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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 19, 2005 (12 weeks)
--------------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4038356
------------------------------ --------------------
(State or other jurisdiction of (I.R.S.
employer incorporation or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
---------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
-----
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Number of shares of Common Stock outstanding as of April 15, 2005:
244,966,803
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 19, 2005 and March 20, 2004 2
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 19, 2005 and March 20, 2004 3
Condensed Consolidated Balance Sheets -
March 19, 2005 and December 25, 2004 4
Notes to Condensed Consolidated Financial Statements 5-11
Report of Independent Registered Public Accounting Firm 12
Item 2. Management's Financial Review 13-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
Part II Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 21-22
Item 6. Exhibits 23
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
19, 2005 20, 2004
-------- --------
Net revenues........................................................... $2,147 $2,067
Cost of sales.......................................................... 1,116 1,051
----- -----
Gross profit........................................................... 1,031 1,016
Selling, delivery and administrative expenses.......................... 911 879
----- -----
Operating income....................................................... 120 137
Interest expense, net.................................................. 55 55
Minority interest...................................................... 6 6
----- -----
Income before income taxes............................................. 59 76
Income tax expense..................................................... 20 26
----- -----
Net income............................................................. $ 39 $ 50
===== =====
Basic earnings per share............................................... $ 0.16 $ 0.19
===== =====
Weighted-average shares outstanding.................................... 248 260
Diluted earnings per share............................................. $ 0.15 $ 0.19
===== =====
Weighted-average shares outstanding.................................... 254 269
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
19, 2005 20, 2004
-------- --------
Cash Flows - Operations
Net income..................................................................... $ 39 $ 50
Adjustments to reconcile net income to net cash (used for) provided by operations:
Depreciation................................................................ 130 124
Amortization................................................................ 3 3
Deferred income taxes....................................................... 4 11
Other non-cash charges and credits, net..................................... 64 62
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net................................................... (3) (3)
Inventories, net........................................................... (48) (67)
Prepaid expenses and other current assets.................................. (45) (2)
Accounts payable and other current liabilities............................. (121) (35)
Income taxes payable....................................................... 2 (2)
----- -----
Net change in operating working capital .................................... (215) (109)
----- -----
Pension contributions....................................................... (20) (20)
Other, net.................................................................. (15) (10)
----- -----
Net Cash (Used for) Provided by Operations...................................... (10) 111
----- -----
Cash Flows - Investments
Capital expenditures........................................................... (93) (102)
Acquisitions of bottlers....................................................... (1) -
Sale of property, plant and equipment.......................................... 1 1
----- -----
Net Cash Used for Investments................................................... (93) (101)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... 147 97
Proceeds of long-term debt..................................................... 23 9
Payments of long-term debt..................................................... (4) (1,004)
Dividends paid................................................................. (13) (3)
Proceeds from exercise of stock options........................................ 13 13
Purchases of treasury stock.................................................... (118) (86)
----- -----
Net Cash Provided by (Used for) Financing....................................... 48 (974)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... - (2)
----- -----
Net Decrease in Cash and Cash Equivalents....................................... (55) (966)
Cash and Cash Equivalents - Beginning of Period................................. 305 1,235
----- -----
Cash and Cash Equivalents - End of Period....................................... $ 250 $ 269
===== =====
Supplemental Cash Flow Information
Net third-party interest paid................................................... $ 66 $ 72
===== =====
Income taxes paid............................................................... $ 14 $ 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
19, 2005 25, 2004
-------- --------
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 250 $ 305
Accounts receivable, less allowance of $59 at March 19, 2005 and
$61 at December 25, 2004..................................................... 1,054 1,054
Inventories..................................................................... 476 427
Prepaid expenses and other current assets....................................... 293 253
------ ------
Total Current Assets......................................................... 2,073 2,039
Property, plant and equipment, net.............................................. 3,543 3,581
Other intangible assets, net.................................................... 3,645 3,639
Goodwill........................................................................ 1,422 1,416
Other assets.................................................................... 113 118
------ ------
Total Assets.......................................................... $10,796 $10,793
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities.................................. $ 1,255 $ 1,373
Short-term borrowings........................................................... 301 155
Current maturities of long-term debt............................................ 77 53
------ ------
Total Current Liabilities.................................................... 1,633 1,581
Long-term debt.................................................................. 4,470 4,489
Other liabilities............................................................... 937 914
Deferred income taxes........................................................... 1,417 1,415
Minority interest............................................................... 452 445
------ ------
Total Liabilities............................................................ 8,909 8,844
------ ------
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares..................................... 3 3
Additional paid-in capital...................................................... 1,716 1,719
Retained earnings............................................................... 1,914 1,887
Accumulated other comprehensive loss............................................ (303) (315)
Deferred compensation........................................................... (1) (1)
Treasury stock: 64 shares and 61 shares at March 19, 2005 and December 25, 2004,
respectively, at cost......................................................... (1,442) (1,344)
------ ------
Total Shareholders' Equity................................................... 1,887 1,949
------ ------
Total Liabilities and Shareholders' Equity............................ $10,796 $10,793
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
-4-
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions, except per share amounts
- --------------------------------------------------------------------------------
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. We have
the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in
all or a portion of the United States, Mexico, Canada and Europe, which consists
of operations in Spain, Greece, Russia and Turkey. When used in these Condensed
Consolidated Financial Statements, "PBG," "we," "our" and "us" each refers to
The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC
("Bottling LLC"), our principal operating subsidiary.
