrate prices are typically determined annually.
In February 2002, PepsiCo announced an increase of approximately 3% in the
price of U.S. concentrate. PepsiCo has recently announced a further increase of
approximately 2%, effective February 2003. Amounts paid or payable to PepsiCo
and its affiliates for concentrate were $1,590 million, $1,502 million and
$1,450 million in 2002, 2001 and 2000, respectively, which excludes any payments
to PepsiCo for royalty fees associated with the Aquafina trademark.
NON-GAAP MEASURES
We utilize certain non-GAAP measures to evaluate our performance. We
consider these measures important indicators of our success. These measures
should not be considered an alternative to measurements required by U.S. GAAP
such as net income and net cash provided by operations or should not be
considered measures of our liquidity. In addition, our non-GAAP measures may not
be comparable to similar measures reported by other companies and could be
misleading unless all companies and analysts calculate them in the same manner.
Our key non-GAAP measures are:
Constant Territory
We believe that constant territory performance results are the most
appropriate indicators of operating trends and performance, particularly in
light of our stated intention of acquiring additional bottling territories, and
are consistent with industry practice. Constant territory operating results are
derived by adjusting current year results to exclude significant current year
acquisitions and adjusting prior year results to include the results of
significant prior year acquisitions as if they had occurred on the first day of
the prior fiscal year. In addition, 2000 constant territory results exclude the
impact from an additional week in our fiscal year ("53rd week"), which occurs
every five or six years, as our fiscal year ends on the last Saturday in
December.
Our constant territory results exclude the operating results of the
following acquisitions made during 2002:
- Fruko Mesrubat Sanayii A.S. and related companies of Turkey in March
2002.
- Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March 2002.
- Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle,
Maine in June 2002.
- Seaman's Beverages Limited of the Canadian province of Prince Edward
Island in July 2002.
- Pepsi-Gemex, S.A. de. C.V of Mexico in November 2002.
- Kitchener Beverages Limited of Ontario, Canada in December 2002.
We adjusted our prior year results to include the operating results of the
following prior year acquisitions as if they had occurred on the first day of
the prior fiscal year:
- Pepsi-Cola Bottling of Northern California in May 2001.
- Pepsi-Cola Elmira Bottling Co. Inc. of New York in August 2001.
Our prior year pro forma adjustments did not have a material impact on our
constant territory results.
The table below reconciles our U.S. GAAP reported results to our constant
territory results for 2002 vs. 2001 on a worldwide basis:
WORLDWIDE 2002 VS. 2001
-------------
AS IMPACT IMPACT FROM CONSTANT
REPORTED FROM 2002 2001 PRO FORMA TERRITORY
CHANGE ACQUISITIONS ADJUSTMENTS CHANGE
------ ------------ ----------- ------
Net revenues .............. 9% -4% 0% 5%
Net revenue per case ...... 1% 2% 0% 3%
Cost of sales ............. 9% -5% 0% 4%
Cost of sales per case .... 1% 2% 0% 3%
25
The table below reconciles our U.S. GAAP reported results to our constant
territory results for 2002 vs. 2001 for our U.S. operations:
U.S. 2002 VS. 2001
-------------
AS IMPACT IMPACT FROM CONSTANT
REPORTED FROM 2002 2001 PRO FORMA TERRITORY
CHANGE ACQUISITIONS ADJUSTMENTS CHANGE
------ ------------ ----------- ------
Net revenues .............. 5% 0% 0% 5%
Net revenue per case ...... 3% 0% 0% 3%
Cost of sales ............. 5% 0% -1% 4%
Cost of sales per case .... 3% 0% 0% 3%
The table below reconciles our U.S. GAAP reported results to our constant
territory results for 2002 vs. 2001 for our operations outside the United
States:
OUTSIDE THE U.S. 2002 VS. 2001
-------------
AS IMPACT IMPACT FROM CONSTANT
REPORTED FROM 2002 2001 PRO FORMA TERRITORY
CHANGE ACQUISITIONS ADJUSTMENTS CHANGE
------ ------------ ----------- ------
Net revenues ............... 32% -26% 0% 6%
Net revenue per case ....... -1% 4% 0% 3%
Cost of sales .............. 31% -25% 0% 6%
Cost of sales per case ..... -1% 4% 0% 3%
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization or EBITDA,
which is computed as operating income plus the sum of depreciation and
amortization, is a key indicator that we and others in our industry use to
evaluate operating performance. We believe that current shareholders and
potential investors in our company use multiples of EBITDA, in making investment
decisions about our company. We use multiples of EBITDA in combination with
discounted cash flow analysis as the primary method of determining the value of
bottling operations.
The table below reconciles Operating Income to EBITDA for 2002 and 2001:
2002 2001 % CHANGE
------ ------ --------
Operating Income ....... $ 898 $ 676 33%
Add back:
Depreciation ......... 443 379
Amortization ......... 8 135
------ ------
EBITDA ................. $1,349 $1,190 13%
====== ======
FINANCIAL OVERVIEW
RESULTS OF OPERATIONS - 2002
VOLUME
2002 VS. 2001
-------------
AS CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Volume ........................................ 8% 2%
Our worldwide reported physical case volume increased 8% in 2002,
reflecting a 6% increase in volume resulting from our acquisitions and a 2%
increase in base volume. In the U.S., reported volume increased by 2%,
reflecting a 1% increase from acquisitions and a 1% increase in base volume.
The weakness in the economy and less travel caused softness in our U.S. results
in the second half of the year. However, take-home volume, particularly in food
stores, as well as volume in our convenience and gas segment continues to grow.
Additionally, U.S. volume growth continued to benefit from innovation, as well
as the strong growth of Aquafina, offset by declines in trademark Pepsi.
Outside the U.S., our volumes increased 32% reflecting a 29% increase from our
acquisitions in Turkey and Mexico. Volume outside the U.S. from our base
business increased 3% due to double-digit growth in Russia driven by the strong
performance of trademark Pepsi and Aqua Minerale, our water product, which was
partially offset by volume declines in Spain.
26
In 2003, we expect our worldwide constant territory volume to grow between
2% and 3%. In the U.S., we expect our constant territory volume growth
projections to be flat to 1% for the full year, which includes a 50 to 100 basis
point negative impact from our Sierra Mist transition. Beginning in 2003, we
will no longer distribute 7 UP in the U.S. as we have decided to manufacture,
sell, and distribute Sierra Mist exclusively in all of our U.S. markets. This
conversion will affect about one third of our markets and will facilitate a
unified and more effective selling and marketing proposition as we support a
single growing lemon-lime brand.
NET REVENUES
2002 VS. 2001
-------------
AS CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Net revenues ............ 9% 5%
Net revenue per case .... 1% 3%
Reported net revenues were $9.2 billion, a 9% increase over the prior
year, reflecting an 8% increase in volume and a 1% increase in net revenue per
case. In the U.S., reported net revenues increased 5% reflecting a 3% increase
in net revenue per case and a 2% increase in volumes. Net revenue per case
growth in the U.S. benefited from rate increases combined with lapping of
account level investment spending in the fourth quarter of 2001. Reported net
revenues outside the U.S. grew approximately 32%, reflecting a 32% increase in
volume offset by a 1% decrease in net revenue per case. Net revenue per case
outside the U.S. grew 3% after excluding the impact of acquisitions. The
favorable impact of currency translations contributed over 1% to our net revenue
per case growth in 2002 outside the United States.
Our reported worldwide net revenues are expected to increase approximately
16% in 2003. The majority of the increase in net revenues will be driven by the
full year impact of results from the six acquisitions made during 2002 combined
with volume increases from our base business.
COST OF SALES
2002 VS. 2001
-------------
CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Cost of sales ............. 9% 4%
Cost of sales per case .... 1% 3%
Cost of sales was $5.0 billion, a 9% increase over the prior year,
reflecting an 8% increase in volume and a 1% increase in cost of sales per case.
In the U.S., cost of sales increased by 5% reflecting a 3% increase in cost of
sales per case and a 2% increase in volume. The increase in U.S. cost of sales
per case was driven by higher concentrate costs and mix shifts into higher cost
packages. Cost of sales outside the U.S. grew by 31% reflecting a 32% increase
in volume offset by a 1% decrease in cost of sales per case.
In 2003, we expect our reported cost of sales per case to decrease in the
mid single digits, due largely to the lower cost structure from our newly
acquired international operations, partially offset by an increase in
concentrate prices of 2% in the United States.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administrative expenses grew $130 million, or 4% in
2002. Had we adopted SFAS No. 142 on the first day of 2001, amortization expense
would have been lowered by $129 million in 2001. The impact of the adoption of
SFAS No. 142 was largely offset by increased selling, delivery and
administrative expenses resulting from our acquisitions in Mexico and Turkey.
Excluding acquisitions and the effects of adopting SFAS No. 142, selling,
delivery and administrative expenses were up 4% for the year driven by growth in
our business and our continued investment in marketing equipment partially
offset by favorable productivity gains. Selling, delivery and administrative
expenses were also favorably impacted as we lapped higher labor costs associated
with labor contract negotiations in the prior year partially offset by increased
accounts receivable reserves resulting from the deterioration of the financial
condition of certain customers.
27
INTEREST EXPENSE, NET
Net interest expense decreased by $3 million, or 2%, in 2002 primarily
reflecting the lower interest rate environment partially offset by increased
interest expense from our new issuance of $1 billion in debt, the proceeds of
which were utilized to finance our acquisition of Gemex.
OTHER NON-OPERATING EXPENSE, NET
Net other non-operating expense in 2002 increased $7 million due primarily
to the amortization of premiums associated with derivative instruments that were
utilized to mitigate currency risk in our acquisition of Gemex.
MINORITY INTEREST
Minority interest represents PepsiCo's approximate 7% ownership in our
principal operating subsidiary, Bottling Group, LLC.
INCOME TAX EXPENSE BEFORE RATE CHANGE
Our full-year effective tax rate for 2002 was 34.0%, a 2.5 percentage
point decrease from the prior year before our income tax rate change benefit.
The decrease in the effective tax rate is primarily a result of the
implementation of SFAS No. 142 in 2002 as goodwill amortization is not
deductible under the U.S. tax code. Our full-year effective tax rate for 2003 is
expected to be 34.3%.
EARNINGS PER SHARE
Shares in millions 2002 2001 2000
-------- -------- --------
Basic earnings per share on reported net income ......... $ 1.52 $ 1.07 $ 0.78
Weighted-average shares outstanding ..................... 282 286 294
Diluted earnings per share on reported net income ....... $ 1.46 $ 1.03 $ 0.77
Weighted-average shares outstanding ..................... 293 296 299
Dilution
Diluted earnings per share reflect the potential dilution that could occur
if stock options from our stock compensation plans were exercised and converted
into common stock that would then participate in net income. Our stock price
improvement and employee option issuances during the last three years has
resulted in $0.06, $0.04 and $0.01 per share of dilution in 2002, 2001 and 2000,
respectively.
Weighted-Average Shares Outstanding
Shares outstanding reflect the effect of our share repurchase program,
which began in October 1999. In addition, in November 2001, we executed a
two-for-one stock split in the form of a 100% stock dividend, which doubled our
weighted-average shares outstanding. As a result of the stock split in 2001, the
amount of shares authorized by the Board of Directors to be repurchased totals
50 million shares, of which we have repurchased approximately 40 million shares
since the inception of our share repurchase program.
OPERATING INCOME/EBITDA
Operating income was $898 million, representing a 33% increase over 2001.
This growth reflects the positive impact from higher pricing, volume growth from
our acquisitions and base business, and the adoption of SFAS No. 142 during 2002
partially offset by increased selling, delivery and administrative expenses.
EBITDA (see page 26 for our definition of and use of EBITDA) was $1,349 million
in 2002, representing a 13% increase over 2001. This growth was a reflection of
higher pricing, volume growth from our acquisitions and base business, partially
offset by increased selling, delivery and administrative expenses resulting from
growth in our business.
In 2003, we expect our reported operating income to grow approximately 15%
driven largely by our 2002 acquisitions.
RESULTS OF OPERATIONS - 2001
VOLUME
2001 VS. 2000
-------------
AS CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Volume .......... 2% 3%
Our worldwide physical case volume grew 2% in 2001, including an
approximate 2 percentage point negative impact from the 53rd week in 2000.
Constant territory volume growth was 3% in 2001, reflecting U.S. growth of more
than 1% and 10% growth outside the United States. U.S. growth was led by the
introductions of Mountain Dew Code Red and Pepsi Twist, expanded distribution of
Sierra Mist, strong growth in
28
Aquafina, as well as the integration of SoBe in the majority of our markets.
This growth was partially offset by declines in brand Pepsi. New product
innovation and consistent in-store execution resulted in positive cold drink and
take-home volume growth in the United States. In addition, take-home volume
growth in the U.S. benefited from significant growth in mass merchandiser
volume. Outside the U.S., all countries delivered solid volume growth in 2001,
led by our operations in Russia. Volume growth in Russia was driven by the
introduction of Mountain Dew and continued growth of Aqua Minerale, our water
product, and Fiesta, our value-brand beverage.
NET REVENUES
2001 VS. 2000
-------------
AS CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Net revenues ....................... 6% 6%
Net revenue per case ............... 3% 3%
Reported net revenues were $8,443 million in 2001, representing a 6%
increase over the prior year, including an approximate 1 percentage point
negative impact from the 53rd week in 2000. On a constant territory basis, net
revenues increased by 6%, reflecting 3% volume growth and 3% growth in net
revenue per case. Constant territory U.S. net revenues grew 6% consisting of 5%
growth in net revenue per case and volume growth of more than 1%. U.S. net
revenue per case results reflect higher pricing, primarily in food stores, and
an increased mix of higher revenue cold drink volume from new product innovation
and double-digit Aquafina growth. Constant territory net revenues outside the
U.S. grew 7%, reflecting volume growth of 10% offset by declines in net revenue
per case of 3%. Excluding the negative impact from currency translations, net
revenue per case growth was flat outside the U.S. and increased 4% worldwide.
