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 September 7, 2002 (36-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 __________
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
-----
(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 October 5, 2002:
280,454,691
The Pepsi Bottling Group, Inc.
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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 and 36-weeks ended September 7, 2002 and September 8, 2001 2
Condensed Consolidated Statements of Cash Flows -
36-weeks ended September 7, 2002 and September 8, 2001 3
Condensed Consolidated Balance Sheets -
September 7, 2002 and December 29, 2001 4
Notes to Condensed Consolidated Financial Statements 5-9
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information 16-22
-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 36-weeks Ended
-------------- --------------
September September September September
7, 2002 8, 2001 7, 2002 8, 2001
--------- --------- --------- ---------
Net Revenues.............................................................. $2,455 $2,274 $6,436 $5,981
Cost of sales............................................................. 1,337 1,222 3,464 3,212
----- ----- ----- -----
Gross Profit.............................................................. 1,118 1,052 2,972 2,769
Selling, delivery and administrative expenses............................. 780 767 2,228 2,177
----- ----- ----- -----
Operating Income.......................................................... 338 285 744 592
Interest expense, net..................................................... 45 45 136 135
Foreign currency loss..................................................... 3 - 3 -
Minority interest......................................................... 21 18 45 37
----- ----- ----- -----
Income before income taxes................................................ 269 222 560 420
Income tax expense before rate change..................................... 91 81 189 153
Income tax rate change benefit............................................. - (9) - (25)
----- ----- ----- -----
Net Income................................................................ $ 178 $ 150 $ 371 $ 292
====== ===== ===== =====
Basic Earnings Per Share.................................................. $ 0.63 $ 0.53 $ 1.31 $ 1.02
Weighted-Average Shares Outstanding........................................ 283 285 282 287
Diluted Earnings Per Share................................................ $ 0.61 $ 0.51 $ 1.26 $ 0.98
Weighted-Average Shares Outstanding....................................... 294 295 294 297
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
36-weeks Ended
--------------
September September
7, 2002 8, 2001
--------- ---------
Cash Flows - Operations
Net income..................................................................... $ 371 $ 292
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 291 257
Amortization.............................................................. 5 92
Deferred income taxes..................................................... 82 17
Other non-cash charges and credits, net................................... 168 133
Changes in operating working capital:
Accounts receivable..................................................... (281) (274)
Inventories............................................................. (35) (58)
Prepaid expenses and other current assets............................... 58 61
Accounts payable and other current liabilities.......................... (8) 17
----- -----
Net change in operating working capital .................................. (266) (254)
----- -----
Net Cash Provided by Operations................................................... 651 537
----- -----
Cash Flows - Investments
Capital expenditures........................................................... (437) (397)
Acquisitions of bottlers....................................................... (34) (111)
Sale of property, plant and equipment.......................................... 4 4
Other, net..................................................................... (44) (24)
----- -----
Net Cash Used for Investments..................................................... (511) (528)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... (76) 67
Proceeds from issuance of long-term debt....................................... 38 -
Payments of long-term debt..................................................... (4) -
Dividends paid................................................................. (8) (9)
Proceeds from exercise of stock options........................................ 84 11
Purchases of treasury stock.................................................... (165) (169)
----- -----
Net Cash Used for Financing....................................................... (131) (100)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... 1 (4)
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents.............................. 10 (95)
Cash and Cash Equivalents - Beginning of Period................................... 277 318
----- -----
Cash and Cash Equivalents - End of Period......................................... $ 287 $ 223
===== =====
Supplemental Cash Flow Information
Third-party interest and income taxes paid........................................ $ 244 $ 235
===== =====
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)
September December
7, 2002 29, 2001
--------- --------
Assets
Current Assets