At March 19, 2005, PepsiCo, Inc. ("PepsiCo") owned 104,303,858 shares of
our common stock, consisting of 104,203,858 shares of common stock and 100,000
shares of Class B common stock. All shares of Class B common stock that have
been authorized have been issued to PepsiCo. At March 19, 2005, PepsiCo owned
approximately 42.4% of our outstanding common stock and 100% of our outstanding
Class B common stock, together representing 47.7% of the voting power of all
classes of our voting stock. In addition, PepsiCo owns approximately 6.8% of the
equity of Bottling LLC. We fully consolidate the results of Bottling LLC and
present PepsiCo's share as minority interest in our Condensed Consolidated
Financial Statements.
The accompanying Condensed Consolidated Balance Sheet at March 19, 2005 and
the Condensed Consolidated Statements of Operations and Cash Flows for the 12
weeks ended March 19, 2005 and March 20, 2004 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 25, 2004 as presented in
our Annual Report on Form 10-K. In the opinion of management, this interim
information includes all material adjustments, which are of a normal and
recurring nature, necessary for a fair presentation.
Our U.S. and Canadian operations report using a fiscal year that consists
of fifty-two weeks, ending on the last Saturday in December. Every five or six
years a fifty-third week is added. Fiscal year 2004 consisted of fifty-two
weeks. In 2005, our fiscal year consists of fifty-three weeks (the additional
week is added to the fourth quarter). 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/17 weeks (FY 2005) September, October,
November and December
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality. From a cash flow perspective,
the majority of our cash flow from operations is generated in the third and
fourth quarters.
- 5 -
Note 3 - New Accounting Standards
Share-Based Payment
In December 2004, the FASB issued a revised Statement of Financial
Accounting Standards ("SFAS") No. 123, "Share-Based Payment." Among its
provisions, SFAS 123R will require us to measure the cost of employee services
in exchange for an award of equity instruments based on the grant-date fair
value of the award and to recognize the cost over the requisite service period.
As a result of the release of a recent Securities and Exchange Commission rule,
SFAS 123R becomes effective for us beginning in the first quarter of 2006. We
are currently evaluating the impact of this proposed standard on our
Consolidated Financial Statements.
FASB Staff Position No. FAS 109-1
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP
109-1"), "Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004." FSP No. 109-1 clarifies SFAS No. 109's guidance that
applies to the new tax deduction for qualified domestic production activities.
We have adopted the standard at the beginning of 2005. This standard will not
have a material impact to our Consolidated Financial Statements.
FASB Staff Position No. FAS 109-2
In December 2004, the FASB issued Staff Position No. FAS 109-2 ("FSP
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-2
provides that an enterprise is allowed time beyond the financial reporting
period of enactment to evaluate the effect of the new tax law on its plan for
applying SFAS No. 109. We are evaluating whether to repatriate our undistributed
foreign earnings in 2005.
FASB Interpretation No. 47
In April 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 provides
clarification of certain sections of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations." Specifically, FIN 47 clarifies the term
conditional asset retirement obligation as used in SFAS 143 and also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. We are currently evaluating
the impact of this standard on our Consolidated Financial Statements.
Note 4 - Stock-Based Employee 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,
"Accounting for Stock-Based Compensation - Transition and Disclosure," 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,
"Accounting for Stock-Based Compensation." If we had measured compensation cost
for the stock awards granted to our employees under the fair-value based method
prescribed by SFAS No. 123, net income would have been changed to the pro forma
amounts set forth below:
- 6 -
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- ---------
Net income:
As reported.................................................. $ 39 $ 50
Add: Total stock-based employee compensation included
in reported net income, net of taxes and and minority
interest.............................................. - -
Less: Total stock-based employee compensation determined
under fair-value based method for all awards, net of
taxes and minority interest........................... (11) (10)
---- ----
Pro forma.................................................... $ 28 $ 40
==== ====
Earnings per share:
Basic - as reported....................................... $0.16 $0.19
Basic - pro forma......................................... $0.11 $0.16
Diluted - as reported..................................... $0.15 $0.19
Diluted - pro forma....................................... $0.11 $0.15
Pro forma compensation cost measured for stock options granted to employees
is amortized using a straight-line basis over the vesting period, which is
typically three years.