COST OF SALES
2001 VS. 2000
-------------
AS CONSTANT
REPORTED TERRITORY
CHANGE CHANGE
------ ------
Cost of sales ...................... 4% 5%
Cost of sales per case ............. 1% 1%
Cost of sales increased $175 million, or 4% in 2001, including an
approximate 2 percentage point favorable impact from the 53rd week in 2000. On a
constant territory basis, cost of sales increased 5% driven by a 3% increase in
volume and a more than 1% increase in cost of sales per case. The increase in
cost of sales per case reflects higher U.S. concentrate costs and mix shifts
into higher cost packages and products, offset by country mix and favorable
currency translations.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administrative expenses grew $200 million, or 7%,
over the comparable period in 2000, including an approximate 1 percentage point
favorable impact from the 53rd week in 2000. Approximately half of the increase
came from higher selling and delivery costs, specifically our continued
investments in our U.S. and Canadian cold drink strategy including people,
routes and equipment. Also contributing to the growth in selling, delivery and
administrative expenses are higher advertising and marketing costs, and higher
costs associated with investments in our information technology systems.
INTEREST EXPENSE, NET
Net interest expense increased by $2 million, or 1%, in 2001 primarily
reflecting lower interest income in 2001. The reduction in interest income was
due to lower average cash balances in 2001, consistent with increases in
acquisition spending and share repurchases, which were primarily funded through
cash generated from operations.
MINORITY INTEREST
Minority interest represents PepsiCo's approximate 7% ownership in our
principal operating subsidiary, Bottling Group, LLC.
INCOME TAX EXPENSE BEFORE RATE CHANGE
Our full-year effective tax rate for 2001 was 36.5% before our income tax
rate change benefit. This rate corresponds to an effective tax rate of 37.0% in
2000. The one-half point decrease is primarily due to the reduced impact of
fixed non-deductible expenses on higher than anticipated pre-tax income in 2001,
partially offset by the decreased favorable impact of our foreign results.
29
INCOME TAX RATE CHANGE BENEFIT
During 2001, the Canadian Government enacted legislation reducing federal
and certain provincial corporate income tax rates. These rate changes reduced
deferred tax liabilities associated with our operations in Canada, and resulted
in one-time gains totaling $0.08 per diluted share in 2001.
EBITDA
On a reported basis, EBITDA (see page 26 for our definition of and use of
EBITDA) was $1,190 million in 2001, representing a 12% increase over 2000,
including an approximate 2 percentage point negative impact from the 53rd week
in 2000. This growth was a reflection of higher pricing, an increased mix of
higher margin cold drink volume, and solid volume growth in the U.S., as well as
continued growth in our operations outside the U.S., particularly in Russia.
These increases were partially offset by investments in our cold drink
infrastructure.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We have financed our capital investments and acquisitions primarily
through cash flows from operations except for the acquisition of Gemex, which
was financed through the issuance of $1 billion of senior notes. We believe that
our future cash flows from operations and borrowing capacity will be sufficient
to fund capital expenditures, acquisitions, dividends and working capital
requirements.
We intend to refinance all or a portion of our $1 billion of 5 3/8% senior
notes on their maturity in February 2004. We are currently in compliance with
all debt covenants in our indenture agreements discussed below.
Financing Transactions Relating to our Acquisition of Gemex
During 2002 we issued $645 million in commercial paper, which was
utilized as bridge financing in connection with our acquisition of Gemex. In
November 2002, the commercial paper was repaid after our issuance of $1 billion
of 4 5/8% senior notes due in November 2012. We utilized the net proceeds of the
$1 billion of 4 5/8% senior notes, together with available cash on hand, for our
acquisition of Gemex and the covenant defeasance and repayment of a portion of
Gemex's debt. The $1 billion of 4 5/8% senior notes will be guaranteed by
PepsiCo in accordance with the terms set forth in the related indenture.
Other Financing Transactions
We converted our entire $1.0 billion of 5 3/8% senior notes and $0.3
billion of 5 5/8% senior notes to floating rate debt through the use of interest
rate swaps with the objective of reducing our overall borrowing costs.
We have a $500 million commercial paper program that is supported by two
$250 million credit facilities. One of the credit facilities expires in May
2003 and the other credit facility expires in April 2004. There were no
borrowings outstanding under these credit facilities at December 28, 2002, or
December 29, 2001.
We have available short-term bank credit lines of approximately $167
million and $177 million at December 28, 2002 and December 29, 2001,
respectively. These lines were used to support the general operating needs of
our businesses outside the United States. The weighted-average interest rate for
these lines of credit outstanding at December 28, 2002, and December 29, 2001,
was 8.9% and 4.3%, respectively.
Long-Term Debt and Lease Obligations
Our future minimum commitments for our long-term debt and non-cancellable
capital and operating leases at December 28, 2002 are as follows:
PAYMENTS DUE BY PERIOD
----------------------
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
------ ---- ------ ---- ---- ---- ----------
Long-term debt and capital leases.. $4,534 $18 $1,165 $ 5 $ 3 $37 $3,306
Operating leases .................. 177 34 25 19 15 14 70
------ --- ------ --- --- --- ------
TOTAL LONG-TERM DEBT AND LEASE
OBLIGATIONS ........................ $4,711 $52 $1,190 $24 $18 $51 $3,376
====== === ====== === === === ======
In addition, at December 28, 2002, we had outstanding letters of credit
and surety bonds valued at $98 million primarily to provide collateral for
estimated self-insurance claims and other insurance requirements.
30
Capital Expenditures
Our business requires substantial infrastructure investments to maintain
our existing level of operations and to fund investments targeted at growing our
business. Capital infrastructure expenditures totaled $623 million, $593 million
and $515 million during 2002, 2001 and 2000, respectively.
Acquisitions
During 2002 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages of several different PepsiCo franchise
bottlers. The following acquisitions occurred for an aggregate purchase price of
$936 million in cash and $375 million of assumed debt:
- Fruko Mesrubat Sanayii A.S. and related companies of Turkey in
March.
- Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March.
- Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle,
Maine in June.
- Seaman's Beverages Limited of the Canadian province of Prince Edward
Island in July.
- Pepsi-Gemex, S.A. de. C.V of Mexico in November.
- Kitchener Beverages Limited of Ontario, Canada in December.
The Mexican and Turkish acquisitions were made to allow us to increase our
markets outside the United States. Our U.S. and Canadian acquisitions were made
to enable us to provide better service to our large retail customers. We expect
these acquisitions to reduce costs through economies of scale.
We completed the acquisition of a Pepsi-Cola bottler based in Buffalo, New
York, in the first quarter of 2003. We intend to continue to pursue other
acquisitions of independent PepsiCo bottlers in the U.S. and Canada,
particularly in territories contiguous to our own, where they create shareholder
value. We also intend to continue to evaluate international acquisition
opportunities as they become available.
CASH FLOWS
Fiscal 2002 Compared with Fiscal 2001
Net cash provided by operations increased $132 million to $1,014 million
reflecting strong operating income growth coupled with lower income tax payments
and higher non-cash casualty and benefits expenses offset by an increase in our
pension contributions.
Net cash used for investments increased by $1,027 million to $1,734
million primarily due to the six acquisitions we made during the year, coupled
with the investment in our debt defeasance trust and an increase in capital
expenditures as we continue to invest in small bottle production lines and cold
drink equipment.
Net cash provided by financing increased by $882 million to $673 million
driven by proceeds received from our issuance of $1.0 billion of 4 5/8% senior
notes to finance our acquisition of Gemex and an increase in stock option
exercises, offset by a reduction of short and long-term borrowings primarily
outside the United States.
Fiscal 2001 Compared with Fiscal 2000
Net cash provided by operating activities increased $103 million to $882
million in 2001, driven by strong operating income growth and the timing of
casualty insurance payments, partially offset by higher pension contribution
payments in 2001.
Net cash used for investments increased by $175 million from $532 million
in 2000 to $707 million in 2001, primarily due to acquisition spending and
increased capital expenditures, which were driven by increases in the U.S.
associated with our cold drink strategy.
Net cash used for financing increased by $94 million to $209 million in
2001. This increase primarily reflects our share repurchase program offset by
higher short-term borrowings outside the U.S. and proceeds from stock option
exercises.
31
MARKET RISKS AND CAUTIONARY STATEMENTS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position is routinely
subject to a variety of risks. These risks include the risk associated with the
price of commodities purchased and used in our business, interest rate on
outstanding debt and currency movements of non-U.S. dollar denominated assets
and liabilities. We are also subject to the risks associated with the business
environment in which we operate, including the collectibility of accounts
receivable. We regularly assess all of these risks and have policies and
procedures in place to protect against the adverse effects of these exposures.
Our objective in managing our exposure to fluctuations in commodity
prices, interest rates, and foreign currency exchange rates is to minimize the
volatility of earnings and cash flows associated with changes in the applicable
rates and prices. To achieve this objective, we primarily enter into commodity
forward contracts, commodity futures and options on futures contracts and
interest rate swaps. Our corporate policy prohibits the use of derivative
instruments for trading or speculative purposes, and we have procedures in place
to monitor and control their use.
A sensitivity analysis has been prepared to determine the effects that
market risk exposures may have on the fair values of our debt and other
financial instruments. To perform the sensitivity analysis, we assessed the risk
of loss in fair values from the hypothetical changes in commodity prices,
interest rates, and foreign currency exchange rates on market-sensitive
instruments. Information provided by this sensitivity analysis does not
necessarily represent the actual changes in fair value that we would incur under
normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor were held constant. In addition, the
results of the analysis are constrained by the fact that certain items are
specifically excluded from the analysis, while the financial instruments that
relate to the financing or hedging of those items are included. As a result, the
reported changes in the values of some financial instruments that affect the
results of the sensitivity analysis are not matched with the offsetting changes
in the values of the items that those instruments are designed to finance or
hedge.
Commodity Price Risk
We are subject to market risks with respect to commodities because our
ability to recover increased costs through higher pricing may be limited by the
competitive environment in which we operate. We use futures contracts and
options on futures in the normal course of business to hedge anticipated
purchases of aluminum and fuel used in our operations. With respect to commodity
price risk, we currently have various contracts outstanding for aluminum and
fuel oil purchases in 2003 and 2004, which establish our purchase prices within
defined ranges. We had $16 million and $19 million in unrealized losses based on
the commodity rates in effect on December 28, 2002, and December 29, 2001,
respectively. We estimate that a 10% decrease in commodity prices with all other
variables held constant would have resulted in a decrease in the fair value of
our financial instruments of $32 million and $15 million at December 28, 2002,
and December 29, 2001, respectively.
Interest Rate Risk
The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
fair market value of our debt representing differences between market interest
rates and the fixed rate on the debt. As a result of the market risk, we
effectively converted $1.3 billion of our fixed rate debt to floating rate debt
through the use of interest rate swaps. The change in fair value of the interest
rate swaps resulted in an increase to our hedge and debt instruments of $16
million and $7 million in 2002 and 2001, respectively. We estimate that a 10%
decrease in interest rates with all other variables held constant would have
resulted in an increase in the fair value of our financial instruments, both our
fixed rate debt and our interest rate swaps, of $162 million and $144 million at
December 28, 2002, and December 29, 2001, respectively
Foreign Currency Exchange Rate Risk
In 2002, approximately 18% of our net revenues came from outside the
United States. This amount is not indicative of our 2003 results due to our
recent acquisition of Gemex. Accordingly, in 2003 we expect approximately 28% of
our net revenues to come from outside the United States. Social, economic, and
political conditions in these international markets may adversely affect our
results of operations, cash flows, and financial condition. The overall risks to
our international businesses include changes in foreign governmental policies,
and other political or economic developments. These developments
32
may lead to new product pricing, tax or other policies, and monetary
fluctuations, which may adversely impact our business. In addition, our results
of operations and the value of the foreign assets and liabilities are affected
by fluctuations in foreign currency exchange rates.
As currency exchange rates change, translation of the statements of
operations of our businesses outside the U.S. into U.S. dollars affects
year-over-year comparability. We generally do not hedge against currency risks
because cash flows from our international operations are usually reinvested
locally. In addition, we historically have not entered into hedges to minimize
the volatility of reported earnings. Based on our overall evaluation of market
risk exposures for our foreign currency financial instruments at December 28,
2002, and December 29, 2001, a near term change in foreign currency exchange
rates would not materially affect our consolidated financial position, results
of operations or cash flows in those periods.
Foreign currency gains and losses reflect translation gains and losses
arising from the re-measurement into U.S. dollars of the net monetary assets of
businesses in highly inflationary countries and transaction gains and losses.
Russia and Turkey have been considered highly inflationary economies for
accounting purposes.
Beginning in 2003, Russia will no longer be considered highly
inflationary, and will change its functional currency from the U.S. dollar to
the Russian ruble. We do not expect any material impact on our consolidated
financial statements as a result of Russia's change in functional currency.
Unfunded Deferred Compensation Liability
Our unfunded deferred compensation liability is subject to changes in our
stock price as well as price changes in certain other equity and fixed income
investments. Participating employees in our deferred compensation program can
elect to defer all or a portion of their compensation to be paid out on a future
date or dates. As part of the deferral process, employees select from phantom
investment options that determine the earnings on the deferred compensation
liability and the amount that they will ultimately receive. Employee investment
elections include PBG stock and a variety of other equity and fixed income
investment options.
Since the plan is unfunded, employees' deferred compensation amounts are
not directly invested in these investment vehicles. Instead, we track the
performance of each employee's investment selections and adjust his or her
deferred compensation account accordingly. The adjustments to the employees'
accounts increases or decreases the deferred compensation liability reflected on
our Consolidated Balance Sheets with an offsetting increase or decrease to our
selling, delivery and administrative expenses.
We use prepaid forward contracts to hedge the portion of our deferred
compensation liability that is based on our stock price. Therefore, changes in
compensation expense as a result of changes in our stock price are substantially
offset by the changes in the fair value of these contracts. We estimate that a
10% unfavorable change in the year end stock price would have reduced our gains
from these commitments by $2 million in 2002 and $1 million in 2001.
CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this annual report on Form 10-K 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. Among the events and
uncertainties that could adversely affect future periods are lower-than-expected
net pricing resulting from marketplace competition, material changes from
expectations in the cost of raw materials and ingredients, an inability to
achieve the expected timing for returns on cold drink equipment and related
infrastructure expenditures, material changes in expected levels of bottler
incentive payments from PepsiCo, material changes in our expected interest and
currency exchange rates, an inability to achieve cost savings, an inability to
achieve volume growth through product and packaging initiatives, competitive
pressures that may cause channel and product mix to shift from more profitable
cold drink channels and packages, weather conditions in PBG's markets, political
conditions in PBG's markets outside the United States and Canada, possible
recalls of PBG's products, an inability to meet projections for performance in
newly acquired territories, unfavorable market performance on our pension plan
assets, unfavorable outcomes from our U.S. Internal Revenue Service audits, and
changes in our debt ratings.
33
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
in millions, except per share data
FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000
------ ------- ------
NET REVENUES ................................ $9,216 $ 8,443 $7,982
Cost of sales ............................... 5,001 4,580 4,405
------ ------- ------
GROSS PROFIT ................................ 4,215 3,863 3,577
Selling, delivery and administrative expenses 3,317 3,187 2,987
------ ------- ------
OPERATING INCOME ............................ 898 676 590
Interest expense, net ....................... 191 194 192
Other non-operating expenses, net ........... 7 -- 1
Minority interest ........................... 51 41 33
------ ------- ------
INCOME BEFORE INCOME TAXES .................. 649 441 364
Income tax expense before rate change ....... 221 161 135
Income tax rate change benefit .............. -- (25) --
------ ------- ------
NET INCOME .................................. $ 428 $ 305 $ 229
====== ======= ======
BASIC EARNINGS PER SHARE .................... $ 1.52 $ 1.07 $ 0.78
Weighted-Average Shares Outstanding ......... 282 286 294
DILUTED EARNINGS PER SHARE .................. $ 1.46 $ 1.03 $ 0.77
Weighted-Average Shares Outstanding ......... 293 296 299
See accompanying notes to Consolidated Financial Statements.
34
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
dollars in millions
FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000
------- ----- -----
CASH FLOWS -- OPERATIONS
Net income ............................................................................ $ 428 $ 305 $ 229
Adjustments to reconcile net income to net cash provided by operations:
Depreciation ...................................................................... 443 379 340
Amortization ...................................................................... 8 135 131
Deferred income taxes ............................................................. 131 23 --
Other non-cash charges and credits, net ........................................... 228 182 176
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable ............................................................ (19) (28) 13
Inventories .................................................................... 13 (50) 11
Prepaid expenses and other current assets ...................................... 33 2 (97)
Accounts payable and other current liabilities ................................. (50) 57 28
------- ----- -----
Net change in operating working capital ..................................... (23) (19) (45)
------- ----- -----
Pension contributions ............................................................. (151) (86) (26)
Other, net ........................................................................ (50) (37) (26)
------- ----- -----
NET CASH PROVIDED BY OPERATIONS ....................................................... 1,014 882 779
------- ----- -----
CASH FLOWS -- INVESTMENTS
Capital expenditures .................................................................. (623) (593) (515)
Acquisitions of bottlers .............................................................. (936) (120) (26)
Sales of property, plant and equipment ................................................ 6 6 9
Investment in debt defeasance trust ................................................... (181) -- --
------- ----- -----
NET CASH USED FOR INVESTMENTS ......................................................... (1,734) (707) (532)
------- ----- -----
CASH FLOWS -- FINANCING
Short-term borrowings, net -- three months or less .................................... (78) 50 12
Proceeds from issuances of long-term debt ............................................. 1,031 -- --
Payments of long-term debt ............................................................ (120) -- (9)
Minority interest distribution ........................................................ (11) (16) (3)
Dividends paid ........................................................................ (11) (12) (12)
Proceeds from exercise of stock options ............................................... 93 18 --
Purchases of treasury stock ........................................................... (231) (249) (103)
------- ----- -----
NET CASH PROVIDED BY (USED FOR) FINANCING ............................................. 673 (209) (115)
------- ----- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .......................... (8) (7) (4)
------- ----- -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................. (55) (41) 128
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR ........................................ 277 318 190
------- ----- -----
CASH AND CASH EQUIVALENTS -- END OF YEAR .............................................. $ 222 $ 277 $ 318
======= ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers $ 813 $ 25 $ 9
See accompanying notes to Consolidated Financial Statements.
35
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
in millions, except per share data
DECEMBER 28, 2002 AND DECEMBER 29, 2001
2002 2001
-------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................................... $ 222 $ 277
Accounts receivable, less allowance of $67 in 2002 and $42 in 2001 ............ 922 823
Inventories ................................................................... 378 331
Prepaid expenses and other current assets ..................................... 215 117
-------- -------
TOTAL CURRENT ASSETS ...................................................... 1,737 1,548
Property, plant and equipment, net ............................................ 3,308 2,543
Intangible assets, net ........................................................ 4,687 3,684
Investment in debt defeasance trust ........................................... 170 --
Other assets .................................................................. 125 82
-------- -------
TOTAL ASSETS .............................................................. $ 10,027 $ 7,857
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities ................................ $ 1,179 $ 1,004
Short-term borrowings ......................................................... 69 77
-------- -------
TOTAL CURRENT LIABILITIES ................................................. 1,248 1,081
Long-term debt ................................................................ 4,523 3,285
Other liabilities ............................................................. 819 550
Deferred income taxes ......................................................... 1,265 1,021
Minority interest ............................................................. 348 319
-------- -------
TOTAL LIABILITIES ......................................................... 8,203 6,256
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share
authorized 900 shares, issued 310 shares ................................... 3 3
Additional paid-in capital .................................................... 1,750 1,739
Retained earnings ............................................................. 1,066 649
Accumulated other comprehensive loss .......................................... (468) (370)
Treasury stock: 30 shares and 29 shares in 2002 and 2001, respectively, at cost (527) (420)
-------- -------
TOTAL SHAREHOLDERS' EQUITY ................................................ 1,824 1,601
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 10,027 $ 7,857
======== =======
See accompanying notes to Consolidated Financial Statements.
36
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
in millions, except per share data
FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS STOCK TOTAL INCOME/(LOSS)
----- ---------- -------- ------------- -------- -------- -------------
BALANCE AT DECEMBER 25, 1999 ....................... $ 2 $ 1,736 $ 138 $(223) $ (90) $ 1,563
Comprehensive income:
Net income .................................. -- -- 229 -- -- 229 $ 229
Currency translation adjustment ............. -- -- -- (31) -- (31) (31)
-----
Total comprehensive income ...................... $ 198
=====
Treasury stock transactions, net: 10 shares ..... -- -- -- -- (103) (103)
Cash dividends declared on common stock
(per share - $0.04) ............................. -- -- (12) -- -- (12)
---- ------- ------- ----- ----- -------
BALANCE AT DECEMBER 30, 2000 ....................... 2 1,736 355 (254) (193) 1,646
Comprehensive income:
Net income .................................. -- -- 305 -- -- 305 $ 305
Currency translation adjustment ............. -- -- -- (49) -- (49) (49)
Cash flow hedge adjustment ................. -- -- -- (12) -- (12) (12)
Minimum pension liability adjustment ....... -- -- -- (55) -- (55) (55)
-----
Total comprehensive income ...................... $ 189
=====
Stock split: (shares: 145 outstanding - 9
treasury) ..................................... 1 (1) -- -- -- --
Stock option exercises: 2 shares ................ -- (4) -- -- 22 18
Tax benefit - stock option exercises ............ -- 8 -- -- -- 8
Purchase of treasury stock: 12 shares ........... -- -- -- -- (249) (249)
Cash dividends declared on common stock
(per share - $0.04) ............................. -- -- (11) -- -- (11)
---- ------- ------- ----- ----- -------
BALANCE AT DECEMBER 29, 2001 ....................... 3 1,739 649 (370) (420) 1,601
Comprehensive income:
Net income .................................. -- -- 428 -- -- 428 $ 428
Currency translation adjustment ............. -- -- -- 18 -- 18 18
Cash flow hedge adjustment ................. -- -- -- 7 -- 7 7
Minimum pension liability adjustment ....... -- -- -- (123) -- (123) (123)
-----
Total comprehensive income ...................... $ 330
=====
Stock option exercises: 8 shares ................ -- (31) -- -- 124 93
Tax benefit - stock option exercises ............ -- 42 -- -- -- 42
Purchase of treasury stock: 9 shares ............ -- -- -- -- (231) (231)
Cash dividends declared on common stock
(per share - $0.04) ............................. -- -- (11) -- -- (11)
---- ------- ------- ----- ----- -------
BALANCE AT DECEMBER 28, 2002 ....................... $ 3 $ 1,750 $ 1,066 $(468) $(527) $ 1,824
==== ======= ======= ===== ===== =======
See accompanying notes to Consolidated Financial Statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular dollars in millions, except per share data
NOTE 1 -- BASIS OF PRESENTATION
The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations
located in all or part of the United States, Canada, Spain, Greece, Russia,
Turkey and Mexico. These bottling operations manufacture, sell and distribute
Pepsi-Cola beverages including Pepsi-Cola, Diet Pepsi, Mountain Dew and other
brands of carbonated soft drinks and ready-to-drink beverages. Approximately 90%
of PBG's 2002 volume was derived from the sale of Pepsi-Cola beverages.
References to PBG throughout these Consolidated Financial Statements are made
using the first-person notations of "PBG," "we," "our" and "us."
On November 27, 2001, our shareholders approved an amendment to our
Certificate of Incorporation increasing the authorized shares of PBG common
stock from 300 million to 900 million facilitating a two-for-one stock split of
issued common stock. The stock split was effected in the form of a 100% stock
dividend paid to our shareholders of record on November 27, 2001. As a result of
the stock split, the accompanying Consolidated Financial Statements reflect an
increase in the number of outstanding shares of common stock and shares of
treasury stock and the transfer of the par value of these incremental shares
from additional-paid-in-capital. All PBG share and per share data were restated
to reflect the split.
PepsiCo, Inc. ("PepsiCo") owns 106,011,358 shares of our common stock,
consisting of 105,911,358 shares of common stock and 100,000 shares of Class B
common stock. All shares of Class B common stock that have been authorized have
been issued to PepsiCo. PepsiCo's ownership at December 28, 2002, represents
37.8% of the outstanding common stock and 100% of the outstanding Class B common
stock, together representing 42.9% of the voting power of all classes of our
voting stock. As of December 28, 2002, PepsiCo also owns 6.8% of the equity of
Bottling Group, LLC, our principal operating subsidiary.
The common stock and Class B common stock both have a par value of $0.01
per share and are substantially identical, except for voting rights. Holders of
our common stock are entitled to one vote per share and holders of our Class B
common stock are entitled to 250 votes per share. Each share of Class B common
stock held by PepsiCo is, at PepsiCo's option, convertible into one share of
common stock. Holders of our common stock and holders of our Class B common
stock share equally on a per share basis in any dividend distributions.
In addition, our Board of Directors has the authority to issue up to
20,000,000 shares of preferred stock, and to determine the price and terms,
including, but not limited to, preferences and voting rights of those shares
without stockholder approval.
Certain reclassifications were made in our Consolidated Financial
Statements to 2001 and 2000 amounts to conform to the 2002 presentation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of our 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 reported
amounts of assets, liabilities, revenues, expenses and disclosure of contingent
assets and liabilities. Actual results could differ from these estimates.
BASIS OF CONSOLIDATION - The accounts of all of our wholly and
majority-owned subsidiaries are included in the accompanying Consolidated
Financial Statements. We have eliminated intercompany accounts and transactions
in consolidation.
FISCAL YEAR - Our fiscal year ends on the last Saturday in December and, as
a result, a 53rd week is added every five or six years. Fiscal years 2002 and
2001 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. The
extra week in 2000 contributed approximately $0.02 of additional diluted
earnings per share to our 2000 operating results.
REVENUE RECOGNITION - We recognize revenue when our products are delivered
to customers. Sales terms do not allow a right of return unless product
freshness dating has expired.
SALES INCENTIVES - We offer certain sales incentives to our customers,
which are accounted for as a reduction in our net revenues when incurred. A
number of these arrangements are based upon annual and quarterly targets that
generally do not exceed one year. Based upon forecasted volume and other
performance criteria, net revenues in our Consolidated Statements of Operations
are reduced by the expected amounts to be paid out to our customers.
ADVERTISING AND MARKETING COSTS - We are involved in a variety of programs
to promote our products. We include advertising and marketing costs in selling,
delivery and administrative expenses and expense such costs in the fiscal year
incurred. Advertising and marketing costs were $441 million, $389 million and
$350 million in 2002, 2001 and 2000, respectively, before bottler incentives
received from PepsiCo and other brand owners.
BOTTLER INCENTIVES - PepsiCo and other brand owners, at their sole
discretion, provide us with various forms of bottler incentives. These
incentives cover a variety of initiatives, including direct marketplace support,
capital equipment funding and advertising
38
support. Based on the objective of the programs and initiatives, we record
bottler incentives as an adjustment to net revenues or as a reduction of
selling, delivery and administrative expenses. Direct marketplace support
represents PepsiCo's and other brand owners' funding to assist us in offering
sales and promotional discounts to retailers and is recorded as an adjustment to
net revenues. Capital equipment funding is designed to help offset the costs of
purchasing and installing marketing equipment, such as vending machines and
glass door coolers at customer locations and is recorded as a reduction of
selling, delivery and administrative expenses. Advertising support represents
the cost of media time, promotional materials, and other advertising and
marketing costs that are funded by PepsiCo and other brand owners and is
recorded as a reduction to advertising and marketing expenses within selling,
delivery and administrative expenses. In addition, PepsiCo and other brand
owners may share certain media costs with us due to our joint objective of
promoting their brands. There are no conditions or other requirements that could
result in a repayment of the bottler incentives received. Total bottler
incentives received, including media costs shared by PepsiCo and other brand
owners were $604 million, $598 million and $566 million in 2002, 2001 and 2000,
respectively. Of these amounts, we recorded $293 million in both 2002 and 2001
and $277 million in 2000, in net revenues, and the remainder as a reduction of
selling, delivery and administrative expenses.
