UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 20, 2004 (12 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
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THE PEPSI BOTTLING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4038356
--------------------------- ----------
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
------------------------------- ----------
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
-----
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Number of shares of Common Stock outstanding as of April 8, 2004: 257,536,218
The Pepsi Bottling Group, Inc.
------------------------------
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 weeks ended March 20, 2004 and March 22, 2003 2
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 20, 2004 and March 22, 2003 3
Condensed Consolidated Balance Sheets -
March 20, 2004 and December 27, 2003 4
Notes to Condensed Consolidated Financial Statements 5-11
Independent Accountants' Review Report 12
Item 2. Management's Financial Review 13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
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
--------------
March March
20, 2004 22, 2003
-------- --------
Net revenues................................................................. $2,067 $1,874
Cost of sales................................................................ 1,051 927
----- -----
Gross profit................................................................. 1,016 947
Selling, delivery and administrative expenses................................ 879 827
----- -----
Operating income............................................................. 137 120
Interest expense, net........................................................ 55 53
Other non-operating expenses, net............................................ - 3
Minority interest............................................................ 6 5
----- -----
Income before income taxes................................................... 76 59
Income tax expense........................................................... 26 20
----- -----
Income before cumulative effect of change in accounting principle............ 50 39
Cumulative effect of change in accounting principle, net of tax and
minority interest......................................................... - 6
----- -----
Net income................................................................... $ 50 $ 33
===== =====
Basic earnings per share before cumulative effect of change in
accounting principle...................................................... $ 0.19 $ 0.14
Cumulative effect of change in accounting principle.......................... - (0.02)
----- -----
Basic earnings per share..................................................... $ 0.19 $ 0.12
===== =====
Weighted-average shares outstanding.......................................... 260 279
Diluted earnings per share before cumulative effect of change in
accounting principle...................................................... $ 0.19 $ 0.14
Cumulative effect of change in accounting principle.......................... - (0.02)
----- -----
Diluted earnings per share................................................... $ 0.19 $ 0.12
===== =====
Weighted-average shares outstanding.......................................... 269 287
See accompanying notes to Condensed Consolidated Financial Statements.
2
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Cash Flows - Operations
Net income.................................................................... $ 50 $ 33
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................ 124 117
Amortization................................................................ 3 2
Deferred income taxes....................................................... 11 4
Cumulative effect of change in accounting principle......................... - 6
Other non-cash charges and credits, net..................................... 62 64
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.................................................. (3) 51
Inventories, net.......................................................... (67) (24)
Prepaid expenses and other current assets................................. (2) (37)
Accounts payable and other current liabilities............................ (35) (183)
Income taxes payable...................................................... (2) 37
----- -----
Net change in operating working capital .................................... (109) (156)
----- -----
Pension contributions....................................................... (20) -
Other, net.................................................................. (10) (3)
----- -----
Net Cash Provided by Operations................................................ 111 67
----- -----
Cash Flows - Investments
Capital expenditures.......................................................... (102) (112)
Acquisitions of bottlers...................................................... - (82)
Sale of property, plant and equipment......................................... 1 1
----- -----
Net Cash Used for Investments.................................................. (101) (193)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less.................................. 97 120
Net proceeds of long-term debt................................................ 9 -
Repayment of long-term debt................................................... (1,004) -
Dividends paid................................................................ (3) (3)
Proceeds from exercise of stock options....................................... 13 7
Purchases of treasury stock................................................... (86) (105)
----- -----
Net Cash (Used for) Provided by Financing...................................... (974) 19
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents................... (2) (1)
----- -----
Net Decrease in Cash and Cash Equivalents...................................... (966) (108)
Cash and Cash Equivalents - Beginning of Period................................ 1,235 222
----- -----
Cash and Cash Equivalents - End of Period...................................... $ 269 $ 114
===== =====
Supplemental Cash Flow Information
Net third-party interest paid.................................................. $ 72 $ 76
===== =====
Income taxes paid (received)................................................... $ 16 $ (19)
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
3
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
(Unaudited)
March December
20, 2004 27, 2003
-------- --------
Assets
Current Assets
Cash and cash equivalents.................................................. $ 269 $ 1,235