The fair value of PBG stock options used to compute pro forma net income
disclosures was estimated on the date of grant using the Black-Scholes-Merton
option-pricing model.
Note 5 - Inventories
March December
19, 2005 25, 2004
-------- --------
Raw materials and supplies................................... $ 175 $ 159
Finished goods............................................... 301 268
---- ----
$ 476 $ 427
==== ====
- 7 -
Note 6 - Property, plant and equipment, net
March December
19, 2005 25, 2004
-------- --------
Land............................................................................ $ 258 $ 257
Buildings and improvements...................................................... 1,270 1,263
Manufacturing and distribution equipment........................................ 3,303 3,289
Marketing equipment............................................................. 2,255 2,237
Other........................................................................... 180 177
------ ------
7,266 7,223
Accumulated depreciation........................................................ (3,723) (3,642)
------ ------
$ 3,543 $ 3,581
====== ======
Note 7 - Other intangible assets, net and Goodwill
March December
19, 2005 25, 2004
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships and lists ...................................... $ 46 $ 46
Franchise/distribution rights.......................................... 45 44
Other identified intangibles........................................... 30 30
------ ------
121 120
------ ------
Accumulated amortization:
Customer relationships and lists ...................................... (6) (6)
Franchise/distribution rights.......................................... (16) (15)
Other identified intangibles........................................... (18) (16)
------ ------
(40) (37)
------ ------
Intangibles subject to amortization, net........................................ 81 83
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights....................................................... 2,965 2,958
Distribution rights.................................................... 289 288
Trademarks............................................................. 209 208
Other identified intangibles........................................... 101 102
------ ------
Intangibles not subject to amortization.................................... 3,564 3,556
------ ------
Total other intangible assets, net.............................................. $ 3,645 $ 3,639
====== ======
Goodwill........................................................................ $ 1,422 $ 1,416
====== ======
Goodwill increased by approximately $6 million in 2005 due to the impact
from foreign currency translation.
- 8 -
For intangible assets subject to amortization, we calculate amortization
expense over the period we expect to receive economic benefit. Total
amortization expense was $3 million for the twelve weeks ended March 19, 2005
and March 20, 2004. 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:
Weighted-Average Estimated Aggregate Amortization Expense to be Incurred
---------------- -------------------------------------------------------
Amortization
-------------
Period
------- Balance of Fiscal Year Ending
---------- ------------------
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
Customer relationships and
lists................................ 17 years $2 $3 $3 $3 $3
Franchise/distribution rights........ 7 years $5 $5 $3 $2 $2
Other identified intangibles......... 7 years $3 $3 $3 $2 $1
Note 8 - Pension and Postretirement Medical Benefit Plans
Pension Benefits
Our U.S. employees participate in noncontributory defined benefit pension
plans, which cover substantially all full-time salaried employees, as well as
most hourly employees. Benefits generally are based on years of service and
compensation, or stated amounts for each year of service. All of our qualified
plans are funded and contributions are made in amounts not less than the minimum
statutory funding requirements and not more than the maximum amount that can be
deducted for U.S. income tax purposes. Our net pension expense for the defined
benefit plans for our operations outside the U.S. was not significant and is not
included in the tables presented below.
Nearly all of our U.S. employees are also eligible to participate in our
401(k) savings plans, which are voluntary defined contribution plans. We make
matching contributions to the 401(k) savings plans on behalf of participants
eligible to receive such contributions. If a participant has one or more but
less than 10 years of eligible service, our match will equal $0.50 for each
dollar the participant elects to defer up to 4% of the participant's pay. If the
participant has 10 or more years of eligible service, our match will equal $1.00
for each dollar the participant elects to defer up to 4% of the participant's
pay.
- 9 -
Components of our U.S. pension expense for the twelve weeks ended March 19,
2005 and March 20, 2004 are as follows:
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Service cost............................................. $ 11 $ 10
Interest cost............................................ 17 16
Expected return on plan assets........................... (21) (19)
Amortization of prior service cost....................... 2 1
Amortization of net loss................................. 7 6
--- ---
Net pension expense for the defined benefit plans........ 16 14
--- ---
Defined contribution plans expense....................... 4 5
--- ---
Total U.S. pension expense recognized in the Condensed
Consolidated Statements of Operations.................... $ 20 $ 19
=== ===
As of March 19, 2005, we have contributed $20 million to our U.S. pension
plans in 2005.
