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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 September 6, 2003
-----------------
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.
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 October 4, 2003:
262,777,484
The Pepsi Bottling Group, Inc.
------------------------------
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 36-weeks ended September 6, 2003 and September 7, 2002 2
Condensed Consolidated Statements of Cash Flows -
36-weeks ended September 6, 2003 and September 7, 2002 3
Condensed Consolidated Balance Sheets -
September 6, 2003 and December 28, 2002 4
Notes to Condensed Consolidated Financial Statements 5-11
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
PART I - FINANCIAL INFORMATION
Item 1.
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations
in millions, except per share amounts, unaudited
12-weeks Ended 36-weeks Ended
-------------- ---------------
September September September September
6, 2003 7, 2002 6, 2003 7, 2002
------- ------- ------- -------
Net revenues.................................................................. $2,810 $2,455 $7,216 $6,436
Cost of sales................................................................. 1,438 1,337 3,655 3,464
------ ------ ------ ------
Gross profit.................................................................. 1,372 1,118 3,561 2,972
Selling, delivery and administrative expenses................................. 1,014 780 2,812 2,228
------ ------ ------ ------
Operating income.............................................................. 358 338 749 744
Interest expense, net......................................................... 56 45 166 136
Other non-operating expenses, net............................................. 2 3 5 3
Minority interest............................................................. 21 21 41 45
------ ------ ------ ------
Income before income taxes.................................................... 279 269 537 560
Income tax expense............................................................ 96 91 184 189
------ ------ ------ ------
Income before cumulative effect of change in accounting
principle..................................................................... 183 178 353 371
Cumulative effect of change in accounting principle, net of
tax and minority interest..................................................... - - 6 -
------ ------ ------ ------
Net income.................................................................... $ 183 $ 178 $ 347 $ 371
====== ====== ====== ======
Basic earnings per share before cumulative effect of change
in accounting principle....................................................... $ 0.68 $ 0.63 $ 1.29 $ 1.31
Cumulative effect of change in accounting principle........................... - - (0.02) -
------ ------ ------ ------
Basic earnings per share...................................................... $ 0.68 $ 0.63 $ 1.27 $ 1.31
====== ====== ====== ======
Weighted-average shares outstanding........................................... 268 283 273 282
Diluted earnings per share before cumulative effect of
change in accounting principle................................................ $ 0.67 $ 0.61 $ 1.26 $ 1.26
Cumulative effect of change in accounting principle........................... - - (0.02) -
------ ------ ------ ------
Diluted earnings per share.................................................... $ 0.67 $ 0.61 $ 1.24 $ 1.26
====== ====== ====== ======
Weighted-average shares outstanding........................................... 274 294 280 294
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
..
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
36-weeks Ended
--------------
September September
6, 2003 7, 2002
------- -------
Cash Flows - Operations
Net income.................................................................... $ 347 $371
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................ 380 291
Amortization................................................................ 6 5
Deferred income taxes....................................................... 56 82
Cumulative effect of change in accounting principle......................... 6 -
Other non-cash charges and credits, net..................................... 232 168
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.................................................. (324) (281)
Inventories, net.......................................................... (52) (35)
Prepaid expenses and other current assets................................. (14) 3
Accounts payable and other current liabilities............................ 44 47
----- -----
Net change in operating working capital .................................... (346) (266)
----- -----
Pension contributions....................................................... (15) -
Other, net.................................................................. (34) (44)
----- -----
Net Cash Provided by Operations................................................ 632 607
----- -----
Cash Flows - Investments
Capital expenditures........................................................... (428) (437)
Acquisitions of bottlers....................................................... (97) (34)
Sale of property, plant and equipment.......................................... 5 4
----- -----
Net Cash Used for Investments................................................... (520) (467)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... 30 (76)
Proceeds from issuance of long-term debt....................................... 247 38
Payments of long-term debt..................................................... (13) (4)
Dividends paid................................................................. (8) (8)
Proceeds from exercise of stock options........................................ 28 84
Purchases of treasury stock.................................................... (363) (165)
----- -----
Net Cash Used for Financing..................................................... (79) (131)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... 1 1
----- -----
Net Increase in Cash and Cash Equivalents....................................... 34 10
Cash and Cash Equivalents - Beginning of Period................................. 222 277
----- -----
Cash and Cash Equivalents - End of Period....................................... $ 256 $ 287
===== =====
Supplemental Cash Flow Information
Net third-party interest paid................................................... $ 186 $ 192
===== =====
Income taxes paid............................................................... $ 65 $ 52
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
(Unaudited)
September December