Accounts receivable, less allowance of $71 at
March 20, 2004 and $72 at December 27, 2003........................... 968 994
Inventories................................................................ 441 374
Prepaid expenses and other current assets.................................. 275 268
Investement in debt defeasance trust....................................... 168 168
------ ------
Total Current Assets............................................... 2,121 3,039
Property, plant and equipment, net........................................... 3,399 3,423
Other intangible assets, net................................................. 3,558 3,562
Goodwill..................................................................... 1,391 1,386
Other assets................................................................. 148 134
------ ------
Total Assets....................................................... $10,617 $11,544
====== ======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities............................. $ 1,175 $ 1,231
Short-term borrowings...................................................... 164 67
Current maturities of long-term debt....................................... 180 1,180
------ ------
Total Current Liabilities.......................................... 1,519 2,478
Long-term debt............................................................... 4,510 4,493
Other liabilities............................................................ 889 875
Deferred income taxes........................................................ 1,430 1,421
Minority interest............................................................ 402 396
------ ------
Total Liabilities.................................................. 8,750 9,663
------ ------
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares.............................. 3 3
Additional paid-in capital................................................ 1,742 1,743
Retained earnings......................................................... 1,519 1,471
Accumulated other comprehensive loss...................................... (377) (380)
Deferred compensation..................................................... (5) (4)
Treasury stock: 51 shares and 49 shares at March 20, 2004 and December 27,
2003, respectively, at cost............................................ (1,015) (952)
------ ------
Total Shareholders' Equity......................................... 1,867 1,881
------ ------
Total Liabilities and Shareholders' Equity........................ $10,617 $11,544
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
4
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions, except per share data
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG" or the "Company") is the world's
largest manufacturer, seller and distributor of Pepsi-Cola beverages, consisting
of bottling operations located in the United States, Mexico, Canada, Spain,
Greece, Russia and Turkey. When used in these Condensed Consolidated Financial
Statements, "PBG," "we," "our" and "us" each refers to the Pepsi Bottling Group,
Inc. and, where appropriate, to Bottling Group, LLC ("Bottling LLC"), our
principal operating subsidiary.
As of March 20, 2004, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
41.0% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 46.2% of the voting power of all classes of our
voting stock. PepsiCo also owns approximately 6.8% of the equity of Bottling
LLC.
The accompanying Condensed Consolidated Balance Sheet at March 20, 2004 and
the Condensed Consolidated Statements of Operations and Cash Flows for the 12
weeks ended March 20, 2004 and March 22, 2003 have not been audited, but have
been prepared in conformity with accounting principles generally accepted in the
United States 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 27, 2003 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.
Our U.S. and Canadian operations report using a fiscal year that consists
of 52 weeks, ending on the last Saturday in December. Every five or six years a
53rd week is added. Our remaining countries report using a calendar year basis.
Accordingly, we recognize our quarterly business results as outlined below:
Quarter U.S. & Canada Mexico & Europe
------- ------------- ---------------
First Quarter 12 weeks January and February
Second Quarter 12 weeks March, April and May
Third Quarter 12 weeks June, July and August
Fourth Quarter 16 weeks September, October,
November and December
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality.
5
Note 3 - New Accounting Standards
EITF 02-16
In January 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor," addressing the recognition
and income statement classification of various cash consideration given by a
vendor to a customer. The consensus requires that certain cash consideration
received by a customer from a vendor is presumed to be a reduction of the price
of the vendor's products, and therefore should be characterized as a reduction
of cost of sales when recognized in the customer's income statement, unless
certain criteria are met. EITF Issue No. 02-16 became effective beginning in our
fiscal year 2003. Prior to 2003, we classified worldwide bottler incentives
received from PepsiCo and other brand owners as adjustments to net revenues and
selling, delivery and administrative expenses depending on the objective of the
program. In accordance with EITF Issue No. 02-16, we have classified certain
bottler incentives as a reduction of cost of sales beginning in 2003. During
2003, we recorded a transition adjustment of $6 million, net of taxes and
minority interest of $1 million, for the cumulative effect on prior years. This
adjustment reflects the amount of bottler incentives that can be attributed to
our 2003 beginning inventory balances.
FASB Staff Position FAS 106-1
During 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act") was passed into law. The reported postretirement benefit
obligation in our Condensed Consolidated Balance Sheet does not reflect the
effects of the Act. We do provide prescription drug benefits to
Medicare-eligible retirees but have elected to defer recognition of the Act
until the Financial Accounting Standards Board ("FASB") provides guidance
regarding its accounting treatment. This deferral election is permitted under
FASB Staff Position FAS 106-1. We do not believe the adoption of the Act will
have a material impact on our consolidated results of operations and financial
position.
Share-Based Payments
The FASB has issued an exposure draft proposing to expense the fair value
of share-based payments to employees beginning in 2005. We are currently
evaluating the impact of this proposed standard on our financial statements.
