FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934 For the quarterly period ended June 12, 1999 (12 and 24 Weeks Ended)
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
THE PEPSI BOTTLING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4038356
-------- ----------
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
------------------------------- -----
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Capital Stock outstanding as of July 9, 1999:
155,005,704
THE PEPSI BOTTLING GROUP, INC.
INDEX
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-
12 and 24 weeks ended June 13, 1998 and June 12, 1999 2
Condensed Consolidated Statements of Cash Flows -
24 weeks ended June 13, 1998 and June 12, 1999 3
Condensed Consolidated Balance Sheets -
December 26, 1998 and June 12, 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
-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 24 Weeks Ended
-------------- --------------
June 13, June 12, June 13, June 12,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues ..................................... $ 1,686 $ 1,831 $ 3,026 $ 3,283
Cost of sales .................................... 990 1,046 1,767 1,881
------- ------- ------- -------
Gross Profit ..................................... 696 785 1,259 1,402
Selling, delivery and administrative expenses .... 592 648 1,116 1,223
Non-cash compensation charge ..................... - 45 - 45
------- ------- ------- -------
Operating Income ................................. 104 92 143 134
Interest expense, net ............................ 53 51 105 97
Foreign currency (gain) loss ..................... 2 (1) 2 -
Minority interest ................................ - 7 - 7
------- ------- ------- -------
Income before income taxes ....................... 49 35 36 30
Income tax expense ............................... 26 15 19 13
------- ------- ------- -------
Net Income ....................................... $ 23 $ 20 $ 17 $ 17
======= ======= ======= =======
Basic and Diluted Earnings Per Share ............. $ 0.41 $ 0.14 $ 0.30 $ 0.18
Weighted Average Basic and Diluted
Shares Outstanding ............................ 55 142 55 98
Pro Forma Basic and Diluted Earnings Per
Share (see note 8):
As reported.................................... $ 0.15 $ 0.13 $ 0.11 $ 0.11
Excluding non-cash compensation charge......... $ 0.15 $ 0.32 $ 0.11 $ 0.30
Basic and diluted shares outstanding .......... 155 155 155 155
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
THE PEPSI BOTTLING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
in millions
(unaudited)
<TABLE>
<CAPTION>
24 Weeks Ended
--------------
June 13, June 12,
1998 1999
---- ----
Cash Flows - Operations
<S> <C> <C>
Net income.................................................................... $ 17 $ 17
Adjustments to reconcile net income to net cash provided by operations:
Depreciation............................................................. 152 164
Amortization............................................................. 54 59
Deferred income taxes.................................................... 24 (2)
Non-cash compensation charge............................................. - 29
Other non-cash charges and credits, net.................................. 33 35
Changes in operating working capital, excluding effects of
acquisitions and dispositions;
Trade accounts receivable............................................. (120) (182)
Inventories........................................................... (76) (44)
Prepaid expenses, deferred income taxes and other current assets...... (4) (20)
Accounts payable and other current liabilities........................ (18) 93
------- -------
Net change in operating working capital ................................. (218) (153)
------- -------
Net Cash Provided by Operations...................................................... 62 149
------- -------
Cash Flows - Investments
Capital expenditures.......................................................... (217) (232)
Acquisitions of bottlers and investments in affiliates........................ (256) (165)
Sale of property, plant and equipment......................................... 14 9
Other, net.................................................................... (33) 34
------- -------
Net Cash Used by Investments..................................................... (492) (354)
------- -------
Cash Flows - Financing
Short-term borrowings - three months or less.................................. 48 (66)
Proceeds from third party debt................................................ 38 3,260
Replacement of PepsiCo allocated debt......................................... - (3,300)
Payments of third party debt.................................................. (5) (41)
Net IPO proceeds.............................................................. - 2,208
Increase (decrease) in advances from PepsiCo.................................. 367 (1,834)
-------- --------
Net Cash Provided by Financing................................................... 448 227
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents..................... - (1)
-------- --------
Net Increase in Cash and Cash Equivalents........................................ 18 21
Cash and Cash Equivalents - Beginning of Period.................................. 86 36
-------- --------
Cash and Cash Equivalents - End of Period........................................ $ 104 $ 57
======== ========
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 June 12,
26, 1998 1999
-------- ----
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents ...................................... $ 36 $ 57
Trade accounts receivable, less allowance of $46 and $52
at December 26, 1998 and June 12, 1999, respectively .... 808 984
Inventories .................................................... 296 341
Prepaid expenses, deferred income taxes and other current assets 178 202
------- -------
Total Current Assets .................................. 1,318 1,584
Property, plant and equipment, net ............................... 2,055 2,147
Intangible assets, net ........................................... 3,806 3,879
Other assets ..................................................... 143 120
------- -------
Total Assets ........................................... $ 7,322 $ 7,730
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities .................. $ 913 $ 1,009
Short-term borrowings ........................................... 112 43
------- -------
Total Current Liabilities ................................... 1,025 1,052
Allocation of PepsiCo long-term debt ............................. 3,300 -
Long-term debt due to third parties .............................. 61 3,279
Other liabilities ................................................ 367 348
Deferred income taxes ............................................ 1,202 1,168
Minority interest ................................................ - 267
Advances from PepsiCo ............................................ 1,605 -
------- -------
Total Liabilities ...................................... 7,560 6,114
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.............................................. - 43
Accumulated other comprehensive loss .......................... (238) (215)
------- -------
Total Shareholders' Equity ............................. (238) 1,616
------- -------
Total Liabilities and Shareholders' Equity ......... $ 7,322 $ 7,730
======= =======
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 June 12, 1999, the
Condensed Consolidated Statements of Operations for the 12 and 24 weeks ended
June 13, 1998 and June 12, 1999 and the Condensed Consolidated Statements of
Cash Flows for the 24 weeks ended June 13, 1998 and June 12, 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
$165 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.
