FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 For the quarterly period ended September 4, 1999 (12 and 36 Weeks
----------------------------------
Ended)
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
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(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
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(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Number of shares of Capital Stock outstanding as of October 1, 1999:
155,005,704
THE PEPSI BOTTLING GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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Part I Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-
12 and 36 weeks ended September 5, 1998 and September 4, 1999 2
Condensed Consolidated Statements of Cash Flows -
36 weeks ended September 5, 1998 and September 4, 1999 3
Condensed Consolidated Balance Sheets -
December 26, 1998 and September 4, 1999 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Independent Accountants' Review Report 18
Part II Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
-1-
PART I - FINANCIAL INFORMATION
Item 1.
THE PEPSI BOTTLING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
in millions, except per share amounts
(unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September September September September
5, 1998 4, 1999 5, 1998 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues ................................ $1,963 $2,036 $4,989 $5,319
Cost of sales ............................... 1,169 1,162 2,936 3,043
------ ------ ------ ------
Gross Profit ................................ 794 874 2,053 2,276
Selling, delivery and administrative expenses 638 669 1,755 1,892
Non-cash compensation charge ................ - - - 45
------ ------ ------ ------
Operating Income ............................ 156 205 298 339
Interest expense, net ....................... 55 44 160 141
Foreign currency loss ....................... 5 1 7 1
Minority interest ........................... - 12 - 19
------ ------ ------ ------
Income before income taxes .................. 96 148 131 178
Income tax expense .......................... 51 56 70 69
------ ------ ------ ------
Net Income .................................. $ 45 $ 92 $ 61 $ 109
====== ====== ====== ======
Basic and Diluted Earnings Per Share ........ $ 0.81 $ 0.59 $ 1.11 $ 0.93
Weighted Average Basic and Diluted
Shares Outstanding ....................... 55 155 55 117
Pro Forma Basic and Diluted Earnings Per
Share (see note 8):
As reported .............................. $ 0.29 $ 0.59 $ 0.40 $ 0.70
Excluding non-cash compensation charge ... $ 0.29 $ 0.59 $ 0.40 $ 0.89
Basic and diluted shares outstanding ..... 155 155 155 155
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
-2-
THE PEPSI BOTTLING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
in millions
(unaudited)
<TABLE>
<CAPTION>
36 Weeks Ended
--------------
September September
5, 1998 4, 1999
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Cash Flows - Operations
<S> <C> <C>
Net income ............................................................. $ 61 $ 109
Adjustments to reconcile net income to net cash provided by operations:
Depreciation ...................................................... 238 252
Amortization ...................................................... 82 90
Deferred income taxes ............................................. 37 (3)
Non-cash compensation charge ...................................... - 29
Other non-cash charges and credits, net ........................... 47 72
Changes in operating working capital, excluding effects of
acquisitions and dispositions;
Trade accounts receivable ...................................... (211) (258)
Inventories .................................................... (48) (11)
Prepaid expenses, deferred income taxes and other current assets (2) 1
Accounts payable and other current liabilities ................. 63 134
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Net change in operating working capital ........................... (198) (134)
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Net Cash Provided by Operations ........................................... 267 415
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Cash Flows - Investments
Capital expenditures ................................................... (356) (371)
Acquisitions of bottlers and investments in affiliates ................. (269) (166)
Sale of property, plant and equipment .................................. 20 21
Other, net ............................................................. (18) 27
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Net Cash Used by Investments .............................................. (623) (489)
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Cash Flows - Financing
Short-term borrowings - three months or less ........................... 40 (78)
Proceeds from third party debt ......................................... 47 3,260
Replacement of PepsiCo allocated debt .................................. - (3,300)
Payments of third party debt ........................................... (33) (49)
Dividends paid ......................................................... - (3)
Net IPO proceeds ....................................................... - 2,208
Increase (decrease) in advances from PepsiCo ........................... 272 (1,834)
----- -----
Net Cash Provided by Financing ............................................ 326 204
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Effect of Exchange Rate Changes on Cash and Cash Equivalents .............. (1) (2)
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents ...................... (31) 128
Cash and Cash Equivalents - Beginning of Period ........................... 86 36
----- -----
Cash and Cash Equivalents - End of Period ................................. $ 55 $ 164
