FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 For the quarterly period ended March 24, 2001 (12 weeks)
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
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(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
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(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Number of shares of Capital Stock outstanding as of April 20, 2001:
143,803,242
The Pepsi Bottling Group
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Index
Page No.
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 weeks ended March 24, 2001 and March 18, 2000 2
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 24, 2001 and March 18, 2000 3
Condensed Consolidated Balance Sheets -
March 24, 2001 and December 30, 2000 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
Independent Accountants' Review Report 11
Part II Other Information and Signatures
Item 6. Exhibits 12
-1-
PART I - FINANCIAL INFORMATION
Item 1.
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations
in millions except per share amounts, unaudited
12 Weeks Ended
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March 24, March 18,
2001 2000
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Net Revenues................................................................ $1,647 $1,545
Cost of sales............................................................... 882 845
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Gross Profit................................................................ 765 700
Selling, delivery and administrative expenses............................... 675 625
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Operating Income............................................................ 90 75
Interest expense, net....................................................... 44 45
Minority interest........................................................... 5 3
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Income before income taxes.................................................. 41 27
Income tax expense.......................................................... 15 10
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Net Income.................................................................. $ 26 $ 17
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Basic Earnings per Share.................................................... $ 0.18 $ 0.11
Weighted-Average Shares Outstanding......................................... 145 149
Diluted Earnings per Share.................................................. $ 0.17 $ 0.11
Weighted-Average Shares Outstanding......................................... 150 149
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
12 Weeks Ended
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March 24, March 18,
2001 2000
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Cash Flows - Operations
Net income...................................................................... $ 26 $ 17
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 81 76
Amortization.............................................................. 30 30
Deferred income taxes..................................................... 1 (11)
Other non-cash charges and credits, net................................... 40 33
Changes in operating working capital:
Trade accounts receivable............................................... 2 (8)
Inventories............................................................. (33) (7)
Prepaid expenses and other current assets............................... 2 (13)
Accounts payable and other current liabilities.......................... (120) (115)
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Net change in operating working capital .................................. (149) (143)
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Net Cash Provided by Operations................................................... 29 2
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Cash Flows - Investments
Capital expenditures........................................................... (114) (85)
Other, net..................................................................... (7) (4)
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Net Cash Used for Investments..................................................... (121) (89)
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Cash Flows - Financing
Short-term borrowings - three months or less................................... 9 19
Payments of third-party debt................................................... (1) (8)
Dividends paid................................................................. (3) (3)
Treasury stock transactions.................................................... (54) (29)
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Net Cash Used for Financing....................................................... (49) (21)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... (4) (1)
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Net Decrease in Cash and Cash Equivalents......................................... (145) (109)
Cash and Cash Equivalents - Beginning of Period................................... 318 190
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Cash and Cash Equivalents - End of Period......................................... $ 173 $ 81
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Supplemental Cash Flow Information
Third-party interest and income taxes paid........................................ $ 100 $ 139
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See accompanying notes to Condensed Consolidated Financial Statements.
-3-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
(Unaudited)
March December
24, 2001 30, 2000
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Assets
Current Assets
Cash and cash equivalents................................................ $ 173 $ 318
Accounts receivable, less allowance of $43 and 42 at
March 24, 2001 and December 30, 2000, respectively................. 782 796
Inventories.............................................................. 313 281
Prepaid expenses and other current assets................................ 172 189
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Total Current Assets............................................. 1,440 1,584
Property, plant and equipment, net......................................... 2,375 2,358
Intangible assets, net..................................................... 3,643 3,694
Other assets............................................................... 97 100
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Total Assets................................................ $7,555 $7,736
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $ 809 $ 941
Short-term borrowings.................................................... 35 26
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Total Current Liabilities........................................ 844 967
Long-term debt............................................................. 3,274 3,271
Other liabilities.......................................................... 485 474
Deferred income taxes...................................................... 1,061 1,072
Minority interest.......................................................... 309 306
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Total Liabilities................................................ 5,973 6,090
Shareholders' Equity
Common stock, par value $.01 per share:
authorized 300 shares, issued 155 shares............................ 2 2
Additional paid-in capital.............................................. 1,736 1,736
Retained earnings....................................................... 378 355
Accumulated other comprehensive loss.................................... (287) (254)
Treasury stock: 11 shares and 10 shares at March 24, 2001 and December 30,
2000, respectively................................................... (247) (193)
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Total Shareholders' Equity....................................... 1,582 1,646
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Total Liabilities and Shareholders' Equity.................. $7,555 $7,736
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See accompanying notes to Condensed Consolidated Financial Statements.
