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Pepsi Bottling Group 10-K 2010 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year Ended December 26, 2009
or
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)
Registrant’s telephone number, including area code: (914) 767-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The number of shares of Common Stock and Class B Common Stock of The Pepsi Bottling Group,
Inc. outstanding as of February 12, 2010 was 221,798,326 and 100,000, respectively. The aggregate
market value of The Pepsi Bottling Group, Inc. Capital Stock held by non-affiliates of The Pepsi
Bottling Group, Inc. (assuming for the sole purpose of this calculation, that all executive
officers and directors of The Pepsi Bottling Group, Inc. are affiliates of The Pepsi Bottling
Group, Inc.) as of June 12, 2009 was $4,858,397,101 (based on the closing sale price of The Pepsi
Bottling Group, Inc.’s Capital Stock on that date as reported on the New York Stock Exchange).
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PART I
Introduction
The Pepsi Bottling Group, Inc. (“PBG”) was incorporated in Delaware in January, 1999, as a
wholly owned subsidiary of PepsiCo, Inc. (“PepsiCo”) to effect the separation of most of PepsiCo’s
company-owned bottling businesses. PBG became a publicly traded company on March 31, 1999. As of
January 22, 2010, PepsiCo’s ownership represented 31.6% of the outstanding common stock and 100% of
the outstanding Class B common stock, together representing 38.6% of the voting power of all
classes of PBG’s voting stock. PepsiCo also owned approximately 6.6% of the equity interest of
Bottling Group, LLC, PBG’s principal operating subsidiary, as of January 22, 2010. When used in
this Report, “PBG,” “we,” “us,” “our” and the “Company” each refers to The Pepsi Bottling Group,
Inc. and, where appropriate, to Bottling Group, LLC, which we also refer to as “Bottling LLC.”
On August 3, 2009, we entered into a merger agreement with PepsiCo and Pepsi-Cola Metropolitan
Bottling Company, Inc., a wholly owned subsidiary of PepsiCo (“Metro”), pursuant to which we will
merge with and into Metro, with Metro continuing as the surviving company and a wholly owned
subsidiary of PepsiCo. Under the terms of the merger agreement, PepsiCo will acquire all
outstanding shares of PBG common stock it does not already own for the price of $36.50 in cash or
0.6432 shares of PepsiCo common stock, subject to proration such that the aggregate consideration
to be paid to PBG shareholders shall be 50 percent in cash and 50 percent in PepsiCo common stock.
At a special meeting of our shareholders held on February 17, 2010, our shareholders adopted the
merger agreement. The transaction is subject to certain regulatory approvals and is expected to be
finalized by the end of the first quarter of 2010.
PBG operates in one industry, carbonated soft drinks and other ready-to-drink beverages, and
all of our segments derive revenue from these products. We conduct business in all or a portion of
the United States, Mexico, Canada, Spain, Russia, Greece and Turkey. PBG manages and reports
operating results through three reportable segments: U.S. & Canada, Europe (which includes Spain,
Russia, Greece and Turkey) and Mexico. Operationally, the Company is organized along geographic
lines with specific regional management teams having responsibility for the financial results in
each reportable segment.
In 2009, approximately 78% of our net revenues were generated in the U.S. & Canada, 13% of our
net revenues were generated in Europe, and the remaining 9% of our net revenues were generated in
Mexico. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and Note 13 in the Notes to Consolidated Financial Statements for additional information regarding
the business and operating results of our reportable segments.
Principal Products
PBG is the world’s largest manufacturer, seller and distributor of Pepsi-Cola beverages. In
addition, in some of our territories we have the right to manufacture, sell and distribute soft
drink products of companies other than PepsiCo, including Dr Pepper, Crush and Squirt. We also have
the right in some of our territories to manufacture, sell and distribute beverages under trademarks
that we own, including Electropura, e-pura and Garci Crespo. The majority of our volume is derived
from brands licensed from PepsiCo or PepsiCo joint ventures.
We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or
a portion of 42 states and the District of Columbia in the United States, nine Canadian provinces,
Spain, Greece, Russia, Turkey and 23 states in Mexico.
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In 2009, approximately 76% of our sales volume in the U.S. & Canada was derived from
carbonated soft drinks and the remaining 24% was derived from non-carbonated beverages, 69% of our
sales volume in Europe was derived from carbonated soft drinks and the remaining 31% was derived
from non-carbonated beverages, and 53% of our Mexico sales volume was derived from carbonated soft
drinks and the remaining 47% was derived from non-carbonated beverages. Our principal beverage
brands include the following:
No individual customer accounted for 10% or more of our total revenues in 2009, except for
sales to Wal-Mart Stores, Inc. and its affiliated companies which accounted for 11% of our revenues
in 2009, primarily as a result of transactions in the U.S. & Canada segment. We have an extensive
direct store distribution system in the United States, Canada and Mexico. In Europe, we use a
combination of direct store distribution and distribution through wholesalers, depending on local
marketplace considerations.
Raw Materials and Other Supplies
We purchase the concentrates to manufacture Pepsi-Cola beverages and other beverage products
from PepsiCo and other beverage companies.
In addition to concentrates, we purchase various ingredients, packaging materials and energy
such as sweeteners, glass and plastic bottles, cans, closures, syrup containers, other packaging
materials, carbon dioxide, some finished goods, electricity, natural gas and motor fuel. We
generally purchase our raw materials, other than concentrates, from multiple suppliers. PepsiCo
acts as our agent for the purchase of such raw materials in the United States and Canada and, with
respect to some of our raw materials, in certain of our international markets. The Pepsi beverage
agreements, as described below, provide that, with respect to the beverage products of PepsiCo, all
authorized containers, closures, cases, cartons and other packages and labels may be purchased only
from manufacturers approved by PepsiCo. There are no materials or supplies used by PBG that are
currently in short supply. The supply or cost of specific materials could be adversely affected by
various factors, including price changes, economic conditions, strikes, weather conditions and
governmental controls.
Franchise and Venture Agreements
We conduct our business primarily under agreements with PepsiCo. These agreements give us the
exclusive right to market, distribute, and produce beverage products of PepsiCo in authorized
containers and to use the related trade names and trademarks in specified territories.
Set forth below is a description of the Pepsi beverage agreements and other bottling
agreements to which we are a party.
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Terms of the Master Bottling Agreement. The Master Bottling Agreement under which we
manufacture, package, sell and distribute the cola beverages bearing the Pepsi-Cola and Pepsi
trademarks in the United States was entered into in March of 1999. The Master Bottling Agreement
gives us the exclusive and perpetual right to distribute cola beverages for sale in specified
territories in authorized containers of the nature currently used by us. The Master Bottling
Agreement provides that we will purchase our entire requirements of concentrates for the cola
beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by
PepsiCo. PepsiCo may determine from time to time what types of containers to authorize for use by
us. PepsiCo has no rights under the Master Bottling Agreement with respect to the prices at which
we sell our products.
Under the Master Bottling Agreement we are obligated to:
The Master Bottling Agreement requires us to meet annually with PepsiCo to discuss plans for
the ensuing year and the following two years. At such meetings, we are obligated to present plans
that set out in reasonable detail our marketing plan, our management plan and advertising plan with
respect to the cola beverages for the year. We must also present a financial plan showing that we
have the financial capacity to perform our duties and obligations under the Master Bottling
Agreement for that year, as well as sales, marketing, advertising and capital expenditure plans for
the two years following such year. PepsiCo has the right to approve such plans, which approval
shall not be unreasonably withheld. In 2009, PepsiCo approved our plans.
If we carry out our annual plan in all material respects, we will be deemed to have satisfied
our obligations to push vigorously the sale of the cola beverages, increase and fully meet the
demand for the cola beverages in our territories and maintain the financial capacity required under
the Master Bottling Agreement. Failure to present a plan or carry out approved plans in all
material respects would constitute an event of default that, if not cured within 120 days of notice
of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement.
If we present a plan that PepsiCo does not approve, such failure shall constitute a primary
consideration for determining whether we have satisfied our obligations to maintain our financial
capacity, push vigorously the sale of the cola beverages and increase and fully meet the demand for
the cola beverages in our territories.
If we fail to carry out our annual plan in all material respects in any segment of our
territory, whether defined geographically or by type of market or outlet, and if such failure is
not cured within six months of notice of the failure, PepsiCo may reduce the territory covered by
the Master Bottling Agreement by eliminating the territory, market or outlet with respect to which
such failure has occurred.