6, 2003 28, 2002
------- --------
Assets
Current Assets
Cash and cash equivalents.................................................... $ 256 $ 222
Accounts receivable, less allowance of $71 at
September 6, 2003 and $67 at December 28, 2002......................... 1,264 922
Inventories.................................................................. 428 378
Prepaid expenses and other current assets.................................... 199 203
Investment in debt defeasance trust.......................................... 175 12
------- -------
Total Current Assets................................................. 2,322 1,737
Property, plant and equipment, net............................................. 3,371 3,308
Other intangible assets, net................................................... 3,593 3,495
Goodwill....................................................................... 1,227 1,192
Investment in debt defeasance trust............................................ - 170
Other assets................................................................... 148 141
------- -------
Total Assets......................................................... $10,661 $10,043
======= =======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities............................... $ 1,295 $ 1,179
Short-term borrowings........................................................ 83 51
Current maturities of long-term debt......................................... 693 18
------- -------
Total Current Liabilities............................................ 2,071 1,248
Long-term debt................................................................. 4,103 4,539
Other liabilities.............................................................. 883 819
Deferred income taxes.......................................................... 1,333 1,265
Minority interest.............................................................. 392 348
------- -------
Total Liabilities.................................................... 8,782 8,219
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares............................... 3 3
Additional paid-in capital.................................................. 1,748 1,750
Retained earnings........................................................... 1,404 1,066
Accumulated other comprehensive loss........................................ (428) (468)
Deferred compensation....................................................... (5) -
Treasury stock: 45 shares and 30 shares at September 6, 2003 and
December 28, 2002, respectively......................................... (843) (527)
------- -------
Total Shareholders' Equity........................................... 1,879 1,824
------- -------
Total Liabilities and Shareholders' Equity.......................... $10,661 $10,043
======= =======
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. 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.
As of September 6, 2003, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
39.9% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 45.1% 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 September 6, 2003,
the Condensed Consolidated Statements of Operations for the 12 and 36-weeks
ended September 6, 2003 and September 7, 2002 and the Condensed Consolidated
Statements of Cash Flows for the 36-weeks ended September 6, 2003 and September
7, 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.
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
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 third quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality.
- 5-
Note 3 - Inventories
September December
6, 2003 28, 2002
------- --------
Raw materials and supplies..................................................... $ 169 $ 162
Finished goods................................................................. 259 216
------- -------
$ 428 $ 378
======= =======
Note 4 - Property, plant and equipment, net
September December
6, 2003 28, 2002
------- --------
Land........................................................................... $ 236 $ 228
Buildings and improvements..................................................... 1,148 1,126
Manufacturing and distribution equipment....................................... 2,919 2,768
Marketing equipment............................................................ 2,104 2,008
Other.......................................................................... 175 154
------- -------
6,582 6,284
Accumulated depreciation....................................................... (3,211) (2,976)
------- -------
$ 3,371 $ 3,308
======= =======
Note 5 - Other intangible assets, net and Goodwill
September December
6, 2003 28, 2002
------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.......................................................... $ 23 $ 20
Other identifiable intangibles............................................ 25 24
------- -------
48 44
------- -------
Accumulated amortization:
Franchise rights.......................................................... (8) (6)
Other identifiable intangibles............................................ (13) (9)
------- -------
(21) (15)
------- -------
Intangibles subject to amortization, net....................................... 27 29
------- -------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.......................................................... 3,524 3,424
Other identifiable intangibles............................................ 42 42
------- -------
Intangibles not subject to amortization........................................ 3,566 3,466
------- -------
Total other intangible assets, net............................................. $ 3,593 $ 3,495
======= =======
Goodwill....................................................................... $ 1,227 $ 1,192
======= =======
Total other intangible assets, net and goodwill increased by approximately
$133 million due to purchase price allocations relating to our recent
acquisitions of $120 million, coupled with the impact from foreign currency
translation of $19 million, offset by amortization of intangible assets of $6
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 $6 million and $5 million for the
36-weeks ended September 6, 2003 and September 7, 2002, respectively. The
weighted-average amortization period for each category of intangible assets and
its estimated aggregate amortization expense expected to be recognized over the
next five years are as follows:
- 6 -
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 $1 $5 $4 $2 $1
Other identifiable intangibles........... 7 years $1 $4 $3 $2 $1
Note 6 - Acquisitions
During 2003 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from three PepsiCo franchise bottlers.
