FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MarkOne)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 15, 2002 (24-weeks)
------------------------
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to
________
Commission file number 1-14893
THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
- ----------------------------------- --------------------
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
- ----------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Capital Stock outstanding as of July 13, 2002:
285,095,507
The Pepsi Bottling Group, Inc.
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Index
Page No.
________
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 24-weeks ended June 15, 2002 and June 16, 2001 2
Condensed Consolidated Statements of Cash Flows -
24-weeks ended June 15, 2002 and June 16, 2001 3
Condensed Consolidated Balance Sheets -
June 15, 2002 and December 29, 2001 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Independent Accountants' Review Report 14
Part II Other Information and Signatures
Item 6. Exhibits 15
-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 24-weeks Ended
-------------- --------------
June 15, June 16, June 15, June 16,
2002 2001 2002 2001
---- ---- ---- ----
Net Revenues....................................................... $2,209 $2,060 $3,981 $3,707
Cost of sales...................................................... 1,185 1,108 2,127 1,990
----- ----- ----- -----
Gross Profit....................................................... 1,024 952 1,854 1,717
Selling, delivery and administrative expenses...................... 753 735 1,448 1,410
----- ----- ----- -----
Operating Income................................................... 271 217 406 307
Interest expense, net.............................................. 46 46 91 90
Minority interest.................................................. 16 14 24 19
----- ----- ----- -----
Income before income taxes......................................... 209 157 291 198
Income tax expense before rate change.............................. 70 57 98 72
Income tax rate change benefit..................................... - (16) - (16)
----- ----- ----- -----
Net Income......................................................... $ 139 $ 116 $ 193 $ 142
===== ===== ===== =====
Basic Earnings Per Share........................................... $ 0.49 $ 0.41 $ 0.68 $ 0.49
Weighted-Average Shares Outstanding................................ 283 287 282 289
Diluted Earnings Per Share......................................... $ 0.47 $ 0.39 $ 0.66 $ 0.48
Weighted-Average Shares Outstanding................................ 296 296 294 298
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
24-weeks Ended
--------------
June 15, June 16,
2002 2001
---- ----
Cash Flows - Operations
Net income........................................................................ $ 193 $ 142
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 189 167
Amortization.............................................................. 3 62
Deferred income taxes..................................................... 36 (7)
Other non-cash charges and credits, net................................... 113 86
Changes in operating working capital:
Accounts receivable..................................................... (235) (222)
Inventories............................................................. (58) (87)
Prepaid expenses and other current assets............................... 31 4
Accounts payable and other current liabilities.......................... 24 34
----- -----
Net change in operating working capital .................................. (238) (271)
----- -----
Net Cash Provided by Operations................................................... 296 179
----- -----
Cash Flows - Investments
Capital expenditures........................................................... (299) (255)
Acquisitions of bottlers....................................................... (30) (68)
Sale of property, plant and equipment.......................................... 7 3
Other, net..................................................................... (18) (15)
----- -----
Net Cash Used for Investments..................................................... (340) (335)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... (80) 149
Proceeds from issuance of long-term debt....................................... 37 -
Payments of long-term debt..................................................... (1) -
Dividends paid................................................................. (6) (6)
Proceeds from exercise of stock options........................................ 70 7
Purchases of treasury stock.................................................... (53) (117)
----- -----
Net Cash (Used for) Provided by Financing......................................... (33) 33
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... 2 (4)
----- -----
Net Decrease in Cash and Cash Equivalents......................................... (75) (127)
Cash and Cash Equivalents - Beginning of Period................................... 277 318
----- -----
Cash and Cash Equivalents - End of Period......................................... $ 202 $ 191
===== =====
Supplemental Cash Flow Information
Third-party interest and income taxes paid........................................ $ 122 $ 143
===== =====
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)
June December
15, 2002 29, 2001
-------- --------
Assets
Current Assets
Cash and cash equivalents................................................ $ 202 $ 277
