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 10, 2000 (24-weeks)
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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
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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
------------------------------- -----
(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
--- ---
Number of shares of Common Stock outstanding as of July 7, 2000:
146,960,318
<PAGE>
The Pepsi Bottling Group, Inc.
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 24-weeks ended June 10, 2000 and June 12, 1999 2
Condensed Consolidated Statements of Cash Flows -
24-weeks ended June 10, 2000 and June 12, 1999 3
Condensed Consolidated Balance Sheets -
June 10, 2000 and December 25, 1999 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Independent Accountants' Review Report 15
Part II Other Information and Signatures
Item 6. Exhibits 16
</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 24-weeks Ended
June 10, June 12, June 10, June 12,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues................................................ $1,913 $1,831 $3,458 $3,283
Cost of sales............................................... 1,033 1,046 1,878 1,881
------ ------ ------ ------
Gross Profit................................................ 880 785 1,580 1,402
Selling, delivery and administrative expenses............... 689 648 1,314 1,223
Non-cash compensation charge................................ - 45 - 45
------ ------ ------ ------
Operating Income............................................ 191 92 266 134
Interest expense, net....................................... 44 51 89 97
Foreign currency gain....................................... - (1) - -
Minority interest........................................... 12 7 15 7
------ ------ ------ ------
Income before income taxes.................................. 135 35 162 30
Income tax expense.......................................... 50 15 60 13
------ ------ ------ ------
Net Income.................................................. $ 85 $ 20 $ 102 $ 17
====== ====== ====== ======
Basic and Diluted Earnings Per Share
As reported................................................. $ 0.58 $ 0.14 $ 0.69 $ 0.18
Weighted-Average Basic and Diluted Shares
Outstanding................................................ 148 142 148 98
Pro Forma Basic and Diluted Earnings Per Share
As reported................................................. $ 0.58 $ 0.13 $ 0.69 $ 0.11
Excluding non-cash compensation charge...................... $ 0.58 $ 0.32 $ 0.69 $ 0.30
Weighted-Average Basic and Diluted Shares
Outstanding............................................... 148 155 148 155
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>
24-weeks Ended
June 10, June 12,
2000 1999
----- ----
Cash Flows - Operations
<S> <C> <C>
Net income...................................................................... $ 102 $ 17
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 153 164
Amortization.............................................................. 61 59
Deferred income taxes..................................................... (14) (2)
Non-cash compensation charge.............................................. - 29
Other non-cash charges and credits, net................................... 78 57
Changes in operating working capital, excluding effects of
acquisitions;
Trade accounts receivable............................................... (177) (182)
Inventories............................................................. (49) (44)
Prepaid expenses, deferred income taxes and other current assets........ (10) (20)
Accounts payable and other current liabilities.......................... 104 93
------ ------
Net change in operating working capital .................................. (132) (153)
------ ------
Net Cash Provided by Operations................................................... 248 171
------ ------
Cash Flows - Investments
Capital expenditures........................................................... (224) (232)
Acquisitions of bottlers....................................................... (2) (165)
Other, net..................................................................... (4) 21
------ ------
Net Cash Used by Investments...................................................... (230) (376)
------ ------
Cash Flows - Financing
Short-term borrowings - three months or less................................... 7 (66)
Proceeds from third-party debt................................................. - 3,260
Replacement of PepsiCo allocated debt.......................................... - (3,300)
Payments of third-party debt................................................... (8) (41)
Dividends paid................................................................. (6) -
Treasury stock transactions.................................................... (58) -
Net IPO proceeds............................................................... - 2,208
Decrease in advances from PepsiCo.............................................. - (1,834)
------ ------
Net Cash (Used) Provided by Financing............................................. (65) 227
------ ------
Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... (3) (1)
------ ------
Net (Decrease) Increase in Cash and Cash Equivalents............................. (50) 21