Note 4 - Stock-Based Compensation
During 2002, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 148 "Accounting for Stock-Based Compensation-Transition and
Disclosure," which provides alternative methods of accounting for stock-based
compensation and amends SFAS No. 123 "Accounting for Stock-Based Compensation."
We measure stock-based compensation expense using the intrinsic value method in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related interpretations. Accordingly,
compensation expense for stock option grants to our employees is measured as the
excess of the quoted market price of common stock at the grant date over the
amount the employee must pay for the stock. Our policy is to grant stock options
at fair value on the date of grant. As allowed by SFAS No. 148, we have elected
to continue to apply the intrinsic value-based method of accounting described
above, and have adopted the disclosure requirements of SFAS No. 123. If we had
measured compensation cost for the stock awards granted to our employees under
the fair-value based method prescribed by SFAS No. 123, net income would have
been changed to the pro forma amounts set forth below:
6
12 Weeks Ended
----------------
March March
20, 2004 22, 2003
-------- --------
Net income:
As reported................................................................. $ 50 $ 33
Add: Total stock-based employee compensation expense
included in reported net income, net of taxes and
minority interest................................................. - 1
Less: Total stock-based employee compensation expense determined
under fair-value based method for all awards, net of taxes
and minority interest............................................. (10) (10)
---- ----
Pro forma................................................................... $ 40 $ 24
==== ====
Earnings per share:
Basic - as reported......................................................... $0.19 $0.12
Basic - pro forma........................................................... $0.16 $0.09
Diluted - as reported....................................................... $0.19 $0.12
Diluted - pro forma......................................................... $0.15 $0.08
Pro forma compensation cost measured for stock options granted to employees
is amortized using a straight-line basis over the vesting period, which is
typically three years.
The fair value of PBG stock options used to compute pro forma net income
disclosures was estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
12 Weeks Ended
----------------
March March
20, 2004 22, 2003
-------- --------
Risk-free interest rate..................................................... 3.2% 2.9%
Expected life............................................................... 6 years 6 years
Expected volatility......................................................... 35% 37%
Expected dividend yield..................................................... 0.68% 0.17%
Note 5 - Inventories
March December
20, 2004 27, 2003
-------- --------
Raw materials and supplies.................................................. $ 163 $ 140
Finished goods.............................................................. 278 234
------ ------
$ 441 $ 374
====== ======
Note 6 - Property, plant and equipment, net
March December
20, 2004 27, 2003
-------- --------
Land....................................................................... $ 240 $ 241
Buildings and improvements................................................. 1,190 1,185
Manufacturing and distribution equipment................................... 3,064 3,028
Marketing equipment........................................................ 2,138 2,131
Other...................................................................... 175 176
------ ------
6,807 6,761
Accumulated depreciation................................................... (3,408) (3,338)
------ ------
$ 3,399 $ 3,423
====== ======
7
Note 7 - Other intangible assets, net and Goodwill
March December
20, 2004 27, 2003
Intangibles subject to amortization: -------- --------
Gross carrying amount:
Customer relationships and lists ................................. $ 47 $ 42
Franchise rights.................................................. 23 23
Other identified intangibles...................................... 27 27
------ ------
97 92
------ ------
Accumulated amortization:
Customer relationships and lists ................................. (4) (3)
Franchise rights.................................................. (11) (10)
Other identified intangibles...................................... (13) (12)
------ ------
(28) (25)
------ ------
Intangibles subject to amortization, net................................... 69 67
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.................................................. 2,895 2,908
Distribution rights............................................... 290 286
Trademarks........................................................ 210 207
Other identified intangibles...................................... 94 94
------ ------
Intangibles not subject to amortization........................... 3,489 3,495
------ ------
Total other intangible assets, net......................................... $ 3,558 $ 3,562
====== ======
Goodwill................................................................... $ 1,391 $ 1,386
====== ======
For intangible assets subject to amortization, we calculate amortization
expense on a straight-line basis over the period we expect to receive economic
benefit. Total amortization expense was $3 million and $2 million for the twelve
weeks ended March 20, 2004 and March 22, 2003, respectively. The
weighted-average amortization period for each category of intangible assets and
their estimated aggregate amortization expense expected to be recognized over
the next five years are as follows:
Weighted-Average Estimated Aggregate Amortization Expense to be Incurred
---------------- -------------------------------------------------------
Amortization
------------
Period
------
Balance of Fiscal Year Ending
---------- ------------------
2004 2005 2006 2007 2008
---- ---- ---- ---- ----
Customer relationships and lists......... 17-20 years $2 $3 $3 $3 $3
Franchise rights......................... 5 years $3 $5 $2 $1 $-
Other identified intangibles............. 6 years $4 $4 $3 $2 $1
8
Note 8 - Pension and Postretirement Benefit Plans
Pension Benefits
Our U.S. employees participate in noncontributory defined benefit pension
plans, which cover substantially all full-time salaried employees, as well as
most hourly employees. Benefits generally are based on years of service and
compensation, or stated amounts for each year of service. All of our qualified
plans are funded and contributions are made in amounts not less than minimum
statutory funding requirements and not more than the maximum amount that can be
deducted for U.S. income tax purposes. Our net pension expense for the defined
benefit plans for our operations outside the U.S. was not significant and is not
included in the tables presented below.