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
THE PEPSI BOTTLING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
in millions, except share amounts
<TABLE>
<CAPTION>
(Unaudited)
December September
26, 1998 4, 1999
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ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents ...................................... $ 36 $ 164
Trade accounts receivable, less allowance of $46 and $50
at December 26, 1998 and September 4, 1999, respectively . 808 1,058
Inventories .................................................... 296 309
Prepaid expenses, deferred income taxes and other current assets 178 186
------ ------
Total Current Assets .................................. 1,318 1,717
Property, plant and equipment, net ............................... 2,055 2,187
Intangible assets, net ........................................... 3,806 3,832
Other assets ..................................................... 143 108
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Total Assets ........................................... $7,322 $7,844
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities .................. $ 913 $1,059
Short-term borrowings ........................................... 112 28
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Total Current Liabilities .............................. 1,025 1,087
Allocation of PepsiCo long-term debt ............................. 3,300 -
Long-term debt due to third parties .............................. 61 3,272
Other liabilities ................................................ 367 345
Deferred income taxes ............................................ 1,202 1,165
Minority interest ................................................ - 278
Advances from PepsiCo ............................................ 1,605 -
------ ------
Total Liabilities ...................................... 7,560 6,147
Shareholders' Equity
Common stock, par value $.01 per share:
Authorized 300,000,000 shares, issued 155,005,704 shares ... - 2
Additional paid in capital .................................... - 1,786
Retained Earnings ............................................. - 132
Accumulated other comprehensive loss .......................... (238) (223)
------ ------
Total Shareholders' Equity ............................. (238) 1,697
------ ------
Total Liabilities and Shareholders' Equity ......... $7,322 $7,844
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
-4-
THE PEPSI BOTTLING GROUP, INC.
tabular dollars in millions, except per share data
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. consists of bottling operations located in
the United States, Canada, Spain, Greece and Russia. Prior to its formation, PBG
was an operating unit of PepsiCo, Inc. PBG was incorporated in Delaware in
January 1999 and, prior to its initial public offering, PepsiCo owned all
55,000,000 shares of outstanding common stock.
On March 31, 1999, 100,000,000 shares of PBG common stock were offered for
sale at $23 per share in an initial public offering generating $2,208 million in
net proceeds, which were used to fund acquisitions and repay obligations to
PepsiCo. Subsequent to the offering, PepsiCo owns 55,005,679 shares of common
stock consisting of 54,917,329 shares of common stock and 88,350 shares of Class
B common stock. PepsiCo's ownership represents 35.4% of the outstanding common
stock and 100% of the outstanding Class B common stock together representing
43.5% of the voting power of all classes of PBG's voting stock. Subsequent to
the offering, PepsiCo also owns 7.1% of the equity of Bottling Group, LLC, PBG's
principal operating subsidiary, giving PepsiCo economic ownership of 40.0% of
PBG's combined operations.
The accompanying Condensed Consolidated Financial Statements include
information, which has been presented on a carve-out basis for the period prior
to PBG's initial public offering. This information includes the historical
results of operations and assets and liabilities directly related to PBG and has
been prepared from PepsiCo's historical accounting records. Certain estimates,
assumptions and allocations were made in determining such financial statement
information. Therefore, these Condensed Consolidated Financial Statements may
not necessarily be indicative of the results of operations, financial position
or cash flows that would have existed had PBG been a separate, independent
company from the first day of all periods presented.
The accompanying Condensed Consolidated Balance Sheet at September 4, 1999,
the Condensed Consolidated Statements of Operations for the 12 and 36 weeks
ended September 5, 1998 and September 4, 1999 and the Condensed Consolidated
Statements of Cash Flows for the 36 weeks ended September 5, 1998 and September
4, 1999 have not been audited, but have been prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. These
Condensed Consolidated Financial Statements should be read in conjunction with
the audited combined financial statements for the year ended December 26, 1998
as presented in PBG's Registration Statement on Form S-1, which was declared
effective on March 30, 1999. 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 of PBG's financial position,
results of operations and cash flows.
-5-
Note 2 - Seasonality of the Business
The results for the periods presented 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, amortization and interest,
which are not significantly impacted by business seasonality.
Note 3 - Acquisitions
During 1998 and 1999, PBG acquired the exclusive right to manufacture, sell
and distribute Pepsi-Cola beverages from several independent PepsiCo franchise
bottlers. These acquisitions were accounted for by the purchase method. During
1999, the following acquisitions occurred for an aggregate purchase price of
$166 million in cash and debt:
- Jeff Bottling Company, Inc. in New York in January.