Postretirement Medical Benefits
Our postretirement medical plans provide medical and life insurance
benefits principally to U.S. retirees and their dependents. Employees are
eligible for benefits if they meet age and service requirements and qualify for
retirement benefits. The plans are not funded and since 1993 have included
retiree cost sharing.
Components of our U.S. postretirement benefits expense for the twelve weeks
ended March 19, 2005 and March 20, 2004 are as follows:
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Service cost.................................................. $ 1 $ 1
Interest cost................................................. 5 4
Amortization of net loss...................................... 1 1
--- ---
U.S. postretirement benefits expense recognized in the
Condensed Consolidated Statements of Operations............... $ 7 $ 6
=== ===
Note 9 - Geographic Data
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in all or a portion of the United States, Mexico,
Canada, Spain, Russia, Greece and Turkey.
Net Revenues 12 Weeks Ended
- ------------ --------------
March March
19, 2005 20, 2004
-------- --------
U.S................................................... $ 1,688 $ 1,626
Mexico................................................ 153 158
Other countries....................................... 306 283
------ ------
$ 2,147 $ 2,067
====== ======
- 10 -
Long-Lived Assets
- -----------------
March December
19, 2005 25, 2004
-------- --------
U.S..................................................... $ 5,841 $ 5,875
Mexico.................................................. 1,431 1,435
Other countries......................................... 1,451 1,444
------ ------
$ 8,723 $ 8,754
====== ======
Note 10 - Comprehensive Income
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Net income.............................................. $ 39 $ 50
Net currency translation adjustment..................... 13 2
Cash flow hedge adjustment (a) ......................... (1) 1
---- ----
Comprehensive income.................................... $ 51 $ 53
==== ====
(a) Net of minority interest and taxes of $1 million and $1 million for the 12
weeks ended March 19, 2005 and March 20, 2004, respectively.
Note 11 - Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes and environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability arising from such claims or
contingencies, if any, in excess of amounts already recognized is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
In 1995, a class action suit was filed against three of our suppliers for
price fixing on the sale of high fructose corn syrup during the years between
1991 and 1995. During this time period we were still part of PepsiCo. During
2004, these suppliers settled their respective charges. The settlement amount
will be allocated to each class action recipient based on the proportion of its
purchases of high fructose corn syrup from these suppliers during the period
1991 through 1995 to the total of such purchases by all class action recipients.
As the allocation of the settlement to each class action recipient has not been
finalized and we do not have reliable information as to the total of such
purchases, we can not accurately estimate with reasonable assurance the amount
of proceeds we will receive from the settlement. Accordingly, we have not
recorded a gain in our Condensed Consolidated Financial Statements. However, our
preliminary estimate of the proceeds we will receive from settlement of this
case is approximately $20 million. We believe the claims process for the
allocation of settlement to each class action recipient will be finalized during
2005.
- 11-
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors & Shareholders of
The Pepsi Bottling Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
Pepsi Bottling Group, Inc. and subsidiaries as of March 19, 2005, and the
related condensed consolidated statements of operations and cash flows for the
twelve-week periods ended March 19, 2005 and March 20, 2004. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States), 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 reviews, 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 U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards established by the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of The Pepsi Bottling Group, Inc. and subsidiaries as of December
25, 2004, and the related consolidated statements of operations, cash flows, and
changes in shareholders' equity, for the fiscal year then ended (not presented
herein), and in our report dated February 25, 2005, 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 25, 2004, 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 27, 2005
- 12 -
Item 2.
Management's Financial Review
- -----------------------------
Tabular dollars in millions, except per share data
OVERVIEW
- --------
The Pepsi Bottling Group, Inc. ("PBG" or the "Company") is the world's
largest manufacturer, seller and distributor of Pepsi-Cola beverages. We have
the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in
all or a portion of the United States, Mexico, Canada and Europe, which consists
of operations in Spain, Greece, Russia and Turkey. When used in these Condensed
Consolidated Financial Statements, "PBG," "we," "our" and "us" each refers to
The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC
("Bottling LLC"), our principal operating subsidiary.
Management's Financial Review should be read in conjunction with the
accompanying unaudited financial statements and our Annual Report on Form 10-K
for the fiscal year ended December 25, 2004, which include additional
information about our accounting policies, practices and the transactions that
underlie our financial results.
FINANCIAL PERFORMANCE SUMMARY
- -----------------------------------------------------------------------------
12 Weeks Ended
--------------
March March %
19, 2005 20, 2004 Change
-------- -------- ------
Net revenues.................... $2,147 $2,067 4%
Gross profit.................... $1,031 $1,016 2%
Operating income................ $ 120 $ 137 (12)%
Net income...................... $ 39 $ 50 (22)%
Diluted earnings per share 1 ... $ 0.15 $ 0.19 (17)%
- -----------------------------------------------------------------------------
1 - Percentage change for diluted earnings per share is calculated by using
earnings per share data that is expanded to the fourth decimal place.