SHIPPING AND HANDLING COSTS - We record the majority of our shipping and
handling costs within selling, delivery and administrative expenses. Such costs
totaled $1,116 million, $1,058 million and $977 million in 2002, 2001 and 2000,
respectively.
FOREIGN CURRENCY GAINS AND LOSSES - We translate the balance sheets of our
foreign subsidiaries that do not operate in highly inflationary economies at the
exchange rates in effect at the balance sheet date, while we translate the
statements of operations at the average rates of exchange during the year. The
resulting translation adjustments of our foreign subsidiaries are recorded
directly to accumulated other comprehensive loss. Foreign currency gains and
losses reflect translation gains and losses arising from the remeasurement into
U.S. dollars of the net monetary assets of businesses in highly inflationary
countries and transaction gains and losses. Turkey and Russia were considered
highly inflationary economies for accounting purposes in 2002.
Beginning in 2003, Russia will no longer be considered highly inflationary,
and will change its functional currency from the U.S. dollar to the Russian
ruble. We do not expect any material impact on our consolidated financial
statements as a result of Russia's change in functional currency in 2003. Turkey
is expected to remain highly inflationary for fiscal year 2003.
PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other
postretirement plans in various forms covering substantially all employees who
meet eligibility requirements. We account for our defined benefit pension plans
and our postretirement benefit plans using actuarial models required by
Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers'
Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
The assets, liabilities and assumptions used to measure expense for any
fiscal year are determined as of September 30 of the preceding year
("measurement date"). The discount rate assumption used in our pension and
postretirement benefit plans' accounting is based on current interest rates for
high-quality, long-term corporate debt as determined on each measurement date.
The expected return on plan assets is based on our long-term historical
experience, our plan asset allocation and our expectations for long-term
interest rates and market performance. In evaluating our rate of return on
assets for a given fiscal year, we consider a 15 to 20 year time horizon for our
pension investment portfolio. In addition, we look at the return on asset
assumptions used by other companies in our industry as well as other large
companies. Over the past three fiscal years the composition of our plan assets
was approximately 70%-75% equity investments and 25%-30% fixed income
securities, which primarily consist of U.S. government and corporate bonds.
Differences between actual and expected returns are generally recognized in the
net periodic pension calculation over five years. To the extent the amount of
all unrecognized gains and losses exceeds 10% of the larger of the benefit
obligation or plan assets, such amount is amortized over the average remaining
service life of active participants. The rate of future compensation increases
is based upon our historical experience and management's best estimate
regarding future expectations. We amortize prior service costs on a
straight-line basis over the average remaining service period of employees
expected to receive benefits.
For our postretirement plans that provide medical and life insurance
benefits, we review external data and our historical health care cost trends
with our actuarial advisors to determine the health care cost trend rates.
INCOME TAXES - Our effective tax rate is based on our income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. The tax bases of our assets and liabilities
reflect our best estimate of the ultimate outcome of our tax audits. Valuation
allowances are established where expected future taxable income does not support
the recognition of the related deferred tax asset.
39
EARNINGS PER SHARE - We compute basic earnings per share by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised and
converted into common stock that would then participate in net income.
CASH EQUIVALENTS - Cash equivalents represent funds we have temporarily
invested with original maturities not exceeding three months.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - We determine our allowance for doubtful
accounts based on the evaluation of the aging of our trade receivable portfolio
and a customer-by-customer analysis of our high-risk customers. Our reserves
contemplate our historical loss rate on receivables, specific customer
situations, and the economic environments in which we operate.
INVENTORIES - We value our inventories at the lower of cost computed on the
first-in, first-out method or net realizable value for the majority of our
locations. For our recent acquisitions in Mexico and Turkey, we value
inventories at the lower of cost computed on the weighted-average cost method or
net realizable value.
PROPERTY, PLANT AND EQUIPMENT - We state property, plant and equipment
("PP&E") at cost, except for PP&E that has been impaired, for which we write
down the carrying amount to estimated fair market value, which then becomes the
new cost basis.
INTANGIBLE ASSETS - During 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets," which
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment. Effective the first day
of fiscal year 2002, we no longer amortize goodwill and certain franchise
rights, but evaluate them for impairment annually.
Our identifiable intangible assets principally arise from the allocation of
the purchase price of businesses acquired, and consist primarily of franchise
rights. Our franchise rights are typically perpetual in duration, subject to
compliance with the underlying franchise agreement. The value and life of our
franchise rights are directly associated with the underlying portfolio of brands
that we are entitled to make, sell and distribute under applicable franchise
agreements. In considering whether franchise rights have an indefinite useful
life, we consider the nature and terms of the underlying franchise agreements;
our intent and ability to use the franchise rights; and the age and market
position of the products within the franchise as well as the historical and
projected growth of those products. We assign amounts to such identifiable
intangibles based on their estimated fair values at the date of acquisition.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 02-07,
"Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible
Assets," we evaluate our franchise rights with indefinite useful lives for
impairment annually as asset groups on a country-by-country basis ("asset
groups"). We measure the fair value of these asset groups utilizing discounted
estimated future cash flows, including a terminal value, which assumes the
franchise rights will continue in perpetuity. Our long-term terminal growth
assumptions reflect our current long-term view of the marketplace. Our discount
rate is based upon our weighted-average cost of capital plus an additional risk
premium to reflect the risk and uncertainty inherent in separately acquiring a
franchise agreement between a willing buyer and a willing seller. Each year we
re-evaluate our assumptions in our discounted cash flow model to address
changes in our business and marketplace conditions. Based upon our annual
impairment analysis, the estimated fair values of our franchise rights with
indefinite lives exceeded their carrying amounts in 2002.
In accordance with SFAS No. 142, we evaluate goodwill on a
country-by-country basis ("reporting unit") for impairment. We evaluate each
reporting unit for impairment based upon a two-step approach. First, we compare
the fair value of our reporting unit with its carrying value. Second, if the
carrying value of our reporting unit exceeds its fair value, we compare the
implied fair value of the reporting unit's goodwill to its carrying amount to
measure the amount of impairment loss. In measuring the implied fair value of
goodwill, we would allocate the fair value of the reporting unit to each of its
assets and liabilities (including any unrecognized intangible assets). Any
excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of goodwill.
We measure the fair value of a reporting unit as the discounted estimated
future cash flows, including a terminal values, which assumes the business
continues in perpetuity, less its respective minority interest and net debt (net
of cash and cash equivalents). Our long-term terminal growth assumptions reflect
our current long-term view of the marketplace. Our discount rate is based upon
our weighted-average cost of capital. Each year we re-evaluate our assumptions
in our discounted cash flow model to address changes in our business and
marketplace conditions. Based upon our annual impairment analysis in the fourth
quarter of 2002, the estimated fair value of our reporting units exceeded their
carrying value and as result, we did not proceed to the second step of the
impairment test.
40
Other identifiable intangible assets that are subject to amortization are
amortized straight-line over the period in which we expect to receive economic
benefit and are reviewed for impairment when facts and circumstances indicate
that the carrying value of the asset may not be recoverable. Determining the
expected life of these intangible assets is based on an evaluation of a number
of factors, including the competitive environment, market share and brand
history. If the carrying value is not recoverable, impairment is measured as
the amount by which the carrying value exceeds its estimated fair value. Fair
value is generally estimated based on either appraised value or other valuation
techniques.
INVESTMENT IN DEBT DEFEASANCE TRUST - We have purchased $181 million in
U.S. government securities and placed those securities into an irrevocable
trust, for the sole purpose of funding payments of principal and interest on the
$160 million of 9 3/4% senior notes maturing in March 2004, in order to defease
their respective covenants. These marketable securities have maturities that
coincide with the scheduled interest payments of the senior notes and ultimate
payment of principal. We have categorized these marketable securities as
held-to-maturity as we have the positive intent and ability to hold these
securities to maturity. Held-to-maturity securities are carried at amortized
cost. The total amortized cost for these held-to-maturity securities at December
28, 2002, was $182 million. The current portion of these held-to-maturity
securities is recorded in prepaid expenses and other current assets in the
amount of $12 million, and the remaining long-term portion of $170 million is
recorded in investment in debt defeasance trust in our Consolidated Balance
Sheets.
CASUALTY INSURANCE COSTS - We are self-insured for casualty costs in the
United States. Casualty insurance costs for our self-insurance program represent
the ultimate net cost of all reported and estimated unreported losses incurred
during the fiscal year. Our liability for casualty costs of $69 million as of
December 28, 2002, is estimated using individual case-based valuations and
statistical analyses and is based upon historical experience, actuarial
assumptions and professional judgment. We do not discount loss expense reserves.
MINORITY INTEREST - PBG and PepsiCo contributed bottling businesses and
assets used in the bottling businesses to Bottling Group, LLC, our principal
operating subsidiary, in connection with the formation of Bottling Group, LLC in
February 1999. At December 28, 2002, PBG owns 93.2% of Bottling Group, LLC and
PepsiCo owns the remaining 6.8%. Accordingly, the Consolidated Financial
Statements reflect PepsiCo's share of the consolidated net income of Bottling
Group, LLC as minority interest in our Consolidated Statements of Operations,
and PepsiCo's share of consolidated net assets of Bottling Group, LLC as
minority interest in our Consolidated Balance Sheets.
TREASURY STOCK - We record the repurchase of shares of our common stock at
cost and classify these shares as treasury stock within shareholders' equity.
Repurchased shares are included in our authorized and issued shares but not
included in our shares outstanding. We record shares reissued using an average
cost. Since the inception of our share repurchase program in October 1999, we
have repurchased approximately 40 million shares and have reissued approximately
10 million for stock option exercises.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - We use derivative instruments
to hedge against the risk associated with the price of commodities purchased and
used in our business, interest rates on outstanding debt and in 2002, certain
currency exposures relating to our acquisition of Pepsi-Gemex, S.A. de C.V.
("Gemex"), a company we acquired in November 2002. Our use of derivative
instruments is limited to interest rate swaps, forward contracts, futures and
options on futures contracts. Our corporate policy prohibits the use of
derivative instruments for trading or speculative purposes, and we have
procedures in place to monitor and control their use.
All derivative instruments are recorded at fair value as either assets or
liabilities in our Consolidated Balance Sheets. Derivative instruments are
generally designated and accounted for as either a hedge of a recognized asset
or liability ("fair value hedge") or a hedge of a forecasted transaction ("cash
flow hedge").
For a fair value hedge, both the effective and ineffective portions of the
change in fair value of the derivative instrument, along with an adjustment to
the carrying amount of the hedged item for fair value changes attributable to
the hedged risk, are recognized in earnings. For derivative instruments that
hedge interest rate risk, the fair value adjustments are recorded to interest
expense, net, in the Consolidated Statements of Operations.
For a cash flow hedge, the effective portion of changes in the fair value
of the derivative instrument that are highly effective are deferred in
accumulated other comprehensive loss until the underlying hedged item is
recognized in earnings. The applicable gain or loss is recognized in earnings
immediately and is recorded consistent with the expense classification of the
underlying hedged item.
The ineffective portion of fair value changes on qualifying cash flow
hedges is recognized in earnings immediately and is recorded
41
consistent with the expense classification of the underlying hedged item. If a
fair value or cash flow hedge were to cease to qualify for hedge accounting or
be terminated, it would continue to be carried on the balance sheet at fair
value until settled, but hedge accounting would be discontinued prospectively.
If a forecasted transaction were no longer probable of occurring, amounts
previously deferred in accumulated other comprehensive loss would be recognized
immediately in earnings.
On occasion, we enter into derivative instruments that do not qualify for
hedge accounting. These instruments are reflected in the Consolidated Balance
Sheets at fair value with changes in fair value recognized in earnings.
We also may enter into certain derivative instruments for which hedge
accounting is not required because it is entered into to offset changes in the
fair value of an underlying transaction recognized in earnings ("natural
hedge"). These instruments are reflected in the Consolidated Balance Sheets at
fair value with changes in fair value recognized in earnings.
STOCK-BASED EMPLOYEE COMPENSATION - We measure stock-based compensation
expense using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees,"
and its related interpretations. Accordingly, compensation expense for stock
option grants to our employees is measured as the excess of the quoted market
price of common stock at the grant date over the amount the employee must pay
for the stock. Our policy is to grant stock options at fair value on the date of
grant. As allowed by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", we have elected to continue to apply
the intrinsic value-based method of accounting described above, and have adopted
the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." If we had measured compensation cost for the stock options
granted to our employees under the fair value based method prescribed by SFAS
No. 123, net income would have been changed to the pro forma amounts set forth
below:
2002 2001 2000
------- ------- -------
Net Income
Reported ........................................................... $ 428 $ 305 $ 229
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of taxes (40) (36) (25)
------- ------- -------
Pro forma .......................................................... $ 388 $ 269 $ 204
======= ======= =======
Earnings per Share
Basic - as reported ................................................ $ 1.52 $ 1.07 $ 0.78
Diluted - as reported .............................................. $ 1.46 $ 1.03 $ 0.77
Basic - pro forma .................................................. $ 1.38 $ 0.94 $ 0.70
Diluted - pro forma ................................................ $ 1.32 $ 0.91 $ 0.69
Pro forma compensation cost measured for stock options granted to employees
is amortized straight-line over the vesting period, which is typically three
years.
COMMITMENTS AND CONTINGENCIES - We are subject to various claims and
contingencies related to lawsuits, taxes, environmental and other matters
arising out of the normal course of business. Liabilities related to commitments
and contingencies are recognized when a loss is probable and reasonably
estimable.