Cash and Cash Equivalents - Beginning of Period................................... 190 36
------ ------
Cash and Cash Equivalents - End of Period......................................... $ 140 $ 57
====== ======
Supplemental Cash Flow Information
Third-party interest and income taxes paid........................................ $ 164 $ 2
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
<TABLE>
<CAPTION>
(Unaudited)
June December
10, 2000 25, 1999
-------- --------
Assets
------
Current Assets
<S> <C> <C>
Cash and cash equivalents................................................ $ 140 $ 190
Trade accounts receivable, less allowance of $48 at
June 10, 2000 and December 25, 1999................................ 977 827
Inventories.............................................................. 340 293
Prepaid expenses, deferred income taxes and other current assets......... 165 183
------ ------
Total Current Assets............................................. 1,622 1,493
Property, plant and equipment, net......................................... 2,270 2,218
Intangible assets, net..................................................... 3,758 3,819
Other assets............................................................... 80 89
------ ------
Total Assets.................................................... $7,730 $7,619
====== ======
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Accounts payable and other current liabilities........................... $1,026 $ 924
Short-term borrowings.................................................... 22 23
------ ------
Total Current Liabilities........................................ 1,048 947
Long-term debt............................................................. 3,269 3,268
Other liabilities.......................................................... 418 385
Deferred income taxes...................................................... 1,124 1,178
Minority interest.......................................................... 291 278
------ ------
Total Liabilities................................................ 6,150 6,056
Shareholders' Equity
Common stock, par value $.01 per share:
Authorized 300 shares, issued 155 shares............................ 2 2
Additional paid-in capital.............................................. 1,736 1,736
Retained earnings....................................................... 234 138
Accumulated other comprehensive loss.................................... (244) (223)
Treasury stock: 8 shares and 5 shares at June 10, 2000 and December 25,
1999, respectively................................................... (148) (90)
------ ------
Total Shareholders' Equity....................................... 1,580 1,563
------ ------
Total Liabilities and Shareholders' Equity...................... $7,730 $7,619
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
-4-
The Pepsi Bottling Group, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Tabular dollars in millions
--------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations
located in the United States, Canada, Spain, Greece and Russia. These bottling
operations manufacture, sell and distribute Pepsi-Cola beverages including
Pepsi-Cola, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks
and other ready-to-drink beverages. Approximately 90% of PBG's net revenues were
derived from the sale of Pepsi-Cola beverages. References to PBG throughout
these Condensed Consolidated Financial Statements are made using the
first-person notations of "we," "our" and "us."
Prior to our formation, we were an operating unit of PepsiCo, Inc.
("PepsiCo"). On March 31, 1999, we offered 100,000,000 shares of PBG common
stock for sale at $23 per share in an initial public offering generating $2,208
million in net proceeds. These proceeds were used to repay obligations to
PepsiCo and fund acquisitions. Subsequent to the offering, PepsiCo owned and
continues to own 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 has increased to 37.4% of the outstanding common stock at June 10,
2000 as a result of net repurchases of 8.1 million shares under our share
repurchase program, which began in October 1999. PepsiCo also owns 100% of the
outstanding Class B common stock, together representing 45.6% of the voting
power of all classes of our voting stock. Subsequent to the offering, PepsiCo
also owns 7.1% of the equity of Bottling Group, LLC, our principal operating
subsidiary, giving PepsiCo economic ownership of 41.9% of our combined
operations at June 10, 2000.
The accompanying Condensed Consolidated Financial Statements include
information that has been presented on a "carve-out" basis for the periods prior
to our 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 we been a separate, independent
company from the first day of all periods presented.
The accompanying Condensed Consolidated Balance Sheet at June 10, 2000, the
Condensed Consolidated Statements of Operations for the 12 and 24-weeks ended
June 10, 2000 and June 12, 1999 and the Condensed Consolidated Statements of
Cash Flows for the 24-weeks ended June 10, 2000 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 consolidated financial
statements for the year ended December 25, 1999 as presented in our Annual
Report on Form 10-K. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation.