PepsiCo has no obligation to participate with us in advertising and marketing spending, but it
may contribute to such expenditures and undertake independent advertising and marketing activities,
as well as cooperative advertising and sales promotion programs that would require our cooperation
and support. Although PepsiCo has advised us that it intends to continue to provide cooperative
advertising funds, it is not obligated to do so under the Master Bottling Agreement.
The Master Bottling Agreement provides that PepsiCo may in its sole discretion reformulate any
of the cola beverages or discontinue them, with some limitations, so long as all cola beverages are
not discontinued. PepsiCo may also introduce new beverages under the Pepsi-Cola trademarks or any
modification thereof. When that occurs, we are obligated to manufacture, package, distribute and
sell such new beverages with the same obligations as then exist with respect to other cola
beverages. We are prohibited from producing or handling cola products, other than those of PepsiCo,
or products or packages that imitate, infringe or cause confusion with the products, containers or
trademarks of PepsiCo. The Master Bottling Agreement also imposes requirements with respect to the
use of PepsiCo’s trademarks, authorized containers, packaging and labeling.
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If we acquire control, directly or indirectly, of any bottler of cola beverages, we must cause
the acquired bottler to amend its bottling appointments for the cola beverages to conform to the
terms of the Master Bottling Agreement. Under the Master Bottling Agreement, PepsiCo has agreed not
to withhold approval for any acquisition of rights to manufacture and sell Pepsi trademarked cola
beverages within a specific area — currently representing approximately 10.3% of PepsiCo’s U.S.
bottling system in terms of volume — if we have successfully negotiated the acquisition and, in
PepsiCo’s reasonable judgment, satisfactorily performed our obligations under the Master Bottling
Agreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell
Pepsi trademarked cola beverages outside of that specific area without PepsiCo’s prior written
approval.
The Master Bottling Agreement is perpetual, but may be terminated by PepsiCo in the event of
our default. Events of default include:
An event of default will also occur if any person or affiliated group acquires any contract,
option, conversion privilege, or other right to acquire, directly or indirectly, beneficial
ownership of more than 15% of any class or series of our voting securities without the consent of
PepsiCo. As of February 12, 2010, to our knowledge, no shareholder of PBG, other than PepsiCo,
held more than 5% of our common stock.
We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or
any interest therein, whether voluntarily, or by operation of law, including by merger or
liquidation, without the prior consent of PepsiCo.
The Master Bottling Agreement was entered into by us in the context of our separation from
PepsiCo and, therefore, its provisions were not the result of arm’s-length negotiations.
Consequently, the agreement contains provisions that are less favorable to us than the exclusive
bottling appointments for cola beverages currently in effect for independent bottlers in the United
States.
Terms of the Non-Cola Bottling Agreements. The beverage products covered by the non-cola
bottling agreements are beverages licensed to us by PepsiCo, including Mountain Dew, Aquafina,
Sierra Mist, Diet Mountain Dew, Mug Root Beer and Mountain Dew Code Red. The non-cola bottling
agreements contain provisions that are similar to those contained in the Master Bottling Agreement
with respect to pricing, territorial restrictions, authorized containers, planning, quality
control, transfer restrictions, term and related matters. Our non-cola bottling agreements will
terminate if PepsiCo terminates our Master Bottling Agreement. The exclusivity provisions contained
in the non-cola bottling agreements would prevent us from manufacturing, selling or distributing
beverage products that imitate, infringe upon, or cause confusion with, the beverage products
covered by the non-cola bottling agreements. PepsiCo may also elect to discontinue the manufacture,
sale or distribution of a non-cola beverage and terminate the applicable non-cola bottling
agreement upon six months notice to us.
Terms of Certain Distribution Agreements. We also have agreements with PepsiCo granting us
exclusive rights to distribute AMP and Dole in all of our territories, SoBe in certain specified
territories and Gatorade and G2 in certain specified channels. The distribution agreements contain
provisions generally similar to those in the Master Bottling Agreement as to use of trademarks,
trade names, approved containers and labels and causes for termination. We also have the right to
sell Tropicana juice drinks in the United States and Canada, Tropicana juices in Russia and Spain,
and Gatorade in Spain, Greece and Russia and in certain limited channels of distribution in the
United States and Canada. Some of these beverage agreements have limited terms and, in most
instances, prohibit us from dealing in similar beverage products.
Terms of the Master Syrup Agreement. The Master Syrup Agreement grants us the exclusive right
to manufacture, sell and distribute fountain syrup to local customers in our territories. We have
agreed to act as a manufacturing and delivery agent for national accounts within our territories
that specifically request direct delivery without using a middleman. In addition, PepsiCo may
appoint us to manufacture and deliver fountain syrup to national accounts that elect delivery
through independent distributors. Under the Master Syrup Agreement, we have the exclusive right to
service fountain equipment for all of the national account customers within our territories. The
Master Syrup Agreement provides that the determination of whether an account is local or national
is at the sole discretion of PepsiCo.
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The Master Syrup Agreement contains provisions that are similar to those contained in the
Master Bottling Agreement with respect to concentrate pricing, territorial restrictions with
respect to local customers and national customers electing direct-to-store delivery only, planning,
quality control, transfer restrictions and related matters. The Master Syrup Agreement had an
initial term of five years which expired in 2004 and has thereafter automatically renewed for two
additional five-year periods, including the most recent renewal in 2009. The Master Syrup
Agreement will automatically renew for additional five-year periods, unless PepsiCo terminates it
for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause at any time
upon twenty-four months notice. In the event PepsiCo terminates the Master Syrup Agreement without
cause, PepsiCo is required to pay us the fair market value of our rights thereunder. Our Master
Syrup Agreement will terminate if PepsiCo terminates our Master Bottling Agreement.
Terms of Other U.S. Bottling Agreements. The bottling agreements between us and other
licensors of beverage products, including Dr Pepper Snapple Group for Dr Pepper, Crush, Schweppes,
Canada Dry, Hawaiian Punch and Squirt, the Pepsi/Lipton Tea Partnership for Lipton Brisk and Lipton
Iced Tea, and the North American Coffee Partnership for Starbucks Frappuccino®, contain
provisions generally similar to those in the Master Bottling Agreement as to use of trademarks,
trade names, approved containers and labels, sales of imitations and causes for termination. Some
of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in
similar beverage products. The agreements with Dr Pepper Snapple Group contain a provision that
permits the Dr Pepper Snapple Group to terminate the agreements in the event of a sale of more than
10% of our stock. Because the pending PepsiCo merger would trigger this provision, PepsiCo and Dr
Pepper Snapple Group have entered into new bottling agreements that will be effective upon closing
of the merger.
Terms of the Country-Specific Bottling Agreements. The country-specific bottling agreements
contain provisions generally similar to those contained in the Master Bottling Agreement and the
non-cola bottling agreements and, in Canada, the Master Syrup Agreement with respect to authorized
containers, planning, quality control, transfer restrictions, term, causes for termination and
related matters. These bottling agreements differ from the Master Bottling Agreement because,
except for Canada, they include both fountain syrup and non-fountain beverages. Certain of these
bottling agreements contain provisions that have been modified to reflect the laws and regulations
of the applicable country. For example, the bottling agreements in Spain do not contain a
restriction on the sale and shipment of Pepsi-Cola beverages into our territory by others in
response to unsolicited orders. In addition, in Mexico and Turkey we are restricted in our ability
to manufacture, sell and distribute beverages sold under non-PepsiCo trademarks.
Terms of the Russia Venture Agreement. In 2007, PBG together with PepsiCo formed PR Beverages
Limited (“PR Beverages”), a venture that enables us to strategically invest in Russia to accelerate
our growth. We contributed our business in Russia to PR Beverages, and PepsiCo entered into
bottling agreements with PR Beverages for PepsiCo beverage products sold in Russia on the same
terms as in effect for us immediately prior to the venture. PepsiCo also granted PR Beverages an
exclusive license to manufacture and sell the concentrate for such products.
Terms of Russia Snack Food Distribution Agreement. Effective January 2009, PR Beverages
entered into an agreement with Frito-Lay Manufacturing, LLC (“FLM”), a wholly owned subsidiary of
PepsiCo, pursuant to which PR Beverages purchases Frito-Lay snack products from FLM for sale and
distribution in the Russian Federation. This agreement provides FLM access to the infrastructure
of our distribution network in Russia and allows us to more effectively utilize some of our
distribution network assets. This agreement replaced a similar agreement, which expired on December
31, 2008.
Seasonality
Sales of our products are seasonal, particularly in our Europe segment, where sales volumes
tend to be more sensitive to weather conditions. Our peak season across all of our segments is the
warm summer months beginning in May and ending in September. More than 70% of our operating income
is typically earned during the second and third quarters and more than 80% of cash flow from
operations is typically generated in the third and fourth quarters.