- Pepsi-Cola General Bottlers of Princeton, Inc. and Pepsi-Cola General
Bottlers of Virginia, Inc. with territories in Virginia and West
Virginia in March.
- St. Petersburg, Russia territory in March.
- Leader Beverage Corporation in Connecticut in April.
On September 10, 1999, PBG acquired Guillemette & Frere, Ltee. in Quebec,
Canada.
During 1998, the following acquisitions occurred for an aggregate cash
purchase price of $546 million:
- The remaining 75% interest in our Russian bottling joint venture,
Pepsi International Bottlers, LLC in February.
- Gray Beverages, Inc. in Canada in May.
- Pepsi-Cola Allied Bottlers, Inc. in New York and Connecticut in
November.
The following table presents the 12 and 36 weeks ended September 5, 1998
unaudited pro forma consolidated results of PBG as if the 1998 acquisitions
noted above had occurred at the beginning of fiscal year 1998. The performance
results of the 1999 acquisitions have been excluded as their impact on the
financial statements was not significant. The pro forma information does not
necessarily represent what the actual consolidated results would have been for
the periods presented and is not intended to be indicative of future results.
September 5, 1998
-----------------
12 weeks 36 weeks
ended ended
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Net revenues.......................................... $2,014 $5,163
====== ======
Net income............................................ $ 49 $ 69
====== ======
Pro forma earnings per share (see note 8)............. $ 0.32 $ 0.45
====== ======
-6-
Note 4 - Inventories
December September
26, 1998 4, 1999
-------- -------
Raw materials and supplies ......................... $ 120 $ 127
Finished goods ..................................... 176 182
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$ 296 $ 309
====== ======
Note 5 - Property, Plant and Equipment, net
December September
26, 1998 4, 1999
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Land ............................................... $ 151 $ 147
Buildings and improvements ......................... 813 837
Production and distribution equipment .............. 1,989 2,063
Marketing equipment ................................ 1,368 1,551
Other .............................................. 95 87
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4,416 4,685
Accumulated depreciation ........................... (2,361) (2,498)
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$2,055 $2,187
====== ======
Note 6 - Long-term Debt and Interest Expense
December September
26, 1998 4, 1999
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5 5/8% senior notes due 2009 ....................... $ - $1,300
5 3/8% senior notes due 2004 ....................... - 1,000
7% senior notes due 2029 ........................... - 1,000
Other .............................................. 109 13
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109 3,313
Less: unamortized discount ......................... - 38
current maturities of long-term debt ......... 48 3
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$ 61 $3,272
====== ======
Allocation of PepsiCo long-term debt ............... $3,300 $ -
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8%
senior notes were issued on February 9, 1999 by Bottling Group, LLC and are
guaranteed by PepsiCo. PBG issued the 7% senior notes, which are guaranteed by
Bottling Group, LLC, on March 8, 1999. During the second quarter PBG executed an
interest rate swap effectively converting 3% of its fixed rate debt to floating
rate debt.
1999 interest expense was determined using $3.3 billion of allocated debt
and PepsiCo's weighted average interest rate of 5.75% until the above PBG debt
was issued. Once issued, the actual PBG interest rates were used to determine
interest expense for the remainder of the period. Allocated interest expense for
1998 was calculated using $3.3 billion of allocated debt and PepsiCo's weighted
average interest rate of 6.4%.
-7-
In April, PBG entered into a $500 million commercial paper program that is
supported by a credit facility. The credit facility consists of two $250 million
components, one of which is one year in duration and the other of which is five
years in duration. There were no borrowings outstanding under this program at
September 4, 1999.
Note 7 - Comprehensive Income
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September September September September
5, 1998 4, 1999 5, 1998 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ......................... $ 45 $ 92 $ 61 $ 109
Currency translation adjustment .... (26) (8) (47) (4)
Minimum pension liability adjustment - - - 19
----- ----- ----- -----
Comprehensive Income ............... $ 19 $ 84 $ 14 $ 124
===== ===== ===== =====
</TABLE>
Note 8 - Earnings per Share
PBG's historical capital structure is not representative of its current
structure due to PBG's initial public offering that became effective on April 6,
1999. Immediately preceding the offering, PBG had 55 million shares of common
stock outstanding. In connection with the offering, 100 million shares were sold
to the public generating $2,208 million of net proceeds, which were used to fund
acquisitions and repay obligations to PepsiCo. The pro forma information
contained in the Condensed Consolidated Statements of Operations and Footnote 3
has been adjusted to reflect the 155 million shares of common stock as if this
stock had been outstanding for all of the periods presented.