For the first quarter, we achieved diluted earnings per share of $0.15, a
17% decrease over the similar period in the prior year. As we expected at the
beginning of the year, our performance in the quarter reflected soft volume
results and continued increases in raw material costs. However, from a net
revenue per case perspective, we have continued to generate strong results.
Excluding the impact of acquisitions, worldwide physical case volume was
flat in the first quarter of 2005 versus the prior year. In the U.S., volume was
down 1% as we lapped last year's strong innovation in the form of Tropicana and
Pepsi Vanilla, coupled with declines in brand Pepsi. In Europe, we generated 3%
volume growth in the quarter due to a strong performance in Turkey and Russia.
In Mexico, volume was flat driven primarily by declines in the metro Mexico City
region, offset by growth in our other regions in Mexico.
Worldwide net revenue per case grew by 3% during the first quarter of 2005
versus the prior year, driven by a 4% increase in the United States. Our pricing
actions in the U.S. have continued to hold in the market place as two thirds of
the growth in net revenue per case was due to rate increases with the remainder
coming from the mix of products we sell.
Cost of sales per case for the quarter increased 6% versus the prior year
driven by increases in raw material costs, coupled with the mix of products we
sell. As expected in the quarter, we have experienced increases in packaging and
sweetener costs. We expect our raw material costs to
- 13 -
continue to increase through the remainder of 2005, with the majority of the
cost of sales growth occurring in the first half of the year. Even with these
increased raw material costs, we were able to grow our gross profit per case by
1% in the quarter versus the prior year, driven by our strong net revenue
performance.
Outlook
In 2005, our fiscal year will include a 53rd week, while fiscal year 2004
consisted of 52 weeks. Our U.S. and Canadian operations report on 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 other countries report on a calendar-year
basis. In order to provide comparable guidance for 2005, we have excluded the
impact of the 53rd week from our outlook. The table and the 2005 outlook
discussion below provide pro forma disclosure by excluding the projected impact
of the 53rd week in 2005:
- --------------------------------------------------------------------------------
Pro forma Forecasted Forecasted
2005 versus Impact of 2005 versus
2004 growth 53rd week 2004 growth
- --------------------------------------------------------------------------------
Worldwide Volume 2% to 3% 1% 3% to 4%
- --------------------------------------------------------------------------------
SD&A Expenses 3% to 4% 1% 4% to 5%
- --------------------------------------------------------------------------------
Operating Income 1% to 3% 1% 2% to 4%
- --------------------------------------------------------------------------------
Pro forma Full-Year Full-Year
Forecasted Impact of Forecasted
2005 Results 53rd week 2005 Results
- --------------------------------------------------------------------------------
Diluted Earnings
Per Share $1.78 to $1.84 $0.02 to $0.03 $1.80 to $1.87
- --------------------------------------------------------------------------------
Pro forma worldwide volume is expected to increase 2% to 3% for the full
year of 2005 versus 2004, excluding the impact of the 53rd week.
We expect to increase our worldwide net revenue per case 3%, which reflects
a 3% increase in the United States. Additionally, as raw material costs continue
to increase, we expect our cost of sales per case to grow about 5% for the full
year of 2005 versus 2004. Pro forma selling, delivery and administrative
expenses (excluding the impact of the 53rd week) is expected to grow
approximately 3% to 4% for the full year of 2005 versus 2004, which reflects
additional costs associated with rising fuel rates and the negative impact of
foreign currency. We expect these results to drive pro forma operating income
(excluding the impact of the 53rd week) growth of 1% to 3% for the full year of
2005 versus 2004.
We expect to deliver a pro forma diluted earnings per share of $1.78 to
$1.84 (excluding the impact of the 53rd week). Our 2005 outlook does not reflect
the effect of the implementation of the final accounting standard on the
expensing of share-based payments, which will have a material impact on our
results. We are in the process of evaluating the impact of the standard. See
Note 3 in Notes to Condensed Consolidated Financial Statements for more
information. Additionally, the American Jobs Creation Act of 2004 was enacted
allowing for special tax breaks for the repatriation of earnings from foreign
subsidiaries. We are evaluating whether to repatriate our undistributed foreign
earnings in 2005.
- 14 -
Volume
- -------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
------ ---- ---------
Base volume.......................... 0% (1)% 0%
Acquisitions......................... 0% 1% 1%
--- --- ---
Total Volume change.............. 0% 0% 1%
=== === ===
- -------------------------------------------------------------------------------
Excluding the impact of acquisitions, our reported worldwide physical case
volume was flat in the first quarter of 2005 versus the prior year, driven by
declines in the U.S. and Canada, partially offset by growth in Europe and a flat
performance in Mexico.
