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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 22, 2003 (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 incorporate 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 19, 2003:
274,178,773
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 22, 2003 and March 23, 2002 2
Condensed Consolidated Statements of Cash Flows -
12-weeks ended March 22, 2003 and March 23, 2002 3
Condensed Consolidated Balance Sheets -
March 22, 2003 and December 28, 2002 4
Notes to Condensed Consolidated Financial Statements 5-11
Independent Accountants' Review Report 12
Item 2. Management's Financial Review 13-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II Other Information 17-22
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
22, 2003 23, 2002
-------- --------
Net revenues.................................................................. $1,874 $1,772
Cost of sales................................................................. 927 942
----- -----
Gross profit................................................................. 947 830
Selling, delivery and administrative expenses................................ 827 695
----- -----
Operating income............................................................. 120 135
Interest expense, net......................................................... 53 45
Other non-operating expenses, net........................................... 3 -
Minority interest............................................................ 5 8
----- -----
Income before income taxes................................................... 59 82
Income tax expense........................................................... 20 28
----- -----
Income before cumulative effect of change in accounting principle............ 39 54
Cumulative effect of change in accounting principle, net of tax and
minority interest.......................................................... 6 -
----- -----
Net income.................................................................... $ 33 $ 54
===== =====
Basic earnings per share before cumulative effect of change in
accounting principle...................................................... $0.14 $ 0.19
Cumulative effect of change in accounting principle.......................... (0.02) -
----- -----
Basic earnings per share.................................................... $0.12 $ 0.19
===== =====
Weighted-average shares outstanding.......................................... 279 280
Diluted earnings per share before cumulative effect of change in
accounting principle...................................................... $0.14 $ 0.19
Cumulative effect of change in accounting principle.......................... (0.02) -
----- -----
Diluted earnings per share................................................... $0.12 $ 0.19
===== =====
Weighted-average shares outstanding........................................... 287 291
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
22, 2003 23, 2002
-------- --------
Cash Flows - Operations
Net income..................................................................... $ 33 $ 54
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................. 117 91
Amortization................................................................. 2 2
Deferred income taxes....................................................... 4 11
Cumulative effect of change in accounting principle......................... 6 -
Other non-cash charges and credits, net..................................... 64 56
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.................................................. 51 (21)
Inventories, net.......................................................... (24) (9)
Prepaid expenses and other current assets................................. (37) (3)
Accounts payable and other current liabilities............................ (183) (87)
Income taxes payable....................................................... 37 -
----- -----
Net change in operating working capital ..................................... (156) (120)
----- -----
Other, net................................................................. (3) (6)
----- -----
Net Cash Provided by Operations................................................. 67 88
----- -----
Cash Flows - Investments
Capital expenditures.......................................................... (112) (110)
Acquisitions of bottlers...................................................... (82) (24)
Sale of property, plant and equipment......................................... 1 1
----- -----
Net Cash Used for Investments................................................... (193) (133)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... 120 15
Dividends paid................................................................. (3) (3)
Proceeds from exercise of stock options......................................... 7 3
Purchases of treasury stock.................................................... (105) (34)
----- -----
Net Cash Provided by (Used for) Financing....................................... 19 (19)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents................... (1) -
----- -----
Net Decrease in Cash and Cash Equivalents....................................... (108) (64)
Cash and Cash Equivalents - Beginning of Period................................ 222 277
----- -----
Cash and Cash Equivalents - End of Period....................................... $ 114 $ 213
===== =====
Supplemental Cash Flow Information
Net third-party interest paid.................................................. $ 76 $ 95
===== =====
Net income taxes (received) / paid.............................................. $ (19) $ 16
===== =====
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
22, 2003 28, 2002
-------- --------
Assets
Current Assets
Cash and cash equivalents.................................................. $ 114 $ 222
Accounts receivable, less allowance of $72 at
March 22, 2003 and $67 at December 28, 2002........................... 882 922
Inventories................................................................. 397 378
Prepaid expenses and other current assets.................................. 207 215