Cash and cash equivalents................................................ $ 287 $ 277
Accounts receivable, less allowance of $50 at
September 7, 2002 and $42 at December 29, 2001..................... 1,135 823
Inventories.............................................................. 376 331
Prepaid expenses and other current assets................................ 117 117
----- -----
Total Current Assets............................................. 1,915 1,548
Property, plant and equipment, net......................................... 2,783 2,543
Intangible assets, net..................................................... 3,739 3,684
Other assets............................................................... 100 82
----- -----
Total Assets.................................................... $8,537 $7,857
===== =====
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $1,095 $1,004
Short-term borrowings.................................................... 55 77
----- -----
Total Current Liabilities........................................ 1,150 1,081
Long-term debt............................................................. 3,350 3,285
Other liabilities.......................................................... 616 550
Deferred income taxes...................................................... 1,101 1,021
Minority interest.......................................................... 365 319
----- -----
Total Liabilities................................................ 6,582 6,256
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares............................ 3 3
Additional paid-in capital.............................................. 1,755 1,739
Retained earnings....................................................... 1,011 649
Accumulated other comprehensive loss.................................... (339) (370)
Treasury stock: 28 shares and 29 shares at September 7, 2002 and December
29, 2001, respectively............................................... (475) (420)
----- -----
Total Shareholders' Equity....................................... 1,955 1,601
----- -----
Total Liabilities and Shareholders' Equity...................... $8,537 $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 September 7, 2002, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
37.6% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 42.7% 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 September 7, 2002
and the Condensed Consolidated Statements of Operations for the 12 and 36-weeks
ended September 7, 2002 and September 8, 2001 and Cash Flows for the 36-weeks
ended September 7, 2002 and September 8, 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 third 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
September December
7, 2002 29, 2001
--------- --------
Raw materials and supplies........................ $139 $117
Finished goods.................................... 237 214
---- ----
$376 $331
==== ====
-5-
Note 4 - Property, plant and equipment, net
September December
7, 2002 29, 2001
--------- --------
Land................................................................... $ 154 $ 145
Buildings and improvements............................................. 989 925
Manufacturing and distribution equipment............................... 2,550 2,308
Marketing equipment.................................................... 1,997 1,846
Other.................................................................. 140 121
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5,830 5,345
Accumulated depreciation............................................... (3,047) (2,802)
------ ------
$ 2,783 $ 2,543
====== ======
Note 5 - Intangible assets, net
September December
7, 2002 29, 2001
--------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.................................................... $ 19 $ 12
Other identifiable intangibles...................................... 44 39
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63 51
------ ------
Accumulated amortization:
Franchise rights.................................................... (4) (2)
Other identifiable intangibles...................................... (27) (25)
------ ------
(31) (27)
------ ------
Intangibles not subject to amortization:
Gross carrying amount:
Franchise rights.................................................... 3,626 3,585
Goodwill............................................................ 1,588 1,574
------ ------
5,214 5,159
------ ------
Accumulated amortization:
Franchise rights.................................................... (976) (971)
Goodwill............................................................ (531) (528)
------ ------
(1,507) (1,499)
------ ------
$ 3,739 $ 3,684
====== ======
Note 6 - Acquisitions
During 2002 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from several different PepsiCo
franchise bottlers. The following acquisitions occurred for an aggregate
purchase price of $30 million in cash and $70 million of assumed debt:
o Fruko Mesrubat Sanayii A.S. of Turkey in March.
o Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March.
o Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in
June.
o Seaman's Beverages Limited of the Canadian province of Prince Edward Island in
July.
-6-
As a result of these acquisitions, we acquired $43 million of intangible
assets, $7 million was assigned to goodwill, and $31 million to franchise rights
and other intangibles, all of which are not subject to amortization, and $5
million was assigned to other identifiable intangibles, which are subject to
amortization.