Excluding the impact of acquisitions, volume in the U.S. declined by
approximately 1% reflecting a 1% decrease in our take-home channel, partially
offset by a 1% increase in our cold-drink channel. During the quarter, the
cold-drink channel was positively impacted by our important twenty-ounce package
business. From a brand perspective, our carbonated soft drink portfolio was down
2% driven primarily by declines in brand Pepsi and the lapping of the
introduction of Pepsi Vanilla. Our non-carbonated beverage portfolio continued
to perform well in the quarter, with an increase of 3% versus the prior year,
reflecting growth from Aquafina and SoBe and the introduction of Aquafina Flavor
Splash, partially offset by the lapping of the Tropicana launch in 2004.
Excluding the impact of acquisitions, volume performance for our operations
outside the U.S., was flat. Volume trends in Canada were similar to those in the
U.S., with declines in take home, partially offset by a slight increase in cold
drink. In Mexico, physical case volume was essentially flat for the quarter,
with a 4% decline in both carbonated soft drinks and bottled water volume,
partially offset by a 7% increase in our jug water business.
In Europe, volume grew 3%, driven by a 15% increase in Turkey and a 6%
increase in Russia. In Turkey, we continued to improve in the areas of execution
and distribution, which resulted in volume increases in brand Pepsi and local
brands. In Russia, we had solid growth in our non-carbonated beverage portfolio,
driven by Tropicana Juice and Lipton Iced Tea. These increases were partially
offset by declines in Spain, where we faced steep overlaps in the first quarter
of 2004.
- 15 -
Net Revenues
- --------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
---- ---- --------
Volume impact............................ 0 % (1)% 0 %
Net price per case impact (rate/mix)..... 3 % 4 % 0 %
Acquisitions............................. 1 % 1 % 1 %
Currency translation..................... 0 % 0 % 3 %
---- ---- ----
Total Net Revenues change........... 4 % 4 % 4 %
==== ==== ====
- --------------------------------------------------------------------------------
Net revenues were $2.1 billion for the first quarter of 2005, a 4% increase
over the similar period in the prior year. The increase in net revenues for the
quarter was driven primarily by growth in net price per case. In the first
quarter, approximately 79% of our net revenues was generated in the U.S., 7% of
our net revenues was generated in Mexico and the remaining 14% was generated
outside the U.S. and Mexico.
In the U.S., net revenues increased 4% in the first quarter of 2005 versus
the prior year, reflecting solid growth in net price per case and contributions
from our prior year acquisitions, partially offset by volume declines. The 4%
increase in net price per case in the U.S. for the quarter was due to a
combination of rate increases within bottles and cans, and the mix of products
we sold.
Net revenues outside the U.S. grew approximately 4% in the first quarter of
2005 versus the prior year. The increase in net revenues outside the U.S. was
driven by the favorable impact of foreign currency translation in Canada,
coupled with contributions from our prior year acquisitions in Mexico. In
Mexico, net price per case declined by 4% in the quarter driven primarily by
mix. This change in mix reflects increased sales of our jug water business,
which carries a lower net price per case.
Cost of Sales
- -------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
---------------
World- Outside
wide U.S. the U.S.
------ ---- --------
Volume impact............................ 0 % (1)% 0 %
Cost per case impact..................... 5 % 6 % 2 %
Acquisitions............................. 1 % 1 % 1 %
Currency translation..................... 0 % 0 % 3 %
---- ---- ----
Total Cost of Sales change.......... 6 % 6 % 6 %
==== ==== ====
- -------------------------------------------------------------------------------
-16 -
Cost of sales was $1.1 billion in the first quarter of 2005, a 6% increase
over the prior year. The growth in cost of sales was driven primarily by cost
per case increases coupled with contributions from our prior year acquisitions.
In the U.S., cost of sales increased 6% due primarily to increases in cost
per case. The increases in cost per case resulted from rate increases in
packaging and concentrate, coupled with the impact of mix shifts into higher
cost products.
Cost of sales outside the U.S. grew approximately 6% due primarily to the
negative impact of foreign currency translation in Canada, coupled with
increases in cost per case in Europe. Cost per case increases in Europe were
driven by a mix shift into higher priced products and packages, coupled with an
increase in packaging and sweetener costs. In Mexico, cost per case declined by
3%, driven primarily by mix shifts into the jug water business, partially offset
by higher raw material costs.