In addition, in connection with the offering PBG issued a one-time
founder's grant of options to all non-management employees to purchase 100
shares of PBG common stock. PBG also issued options during the second quarter to
all management employees as part of its long-term incentive plan. At September
4, 1999, approximately 12 million options were outstanding, all of which have an
exercise price of $23 per share. These options did not have a dilutive effect on
earnings per share for the periods presented.
Note 9 - Minority Interest
PBG and PepsiCo contributed bottling businesses and assets used in the
bottling businesses to Bottling Group, LLC in connection with the formation of
Bottling Group, LLC. As a result of the contribution of the assets, PBG owns
92.9% of Bottling Group, LLC and PepsiCo owns the remaining 7.1%. Accordingly,
the Condensed Consolidated Financial Statements reflect PepsiCo's share of
consolidated net income of Bottling Group, LLC as minority interest on PBG's
Condensed Consolidated Statements of Operations and PepsiCo's share of
consolidated net assets of Bottling Group, LLC as minority interest on PBG's
Condensed Consolidated Balance Sheet.
-8-
Note 10 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
36 Weeks Ended
--------------
September September
5, 1998 4, 1999
------- -------
Liabilities incurred and/or assumed in connection with
<S> <C> <C>
acquisitions of bottlers.......................................... $ 71 $ 48
Interest paid to third parties....................................... $ 17 $102
Income taxes paid to third parties................................... $ - $ 29
</TABLE>
In 1998, allocations of income taxes and interest costs have been deemed to
have been paid to PepsiCo, in cash, in the period in which the cost was
incurred.
Note 11 - Non-cash Compensation Charge
In connection with the consummation of the offering, substantially all
non-vested PepsiCo stock options held by PBG employees vested. As a result, PBG
incurred a $45 million non-cash compensation charge in the second quarter ($29
million after tax or $0.19 per share based on pro forma weighted average shares
outstanding), equal to the difference between the market price of the PepsiCo
capital stock and the exercise price of these options at the vesting date.
Note 12 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts which are collectively referred to as derivatives,
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. PBG is currently assessing the effects
of adopting SFAS 133, and has not yet made a determination of the impact on its
financial position or results of operations.
In July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 137 delaying the implementation of SFAS 133 for
one year. SFAS 133 will now be effective for PBG's first quarter of fiscal year
2001.
-9-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The Business
PBG is the world's largest manufacturer, seller and distributor of
Pepsi-Cola beverages, accounting for 55% of the Pepsi-Cola beverages sold
annually in the United States and Canada and 32% worldwide. We have the
exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all
or a portion of 41 states, the District of Columbia, eight Canadian provinces,
Spain, Greece and Russia. Approximately 92% of our annual volume is sold in the
United States and Canada.
General
Management's discussion and analysis should be read in conjunction with
PBG's Condensed Consolidated Financial Statements and accompanying footnotes
along with the cautionary statements at the end of this section.
In line with our strategy to be a key consolidator of PepsiCo's bottling
system, 1999 results are impacted by the 1998 acquisitions of Gray Beverages,
Inc. in Canada, Pepsi-Cola Allied Bottlers, Inc. in New York and Connecticut and
Pepsi International Bottlers, LLC in Russia. In addition, in 1999 PBG acquired
Jeff Bottling Company, Inc. in New York, Pepsi-Cola General Bottlers of
Princeton, Inc. and Pepsi-Cola General Bottlers of Virginia, Inc., whose
territories are in Virginia and West Virginia, the territory in St. Petersburg,
Russia and Leader Beverages in Fairfield, Connecticut.
Management believes that constant territory performance results are better
indicators of operating trends and performance, particularly in light of our
stated intention of acquiring additional bottling territories and of industry
practice. Constant territory operating results are achieved by adjusting 1999
results to exclude 1999 acquisitions and 1998 results to include the results of
1998 acquisitions as if they had occurred on the first day of fiscal year 1998.
The results for the 12 and 36 week periods ended September 5, 1998 and September
4, 1999 are presented below both on an as reported and constant territory basis.