The Turkey and Prince Edward Island acquisitions were 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 Mr. Enrique C. Molina
Sobrino and PepsiCo, the two principal shareholders of the Mexican bottler
Pepsi-Gemex, S.A. de. C.V. ("Pepsi-Gemex") regarding the possible acquisition of
all of the shares of Pepsi-Gemex. On October 7, 2002, we commenced cash tender
offers in the United States and Mexico to complete the acquisition of
Pepsi-Gemex. The tender offers will expire at 5 p.m. (EDT) on November 4, 2002,
unless the offers are extended. Both Mr. Molina and PepsiCo have each agreed to
tender approximately 40 percent and 34.2 percent, respectively, of the total
outstanding capital stock of Pepsi-Gemex. Pepsi-Gemex's Board of Directors has
recommended that all other Pepsi-Gemex shareholders accept the offers and tender
their shares. The U.S. offer is for all global depositary shares ("GDS") at Ps
106.38 per GDS and for all series B shares and all ordinary participation
certificates ("CPO") held by holders who are not resident in Mexico at Ps 5.91
per series B share and Ps 17.73 per CPO. The Mexican offer is for all series B
shares and CPOs at the same prices offered in the U.S. tender offer. The tender
offers are conditioned upon, among other things, the number of shares, CPOs and
GDSs tendered and not withdrawn, that represent not less than 90 percent of all
outstanding shares of capital stock of Pepsi-Gemex on the expiration date. The
final tender offer price per share is based on the shares outstanding at the
date of the tender offer and Gemex's equity value of approximately 9.0 billion
Mexican pesos as disclosed in the tender offer documents filed with the U.S.
Securities and Exchange Commission and the Comision Nacional Bancaria y de
Valores of Mexico. A payment from PepsiCo to PBG of 172.7 million Mexican pesos
is being made in order to facilitate the purchase and ensure a smooth ownership
transition of Gemex. We are financing the tender offers through temporary
issuances of commercial paper and/or temporary bridge financing in the amount up
to $1.2 billion. We expect to repay the commercial paper and/or bridge financing
through the subsequent issuance of long term debt upon consummation of the
tender offers.
During the fourth quarter, PBG signed a letter of intent to acquire the
Pepsi-Cola Buffalo Bottling Corp., based in Buffalo, NY. The transaction is
expected to close during the first quarter of 2003. Also in the fourth quarter,
we signed a letter of intent to acquire Kitchener Beverages Limited, based in
Kitchener, Ontario. This transaction is expected to close in the fourth quarter
of 2002.
Note 7 - Treasury Stock
In the first 36 weeks of 2002, we repurchased approximately 6 million
shares for $165 million and approximately 8 million shares for $169 million over
the same period in 2001. Since the inception of our share repurchase program in
October 1999, nearly 38 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 September 7, 2002, our use of derivative instruments is limited to
interest rate swaps, forward contracts, futures and options on futures
contracts.
-7-
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.
The amount of deferred losses from our commodity hedging that we recognized
into income was $13 million during the first 36 weeks of 2002 and was not
significant over the same period in 2001. As a result of our commodity hedges, a
$21 million and $19 million deferred loss remained in accumulated other
comprehensive loss in our Condensed Consolidated Balance Sheets based on the
commodity rates in effect on September 7, 2002, and December 29, 2001,
respectively. Assuming no change in the commodity prices as measured on
September 7, 2002, $16 million of the deferred loss or $10 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 Hedge - 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 September 7,
2002 and December 29, 2001 our debt instruments primarily consisted of $3.3
billion of fixed-rate long-term senior notes of which we converted our $1.0
billion 5 3/8% fixed rate debt to floating rate debt through the use of interest
rate swaps. Our objective was to reduce our overall borrowing costs.
The interest rate swaps, which expire in 2004, are designated as and
qualify for fair value hedge accounting and are 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 the swaps are fully offset by the opposite
market impact on the related debt.
The change in fair value of the interest rate swaps in the first 36 weeks
was a gain of $12 million and $5 million in 2002 and 2001, respectively. The
fair value change of the swap agreement 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 fourth quarter of 2002, PBG purchased an interest rate swap that
converted $300 million of our $1.3 billion 5 5/8% fixed rate debt to floating
rate debt. The new interest rate swap expires in 2009 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.
-8-
At 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. This contract was amended in the third quarter of 2002 to include an
additional 30,000 shares at an initial price of $25.01. Therefore, at September
7, 2002 the contract reflects 638,000 shares of PBG stock with an average
exercise price of $23.11. The contract expires in December 2002 with a one-year
renewal option.