Competition
The carbonated soft drink market and the non-carbonated beverage market are highly
competitive. Our competitors in these markets include bottlers and distributors of nationally
advertised and marketed products, bottlers and distributors of regionally advertised and marketed
products, as well as bottlers of private label soft drinks sold in chain stores. Among our major
competitors are bottlers that distribute products from The Coca-Cola Company including Coca-Cola
Enterprises Inc., Coca-Cola Hellenic Bottling Company S.A., Coca-Cola FEMSA S.A. de C.V. and
Coca-Cola Bottling Co. Consolidated.
Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo in our U.S.
territories ranges from approximately 23% to approximately 43%. Our market share for carbonated
soft drinks sold under trademarks owned by PepsiCo for each country outside the United States in
which we do business is as follows: Canada 46%; Russia 17%; Turkey 18%; Spain
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10% and Greece 14% (including market share for our IVI brand). In addition, market share
for our territories and the territories of other Pepsi bottlers in Mexico is 16% for carbonated
soft drinks sold under trademarks owned by PepsiCo.
Our market share for liquid refreshment beverages sold under trademarks owned by PepsiCo in
our U.S. territories is approximately 26%. Our market share for liquid refreshment beverages sold
under trademarks owned by PepsiCo for each country outside the United States in which we do
business is as follows: Canada 23%; Russia 21%; Turkey 17%; Spain 7% and Greece 11%
(including market share for our IVI brand). In addition, market share for our territories and the
territories of other Pepsi bottlers in Mexico is 18% for liquid refreshment beverage sold under
trademarks owned by PepsiCo.
All market share figures are based on generally available data published by third parties.
Actions by our major competitors and others in the beverage industry, as well as the general
economic environment, could have an impact on our future market share.
We compete primarily on the basis of advertising and marketing programs to create brand
awareness, price and promotions, retail space management, customer service, consumer points of
access, new products, packaging innovations and distribution methods. We believe that brand
recognition, market place pricing, consumer value, customer service, availability and consumer and
customer goodwill are primary factors affecting our competitive position.
Governmental Regulation Applicable to PBG
Our operations and properties are subject to regulation by various federal, state and local
governmental entities and agencies in the United States as well as foreign governmental entities
and agencies in Canada, Spain, Greece, Russia, Turkey and Mexico. As a producer of food products,
we are subject to production, packaging, quality, labeling and distribution standards in each of
the countries where we have operations, including, in the United States, those of the Federal Food,
Drug and Cosmetic Act and the Public Health Security and Bioterrorism Preparedness and Response
Act. The operations of our production and distribution facilities are subject to laws and
regulations relating to the protection of our employees’ health and safety and the environment in
the countries in which we do business. In the United States, we are subject to the laws and
regulations of various governmental entities, including the Department of Labor, the Environmental
Protection Agency and the Department of Transportation, and various federal, state and local
occupational, labor and employment and environmental laws. These laws and regulations include the
Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability
Act, the Superfund Amendments and Reauthorization Act, the Federal Motor Carrier Safety Act and the
Fair Labor Standards Act.
We believe that our current legal, operational and environmental compliance programs are
adequate and that we are in substantial compliance with applicable laws and regulations of the
countries in which we do business. We do not anticipate making any material expenditures in
connection with environmental remediation and compliance. However, compliance with, or any
violation of, future laws or regulations could require material expenditures by us or otherwise
have a material adverse effect on our business, financial condition or results of operations.
Bottle and Can Legislation. Legislation has been enacted in certain U.S. states and Canadian
provinces where we operate that generally prohibits the sale of certain beverages in non-refillable
containers unless a deposit or levy is charged for the container. These include California,
Connecticut, Delaware, Hawaii, Iowa, Maine, Massachusetts, Michigan, New York, Oregon, British
Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Quebec.
Connecticut, Massachusetts, Michigan and New York have statutes that require us to pay all or
a portion of unclaimed container deposits to the state. Hawaii and California impose a levy on
beverage containers to fund a waste recovery system.
In addition to the Canadian deposit legislation described above, Ontario, Canada currently has
a regulation requiring that at least 30% of all soft drinks sold in Ontario be bottled in
refillable containers.
The European Commission issued a packaging and packing waste directive that was incorporated
into the national legislation of most member states. This has resulted in targets being set for the
recovery and recycling of household, commercial and industrial packaging waste and imposes
substantial responsibilities upon bottlers and retailers for implementation. Similar legislation
has been enacted in Turkey.
Mexico adopted legislation regulating the disposal of solid waste products. In response to
this legislation, PBG Mexico maintains agreements with local and federal Mexican governmental
authorities as well as with civil associations, which require PBG Mexico, and other participating
bottlers, to provide for collection and recycling of certain minimum amounts of plastic bottles.
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We are not aware of similar material legislation being enacted in any other areas served by
us. The recent economic downturn, however, has resulted in reduced tax revenue for many states and
has increased the need for some states to identify new revenue sources. Some states may pursue
additional revenue through new or amended bottle and can legislation. We are unable to predict,
however, whether such legislation will be enacted or what impact its enactment would have on our
business, financial condition or results of operations.
Soft Drink Excise Tax Legislation. Specific soft drink excise taxes have been in place in
certain states for several years. The states in which we operate that currently impose such a tax
are West Virginia and Arkansas and, with respect to fountain syrup only, Washington.
Value-added taxes on soft drinks vary in our territories located in Canada, Spain, Greece,
Russia, Turkey and Mexico, but are consistent with the value-added tax rate for other consumer
products. In addition, there is a special consumption tax applicable to cola products in Turkey. In
Mexico, bottled water in containers over 10.1 liters are exempt from value-added tax, and we
obtained a tax exemption for containers holding less than 10.1 liters of water. The tax exemption
currently also applies to non-carbonated soft drinks.
We are not aware of any material soft drink taxes that have been enacted in any other market
served by us. The recent economic downturn, however, has resulted in reduced tax revenue for many
states and has increased the need for some states to identify new revenue sources. Some states may
pursue additional revenue through new or amended soft drink or similar excise tax legislation. We
are unable to predict, however, whether such legislation will be enacted or what impact its
enactment would have on our business, financial condition or results of operations.
New York State Governor, David Paterson, has included a recommendation in his 2011 proposed
budget that essentially would place a one cent per ounce tax on sweetened beverages sold in that
state. Whether such tax will be enacted is unknown at this point. A similar proposal was included
in the 2010 proposed budget, but was withdrawn before legislative consideration due to strong
public and political opposition.
Trade Regulation. As a manufacturer, seller and distributor of bottled and canned soft drink
products of PepsiCo and other soft drink manufacturers in exclusive territories in the United
States and internationally, we are subject to antitrust and competition laws. Under the Soft Drink
Interbrand Competition Act, soft drink bottlers operating in the United States, such as us, may
have an exclusive right to manufacture, distribute and sell a soft drink product in a geographic
territory if the soft drink product is in substantial and effective competition with other products
of the same class in the same market or markets. We believe that there is such substantial and
effective competition in each of the exclusive geographic territories in which we operate.
School Sales Legislation; Industry Guidelines. In 2004, the U.S. Congress passed the Child
Nutrition Act, which required school districts to implement a school wellness policy by July 2006.
In May 2006, members of the American Beverage Association, the Alliance for a Healthier Generation,
the American Heart Association and The William J. Clinton Foundation entered into a memorandum of
understanding that sets forth standards for what beverages can be sold in elementary, middle and
high schools in the United States (the “ABA Policy”). Also, the beverage associations in the
European Union and Canada have recently issued guidelines relating to the sale of beverages in
schools. We intend to comply fully with the ABA Policy and these guidelines. In addition,
legislation has been proposed in Mexico that would restrict the sale of certain high-calorie
products, including soft drinks, in schools and that would require these products to include a
label that warns consumers that consumption abuse may lead to obesity.
California Carcinogen and Reproductive Toxin Legislation. A California law requires that any
person who exposes another to a carcinogen or a reproductive toxin must provide a warning to that
effect. Because the law does not define quantitative thresholds below which a warning is not
required, virtually all manufacturers of food products are confronted with the possibility of
having to provide warnings due to the presence of trace amounts of defined substances. Regulations
implementing the law exempt manufacturers from providing the required warning if it can be
demonstrated that the defined substances occur naturally in the product or are present in municipal
water used to manufacture the product. We have assessed the impact of the law and its implementing
regulations on our beverage products and have concluded that none of our products currently
requires a warning under the law. We cannot predict whether or to what extent food industry efforts
to minimize the law’s impact on food products will succeed. We also cannot predict what impact,
either in terms of direct costs or diminished sales, imposition of the law may have.