Our U.S. employees are also eligible to participate in our 401(k) savings
plans, which are voluntary defined contribution plans. We make matching
contributions to the 401(k) savings plans on behalf of participants eligible to
receive such contributions. If a participant has one or more but less than 10
years of eligible service, our match will equal $0.50 for each dollar the
participant elects to defer up to 4% of the participant's pay. If the
participant has 10 or more years of eligible service, our match will equal $1.00
for each dollar the participant elects to defer up to 4% of the participant's
pay.
Components of our pension expense for the twelve weeks ended March 20, 2004
and March 22, 2003 are as follows:
12 Weeks Ended
----------------
March March
20, 2004 22, 2003
-------- --------
Service cost.................................................... $ 10 $ 9
Interest cost................................................... 16 14
Expected return on plan assets.................................. (19) (15)
Amortization of prior service cost.............................. 1 1
Amortization of net loss........................................ 6 3
--- ---
Net pension expense for the defined benefit plans............... 14 12
--- ---
Defined contribution plans expense.............................. 5 5
--- ---
Total pension expense recognized in the Condensed Consolidated
Statements of Operations........................................ $ 19 $ 17
=== ===
9
Postretirement Benefits
Our postretirement plans provide medical and life insurance benefits
principally to U.S. retirees and their dependents. Employees are eligible for
benefits if they meet age and service requirements and qualify for retirement
benefits. The plans are not funded and since 1993 have included retiree cost
sharing.
Components of our postretirement benefits expense for the twelve weeks
ended March 20, 2004 and March 22, 2003 are as follows:
12 Weeks Ended
---------------
March March
20, 2004 22, 2003
-------- --------
Service cost.................................................... $ 1 $ 1
Interest cost................................................... 4 4
Amortization of net loss........................................ 1 1
--- ---
Net postretirement benefits expense recognized in the Condensed
Consolidated Statements of Operations........................... $ 6 $ 6
=== ===
We expect to contribute $100 million to our pension plans in 2004. As of
March 20, 2004, $20 million of contributions to our pension plans have been
made.
Note 9 - Geographic Data
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in all or a portion of the United States, Mexico,
Canada, Spain, Russia, Greece and Turkey.
Net Revenues 12 Weeks Ended
------------- --------------
March March
20, 2004 22, 2003
-------- --------
U.S........................................................... $ 1,626 $ 1,496
Mexico........................................................ 158 157
Other countries............................................... 283 221
------ ------
$ 2,067 $ 1,874
====== ======
Long-Lived Assets March Decemeber
----------------- 20, 2004 27, 2003
-------- --------
U.S........................................................... $ 5,723 $ 5,723
Mexico........................................................ 1,446 1,432
Other countries............................................... 1,327 1,350
------ ------
$ 8,496 $ 8,505
====== ======
10
Note 10 - Comprehensive Income
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Net income...................................................... $50 $33
Currency translation adjustment................................. 2 (24)
Cash flow hedge adjustment (a).................................. 1 7
--- ---
Comprehensive income............................................ $53 $16
=== ===
(a) Net of minority interest and taxes of $1 and $6 for the 12 weeks ended
March 20, 2004 and March 22, 2003, respectively.
Note 11 - Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes and environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability arising from such claims or
contingencies, if any, in excess of amounts already recognized is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
Note 12 - Subsequent Event
On March 30, 2004, we repaid our $160 million 9.75% senior notes by
liquidating our investments in our debt defeasance trust.
11
Independent Accountants' Review Report
--------------------------------------
Shareholders of
The Pepsi Bottling Group, Inc:
We have reviewed the accompanying condensed consolidated balance sheet of The
Pepsi Bottling Group, Inc. and subsidiaries as of March 20, 2004, and the
related condensed consolidated statements of operations and cash flows for the
twelve weeks ended March 20, 2004 and March 22, 2003. These condensed
consolidated financial statements are the responsibility of the Company'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 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. and subsidiaries as of December 27, 2003, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the fifty-two week period then ended not presented herein;
and in our report dated January 27, 2004, 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
27, 2003, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
April 13, 2004
12
Item 2.