EBITDA, which is computed as operating income plus the sum of depreciation,
amortization, and any unusual non-cash charges, is a key indicator management
and the industry use to evaluate our operating performance. It is not, however,
required under GAAP and should not be considered an alternative to measurements
required by GAAP such as net income or cash flows. 1999 EBITDA excludes the
impact of the non-cash compensation charge discussed below.
-10-
Results of Operations
- ---------------------
Overview
On a constant territory basis, EBITDA grew 13% in the quarter and 11%
year-to-date, ahead of our expectations. This growth can be attributed to our
ability to execute market by market in a disciplined and focused fashion with
tools and processes adapted to each of our individual markets. In the third
quarter we have been able to raise pricing significantly on the take-home side
of our business with a modest near-term impact on our volume performance.
Additionally, we have continued to increase cold drink equipment placements
resulting in improved EBITDA and return on invested capital, and have benefited
from reduced operating losses in Russia. We now believe that EBITDA growth for
full year 1999 will be 12%, the upper end of the range we set three months ago.
EBITDA
12 weeks ended 36 weeks ended
September 4, 1999 September 4, 1999
----------------- -----------------
Constant Constant
Reported Territory Reported Territory
Change Change Change Change
------ ------ ------ ------
Growth.................. 21% 13% 17% 11%
On a reported basis, EBITDA was $324 million and $726 million in the third
quarter and year-to-date, respectively. This represents a 21% and 17% increase
for the quarter and year-to-date, respectively, over the comparable period in
1998. On a constant territory basis, the third quarter and year-to-date growth
in EBITDA reflects our third consecutive quarter of solid margin improvements
resulting from a continued strong pricing environment in North America,
favorable raw material costs and reduced operating losses in Russia.
Volume
Our worldwide physical case volume increased slightly for the quarter and
grew almost 5% year-to-date on a reported basis, and decreased 3% in the quarter
and was flat year-to-date on a constant territory basis. In North America, which
includes the U.S. and Canada, constant territory volume decreased slightly less
than 3% in the quarter and improved more than 1% year-to-date as growth in our
cold drink channel was offset by declines in the take home side of the business
as we continue to raise prices in this channel. Outside North America our
constant territory volumes declined 7% for the quarter and 9% year-to-date
driven by the economic conditions in Russia, which began to deteriorate last
August with the devaluation of the ruble.
Net Revenues
On a reported basis, net revenues were $2,036 million and $5,319 million,
for the quarter and year-to-date, respectively, representing an almost 4% and 7%
increase. On a constant territory basis net revenues were flat for the quarter
and increased more than 2% year-to-date with increases in North America
offsetting a revenue decline outside North America. Strong pricing was the
primary driver of the revenue growth in North America while declines in Russia
due to the ruble devaluation was the main driver outside North America. On a
worldwide basis, third quarter constant territory revenue per physical case was
up more than 3%, driven by a 5% increase in North America.
-11-
Cost of Sales
Cost of sales as a percentage of net revenues improved by 2.4 percentage
points to 57.1% for the quarter and 1.7 percentage points year-to-date to 57.2%
on a reported basis. These trends were driven by higher net price per case and
lower packaging costs, partially offset by the February increase in North
America concentrate prices.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses as a percentage of net
revenues grew by four tenths of a percentage point to 32.9% and 35.6% for the
quarter and year-to-date, respectively, on a reported basis. This primarily
reflects increased selling and delivery costs resulting from an increase in our
North American sales force and our continued program of heavy investment in
vending machines and coolers, consistent with our long-term strategy to expand
our presence in the cold drink segment of the industry in North America. These
increases were partially offset by reduced operating costs in Russia as our cost
structure benefited from our fourth quarter 1998 restructuring actions, as well
as relatively flat year over year general and administrative costs.
Non-cash Compensation Charge
In connection with the consummation of the offering, substantially all
non-vested PepsiCo stock options held by PBG employees vested. As a result, PBG
incurred a $45 million non-cash compensation charge in the second quarter ($29
million after tax or $0.19 per share based on pro forma weighted average shares
outstanding), equal to the difference between the market price of the PepsiCo
capital stock and the exercise price of these options at the vesting date.
Interest Expense, net
Net interest expense decreased by $11 million to $44 million in the quarter
and decreased by $19 million to $141 million year-to-date due to a lower
weighted average interest rate on our $3.3 billion of debt, which went from 6.4%
in the prior year to 5.9% in the current year, coupled with reduced external
debt outside North America.