Selling, Delivery and Administrative Expenses
- ------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
---- ---- --------
Cost impact.............................. 2 % 1 % 5 %
Acquisitions............................. 1 % 1 % 1 %
Currency translation..................... 1 % 0 % 2 %
---- ---- ----
Total SD&A change................... 4 % 2 % 8 %
==== ==== ====
- ------------------------------------------------------------------------------
Selling, delivery and administrative expenses were $911 million in the
first quarter of 2005, a 4% percent increase over the prior year. Growth in
selling, delivery and administrative expenses was driven by a 2% increase from
operations, coupled with a two percentage point contribution from the negative
impact of foreign currency translation and acquisitions. Excluding acquisitions
and foreign currency, we limited our selling, delivery and administrative
expenses to 2% growth, reflecting the positive impact from a number of ongoing
productivity initiatives we put in place, partially offset by higher benefits
and fuel costs.
Operating Income
Operating income was $120 million in the first quarter of 2005,
representing a 12% decrease over the prior year, driven by declines in the U.S.
and Mexico. Operating income declines in the U.S. were due to higher raw
material costs and soft volume results during the quarter. In Mexico, declines
in operating income were driven by mix shifts into the jug water business, which
delivers a lower gross profit than the remainder of our portfolio.
Interest Expense, net
Interest expense, net remained flat in the first quarter of 2005 versus the
prior year. During the quarter, we incurred higher effective interest rates on
our long-term debt from the use of interest rate swaps. This was partially
offset by less interest incurred in the quarter resulting from the repayment of
our $1 billion senior note in February 2004.
- 17 -
Income Tax Expense
Our effective tax rate for the first quarter of 2005 was 33.7%, compared
with our effective tax rate of 34.4% in the first quarter of 2004. The decrease
in our effective tax rate versus the prior year is due largely to an increase in
anticipated pre-tax income in jurisdictions with lower effective tax rates.
Liquidity and Financial Condition
- ---------------------------------
Cash Flows
Net cash from operations decreased by $121 million to a use of $10 million
in the first quarter of 2005. Decreases in net cash used for operations were
driven by lower profits in the quarter, coupled with a decrease in working
capital due to higher incentive compensation payouts and the timing of certain
disbursements.
Net cash used for investments decreased by $8 million to $93 million in the
first quarter of 2005, reflecting lower capital spending.
Net cash from financing increased by $1,022 million to a source of $48
million in the first quarter of 2005 driven primarily by the lapping of the
repayment of our $1.0 billion note in February 2004 and higher short-term
borrowings, partially offset by higher share repurchases.
For the full year in 2005, we expect to generate net cash provided by
operations of about $1.2 billion. In addition, we expect capital expenditures to
be between $675 million and $725 million.
Liquidity and Capital Resources
We believe that our future cash flows from operations and borrowing
capacity will be sufficient to fund capital expenditures, acquisitions,
dividends and working capital requirements for the foreseeable future.
We have a $500 million commercial paper program in the U.S. that is
supported by a credit facility, which is guaranteed by Bottling LLC and expires
in April 2009. There are certain financial covenants associated with this credit
facility. We had $194 million and $84 million outstanding in commercial paper,
at March 19, 2005 and March 20, 2004, respectively.
Due to the nature of our business, we require insurance coverage for
certain casualty risks. Given the rapidly increasing costs associated with
obtaining third-party insurance coverage for our casualty risks in the U.S., we
moved to a self-insurance program in 2002. In 2005, we are self-insured for
workers' compensation and automobile risks for occurrences up to $10 million,
and product and general liability risks for occurrences up to $5 million. For
losses exceeding these self-insurance thresholds, we purchase casualty insurance
from a third-party provider.
Contractual Obligations
As of March 19, 2005, there have been no material changes outside the
normal course of business in the contractual obligations disclosed in Item 7 to
our Annual Report on Form 10-K for the fiscal year ended December 25, 2004,
under the caption "Contractual Obligations."
- 18 -
Cautionary Statements
- ---------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are:
o changes in our relationship with PepsiCo that could have a material adverse
effect on our long-term and short-term business and financial results;
o restrictions imposed by PepsiCo on our raw material suppliers that could
increase our costs;
o material changes from expectations in the cost of raw materials and
ingredients;
o decreased demand for our product resulting from changes in consumers'
preferences;
o an inability to achieve volume growth through product and packaging
initiatives;
o impact of competitive activities on our business;
o impact of customer consolidations on our business;
o an inability to achieve cost savings;
o material changes in capital investment for infrastructure and an inability to
achieve the expected timing for returns on cold-drink equipment and related
infrastructure expenditures;
o material changes in expected levels of bottler incentive payments from
PepsiCo;
o changes in product category consumption;
o unfavorable weather conditions in our markets;
o unforeseen economic and political changes;
o possible recalls of our products;
o an inability to meet projections for performance in newly acquired
territories;
o failure or inability to comply with laws and regulations;
o changes in laws and regulations governing the manufacture and sale of food and
beverages, including restrictions on the sale of carbonated soft drinks in
schools;
o changes in laws and regulations governing the environment, transportation,
employee safety, labor and government contracts;
o changes in accounting standards and taxation requirements (including
unfavorable outcomes from audits performed by various tax authorities);
o changes in our debt ratings;
o material changes in expected interest and currency exchange rates and
unfavorable market performance of our pension plan assets;
o interruptions of operations due to labor disagreements;
o loss of business from a significant customer; and
o limitations on the availability of water or obtaining water rights.