-5-
Note 2 - Seasonality of Business
The results for the second quarter and first 24-weeks 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 - Inventories
June December
10, 2000 25, 1999
-------- --------
Raw materials and supplies......................... $ 125 $ 110
Finished goods..................................... 215 183
------ ------
$ 340 $ 293
====== ======
Note 4 - Property, Plant and Equipment, net
June December
10, 2000 25, 1999
-------- --------
Land............................................... $ 144 $ 145
Buildings and improvements......................... 862 852
Production and distribution equipment.............. 2,148 2,112
Marketing equipment................................ 1,667 1,596
Other.............................................. 86 84
------ ------
4,907 4,789
Accumulated depreciation........................... (2,637) (2,571)
------ ------
$2,270 $2,218
====== ======
Note 5 - Comprehensive Income
<TABLE>
<CAPTION>
12-weeks Ended 24-weeks Ended
June June June June
10, 2000 12, 1999 10, 2000 12, 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income......................................... $ 85 $ 20 $ 102 $ 17
Currency translation adjustment.................... (8) (7) (21) 4
Minimum pension liability adjustment............... - 19 - 19
----- ----- ----- -----
Comprehensive Income............................... $ 77 $ 32 $ 81 $ 40
===== ===== ===== =====
</TABLE>
-6-
Note 6 - Comparability of Results
Asset Lives
-----------
At the beginning of fiscal year 2000, we changed the estimated useful lives
of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in the table below, lowered total depreciation
cost by $18 million, or $0.07 per share, and $32 million, or $0.12 per share,
for the 12 and 24-weeks ended June 10, 2000, respectively.
Estimated Useful Lives
2000 1999
---- ----
Manufacturing equipment................................. 15 10
Heavy fleet............................................. 10 8
Fountain dispensing equipment........................... 7 5
Small specialty coolers and marketing equipment......... 3 5 to 7
Initial Public Offering
-----------------------
The 1999 financial information for the period prior to our initial public
offering has been carved out from the financial statements of PepsiCo using the
historical results of operations and assets and liabilities of our business. The
Condensed Consolidated Financial Statements reflect certain costs that may not
necessarily be indicative of the costs we would have incurred had we operated as
an independent, stand-alone entity from the beginning of 1999. These costs
include an allocation of PepsiCo corporate overhead and interest expense, and
income taxes.
o We included corporate overhead related to PepsiCo's corporate
administrative functions based on a specific identification of
PepsiCo's administrative costs relating to the bottling operations
and, to the extent that such identification was not practicable, based
upon the percentage of our revenues to PepsiCo's consolidated net
revenues. These costs are included in selling, delivery and
administrative expenses in our Condensed Consolidated Statements of
Operations.
o We allocated $3.3 billion of PepsiCo debt to our business. We charged
interest expense on this debt using PepsiCo's weighted-average
interest rate. Once we issued $3.3 billion of third-party debt in the
first quarter of 1999, our actual interest rates were used to
determine interest expense for the remainder of the year. Allocated
interest expense was deemed to have been paid to PepsiCo, in cash, in
the period in which the cost was incurred.
o We reflected income tax expense in our Condensed Consolidated
Financial Statements as if we had actually filed a separate income tax
return. Our allocable share of income taxes was deemed to have been
paid to PepsiCo, in cash, in the period in which the cost was
incurred.
-7-
The amounts of the historical allocations described above are as follows:
1999
----
Corporate overhead expense...................................... $ 3
Interest expense................................................ $ 28
PepsiCo weighted-average interest rate.......................... 5.8%
In addition, our historical capital structure is not representative of our
current structure due to our initial public offering. In 1999, immediately
preceding the offering, we had 55,000,000 shares of common stock outstanding. In
connection with the offering, we sold 100,000,000 shares to the public. Pro
forma 1999 average shares outstanding reflect our initial public offering as if
it occurred on the first day of fiscal year 1999.
Note 7 - Non-cash Compensation Charge
In connection with the consummation of our initial public offering,
substantially all non-vested PepsiCo stock options held by our employees vested.
As a result, we incurred a $45 million non-cash compensation charge in the
second quarter of 1999 ($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 8 - Subsequent Events
On June 12, 2000, union employees at our Burnsville, Minnesota plant went
on strike over employment contract disputes. At this time we are not able to
determine how long the strike will last. We do not believe the strike will have
a significant financial impact on our overall results.
