FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 23, 2002 (12 weeks)
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OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
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(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
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(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Number of shares of Capital Stock outstanding as of April 19, 2002:
282,589,617
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 weeks ended March 23, 2002 and March 24, 2001 3
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 23, 2002 and March 24, 2001 4
Condensed Consolidated Balance Sheets -
March 23, 2002 and December 29, 2001 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Independent Accountants' Review Report 12
Part II Other Information and Signatures
Item 6. Exhibits 13
2
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 23, March 24,
2002 2001
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Net Revenues........................................ $1,772 $1,647
Cost of sales....................................... 942 882
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Gross Profit........................................ 830 765
Selling, delivery and administrative expenses....... 695 675
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Operating Income.................................... 135 90
Interest expense, net............................... 45 44
Minority interest................................... 8 5
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Income before income taxes.......................... 82 41
Income tax expense.................................. 28 15
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Net Income.......................................... $ 54 $ 26
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Basic Earnings per Share............................ $0.19 $0.09
Weighted-Average Shares Outstanding................. 280 290
Diluted Earnings per Share.......................... $0.19 $0.09
Weighted-Average Shares Outstanding................. 291 299
See accompanying notes to Condensed Consolidated Financial Statements.
3
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
12 Weeks Ended
----------------
March 23, March 24,
2002 2001
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Cash Flows - Operations
Net income..................................................................... $ 54 $ 26
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 91 81
Amortization.............................................................. 2 30
Deferred income taxes..................................................... 11 1
Other non-cash charges and credits, net................................... 56 40
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable..................................................... (21) 2
Inventories............................................................. (9) (33)
Prepaid expenses and other current assets............................... (3) 2
Accounts payable and other current liabilities.......................... (87) (120)
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Net change in operating working capital .................................. (120) (149)
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Net Cash Provided by Operations................................................... 94 29
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Cash Flows - Investments
Capital expenditures........................................................... (110) (114)
Acquisitions................................................................... (24) -
Sale of property, plant and equipment.......................................... 1 -
Other, net..................................................................... (6) (7)
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Net Cash Used for Investments..................................................... (139) (121)
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Cash Flows - Financing
Short-term borrowings - three months or less................................... 15 9
Payments of third-party debt................................................... - (1)
Dividends paid................................................................. (3) (3)
Proceeds from exercise of stock options........................................ 3 -
Purchase of treasury stock..................................................... (34) (54)
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Net Cash Used for Financing....................................................... (19) (49)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... - (4)
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Net Decrease in Cash and Cash Equivalents......................................... (64) (145)
Cash and Cash Equivalents Beginning of Period..................................... 277 318
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Cash and Cash Equivalents End of Period........................................... $213 $173
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Supplemental Cash Flow Information
Third-party interest and income taxes paid........................................ $111 $100
==== ====
See accompanying notes to Condensed Consolidated Financial Statements.
4
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
(Unaudited)
March December
23, 2002 29, 2001
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Assets
Current Assets
Cash and cash equivalents................................................ $ 213 $ 277
Accounts receivable, less allowance of $39 and $42 at
March 23, 2002 and December 29, 2001, respectively................. 850 823
Inventories.............................................................. 346 331
Prepaid expenses and other current assets................................ 119 117
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Total Current Assets................................................ 1,528 1,548
Property, plant and equipment, net......................................... 2,641 2,543
Intangible assets, net..................................................... 3,688 3,684
Other assets............................................................... 98 82
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Total Assets..................................................... $7,955 $7,857
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $ 946 $1,004
Short-term borrowings.................................................... 109 77
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Total Current Liabilities........................................... 1,055 1,081
Long-term debt............................................................. 3,331 3,285
Other liabilities.......................................................... 576 550
Deferred income taxes...................................................... 1,035 1,021
Minority interest.......................................................... 327 319
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Total Liabilities................................................ 6,324 6,256
Shareholders' Equity
Common stock, par value $.01 per share:
authorized 900 shares, issued 310 shares............................ 3 3
Additional paid-in capital.............................................. 1,740 1,739
Retained earnings....................................................... 700 649
Accumulated other comprehensive loss.................................... (361) (370)
Treasury stock: 30 shares and 29 shares at March 23, 2002 and December
29, 2001, respectively............................................... (451) (420)
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Total Shareholders' Equity.......................................... 1,631 1,601
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Total Liabilities and Shareholders' Equity...................... $7,955 $7,857
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See accompanying notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
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Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG") 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 March 23, 2002, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
37.9% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 43.0% 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 March 23, 2002 and
the Condensed Consolidated Statements of Operations and Cash Flows for the
12-weeks ended March 23, 2002 and March 24, 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 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.