----- ------
Total Current Assets............................................... 1,600 1,737
Property, plant and equipment, net........................................... 3,300 3,308
Intangible assets, net...................................................... 4,727 4,687
Investment in debt defeasance trust.......................................... 171 170
Other assets................................................................. 120 125
----- ------
Total Assets....................................................... $9,918 $10,027
===== ======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities............................. $ 997 $ 1,179
Short-term borrowings...................................................... 170 51
Current maturities of long-term debt....................................... 1,016 18
----- ------
Total Current Liabilities.......................................... 2,183 1,248
Long-term debt............................................................... 3,519 4,523
Other liabilities........................................................... 847 819
Deferred income taxes........................................................ 1,274 1,265
Minority interest............................................................ 352 348
----- ------
Total Liabilities.................................................. 8,175 8,203
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares.............................. 3 3
Additional paid-in capital................................................ 1,755 1,750
Retained earnings......................................................... 1,096 1,066
Accumulated other comprehensive loss...................................... (485) (468)
Deferred compensation..................................................... (5) -
Treasury stock: 34 shares and 30 shares at March 22, 2003 and December 28,
2002, respectively, at cost............................................ (621) (527)
----- ------
Total Shareholders' Equity......................................... 1,743 1,824
----- ------
Total Liabilities and Shareholders' Equity....................... $9,918 $10,027
===== ======
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" 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. References to PBG throughout these Condensed
Consolidated Financial Statements are made using the first-person notations of
"we", "our" and "us."
As of March 22, 2003, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
38.4% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 43.5% of the voting power of all classes of our
voting stock. PepsiCo also owns approximately 6.8% of the equity of Bottling
Group, LLC, our principal operating subsidiary.
The accompanying Condensed Consolidated Balance Sheet at March 22, 2003 and
the Condensed Consolidated Statements of Operations and Cash Flows for the
12-weeks ended March 22, 2003 and March 23, 2002 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 28, 2002 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.
Beginning in 2003, Russia is no longer considered highly inflationary, and
as a result, changed its functional currency from the U.S. dollar to the Russian
ruble. There was no material impact on our consolidated financial statements as
a result of Russia's change in functional currency in 2003.
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.
For the first quarter, our U.S. and Canadian operating results consisted of a
twelve-week period, while our operating results for our remaining countries
consisted of the months of January and February.
Certain reclassifications were made in our Condensed Consolidated Financial
Statements to 2002 amounts to conform to the 2003 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
22, 2003 28, 2002
-------- --------
Raw materials and supplies........................... $ 153 $ 162
Finished goods....................................... 244 216
---- ----
$ 397 $ 378
==== ====
5
Note 4 - Property, plant and equipment, net
March December
22, 2003 28, 2002
-------- --------
Land.................................................... $ 228 $ 228
Buildings and improvements.............................. 1,128 1,126
Manufacturing and distribution equipment................ 2,817 2,768
Marketing equipment..................................... 2,036 2,008
Other................................................... 154 154
------ ------
6,363 6,284
Accumulated depreciation................................ (3,063) (2,976)
------ ------
$ 3,300 $ 3,308
====== =======
Note 5 - Intangible assets, net
March December
22, 2003 28, 2002
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights........................................ $ 22 $ 20
Other identifiable intangibles.......................... 25 24
------ ------
47 44
------ ------
Accumulated amortization:
Franchise rights........................................ (6) (6)
Other identifiable intangibles.......................... (11) (9)
------ ------
(17) (15)
------ ------
Intangibles subject to amortization, net................ 30 29
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights........................................ 3,441 3,424
Goodwill................................................ 1,214 1,192
Other identifiable intangibles.......................... 42 42
------ ------
Intangibles not subject to amortization................. 4,697 4,658
------ ------
Total intangible assets, net............................ $ 4,727 $ 4,687
====== ======
Total intangible assets increased by $40 million due to purchase price
allocations relating to our recent acquisitions of $68 million, offset by a
negative impact from currency translation adjustments of $26 million and
amortization of intangible assets of $2 million.
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 $2 million for the twelve-weeks ended
March 22, 2003 and March 23, 2002. 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
---------- ------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Franchise rights...................... 5 years $3 $4 $4 $2 $1
Other identifiable intangibles........ 7 years $3 $4 $3 $2 $1
6
Note 6 - Acquisitions
During 2003 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from two PepsiCo franchise bottlers.