-8-
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial
--------------------------------------------------------------------------------
Condition Overview
------------------
Just over 15 months ago, The Pepsi Bottling Group, Inc. (collectively
referred to as "PBG," "we," "our" and "us") became a public company through an
initial public offering of 100,000,000 shares of common stock. Since our
separation from PepsiCo, Inc. and our beginning as a company focused solely on
the bottling business we have concentrated our efforts on three key objectives -
fixing the economics of our take-home business, aggressively growing our
high-margin cold drink volume and sharply improving our international business.
As we complete the first half of 2000, we are proud of our performance against
these objectives as we have continued to generate outstanding operating results:
o We delivered 18% and 19% constant territory EBITDA growth in the second
quarter and first 24-weeks of 2000, respectively.
o We delivered $0.58 in earnings per share in the second quarter, an increase
of $0.26 over 1999 after adjusting for the number of shares outstanding and
excluding a 1999 non-cash compensation charge. On a year-to-date basis,
earnings per share more than doubled to $0.69.
o We generated $20 million of operating free cash flow in the first 24-weeks
of 2000, $60 million better than the prior year.
The following management's discussion and analysis should be read in
conjunction with our Condensed Consolidated Financial Statements and
accompanying footnotes along with the cautionary statements at the end of this
section.
Constant Territory
We believe that constant territory performance results are the most
appropriate indicators of operating trends and performance, particularly in
light of our stated intention of acquiring additional bottling territories, and
are consistent with industry practice. Constant territory operating results are
achieved by adjusting current year results to exclude significant current year
acquisitions and adjusting prior year results to include the results of
significant prior year acquisitions as if they had occurred on the first day of
the prior fiscal year. Constant territory results also exclude any unusual
impairment and other charges and credits.
Use of EBITDA
EBITDA, which is computed as operating income plus the sum of depreciation,
amortization and any unusual non-cash charges and credits, is a key indicator
management and the industry use to evaluate operating performance. It is not,
however, required under generally accepted accounting principles and should not
be considered an alternative to measurements required by GAAP such as net income
or cash flows.
-9-
Comparability of Results
Asset Lives
-----------
At the beginning of fiscal year 2000, we changed the estimated useful lives
of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in Note 6 to the Condensed Consolidated
Financial Statements, lowered total depreciation cost by $18 million, or $0.07
per share, and $32 million, or $0.12 per share, for the 12 and 24-weeks ended
June 10, 2000, respectively. We anticipate that this change will reduce full
year 2000 depreciation expense by approximately $70 million equivalent to $0.27
per share.
Initial Public Offering
-----------------------
The 1999 financial information for the period prior to our initial public
offering has been carved out from the financial statements of PepsiCo using the
historical results of operations and assets and liabilities of our business. The
Condensed Consolidated Financial Statements reflect certain costs that may not
necessarily be indicative of the costs we would have incurred had we operated as
an independent, stand-alone entity from the beginning of 1999. These costs
include an allocation of PepsiCo corporate overhead and interest expense, and
income taxes. We reflected income tax expense in the Condensed Consolidated
Financial Statements as if we had actually filed a separate income tax return
and allocated overhead and interest expense as follows:
1999
----
Corporate overhead expense..................................... $ 3
Interest expense............................................... $ 28
PepsiCo weighted-average interest rate......................... 5.8%
In addition, our historical capital structure is not representative of our
current structure due to our initial public offering. In 1999, immediately
preceding the offering, we had 55,000,000 shares of common stock outstanding. In
connection with the offering, we sold 100,000,000 shares to the public.
Results of Operations
<TABLE>
<CAPTION>
Reported Change Constant Territory Change
June 10, 2000 June 10, 2000
12-weeks 24-weeks 12-weeks 24-weeks
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EBITDA............................. 18% 19% 18% 19%
Volume.............................. 0% 0% 0% 0%
Net Revenue per Case................ 4% 5% 4% 5%
</TABLE>
EBITDA
Reported EBITDA was $299 million and $480 million in the second quarter and
first 24-weeks of 2000, respectively, representing an 18% and 19% increase over
the same periods of 1999. On a constant territory basis, EBITDA growth was also
18% and 19% over the same periods reflecting strong pricing in U.S. foodstores,
an increased mix of higher margin cold drink volume and continued growth in our
operations outside the U.S.