Mexican Water Regulation. In Mexico, we pump water from our own wells and we purchase water
directly from municipal water companies pursuant to concessions obtained from the Mexican
government on a plant-by-plant basis. The concessions are generally for ten-year terms and can
generally be renewed by us prior to expiration with minimal cost and effort. Our concessions may be
terminated if, among other things, (a) we use materially more water than permitted by the
concession, (b) we use materially less water than required by the concession, (c) we fail to pay
for the rights for water usage or (d) we carry out, without governmental authorization, any
material construction on or improvement to, our wells. Our concessions generally satisfy our
current water requirements and we believe that we are generally in compliance in all material
respects with the terms of our existing concessions.
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Employees
As of December 26, 2009, we employed approximately 64,900 workers, of whom approximately
32,500 were employed in the United States. Approximately 8,500 of our workers in the United States
are union members and approximately 15,100 of our workers outside the United States are union
members. We consider relations with our employees to be good and have not experienced significant
interruptions of operations due to labor disagreements.
Available Information
We maintain a website at www.pbg.com. We make available, free of charge, through the Investor
Relations — Financial Information — SEC Filings section of our website, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such reports are electronically filed
with, or furnished to, the Securities and Exchange Commission (the “SEC”).
Additionally, we have made available, free of charge, the following governance materials on
our website at www.pbg.com under Investor Relations — Company Information — Corporate Governance:
Certificate of Incorporation, Bylaws, Corporate Governance Principles and Practices, Worldwide Code
of Conduct (including any amendment thereto), Director Independence Policy, the Audit and
Affiliated Transactions Committee Charter, the Compensation and Management Development Committee
Charter, the Nominating and Corporate Governance Committee Charter, the Disclosure Committee
Charter and the Policy and Procedures Governing Related-Person Transactions. These governance
materials are available in print, free of charge, to any PBG shareholder upon request.
Financial Information on Industry Segments and Geographic Areas
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all
of our segments derive revenue from these products. PBG has three reportable segments: U.S. &
Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. Operationally, the
Company is organized along geographic lines with specific regional management teams having
responsibility for the financial results in each reportable segment.
For additional information, see Note 13 in the Notes to Consolidated Financial Statements
included in Item 7 below.
Our business and operations entail a variety of risks and uncertainties, including those
described below.
We may not be able to respond successfully to consumer trends related to carbonated and
non-carbonated beverages.
Consumer trends with respect to the products we sell are subject to change. Consumers are
seeking increased variety in their beverages, and there is a growing interest among the public
regarding the ingredients in our products, the attributes of those ingredients and health and
wellness issues generally. This interest has resulted in a decline in consumer demand for
carbonated soft drinks and an increase in consumer demand for products associated with health and
wellness, such as water, enhanced water, teas and certain other non-carbonated beverages. Consumer
preferences may change due to a variety of other factors, including the aging of the general
population, changes in social trends, the real or perceived impact the manufacturing of our
products has on the environment, changes in consumer demographics, changes in travel, vacation or
leisure activity patterns, a downturn in economic conditions or taxes specifically targeting the
consumption of our products. Any of these changes may reduce consumers’ demand for our products.
For example, the recent downturn in economic conditions has adversely impacted sales of certain of
our higher margin products, including our products sold for immediate consumption in restaurants.
Because we rely mainly on PepsiCo to provide us with the products we sell, if PepsiCo fails to
develop innovative products and packaging that respond to consumer trends, we could be put at a
competitive disadvantage in the marketplace and our business and financial results could be
adversely affected. In addition, PepsiCo is under no obligation to provide us distribution rights
to all of its products in all of the channels in which we operate. If we are unable to enter into
agreements with PepsiCo to distribute innovative products in all of these channels or otherwise
gain broad access to products that respond to consumer trends, we could be put at a competitive
disadvantage in the marketplace and our business and financial results could be adversely affected.
We may not be able to respond successfully to the demands of our largest customers.
Our retail customers are consolidating, leaving fewer customers with greater overall
purchasing power and, consequently, greater influence over our pricing, promotions and distribution
methods. Because we do not operate in all markets in which these customers operate, we must rely on
PepsiCo and other Pepsi bottlers to service such customers outside of our markets. The inability of
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PepsiCo or Pepsi bottlers as a whole to meet the product, packaging and service demands of our
largest customers could lead to a loss or decrease in business from such customers and have a
material adverse effect on our business and financial results.
Our business requires a significant supply of raw materials and energy, the limited availability or
increased costs of which could adversely affect our business and financial results.
The production and distribution of our beverage products is highly dependent on certain
ingredients, packaging materials, other raw materials, and energy. To produce our products, we
require significant amounts of ingredients, such as beverage concentrate and high fructose corn
syrup, as well as access to significant amounts of water. We also require significant amounts of
packaging materials, such as aluminum and plastic bottle components, such as resin (a
petroleum-based product). In addition, we use a significant amount of electricity, natural gas,
motor fuel and other energy sources to operate our fleet of trucks and our bottling plants.
If the suppliers of our ingredients, packaging materials, other raw materials or energy are
impacted by an increased demand for their products, business downturn, weather conditions
(including those related to climate change), natural disasters, governmental regulation, terrorism,
strikes or other events, and we are not able to effectively obtain the products from another
supplier, we could incur an interruption in the supply of such products or increased costs of such
products. Any sustained interruption in the supply of our ingredients, packaging materials, other
raw materials or energy, or increased costs thereof, could have a material adverse effect on our
business and financial results.
The prices of some of our ingredients, packaging materials, other raw materials and energy,
including aluminum, resin, high fructose corn syrup and motor fuel, have recently experienced
unprecedented volatility, which in turn can unpredictably and substantially alter our costs. We
have implemented a hedging strategy to better predict our costs of some of these products. In a
volatile market, however, such strategy includes a risk that, during a particular period of time,
market prices fall below our hedged price and we pay higher than market prices for certain
products. As a result, under certain circumstances, our hedging strategy may increase our overall
costs.
If there is a significant or sustained increase in the costs of our ingredients, packaging
materials, other raw materials or energy, and we are unable to pass effectively the increased costs
on to our customers in the form of higher prices, there could be a material adverse effect on our
business and financial results.
Changes in the legal and regulatory environment, including those related to climate change, could
increase our costs or liabilities or impact the sale of our products.
Our operations and properties are subject to regulation by various federal, state and local
governmental entities and agencies as well as foreign governmental entities. Such regulations
relate to, among other things, food and drug laws, competition laws, labor laws, taxation
requirements (including taxes specifically targeting the consumption of our products), bottle and
can legislation (see above under “Governmental Regulation Applicable to PBG”), accounting standards
and environmental laws.
There is also growing support for the conclusion that emissions of greenhouse gases are linked
to global climate change, which may result in more regional, federal and/or global legal and
regulatory requirements to reduce or mitigate the effects of greenhouse gases. Until any such
requirements come into effect, it is difficult to predict their impact on our business or financial
results, including any impact on our supply chain costs. In the interim, we are working to improve
our systems to record baseline data and monitor our greenhouse gas emissions and, during the
process of developing our business strategies, we consider the impact our plans may have on the
environment.
We cannot assure you that we have been or will at all times be in compliance with all
regulatory requirements or that we will not incur material costs or liabilities in connection with
existing or new regulatory requirements, including those related to climate change.
Our pending merger with PepsiCo may cause disruption in our business and, if the pending merger
does not occur, we will have incurred significant expenses and our stock price may decline.
The announcement of our pending merger with PepsiCo, whether or not consummated, may result in
a loss of key personnel and may disrupt our sales and operations, which may have an impact on our
financial performance. The merger agreement generally requires us to operate our business in the
ordinary course pending consummation of the merger, but includes certain contractual restrictions
on the conduct of our business that may affect our ability to execute on our business strategies
and attain our financial goals. Additionally, the announcement of the pending merger, whether or
not consummated, may impact our relationships with third parties.
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The completion of the pending merger is subject to certain conditions, including, among others
(i) adoption of the merger agreement by our shareholders, (ii) the absence of certain legal
impediments to the consummation of the pending merger, (iii) the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the “HSR Act”), and obtaining antitrust approvals in certain other jurisdictions, (iv)
subject to certain materiality exceptions, the accuracy of the representations and warranties made
by us and PepsiCo, respectively, and compliance by us and PepsiCo with our and their respective
obligations under the merger agreement, (v) declaration of the effectiveness by the SEC of the
Registration Statement on Form S-4/A filed by PepsiCo on January 12, 2010, and (vi) the
non-occurrence of a Material Adverse Effect (as defined in the merger agreement) on PBG or PepsiCo.