Other Derivatives - During the third quarter, Bottling Group LLC entered
into an option contract to mitigate certain currency risks. Although this
instrument does not qualify for hedge accounting, it is deemed a derivative
since it contains a net settlement clause. We have amortized the premium as a
reduction of net income in our Condensed Consolidated Statement of Operations.
The option contract had no fair value at September 7, 2002.
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 $89 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 $171 million (or $0.58 per diluted share) and $63 million
(or $0.22 per diluted share) to $355 million (or $1.20 per diluted share) in the
quarter and year-to-date, respectively.
Note 10 - Comprehensive Income
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
7, 2002 8, 2001 7, 2002 8, 2001
--------- --------- --------- ---------
Net income................................................ $178 $150 $371 $292
Currency translation adjustment........................... 4 (1) 31 (32)
Cash flow hedge accounting adjustment..................... (17) (9) (1) (11)
--- --- --- ---
Comprehensive income...................................... $165 $140 $401 $249
=== === === ===
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-
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 September 7, 2002, and the related Condensed
Consolidated Statements of Operations for the twelve and thirty-six weeks ended
September 7, 2002 and September 8, 2001 and the Condensed Consolidated
Statements of Cash Flows for the thirty-six weeks ended September 7, 2002 and
September 8, 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
October 1, 2002
-10-
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") third quarter and first 36-weeks of 2002 were
as follows:
o We delivered 6% constant territory EBITDA growth in the third quarter and 9%
growth in the first 36-weeks of 2002.
o We increased worldwide constant territory physical case volume by 1% and 2% in
the third quarter and first 36-weeks of 2002, respectively.
o We grew third quarter and year-to-date worldwide constant territory net
revenue per case by 3%.
o We delivered third quarter 2002 diluted earnings per share of $0.61, an
increase of $0.10, or 19%, over 2001 and third quarter year-to-date diluted
earnings per share of $1.26, an increase of $0.28, or 28%, over the same 36-
week period in 2001.
- Included in the third quarter increase of $0.10 and year-to-date increase
of $0.28 is a $0.07 and $0.22, 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 included a tax benefit of
$0.03 and $0.08 in the quarter and year-to-date, respectively, 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.
-11-
Results of Operations
Reported Change Constant Territory Change
--------------- -------------------------
12-weeks 36-weeks 12-weeks 36-weeks
------- -------- -------- --------
EBITDA........................ 9% 10% 6% 9%
Volume........................ 7% 5% 1% 2%
Net Revenue per Case.......... 1% 2% 3% 3%
EBITDA
EBITDA was $442 million and $1,040 million in the third quarter and first
36-weeks of 2002, representing a 9% and 10% increase over the same periods of
2001, respectively. On a constant territory basis, EBITDA growth was 6% for the
quarter and 9% year-to-date. In the quarter, constant territory EBITDA growth
was driven by worldwide net revenue per case growth of 3% and volume growth of
1%, offset by cost of sales growth of 5% and selling, delivery and
administrative expense growth of 3%. On a year-to-date basis, constant territory
EBITDA growth was driven by worldwide net revenue per case growth of 3% and
volume growth of 2%, offset by cost of sales growth of 5% and selling, delivery
and administrative expenses growth of 5%. Excluding the favorable impact of
currency translations, constant territory EBITDA grew 5% in the quarter and 8%
year-to-date on a worldwide basis. As we look to the fourth quarter and full
year, we expect our worldwide constant territory EBITDA growth rate to be about
15% for the quarter and 10% to 12% for the full year.