NEW ACCOUNTING STANDARDS - During 2001, the FASB issued SFAS No. 141,
"Business Combinations," which requires that the purchase method of accounting
be used for all business combinations initiated or completed after June 30,
2001, and SFAS No. 142, "Goodwill and Other Intangible Assets," which requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment. Effective the first day of fiscal
year 2002 we no longer amortize goodwill and certain franchise rights, but
evaluate them for impairment annually. We have completed our annual impairment
review and have determined that our goodwill and indefinite-lived intangible
assets are not impaired. The following table provides pro forma disclosure of
the elimination of goodwill and certain franchise rights amortization in 2001
and 2000, as if SFAS No. 142 had been adopted in 2000:
42
2002 2001 2000
------- ------- -------
Reported net income .................................. $ 428 $ 305 $ 229
Add back: Goodwill amortization, net of tax ....... -- 27 27
Add back: Franchise rights amortization, net of tax -- 64 63
------- ------- -------
Adjusted net income .................................. $ 428 $ 396 $ 319
======= ======= =======
Reported earnings per common share - Basic ........... $ 1.52 $ 1.07 $ 0.78
Add back: Goodwill amortization, net of tax ....... -- 0.09 0.09
Add back: Franchise rights amortization, net of tax -- 0.23 0.22
------- ------- -------
Adjusted earnings per common share - Basic ........... $ 1.52 $ 1.39 $ 1.09
======= ======= =======
Reported earnings per common share - Diluted ......... $ 1.46 $ 1.03 $ 0.77
Add back: Goodwill amortization, net of tax ....... -- 0.09 0.09
Add back: Franchise rights amortization, net of tax -- 0.22 0.21
------- ------- -------
Adjusted earnings per common share - Diluted ......... $ 1.46 $ 1.34 $ 1.07
======= ======= =======
During 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It requires that we recognize the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is
effective for fiscal year 2003. We do not anticipate that the adoption of SFAS
No. 143 will have a material impact on our Consolidated Financial Statements.
During 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting
model for the impairment of long-lived assets and broadens the presentation of
discontinued operations to include more disposal transactions. We adopted SFAS
No. 144 at the beginning of fiscal year 2002. The adoption of SFAS No. 144 did
not have a material impact on our Consolidated Financial Statements.
During 2001, the EITF issued EITF Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products," which addresses the recognition of income statement and
classification of various sales incentives. We adopted EITF Issue No. 01-09 at
the beginning of fiscal 2002 and it did not have a material impact on our
Consolidated Financial Statements.
During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with the Exit or Disposal Activities." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We do not anticipate that
the adoption of SFAS No. 146 will have a material impact on our Consolidated
Financial Statements.
During 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this statement requires SFAS No.
123 disclosure requirements in both annual and interim financial statements. We
will continue to measure stock-based compensation expense in accordance with APB
Opinion 25, "Accounting for Stock Issued to Employees," and its related
interpretations, and therefore we do not anticipate that the adoption of SFAS
No. 148 will have a material impact on our Consolidated Financial Statements.
During 2002, the EITF addressed various issues related to the income
statement classification of certain payments received by a customer from a
vendor. In November 2002, the EITF reached a consensus on Issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," addressing the recognition and
income statement classification of various consideration given by a vendor to a
customer. Among its requirements, the consensus requires that certain cash
consideration received by a customer from a vendor is presumed to be a reduction
of the price of the vendor's products, and therefore should be characterized as
a reduction of cost of sales when recognized in the customer's income statement,
unless certain criteria are met. EITF Issue No. 02-16 will be effective
beginning in our fiscal year 2003. We currently classify bottler incentives
received from PepsiCo and other brand owners as adjustments to net revenues and
selling, delivery and administrative expenses. In accordance with EITF Issue No.
02-16, we will classify certain bottler incentives as a reduction of cost of
sales beginning in 2003. We are currently assessing the transitional guidance
released by the EITF to determine the net impact to our Consolidated Financial
Statements.
43
NOTE 3 -- INVENTORIES
2002 2001
----- -----
Raw materials and supplies................................... $ 162 $ 117
Finished goods............................................... 216 214
----- -----
$ 378 $ 331
===== =====
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT, NET
2002 2001
------- -------
Land ................................... $ 228 $ 145
Buildings and improvements ............. 1,126 925
Manufacturing and distribution equipment 2,768 2,308
Marketing equipment .................... 2,008 1,846
Other .................................. 154 121
------- -------
6,284 5,345
Accumulated depreciation ............... (2,976) (2,802)
------- -------
$ 3,308 $ 2,543
======= =======
We calculate depreciation on a straight-line basis over the estimated lives of
the assets as follows:
Buildings and improvements........................ 20-33 years
Manufacturing equipment........................... 15 years
Distribution equipment............................ 2-10 years
Marketing equipment............................... 3-7 years
NOTE 5 -- INTANGIBLE ASSETS, NET
2002 2001
------- -------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights ................................................... $ 20 $ 12
Other identifiable intangibles ..................................... 24 39
------- -------
44 51
------- -------
Accumulated amortization:
Franchise rights ................................................... (6) (2)
Other identifiable intangibles ..................................... (9) (25)
------- -------
(15) (27)
------- -------
Intangibles subject to amortization (less accumulated amortization) 29 24
------- -------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights ................................................... 3,424 2,577
Goodwill ........................................................... 1,192 1,046
Other identifiable intangibles ..................................... 42 37
------- -------
Intangibles not subject to amortization ............................ 4,658 3,660
------- -------
Total Intangible Assets (less accumulated amortization) ............... $ 4,687 $ 3,684
======= =======
For intangible assets subject to amortization, we calculate amortization on
a straight-line basis over the period we expect to receive economic benefit.
Total amortization expense was $8 million, $135 million and $131 million in
2002, 2001 and 2000, respectively. The weighted-average amortization period for
each class of intangible assets and their estimated aggregate amortization
expense expected to be recognized over the next five years are as follows:
Weighted-Average
Amortization Period Estimated Aggregate Amortization Expense to be Incurred
------------------- -------------------------------------------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Franchise rights ................ 5 years $4 $4 $4 $2 $--
Other identifiable intangibles .. 7 years $4 $4 $3 $2 $1
Through our various current and prior year acquisitions we accumulated $146
million of goodwill during 2002.
44
NOTE 6 -- ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
2002 2001
------ ------
Accounts payable ................ $ 394 $ 362
Trade incentives ................ 210 205
Accrued compensation and benefits 181 141
Accrued interest ................ 81 71
Other accrued taxes ............. 57 38
Other current liabilities ....... 256 187
------ ------
$1,179 $1,004
====== ======
NOTE 7 -- SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2002 2001
------ ------
Short-term borrowings
Current maturities of long-term debt ......................... $ 18 $ 3
Other short-term borrowings .................................. 51 74
------ ------
$ 69 $ 77
====== ======
Long-term debt
5 5/8% senior notes due 2009 ................................. $1,300 $1,300
5 3/8% senior notes due 2004 ................................. 1,000 1,000
7% senior notes due 2029 ..................................... 1,000 1,000
4 5/8% senior notes due 2012 ................................. 1,000 --
9 3/4% senior notes due 2004 ................................. 160 --
Other (average rate 3.7%) .................................... 74 11
------ ------
4,534 3,311
Add: SFAS No. 133 adjustment * ............................... 23 7
Fair value adjustment relating to purchase accounting 14 --
Less: Unamortized discount, net .............................. 30 30
Current maturities of long-term debt .................... 18 3
------ ------
$4,523 $3,285
====== ======
* In accordance with the requirements of SFAS No. 133, the portion of our
fixed-rate debt obligations that is hedged is reflected in our Consolidated
Balance Sheets as an amount equal to the sum of the debt's carrying value
plus a SFAS No. 133 fair value adjustment representing changes recorded in
the fair value of the hedged debt obligations attributable to movements in
market interest rates.
Maturities of long-term debt as of December 28, 2002, are 2003: $18
million, 2004: $1,165 million, 2005: $5 million, 2006: $3 million, 2007: $37
million and thereafter, $3,306 million.
The $1.3 billion of 5 5/8% senior notes (with an effective interest rate
of 5.6%) and the $1.0 billion of 5 3/8% senior notes (with an effective
interest rate of 4.5%) were issued on February 9, 1999, by our subsidiary
Bottling Group, LLC and are guaranteed by PepsiCo. PBG issued the $1.0 billion
of 7% senior notes (with an effective interest rate of 7.0%) on March 8, 1999
and they are guaranteed by Bottling Group, LLC.
The $1.0 billion of 4 5/8% senior notes (with an effective interest rate
of 4.6%) was issued on November 15, 2002, by our subsidiary Bottling Group, LLC
and will be guaranteed by PepsiCo, in accordance with the terms set forth in
the related indenture.
Each of the senior notes mentioned above has redemption features,
covenants and will, among other things, limit our ability and the ability of
our restricted subsidiaries to create or assume liens, enter into sale and
lease-back transactions, engage in mergers or consolidations and transfer or
lease all or substantially all of our assets.
The $160 million of 9 3/4% senior notes were issued by Gemex. These senior
notes have an effective interest rate of 3.7% after a fair value adjustment of
$14 million resulting from our acquisition of Gemex. In December 2002, we
purchased $181 million of U.S. government securities and placed those securities
into an irrevocable trust, for the sole purpose of funding payments of principal
and interest on the $160 million of 9 3/4% senior notes maturing in March 2004,
in order to defease its respective covenants. We estimate that the U.S.
government securities will be sufficient to satisfy all future principal and
interest requirements of the senior notes. See Note 2.
We have a $500 million commercial paper program that is supported by two
$250 million credit facilities. One of the credit facilities expires in May
2003 and the other credit facility expires in April 2004. There were no
borrowings outstanding under these credit facilities at December 28, 2002, or
December 29, 2001.
We have available short-term bank credit lines of approximately $167
million and $177 million at December 28, 2002, and December 29, 2001,
respectively. These lines were used to support the general operating needs of
our businesses outside the United States. The weighted-average interest rate for
these lines of credit outstanding at December 28, 2002, and December 29, 2001,
was 8.9% and 4.3%, respectively.
Amounts paid to third parties for interest were $196 million, $191 million
and $202 million in 2002, 2001 and 2000, respectively. Total interest expense
incurred during 2002, 2001 and 2000 was $200 million, $204 million and $208
million, respectively.
45
NOTE 8 -- COMMITMENTS
We have noncancellable commitments under both capital and long-term
operating leases, which consist principally of buildings, office equipment and
machinery. Capital and operating lease commitments expire at various dates
through 2021. Most leases require payment of related executory costs, which
include property taxes, maintenance and insurance.
Our future minimum commitments under noncancellable leases are set forth
below:
LEASES
------
CAPITAL OPERATING
------- ---------
2003 ...... $ 1 $ 34
2004 ...... 1 25
2005 ...... -- 19
2006 ...... -- 15
2007 ...... -- 14
Later years 3 70
------- ---------
$ 5 $177
======= =========
In addition, at December 28, 2002, we have outstanding letters of credit
and surety bonds valued at $98 million primarily to provide collateral for
estimated self-insurance claims and other insurance requirements.
At December 28, 2002, the present value of minimum payments under capital
leases was $3 million, after deducting $2 million for imputed interest. Our
rental expense was $62 million, $40 million and $42 million for 2002, 2001 and
2000, respectively.
NOTE 9 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
These Consolidated Financial Statements reflect the implementation of SFAS
No. 133, as amended by SFAS No. 138, on the first day of fiscal year 2001. In
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for hedging activities and derivative instruments, including certain
derivative instruments embedded in other contracts, which are collectively
referred to as derivatives. It requires that an entity recognize all derivatives
as either assets or liabilities in the consolidated balance sheet and measure
those instruments at fair value. In June 2000, the FASB issued SFAS No. 138,
amending the accounting and reporting standards of SFAS No. 133. Prior to the
adoption of SFAS No. 133, there were no deferred gains or losses from our
hedging activities recorded in our Consolidated Financial Statements. The
adoption of these statements resulted in the recording of a deferred gain in our
Consolidated Balance Sheets, which was recorded as an increase to current assets
of $4 million and a reduction of other comprehensive loss of $4 million.
Furthermore, the adoption had no impact on our Consolidated Statements of
Operations.
As of December 28, 2002, our use of derivative instruments is limited to
interest rate swaps, forward contracts, futures and options on futures
contracts. Our corporate policy prohibits the use of derivative instruments for
trading or speculative purposes, and we have procedures in place to monitor and
control their use.
CASH FLOW HEDGES - We are subject to market risk with respect to the cost
of commodities because our ability to recover increased costs through higher
pricing may be limited by the competitive environment in which we operate. We
use future and option contracts to hedge the risk of adverse movements in
commodity prices related to anticipated purchases of aluminum and fuel used in
our operations. These contracts, which generally range from one to 12 months in
duration, establish our commodity purchase prices within defined ranges in an
attempt to limit our purchase price risk resulting from adverse commodity price
movements and are designated as and qualify for cash flow hedge accounting
treatment.
The amount of deferred losses from our commodity hedging that we recognized
into cost of sales in our Consolidated Statements of Operations was $22 million
in 2002 and $4 million for 2001. As a result of our commodity hedges, $16
million and $19 million of deferred losses (before taxes and minority interest)
remained in accumulated other comprehensive loss in our Consolidated Balance
Sheets based on the commodity rates in effect on December 28, 2002, and December
29, 2001, respectively. The adjustment to accumulated other comprehensive loss
is reflected after income taxes and minority interest of $7 million and $8
million in 2002 and 2001, respectively, in our Consolidated Statements of
Changes in Shareholders' Equity. Assuming no change in the commodity prices as
measured on December 28, 2002, $13 million of the deferred loss will be
recognized in our cost of sales over the next 12 months. The ineffective portion
of the change in fair value of these contracts was not material to our results
of operations in 2002 or 2001.
On November 15, 2002, Bottling Group, LLC issued a $1 billion 10 year bond
with an interest rate of 4 5/8%. In anticipation of the bond issuance, Bottling
Group, LLC entered into several treasury rate future contracts to hedge against
adverse interest rate changes. We recognized $8 million as a deferred gain
(before taxes and minority interest) reported in accumulated other comprehensive
loss resulting from these treasury rate
46
contracts. The adjustment to accumulated other comprehensive income is reflected
after minority interest and income taxes of $3 million. These deferred gains are
released to match the underlying interest expense on the debt. Deferred gains of
$0.7 million will be recognized in interest expense over the next 12 months.