The following acquisitions occurred for an aggregate purchase price of $77
million in cash and liabilities of $7 million:
o Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February in 2003.
o Cassidy's Beverage Limited of New Brunswick, Canada in February in 2003.
As a result of these acquisitions, we have assigned $68 million of the
purchase price to intangible assets, of which $14 million was assigned to
goodwill and $54 million to franchise rights. The goodwill and franchise rights
are not subject to amortization. As part of our purchase of the Pepsi-Cola
Buffalo Bottling Corp., we may be required to pay to the prior owners up to $5
million over the next three years in accordance with the purchase agreement. The
final allocations of the purchase price for these acquisitions are still
preliminary and will be determined based on the fair value of assets acquired
and liabilities assumed as of the dates of acquisition.
These 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 addition, the allocation of the purchase price for certain prior year
acquisitions, including our acquisition of Pepsi-Gemex, S.A. de. C.V of Mexico,
is still preliminary, pending final valuations on certain assets. The final
allocations of the purchase price will be determined based on the fair value of
assets acquired and liabilities assumed as of the dates of acquisition.
In the first quarter of 2003, we paid approximately $3 million to PepsiCo
for distribution rights relating to the SoBe brand in certain PBG-owned
territories in the United States, which are being amortized over their estimated
useful life of five years. In addition, we paid $2 million for the final working
capital settlements relating to acquisitions made in the prior year.
Note 7 - Treasury Stock
In the first 12 weeks of 2003, we repurchased approximately 4.8 million
shares for $105 million and approximately 1.5 million shares for $34 million
over the same period in 2002. Since the inception of our share repurchase
program in October 1999, 45.2 million shares of PBG common stock have been
repurchased of the total 50 million shares authorized to be repurchased.
7
Note 8 - 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.
12-Weeks Ended
---------------
Net Revenues March March
22, 2003 23, 2002
-------- --------
U.S............................................ $ 1,496 $ 1,580
Mexico......................................... 157 -
Other countries................................ 221 192
------ ------
$ 1,874 $ 1,772
====== ======
Long-Lived Assets March December
22, 2003 28, 2002
-------- --------
U.S............................................ $ 5,631 $ 5,577
Mexico......................................... 1,509 1,586
Other countries................................ 1,178 1,127
------ ------
$ 8,318 $ 8,290
====== ======
Note 9 - Stock-Based Compensation
During 2002, the Financial Accounting Standards Board ("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:
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net income:
As reported.................................................................. $ 33 $ 54
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) (13)
---- ----
Pro forma................................................................... $ 24 $ 41
==== ====
Earnings per share:
Basic - as reported......................................................... $0.12 $0.19
Basic - pro forma........................................................... $0.09 $0.15
8
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Diluted - as reported....................................................... $0.12 $0.19
Diluted - pro forma......................................................... $0.08 $0.14
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.
In the first quarter of 2003, we issued restricted stock awards to certain
key senior management, which vest over periods ranging from three to five years
from the date of grant. These restricted stock awards are earned only if the
Company achieves certain performance targets over a three-year period. These
restricted share awards are considered variable awards pursuant to APB Opinion
25, which requires the related compensation expense to be re-measured each
period until the performance targets are met and the amount of the awards
becomes fixed. When the restricted stock award was granted, deferred
compensation of approximately $6 million was recorded as a reduction to
shareholders' equity, and will be amortized on a straight-line basis over the
vesting periods.