Accounts receivable, less allowance of $43 at
June 15, 2002 and $42 at December 29, 2001......................... 1,081 823
Inventories.............................................................. 398 331
Prepaid expenses and other current assets................................ 129 117
----- -----
Total Current Assets............................................. 1,810 1,548
Property, plant and equipment, net......................................... 2,739 2,543
Intangible assets, net..................................................... 3,726 3,684
Other assets............................................................... 90 82
----- -----
Total Assets.................................................... $8,365 $7,857
===== =====
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $1,086 $1,004
Short-term borrowings.................................................... 73 77
----- -----
Total Current Liabilities........................................ 1,159 1,081
Long-term debt............................................................. 3,311 3,285
Other liabilities.......................................................... 600 550
Deferred income taxes...................................................... 1,066 1,021
Minority interest.......................................................... 347 319
----- -----
Total Liabilities................................................ 6,483 6,256
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares............................ 3 3
Additional paid-in capital.............................................. 1,753 1,739
Retained earnings....................................................... 835 649
Accumulated other comprehensive loss.................................... (327) (370)
Treasury stock: 25 shares and 29 shares at June 15, 2002 and December 29,
2001, respectively................................................... (382) (420)
----- -----
Total Shareholders' Equity....................................... 1,882 1,601
----- -----
Total Liabilities and Shareholders' Equity...................... $8,365 $7,857
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
-4-
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG") is the world's largest manufacturer,
seller and distributor of Pepsi-Cola beverages consisting of bottling operations
located in the United States, Canada, Spain, Greece, Russia and Turkey.
Pepsi-Cola beverages sold by PBG include Pepsi-Cola, Diet Pepsi, Mountain Dew,
Aquafina and other brands of carbonated soft drinks and non-carbonated
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."
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 Condensed 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 have
been restated to reflect the split.
As of June 15, 2002, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
37.2% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 42.2% of the voting power of all classes of our
voting stock. PepsiCo also owns 7.0% of the equity of Bottling Group, LLC, our
principal operating subsidiary.
The accompanying Condensed Consolidated Balance Sheet at June 15, 2002 and
the Condensed Consolidated Statements of Operations for the 12 and 24-weeks
ended June 15, 2002 and June 16, 2001 and Cash Flows for the 24-weeks ended June
15, 2002 and June 16, 2001 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 29, 2001 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 second 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 and interest, which are not
significantly impacted by business seasonality.
Note 3 - Inventories
June December
15, 2002 29, 2001
-------- --------
Raw materials and supplies.................. $137 $117
Finished goods.............................. 261 214
--- ---
$398 $331
=== ===
-5-
Note 4 - Property, plant and equipment, net
June December
15, 2002 29, 2001
------- --------
Land................................................................... $ 153 $ 145
Buildings and improvements............................................. 976 925
Manufacturing and distribution equipment............................... 2,496 2,308
Marketing equipment.................................................... 1,955 1,846
Other.................................................................. 133 121
----- -----
5,713 5,345
Accumulated depreciation............................................... (2,974) (2,802)
----- -----
$2,739 $2,543
===== =====
Note 5 - Intangible assets, net
June December
15, 2002 29, 2001
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.................................................... $ 18 $ 12
Other identifiable intangibles...................................... 44 39
----- -----
62 51
----- -----
Accumulated amortization:
Franchise rights.................................................... (4) (2)
Other identifiable intangibles...................................... (26) (25)
----- -----
(30) (27)
----- -----
Intangibles not subject to amortization:
Gross carrying amount:
Franchise rights.................................................... 3,610 3,585
Goodwill............................................................ 1,589 1,574
----- -----
5,199 5,159
----- -----
Accumulated amortization:
Franchise rights.................................................... (975) (971)
Goodwill............................................................ (530) (528)
----- -----
(1,505) (1,499)
----- -----
$3,726 $3,684
===== =====
Note 6 - Acquisitions
In March 2002, PBG acquired the operations and exclusive right to
manufacture, sell and distribute Pepsi-Cola's international beverages in Turkey.