FAIR VALUE HEDGES - We finance a portion of our operations through
fixed-rate debt instruments. We converted our entire $1.0 billion 5 3/8% senior
notes and $300 million of our $1.3 billion 5 5/8% senior notes to floating rate
debt through the use of interest rate swaps with the objective of reducing our
overall borrowing costs. These interest rate swaps meet the criteria for fair
value hedge accounting and are 100% effective in eliminating the market rate
risk inherent in our long-term debt. Accordingly, any gain or loss associated
with these swaps are fully offset by the opposite market impact on the related
debt. The change in fair value of the interest rate swaps was a gain of $16
million in 2002 and a gain of $7 million in 2001. The fair value change was
recorded in interest expense, net in our Consolidated Statements of Operations
and in prepaid expenses and other current assets in our Consolidated Balance
Sheets. An offsetting adjustment was recorded in interest expense, net in our
Consolidated Statements of Operations and in long-term debt in our Consolidated
Balance Sheets representing the change in fair value of the related long-term
debt.
UNFUNDED DEFERRED COMPENSATION LIABILITY - Our unfunded deferred
compensation liability is subject to changes in our stock price as well as price
changes in other equity and fixed income investments. Participating employees
in our deferred compensation program can elect to defer all or a portion of
their compensation to be paid out on a future date or dates. As part of the
deferral process, employees select from phantom investment options that
determine the earnings on the deferred compensation liability and the amount
that they will ultimately receive. Employee investment elections include PBG
stock and a variety of other equity and fixed income investment options.
Since the plan is unfunded, employees' deferred compensation amounts are
not directly invested in these investment vehicles. Instead, we track the
performance of each employee's investment selections and adjust his or her
deferred compensation account accordingly. The adjustments to the employees'
accounts increases or decreases the deferred compensation liability reflected on
our Consolidated Balance Sheets with an offsetting increase or decrease to our
selling, delivery and administrative expenses.
We use prepaid forward contracts to hedge the portion of our deferred
compensation liability that is based on our stock price. At December 28, 2002,
we had a prepaid forward contract for 638,000 shares at an exercise price of
$28.50, which was accounted for as a natural hedge. This contract requires cash
settlement and has a fair value at December 28, 2002, of $16 million recorded in
prepaid expenses and other current assets in our Consolidated Balance Sheets.
The fair value of this contract changes based on the change in our stock price
compared with the contract exercise price. We recognized $1 million in gains in
2002 and $2 million in gains in 2001, resulting from the change in fair value of
these prepaid forward contracts. The earnings impact from these instruments are
classified as selling, delivery and administrative expenses.
OTHER DERIVATIVES - During 2002, we entered into option contracts to
mitigate certain foreign currency risks in anticipation of our acquisition of
Gemex. Although these instruments did not qualify for hedge accounting, they
were deemed derivatives since they contained a net settlement clause. These
options expired unexercised and the cost of these options of $7 million has been
recorded in other non-operating expenses, net in our Consolidated Statements of
Operations.
OTHER FINANCIAL ASSETS AND LIABILITIES - Financial assets with carrying
values approximating fair value include cash and cash equivalents and accounts
receivable. Financial liabilities with carrying values approximating fair value
include accounts payable and other accrued liabilities and short-term debt. The
carrying value of these financial assets and liabilities approximates fair value
due to the short maturities and since interest rates approximate current market
rates for short-term debt.
Long-term debt at December 28, 2002, had a carrying value and fair value of
$4.5 billion and $4.9 billion, respectively, and at December 29, 2001, had a
carrying value and fair value of $3.3 billion and $3.4 billion, respectively.
The fair value is based on interest rates that are currently available to us for
issuance of debt with similar terms and remaining maturities.
NOTE 10 -- PENSION AND POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS
Our U.S. employees participate in noncontributory defined benefit pension
plans, which cover substantially all full-time salaried employees, as well as
most hourly employees. Benefits generally are based on years of service and
compensation, or stated amounts for each year of service. All of our qualified
plans are funded and contributions are made in amounts not less than minimum
statutory funding requirements and not more than the maximum amount that can be
deducted for U.S. income tax purposes. Our net pension expense for the defined
benefit plans for our operations outside the U.S. was not significant.
47
Our U.S. employees are also eligible to participate in our 401(k) savings
plans, which are voluntary defined contribution plans. We make matching
contributions to the 401(k) savings plans on behalf of participants eligible to
receive such contributions. If a participant has one or more but less than 10
years of eligible service, our match will equal $0.50 for each dollar the
participant elects to defer up to 4% of the participant's pay. If the
participant has 10 or more years of eligible service, our match will equal $1.00
for each dollar the participant elects to defer up to 4% of the participant's
pay.
PENSION
--------------------------
Components of pension expense: 2002 2001 2000
---- ---- ----
Service cost ............................................ $ 28 $ 25 $ 24
Interest cost ........................................... 56 50 49
Expected return on plan assets .......................... (66) (57) (53)
Amortization of prior service amendments ................ 6 4 5
Special termination benefits ............................ 1 -- --
---- ---- ----
Net pension expense for the defined benefit plans ....... $ 25 $ 22 $ 25
---- ---- ----
Cost of defined contribution plans ...................... $ 18 $ 17 $ 15
---- ---- ----
Total pension expense recognized in the Consolidated
Statements of Operations ................................ $ 43 $ 39 $ 40
==== ==== ====
POSTRETIREMENT BENEFITS
Our postretirement plans provide medical and life insurance benefits
principally to U.S. retirees and their dependents. Employees are eligible for
benefits if they meet age and service requirements and qualify for retirement
benefits. The plans are not funded and since 1993 have included retiree cost
sharing.
POSTRETIREMENT
--------------------------
2002 2001 2000
---- ---- ----
Components of postretirement benefits expense:
Service cost ........................................... $ 3 $ 3 $ 3
Interest cost .......................................... 17 16 14
Amortization of net loss ............................... 2 1 1
Amortization of prior service amendments ............... (6) (6) (6)
---- ---- ----
Net postretirement benefits expense recognized in the
Consolidated Statements of Operations .................. $ 16 $ 14 $ 12
==== ==== ====
CHANGES IN THE BENEFIT OBLIGATION
PENSION POSTRETIREMENT
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Obligation at beginning of year $ 760 $ 664 $ 228 $ 212
Service cost ............................... 28 25 3 3
Interest cost .............................. 56 50 17 16
Plan amendments ............................ 22 10 -- --
Actuarial loss ............................. 127 48 55 14
Benefit payments ........................... (41) (37) (17) (17)
Special termination benefits ............... 1 -- -- --
----- ----- ----- -----
Obligation at end of year .................. $ 953 $ 760 $ 286 $ 228
===== ===== ===== =====
48
CHANGES IN THE FAIR VALUE OF ASSETS
PENSION POSTRETIREMENT
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Fair value at beginning of year $ 578 $ 665 $ -- $ --
Actual return on plan assets ............... (61) (120) -- --
Asset transfers ............................ 11 -- -- --
Employer contributions ..................... 51 70 17 17
Benefit payments ........................... (41) (37) (17) (17)
----- ----- ----- -----
Fair value at end of year .................. $ 538 $ 578 $ -- $ --
===== ===== ===== =====
SELECTED INFORMATION FOR THE PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN
EXCESS OF PLAN ASSETS
PENSION POSTRETIREMENT
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Projected benefit obligation ....................... $953 $760 $286 $228
Accumulated benefit obligation ..................... 843 690 286 228
Fair value of plan assets * ........................ 663 604 -- --
*Includes fourth quarter employer contributions.
FUNDED STATUS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Funded status at end of year ................................. $(415) $(182) $(286) $(228)
Unrecognized prior service cost .............................. 41 36 (9) (16)
Unrecognized loss ............................................ 407 153 110 57
Unrecognized transition asset ................................ -- (1) -- --
Fourth quarter employer contribution ......................... 125 26 6 5
----- ----- ----- -----
Net amounts recognized ....................................... $ 158 $ 32 $(179) $(182)
===== ===== ===== =====
NET AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Other liabilities ........................................... $(196) $(101) $(179) $(182)
Intangible assets ........................................... 42 37 -- --
Accumulated other comprehensive loss......................... 312 96 -- --
----- ----- ----- -----
Net amounts recognized ...................................... $ 158 $ 32 $(179) $(182)
===== ===== ===== =====
At December 28, 2002, and December 29, 2001, the accumulated benefit
obligation of certain PBG pension plans exceeded the fair market value of the
plan assets resulting in the recognition of the unfunded liability as a minimum
balance sheet liability. As a result of this additional liability, our
intangible asset increased by $5 million to $42 million in 2002, which equals
the amount of unrecognized prior service cost in our plans. The remainder of the
liability that exceeded the unrecognized prior service cost was recognized as an
increase to accumulated other comprehensive loss of $216 million and $96 million
in 2002 and 2001, respectively, before taxes and minority interest. The
adjustment to accumulated other comprehensive loss is reflected after minority
interest of $15 million and $7 million, and deferred income taxes of $78 million
and $34 million in 2002 and 2001, respectively in our Consolidated Statements of
Changes in Shareholders' Equity.
ASSUMPTIONS
The weighted-average assumptions used to compute the above information are set
forth below:
PENSION
------------------------
2002 2001 2000
---- ---- ----
Discount rate for benefit obligation ............................................ 6.8% 7.5% 7.8%
Expected return on plan assets (1) .............................................. 9.5% 9.5% 9.5%
Rate of compensation increase ................................................... 4.3% 4.3% 4.6%
(1) Expected return on plan assets is presented after administration expenses.
POSTRETIREMENT
---------------------------
2002 2001 2000
---- ---- ----
Discount rate for benefit obligation........................................... 6.8% 7.5% 7.8%
We evaluate these assumptions with our actuarial advisors on an annual
basis and we believe they are within accepted industry ranges, although an
increase or decrease in the assumptions or economic events outside our control
could have a direct impact on reported net earnings.
FUNDING AND PLAN ASSETS
The pension plan assets are principally invested in stocks and bonds. None
of the assets are invested directly into PBG, PepsiCo or any bottling affiliates
of PepsiCo, although it is possible that insignificant indirect investments
exist through our broad market indices. Our contributions are made in
accordance with applicable tax regulations that provide for current tax
deductions for our contributions and for taxation to the employee of plan
benefits when the benefits are received. We do not fund our pension plan and
postretirement plans when our contributions would not be deductible and when
benefits would be taxable to the employee before receipt. Of the total pension
liabilities at year end 2002, $52 million relates to plans not funded due to
these unfavorable tax consequences.
HEALTH CARE COST TREND RATES
We have assumed an average increase of 12.0% in 2003 in the cost of
postretirement medical benefits for employees who retired before cost sharing
was introduced. This average increase is then projected to decline gradually to
5.0% in 2013 and thereafter.
Assumed health care cost trend rates have an impact on the amounts reported
for postretirement medical plans. A one-percentage point change in assumed
health care costs would have the following effects:
49
1% 1%
INCREASE DECREASE
-------- --------
Effect on total fiscal year 2002 service and interest cost components ................... $-- $--
Effect on the fiscal year 2002 accumulated postretirement benefit obligation ............ $10 $(8)
NOTE 11 -- EMPLOYEE STOCK OPTION PLANS
Under our long-term incentive plan, stock options are issued to middle and
senior management employees and vary according to salary and level within PBG.
Except as noted below, options granted in 2002, 2001 and 2000 had exercise
prices ranging from $23.25 per share to $29.25 per share, $18.88 per share to
$22.50 per share, and $9.38 per share to $15.88 per share, respectively, expire
in 10 years and generally become exercisable 25% after one year, an additional
25% after two years, and the remainder after three years.
In 2001, two additional option grants were made to certain senior
management employees. One grant had an exercise price of $19.50 per share,
expires in 10 years and became exercisable on the grant date. The other grant
had an exercise price of $22.50 per share, expires in 10 years and becomes
exercisable in 5 years.
The following table summarizes option activity during 2002:
WEIGHTED-
AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- --------
Outstanding at beginning of year ............................. 39.7 $13.20
Granted ................................................... 6.4 25.32
Exercised ................................................. (8.1) 11.63
Forfeited ................................................. (0.6) 16.89
------ ------
Outstanding at end of year ................................... 37.4 $15.53
====== ======
Exercisable at end of year ................................... 19.9 $12.59
====== ======
Weighted-average fair value of options granted during the year $10.89
======
The following table summarizes option activity during 2001:
WEIGHTED-
AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- --------
Outstanding at beginning of year ............................. 33.2 $10.75
Granted ................................................... 10.2 20.47
Exercised ................................................. (1.8) 10.84
Forfeited ................................................. (1.9) 12.01
------ ------
Outstanding at end of year ................................... 39.7 $13.20
====== ======
Exercisable at end of year ................................... 6.6 $13.38
====== ======
Weighted-average fair value of options granted during the year $ 8.55
======
The following table summarizes option activity during 2000:
WEIGHTED-
AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- --------
Outstanding at beginning of year ............................. 22.4 $11.49
Granted ................................................... 13.2 9.57
Exercised ................................................. (0.2) 10.53
Forfeited ................................................. (2.2) 11.20
------ ------
Outstanding at end of year ................................... 33.2 $10.75
====== ======
Exercisable at end of year ................................... 1.8 $11.11
====== ======
Weighted-average fair value of options granted during the year $ 4.68
======
50
Stock options outstanding and exercisable at December 28, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE
Options in millions REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------- ------- ------------- -------------- ------- --------------
$9.38-$11.49 8.9 6.99 $ 9.39 7.0 $10.38
$11.50-$15.88 13.2 6.06 $11.63 9.6 $11.61
$15.89-$22.50 9.1 8.00 $20.49 3.2 $20.04
$22.51-$29.25 6.2 9.00 $25.34 0.1 $25.16
---- ---- ------ ---- ------
37.4 7.24 $15.53 19.9 $12.59
==== ==== ====== ==== ======
The fair value of PBG stock options used to compute pro forma net income
disclosures was estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate..................................... 4.5% 4.6% 6.7%
Expected life............................................... 6 years 6 years 7 years
Expected volatility......................................... 37% 35% 35%
Expected dividend yield..................................... 0.16% 0.20% 0.43%
NOTE 12 -- INCOME TAXES
The details of our income tax provision are set forth below:
2002 2001 2000
----- ----- -----
Current: Federal ......................................... $ 61 $ 93 $ 107
Foreign ......................................... 12 5 1
State ........................................... 17 15 27
----- ----- -----
90 113 135
----- ----- -----
Deferred: Federal ......................................... 115 43 7
Foreign ......................................... 2 (1) --
State ........................................... 14 6 (7)
----- ----- -----
131 48 --
----- ----- -----
221 161 135
Rate change benefit -- (25) --
----- ----- -----
$ 221 $ 136 $ 135
===== ===== =====
Our 2001 income tax provision includes a nonrecurring reduction in income
tax expense of $25 million due to enacted tax rate changes in Canada during
2001.