As of February 22, 2010, some of these closing conditions, such as adoption of the merger agreement
by our shareholders, obtaining antitrust approval in jurisdictions outside the United States, and
declaration of the effectiveness by the SEC of the Form S-4/A filed by PepsiCo, have been
satisfied. Other closing conditions, however, remained unsatisfied as of February 22, 2010,
including, but not limited to, the expiration or termination of the applicable waiting period under
the HSR Act.
If the merger agreement is terminated under certain circumstances, then we would be required
to pay PepsiCo a termination fee of approximately $165 million. On November 16, 2009, in
connection with the settlement of certain stockholder litigation, PepsiCo agreed, among other
things, to reduce the termination fee to $115 million. Upon approval of the merger agreement by
our shareholders on February 17, 2010, the circumstances under which we would be required to pay
PepsiCo a termination fee ceased to exist.
We cannot predict whether all of the closing conditions for the pending merger set forth in
the merger agreement will be satisfied. As a result, we cannot assure you that the pending merger
will be completed. If the closing conditions for the pending merger set forth in the merger
agreement are not satisfied or waived pursuant to the merger agreement, or if the transaction is
not completed for any other reason, the market price of our common stock may decline. In addition,
if the pending merger does not occur, we will nonetheless remain liable for significant expenses
that we have incurred related to the transaction.
Additionally, we and members of our Board of Directors have been named in a number of lawsuits
relating to the pending merger. The parties to these lawsuits entered into a settlement
stipulation, which is subject to customary conditions, as more fully described in Note 18
“Contingencies” to our Consolidated Financial Statements.
These matters, alone or in combination, could have a material adverse effect on our business
and financial results.
PepsiCo’s equity ownership of PBG could affect matters concerning us.
As of January 22, 2010, PepsiCo owned approximately 38.6% of the combined voting power of our
voting stock (with the balance owned by the public). PepsiCo will be able to significantly affect
the outcome of PBG’s shareholder votes, thereby affecting matters concerning us.
Because we depend upon PepsiCo to provide us with concentrate, certain funding and various
services, changes in our relationship with PepsiCo could adversely affect our business and
financial results.
We conduct our business primarily under beverage agreements with PepsiCo. If our beverage
agreements with PepsiCo are terminated for any reason, it would have a material adverse effect on
our business and financial results. These agreements provide that we must purchase all of the
concentrate for such beverages at prices and on other terms which are set by PepsiCo in its sole
discretion. Any significant concentrate price increases could materially affect our business and
financial results.
PepsiCo has also traditionally provided bottler incentives and funding to its bottling
operations. PepsiCo does not have to maintain or continue these incentives or funding. Termination
or decreases in bottler incentives or funding levels could materially affect our business and
financial results.
Under our shared services agreement, we obtain various services from PepsiCo, including
procurement of raw materials and certain administrative services. If any of the services under the
shared services agreement were terminated, we would have to obtain such services on our own. This
could result in a disruption of such services, and we might not be able to obtain these services on
terms, including cost, that are as favorable as those we receive through PepsiCo.
We may have potential conflicts of interest with PepsiCo, which could result in PepsiCo’s
objectives being favored over our objectives.
Our past and ongoing relationship with PepsiCo could give rise to conflicts of interests. In
addition, two members of our Board of Directors are executive officers of PepsiCo, and one of the
three Managing Directors of Bottling LLC, our principal operating subsidiary, is an officer of
PepsiCo, a situation which may create conflicts of interest.
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These potential conflicts include balancing the objectives of increasing sales volume of
PepsiCo beverages and maintaining or increasing our profitability. Other possible conflicts could
relate to the nature, quality and pricing of services or products provided to us by PepsiCo or by
us to PepsiCo.
Conflicts could also arise in the context of our potential acquisition of bottling territories
and/or assets from PepsiCo or other independent Pepsi bottlers. Under our Master Bottling Agreement
with PepsiCo, we must obtain PepsiCo’s approval to acquire any independent Pepsi bottler. PepsiCo
has agreed not to withhold approval for any acquisition within agreed-upon U.S. territories if we
have successfully negotiated the acquisition and, in PepsiCo’s reasonable judgment, satisfactorily
performed our obligations under the Master Bottling Agreement. We have agreed not to attempt to
acquire any independent Pepsi bottler outside of those agreed-upon territories without PepsiCo’s
prior written approval.
In addition, we are subject to certain contractual restrictions on the conduct of our business
pursuant to the terms of the merger agreement between us and PepsiCo, as more fully described in
the risk factor above entitled “Our pending merger with PepsiCo may cause disruption in our
business and, if the pending merger does not occur, we will have incurred significant expenses and
our stock price may decline.”
Our acquisition strategy may be limited by our ability to successfully integrate acquired
businesses into ours or our failure to realize our expected return on acquired businesses.
We intend to continue to pursue acquisitions of bottling assets and territories from PepsiCo’s
independent bottlers. The success of our acquisition strategy may be limited because of unforeseen
costs and complexities. We may not be able to acquire, integrate successfully or manage profitably
additional businesses without substantial costs, delays or other difficulties. Unforeseen costs and
complexities may also prevent us from realizing our expected rate of return on an acquired
business. Any of the foregoing could have a material adverse effect on our business and financial
results.
We may not be able to compete successfully within the highly competitive carbonated and
non-carbonated beverage markets.
The carbonated and non-carbonated beverage markets are highly competitive. Competitive
pressures in our markets could cause us to reduce prices or forego price increases required to
off-set increased costs of raw materials and fuel, increase capital and other expenditures, or lose
market share, any of which could have a material adverse effect on our business and financial
results.
If we are unable to fund our substantial capital requirements, it could cause us to reduce our
planned capital expenditures and could result in a material adverse effect on our business and
financial results.
We require substantial capital expenditures to implement our business plans. If we do not have
sufficient funds or if we are unable to obtain financing in the amounts desired or on acceptable
terms, we may have to reduce our planned capital expenditures, which could have a material adverse
effect on our business and financial results.
The level of our indebtedness could adversely affect our financial health.
The level of our indebtedness requires us to dedicate a substantial portion of our cash flow
from operations to payments on our debt. This could limit our flexibility in planning for, or
reacting to, changes in our business and place us at a competitive disadvantage compared to
competitors that have less debt. Our indebtedness also exposes us to interest rate fluctuations,
because the interest on some of our indebtedness is at variable rates, and makes us vulnerable to
general adverse economic and industry conditions. All of the above could make it more difficult for
us, or make us unable to satisfy our obligations with respect to all or a portion of such
indebtedness and could limit our ability to obtain additional financing for future working capital
expenditures, strategic acquisitions and other general corporate requirements.
Deterioration of economic conditions could harm our business.
Our business may be adversely affected by changes in national or global economic conditions,
including inflation, interest rates, availability of capital markets, consumer spending rates,
energy availability and costs (including fuel surcharges) and the effects of governmental
initiatives to manage economic conditions. Any such changes could adversely affect the demand for
our products or increase our costs, thereby negatively affecting our financial results.
The recent deterioration of economic conditions, could, among other things, make it more
difficult or costly for us to obtain financing for our operations or investments, adversely impact
the credit worthiness of our customers or suppliers, and decrease the value of our investments in
equity and debt securities, including our marketable debt securities and pension and other
postretirement plan assets.
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Our foreign operations are subject to social, political and economic risks and may be adversely
affected by foreign currency fluctuations.
In the fiscal year ended December 26, 2009, approximately 30% of our net revenues were
generated in territories outside the United States. Social, economic and political developments in
our international markets (including Russia, Mexico, Canada, Spain, Turkey and Greece) may
adversely affect our business and financial results. These developments may lead to new product
pricing, tax or other policies and monetary fluctuations that may adversely impact our business and
financial results. The overall risks to our international businesses also include changes in
foreign governmental policies. In addition, we are expanding our investment and sales and marketing
efforts in certain emerging markets, such as Russia. Expanding our business into emerging markets
may present additional risks beyond those associated with more developed international markets. For
example, Russia has been a significant source of our profit growth, but is now experiencing an
economic downturn, which if sustained may have a material adverse impact on our business and
financial results. Additionally, our cost of goods, our results of operations and the value of our
foreign assets are affected by fluctuations in foreign currency exchange rates. For example, the
recent weakening of foreign currencies negatively impacted our earnings in 2009 compared with the
prior year.