-4-
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
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Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations
located in the United States, Canada, Spain, Greece and Russia. 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 other ready-to-drink beverages. Approximately 90% of PBG's net revenues were
derived from the sale of Pepsi-Cola beverages. References to PBG throughout
these Condensed Consolidated Financial Statements are made using the
first-person notations of "we," "our" and "us."
Prior to our formation, we were an operating unit of PepsiCo, Inc.
("PepsiCo"). On March 31, 1999, we offered 100 million shares of PBG common
stock for sale at $23 per share in an initial public offering. As of March 24,
2001, PepsiCo's ownership consisted of 38.1% of our outstanding common stock and
100% of our outstanding Class B common stock, together representing 46.4% of the
voting power of all classes of our voting stock. PepsiCo also owns 7.1% of the
equity of Bottling Group, LLC, our principal operating subsidiary, giving
PepsiCo economic ownership of 42.5% of our combined operations at March 24,
2001.
The accompanying Condensed Consolidated Balance Sheet at March 24, 2001 and
the Condensed Consolidated Statements of Operations and Cash Flows for the 12
weeks ended March 24, 2001 and March 18, 2000 have not been audited, but have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. These Condensed Consolidated Financial Statements should
be read in conjunction with the audited consolidated financial statements for
the fiscal year ended December 30, 2000 as presented in our Annual Report on
Form 10-K. In the opinion of management, this interim information includes all
material adjustments, which are of a normal and recurring nature, necessary for
a fair presentation.
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation, amortization and interest,
which are not significantly impacted by business seasonality.
Note 3 - Inventories
March December
24, 2001 30, 2000
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Raw materials and supplies............................................. $ 118 $ 107
Finished goods......................................................... 195 174
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$ 313 $ 281
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-5-
Note 4 - Property, Plant and Equipment, net
March December
24, 2001 30, 2000
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Land................................................................... $ 144 $ 145
Buildings and improvements............................................. 904 903
Manufacturing and distribution equipment............................... 2,219 2,186
Marketing equipment.................................................... 1,758 1,745
Other.................................................................. 93 89
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5,118 5,068
Accumulated depreciation............................................... (2,743) (2,710)
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$2,375 $2,358
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Note 5 - New Accounting Standards
We adopted the accounting and reporting standards of Statement of Financial
Accounting Standard 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 137 and SFAS 138, on the first day of fiscal
year 2001. The adoption resulted in an increase in current assets of $4 million,
a reduction of accumulated other comprehensive loss of $4 million and had no
impact on our statement of operations.
All derivatives are now recorded at fair value as either assets or
liabilities in our consolidated balance sheet. Using qualifying criteria defined
in SFAS 133, derivative instruments are 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 a cash flow hedge, 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 ineffective portion of fair value changes on qualifying hedges is recognized
in earnings immediately and is recorded 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 may enter into a derivative instrument 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 Condensed Consolidated Balance Sheets at
fair value with changes in fair value recognized in earnings.
As of March 24, 2001, our use of derivative instruments was limited to an
interest rate swap, 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.
-6-
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 futures
contracts and options on futures in the normal course of business to hedge the
risk of adverse movements in commodity prices related to anticipated purchases
of certain raw materials and fuel used in our operations. These contracts, which
generally range from 1 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.
During the first quarter of 2001, we recognized $2 million of deferred
gains from our commodity hedging into income as inventory being hedged was sold.
At March 24, 2001 a $2 million deferred loss remained in accumulated other
comprehensive loss in our Condensed Consolidated Balance Sheet resulting from
our commodity hedges. We anticipate that this loss, which totals $1 million on
an after-tax basis, will be recognized in cost of sales in our Condensed
Consolidated Statements of Operations 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 the first quarter of 2001.
Fair Value Hedges
We finance a portion of our operations through fixed rate debt instruments.