The following acquisitions occurred for an aggregate purchase price of $91
million in cash and liabilities of $12 million:
o Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February 2003
o Cassidy's Beverage Limited of New Brunswick, Canada in February 2003
o Olean Bottling Works, Inc. of Olean, New York in August 2003
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.
As a result of these acquisitions, we have assigned $80 million of the
purchase price to intangible assets, of which $15 million was assigned to
goodwill and $65 million to franchise rights. The goodwill and franchise rights
are not subject to amortization. The allocations of the purchase price for these
acquisitions are still preliminary and will be determined based on the estimated
fair value of assets acquired and liabilities assumed as of the dates of
acquisitions.
In addition, we made purchase price allocations of approximately $40
million during the first 36-weeks of 2003, primarily relating to our 2002
acquisition of Pepsi-Gemex, S.A. de C.V. of Mexico ("Gemex"). The allocation of
the purchase price of Gemex is still preliminary, pending final valuation of
certain assets. We will be finalizing the purchase price allocation for Gemex in
the fourth quarter of 2003.
During 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 $3 million for purchase obligations relating to
acquisitions made in the prior year.
Note 7 - Treasury Stock
In the first 36-weeks of 2003 and 2002, we repurchased approximately 17.2
million shares for $363 million and approximately 6.4 million shares for $165
million, respectively. During the second quarter, we completed our original
share repurchase program of 50 million shares of common stock. PBG's Board of
Directors announced a new share repurchase program at the Company's Annual
Meeting in May 2003, under which 25 million additional shares of common stock
may be repurchased. Approximately 7.6 million shares have been repurchased to
date under the new program.
- 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.
Net Revenues 12-weeks Ended 36-weeks Ended
- ------------ -------------- --------------
September September September September
6, 2003 7, 2002 6, 2003 7, 2002
------- ------- ------ -------
U.S................................................ $ 1,929 $ 1,961 $ 5,222 $ 5,406
Mexico............................................. 298 - 763 -
Other countries.................................... 583 494 1,231 1,030
------- ------- ------- -------
$ 2,810 $ 2,455 $ 7,216 $ 6,436
======= ======= ======= =======
Long-Lived Assets September December
- ----------------- 6, 2003 28, 2002
------- --------
U.S................................................ $ 5,691 $ 5,593
Mexico............................................. 1,368 1,586
Other countries.................................... 1,280 1,127
------- -------
$ 8,339 $ 8,306
======= =======
Note 9 - Stock-Based Compensation
During 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123," which provides alternative methods of 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 based upon the fair value of the PBG stock 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-based 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 36-weeks Ended
-------------- --------------
September September September September
6, 2003 7, 2002 6, 2003 7, 2002
------- ------- ------- -------
Net income:
As reported..................................................... $ 183 $ 178 $ 347 $ 371
Add: Total stock-based employee compensation expense
included in reported net income, net of taxes and
minority interest......................................... - - 2 -
Less: Total stock-based employee compensation expense
under fair value-based method for all awards,
net of taxes and minority interest........................ (12) (9) (32) (31)
------ ------ ------ ------
Pro forma....................................................... $ 171 $ 169 $ 317 $ 340
====== ====== ====== ======
Earnings per share:
Basic - as reported.......................................... $ 0.68 $ 0.63 $ 1.27 $ 1.31
Basic - pro forma............................................ 0.64 0.60 1.16 1.21
Diluted - as reported........................................ $ 0.67 $ 0.61 $ 1.24 $ 1.26
Diluted - pro forma.......................................... 0.63 0.58 1.14 1.16
- 8 -
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 members of 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 No. 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 such amount will be adjusted quarterly and amortized
on a straight-line basis over the vesting periods. As of September 6, 2003, the
deferred compensation balance remaining to be amortized is approximately $5
million.