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 24 weeks ended June 13, 1998
unaudited pro forma consolidated results of PBG and the 1998 acquisitions noted
above as if they 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.
June 13, 1998
-------------
12 weeks 24 weeks
ended ended
----- -----
Net revenues............................................... $1,753 $3,149
====== ======
Net income................................................. $ 28 $ 20
====== ======
Pro forma earnings per share (see note 8).................. $ 0.18 $ 0.13
====== ======
-6-
Note 4 - Inventories
December June 12,
26, 1998 1999
-------- ----
Raw materials and supplies ............................... $ 120 $ 126
Finished goods ........................................... 176 215
------- -------
$ 296 $ 341
======= =======
Note 5 - Property, Plant and Equipment, net
December June 12,
26, 1998 1999
-------- ----
Land ..................................................... $ 151 $ 147
Buildings and improvements ............................... 813 834
Production and distribution equipment .................... 1,989 2,032
Marketing equipment ...................................... 1,368 1,495
Other .................................................... 95 89
------- -------
4,416 4,597
Accumulated depreciation ................................. (2,361) (2,450)
------- -------
$ 2,055 $ 2,147
======= =======
Note 6 - Long-term Debt and Interest Expense
December June 12,
26, 1998 1999
-------- ----
5 5/8% notes due 2009 .................................. $ - $ 1,300
5 3/8% notes due 2004 .................................. - 1,000
7% notes due 2029 ...................................... - 1,000
Other .................................................. 109 22
------- -------
109 3,322
Less: unamortized discount ............................. - 40
current maturities of long-term debt .......... 48 3
------- -------
$ 61 $ 3,279
======= =======
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.
Note 7 - Comprehensive Income (Loss)
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 13, June 12, June 13, June 12,
1998 1999 1998 1999
---- ---- ---- ----
Net income................................ $23 $ 20 $ 17 $ 17
Currency translation adjustment........... (20) (7) (21) 4
Minimum pension liability adjustment...... - 19 - 19
----- ----- ----- ----
Comprehensive Income (Loss)............... $ 3 $ 32 $ (4) $ 40
===== ===== ===== ====
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 June 12,
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
24 Weeks Ended
--------------
June 13, June 12,
1998 1999
Liabilities incurred and/or assumed in connection with ---- ----
acquisitions of bottlers............................. $ 39 $ 48
Interest paid to third parties.......................... $ 10 $ 2
Amounts paid to third parties for income taxes were not significant in the
periods presented.
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 $.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 24 week periods ended June 13, 1998 and June 12, 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 12% in the quarter and 9%
year-to-date, ahead of our expectations for the first half of the year. 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 second quarter we have executed against our
objectives and increased cold drink equipment and delivered an improved
price/volume trade-off. We believe that we are well positioned to deliver 10-12%
EBITDA growth for full year 1999.
EBITDA
12 weeks ended 24 weeks ended
June 12, 1999 June 12, 1999
------------ -------------
Constant Constant
Reported Territory Reported Territory
Change Change Change Change
------ ------ ------ ------
Growth............... 20% 12% 15% 9%
On a reported basis, EBITDA was $252 million and $402 million in the second
quarter and year-to-date, respectively. This represents a 20% and 15% increase
for the quarter and year-to-date, respectively, over the comparable period in
1998. On a constant territory basis, the second quarter and year-to-date growth
in EBITDA reflect a stronger pricing environment and volume growth in North
America, favorable raw material costs and reduced operating losses in Russia.
Volume
Our worldwide physical case volume grew 7% in the quarter and 8%
year-to-date on a reported basis and 2% in the quarter and 3% year-to-date on a
constant territory basis. In North America, which includes the U.S. and Canada,
constant territory volume increased more than 3% in the quarter and improved 4%
year-to-date driven by strong growth in the cold drink channel and more modest
advances in the take home business. Outside North America our constant territory
volumes declined more than 10% for the quarter and 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 $1,831 million and $3,283 million
for the quarter and year-to-date, respectively, a 9% increase over the prior
year for both time periods. On a constant territory basis net revenues grew 4%
for the quarter and year-to-date. This increase was driven by strong North
America volume growth and an approximate 2% and 1% increase in revenue per
physical case for the quarter and year-to-date, respectively, driven largely by
higher pricing and changes in channel and package mix in our North American
business.