Specifically, we acquired the majority and minority ownership interests in Fruko
Mesrubat Sanayii A.S. and other related entities from Tamek Holding A.S. and
individual shareholders, and PepsiCo. Prior to the acquisition, PepsiCo had a
22% investment in the bottling operations in Turkey. As part of this
acquisition, PBG paid PepsiCo $7 million for its equity interest in the acquired
entity, and received $16 million from PepsiCo for the sale of the acquired
entity's local brands to PepsiCo. Also in March 2002, we acquired the operations
and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages
from the Pepsi-Cola Bottling Company of Macon, Inc. in Georgia. The aggregate
purchase price of these two acquisitions was $91 million consisting of $21
million of net cash paid and $70 million of assumed debt. Of the $26 million of
acquired intangible assets, $6 million was assigned to goodwill, and $15 million
to franchise rights, both of which are not subject to amortization, and $5
million was assigned to other identifiable intangibles, which are subject to
amortization.
-6-
In June 2002, PBG acquired the operations and exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages from the Pepsi-Cola
Bottling Company of Aroostook, Inc., based in Presque Isle, Maine. The purchase
price of this acquisition was approximately $5 million.
The Turkey acquisition was made to allow us to strategically increase our
markets outside the United States. Our domestic 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.
In 2002, PBG paid approximately $4 million to PepsiCo for distribution
rights relating to the SoBe brand in certain PBG-owned territories in the United
States. These rights are subject to amortization.
In May 2002, PBG signed a non-binding agreement with the two principal
shareholders of the Mexican bottler Pepsi-Gemex, S.A. de C.V. regarding the
possible acquisition of all the outstanding shares of the company. Pepsi-Gemex
is the second largest bottler of Pepsi-Cola beverages outside of the United
States. It is expected that if the transaction occurs, it will be in the form of
cash tender offers in the United States and Mexico. The gross enterprise value
of Pepsi-Gemex, of which PepsiCo is an approximately 34% shareholder, as
determined by the parties is 11.9 billion Mexican pesos. At the time of the
filing of this 10-Q, we can provide no assurance with respect to the timing,
value or determination to proceed with any transaction.
Note 7 - Treasury Stock
In the first 24 weeks of 2002, we repurchased approximately 2 million
shares for $53 million and approximately 6 million shares for $117 million over
the same period in 2001. Since the inception of the our share repurchase program
in October 1999, nearly 34 million shares of PBG common stock have been
repurchased of the total 50 million shares authorized to be repurchased.
Note 8 - Financial Instruments
As of June 15, 2002, our use of derivative instruments is limited to an
interest rate swap, forward contracts, futures and options on futures contracts.
Cash Flow Hedge - 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 aluminum 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.
In the first 24 weeks of 2002, the amount of deferred losses from our
commodity hedging that we recognized into income was $7 million, while a $2
million deferred gain was recognized over the same period of 2001. An $8 million
deferred gain and $19 million deferred loss remained in accumulated other
comprehensive loss in our Condensed Consolidated Balance Sheets at June 15, 2002
and December 29, 2001, respectively, resulting from our commodity hedges. We
anticipate that the deferred gain as of June 15, 2002, which is $5 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 2002 or 2001.
Fair Value Hedges - 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. At June 15, 2002
and December 29, 2001 our debt instruments primarily consisted of $3.3 billion
-7-
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.
There was essentially no change in fair value of the interest rate swap in
the first 24 weeks of 2002, which compares to a gain of $7 million over the same
period in 2001. The fair value change was recorded in interest expense, net in
our Condensed Consolidated Statements of Operations and in prepaid expenses and
other current assets in our Condensed Consolidated Balance Sheets. An offsetting
adjustment 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.