Provision for Income Taxes
PBG's full year anticipated effective tax rate for 1999 is 38% compared to
53.5% in 1998. The $45 million non-cash compensation charge described above
contributed an additional point to the third quarter year to date effective tax
rate. The decrease of 15.5 points in the full year ongoing effective tax rate is
primarily due to favorable tax treatment of foreign operations and the reduced
impact of fixed nondeductible permanent expenses on higher pretax income in
1999.
-12-
Minority Interest
PBG and PepsiCo contributed bottling businesses and assets used in the
bottling businesses to Bottling Group, LLC in connection with the formation of
Bottling Group, LLC. As a result of the contribution of the assets, PBG owns
92.9% of Bottling Group, LLC and PepsiCo owns the remaining 7.1%. Accordingly,
the Condensed Consolidated Financial Statements reflect PepsiCo's share of
consolidated net income of Bottling Group, LLC as minority interest on PBG's
Condensed Consolidated Statements of Operations for the period from the initial
public offering on April 6, 1999 through the end of the quarter.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operating activities increased $148 million to $415
million during the first 36 weeks of 1999 compared to the same period in 1998.
This increase reflects strong growth in EBITDA and favorable working capital
cash flows resulting from the timing of cash payments for interest and taxes.
Net cash used by investments decreased from $623 million during the 36
weeks ended September 5, 1998 to $489 million over the same period in 1999
mainly related to the timing of acquisitions, which were $103 million lower in
the first three quarters of 1999. However, capital expenditures increased by $15
million, or 4%, driven by a 19% increase in North America as we continue to
invest heavily in cold drink equipment, partially offset by a reduction in
spending in Russia where our existing infrastructure is adequate for current
operations.
Net cash provided by financing decreased by $122 million to $204 million
for the first three quarters of 1999 mainly due to the net pay down of $78
million of short-term borrowings in 1999 versus 1998 proceeds of $40 million.
Also contributing to the change are 1998 borrowings in Russia related to the
purchase of Pepsi International Bottlers LLC, which was paid down in the first
quarter of 1999. Net IPO proceeds of $2.2 billion were used to fund acquisitions
and repay obligations to PepsiCo.
Euro
- ----
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between existing currencies and one common
currency, the Euro. Beginning in January 2002, new Euro-denominated bills and
coins will be issued, and existing currencies will be withdrawn from
circulation. Spain is one of the member countries that instituted the Euro and
we have established plans to address the issues raised by the Euro currency
conversion. These issues include, among others, the need to adapt computer and
financial systems, business processes and equipment, such as vending machines,
to accommodate Euro-denominated transactions and the impact of one common
currency on cross-border pricing. Since financial systems and processes
currently accommodate multiple currencies, we do not expect the system and
equipment conversion costs to be material. Due to numerous uncertainties, we
cannot reasonably estimate the long-term effects one common currency may have on
pricing, costs and the resulting impact, if any, on the financial condition or
results of operations.
-13-
Year 2000
- ---------
Many computerized systems and microprocessors that are embedded in a
variety of products used by PBG have the potential for operational problems if
they lack the ability to handle the transition to the Year 2000. We have
established teams to identify and correct Year 2000 issues. We have engaged IBM
to help set the testing strategy and complete some of the offsite remediation.
Information technology systems with non-compliant code have been modified or
replaced with systems that are Year 2000 compliant. Similar actions were taken
with respect to systems embedded in manufacturing and other facilities. The
teams are also charged with investigating the Year 2000 readiness of suppliers,
customers and other third parties and with developing contingency plans where
necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are largely complete with 99%
of the systems already compliant. The remaining work includes the completion of
Y2K testing and rollout for one system and is scheduled for completion by the
end of October. A contingency plan has been developed and tested for this one
application. Inventories and assessments of systems embedded in manufacturing
and other facilities were completed in June 1999; remediations began in the
fourth quarter of 1998 and are currently 97% complete with the final remediation
scheduled to be completed by the end of October 1999. A full scale Year 2000
test was performed at one representative plant in November 1998. Results from
that test concluded that minimal disruptions could be expected. Independent
consultants are monitoring progress against remediation. In addition, senior
management and the board of directors are monitoring the progress of the
remediation programs.
Our most significant exposure arises from our dependence on high volume
transaction processing systems, particularly for production scheduling,
inventory cost accounting, purchasing, customer billing and collection, and
payroll. All corrective actions have been taken on these applications.