Management's Financial Review
- -----------------------------
Tabular dollars in millions, except per share data
OVERVIEW
- --------
The Pepsi Bottling Group, Inc. ("PBG" or the "Company") is the world's
largest manufacturer, seller and distributor of Pepsi-Cola beverages. We have
the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in
all or a portion of the United States, Mexico, Canada, Spain, Greece, Russia and
Turkey. When used in these Condensed Consolidated Financial Statements, "PBG,"
"we," "our" and "us" each refers to the Pepsi Bottling Group, Inc. and, where
appropriate, to Bottling Group, LLC, our principal operating subsidiary.
Management's Financial Review should be read in conjunction with the
accompanying unaudited financial statements and our Annual Report on Form 10-K
for the fiscal year ended December 27, 2003, which include additional
information about our accounting policies, practices and the transactions that
underlie our financial results.
Financial Performance Summary
- -----------------------------
12 Weeks Ended
--------------
March March %
20, 2004 22, 2003 Change
-------- -------- ------
Net revenues.................................................... $2,067 $1,874 10%
Operating income................................................ 137 120 14%
Income before cumulative effect of change in
accounting principle 1.......................................... 50 39 28%
Net income...................................................... 50 33 51%
Diluted earnings per share before cumulative effect
of change in accounting principle 1, 2.......................... $ 0.19 $ 0.14 37%
Diluted earnings per share 2.................................... $ 0.19 $ 0.12 61%
1 - Cumulative effect of change in accounting principle for the twelve weeks
ended March 22, 2003, reflects the impact of adoption of EITF Issue No. 02-16.
See Note 3 - New Accounting Standards in the Notes to Condensed Consolidated
Financial Statements for more information.
2 - Percentage change for diluted earnings per share and diluted earnings per
share before cumulative effect of change in accounting principle is calculated
by using earnings per share data that is expanded to the fourth decimal place.
Our diluted earnings per share, before the cumulative effect of change in
accounting principle, increased 37% reflecting strong topline results. Our
worldwide volume increased 5% in the first quarter due to our continued
executional focus on building our brands, introducing new products and packages
and revitalizing our cold drink business. There was solid volume growth across
our territories in the U.S., Canada and Europe. In Mexico, physical case volume
was down 2% for the quarter, however, we saw improving trends in our eight-ounce
equivalent case volume (one eight-ounce case is equal to 192 U.S. fluid ounces
of finished beverages), resulting from the continued success of the upsizing
initiatives of the 2.5-liter carbonated soft drink package and the 5.25-liter
ELECTROPURA bottle.
13
From a net revenue perspective, we have remained committed to our pricing
principles, which center on consumer value and remaining competitive. This is
evident in our results, as worldwide net revenue per case increased 5%, which
includes two points of benefit from foreign currency.
We generated strong cash flows from operations for the quarter. On March
25, 2004, we announced an increase to our annual dividend, raising it from $0.04
to $0.20. In addition, our Board expanded our share repurchase program by
authorizing the repurchase of another 25 million shares. This brings the total
number of shares authorized for repurchase to 100 million since the program
began in late 1999.
For the remainder of 2004, we continue to expect solid worldwide operating
income growth in the mid-single digits versus the prior year and to generate
diluted EPS of $1.62 to $1.70 for the full year. Based on stronger than expected
growth in the early part of the year, we are increasing our expectations for
full year worldwide volume growth to 2% to 3% and worldwide net revenue per case
growth to 2%.
Volume
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Total Worldwide Volume Change........................ 5 %
====
Our worldwide reported physical case volume increased 5% in the first
quarter of 2004, driven primarily from increases in the U.S., Canada and Europe,
partially offset by a decline in Mexico.
In the U.S., volume increased by 6%, reflecting balanced growth in both the
cold-drink and take-home channels of our business. From a brand perspective,
there was improvement in our diet portfolio and brand PEPSI, resulting from our
increased executional focus on colas. One of our priorities for 2004 is to
ensure we have the appropriate space allocation for brand PEPSI and DIET PEPSI.
During the quarter, we have added thousands of incremental racks in our large
and small format locations to increase the presence of our core carbonated soft
drink products. In addition, as consumers sought more variety, we saw strong
growth in AQUAFINA, coupled with product introductions such as PEPSI VANILLA and
TROPICANA juice drinks.