Our U.S. and foreign income before income taxes is set forth below:
2002 2001 2000
---- ---- ----
U.S. .................................................... $573 $375 $318
Foreign.................................................. 76 66 46
---- ---- ----
$649 $441 $364
==== ==== ====
Our reconciliation of income taxes calculated at the U.S. federal
statutory rate to our provision for income taxes is set forth below:
2002 2001 2000
---- ---- ----
Income taxes computed at the U.S. federal statutory rate.... 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit ............... 2.8 3.1 3.2
Impact of foreign results .................................. (6.1) (9.0) (7.5)
Goodwill and other nondeductible expenses .................. 1.0 3.9 5.1
Other, net ................................................. 1.3 3.5 1.2
---- ---- ----
34.0 36.5 37.0
Rate change benefit ........................................ -- (5.7) --
---- ---- ----
Total effective income tax rate ............................ 34.0% 30.8% 37.0%
==== ==== ====
51
The details of our 2002 and 2001 deferred tax liabilities (assets) are set
forth below:
2002 2001
------- -------
Intangible assets and property, plant and equipment......... $ 1,424 $ 1,094
Other ...................................................... 94 109
------- -------
Gross deferred tax liabilities ............................. 1,518 1,203
------- -------
Net operating loss carryforwards ........................... (142) (121)
Employee benefit obligations ............................... (191) (141)
Bad debts .................................................. (22) (13)
Various liabilities and other .............................. (106) (72)
------- -------
Gross deferred tax assets .................................. (461) (347)
Deferred tax asset valuation allowance ..................... 147 122
------- -------
Net deferred tax assets .................................... (314) (225)
------- -------
Net deferred tax liability ................................. $ 1,204 $ 978
======= =======
CONSOLIDATED BALANCE SHEETS CLASSIFICATION
Prepaid expenses and other current assets................... $ (61) $ (43)
Deferred income taxes....................................... 1,265 1,021
------- -------
$ 1,204 $ 978
======= =======
We have net operating loss carryforwards totaling $443 million at December
28, 2002, which are available to reduce future taxes in the U.S., Spain, Greece,
Russia, Turkey and Mexico. Of these carryforwards, $14 million expire in 2003
and $429 million expire at various times between 2004 and 2022. We have
established a full valuation allowance for the net operating loss carryforwards
attributable to our operations in Spain, Greece, Russia, Turkey and Mexico based
upon our projection that it is more likely than not that the benefit of these
losses will not be realized. In addition, at December 28, 2002, we have tax
credit carryforwards in the U.S. of $7 million with an indefinite carryforward
period and in Mexico of $13 million, which expire at various times between 2006
and 2012.
Our valuation allowances, which reduce deferred tax assets to an amount
that will more likely than not be realized, have increased by $25 million in
2002 and decreased by $26 million in 2001. The increase in 2002 was mainly due
to our business acquisitions in Turkey and Mexico.
Deferred taxes are not recognized for temporary differences related to
investments in foreign subsidiaries that are essentially permanent in duration.
Determination of the amount of unrecognized deferred taxes related to these
investments is not practicable.
Income taxes receivable were $42 million and $15 million at December 28,
2002, and December 29, 2001, respectively. Such amounts are recorded within
prepaid expenses and other current assets in our Consolidated Balance Sheets.
Amounts paid to taxing authorities and related parties for income taxes were $49
million, $101 million and $147 million in 2002, 2001 and 2000, respectively.
Under our tax separation agreement with PepsiCo, PepsiCo maintains full
control and absolute discretion for any combined or consolidated tax filings for
tax periods ending on or before our initial public offering that occurred in
March 1999. PepsiCo has contractually agreed to act in good faith with respect
to all tax audit matters affecting us. In accordance with the tax separation
agreement, we will share on a pro rata basis any risk or upside resulting from
the settlement of tax matters affecting us for these periods.
NOTE 13 -- GEOGRAPHIC DATA
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in 41 states and the District of Columbia in the
United States. Outside the U.S., we conduct business in Canada, Spain, Russia,
Greece, Turkey and Mexico.
NET REVENUES
----------------------------------
2002 2001 2000
------ ------ ------
U.S. ....................... $7,572 $7,197 $6,830
Mexico ..................... 164 -- --
Other countries ............ 1,480 1,246 1,152
------ ------ ------
$9,216 $8,443 $7,982
====== ====== ======
LONG-LIVED ASSETS
----------------------------------
2002 2001 2000
------ ------ ------
U.S. ....................... $5,577 $5,395 $5,192
Mexico...................... 1,586 -- --
Other countries............. 1,127 914 960
------ ------ ------
$8,290 $6,309 $6,152
====== ====== ======
NOTE 14 -- RELATIONSHIP WITH PEPSICO
PepsiCo is considered a related party due to the nature of our franchisee
relationship and its ownership interest in our company. Approximately 90% of
PBG's 2002 volume was derived from the sale of Pepsi-Cola beverages. At December
28, 2002, PepsiCo owned approximately 37.8% of our outstanding common stock and
100% of our outstanding class B common stock, together representing
approximately 42.9% of the voting power of all classes of our voting stock. In
addition, PepsiCo owns 6.8% of the equity of Bottling Group, LLC, our principal
operating subsidiary. We fully consolidate the results of Bottling Group, LLC
and present PepsiCo's share as minority interest in our Consolidated Financial
Statements.
The most significant agreements that govern our relationship with PepsiCo
consist of:
(1) The master bottling agreement for cola beverages bearing the
"Pepsi-Cola" and "Pepsi" trademark in the United States; master
bottling agreements and distribution agreements for non-cola products
in the United States, including Mountain Dew; and a master fountain
syrup agreement in the United States;
(2) Agreements similar to the master bottling agreement and the non-cola
agreements for each country, including Canada, Spain, Russia, Greece,
Turkey and Mexico, as well as a fountain syrup agreement similar to
the master syrup agreement for Canada;
52
(3) A shared services agreement whereby PepsiCo provides us or we provide
PepsiCo with certain support, including information technology
maintenance, procurement of raw materials, shared space, employee
benefits, credit and collection, international tax and accounting
services. The amounts paid or received under this contract are equal
to the actual costs incurred by the company providing the service.
Through 2001, a PepsiCo affiliate provided casualty insurance to us;
and
(4) Transition agreements that provide certain indemnities to the parties,
and provide for the allocation of tax and other assets, liabilities,
and obligations arising from periods prior to the initial public
offering. Under our tax separation agreement, PepsiCo maintains full
control and absolute discretion for any combined or consolidated tax
filings for tax periods ended on or before the initial public
offering. PepsiCo has contractually agreed to act in good faith with
respect to all tax audit matters affecting us. In addition, PepsiCo
has agreed to use its best efforts to settle all joint interests in
any common audit issue on a basis consistent with prior practice.
BOTTLER INCENTIVES AND OTHER ARRANGEMENTS - We share a business objective
with PepsiCo of increasing the availability and consumption of Pepsi-Cola
beverages. Accordingly, PepsiCo, at its discretion, provides us with various
forms of bottler incentives to promote its beverages. These incentives cover a
variety of initiatives, including direct marketplace support, capital equipment
funding and advertising support. Based on the objective of the programs and
initiatives, we record bottler incentives as an adjustment to net revenues or as
a reduction of selling, delivery and administrative expenses. Direct marketplace
support represents PepsiCo's funding to assist us in offering sales and
promotional discounts to retailers and is recorded as an adjustment to net
revenues. Capital equipment funding is designed to help offset the costs of
purchasing and installing marketing equipment, such as vending machines and
glass door coolers at customer locations and is recorded as a reduction of
selling, delivery and administrative expenses. Advertising support represents
the cost of media time, promotional materials, and other advertising and
marketing costs that are funded by PepsiCo and is recorded as a reduction to
advertising and marketing expenses within selling, delivery and administrative
expenses. In addition, PepsiCo may share certain media costs with us due to our
joint objective of promoting PepsiCo brands. There are no conditions or other
requirements that could result in a repayment of the bottler incentives
received. Bottler incentives received from PepsiCo, including media costs shared
by PepsiCo, were $560 million, $554 million and $524 million for 2002, 2001 and
2000, respectively. Of these amounts, we recorded $257 million, $262 million and
$244 million for 2002, 2001 and 2000, respectively, in net revenues, and the
remainder as a reduction of selling, delivery and administrative expenses.
PURCHASES OF CONCENTRATE AND FINISHED PRODUCT - We purchase concentrate
from PepsiCo, which is the critical flavor ingredient used in the production of
carbonated soft drinks and other ready-to-drink beverages. PepsiCo determines
the price of concentrate annually at its discretion. We also pay a royalty fee
to PepsiCo for the Aquafina trademark. Amounts paid or payable to PepsiCo and
its affiliates for concentrate and royalty fees were $1,699 million, $1,584
million and $1,507 million in 2002, 2001 and 2000, respectively.
We also produce or distribute other products and purchase finished goods
and concentrate through various arrangements with PepsiCo or PepsiCo joint
ventures. During 2002, 2001 and 2000, total amounts paid or payable to PepsiCo
or PepsiCo joint ventures for these transactions were $464 million, $375 million
and $155 million, respectively.
We provide manufacturing services to PepsiCo and PepsiCo affiliates in
connection with the production of certain finished beverage products. During
2002, 2001 and 2000, total amounts paid or payable by PepsiCo for these
transactions were $10 million, $32 million and $36 million, respectively.
FOUNTAIN SERVICE FEE - We manufacture and distribute fountain products and
provide fountain equipment service to PepsiCo customers in some territories in
accordance with the Pepsi beverage agreements. Amounts received from PepsiCo for
these transactions are offset by the cost to provide these services and are
reflected in our Consolidated Statements of Operations in selling, delivery and
administrative expenses. Net amounts paid or payable by PepsiCo to us for these
services were approximately $200 million, $185 million and $189 million, in
2002, 2001 and 2000, respectively.
OTHER TRANSACTIONS - Prior to 2002, Hillbrook Insurance Company, Inc., a
subsidiary of PepsiCo, provided insurance and risk management services to us
pursuant to a contractual agreement. Total premiums paid to Hillbrook Insurance
Company, Inc. during 2001 and 2000 were $58 million and $62 million,
respectively.
53
We provide PepsiCo and PepsiCo affiliates or PepsiCo provides us various
services pursuant to a shared services agreement and other arrangements,
including information technology maintenance, procurement of raw materials,
shared space, employee benefits, credit and collection, international tax and
accounting services. Total net expenses incurred were approximately $57 million,
$133 million and $117 million during 2002, 2001 and 2000, respectively.
We purchase snack food products from Frito-Lay, Inc., a subsidiary of
PepsiCo, for sale and distribution in all of Russia except Moscow. Amounts paid
or payable to PepsiCo and its affiliates for snack food products were $44
million, $27 million and $24 million in 2002, 2001 and 2000, respectively.
The Consolidated Statements of Operations include the following income (expense)
amounts as a result of transactions with PepsiCo and its affiliates:
2002 2001 2000
------- ------- -------
Net revenues:
Bottler incentives ................................... $ 257 $ 262 $ 244
======= ======= =======
Cost of sales:
Purchases of concentrate and finished products,
and Aquafina royalty fees ........................ $(2,163) $(1,959) $(1,662)
Manufacturing and distribution service reimbursements 10 32 36
------- ------- -------
$(2,153) $(1,927) $(1,626)
======= ======= =======
Selling, delivery and administrative expenses:
Bottler incentives ................................... $ 303 $ 292 $ 280
Fountain service fee ................................. 200 185 189
Frito-Lay purchases .................................. (44) (27) (24)
Insurance costs ...................................... -- (58) (62)
Shared services ...................................... (57) (133) (117)
------- ------- -------
$ 402 $ 259 $ 266
======= ======= =======
We are not required to pay any minimum fees to PepsiCo, nor are we
obligated to PepsiCo under any minimum purchase requirements.
As part of our acquisition in Turkey (see Note 16), PBG paid PepsiCo $8
million for its share of Fruko Mesrubat Sanayii A.S. and related entities. In
addition, we sold certain brands to PepsiCo from the net assets acquired for $16
million.
As part of our acquisition of Gemex in Mexico (see Note 16), PepsiCo
received $297 million for the tender of its shares for its 34.4% ownership in
the outstanding capital stock of Gemex. In addition, PepsiCo made a payment to
us for $17 million, to facilitate the purchase and ensure a smooth ownership
transition of Gemex.
We paid PepsiCo $10 million and $9 million during 2002 and 2001,
respectively, for distribution rights relating to the SoBe brand in certain
PBG-owned territories in the U.S. and Canada.
In connection with PBG's acquisition of Pepsi-Cola Bottling of Northern
California in 2001, PBG paid $10 million to PepsiCo for its equity interest in
Northern California.
With respect to PepsiCo's 6.8% ownership in Bottling Group, LLC, our
principal operating subsidiary, Bottling Group, LLC will distribute pro rata to
PepsiCo and us sufficient cash such that aggregate cash distributed to us will
enable us to pay our income taxes and interest on our $1 billion 7% senior notes
due 2029. PepsiCo's pro rata cash distribution during 2002 from Bottling Group,
LLC was $11 million.
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8%
senior notes issued on February 9, 1999, by our subsidiary Bottling Group, LLC
are guaranteed by PepsiCo. In addition, the $1.0 billion of 4 5/8% senior notes
issued on November 15, 2002, also by Bottling Group, LLC, will be guaranteed by
PepsiCo in accordance with the terms set forth in the related indenture.