If we are unable to maintain brand image and product quality, or if we encounter other product
issues such as product recalls, our business may suffer.
Maintaining a good reputation globally is critical to our success. If we fail to maintain high
standards for product quality, or if we fail to maintain high ethical, social and environmental
standards for all of our operations and activities, our reputation could be jeopardized. In
addition, we may be liable if the consumption of any of our products causes injury or illness, and
we may be required to recall products if they become contaminated or are damaged or mislabeled. A
significant product liability or other product-related legal judgment against us or a widespread
recall of our products could have a material adverse effect on our business and financial results.
Our success depends on key members of our management, the loss of whom could disrupt our business
operations.
Our success depends largely on the efforts and abilities of key management employees. Key
management employees are not parties to employment agreements with us. The loss of the services of
key personnel could have a material adverse effect on our business and financial results.
If we are unable to renew collective bargaining agreements on satisfactory terms, or if we
experience strikes, work stoppages or labor unrest, our business may suffer.
Approximately 30% of our U.S. and Canadian employees are covered by collective bargaining
agreements. These agreements generally expire at various dates over the next five years. Our
inability to successfully renegotiate these agreements could cause work stoppages and
interruptions, which may adversely impact our operating results. The terms and conditions of
existing or renegotiated agreements could also increase our costs or otherwise affect our ability
to increase our operational efficiency.
Benefits cost increases could reduce our profitability or cash flow.
Our profitability and cash flow is substantially affected by the costs of pension,
postretirement medical and employee medical and other benefits. Recently, these costs have
increased significantly due to factors such as fluctuations in investment returns on pension
assets, changes in discount rates used to calculate pension and related liabilities, and increases
in health care costs. Although we actively seek to control increases, there can be no assurance
that we will succeed in limiting future cost increases, and continued upward pressure in these
costs could have a material adverse affect on our business and financial performance.
Our failure to effectively manage our information technology infrastructure could disrupt our
operations and negatively impact our business.
We rely on information technology systems to process, transmit, store and protect electronic
information. Additionally, a significant portion of the communications between our personnel,
customers, and suppliers depends on information technology. If we do not effectively manage our
information technology infrastructure, we could be subject to transaction errors, processing
inefficiencies, the loss of customers, business disruptions and data security breaches.
Adverse weather conditions could reduce the demand for our products.
Demand for our products is influenced to some extent by the weather conditions in the markets
in which we operate. Weather conditions in these markets, such as unseasonably cool temperatures,
could have a material adverse effect on our sales volume and financial results.
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Catastrophic events in the markets in which we operate could have a material adverse effect on our
financial condition.
Natural disasters, terrorism, pandemic, strikes or other catastrophic events could impair our
ability to manufacture or sell our products. Failure to take adequate steps to mitigate the
likelihood or potential impact of such events, or to manage such events effectively if they occur,
could adversely affect our sales volume, cost of raw materials, earnings and financial results.
None.
Our corporate headquarters is located in leased property in Somers, New York. In addition, we
have a total of 590 manufacturing and distribution facilities, as follows:
We also own or lease and operate approximately 37,100 vehicles, including delivery trucks,
delivery and transport tractors and trailers and other trucks and vans used in the sale and
distribution of our beverage products. We also own more than two million coolers, soft drink
dispensing fountains and vending machines.
With a few exceptions, leases of plants in the U.S. & Canada are on a long-term basis,
expiring at various times, with options to renew for additional periods. Our leased facilities in
Europe and Mexico are generally leased for varying and usually shorter periods, with or without
renewal options. We believe that our properties are in good operating condition and are adequate to
serve our current operational needs.
From time to time we are a party to various litigation proceedings arising in the ordinary
course of our business, none of which, in the opinion of management, is likely to have a material
adverse effect on our financial condition or results of operations.
For further information about our legal proceedings see Note 18 in the Notes to Consolidated
Financial Statements, which discussion is incorporated herein by reference.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol “PBG.” Our Class B
common stock is not publicly traded. On February 12, 2010, the last sales price for our common
stock on the New York Stock Exchange was $37.82 per share. The
following table sets forth the intra-day high
and low sales prices per share of our common stock during each of our fiscal quarters in 2009 and
2008.
Shareholders
As
of February 5, 2010, there were approximately 47,893 registered and beneficial
holders of our common stock. PepsiCo is the holder of all of our outstanding shares of Class B
common stock.
Dividend Policy
Quarterly cash dividends are usually declared in late January or early February, March, July
and October and paid at the end of March, June, and September and at the beginning of January. The
dividend record date for the first quarter of 2010 is March 5, 2010.
We declared the following dividends on our common stock during fiscal years 2009 and 2008:
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Performance Graph
The following performance graph compares the cumulative total return of our common stock to
the Standard & Poor’s 500 Stock Index and to an index of peer companies selected by us (the
“Bottling Group Index”). The Bottling Group Index consists of Coca-Cola Hellenic Bottling Company
S.A., Coca-Cola Bottling Co. Consolidated, Coca-Cola Enterprises Inc., Coca-Cola FEMSA ADRs, and
PepsiAmericas, Inc. The graph assumes the return on $100 invested on December 25, 2004 until
December 26, 2009. The returns of each member of the Bottling Group Index are weighted according to
each member’s stock market capitalization as of the beginning of the period measured and includes
the subsequent reinvestment of dividends.
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PBG Purchases of Equity Securities
We did not repurchase shares in 2009. Since the inception of our share repurchase program in
October 1999 and through the end of fiscal year 2009, approximately 146 million shares of PBG
common stock have been repurchased. Our share repurchases for the fourth quarter of 2009 are as
follows:
Unless terminated by resolution of our Board, each share repurchase program expires when we
have repurchased all shares authorized for repurchase thereunder.
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SELECTED FINANCIAL AND OPERATING DATA
in millions, except per share data
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MANAGEMENT’S
FINANCIAL REVIEW
Tabular dollars in millions, except per share data
OUR BUSINESS
The Pepsi Bottling Group, Inc. is the world’s largest manufacturer, seller and distributor of
Pepsi-Cola beverages. When used in these Consolidated Financial Statements, “PBG,” “we,” “our,”
“us” and the “Company” each refers to The Pepsi Bottling Group, Inc. and, where appropriate, to
Bottling Group, LLC (“Bottling LLC”), our principal operating subsidiary.
We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or
a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. PBG manages and reports
operating results through three reportable segments: U.S. & Canada, Europe (which includes Spain,
Russia, Greece and Turkey) and Mexico. As shown in the graph below, the U.S. & Canada segment is
the dominant driver of our results, generating 68 percent of our volume, 78 percent of our net
revenues and 84 percent of our operating income.
The majority of our volume is derived from brands licensed from PepsiCo, Inc. (“PepsiCo”) or
PepsiCo joint ventures. These brands are some of the most recognized in the world and consist of
carbonated soft drinks (“CSDs”) and non-carbonated beverages. Our CSDs include brands such as
Pepsi-Cola, Diet Pepsi, Diet Pepsi Max, Mountain Dew and Sierra Mist. Our non-carbonated
beverages portfolio includes brands with Starbucks Frapuccino in the ready-to-drink coffee
category; Amp Energy and SoBe Adrenaline Rush in the energy drink category; SoBe and Tropicana in
the juice and juice drinks category; Aquafina in the water category; and Lipton Iced Tea in the tea
category. We continue to strengthen our powerful portfolio highlighted by our focus on the
hydration category with SoBe Lifewater, Propel fitness water and G2 in the United States. In some
of our territories we have the right to manufacture, sell and distribute soft drink products of
companies other than PepsiCo, including Dr Pepper, Crush, Squirt and Rockstar. We also have the
right in some of our territories to manufacture, sell and distribute beverages under brands that we
own, including Electropura, e-pura and Garci Crespo. See Part I, Item 1 of this report for a
listing of our principal products by segment.
We sell our products through cold-drink and take-home channels. Our cold-drink channel
consists of chilled products sold in the retail and foodservice channels. We earn the highest
profit margins on a per-case basis in the cold-drink channel. Our take-home channel consists of
unchilled products that are sold in the retail, mass merchandiser and club store channels for
at-home consumption.
Our products are brought to market primarily through direct store delivery (“DSD”) or
third-party distribution, including foodservice and vending distribution networks. The hallmarks
of the Company’s DSD system are customer service, speed to market, flexibility and reach. These
are all critical factors in bringing new products to market, adding accounts to our existing base
and meeting increasingly diverse volume demands.