-11-
Cost of Sales
Cost of sales as a percentage of net revenues improved by 1.6 percentage
points in the quarter to 57.1% and slightly more than one percentage point
year-to-date to 57.3% on a reported basis. This improvement was 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 two tenths of a percentage point to 35.4% and four tenths of a
percentage point to 37.3% 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. In addition, the 1999 year-to-date expense
also includes a $6 million one-time cash cost for shell deposits incurred to
eliminate PBG's previous practice of collecting deposits on plastic shells used
to carry our products to market.
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 $.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 $2 million to $51 million in the quarter
and decreased by $8 million to $97 million year-to-date due to lower weighted
average interest rates 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 5 points to the second quarter 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 $87 million to $149
million reflecting 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 $492 million during the 24
weeks ended June 13, 1998 to $354 million over the same period in 1999 mainly
related to the timing of acquisitions, which were $91 million lower in the first
two quarters of 1999. However, capital expenditures increased by $15 million, or
7%, driven by a 25% 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 $221 million to $227 million
for the first two quarters of 1999 mainly due to the net pay down of $66 million
of short-term borrowings in 1999 versus 1998 proceeds of $48 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 are expected to be
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 97%
of the systems already compliant. This percentage is expected to increase to 99%
in the third quarter. The remaining work includes the completion of Y2K testing
and rollout for one system. A contingency plan has been developed and will be
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 with a third quarter 1999 target completion
date. A full scale Year 2000 test was performed at one representative plant.
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 also 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 second quarter of 1999 ($8 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. Contingency plans for national customers and suppliers are
being maintained centrally and are expected to be complete by the end of the
third quarter. 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.
While we do not expect any major disruptions, we will be prepared to
respond to unanticipated external or internal disruptions. We will establish an
Event Management Center, which will monitor the status of our business, support
customers through access to the Center, and provide event management guidance if
necessary. Existing processes for each area will be leveraged. The Center will
be fully functional in December and January. Additionally, field resources
necessary to activate contingency plans are being identified and work schedules
are being developed.
-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 June 12, 1999 and the related condensed
consolidated statements of operations for the twelve and twenty-four weeks ended
June 13, 1998 and June 12, 1999 and the condensed consolidated statements of
cash flows for the twenty-four weeks ended June 13, 1998 and June 12, 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
July 7, 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: July 26, 1999 Peter A. Bridgman
- ------------------- -----------------
Senior Vice President and
Controller
Date: July 26, 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 June 12, 1999
Exhibit 27.2 Financial Data Schedule 12 weeks ended June 13, 1998
-21-
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
-------------- --------------
6/13/98 6/12/99 6/13/98 6/12/99
------- ------- ------- -------
Number of shares on which basic earnings per share is based:
<S> <C> <C> <C> <C>
Average outstanding during period .. 55,000,000 141,904,898 55,000,000 98,452,449
Add - Incremental shares under stock
compensation plans ............... - - - -
---------- ----------- ---------- ----------
Number of shares in which diluted
earnings per share is based ........ 55,000,000 141,904,898 55,000,000 98,452,449
Net earnings applicable to common
shareholders (millions) ........... $ 23 $ 20 $ 17 $ 17
Net earnings on which diluted earnings
per share is based (millions) ..... $ 23 $ 20 $ 17 $ 17
Basic earnings per share ............. $ 0.41 $ 0.14 $ 0.30 $ 0.18
Diluted earnings per share ........... $ 0.41 $ 0.14 $ 0.30 $ 0.18
</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
24 WEEKS ENDED JUNE 12, 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> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> JUN-12-1999
<CASH> 57
<SECURITIES> 0
<RECEIVABLES> 1,036
<ALLOWANCES> 52
<INVENTORY> 341
<CURRENT-ASSETS> 1,584
<PP&E> 4,597
<DEPRECIATION> 2,450
<TOTAL-ASSETS> 7,730
<CURRENT-LIABILITIES> 1,052
<BONDS> 3,279
0
0
<COMMON> 2
<OTHER-SE> 1,614
<TOTAL-LIABILITY-AND-EQUITY> 7,730
<SALES> 3,283
<TOTAL-REVENUES> 3,283
<CGS> 1,881
<TOTAL-COSTS> 1,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 30
<INCOME-TAX> 13
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</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
24 WEEKS ENDED JUNE 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> JUN-13-1998
<CASH> 104
<SECURITIES> 0
<RECEIVABLES> 1,007
<ALLOWANCES> 48
<INVENTORY> 350
<CURRENT-ASSETS> 1,606
<PP&E> 4,250
<DEPRECIATION> 2,146
<TOTAL-ASSETS> 7,655
<CURRENT-LIABILITIES> 1,218
<BONDS> 123
0
0
<COMMON> 0
<OTHER-SE> (205)
<TOTAL-LIABILITY-AND-EQUITY> 7,655
<SALES> 3,026
<TOTAL-REVENUES> 3,026
<CGS> 1,767
<TOTAL-COSTS> 1,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 36
<INCOME-TAX> 19
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
</TABLE>