-10-
Volume
Our worldwide physical case volume was flat on both a reported and constant
territory basis in the second quarter and first 24-weeks of 2000. For both the
second quarter and first 24-weeks of 2000, U.S. constant territory volume
decreased 1% driven by declines in the take-home segment resulting from price
increases and the lapping of a very successful Star Wars promotional program in
the second quarter of 1999. While take-home volume was lower, we were able to
make up some of the lost volume in our cold drink segment as we continued to be
successful in placing cold drink equipment and in growing our small format
channels.
Outside the U.S., our constant territory volumes increased 7% in the
quarter and 6% year-to-date reflecting continued improvements in Russia and
solid growth in Spain. Russia volumes continued to rebound from the August 1998
devaluation of the ruble as we have aggressively reestablished brand Pepsi,
introduced our own line of value brand beverage products (Fiesta) and continued
to increase distribution of our water products. Partially offsetting the growth
in Russia and Spain were volume declines in Canada resulting from significant
price increases in foodstores in that country.
Net Revenues
Net revenues for the quarter were $1,913 million, a more than 4% increase
over the prior year, raising year-to-date net revenues by 5% to $3,458 million.
On a constant territory basis, worldwide net revenues and net revenue per case
grew 4% and 5% in the quarter and for the first 24-weeks, respectively. These
increases were driven by strong pricing, particularly in U.S. foodstores, and an
increased mix of higher-revenue cold drink volume. Reported net revenues and net
revenue per case were lowered by approximately 1% due to currency translation in
both the quarter and 24-weeks ended June 10, 2000.
Cost of Sales
Cost of sales decreased $13 million, or 1%, in the second quarter and $3
million, or essentially flat, in the first half of 2000. Current year costs
include a $9 million and $17 million favorable impact from the change in our
estimated useful lives of manufacturing assets in the second quarter and first
24-weeks of 2000, respectively. Currency translations also had an approximately
1% favorable impact on the second quarter and year-to-date results. Excluding
the effects of the change in depreciation lives and currency translations, cost
of sales were 1% higher in the quarter and year-to-date, as higher U.S.
concentrate costs were partially offset by favorable packaging and sweetener
costs.
Selling, delivery and administrative expenses
Selling, delivery and administrative expenses grew $41 million, or 6%, in
the second quarter, bringing year-to-date growth to $91 million, or 7%, over the
comparable periods in 1999. This increase primarily reflects higher selling and
delivery costs as we continued to aggressively place cold drink equipment and
invest in this high margin segment of our business. In addition, higher
performance based compensation costs and costs associated with our previously
announced 401(k) plan contributed approximately 4 points of the cost growth in
the quarter and 3 points of the cost growth year-to-date. Currency translation
and the depreciation accounting change partially offset these cost increases.
Currency translations had an approximately 1% favorable impact in both the
quarter and 24-weeks ended June 10, 2000. Current year costs include a $9
million and $15 million favorable impact from the change in our estimated useful
lives of certain selling and delivery assets in the second quarter and first
24-weeks of 2000, respectively.
-11-
Interest expense, net
Interest expense decreased by $7 million in the quarter and $8 million in
the first half of 2000 primarily reflecting lower external debt outside the U.S.
Non-cash Compensation Charge
In connection with the consummation of our initial public offering,
substantially all non-vested PepsiCo stock options held by our employees vested.
As a result, we incurred a $45 million non-cash compensation charge in the
second quarter of 1999 ($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.
Minority Interest
PBG and PepsiCo contributed bottling businesses and assets used in the
bottling businesses to Bottling Group, LLC, our principal operating subsidiary,
in connection with the formation of Bottling Group, LLC. As a result of the
contribution of these assets, we own 92.9% of Bottling Group, LLC and PepsiCo
owns the remaining 7.1%. Accordingly, starting from our initial public offering
on March 31, 1999, our Condensed Consolidated Financial Statements reflect
PepsiCo's share of consolidated net income of Bottling Group, LLC as minority
interest in our Condensed Consolidated Statements of Operations.