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 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. 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, in the first
quarter of 2003. 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 third quarter and first 36-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 12 and 36-weeks ended September 7, 2002:
12-weeks Ended September 7, 2002
---------------------------------
As EITF 02-16 Pro Forma
Reported Adjustment Results
-------- ---------- -------
Net revenues................................................ $2,455 $ (72) $2,383
Cost of sales............................................... 1,337 (125) 1,212
Selling, delivery and administrative expenses............... 780 53 833
------ ----- ------
Operating income............................................ $ 338 $ - $ 338
====== ===== ======
36-weeks Ended September 7, 2002
--------------------------------
As EITF 02-16 Pro Forma
Reported Adjustment Results
-------- ---------- -------
Net revenues................................................ $6,436 $ (202) $6,234
Cost of sales............................................... 3,464 (339) 3,125
Selling, delivery and administrative expenses............... 2,228 139 2,367
------ ------ ------
Operating income............................................ $ 744 $ (2) $ 742
====== ===== =====
- 9 -
Assuming EITF Issue No. 02-16 had been adopted for all periods presented,
pro forma net income and earnings per share for the 12 and 36-weeks ended
September 6, 2003 and September 7, 2002, would have been as follows:
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
6, 2003 7, 2002 6, 2003 7, 2002
------- ------- ------- -------
Net income:
As reported.................................... $ 183 $ 178 $ 347 $ 371
Pro forma...................................... 183 178 353 370
Earnings per share:
Basic - as reported............................ $ 0.68 $ 0.63 $ 1.27 $ 1.31
Basic - pro forma.............................. 0.68 0.63 1.29 1.31
Diluted - as reported.......................... $ 0.67 $ 0.61 $ 1.24 $ 1.26
Diluted - pro forma............................ 0.67 0.61 1.26 1.26
During 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on our
Condensed Consolidated Financial Statements.
During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
146 did not 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, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,"
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.
The adoption of FIN 45 did not 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 an Interpretation of ARB No. 51,"
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. The adoption of FIN 46 did not have a
material impact on our Condensed Consolidated Financial Statements.
- 10 -
Note 11 - Short-term Borrowings and 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.
During the second quarter, Bottling Group, LLC issued $250 million of
Series B Senior Notes with a coupon rate of 4 1/8%, which has a yield of 4.4%,
maturing on June 15, 2015. These notes are general unsecured obligations and
rank on an equal basis with all of our other existing and future senior
unsecured indebtedness and rank senior to all of our existing and future
subordinated indebtedness. These senior notes have redemption features and
covenants similar to our other senior notes.
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities, which are guaranteed by Bottling Group, LLC.
During the second quarter, PBG renegotiated the credit facilities. One of the
credit facilities expires in April 2004 and the other credit facility expires in
April 2008.
During the third quarter, Bottling Group, LLC filed a shelf registration
statement with the Securities and Exchange Commission (the "SEC") that was
declared effective by the SEC on September 5, 2003. Under this registration
statement we may issue, in one or more offerings, up to $1 billion in senior
notes. On October 7, 2003, we completed the offering of $500 million of our
2.45% senior notes due on October 16, 2006 pursuant to the shelf registration
statement. We intend to use the net proceeds from this offering for the
repayment at maturity of a portion of our $1 billion principal amount of 5 3/8%
senior notes due in February 2004 ("February 2004 Senior Notes") and as such, we
have reclassified $500 million of the February 2004 Senior Notes from current
maturities of long-term debt to long-term debt in our Condensed Consolidated
Balance Sheets as of September 6, 2003. Pending such use, the net proceeds will
be invested in short-term instruments with an original maturity of three months
or less.
Note 12 - Comprehensive Income
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
6, 2003 7, 2002 6, 2003 7, 2002
------- ------- ------- -------
Net income.................................................. $ 183 $ 178 $ 347 $ 371
Currency translation adjustment............................. (112) 4 30 31
Cash flow hedge adjustment (a) (b).......................... 2 (17) 9 (1)
---- ----- ---- ----
Comprehensive income........................................ $ 73 $ 165 $ 386 $ 401
===== ===== ===== =====
(a) Net of minority interest and taxes of $1 and $12 for the 12-weeks ended
September 6, 2003 and September 7, 2002, respectively.
(b) Net of minority interest and taxes of $7 and $1 for the 36-weeks ended
September 6, 2003 and September 7, 2002, respectively.
Note 13 - 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 expected
to have a material adverse effect on our results of operations, financial
condition or liquidity.
- 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 September 6, 2003, and the related condensed
consolidated statements of operations for the twelve and thirty-six weeks ended
September 6, 2003 and September 7, 2002 and the condensed consolidated
statements of cash flows for the thirty-six weeks ended September 6, 2003 and
September 7, 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
September 30, 2003, except as to Note 11, which is as of October 7, 2003
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Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
- --------
The Pepsi Bottling Group, Inc. ("PBG" or the "Company") is the world's
largest manufacturer, seller and distributor of Pepsi-Cola beverages. 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. 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 the third quarter of 2003,
approximately 69% of our net revenues were generated in the United States, 10%
of our net revenues were generated in Mexico and the remaining 21% were
generated outside the United States and Mexico. For the first 36-weeks of 2003,
approximately 72% of our net revenues were generated in the United States, 11%
of our net revenues were generated in Mexico and the remaining 17% were
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, 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
Worldwide
---------
Volume Drivers
--------------
12-weeks Ended 36-weeks Ended
-------------- --------------
September 6, 2003 vs. September 6, 2003 vs.