Outside the U.S., our volumes increased 4%, reflecting solid volume growth
from Canada and Europe, partially offset by a 2% decline in Mexico. Declines in
Mexico's physical case volume were broadly in line with our expectations
resulting from decreases in our carbonated soft drink and jug water categories.
However, our volume on an eight-ounce equivalent case basis, increased 2%,
resulting from the continued success of the upsizing initiatives of the
2.5-liter carbonated soft drink package and the 5.25-liter ELECTROPURA bottle.
In Europe, volume grew 15% in the quarter, led by strong performances in
Russia and Turkey, which both delivered volume growth of more than 20%. In
Russia, we had solid growth in our core brands, coupled with contributions from
new product and package introductions, including PEPSI X and our 5-liter AQUA
MINERALE package. In Turkey, there was improved execution in the marketplace,
particularly with our large format customers, resulting from the realignment of
our sales force and consolidation of our distributors.
Canada's base business volume increased 4% for the quarter driven by growth
in our large and small format segments. (The term "base business" reflects
territories that we owned and operated for comparable periods in both the
current year and the prior year.) Innovation contributed to the growth with the
successful launch of TROPICANA TWISTER and our eight-ounce can package.
Our worldwide volume in the second quarter of 2004 is expected to grow 2%
to 3%, reflecting growth in the United States of 2% to 3% and a continued strong
performance in Europe. In Mexico, we expect physical case volume declines in the
second quarter consistent with our first quarter's performance.
14
Net Revenues
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Volume impact.......................................... 5 %
Rate / mix impact...................................... 3 %
Currency translation................................... 2 %
----
Total Worldwide Net Revenues Change................. 10 %
====
Net revenues were $2.1 billion for the first quarter of 2004, a 10%
increase over the similar period in the prior year. Approximately 79% of our net
revenues was generated in the United States, 8% of our net revenues was
generated in Mexico and the remaining 13% was generated outside the United
States and Mexico. The increase in net revenues in 2004 was driven by
improvements in volume and net revenue per case, coupled with favorable foreign
currency translations in Canada and Europe.
In the U.S., net revenues increased 9%, which includes a 1% increase from
acquisitions and over a 2% increase in net revenue per case. We have remained
committed to our pricing principles and were able to execute our planned rate
increases for the first quarter. Improvement in our net revenue per case was due
to both rate increases and the mix of products we sold, driven by a strong cold
drink performance and a package mix shift. We expect this trend of net price
increases to continue through the remainder of the year.
Net revenues outside the U.S. grew approximately 17%, reflecting the
favorable impact from foreign exchange, improvement in volume and the impact of
rate and mix. The combination of rate increases and the mix of products we sold
contributed four points of growth to net revenues outside the United States. The
increase in rate and mix was driven primarily by Mexico resulting from the
impact of higher priced packages.
We expect our worldwide net revenue per case to grow about 2% in the second
quarter of 2004.
Cost of Sales
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Volume impact.......................................... 5 %
Cost per case impact................................... 6 %
Currency translation................................... 2 %
----
Total Worldwide Cost of Sales Change................ 13 %
====
Cost of sales was $1.1 billion in the first quarter of 2004, a 13% increase
over the prior year. The increase in cost of sales was due primarily to volume
and cost per case increases coupled with the negative impact of foreign currency
translation in Canada and Europe.
In the U.S., cost of sales increased by 12%, which includes a 1% increase
from acquisitions and a 5% increase in cost per case. Increases in cost per case
have resulted from the impact of higher priced packages, including our
non-carbonated products, coupled with higher commodity costs, which we started
to encounter in the second and third quarters of last year.
Cost of sales outside the U.S. grew by 19%, reflecting the negative impact
from foreign currency translation, coupled with growth in volume and cost per
case increases of 7%. Cost per case increases outside the U.S. were driven by a
mix shift into higher priced packages, coupled with increases in certain
commodity costs.
15
We expect our worldwide cost of sales per case to grow 3% to 5% in the
second quarter and for the full year. While we will begin to lap some of the
commodity rate increases we experienced last year, we expect the unfavorable mix
impact we experienced in the first quarter to continue.
Selling, Delivery and Administrative Expenses
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
-------------
Cost performance....................................... 4 %
Currency translation................................... 2 %
----
Total Worldwide Selling, Delivery and
Administrative Expenses Change...................... 6 %
====
Selling, delivery and administrative expenses were $879 million in the
first quarter of 2004, a 6% increase over the prior year. The increase in
selling, delivery and administrative expenses resulted from the negative impact
of foreign currency translation in Canada and Europe and an increase in our cost
performance. Our worldwide cost performance increased 4% resulting from
additional variable costs associated with volume growth and increases in
employee benefits and depreciation costs.