At March 24, 2001 our debt instruments primarily consisted of $3 billion of
fixed rate long-term senior notes, 3% of which we converted to floating rate
debt through the use of an interest rate swap with the objective of reducing our
overall borrowing costs. This interest rate swap, which expires in 2004, is
designated as and qualifies for fair value hedge accounting and is 100%
effective in eliminating the interest rate risk inherent in our long-term debt
as the notional amount, interest payment and maturity date of the swap matches
the notional amount, interest payment and maturity date of the related debt.
Accordingly, any market risk or opportunity associated with this swap is fully
offset by the opposite market impact on the related debt. The first quarter 2001
change in fair value of the interest rate swap was a gain of $3 million, which
was recorded in interest expense, net in our Condensed Consolidated Statements
of Operations and prepaid expenses and other current assets in our Condensed
Consolidated Balance Sheets. An offsetting $3 million loss was recorded in
interest expense, net in our Condensed Consolidated Statements of Operations and
in long-term debt in our Condensed Consolidated Balance Sheets representing the
change in fair value in long-term debt in the first quarter of 2001.
Equity derivatives
We use equity derivative contracts with financial institutions to hedge a
portion of our deferred compensation liability which is based on our stock
price. These prepaid forward contracts for the purchase of PBG common stock are
accounted for as natural hedges. The earnings impact from these hedges is
classified as selling, delivery and administrative expenses consistent with the
expense classification of the underlying hedged item.
Note 6 - Comprehensive Income (Loss)
12 Weeks Ended
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March March
24, 2001 18, 2000
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Net income............................................................. $ 26 $ 17
Currency translation adjustment........................................ (27) (13)
FAS 133 adjustment..................................................... (6) -
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Comprehensive Income (Loss)............................................ $ (7) $ 4
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-7-
Item 2.
Management's Discussion and Analysis of Results of Operations
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and Financial Condition
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Overview
In the first quarter of 2001 The Pepsi Bottling Group, Inc. (collectively
referred to as "PBG," "we," "our" and "us") again delivered outstanding
operating results. Highlights of the quarter were as follows:
o We delivered 11% EBITDA growth in the first quarter of 2001.
o We increased worldwide physical case volume by 4% in the quarter.
o We grew first quarter worldwide net revenue per case by 3% compared to the
same period in 2000.
o We delivered $0.17 in diluted earnings per share, an increase of $0.06 or
54%, over 2000.
The following management's discussion and analysis should be read in
conjunction with our Condensed Consolidated Financial Statements and
accompanying footnotes along with the cautionary statements at the end of this
section.
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. Constant territory results also exclude any unusual
impairment and other charges and credits.
Use of EBITDA
EBITDA, which is computed as operating income plus the sum of depreciation
and amortization, is a key indicator management and the industry use to evaluate
operating performance. It is not, however, required under generally accepted
accounting principles and should not be considered an alternative to
measurements required by GAAP such as net income or cash flows.
Results of Operations
- ---------------------
Constant
Reported Territory
Change Change
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EBITDA................................................................... 11% 11%
Volume................................................................... 4% 4%
Net Revenue per Case..................................................... 3% 3%
EBITDA
EBITDA was $201 million in the first quarter of 2001, representing an 11%
increase over the same period of 2000. Our growth reflected a balanced equation
of increased pricing and solid volume growth as well as continued favorable cost
of sales trends.
Volume
Our worldwide physical case volume was up 4% in the first quarter of 2001.
In the U.S., volume increased 2% led by distribution of Sierra Mist and strong
growth in Aquafina, driving increases in both our cold drink and take-home
segments. Outside the U.S., our constant territory volumes increased 14%
reflecting improvements across all of our markets, particularly in Russia, which
grew well over 50%.
-8-
Net Revenues
Net revenues for the quarter grew 7% on a reported basis and over 6% on a
constant territory basis driven by volume growth of 4% and an approximate 3%
increase in net revenue per case. Constant territory net revenue per case growth
was driven by the U.S., which grew 4%, reflecting higher take-home pricing and
positive package and channel mix. Outside the U.S., constant territory net
revenues were up 8% reflecting a 14% increase in volume offset by a 6% decrease
in net revenue per case. Excluding the negative impact of currency translations,
net revenue per case was flat outside the U.S. and increased over 3% worldwide.
Cost of Sales
Cost of sales increased $37 million, or 4%, in the first quarter of 2001.