During the third quarter of 2002, PBG purchased an interest rate swap that
converted the remaining $900 million of our $1 billion 5 3/8% fixed rate debt to
floating rate debt. The new interest rate swap expires in 2004 and is designed
as and qualifies for fair value hedge accounting. The hedge is 100% effective in
eliminating the interest rate risk inherent in our long-term debt.
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.
At June 15, 2002 and December 29, 2001, we had one prepaid forward contract
outstanding. The contract was for 608,000 shares of PBG stock with an exercise
price of $23.02 per share. The contract expires in December of 2002 with a
one-year renewal option.
Note 9 - New Accounting Standards
During 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 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 the initial impairment review required by SFAS 142 and have determined
that our intangible assets were not impaired. Had we adopted SFAS 142 on the
first day of 2001, our 2001 amortization expense would have been lowered by
approximately $30 million and $59 million in the quarter and year-to-date,
respectively. In addition, net income would have increased $21 million (or $0.07
per diluted share) to $137 million (or $0.46 per diluted share) and $42 million
(or $0.14 per diluted share) to $184 million (or $0.62 per diluted share) in the
quarter and year-to-date, respectively.
-8-
Note 10 - Comprehensive Income
12-weeks Ended 24-weeks Ended
-------------- --------------
June June June June
15, 2002 16, 2001 15, 2002 16, 2001
-------- -------- -------- --------
Net income..................................................... $139 $116 $193 $142
Currency translation adjustment................................ 25 - 27 (31)
Cash flow hedge accounting adjustment.......................... 9 - 16 (2)
--- --- --- ---
Comprehensive income........................................... $173 $116 $236 $109
=== === === ===
Note 11 - Contingencies
We are involved in a lawsuit with current and former employees concerning
wage and hour issues in New Jersey. We are unable to predict the ultimate amount
of any costs or implications of this case at this time as legal proceedings are
ongoing.
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.
-9-
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
- --------------------------------------------------------------------------------
Overview
Highlights for The Pepsi Bottling Group, Inc.'s (collectively referred to
as "PBG," "we," "our" and "us") second quarter and first 24-weeks of 2002 were
as follows:
o We delivered 10% constant territory EBITDA growth in the second quarter and
11% growth in the first 24-weeks of 2002.
o We increased worldwide constant territory physical case volume by 2% and 3%
in the second quarter and first 24-weeks of 2002, respectively.
o We grew second quarter and year-to-date worldwide constant territory net
revenue per case by 3%.
o We delivered second quarter 2002 diluted earnings per share of $0.47, an
increase of $0.08, or 19%, over 2001 and second quarter year-to-date
diluted earnings per share of $0.66, an increase of $0.18, or 38%, over the
same 24 -week period in 2001.
- Included in the second quarter increase of $0.08 and year-to-date
increase of $0.18 is a $0.07 and $0.14, respectively, favorable impact
from the adoption of Statement of Financial Accounting Standard
("SFAS") 142, "Goodwill and Other Intangible Assets."
- In addition, diluted earnings per share in 2001 include a tax benefit
of $0.05 in both the quarter and year-to-date resulting from a
reduction in Canadian income tax rates.
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.
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
- ---------------------
Reported Change Constant Territory Change
--------------- -------------------------
12-weeks 24-weeks 12-weeks 24-weeks
-------- -------- -------- --------
EBITDA..................... 11% 12% 10% 11%
Volume...................... 5% 5% 2% 3%
Net Revenue per Case........ 2% 3% 3% 3%
-10-
EBITDA
EBITDA was $370 million and $598 million in the second quarter and first
24-weeks of 2002, representing an 11% and 12% increase over the same periods of
2001, respectively. On a constant territory basis, EBITDA growth was 10% for the
quarter and 11% year-to-date reflecting an increase in net revenue per case
across all countries and volume growth, primarily in the U.S. and Russia. The
growth in both periods is partially offset by modest increases in cost of sales
per case and selling, delivery and administrative expenses.