Volume
Our worldwide physical case volume increased 7% in the third quarter and 5%
in the first 36-weeks of 2002. Constant territory volume growth was 1% and 2% in
the third quarter and year-to-date, respectively, with the U.S. increasing by 1%
in the third quarter and 2% year-to-date. The U.S. results were modestly lower
than expected and reflect continued growth in take-home volume, particularly in
foodstores, as well as favorable cold drink performance in our convenience and
gas segment, offset by continued softness in our on-premise business. United
States volume growth continues to benefit from innovation, as well as the strong
growth of Aquafina, offset by declines in brand Pepsi. Outside the U.S., our
constant territory volume increased over 1% in the quarter and 3% year-to-date
as double-digit growth in Russia, which was driven by the strong performance of
Pepsi Twist, Pepsi Cherry and Aqua Minerale, was partially offset by volume
declines in Spain. As we look to the fourth quarter and the full year, we expect
U.S. constant territory volume growth to continue at approximately 1% for the
quarter and 2% for the full year and with worldwide constant territory volume
expected to be about 2% for both the quarter and the full year.
Net Revenues
Net revenues for the quarter grew $181 million, an 8% increase over the
prior year, with year-to-date net revenues up 8% as well. On a constant
territory basis, net revenues grew 4% in the quarter driven by volume growth of
1% and a 3% increase in net revenue per case. Excluding the favorable impact of
currency translations, worldwide net revenue per case grew 2% in the quarter. On
a year-to-date basis, constant territory net revenue grew 5% reflecting 2%
growth in volume and an increase in net revenue per case of 3%. Worldwide
constant territory net revenue per case growth in both periods was driven by the
U.S., which grew 3% reflecting price increases combined with favorable package
mix. Outside the U.S., constant territory net revenues were up approximately 7%
in the quarter, reflecting over 1% volume growth and over 5% net revenue per
case growth. On a year-to-date basis, our net revenues outside the U.S. grew 6%,
reflecting a 3% increase in both volume and net revenue per case. Excluding the
favorable impact of currency translations, net revenue per case outside the U.S.
grew 2% in both the quarter and year-to-date.
-12-
Cost of Sales
Cost of sales increased $115 million, or 9%, in the third quarter of 2002
and $252 million, or 8%, year-to-date. On a constant territory basis, cost of
sales grew 5% in the quarter driven by volume growth of 1% and a 4% increase in
cost of sales per case. On a year-to-date basis, constant territory cost of
sales grew 5% reflecting 2% growth in volume and a 3% increase in cost of sales
per case. The increase in cost of sales per case for both periods was driven by
higher U.S. concentrate costs, and mix shifts into higher cost packages.
Excluding the negative impact of currency translations, cost of sales per case
increased 3% in the quarter and less than 3% year-to-date.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses grew 2% in both the third
quarter and first 36-weeks of 2002. Had we adopted SFAS 142 on the first day of
2001, amortization expense would have been lowered by $30 million and $89
million for the third quarter and year-to-date, respectively. Excluding the
impact of SFAS 142, constant territory selling, delivery and administrative
expenses grew 3% in the quarter and 5% year-to-date. This increase was primarily
driven by higher variable selling and delivery costs reflecting growth in our
business. Selling, delivery and administrative expenses were also favorably
impacted as we lapped higher labor costs associated with labor contract
negotiations from the third quarter last year. Excluding this favorable impact,
our underlying selling, delivery and administrative expense trend was consistent
with the first half of the 2002. Excluding the negative impact of currency
translations, selling, delivery and administrative expenses increased less than
3% in the quarter and remained at 5% year-to-date.
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. Our effective tax rate in 2001 was 36.5%. 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 and third 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, and resulted
in one-time gains in the 12-weeks and 36-weeks ended September 8, 2001 of $9
million and $25 million ($0.03 and $0.08 per diluted share after minority
interest), respectively.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations increased $114 million to $651 million
reflecting strong EBITDA growth coupled with a higher deferred tax provision as
we lap the Canadian income tax rate change in 2001 and higher non-cash casualty
and benefits expenses.
Net cash used for investments decreased by $17 million primarily due to
lower acquisition spending, partially offset by an increase in capital
expenditures as we continue to invest in small bottle production lines and cold
drink equipment.
-13-
Net cash used for financing increased by $31 million driven by reduction of
short-term borrowings primarily outside the U.S., offset by an increase in stock
option exercises.
Our operating free cash flow is projected to be $375 million for the full
year, which is an increase of approximately $80 million over 2001.
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.