--------------------- ---------------------
September 7, 2002 September 7, 2002
----------------- -----------------
Acquisitions....................... 21 % 23 %
Base business...................... 1 % (1) %
---- -----
Total Worldwide Change........... 22 % 22 %
==== =====
Our reported worldwide physical case volume increased 22% in both the third
quarter and first 36-weeks of 2003, when compared with similar periods of 2002.
The increase in reported
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worldwide volume was driven by our acquisitions. Our acquisition of Gemex
contributed over 95% and 90% of the growth resulting from acquisitions for the
third quarter and first 36-weeks of 2003,respectively. Our base business volume
(base business reflects territories that we owned and operated for comparable
periods in both the current year and the prior year) increased 1% for the third
quarter and decreased 1% for the first 36-weeks of 2003, when compared with
similar periods of 2002.
In the U.S., our reported volume increased by 1% in the third quarter of
2003 and decreased by 1% for the first 36-weeks of 2003, when compared with
similar periods of 2002. On a quarter-to-date basis, the increase in U.S.
reported volume was driven by incremental volume from acquisitions. For the
quarter, our U.S. base business volume was flat versus the comparable period in
the prior year, resulting from improvement in large and small format segments in
our take home business offset by declines in our cold drink business. On a
year-to-date basis, the decrease in U.S. reported volume was driven primarily by
the overlap of innovation in the first half of last year and a soft retail
environment, partially offset by incremental volume from acquisitions. From a
brand perspective in the U.S., brand PEPSI declines were partially offset by
strong growth in AQUAFINA and incremental lemon-lime volume, led by SIERRA MIST,
coupled with product introductions such as PEPSI VANILLA and MOUNTAIN DEW
LIVEWIRE.
Outside the U.S., reported volume increased by 77% and 102%, respectively,
in the third quarter and the first 36-weeks of 2003, when compared with similar
periods of 2002. The increase in volume was driven by our Gemex acquisition
coupled with increases in our base business of 4% and 3%, respectively, for the
quarter and on a year-to-date basis. The increase in base business volume
outside the U.S. was driven by strong growth in Spain, coupled with a solid
performance in Russia, resulting from the launch of PEPSI X and LIPTON ICE TEA.
Net Revenues
Worldwide
---------
Net Revenues
------------
Drivers
-------
12-weeks Ended 36-weeks Ended
-------------- --------------
September 6, 2003 vs. September 6, 2003 vs.
--------------------- ---------------------
September 7, 2002 September 7, 2002
----------------- -----------------
Acquisitions....................... 13 % 13 %
------ -------
Base business:
EITF Issue No. 02-16 impact...... (3) % (3) %
Volume impact.................... 1 % (1) %
Currency translation............. 2 % 2 %
Rate / mix impact................ 1 % 1 %
------ ------
Base business change............... 1 % (1) %
------ ------
Total Worldwide Change............. 14 % 12 %
====== ======
Net revenues were $2.8 billion for the third quarter and $7.2 billion for
the first 36-weeks in 2003, a 14% and 12% increase over similar periods in 2002,
respectively. The increase in net revenues was driven primarily by our
acquisition of Gemex, which contributed over 90% and 85% of the growth resulting
from acquisitions for the third quarter and first 36-weeks of 2003,
respectively. Our base business net revenues increased 1% for the quarter and
decreased 1% for the first 36-weeks of 2003, when compared with similar periods
in 2002. For the quarter, base business net revenues were positively impacted by
improved net rate and mix, favorable currency translations and volume increases,
partially offset by the reclassification of certain bottler incentives from net
revenues to cost of sales resulting from the adoption of Emerging Issues Task
Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor," at the beginning of 2003 (See
Note 10 to the Condensed Consolidated Financial Statements for a more detailed
description of the newly adopted accounting
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standard). On a year-to-date basis, the decrease in our base business net
revenues was driven by the adoption of EITF Issue No. 02-16 and volume declines,
partially offset by an increase in the net impact of rate and mix and favorable
foreign currency translations.