Amounts payable to PepsiCo and its affiliates were $26 million and $17
million at December 28, 2002, and December 29, 2001, respectively. Such amounts
are recorded within accounts payable and other current liabilities in our
Consolidated Balance Sheets.
54
NOTE 15 -- CONTINGENCIES
We are involved in a lawsuit with current and former employees concerning
wage and hour issues in New Jersey. We believe that the ultimate resolution to
this matter will not have a material adverse effect on our results of
operations, financial condition or liquidity. Subsequent to year end we have
resolved this matter, see Note 19.
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of 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 16 -- ACQUISITIONS
During 2002, we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from several PepsiCo franchise
bottlers. The following acquisitions occurred for an aggregate amount of $936
million in cash and $375 million of assumed debt:
- Fruko Mesrubat Sanayii A.S. and related entities of Turkey in March.
- Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March.
- Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine
in June.
- Seaman's Beverages Limited of the Canadian province of Prince Edward
Island in July.
- Pepsi-Gemex, S.A. de. C.V of Mexico in November.
- Kitchener Beverages Limited of Ontario, Canada in December.
The largest of our six acquisitions was Gemex, where we acquired all of
their outstanding capital stock. Our total cost for the purchase of Gemex was a
net cash payment of $871 million and assumed debt of approximately $305 million.
Gemex produces, sells and distributes a variety of soft drink products under the
Pepsi-Cola, Pepsi Light, Pepsi Max, Pepsi Limon, Mirinda, 7 UP, Diet 7 UP, KAS,
Mountain Dew, Power Punch and Manzanita Sol trademarks under exclusive franchise
and bottling arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex
owns, produces, sells and distributes purified and mineral water in Mexico under
the trademarks Electropura and Garci Crespo and has rights to produce, sell and
distribute soft drink products of other companies in Mexico.
Our U.S. and Canadian acquisitions were made to enable us to provide better
service to our large retail customers. We expect these acquisitions to reduce
costs through economies of scale. The Mexican and Turkish acquisitions were made
to allow us to increase our markets outside the United States.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed in connection with our acquisitions, net of
cash acquired:
ASSETS USEFUL LIFE
(YEARS) GEMEX OTHER TOTAL
----------- ----- ----- -----
Current assets ......................................... $ 101 $ 33 $ 134
Fixed assets ........................................... 5-33 505 85 590
Intangible assets:
Non-compete agreements subject to amortization......... 3-5 -- 4 4
Franchise rights subject to amortization .............. 5 -- 8 8
Franchise rights not subject to amortization .......... 808 35 843
Goodwill (non-tax deductible) ......................... 126 20 146
Other assets ........................................... 15 2 17
------ ------ ------
TOTAL ASSETS .................................. $1,555 $ 187 $1,742
------ ------ ------
LIABILITIES
Accounts payable and other current liabilities ......... 141 43 184
Short-term borrowings .................................. 5 50 55
Long-term debt ......................................... 300 20 320
Other liabilities ...................................... 238 16 254
------ ------ ------
TOTAL LIABILITIES ...................... $ 684 $ 129 $ 813
------ ------ ------
NET ASSETS ACQUIRED ...................................... $ 871 $ 58 $ 929
====== ====== ======
In addition to the net assets acquired above, we also incurred
non-capitalizable costs associated with the acquisition of Gemex. As discussed
in Note 9, we entered into option contracts to mitigate certain foreign currency
risks in anticipation of our acquisition. These options expired unexercised and
the cash flow of $7 million associated with these options is included in
acquisitions of bottlers in the Consolidated Statements of Cash Flows.
The allocation of the purchase price for Gemex is preliminary, pending
final valuations on certain assets. The final allocations of the purchase price
will be determined based on the fair value of assets acquired and liabilities
assumed as of the date of acquisition.
55
Non-compete agreements and franchise rights that are subject to
amortization acquired during 2002 have a weighted-average amortization period of
three to five years, respectively.
The following unaudited pro forma operating information summarizes our
consolidated results of operations as if the Gemex acquisition had occurred on
the first day of fiscal year 2001.
2002 2001
------- -------
Net revenues .................................................................. $10,297 $ 9,617
Income before income taxes..................................................... $ 678 $ 468
Net income .................................................................... $ 448 $ 324
Earnings per share
Basic ....................................................................... $ 1.59 $ 1.14
Diluted ..................................................................... $ 1.53 $ 1.09
The operating results of each of our acquisitions are included in the
accompanying consolidated financial statements from its respective date of
purchase.
During 2001, PBG acquired the operations and exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages from two PepsiCo franchise
bottlers. In May and August of 2001, we acquired Pepsi-Cola Bottling of Northern
California, and Pepsi-Cola Elmira Bottling Co. Inc., respectively, for an
aggregate purchase price of $125 million of cash and assumed debt. These
acquisitions were accounted for by the purchase method and were made to enable
us to provide better service to our large retail customers, as well as reduce
costs through economies of scale. The aggregate purchase price exceeded the
fair value of net tangible assets acquired, including the resulting tax effect,
by approximately $108 million in 2001.
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The balances related to each component of accumulated other comprehensive
loss were as follows:
2002 2001 2000
------ ------ ------
Currency translation adjustment ................................. $(285) $(303) $(254)
Cash flow hedge adjustment (a) .................................. (5) (12) --
Minimum pension liability adjustment (b)......................... (178) (55) --
------ ------ -----
Accumulated other comprehensive loss ............................ $(468) $(370) $(254)
====== ====== =====
(a) Net of minority interest and taxes of $4 million in 2002, $8 million in
2001 and $0 in 2000.
(b) Net of minority interest and taxes of $134 million in 2002, $41 million in
2001 and $0 in 2000.
NOTE 18 -- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(shares in thousands)
2002 2001 2000
-------- -------- --------
Number of shares on which basic earnings per share are based:
Weighted-average outstanding during period .................... 281,674 286,024 294,294
Add - Incremental shares under stock compensation plans ....... 11,116 9,655 4,376
-------- -------- --------
Number of shares on which diluted earnings per share are based .. 292,790 295,679 298,670
Basic and diluted net income applicable to common shareholders .. $ 428 $ 305 $ 229
Basic earnings per share ........................................ $ 1.52 $ 1.07 $ 0.78
Diluted earnings per share ...................................... $ 1.46 $ 1.03 $ 0.77
Diluted earnings per share reflect the potential dilution that could occur
if the stock options from our stock compensation plans were exercised and
converted into common stock that would then participate in net income. The
calculation of earnings per share above reflects the two-for-one stock split as
discussed in Note 1.
Shares outstanding reflect the effect of our share repurchase program,
which began in October 1999. In addition, in November 2001 we executed a
two-for-one stock split in the form of a 100% stock dividend, doubling our
weighted-average shares outstanding. As a result of the stock split in 2001, the
amount of shares authorized by the Board of Directors to be repurchased totals
50 million shares, of which we have repurchased approximately 40 million shares
and have reissued approximately 10 million shares for stock option exercises
since the inception of our share repurchase program.
NOTE 19 -- SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 2003, we acquired a Pepsi-Cola bottler based in
Buffalo, New York, for a purchase price of approximately $75 million.
In the first quarter of 2003, we settled a lawsuit with the New Jersey
State Department of Labor and with current and former employees concerning
overtime wage issues. The amount of this settlement was approximately $28
million, which was fully provided for in our litigation reserves as of December
28, 2002 in our Consolidated Balance Sheets.
56
NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER FULL YEAR
------- ------- ------- ------- ---------
Net revenues ........ $1,772 $2,209 $2,455 $2,780 $9,216
Gross profit ........ 830 1,024 1,118 1,243 4,215
Operating income..... 135 271 338 154 898
Net income .......... 54 139 178 57 428
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER FULL YEAR
------- ------- ------- ------- ---------
Net revenues ........ $1,647 $2,060 $2,274 $2,462 $8,443
Gross profit ........ 765 952 1,052 1,094 3,863
Operating income..... 90 217 285 84 676
Net income (1) ...... 26 116 150 13 305
(1) During 2001, the Canadian Government passed laws reducing federal and
certain provincial corporate income tax rates. These rate changes resulted
in one-time gains of $16 million and $9 million in the second and third
quarters of 2001, respectively.
57
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To Our Shareholders:
We are responsible for the preparation, integrity and fair presentation of
the Consolidated Financial Statements, related notes and other information
included in this annual report. The Consolidated Financial Statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and include certain amounts based upon our estimates
and assumptions, as required. Other financial information presented in the
annual report is derived from the Consolidated Financial Statements.
We maintain a system of internal control over financial reporting, designed
to provide reasonable assurance as to the reliability of the Consolidated
Financial Statements, as well as to safeguard assets from unauthorized use or
disposition. The system is supported by formal policies and procedures,
including an active Code of Conduct program intended to ensure employees adhere
to the highest standards of personal and professional integrity. Our internal
audit function monitors and reports on the adequacy of and compliance with the
internal control system, and appropriate actions are taken to address
significant control deficiencies and other opportunities for improving the
system as they are identified.
The Consolidated Financial Statements have been audited and reported on by
our independent auditors, KPMG LLP, who were given free access to all financial
records and related data, including minutes of the meetings of the Board of
Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and appropriate.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, provides oversight to our financial reporting process and our
controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent auditors and
internal auditors have free access to the Audit Committee.
Although no cost-effective internal control system will preclude all errors
and irregularities, we believe our controls as of December 28, 2002 provide
reasonable assurance that our assets are safeguarded.
Alfred H. Drewes Andrea L. Forster
Senior Vice President Vice President
and Chief Financial Officer and Controller
Independent Auditors' Report
The Board of Directors and Shareholders
The Pepsi Bottling Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Pepsi
Bottling Group, Inc. as of December 28, 2002 and December 29, 2001, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the fiscal years in the three-year period ended
December 28, 2002. These consolidated financial statements are the
responsibility of management of The Pepsi Bottling Group, Inc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Pepsi
Bottling Group, Inc. as of December 28, 2002 and December 29, 2001, and the
results of its operations and its cash flows for each of the fiscal years in the
three-year period ended December 28, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted FASB 142, "Goodwill and Other Intangible Assets," as
of December 30, 2001.
/s/ KPMG LLP
New York, New York
January 28, 2003
58
SELECTED FINANCIAL AND OPERATING DATA
in millions, except per share data
FISCAL YEARS ENDED 2002 2001 2000(1) 1999 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues ....................................... $ 9,216 $ 8,443 $ 7,982 $ 7,505 $ 7,041
Cost of sales ...................................... 5,001 4,580 4,405 4,296 4,181
-------- -------- -------- -------- --------
Gross profit ....................................... 4,215 3,863 3,577 3,209 2,860
Selling, delivery and administrative expenses ...... 3,317 3,187 2,987 2,813 2,583
Unusual impairment and other charges and credits (2) -- -- -- (16) 222
-------- -------- -------- -------- --------
Operating income ................................... 898 676 590 412 55
Interest expense, net .............................. 191 194 192 202 221
Other non-operating expenses, net .................. 7 -- 1 1 26
Minority interest .................................. 51 41 33 21 --
-------- -------- -------- -------- --------
Income (loss) before income taxes .................. 649 441 364 188 (192)
Income tax expense (benefit) (3)(4) ................ 221 136 135 70 (46)
-------- -------- -------- -------- --------
Net income (loss) .................................. $ 428 $ 305 $ 229 $ 118 $ (146)
======== ======== ======== ======== ========
PER SHARE DATA: (5)
Basic earnings (loss) per share .................... $ 1.52 $ 1.07 $ 0.78 $ 0.46 $ (1.33)
Diluted earnings (loss) per share .................. $ 1.46 $ 1.03 $ 0.77 $ 0.46 $ (1.33)
Cash dividend per share ............................ $ 0.04 $ 0.04 $ 0.04 $ 0.03 $ --
Weighted-average basic shares outstanding .......... 282 286 294 257 110
Weighted-average diluted shares outstanding ........ 293 296 299 257 110
OTHER FINANCIAL DATA:
Cash provided by operations ........................ $ 1,014 $ 882 $ 779 $ 699 $ 601
Capital expenditures ............................... $ (623) $ (593) $ (515) $ (560) $ (507)
BALANCE SHEET DATA (AT PERIOD END):
Total assets ....................................... $ 10,027 $ 7,857 $ 7,736 $ 7,624 $ 7,322
Long-term debt:
Allocation of PepsiCo long-term debt ............ $ -- $ -- $ -- $ -- $ 3,300
Due to third parties ............................ 4,523 3,285 3,271 3,268 61
-------- -------- -------- -------- --------
Total long-term debt .......................... $ 4,523 $ 3,285 $ 3,271 $ 3,268 $ 3,361
Minority interest .................................. $ 348 $ 319 $ 306 $ 278 $ --
Advances from PepsiCo .............................. $ -- $ -- $ -- $ -- $ 1,605
Accumulated other comprehensive loss ............... $ (468) $ (370) $ (254) $ (223) $ (238)
Shareholders' equity (deficit) ..................... $ 1,824 $ 1,601 $ 1,646 $ 1,563 $ (238)
(1) Our fiscal year 2000 results were impacted by the inclusion of an
extra week in our fiscal year. The extra week increased net income by
$7 million, or $0.02 per share.
(2) Unusual impairment and other charges and credits comprises of the
following:
- $45 million non-cash compensation charge in the second quarter of
1999.
- $53 million vacation accrual reversal in the fourth quarter of 1999.
- $8 million restructuring reserve reversal in the fourth quarter of
1999.
- $222 million charge related to the restructuring of our Russian
bottling operations and the separation of Pepsi-Cola North America's
concentrate and bottling organizations in the fourth quarter of 1998.
(3) 1998 includes a $46 million income tax benefit in the fourth quarter
for the settlement of a disputed claim with the Internal Revenue
Service relating to the deductibility of the amortization of acquired
franchise rights.
(4) Fiscal year 2001 includes Canada tax law change benefits of $25
million.
(5) Reflects the 2001 two-for-one stock split.
59