We have contacted and assessed the 51 suppliers that are critical to our
production processes. These suppliers have been selected either because of our
dependence on them or because of concerns regarding their remediation plans. We
believe that these suppliers will not present any material risks to our business
and will be able to continue to supply us through the year 2000. We have also
contacted significant customers and PepsiCo joint venture partners who
manufacture certain Lipton and Starbucks products that we sell, and have
completed a survey of their Year 2000 efforts. We will continue to monitor
remediation until it is complete.
-14-
Costs directly related to Year 2000 issues are estimated to be $56 million,
of which $5 million was spent in the third quarter of 1999 ($13 million
year-to-date), $26 million and $7 million in full year 1998 and 1997,
respectively. We have redeployed approximately 160 employees to support this
work, as well as engaged over 100 independent contractors. Approximately
one-half of the total estimated spending represents costs to modify existing
systems, which includes the inventory, assessment, remediation, and testing and
rollout phases. The remaining dollars represent spending for the development,
testing and rollout of new systems to replace older, non-compliant applications.
This estimate assumes that we will not incur any costs on behalf of our
suppliers, customers or other third parties. These costs will not necessarily
increase our normal level of spending on information technology, due to the
deferral of other projects to enable us to focus on Year 2000 remediation.
Contingency plans for Year 2000 are being developed and will include, but
not be limited to: the development of emergency backup and recovery procedures;
remediation of existing systems parallel with installation of new systems;
replacement of electronic applications with manual processes; identification of
alternative suppliers and an increase in raw material and finished goods
inventory levels, and rollover procedures for infrastructure and applications.
Contingency plans for national customers and suppliers have been developed and
are being maintained centrally. Additional contingency plans are being developed
and maintained for local requirements and will continue to be enhanced through
the end of the year.
In light of the foregoing, we do not currently anticipate that we will
experience a significant disruption to our business as a result of the Year 2000
issue. Our most likely potential risk is a temporary inability of suppliers to
provide supplies of raw materials or customers to pay on a timely basis. We
typically experience below average sales in January due to the seasonality of
our business. In addition, we are not dependent on any single supplier location
or PBG location for a critical commodity or product. Consequently we believe
that in a worst case scenario any supply disruption can be minimized by drawing
down inventories or increasing production at unaffected plants with some
increase in distribution costs. We are testing electronic billing and payment
systems during 1999 as part of our overall Year 2000 strategy and will work with
customers that experience disruptions that might impact payment to us.
We continue to be optimistic about our levels of preparedness and do not
expect any major disruptions. The establishment of an Event Management Center is
well underway and will be fully functional in December and January. Staffing the
Center for monitoring, assessing and reporting purposes is complete. The
processes that are used to resolve issues as part of our normal daily business
practices will continue to be the first line of action should minor disruptions
occur. However, the Center will also have a team of individuals who can provide
additional support throughout the country if that becomes necessary. This team
is currently being assembled.
In the upcoming months event management team representatives will be
holding meetings to ensure that the year-end processes are understood and that
local plans are complete. Any outstanding issues will be addressed at that time.
-15-
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While we anticipate no major interruption to our business
activities, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect us and third parties, including suppliers and customers.
For example, lack of readiness by electrical and water utilities and other
providers of general infrastructure, such as rail transportation, could, in some
geographic areas, pose significant impediments to our ability to carry on normal
operations in the area affected. Accordingly, while we believe our actions in
this regard should have the effect of lessening Year 2000 risks, we are unable
to estimate such risks or to estimate the ultimate Year 2000 risks on our
operations.
Cautionary Statements
- ---------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute 'forward looking
statements' as defined by the Private Securities Litigation Reform Act of 1995.
These 'forward looking statements' are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and related infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories, unexpected costs and business risks associated with Year 2000
compliance by PBG, its customers and/or suppliers, unexpected costs associated
with conversion to the common European currency and unfavorable interest rate
and currency fluctuations. We caution that in addition to the above cautionary
statements, all forward-looking statements contained herein should be read in
conjunction with the detailed cautionary statements found on pages eleven to
eighteen of PBG's Registration Statement on Form S-1, which was declared
effective on March 30, 1999.
-16-
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosures made on this matter in our
Registration Statement on Form S-1, which was declared effective on March 30,
1999.