Selling, delivery and administrative expenses for the full year is expected
to grow in the low-single digits.
Operating Income
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Gross margin rate/mix impact........................... 2 %
Volume................................................. 39 %
SD&A impact............................................ (26)%
Currency translation................................... (1)%
-----
Total Worldwide Operating Income Change............. 14 %
=====
Operating income was $137 million in the first quarter of 2004,
representing a 14% increase over 2003. The increase in operating profit was
driven primarily by topline growth in the U.S, partially offset by higher
worldwide selling, delivery and administrative costs.
Operating profit in the second quarter is expected to grow in the
mid-single digits driven by the continued strong topline growth in the U.S.,
Europe and Canada.
Interest Expense, net
Interest expense, net increased by $2 million to $55 million, when compared
with 2003, largely due to the additional $1.2 billion of debt issued during
2003. This was partially offset by the lower effective interest rate achieved on
our fixed rate long-term debt from the use of interest rate swaps and the
repayment of $1 billion of our debt in February 2004.
Income Tax Expense
For the first quarter of 2004, our effective tax rate was 34.4%, compared
with our effective tax rate of 34.25% in the first quarter of 2003. The slight
increase in the effective tax rate is primarily due to an increase in
anticipated pre-tax income in jurisdictions with higher tax rates.
16
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Our net cash provided by operations of $111 million was driven by the
strong cash flow generated from the sale of our products. Net operating cash
flow in 2004 grew by $44 million over the prior year due to payments related to
the settlement of our New Jersey wage and hour litigation in the prior year and
timing of working capital payments, partially offset by the timing of pension
contributions during 2004.
Net cash used for investments decreased by $92 million to $101 million
reflecting lower acquisition spending.
Net cash used for financing increased by $993 million to $974 million
driven by the repayment of long-term debt and lower short-term borrowings,
partially offset by lower share repurchases and higher stock option exercises.
For the full year in 2004, we expect to achieve net cash provided by
operations of approximately $1.2 billion. In addition, we expect capital
expenditures to be between $675 million and $700 million.
Liquidity and Capital Resources
We believe that our future cash flows from operations and borrowing
capacity will be sufficient to fund capital expenditures, acquisitions,
dividends and working capital requirements for the foreseeable future.
Additionally, we are currently in compliance with all debt covenants in our
indenture agreements and credit facilities.
During the first quarter we repaid our $1 billion 5.38% senior notes with
the proceeds we received from debt issued in the prior year.
We have a $500 million commercial paper program that is supported by two
$250 million credit facilities, which are guaranteed by Bottling Group, LLC. One
of the credit facilities expires in April 2004, and the other credit facility
expires in April 2008. We are in the process of renegotiating these credit
facility contracts. We have used these credit facilities to support our
commercial paper program in 2004 and 2003. We had $84 million and $87 million
outstanding in commercial paper, at March 20, 2004 and March 22, 2003,
respectively.
Due to the nature of our business, we require insurance coverage for
certain casualty risks. Given the rapidly increasing costs associated with
obtaining third-party insurance coverage for our casualty risks in the U.S., we
moved to a self-insurance program in 2002. In 2004, we are self-insured for
workers' compensation and automobile risks for occurrences up to $10 million,
and product and general liability risks for occurrences up to $5 million. For
losses exceeding our self insurance threshold, we purchased casualty insurance
from a third party.
Subsequent to quarter end, on March 30, 2004, we repaid our $160 million
9.75% senior notes by liquidating our investments in our debt defeasance trust.
Contractual Obligations
As of March 20, 2004, there have been no material changes outside the
normal course of business in the contractual obligations disclosed in Exhibit 13
to our Annual Report on Form 10-K for the fiscal year ended December 27, 2003,
under the caption "Contractual Obligations," other than the repayment of our
long-term debt discussed above.