Volume
Our worldwide physical case volume increased 5% in both the second quarter
and first 24-weeks of 2002. Constant territory volume growth was 2% and 3% in
the second quarter and year-to-date, respectively, led by the U.S. where volume
increased 2% in the second quarter and 3% year-to-date. The U.S. second quarter
results reflect solid take-home volume growth, partially offset by flat cold
drink volume. The second quarter cold drink volume was unfavorably impacted by
unseasonably cold weather in the U.S. and Canada, in addition to the lapping of
the introduction of Mountain Dew Code Red in the prior year. On a year-to-date
basis, the U.S. constant territory volume increase was led by favorable
performance in both the take-home and cold drink channels. United States volume
growth continues to benefit from innovation, as well as the strong growth of
Aquafina. Outside the U.S., our constant territory volume increased 4% in both
the quarter and year-to-date as double-digit growth in Russia was partially
offset by volume softness in Canada and declines in Spain.
Net Revenues
Net revenues for the quarter grew $149 million, a 7% increase over the
prior year, with year-to-date net revenues up 7% as well. On a constant
territory basis, net revenues grew 5% in the quarter driven by volume growth of
2% and a 3% increase in net revenue per case. On a year-to-date basis, constant
territory net revenue grew 6% reflecting 3% growth in both volume and net
revenue per case. Constant territory net revenue per case growth was driven by
the U.S., which grew 3% in both periods reflecting an increase in pricing,
combined with favorable package and channel mix. Outside the U.S., constant
territory net revenues were up 5% in the quarter, consisting of 4% volume growth
and 1% net revenue per case growth. On a year-to-date basis, net revenues
outside the U.S. were up 4%, reflecting a 4% increase in volume and relatively
flat net revenue per case growth. Excluding the negative impact of currency
translations, net revenue per case grew 1% and 2% outside the U.S. in the
quarter and first 24-weeks of 2002, respectively, and had no impact on worldwide
net revenue per case growth.
Cost of Sales
Cost of sales increased $77 million, or 7%, in the second quarter of 2002
and $137 million, or 7%, year-to-date. On a constant territory basis, cost of
sales grew 4% in the quarter driven by volume growth of 2% and a 2% increase in
cost of sales per case. On a year-to-date basis, constant territory cost of
sales grew 5% reflecting 3% growth in volume and a 2% increase in cost of sales
per case. The increase in cost of sales per case was driven by higher U.S.
concentrate costs, and mix shifts into higher cost packages.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses grew $18 million, or 3%, in
the second quarter and $38 million, or 3%, in the first 24-weeks of 2002.
Excluding the impact of the adoption of SFAS 142, which had it been adopted on
the first day of 2001 would have lowered second quarter and year-to-date
amortization expense by $30 million and $59 million, respectively, constant
territory selling, delivery and administrative expenses grew 5% in the quarter
and 6% year-to-date. This increase was primarily driven by higher variable
selling and delivery costs reflecting growth in our business and higher
advertising and marketing costs.
-11-
Income Tax Expense Before Rate Change
PBG's full year forecasted effective tax rate for 2002 is 33.8% and has
been applied to our 2002 results. This rate corresponds to an effective tax rate
of 36.5% in 2001. The decrease in the effective tax rate is primarily a result
of the implementation of SFAS 142 in 2002.
Income Tax Rate Change Benefit
In the second quarter of 2001, the Canadian Government enacted legislation
that reduced the federal corporate income tax rate from 28% to 21% over a
four-year period beginning January 1, 2001. In addition, certain provincial
income tax rates were also reduced. These rate changes reduced deferred tax
liabilities associated with our operations in Canada. The changes to deferred
taxes resulted in a reduction of our tax expense in the second quarter of 2001
totaling $16 million ($0.05 per diluted share after minority interest).