In the U.S., net revenues decreased 2% in the third quarter and 3% in the
first 36-weeks of 2003, when compared with the similar periods of 2002. For the
quarter, the decrease in net revenues in the U.S. is due primarily to the impact
of adopting EITF Issue No. 02-16, partially offset by an increase in the net
impact of rate and mix and incremental revenue from acquisitions. On a
year-to-date basis, net revenues in the U.S. decreased primarily from the impact
of adopting EITF Issue No. 02-16 and volume declines, partially offset by an
increase in the net impact of rate and mix and incremental revenue from
acquisitions. For both the third quarter and on a year-to-date basis, our net
rate and mix impact reflects an approximate 2% price increase in the
marketplace, partially offset by a negative mix impact of 1%, resulting from
declines in cold drink volume.
Net revenues outside the U.S. grew approximately 78% in the third quarter
and 94% for the first 36-weeks of 2003 when compared with the similar periods of
2002. For both the third quarter and the first 36-weeks of 2003, the increases
were driven by our Gemex acquisition and increases in our base business. The
increases in our base business net revenues outside the U.S. for the quarter and
on a year-to-date basis was the result of favorable foreign currency
translations, increases in the net impact of rate and mix and volume
performance, partially offset by a decline due to the impact of adopting EITF
Issue No. 02-16.
For the full year, worldwide net revenues are expected to increase in the
low double digits as a percentage of growth versus the prior year, with the
majority of the increase resulting from our Gemex acquisition. Worldwide net
revenue per case is expected to be down in the mid to high single-digits as a
percentage of growth for the full year of 2003, as compared with the similar
period in 2002. The decline in our worldwide net revenue per case will be driven
by country mix as a result of our Gemex acquisition and the adoption of EITF
Issue No. 02-16. Net revenue per case results in the U.S. are expected to be
down two percent for the full year of 2003 versus the comparable period in 2002
reflecting the adoption of EITF Issue No. 02-16. We expect U.S. pricing in the
marketplace to continue to be solid, up about two percent for the full year of
2003. For the fourth quarter of 2003 in the U.S., we expect a combination of
pricing and mix to be up two percent, with net revenue per case down one to two
percent versus the comparable period in 2002, reflecting the adoption of EITF
Issue No. 02-16.
Cost of Sales
Worldwide
---------
Cost of Sales
------------
Drivers
-------
12-weeks Ended 36-weeks Ended
-------------- --------------
September 6, 2003 vs. September 6, 2003 vs.
--------------------- ---------------------
September 7, 2002 September 7, 2002
----------------- -----------------
Acquisitions....................... 12 % 12 %
------ -------
Base business:
EITF Issue No. 02-16 impact...... (10) % (10) %
Cost per case impact............. 3 % 3 %
Volume impact.................... 1 % (1) %
Currency translation............. 2 % 2 %
------ ------
Base business change............... (4) % (6) %
------ ------
Total Worldwide Change............. 8 % 6 %
====== ======
Cost of sales was $1.4 billion in the third quarter and $3.7 billion for
the first 36-weeks of 2003, an 8% and 6% increase over similar periods in 2002,
respectively. The increase in cost of sales was driven primarily by our
acquisition of Gemex, which contributed over 90% and 80% of the growth resulting
from acquisitions in the third quarter and the first 36-weeks of 2003,
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respectively, partially offset by declines in our base business costs. For the
quarter, base business cost of sales declined due primarily to the
reclassification of certain bottler incentives from net revenues and selling,
delivery and administrative expenses to cost of sales resulting from the
adoption of EITF Issue No. 02-16, partially offset by increases in cost per case
and volume and the negative impact of foreign currency translations. On a
year-to-date basis, base business cost of sales decreased due primarily to the
impact of adopting EITF Issue No. 02-16 and volume declines, partially offset by
cost per case increases and the negative impact of foreign currency translation.
In the U.S., cost of sales decreased 5% in the third quarter and 7% for the
first 36-weeks of 2003, when compared with the similar periods of 2002. For the
quarter, the decrease in our U.S. cost of sales was driven by the impact of
adopting EITF Issue No. 02-16, partially offset by cost per case increases and
incremental costs from acquisitions. On year-to-date basis, the decrease in our
U.S. cost of sales was driven by the impact of adopting EITF Issue No. 02-16 and
volume declines, partially offset by cost per case increases and incremental
costs from acquisitions. In the U.S., cost per case increased 3% for both the
third quarter and on a year-to-date basis, resulting from higher concentrate
costs and the mix of products we sell.