Note 3 - Inventories
March December
23, 2002 29, 2001
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Raw materials and supplies................ $117 $117
Finished goods............................ 229 214
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$346 $331
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6
Note 4 - Property, Plant and Equipment, net
March December
23, 2002 29, 2001
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Land.............................................. $ 145 $ 145
Buildings and improvements........................ 939 925
Manufacturing and distribution equipment.......... 2,426 2,308
Marketing equipment............................... 1,855 1,846
Other............................................. 124 121
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5,489 5,345
Accumulated depreciation.......................... (2,848) (2,802)
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$2,641 $2,543
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Note 5 - Intangible assets, net
March December
23, 2002 29, 2001
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Intangibles subject to amortization:
Gross carrying amount:
Franchise rights............................... $ 13 $ 12
Other identifiable intangibles................. 39 39
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52 51
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Accumulated amortization:
Franchise rights............................... (3) (2)
Other identifiable intangibles................. (26) (25)
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(29) (27)
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Intangibles not subject to amortization:
Gross carrying amount:
Franchise rights............................... 3,590 3,585
Goodwill....................................... 1,574 1,574
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5,164 5,159
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Accumulated amortization:
Franchise rights............................... (971) (971)
Goodwill....................................... (528) (528)
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(1,499) (1,499)
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$3,688 $3,684
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Note 6 - Acquisitions
In late March 2002, PBG acquired the operations and exclusive right to
manufacture, sell and distribute Pepsi-Cola's international beverages in Turkey.
Specifically, we acquired the majority and minority ownership interests in Fruko
Mesrubat Sanayii A.S. and other related entities from Tamek Holding A.S. and
individual shareholders, and PepsiCo. Prior to the acquisition, PepsiCo had a
22% investment in the bottling operations in Turkey. As part of this
acquisition, PBG paid PepsiCo $7 million for its equity interest in the acquired
entity and received $16 million from PepsiCo for the sale of the acquired
entity's local brands to PepsiCo. Also in late March 2002, we acquired the
operations and exclusive right to manufacture, sell and distribute Pepsi-Cola
beverages from the Pepsi-Cola Bottling Company of Macon, Inc. in Georgia. The
aggregate purchase price of these two acquisitions was $90 million consisting of
$20 million of cash paid and $70 million of assumed debt.
The Turkey acquisition was made to allow us to strategically increase our
markets outside the United States. The Macon acquisition was made to enable us
to provide better service to our large retail customers in the United States. We
also expect both acquisitions to reduce costs through economies of scale.
7
As these acquisitions were completed late in our first quarter, the results
of their operations were not material and have not been included in our 2002
first quarter results. In addition, due to the timing of the acquisitions the
purchase accounting allocations including the allocation of the purchase price
to goodwill and other identifiable intangibles was not made in the first quarter
but rather will be made during the balance of 2002.
In the first quarter of 2002, PBG paid $4 million to PepsiCo for
distribution rights relating to the SoBe brand in certain PBG-owned territories
in the United States.
Note 7 - Treasury Stock
In the first quarter of 2002, we repurchased approximately 1.5 million
shares for $34 million and approximately 2.8 million shares for $54 million over
the same period in 2001. Since the inception of the Company's share repurchase
program in October 1999, nearly 33 million shares of PBG common stock have been
repurchased of the total 50 million shares authorized to be repurchased.
Note 8 - New Accounting Standards
During 2001, the Financial Accounting Standards Board ("FASB") 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 first quarter 2001 amortization expense
would have been lowered by approximately $29 million and net income would have
increased $20 million (or $0.07 per diluted share) to $46 million.
Note 9 - Comprehensive Income/(Loss)
12-weeks Ended
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March March
23, 2002 24, 2001
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Net income........................................... $ 54 $ 26
Currency translation adjustment...................... 2 (27)
SFAS 133 adjustment.................................. 7 (6)
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Comprehensive Income/(Loss).......................... $ 63 $ (7)
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Note 10 - 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 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.
8
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
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Overview
The first quarter of 2002 marked the 13th consecutive quarter of
outstanding operating results for The Pepsi Bottling Group, Inc. (collectively
referred to as "PBG," "we," "our" and "us"). Highlights of these results were as
follows:
o Constant territory EBITDA grew 12% in the first quarter.
o Our worldwide constant territory physical case volume grew by 4% in the
first 12-weeks of 2002.
o We increased first quarter worldwide constant territory net revenue per
case by 3% as compared to the same period in 2001.
o We delivered first quarter 2002 diluted earnings per share of $0.19, an
increase of $0.10 over the same 12 week period in 2001. Included in the
increase of $0.10 is a $0.07 favorable impact from the adoption of SFAS
142, "Goodwill and Other Intangible Assets."
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 accounting principles
generally accepted in the United States of America and should not be considered
an alternative to measurements required by GAAP such as net income or cash
flows.