-14-
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
In March 2002 we acquired Fruko Mesrubat Sanayii A.S. in Turkey. The
overall risks to our international businesses include changes in foreign
governmental policies, and other political or economic developments. These
developments 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 are affected by
fluctuations in foreign currency exchange rates.
Foreign currency gains and losses reflect transaction gains and losses as
well as translation gains and losses arising from the re-measurement into U.S.
dollars of the net monetary assets of businesses in highly inflationary
countries. Turkey is considered a highly inflationary economy for accounting
purposes.
Item 4.
Controls and Procedures
- -----------------------
Within the 90 days prior to the date of this report, The Pepsi Bottling
Group, Inc. ("the Company") carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic SEC
filings relating to the Company (including its consolidated subsidiaries).
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of our most recent evaluation.
-15-
PART II - OTHER INFORMATION
Item 5. Other Information
-----------------
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
responsible for disclosing any non-audit services approved by the Company's
Audit and Affiliated Transactions Committee (the "Committee") to be performed by
KPMG LLP ("KPMG"), the Company's external auditor. Non-audit services are
defined in the Act as services other than those provided in connection with an
audit or a review of the financial statements of the Company. On August 13,
2002, the Committee approved the engagement of KPMG for the following non-audit
services: (1) tax consulting services relating to acquisitions; (2) auditing of
benefit plans; (3) due diligence related to acquisitions; (4) assistance in
preparing certain pro forma financial information related to acquisitions; (5)
technical assistance relating to the internal audit of the Company's Information
Technology function, provided that such services are conducted under the
direction and supervision of the Director of Internal Audit; and (6) other
non-audit services approved by the Chairman of the Committee, provided that such
services are approved by the entire Committee at the next regularly scheduled
Committee meeting.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
ITEM 6 (b). REPORTS ON FORM 8-K
- -------------------------------
On August 14, 2002, the Company filed a Form 8-K, to submit to the Securities
and Exchange Committee the Statements under Oath of the Principal Executive
Officer and the Principal Financial Officer in accordance with the SEC's June
27, 2002 Order requiring the filing of sworn statements pursuant to Section
21(a)(1) of the Securities Exchange Act of 1934.
On August 14, 2002, the Company filed a Form 8-K, regarding the issue of a press
release announcing that it had reached agreement with the principal shareholders
of Pepsi-Gemex S.A. de C.V. ("Pepsi-Gemex"), on the enterprise value of
Pepsi-Gemex in connection with the possible acquisition of all of the
outstanding capital stock of Pepsi-Gemex through tender offers in the U.S. and
Mexico, as was previously announced by PBG on May 7, 2002.
-16-
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: October 17, 2002 Andrea L. Forster
---------------- ------------------------------
Vice President and Controller
Date: October 17, 2002 Alfred H. Drewes
---------------- ------------------------------
Senior Vice President and
Chief Financial Officer
-17-
Form 10-Q Certification
I, John T. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pepsi Bottling
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
-18-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 17, 2002 John T. Cahill
---------------- ------------------------
Chief Executive Officer
-19-
Form 10-Q Certification
I, Alfred H. Drewes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pepsi Bottling
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
-20-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 17, 2002 Alfred H. Drewes
---------------- --------------------------
Senior Vice President and
Chief Financial Officer
-21-
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
(in millions, except per share data)
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
7, 2002 8, 2001 7, 2002 8, 2001
--------- --------- --------- ---------
Number of shares on which basic earnings
per share is based:
Average outstanding during period................ 283 285 282 287
Add - Incremental shares under stock
compensation plans............................. 11 10 12 10
---- ---- ---- ----
Number of shares in which diluted
earnings per share is based...................... 294 295 294 297
Net earnings applicable to common
shareholders (millions)......................... $ 178 $ 150 $ 371 $ 292
Net earnings on which diluted earnings
per share is based (millions)................... $ 178 $ 150 $ 371 $ 292
Basic earnings per share........................... $0.63 $0.53 $1.31 $1.02
Diluted earnings per share......................... $0.61 $0.51 $1.26 $0.98
-22-