Cost of sales outside the U.S. grew approximately 54% in the third quarter
and 66% for the first 36-weeks of 2003, when compared with the similar periods
of 2002. The increases in cost of sales outside the U.S., for the quarter and on
a year-to-date basis, were driven by our Gemex acquisition, the impact of
foreign currency translation, and increases in both cost per case and volume,
partially offset by a reduction resulting from the impact of adopting EITF Issue
No. 02-16.
For the balance of the year, we expect our cost of sales to grow at a rate
similar to that experienced during the first three-quarters of the year. The
expected growth in our cost of sales will be driven primarily by our Gemex
acquisition and cost per case increases in the U.S., partially offset by the
adoption of EITF Issue No. 02-16.
Selling, Delivery and Administrative Expenses
Worldwide
---------
SD&A Drivers
------------
12-weeks Ended 36-weeks Ended
-------------- --------------
September 6, 2003 vs. September 6, 2003 vs.
--------------------- ---------------------
September 7, 2002 September 7, 2002
----------------- -----------------
Acquisitions....................... 16 % 17 %
------ -------
Base business:
EITF Issue No. 02-16 impact...... 8 % 6 %
Currency translation............. 3 % 2 %
Cost performance................. 3 % 1 %
------ ------
Base business change............... 14 % 9 %
------ ------
Total Worldwide Change............. 30 % 26 %
====== ======
Selling, delivery and administrative expenses were $1.0 billion in the
third quarter and $2.8 billion for the first 36-weeks of 2003, a 30% and 26%
increase over similar periods in 2002, respectively. The increase in selling,
delivery and administrative expenses was driven primarily by our acquisition of
Gemex and increases in our base business costs. Gemex contributed over 95% and
90% of the growth resulting from acquisitions for the third quarter and first
36-weeks of 2003, respectively. Increases in our base business selling, delivery
and administrative expenses in both the third quarter and first 36-weeks of
2003, were driven by the reclassification of certain bottler incentives from
selling, delivery and administrative expenses to cost of sales resulting from
the adoption of EITF Issue No. 02-16, coupled with the impact of foreign
currency translation and incremental costs in the base business. Our base
business cost performance increased 3% and 1%, respectively, in the third
quarter and on a year-to-date basis, driven largely by increases in pension,
benefit and casualty costs, partially offset by reductions in labor and other
costs.
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For the balance of the year, we expect the rate of growth of our selling,
delivery and administrative expenses to be similar to that experienced during
the first three quarters of the year. Expected increases in selling, delivery
and administrative expenses will be driven predominantly by our Gemex
acquisition and the adoption of EITF Issue No. 02-16.
Operating Income
Worldwide
---------
Operating Income
----------------
Drivers
-------
12-weeks Ended 36-weeks Ended
-------------- --------------
September 6, 2003 vs. September 6, 2003 vs.
--------------------- ---------------------
September 7, 2002 September 7, 2002
----------------- -----------------
Acquisitions....................... 10 % 8 %
------ ------
Base business:
Volume impact.................... 2 % (6) %
Rate/mix impact.................. 14 % 14 %
Cost of sales per case impact.... (14) % (14) %
SD&A impact...................... (8) (2) %
Currency translation............. 2 % 1 %
------ ------
Base business change............... (4) % (7) %
------ ------
Total Worldwide Change............. 6 % 1 %
======= ======
Operating income was $358 million in the third quarter and $749 million for
the first 36-weeks of 2003, a 6% and 1% respective increase over similar periods
in 2002. The increase in operating income for the quarter and on a year-to-date
basis was driven primarily by our acquisition of Gemex partially offset by
decreases in our base business. On a quarter-to-date basis, our base business
operating income decreased primarily from higher product costs and increased
costs associated with our selling, delivery and administrative expenses,
partially offset by rate increases in the U.S. marketplace, volume growth and
the favorable impact of foreign currency translations. On a year-to-date basis,
our base business operating income decreased primarily from higher product
costs, volume declines and increased costs associated with our selling, delivery
and administrative expenses, partially offset by rate increases in the U.S.
marketplace and the favorable impact of foreign currency translations.
For the full year we expect operating profit to grow approximately 7%, as
compared with the prior-year periods. Expected increases in operating income for
the full year of 2003 will be driven by improving trends in the U.S. and
contributions from our Gemex acquisition.