Results of Operations
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Constant
Reported Territory
Change Change
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EBITDA.................................. 13% 12%
Volume.................................. 4% 4%
Net Revenue per Case.................... 3% 3%
EBITDA
On a reported basis, EBITDA was $228 million in the first quarter of 2002,
representing a 13% increase over the same period of 2001. On a constant
territory basis, EBITDA grew 12% for the first quarter of 2002, reflecting
higher pricing in the U.S., an increased mix of higher margin cold drink volume,
approximately 4% volume growth in the U.S., and continued growth in our
operations outside the U.S., particularly in Russia. These increases are
partially offset by higher variable selling and delivery costs.
9
Volume
Our worldwide physical case volume grew approximately 4% in the first
12-weeks of 2002. Constant territory volume grew 4% in the first quarter
reflecting approximately 4% volume growth from both the U.S. and our operations
outside the United States. U.S. growth was led by solid performance in both the
take-home and cold drink channels. In both channels, we continue to benefit from
innovation, as well as the continued strong growth of Aquafina. Outside the
U.S., volume growth was led by double-digit growth in Russia. Our Russian
business benefited from the introduction of several new products this quarter,
including Cherry Pepsi, Pepsi Twist, two new local flavors as well as the
continued success of our water business.
Net revenues
Reported net revenues were $1,772 million in the first quarter of 2002,
representing an 8% increase over the prior year. On a constant territory basis,
net revenues increased by 7% in the quarter, reflecting 4% volume growth and
approximately 3% growth in net revenue per case. U.S. net revenues grew 7%,
driven by approximately 4% volume and net revenue per case growth. The net
revenue per case growth in the U.S. was driven equally by an improved mix of
higher revenue products resulting from innovation and Aquafina growth as well as
price increases primarily in our take-home business. Outside the U.S., growth in
net revenues was 4% reflecting approximately 4% volume growth and flat net
revenue per case growth. Excluding the negative impact from currency
translations, net revenue per case growth was over 4% outside the U.S. and 4%
worldwide.
Cost of sales
Cost of sales increased $60 million, or 7%, in the first quarter of 2002.
On a constant territory basis, cost of sales increased 6% reflecting volume
growth of nearly 4% and cost of sales per case growth of approximately 3%. The
increase in cost of sales per case is primarily driven by higher U.S.
concentrate costs and mix shifts into higher cost packages and products.
Selling, delivery and administrative expenses
Selling, delivery and administrative expenses grew $20 million, or 3%, in
the first quarter over the comparable period in 2001. Excluding the impact of
the adoption of SFAS 142, constant territory selling, delivery and
administrative expenses grew 7%. This increase was primarily driven by higher
variable selling and delivery costs reflecting growth in our business and an
increase in our bad debt provision.
Income tax expense
Our full year forecasted tax rate for 2002 is 33.75%, which corresponds to
an effective tax rate of 36.5% in 2001. The decrease in the effective tax rate
is primarily as a result of the implementation of SFAS 142 in 2002.
Liquidity and Capital Resources
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Cash Flows
Net cash provided by operating activities increased $65 million to $94
million in the first 12 weeks of 2002, reflecting strong EBITDA growth coupled
with improved working capital trends.
Net cash used for investments increased by $18 million from $121 million at
the end of the first quarter of 2001 to $139 million in the first 12 weeks of
2002, primarily due to acquisition spending, which was $24 million higher in
2002.
Net cash used for financing decreased $30 million from the end of the first
quarter of 2001 to the first 12-weeks of 2002. This change primarily reflects
lower share repurchases.
10
Cautionary Statements
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Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and employee infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories and unfavorable interest rate and currency fluctuations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
We have no material changes to the risk disclosures made in our 2001 Annual
Report on Form 10-K.
11
Independent Accountants' Review Report
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The Board of Directors
The Pepsi Bottling Group, Inc.
We have reviewed the accompanying Condensed Consolidated Balance Sheet of
The Pepsi Bottling Group, Inc. as of March 23, 2002, and the related Condensed
Consolidated Statements of Operations and Cash Flows for the twelve weeks ended
March 23, 2002 and March 24, 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
April 15, 2002
12
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
See Index to Exhibits on page 15.
13
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
THE PEPSI BOTTLING GROUP, INC.
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(Registrant)
Date: May 6, 2002 Andrea L. Forster
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Vice President and Controller
Date: May 6, 2002 Alfred H. Drewes
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Senior Vice President and
Chief Financial Officer
14
INDEX TO EXHIBITS
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ITEM 6 (a)
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EXHIBITS
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Exhibit 11 Computation of Basic and Diluted Earnings Per Share
15
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
(in millions, except per share data)
12-weeks Ended
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3/23/02 3/24/01
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Number of shares on which basic earnings
per share is based:
Average outstanding during period............. 280 290
Add - Incremental shares under stock
compensation plans.......................... 11 9
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Number of shares in which diluted
earnings per share is based................... 291 299
Net earnings applicable to common
shareholders (millions)...................... $ 54 $ 26
Net earnings on which diluted earnings
per share is based (millions)................ $ 54 $ 26
Basic earnings per share........................ $0.19 $0.09
Diluted earnings per share...................... $0.19 $0.09
16