Note 10 - New Accounting Standards
In January 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Reseller for Cash Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)," addressing the recognition and income statement classification of
various cash considerations given by a vendor to a customer. The consensus
requires that certain cash considerations received by a customer from a vendor
are 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. In the
prior year 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. We have 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. This accounting change did not have a material effect on our income
before cumulative effect of change in accounting principle in the first twelve
weeks of 2003 and is not expected to have a material effect on such amounts for
the balance of fiscal 2003. Assuming that EITF Issue No. 02-16 had been in place
for all periods presented, the following pro forma adjustments would have been
made to our reported results for the twelve-weeks ended March 23, 2002:
As EITF 02-16 Pro Forma
Reported Adjustment Results
-------- ---------- --------
Net revenues.................................... $1,772 $ (59) $1,713
Cost of sales................................... 942 (95) 847
Selling, delivery and administrative expenses... 695 37 732
----- ---- -----
Operating income................................ $ 135 $ (1) $ 134
===== ==== =====
9
Assuming EITF Issue No. 02-16 had been adopted for all periods presented,
pro forma net income and earnings per share for the twelve-weeks ended March 22,
2003 and March 23, 2002, would have been as follows:
12-Weeks Ended
---------------
March March
22, 2003 23, 2002
-------- --------
Net income:
As reported.............................. $ 33 $ 54
Pro forma................................ 39 53
Earnings per share:
Basic - as reported...................... $ 0.12 $ 0.19
Basic - pro forma........................ $ 0.14 $ 0.19
Diluted - as reported.................... 0.12 0.19
Diluted - pro forma...................... 0.14 0.18
During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with the Exit or Disposal Activities." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We do not anticipate that
the adoption of SFAS No. 146 will have a material impact on our Condensed
Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which addresses the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. We do not anticipate that the adoption
of FIN 45 will have a material impact on our Condensed Consolidated Financial
Statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
business enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
We do not anticipate that the adoption of FIN 46 will have a material impact on
our Condensed Consolidated Financial Statements.
Note 11 - Comprehensive Income
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net income.................................................... $ 33 $ 54
Currency translation adjustment............................... (24) 2
Cash flow hedge adjustment (a)................................ 7 7
--- ---
Comprehensive income.......................................... $ 16 $ 63
=== ===
(a) Net of minority interest and taxes of $6 and
$5 for the 12-weeks ended March 22, 2003 and March
23, 2002, respectively.
10
Note 12 - 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.
In the first quarter of 2003, we settled a lawsuit with the New Jersey
State Department of Labor and with current and former employees concerning
overtime wage issues. The amount of this settlement was approximately $28
million, which was fully provided for in our litigation reserves in our
Consolidated Balance Sheets at December 28, 2002.
11
Independent Accountants' Review Report
--------------------------------------
The Board of Directors and Shareholders
The Pepsi Bottling Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
Pepsi Bottling Group, Inc. as of March 22, 2003, and the related condensed
consolidated statements of operations and cash flows for the twelve weeks ended
March 22, 2003 and March 23, 2002. 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 generally
accepted auditing standards, 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 28, 2002, 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 28, 2003, 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 28, 2002,
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 22, 2003
12
Item 2.
Management's Financial Review
OVERVIEW
- ---------
The Pepsi Bottling Group, Inc. (collectively referred to as "PBG", "we",
"our" and "us") 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. In first quarter of 2003,
approximately 80% of our net revenues were generated in the United States, 8% of
our net revenues were generated in Mexico and the remaining 12% generated
outside the United States and Mexico.
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
- ----------------------------------------------------
Gemex Acquisition
- -----------------
In November 2002, we acquired all of the outstanding capital stock of
Pepsi-Gemex, S.A. de. C.V. of Mexico ("Gemex"). Our total acquisition cost
consisted of a net cash payment of $871 million and assumed debt of
approximately $305 million. The Gemex acquisition was made to allow us to
increase our markets outside the United States. Gemex was the largest Pepsi-Cola
bottler in Mexico and the largest bottler outside the United States of
Pepsi-Cola soft drink products based on sales volume. Gemex produced, sold and
distributed a variety of soft drink products under the Pepsi-Cola, Pepsi Light,
Pepsi Max, Pepsi Limon, Mirinda, 7 UP, Diet 7 UP, KAS, Mountain Dew, Power Punch
and Manzanita Sol trademarks, under exclusive franchise and bottling
arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex also had
rights to produce, sell and distribute in Mexico soft drink products of other
companies and it produced, sold and distributed purified and mineral water in
Mexico under the trademarks Electropura and Garci Crespo, respectively. As a
result of the acquisition of Gemex, we own the Electropura and Garci Crespo
brands.
New Accounting Standards
- ------------------------
See Note 10 - New Accounting Standards, in our Notes to Condensed
Consolidated Financial Statements, for a detailed discussion of new accounting
standards that were adopted in 2003.