- 19 -
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 our 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. There have been no
material changes to our market risks as disclosed in Item 7 to our Annual Report
on Form 10-K for the year ended December 25, 2004.
Item 4.
Controls and Procedures
- -----------------------
PBG's management carried out an evaluation, as required by Rule 13a-15(b)
of the Securities Exchange Act of 1934 (the "Exchange Act"), with the
participation of our Chief Executive Officer and our Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures, as of the end of
our last fiscal quarter. Based upon this evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that our disclosure controls and
procedures were effective, as of the end of the period covered by this Quarterly
Report on Form 10-Q, 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, PBG's management carried out an evaluation, as required by
Rule 13a-15(d) of the Exchange Act, with the participation of our Chief
Executive Officer and our Chief Financial Officer, of changes in PBG's internal
control over financial reporting. Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that there were no changes in
our internal control over financial reporting that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
- 20 -
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
- -----------------
At the end of the fourth quarter of 2004 and during the first quarter of
2005, we received Notices of Violation ("NOVs") and Orders For Compliance from
the Environmental Protection Agency, Region 9, relating to operations at three
bottling plants in California and one in Hawaii. The NOVs allege that we
violated our permits and the Clean Water Act as a result of certain events
relating to waste water discharge and storm water run-off. We believe monetary
sanctions may be sought in connection with one or more of these NOVs. We further
believe that neither the sanctions nor the remediation costs associated with
these NOVs will be material to the Company's business or financial condition.
Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
- --------------------------------------------------------------------------------
PBG Purchases of Equity Securities
- ----------------------------------
In the first quarter of 2005, we repurchased approximately 4 million shares
of PBG common stock. Since the inception of our share repurchase program in
October 1999, we have repurchased 88 million shares of PBG common stock. Our
share repurchases for the first quarter of 2005, are as follows:
- -------------------------------------------------------------------------------
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Shares (or Units)
Total Number Units) Purchased that May Yet Be
of Shares Average Price as Part of Purchased Under
Period (or Units) Paid per Share Publicly Announced the Plans or
Purchased 1 (or Unit) 2 Plans or Programs 3 Programs 3, 4
- -------------------------------------------------------------------------------
Period 1 1,429,800 $26.63 1,429,800 15,027,200
- --------
12/26/04-
01/22/05
- -------------------------------------------------------------------------------
Period 2 1,452,200 $27.21 1,452,200 13,575,000
- --------
01/23/05-
02/19/05
- -------------------------------------------------------------------------------
Period 3 1,465,500 $27.44 1,465,500 12,109,500
- --------
02/20/05-
03/19/05
- -------------------------------------------------------------------------------
Total 4,347,500 $27.10 4,347,500
- -------------------------------------------------------------------------------
1 Shares have only been repurchased through publicly announced programs.
2 Average share price excludes brokerage fees.
- 21 -
3 The PBG Board has authorized the repurchase of shares of common stock on
the open market and through negotiated transactions as follows:
Number of Shares
Authorized to be
Date Share Repurchase Program was Publicly Announced Repurchased
October 14, 1999...................................... 20,000,000
July 13, 2000......................................... 10,000,000
July 11, 2001......................................... 20,000,000
May 28, 2003.......................................... 25,000,000
March 25, 2004........................................ 25,000,000
----------
Total shares authorized to be repurchased as of
March 19, 2005........................................ 100,000,000
===========
Unless terminated by resolution of the PBG Board, each share repurchase
program expires when we have repurchased all shares authorized for
repurchase thereunder.
4 Number of shares does not include an additional 25 million shares of PBG
common stock that was publicly announced for repurchase on March 24, 2005.
This brings the total number of shares authorized for repurchase to 125
million since the Company initiated its share repurchase program in October
1999.
- 22-
Item 6.
Exhibits
- --------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit No.
- -----------
11.1 Computation of Basic and Diluted Earnings Per Share
15.1 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
99.1 Financial statements of Bottling LLC, which are incorporated herein by
reference to Bottling LLC's Quarterly Report on Form 10-Q for the
quarter ended March 19, 2005, 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.
- 23 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: April 25, 2005 /s/ Andrea L. Forster
-------------- ---------------------
Andrea L. Forster
Vice President and Controller
Date: April 25, 2005 /s/ Alfred H. Drewes
-------------- --------------------
Alfred H. Drewes
Senior Vice President and
Chief Financial Officer