-17-
Independent Accountants' Review Report
The Board of Directors
The Pepsi Bottling Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of The
Pepsi Bottling Group, Inc. as of September 4, 1999 and the related condensed
consolidated statements of operations for the twelve and thirty-six weeks ended
September 5, 1998 and September 4, 1999 and the condensed consolidated
statements of cash flows for the thirty-six weeks ended September 5, 1998 and
September 4, 1999. These condensed consolidated financial statements are the
responsibility of The Pepsi Bottling Group, Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of The Pepsi Bottling Group, Inc. as of
December 26, 1998, and the related combined statements of operations, cash flows
and accumulated other comprehensive loss for the fifty-two week period then
ended not presented herein; and in our report dated March 8, 1999, we expressed
an unqualified opinion on those combined financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 26, 1998, is fairly presented, in all material respects, in
relation to the condensed consolidated balance sheet from which it has been
derived.
KPMG LLP
New York, New York
September 21, 1999
-18-
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 21.
-19-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: October 15, 1999 Peter A. Bridgman
---------------- -----------------
Senior Vice President and
Controller
Date: October 15, 1999 John T. Cahill
---------------- --------------
Executive Vice President and
Chief Financial Officer
-20-
INDEX TO EXHIBITS
-----------------
ITEM 6 (a)
----------
EXHIBITS
- --------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
Exhibit 27.1 Financial Data Schedule 12 weeks ended September 4, 1999
Exhibit 27.2 Financial Data Schedule 12 weeks ended September 5, 1998
-21-
<TABLE>
<CAPTION>
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
12 Weeks Ended 36 Weeks Ended
-------------- --------------
9/5/98 9/4/99 9/5/98 9/4/99
------ ------ ------ ------
Number of shares on which basic earnings
per share is based:
<S> <C> <C> <C> <C>
Average outstanding during period .... 55,000,000 155,000,000 55,000,000 117,301,633
Add - Incremental shares under stock
compensation plans ............... - - - -
---------- ----------- ---------- -----------
Number of shares in which diluted
earnings per share is based ........ 55,000,000 155,000,000 55,000,000 117,301,633
Net earnings applicable to common
shareholders (millions) ........... $ 45 $ 92 $ 61 $ 109
Net earnings on which diluted earnings
per share is based (millions) ..... $ 45 $ 92 $ 61 $ 109
Basic earnings per share ............. $ 0.81 $ 0.59 $ 1.11 $ 0.93
Diluted earnings per share ........... $ 0.81 $ 0.59 $ 1.11 $ 0.93
</TABLE>
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PEPSI BOTTLING GROUP, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
36 WEEKS ENDED SEPTEMBER 4, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001076405
<NAME> The Pepsi Bottling Group, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> SEP-04-1999
<CASH> 164
<SECURITIES> 0
<RECEIVABLES> 1,108
<ALLOWANCES> 50
<INVENTORY> 309
<CURRENT-ASSETS> 1,717
<PP&E> 4,685
<DEPRECIATION> 2,498
<TOTAL-ASSETS> 7,844
<CURRENT-LIABILITIES> 1,087
<BONDS> 3,272
0
0
<COMMON> 2
<OTHER-SE> 1,695
<TOTAL-LIABILITY-AND-EQUITY> 7,844
<SALES> 5,319
<TOTAL-REVENUES> 5,319
<CGS> 3,043
<TOTAL-COSTS> 3,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 178
<INCOME-TAX> 69
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-BASIC> 0.93
<EPS-DILUTED> 0.93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PEPSI BOTTLING GROUP, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
36 WEEKS ENDED SEPTEMBER 5, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001076405
<NAME> The Pepsi Bottling Group, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-05-1998
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 1,098
<ALLOWANCES> 50
<INVENTORY> 321
<CURRENT-ASSETS> 1,615
<PP&E> 4,333
<DEPRECIATION> 2,190
<TOTAL-ASSETS> 7,689
<CURRENT-LIABILITIES> 1,287
<BONDS> 99
0
0
<COMMON> 0
<OTHER-SE> (231)
<TOTAL-LIABILITY-AND-EQUITY> 7,689
<SALES> 4,989
<TOTAL-REVENUES> 4,989
<CGS> 2,936
<TOTAL-COSTS> 2,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11
<INTEREST-EXPENSE> 160
<INCOME-PRETAX> 131
<INCOME-TAX> 70
<INCOME-CONTINUING> 61
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.11
</TABLE>