17
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:
o changes in our relationship with PepsiCo that could have a material adverse
effect on our business and financial results;
o restrictions imposed by PepsiCo on our raw material suppliers that could
increase our costs;
o decreased demand for our product resulting from changes in consumers'
preferences;
o an inability to achieve volume growth through product and packaging
initiatives;
o lower-than-expected net pricing resulting from marketplace competition
and competitive pressures that may cause channel and product mix to shift
from more profitable cold drink channels and packages;
o material changes from expectations in the cost of raw materials and
ingredients;
o an inability to achieve cost savings;
o an inability to achieve the expected timing for returns on cold drink
equipment and related infrastructure expenditures;
o material changes in expected levels of bottler incentive payments from
PepsiCo;
o changes in product category consumption;
o unfavorable weather conditions in our markets;
o unforeseen economic and political changes;
o possible recalls of our products;
o an inability to meet projections for performance in newly acquired
territories;
o changes in laws and regulations, including restrictions on the sale of
carbonated soft drinks in schools, changes in food and drug laws,
transportation regulations, employee safety rules, labor laws, accounting
standards, taxation requirements (including unfavorable outcomes from
audits performed by various tax authorities) and environmental laws;
o changes in our debt ratings; and
o material changes in expected interest and currency exchange rates and
unfavorable market performance of our pension plan assets.
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
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.
Item 4.
Controls and Procedures
- -----------------------
PBG's management carried out an evaluation (the "Evaluation"), as required
by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),
with the participation of our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures, as of
the end of the period covered by this report on Form 10-Q. Based upon the
Evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to PBG and its consolidated
subsidiaries required to be included in our Exchange Act reports filed with the
SEC. In addition, there were no changes in our internal control over financial
reporting identified in connection with the Evaluation that occurred during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
19
PART II - OTHER INFORMATION
Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
- --------------------------------------------------------------------------------
PBG Purchases of Equity Securities
- ----------------------------------
In the first 12 weeks of 2004, we repurchased approximately 3.1 million
shares for $86 million. Since the inception of our share repurchase program in
October 1999, 66.2 million shares of PBG common stock have been repurchased. Our
share repurchases for the twelve weeks ended March 20, 2004, are as follows:
Maximum Number (or Approximate
Total Number Total Number of Shares (or Dollar Value) of Shares (or
of Shares(or Average Price Units) Purchased as Part of Units) that May Yet Be
Units) Paid per Share Publicly Announced Plans or Purchased Under the Plans or
Period Purchased 1 (or Unit)2 Programs 3 Programs 3,4
------ ---------- -------------- --------------------------- ----------------------------
Period 1 215,900 $23.86 215,900 11,682,100
- --------
12/28/03-01/24/04
Period 2 1,050,900 $26.98 1,050,900 10,631,200
- --------
01/25/04-02/21/04
Period 3 1,808,800 $28.84 1,808,800 8,822,400
- -------- --------- ---------
02/22/04-03/20/04
Total 3,075,600 $27.86 3,075,600
========= ====== =========
1 Shares have only been repurchased through publicly announced programs.
2 Average share price excludes brokerage fees.
3 The PBG Board has authorized the repurchase of shares of common stock on
the open market and through negotiated transactions as follows:
Date Share Repurchase Program was Publicly Number of Shares
Announced Authorized to be Repurchased
--------------------------------------------------------- -----------------------------
October 14, 1999....................................................... 20,000,000
July 13, 2000.......................................................... 10,000,000
July 11, 2001.......................................................... 20,000,000
May 28, 2003........................................................... 25,000,000
----------
Total shares authorized to be repurchased as of March 20, 2004........ 75,000,000
==========
Unless terminated earlier by resolution of the PBG Board, each share
repurchase program expires when we have repurchased all shares authorized
for repurchase thereunder.
4 Number of shares does not include an additional 25 million shares of common
stock that was authorized by the PBG Board and publicly announced for
repurchase on March 25, 2004.
20
Item 5.
Other Information
- -----------------
The financial statements of Bottling Group, LLC ("Bottling LLC"), included
in Bottling LLC's Quarterly Report on Form 10-Q and filed with the SEC on April
28, 2004, are hereby incorporated by reference as required by the SEC as a
result of Bottling LLC's guarantee of up to $1,000,000,000 aggregate principal
amount of our 7% Senior Notes due in 2029.
Item 6.
Exhibits and Reports on Form 8-K
- ---------------------------------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit No.
- -----------
11 Computation of Basic and Diluted Earnings Per Share
15 Accountants' Acknowledgement
31.1 Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
ITEM 6 (b). REPORTS ON FORM 8-K
- -------------------------------
On January 27, 2004, the Company furnished a current Form 8-K Report
announcing its financial results for its fourth quarter and its full year ended
December 27, 2003, and also provided its full year 2004 forecast.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Pepsi Bottling Group, Inc.
------------------------------
(Registrant)
/s/ Andrea L. Forster
Date: April 26, 2004 ---------------------
-------------- Andrea L. Forster
Vice President and Controller
/s/ Alfred H. Drewes
Date: April 26, 2004 --------------------
-------------- Alfred H. Drewes
Senior Vice President and
Chief Financial Officer