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations increased $117 million to $296 million
reflecting strong EBITDA growth coupled with improved working capital.
Net cash used for investments increased by $5 million primarily due to an
increase in capital expenditures, partially offset by lower acquisition
spending.
Net cash (used for) provided by financing increased by $66 million from a
source of cash of $33 million in 2001 to a use of cash of $33 million in 2002.
In 2002, net cash used for financing activities is driven by the pay down of
short term borrowings primarily outside the U.S., offset by a decrease in share
repurchases and an increase of stock option exercises. In 2001, net cash
provided by financing was driven by short-term borrowings, which were used
primarily to fund investment spending and share repurchases.
Cautionary Statements
- ----------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. 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, and unfavorable interest rate and currency fluctuations.
-12-
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
We have no material changes to the risk disclosures made in our 2001 Annual
Report on Form 10-K.
Item 4.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
(a) Annual Meeting of Shareholders of The Pepsi Bottling Group, Inc. was
held on May 22, 2002.
(b) The names of all directors are set forth in (c) below. The proxies for
the meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934. There were no solicitations in opposition to the
nominees as listed in the proxy and all such nominees were elected.
(c) A brief description of each matter voted on and the number of votes
cast are as follows:
Number of Votes (millions)
--------------------------
Broker
Description of Proposals For Against Abstain Non-votes
- ------------------------ --- ------- ------- ---------
1) Election of Directors:
Linda G. Alvarado 275 N/A 30 N/A
Barry H. Beracha 276 N/A 29 N/A
John T. Cahill 277 N/A 28 N/A
Thomas H. Kean 278 N/A 27 N/A
Susan D. Kronick 276 N/A 29 N/A
Blythe J. McGarvie 277 N/A 28 N/A
Margaret D. Moore 277 N/A 28 N/A
Clay G. Small 283 N/A 22 N/A
Craig E. Weatherup 277 N/A 28 N/A
2) Approval of the PBG 2002 Long-Term
Incentive Plan 150 94 61 N/A
3) Approval of the appointment of KPMG LLP
as independent auditors 252 6 47 N/A
-13-
Independent Accountants' Review Report
--------------------------------------
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 June 15, 2002, and the related Condensed
Consolidated Statements of Operations for the twelve and twenty-four weeks ended
June 15, 2002 and June 16, 2001 and the Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended June 15, 2002 and June 16, 2001.
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 29, 2001, and the related Consolidated
Statements of Operations, Cash Flows and Changes in Shareholders' Equity for the
fifty-two week period then ended not presented herein; and in our report dated
January 24, 2002, 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 29, 2001, 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
July 9, 2002
-14-
PART II - OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 17.
-15-
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.
------------------------------
(Registrant)
Date: July 26, 2002 Andrea L. Forster
------------- -------------------------------
Vice President and Controller
Date: July 26, 2002 Alfred H. Drewes
------------- -------------------------------
Senior Vice President and
Chief Financial Officer
-16-
INDEX TO EXHIBITS
-----------------
ITEM 6 (a)
----------
EXHIBITS
- --------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
-17-
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
(in millions, except per share data)
12-weeks Ended 24-weeks Ended
-------------- --------------
June 15, June 16, June 15, June 16,
2002 2001 2002 2001
---- ---- ---- ----
Number of shares on which basic earnings
per share is based:
Average outstanding during period................ 283 287 282 289
Add - Incremental shares under stock
compensation plans............................. 13 9 12 9
---- ---- ---- ----
Number of shares in which diluted
earnings per share is based...................... 296 296 294 298
Net earnings applicable to common
shareholders (millions)......................... $ 139 $ 116 $ 193 $ 142
Net earnings on which diluted earnings
per share is based (millions)................... $ 139 $ 116 $ 193 $ 142
Basic earnings per share........................... $0.49 $0.41 $0.68 $0.49
Diluted earnings per share......................... $0.47 $0.39 $0.66 $0.48
-18-