Our customers range from large format accounts, including large chain foodstores,
supercenters, mass merchandisers, chain drug stores, club stores and military bases, to small
independently owned shops and foodservice businesses. Changes in consumer shopping trends and
current economic trends are shifting more of our volume to channels such as supercenters, club and
dollar stores. Retail consolidation continues to increase the strategic significance of our
large-volume customers. No individual customer accounted for 10 percent or more of
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our total revenue in 2009, except for sales to Walmart Stores, Inc. and its affiliates which were
11 percent of our revenue in 2009, primarily as a result of transactions in the U.S. & Canada
segment. Sales to our top five retail customers represented approximately 21 percent of our net
revenues in 2009.
PBG’s focus is on superior sales execution, customer service, merchandising and operating
excellence. Our goal is to help our customers grow their beverage business by making our portfolio
of brands readily available to consumers at every shopping occasion, using proven methods to grow
not only PepsiCo brand sales, but the overall beverage category. Our objective is to ensure we
have the right product in the right package to satisfy the ever changing needs of today’s
consumers.
We measure our sales in terms of physical cases sold to our customers. Each package, as sold
to our customers, regardless of configuration or number of units within a package, represents one
physical case. Our net price and gross margin on a per-case basis are impacted by how much we
charge for the product, the mix of brands and packages we sell, and the channels through which the
product is sold. For example, we realize a higher net revenue and gross margin per case on a
20-ounce chilled bottle sold in a convenience store than on a 2-liter unchilled bottle sold in a
grocery store.
Our financial success is dependent on a number of factors, including: our strong partnership
with PepsiCo, the customer relationships we cultivate, the pricing we achieve in the marketplace,
our market execution, our ability to meet changing consumer preferences and the efficiencies we
achieve in manufacturing and distributing our products. Key indicators of our financial success
are: the number of physical cases we sell, the net price and gross margin we achieve on a per-case
basis, cash and capital management and our overall cost productivity which reflects how well we
manage our raw material, manufacturing, distribution and other overhead costs.
The discussion and analysis throughout Management’s Financial Review should be read in
conjunction with the Consolidated Financial Statements and the related accompanying notes. The
preparation of our Consolidated Financial Statements and the related accompanying notes in
conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires us to make
estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements
and the related accompanying notes, including various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of business. We apply our
best judgment, our knowledge of existing facts and circumstances and actions that we may undertake
in the future, in determining the estimates that affect our Consolidated Financial Statements. We
evaluate our estimates on an on-going basis using our historical experience as well as other
factors we believe appropriate under the circumstances, such as current economic conditions, and
adjust or revise our estimates as circumstances change. As future events and their effect cannot
be determined with precision, actual results may differ from these estimates.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are discussed in Note 2 in the Notes to Consolidated
Financial Statements. Management believes the following policies, which require the use of
estimates, assumptions and the application of judgment, to be the most critical to the portrayal of
PBG’s results of operations and financial condition. We applied these accounting policies and
estimation methods consistently in all material respects and have discussed the selection of these
policies and related disclosures with the Audit and Affiliated Transactions Committee of our Board
of Directors.
OTHER INTANGIBLE ASSETS, NET AND GOODWILL
Our intangible assets consist primarily of franchise rights, distribution rights, licensing
rights, brands and goodwill and principally arise from the allocation of the purchase price of
businesses acquired. These intangible assets, other than goodwill, are classified as either
finite-lived intangibles or indefinite-lived intangibles.
The classification of intangible assets and the determination of the appropriate useful life
require substantial judgment. The determination of the expected life depends upon the use and
underlying characteristics of the intangible asset. In our evaluation of the expected life of these
intangible assets, we consider the nature and terms of the underlying agreements; our intent and
ability to use the specific asset; the age and market position of the products within the
territories in which we are entitled to sell; the historical and projected growth of those
products; and costs, if any, to renew the related agreement.
Intangible assets that are determined to have a finite life are amortized over their expected
useful life, which generally ranges from five to twenty years. For intangible assets with finite
lives, evaluations for impairment are performed only if facts and circumstances indicate that the
carrying value may not be recoverable.
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Intangible assets with indefinite lives and goodwill are not amortized; however, they are
evaluated for impairment at least annually or more frequently if facts and circumstances indicate
that the assets may be impaired.
We evaluate intangible assets with indefinite useful lives for impairment by comparing the
fair values of the assets with their carrying values. The fair value of our franchise rights and
distribution rights is measured using a multi-period excess earnings method that is based upon
estimated discounted future cash flows. The fair value of our brands and licensing rights is
measured using a multi-period royalty savings method, which reflects the savings realized by owning
the brand or licensing right and, therefore, not requiring payment of third party royalty fees.
We evaluate goodwill for impairment at the reporting unit level, which we determined to be the
countries in which we operate. We evaluate goodwill for impairment by comparing the fair value of
the reporting unit, as determined by its discounted cash flows, with its carrying value. If the
carrying value of a reporting unit exceeds its fair value, we compare the implied fair value of the
reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss.
Considerable management judgment is necessary to estimate discounted future cash flows in
conducting an impairment analysis for goodwill and other intangible assets. The cash flows may be
impacted by future actions taken by us and our competitors and the volatility of macroeconomic
conditions in the markets in which we conduct business. Assumptions used in our impairment
analysis, such as forecasted growth rates, cost of capital and additional risk premiums used in the
valuations, are based on the best available market information and are consistent with our
long-term strategic plans. An inability to achieve strategic business plan targets in a reporting
unit, a change in our discount rate or other assumptions could have a significant impact on the
fair value of our reporting units and other intangible assets, which could then result in a
material non-cash impairment charge to our results of operations. The weakening of global
macroeconomic conditions has had a negative impact on our business results. If these conditions
continue, the fair value of our intangible assets could be adversely impacted.
In the third quarter of 2009, the Company completed its impairment test of goodwill and
indefinite lived assets and recorded no impairment charge. During 2008, the Company recorded $412
million in non-cash impairment charges relating primarily to distribution rights and brands for the
Electropura water business in Mexico. The impairment charge relating to these intangible assets
was based upon the findings of an extensive strategic review and the finalization of restructuring
plans for our Mexican business.
For further information about our goodwill and other intangible assets see Note 6 Other
Intangible Assets, net and Goodwill in the Notes to Consolidated Financial Statements.
PENSION AND POSTRETIREMENT MEDICAL BENEFIT PLANS
We sponsor pension and other postretirement medical benefit plans in various forms in the
United States and similar pension plans in our international locations, covering employees who meet
specified eligibility requirements. The assets, liabilities and expenses associated with our
international plans were not significant to our worldwide results of operations or financial
position, and accordingly, assumptions, expenses, sensitivity analyses and other data regarding
these plans are not included in any of the discussions provided below.
In the U.S., the non-contributory defined benefit pension plans provide benefits to certain
full-time salaried and hourly employees. Benefits are generally based on years of service and
compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired
salaried and non-union hourly employees are not eligible to participate in these plans.
Additionally, effective April 1, 2009, benefits from these plans are no longer accrued for certain
salaried and non-union employees that did not meet specified age and service requirements. The
impact of these plan changes will significantly reduce the Company’s future long-term pension
obligation, pension expense and cash contributions to the plans. Employees not eligible to
participate in these plans or employees whose benefits have been frozen are receiving additional
retirement contributions under the Company’s defined contribution plans.
Substantially all of our U.S. employees meeting age and service requirements are eligible to
participate in our postretirement medical benefit plans.
Assumptions
During 2008, the Company changed the measurement date for plan assets and benefit obligations
from September 30 to its fiscal year-end as required by the new pension accounting rules.
The determination of pension and postretirement medical benefit plan obligations and related
expenses requires the use of assumptions to estimate the amount of benefits that employees earn
while working, as well as the present value of those benefit obligations. Significant assumptions
include discount rate; expected return on plan assets;
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certain employee-related factors such as retirement age, mortality, and turnover; rate of
salary increases for plans where benefits are based on earnings; and for retiree medical plans,
health care cost trend rates.
On an annual basis we evaluate these assumptions, which are based upon historical experience
of the plans and management’s best judgment regarding future expectations. These assumptions may
differ materially from actual results due to changing market and economic conditions. A change in
the assumptions or economic events outside our control could have a material impact on the
measurement of our pension and postretirement medical benefit expenses and obligations as well as
related funding requirements.