RESULTS OF OPERATIONS
- ---------------------
Volume
Our worldwide reported physical case volume increased 16% in the first
quarter of 2003, reflecting a 20% increase in volume resulting from our
acquisitions and a 4% decrease in volume from our base business (base business
reflects territories that have operating results in the current and prior year).
In the U.S., volume decreased by 4%, reflecting a 5% decrease in base business
volumes offset by a 1% increase resulting from acquisitions. Volume decreases in
the U.S. reflect declines in both our take home and cold drink businesses. U.S.
declines in trademark Pepsi were partially offset by strong growth from Aquafina
and Sierra Mist. Outside the U.S., our volumes increased 125% reflecting a 124%
increase from new volume due to acquisitions in Mexico, Turkey and Canada. Base
business volume outside the U.S. increased 1% due to double-digit growth in
Russia, which was partially offset by volume declines in Spain and volume in
Canada that was essentially flat.
13
Net Revenues
Reported net revenues were $1.9 billion for the first quarter in 2003, a 6%
increase over the prior year, which includes an 11% increase from acquisitions.
In our base business, we had a 2% increase in net revenue per case and a 1%
favorable impact from currency translations, partially offset by a 4% decrease
in volume and a more than 3% negative impact from the adoption of EITF Issue No.
02-16. Worldwide net revenue per case declined by 9%, reflecting negative
country mix, primarily from our acquisition territories in Mexico and Turkey,
and the impact of adopting EITF Issue No. 02-16.
In the U.S., reported net revenues decreased 5%, which includes a 1%
increase from acquisitions. In our base business, there was a 5% decrease in
volume and a 3% negative impact from the adoption of EITF Issue No. 02-16, which
was partially offset by rate increases of approximately 2%.
Reported net revenues outside the U.S. grew approximately 97%, which
includes a 93% increase from acquisitions. In our base business, there was a 9%
favorable impact of currency translations, partially offset by a 5% decrease
from the adoption of EITF Issue No. 02-16. Approximately 82% of the increase in
net revenues outside the U.S. was attributable to our acquisition in Mexico.
Worldwide net revenue per case is expected to be down in the low
double-digits in the second quarter and down in the high single digits for the
full year. The decline in our worldwide net revenue per case will be driven by
our acquisition in Mexico in November of the prior year and the adoption of EITF
Issue No. 02-16.
Cost of Sales
Cost of sales was $927 million in the first quarter of 2003, a 2% decrease
over the prior year, which includes a 10% increase from acquisitions. In our
base business, there was a 10% decrease resulting from the adoption of EITF
Issue No. 02-16 and a 4% decrease in volume, partially offset by a 1% negative
impact from currency translations and a 1% increase in cost of sales per case.
In the U.S., cost of sales decreased by 11%, which includes a 1% increase
from acquisitions. In our base business there was a 9% decrease from the
adoption of EITF Issue No. 02-16 and 5% decrease in volume, which was partially
offset by more than 1% increase in cost of sales per case. The increase in cost
of sales per case was driven by higher concentrate costs in the United States.
Cost of sales outside the U.S. grew by 65%, which includes a 76% increase
from acquisitions. In our base business, there was a 7% increase resulting from
the negative impact from currency translations and a 2% increase in our cost of
sales per case, partially offset by a 20% decrease resulting from the adoption
of EITF Issue No. 02-16. Approximately 62% of the increase in cost of sales
outside the U.S. was attributable to our acquisition in Mexico in the prior
year.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses grew $132 million, or 19% in
the first quarter of 2003, which includes a 14% increase resulting from
acquisitions. In our base business there was a 5% increase from the adoption of
EITF Issue No. 02-16 and a 1% negative impact from currency translations, which
was partially offset by a 1% decline in selling, delivery and administrative
expenses resulting from additional accounts receivable reserves taken in the
prior year and current year productivity gains.
Operating Income
Operating income was $120 million in the first quarter of 2003,
representing a 10% decrease over first quarter of 2002. This decline is driven
primarily by the negative impact from lower volume in the U.S., partially offset
by higher pricing. Our acquisitions did not have a material impact on operating
income in the first quarter of 2003.