On a per case basis, cost of sales increased 1% over the same period in 2000
reflecting higher U.S. concentrate costs, which took effect in February 2001,
offset by favorable currency translations and country mix.
Selling, delivery and administrative expenses
Selling, delivery and administrative expenses grew $50 million, or 8%. This
primarily reflects increased selling and delivery costs resulting from volume
growth, our continued investment in our U.S. and Canadian cold drink
infrastructure and higher advertising and marketing costs. Current year costs
also include an approximate 1 percentage point favorable impact from currency
translations.
Income tax expense
PBG's full year forecasted effective tax rate for 2001 is 36.5% and this
rate has been applied to first quarter results. This rate corresponds to an
effective tax rate of 37.0% in 2000. The decrease is primarily due to the
reduced impact of fixed non-deductible expenses on higher anticipated pre-tax
income in 2001.
Liquidity and Capital Resources
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Cash Flows
Net cash provided by operations increased $27 million to $29 million as
strong growth in income was partially offset by unfavorable working capital cash
flows.
Net cash used for investments increased by $32 million from $89 million in
the first quarter of 2000 to $121 million over the same period in 2001,
primarily due to capital expenditures, which increased by $29 million, or 34%,
driven by increased infrastructure spending.
Net cash used for financing increased by $28 million from $21 million in
2000 to $49 million in 2001. This increase primarily reflects an increase in
share repurchases of $25 million in 2001.
Euro
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On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between existing currencies and one common
currency, the Euro. Beginning in January 2002, new Euro-denominated bills and
coins will be issued, and existing currencies will be withdrawn from
circulation. Spain is one of the original member countries that instituted the
Euro and, in June 2000, Greece also elected to institute the Euro effective
January 1, 2001. We have established plans to address the issues raised by the
Euro currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment such as vending
machines to accommodate Euro-denominated transactions and the impact of one
common currency on cross-border pricing. Since financial systems and processes
currently accommodate multiple currencies, we do not expect the system and
equipment conversion costs to be material. Due to numerous uncertainties, we
cannot reasonably estimate the long-term effects one common currency may have on
pricing, costs and the resulting impact, if any, on our financial condition or
results of operations.
-9-
Cautionary Statements
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Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. 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 employee infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories, unexpected costs associated with conversion to the common European
currency and unfavorable interest rate and currency fluctuations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the risk disclosures made in our 2000 Annual
Report on Form 10-K.
-10-
Independent Accountants' Review Report
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The Board of Directors
The Pepsi Bottling Group, Inc.
We have reviewed the accompanying Condensed Consolidated Balance Sheet of
The Pepsi Bottling Group, Inc. as of March 24, 2001, and the related Condensed
Consolidated Statements of Operations and Cash Flows for the twelve weeks ended
March 24, 2001 and March 18, 2000. These Condensed Consolidated Financial
Statements are the responsibility of The Pepsi Bottling Group, Inc.'s
management.
We conducted our review in accordance with standards established by the
American institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the Condensed Consolidated Financial Statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the Consolidated Balance Sheet of The
Pepsi Bottling Group, Inc. as of December 30, 2000, and the related Consolidated
Statements of Operations, Cash Flows and Changes in Owners' Equity for the
fifty-three week period then ended not presented herein; and in our report dated
January 30, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 30, 2000, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
April 11, 2001
-11-
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 14.
-12-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
THE PEPSI BOTTLING GROUP, INC.
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(Registrant)
Date: May 7, 2001 Andrea L. Forster
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Vice President and Controller
Date: May 7, 2001 Lionel L. Nowell III
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Executive Vice President and
Chief Financial Officer
-13-
INDEX TO EXHIBITS
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ITEM 6 (a)
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EXHIBITS
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
-14-
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
(in millions, except per share data)
12 Weeks Ended
---------------
3/24/01 3/18/00
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Number of shares on which basic earnings per share is based:
Weighted-average outstanding during period.................. 145 149
Add - Incremental shares under stock
compensation plans........................................ 5 -
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Number of shares in which diluted
earnings per share is based................................. 150 149
Net earnings applicable to common
shareholders............................................... $ 26 $ 17
Net earnings on which diluted earnings
per share is based......................................... $ 26 $ 17
Basic earnings per share...................................... $0.18 $0.11
Diluted earnings per share.................................... $0.17 $0.11
-15-