Provision for Income Taxes
Our full year forecasted tax rate for 2000 is 37% and this rate has been
applied to our 2000 results. This rate corresponds to an effective tax rate,
excluding any unusual impairment and other charges and credits, of 38% in 1999.
The one point decrease is primarily due to the reduced impact of fixed
non-deductible permanent expenses on higher anticipated pre-tax income in 2000.
Earnings Per Share
<TABLE>
<CAPTION>
12-weeks Ended 24-weeks Ended
June June June June
10, 2000 12, 1999 10, 2000 12, 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings per share on reported net income..... $ 0.58 $ 0.14 $ 0.69 $ 0.18
Average shares outstanding (millions)......... 148 142 148 98
</TABLE>
Our historical capital structure is not representative of our current
structure due to our initial public offering. In 1999, immediately preceding the
offering, we had 55 million shares of common stock outstanding. In connection
with the offering, we sold 100,000,000 shares of common stock to the public and
used the $2.2 billion of proceeds to repay obligations to PepsiCo and to fund
acquisitions.
-12-
The table below sets forth 1999 earnings per share adjusted for the initial
public offering assuming 155 million shares had been outstanding for the entire
period presented. Shares outstanding in 2000 reflect our share repurchase
program, which began in October 1999 when our Board of Directors authorized the
repurchase of up to 10 million shares of our common stock. In the second quarter
of 2000, our Board of Directors authorized the repurchase of an additional 5
million shares. Approximately 1.3 million shares were repurchased in the second
quarter of 2000 with a total of over 8 million shares repurchased since last
October.
<TABLE>
<CAPTION>
12-weeks Ended 24-weeks Ended
June June June June
10, 2000 12, 1999 10, 2000 12, 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings per share on reported net income........ $ 0.58 $ 0.13 $ 0.69 $ 0.11
Pro Forma average shares outstanding (millions).. 148 155 148 155
</TABLE>
Liquidity and Capital Resources
-------------------------------
Cash Flows
Net cash provided by operating activities increased $77 million to $248
million in the first 24-weeks of 2000 as strong EBITDA growth combined with
improved working capital cash flows driven by the timing of cash payments on
current liabilities.
Net cash used by investments decreased by $146 million from $376 million at
the end of the second quarter of 1999 to $230 million in the first 24-weeks of
2000, primarily due to acquisition spending, which was $163 million lower in
2000. Capital expenditures decreased by $8 million, or 3%, as increases in the
U.S. associated with our cold drink strategy were offset by decreases outside
the U.S. Our 2000 net marketing equipment placements through the end of the
second quarter were made at a rate which should allow us to meet our 2000 North
American target of 150,000 net placements compared to 142,000 in 1999.
Net cash (used) provided by financing decreased from a source of $227
million in 1999 to a use of $65 million in 2000. This decrease resulted from net
cash received from IPO activities in 1999 coupled with $58 million of share
repurchases in 2000.
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.
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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 employee 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 associated with conversion to the common European
currency and unfavorable interest rate and currency fluctuations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosures made on this matter in our
1999 Annual Report on Form 10-K.
-14-
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 10, 2000, and the related Condensed
Consolidated Statements of Operations for the twelve and twenty-four weeks ended
June 10, 2000 and June 12, 1999 and the Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended June 10, 2000 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 Consolidated Balance Sheets of The Pepsi Bottling Group, Inc. as
of December 25, 1999, and the related Consolidated Statements of Operations,
Cash Flows and Changes in Shareholders' Equity for the fifty-two week period
then ended not presented herein; and in our report dated January 25, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying Condensed
Consolidated Balance Sheet as of December 25, 1999, is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ KPMG LLP
New York, New York
July 13, 2000
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PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
See Index to Exhibits on page 17.
-16-
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 24, 2000 Peter A. Bridgman
----- ------------- -----------------
Senior Vice President and
Controller
Date: July 24, 2000 John T. Cahill
----- ------------- --------------
Executive Vice President and
Chief Financial Officer
-17-
INDEX TO EXHIBITS
ITEM 6 (a)
----------
EXHIBITS
--------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
Exhibit 27.1 Financial Data Schedule 24-weeks ended June 10, 2000
-18-