14
We expect reported operating income during the second quarter to grow in
the mid-single digits with growth coming predominately from Mexico. For the full
year, reported operating income is expected to increase in the mid-teens with
Mexico contributing two-thirds of that growth.
Interest Expense, net
Interest expense, net increased by $8 million largely due to the additional
interest associated with the $1 billion 4 5/8% senior notes used to finance our
acquisition of Gemex in November 2002, partially offset by the favorable impact
of the interest rate swaps on $1.3 billion of our fixed rate long-term debt.
Income Tax Expense
PBG's estimated full year effective tax rate for 2003 is 34.3% and has been
applied to our first quarter 2003 results. Our effective tax rate in the first
quarter of 2002 was 33.8%. 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.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations decreased by $21 million to $67 million
reflecting a decline in operating income coupled with the increased use of cash
from working capital, principally from the timing of payments, offset by an
increase in depreciation expense.
Net cash used for investments increased by $60 million to $193 million
reflecting higher acquisition spending.
Net cash provided by financing increased by $38 million driven by increased
short term borrowings partially offset by higher share repurchases.
Current Maturities of Long Term Debt
We intend to refinance all or a portion of our $1 billion of 5 3/8% senior
notes upon their maturity in February 2004. We are currently in compliance with
all debt covenants in our indenture agreements.
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 related infrastructure expenditures,
material changes in expected levels of bottler incentive payments from PepsiCo,
material changes in our expected interest and currency exchange rates, an
inability to achieve cost savings, an inability to achieve volume growth through
product and packaging initiatives, competitive pressures that may cause channel
and product mix to shift from more profitable cold drink channels and packages,
weather conditions in PBG's markets, political conditions in PBG's markets
outside the United States and Canada, possible recalls of PBG's products, an
inability to meet projections for performance in newly acquired territories,
unfavorable market performance on our pension plan assets, unfavorable outcomes
from our U.S. Internal Revenue Service audits, and changes in our debt ratings.
15
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. Beginning in 2003, Russia is no longer considered highly
inflationary, and changed its functional currency from the U.S. dollar to the
Russian ruble. The impact to our consolidated financial statements as a result
of Russia's change in functional currency in 2003 was not material.
We acquired Gemex in November 2002. Approximately 8% of our net revenues
were derived from Mexico in the first quarter of 2003. During the first quarter
of 2003, the Mexican peso declined by approximately 6%. Future movements in the
Mexican peso could have a material impact on our financial results.
Item 4.
Controls and Procedures
- -----------------------
Within 90 days prior to the date of this report, PBG carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer of PBG, of
the effectiveness of our disclosure controls and procedures pursuant to the
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded, subject to the limitations
set forth below, 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 PBG's periodic filings with
the SEC. In addition, subject to the limitations set forth below, there were no
significant changes in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the date of our most
recent evaluation.
Limitations on the Effectiveness of Controls.
Our management, including the Chief Executive Officer and the Chief
Financial Officer, does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been detected. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
Exhibit 15 Accountants' Acknowledgement
Exhibit 99.1 Certification by the Chief Executive Officer of
Periodic Financial Report pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
Exhibit 99.2 Certification by the Chief Financial Officer of
Periodic Financial Report pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
Exhibit 99.3 Bottling Group LLC condensed consolidated financial
statements and notes thereto for the first quarter
ended March 22, 2003
ITEM 6 (b). REPORTS ON FORM 8-K
- -------------------------------
On January 27, 2003, the Company filed a current Form 8-K Report, announcing the
election of John T. Cahill as Chairman of the Company.
17
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: May 5, 2003 /s/ Andrea L. Forster
------------ ----------------------
Andrea L. Forster
Vice President and Controller
Date: May 5, 2003 /s/ Alfred H. Drewes
------------ ---------------------
Alfred H. Drewes
Senior Vice President and
Chief Financial Officer
18
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
19
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: May 5, 2003 /s/ John T. Cahill
----------- ------------------
John T. Cahill
Chief Executive Officer
20
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
21
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: May 5, 2003 /s/ Alfred H. Drewes
----------- ---------------------
Alfred H. Drewes
Senior Vice President and
Chief Financial Officer
22