Interest Expense, net
Interest expense, net increased by $11 million and $30 million,
respectively, in the third quarter and the first 36-weeks of 2003, when compared
with similar periods of 2002, 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%, before the
cumulative effect of change in accounting principle, and has been applied to our
third quarter 2003 results. Our effective tax rate in the third quarter of 2002
was 33.8%. The slight increase in the effective tax rate is primarily due to the
unfavorable mix in anticipated pre-tax income in jurisdictions with higher tax
rates.
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Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations increased by $25 million to $632 million
for the first 36-weeks of 2003, when compared with the similar period in 2002,
reflecting an increase in the mix of non-cash expenses, such as depreciation and
long-term benefit costs, partially offset by the increased use of cash from
working capital, principally from the timing of payments, coupled with a decline
in net income.
Net cash used for investments increased by $53 million to $520 million for
the first 36-weeks of 2003, when compared with the similar period in 2002,
reflecting higher acquisition spending, partially offset by declines in capital
expenditures.
Net cash used for financing decreased by $52 million for the first 36-weeks
of 2003 when compared with the similar period in 2002, driven by the issuance of
$250 million in long-term debt and other short-term borrowing activity,
partially offset by higher share repurchases and lower stock option exercises.
For the full year in 2003, we expect to achieve net cash provided by
operations of over $1.0 billion. In addition, we expect capital expenditures to
be approximately $675 million for the full year in 2003.
Short-term Borrowings and 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.
During the second quarter Bottling Group, LLC issued $250 million of Series
B Senior Notes with a coupon rate of 4 1/8%, which have a yield of 4.4%,
maturing on June 15, 2015. These notes are general unsecured obligations and
rank on an equal basis with all of our other existing and future senior
unsecured indebtedness and rank senior to all of our existing and future
subordinated indebtedness. These senior notes have redemption features and
covenants similar to our other senior notes.
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities. During the second quarter, PBG renegotiated the
credit facilities. One of the credit facilities expires in April 2004 and the
other credit facility expires in April 2008. Both credit facilities are
guaranteed by Bottling Group, LLC.
During the third quarter, Bottling Group, LLC filed a shelf registration
statement with the Securities and Exchange Commission (the "SEC") that was
declared effective by the SEC on September 5, 2003. Under this registration
statement we may issue, in one or more offerings, up to $1 billion in senior
notes. On October 7, 2003, we completed the offering of $500 million of our
2.45% senior notes due on October 16, 2006 pursuant to the shelf registration
statement. We intend to use the net proceeds from this offering for the
repayment at maturity of a portion of our $1 billion principal amount of 5 3/8%
senior notes due in February 2004 ("February 2004 Senior Notes") and as such, we
have reclassified $500 million of the February 2004 Senior Notes from current
maturities of long-term debt to long-term debt in our Condensed Consolidated
Balance Sheets as of September 6, 2003. Pending such use, the net proceeds will
be invested in short-term instruments with an original maturity of three months
or less.
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
- 18 -
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 our markets, political conditions in our markets outside
the United States and Canada, possible recalls of our products, an inability to
meet projections for performance in newly acquired territories, unfavorable
market performance of our pension plan assets, unfavorable outcomes from audits
performed by various tax authorities and changes in our debt ratings.
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 10% and 11% of our net
revenues were derived from Mexico in the third quarter and first 36-weeks of
2003, respectively. Since the beginning of the year, the Mexican peso devalued
by approximately 7%. Future movements in the Mexican peso could have a material
impact on our financial results.
Item 4.
Controls and Procedures
- -----------------------
PBG's management carried out an evaluation (the "Evaluation"), as required
by Rule 13a-15(d) 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 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
October 17, 2003, 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.
- -----------
4 Indenture, dated as of June 10, 2003, by and between Bottling Group,
LLC, as Obligor, and JPMorgan Chase Bank, as Trustee, relating to 4
1/8% Senior Notes due June 15, 2015
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 July 8, 2003, the Company furnished a current Form 8-K Report announcing its
financial results for its second quarter ended June 14, 2003.
On September 3, 2003, the Company confirmed its third quarter 2003 financial
guidance and provided an update for its full year 2003 forecast.
- 20 -
SIGNATURES
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 thereunto duly authorized.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: October 17, 2003 /s/ Andrea L. Forster
---------------- -----------------
Andrea L. Forster
Vice President and Controller
Date: October 17, 2003 /s/ Alfred H. Drewes
---------------- ----------------
Alfred H. Drewes
Senior Vice President and
Chief Financial Officer