The discount rates used in calculating the present value of our pension and postretirement
medical benefit plan obligations are developed based on a yield curve that is comprised of
high-quality, non-callable corporate bonds. These bonds are rated Aa or better by Moody’s; have a
principal amount of at least $250 million; are denominated in U.S. dollars; and have maturity dates
ranging from six months to thirty years, which matches the timing of our expected benefit payments.
The expected rate of return on plan assets for a given fiscal year is based upon actual
historical returns and the long-term outlook on asset classes in the pension plans’ investment
portfolio. The current target asset allocation for the U.S. pension plans is 65 percent equity
investments, of which approximately half is to be invested in domestic equities and half is to be
invested in foreign equities. The remaining 35 percent is to be invested primarily in long-term
corporate bonds. Based on our asset allocation, historical returns and estimated future outlook of
the pension plans’ portfolio, we estimate the long-term rate of return on plan assets assumption to
be 8.0 percent in 2010.
Differences between the assumed rate of return and actual rate of return on plan assets are
deferred in accumulated other comprehensive loss (“AOCL”) in equity and amortized to earnings utilizing the
market-related value method. Under this method, differences between the assumed rate of return and
actual rate of return from any one year will be recognized over a five-year period to determine the
market-related value.
Differences between assumed and actual returns on plan assets and other gains and losses
resulting from changes in actuarial assumptions are determined at each measurement date and
deferred in AOCL in equity. To the extent the amount of all
unrecognized gains and losses exceeds 10 percent of the larger of the benefit obligation or the
market-related value of plan assets, such amount is amortized to earnings over the average
remaining service period of active participants.
The
cost or benefit from benefit plan changes is also deferred in AOCL in equity and amortized to earnings on a straight-line basis over the average
remaining service period of the employees expected to receive benefits.
Net unrecognized losses and unamortized prior service costs relating to the pension and
postretirement plans in the United States totaled $763 million and $969 million at December 26,
2009 and December 27, 2008, respectively.
The following tables provide the weighted-average assumptions for our 2010 and 2009 pension
and postretirement medical plans’ expense:
During 2009, our ongoing defined benefit pension and postretirement medical plan expenses
totaled $98 million. In 2010, these expenses are expected to decrease by approximately $15 million
to $83 million as a result of the following factors:
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Sensitivity Analysis
It is unlikely that in any given year the actual rate of return will be the same as the
assumed long-term rate of return. The following table provides a summary for the last three years
of actual rates of return versus expected long-term rates of return for our pension plan assets:
Sensitivity of changes in key assumptions for our pension and postretirement plans’ expense in
2010 are as follows:
Funding
We make contributions to the pension trust to provide plan benefits for certain pension plans.
Generally, we do not fund the pension plans if current contributions would not be tax deductible.
Effective in 2008, under the Pension Protection Act, funding requirements are more stringent and
require companies to make minimum contributions equal to their service cost plus amortization of
their deficit over a seven year period. Failure to achieve appropriate funding levels will result
in restrictions on employee benefits. Failure to contribute the minimum required contributions
will result in excise taxes for the Company and an obligation to report to the regulatory agencies.
During 2009, the Company contributed $229 million to its funded pension trusts. The Company
expects to contribute an additional $132 million to its funded pension trusts in 2010. These
amounts exclude $30 million of contributions and $26 million of expected contributions to the
unfunded plans for the years ended December 26, 2009 and December 25, 2010, respectively.
For further information about our pension and postretirement plans see Note 11 Pension and
Postretirement Medical Benefit Plans in the Notes to Consolidated Financial Statements.
CASUALTY INSURANCE COSTS
Due to the nature of our business, we require insurance coverage for certain casualty risks.
In the United States, we use a combination of insurance and self-insurance mechanisms, including a
wholly owned captive insurance entity. This captive entity participates in a reinsurance pool for
a portion of our workers’ compensation risk. We provide self-insurance for the workers’
compensation risk retained by the Company and automobile risks up to $10 million per occurrence,
and product and general liability risks up to $5 million per occurrence. For losses exceeding these
self-insurance thresholds, we purchase casualty insurance from third-party providers.
At December 26, 2009, our net liability for casualty costs was $240 million, of which $70
million was considered short-term in nature. At December 27, 2008, our net liability for casualty
costs was $235 million, of which $70 million was considered short-term in nature.
Our liability for casualty costs is estimated using individual case-based valuations and
statistical analyses and is based upon historical experience, actuarial assumptions and
professional judgment. We do not discount our loss expense reserves. These estimates are subject to
the effects of trends in loss severity and frequency and are subject to a significant degree of
inherent variability. We evaluate these estimates periodically during the year and we believe that
they are appropriate; however, an increase or decrease in the estimates or events outside our
control could have a material impact on reported net income. Accordingly, the ultimate settlement
of these costs may vary significantly from the estimates included in our financial statements.
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INCOME TAXES
Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and
regulations and tax planning strategies available to us in the various jurisdictions in which we
operate. Significant management judgment is required in evaluating our tax positions and in
determining our effective tax rate.
Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and
costs we expect to realize in the future. We establish valuation allowances to reduce our deferred
tax assets to an amount that will more likely than not be realized.
We recognize the impact of our tax positions in our financial statements if those positions
will more likely than not be sustained on audit, based on the technical merits of the position. A
number of years may elapse before an uncertain tax position for which we have established a tax
reserve is audited and finally resolved, and the number of years for which we have audits that are
open varies depending on the tax jurisdiction. While it is often difficult to predict the final
outcome or the timing of the resolution of an audit, we believe that our reserves for uncertain tax
benefits reflect the outcome of tax positions that is more likely than not to occur. Nevertheless,
it is possible that tax authorities may disagree with our tax positions, which could have a
significant impact on our results of operations, financial position and cash flows. The resolution
of a tax position could be recognized as an adjustment to our provision for income taxes and our
deferred taxes in the period of resolution, and may also require the use of cash.
For further information about our income taxes see “Income Tax Expense” in the Results of
Operations and Note 12 Income Taxes in the Notes to Consolidated Financial Statements.
RELATIONSHIP WITH PEPSICO
PepsiCo is a related party due to the nature of our franchise relationship and its ownership
interest in our company. More than 80 percent of our volume is derived from the sale of PepsiCo or
PepsiCo joint venture brands. At December 26, 2009, PepsiCo owned approximately 31.7 percent of
our outstanding common stock and 100 percent of our outstanding class B common stock, together
representing approximately 38.6 percent of the voting power of all classes of our voting stock. In
addition, at December 26, 2009, PepsiCo owned 6.6 percent of the equity of Bottling LLC.
While we manage all phases of our operations, including pricing of our products, we exchange
production, marketing and distribution information with PepsiCo, which benefits both companies’
respective efforts to lower costs, improve quality and productivity and increase product sales. We
have a significant ongoing relationship with PepsiCo and enter into various transactions and
agreements with them. We purchase concentrate, pay royalties related to Aquafina products, and
manufacture, package, sell and distribute cola and non-cola beverages under various bottling and
fountain syrup agreements with PepsiCo. These agreements give us the right to manufacture, sell
and distribute beverage products of PepsiCo in both bottles and cans, as well as fountain syrup in
specified territories. PepsiCo has the right under these agreements to set prices of beverage
concentrate, as well as the terms of payment and other terms and conditions under which we purchase
concentrate. PepsiCo also provides us with bottler funding to support a variety of trade and
consumer programs such as consumer incentives, advertising support, new product support and vending
and cooler equipment placement. The nature and type of programs, as well as the level of funding,
vary annually. Additionally, under a shared services agreement, we obtain various services from
PepsiCo, which include services for information technology maintenance and procurement of raw
materials. We also provide services to PepsiCo, including facility and credit and collection
support. Because we depend on PepsiCo to provide us with concentrate, bottler incentives and
various services, changes in our relationship with PepsiCo could have a material adverse effect on
our business and financial results.
We also enter into various transactions with joint ventures in which PepsiCo holds an equity
interest. In particular, we purchase tea concentrate and finished beverage products from the
Pepsi/Lipton Tea Partnership, a joint venture between PepsiCo and Unilever, in which PepsiCo holds
a 50 percent interest. We also purchase finished beverage products from the North American Coffee
Partnership, a joint venture between PepsiCo and Starbucks Corporation in which PepsiCo holds a 50
percent interest.
PepsiCo owns 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for
our Russian operations, which was formed on March 1, 2007. PR Beverages has an exclusive license
to manufacture and sell PepsiCo concentrate for beverage products sold in Russia. PR Beverages has
also entered into a Russian Snack Food Distribution Agreement with Frito Lay, Inc., a subsidiary of
PepsiCo, to sell and distribute their snack products in the Russian Federation.
For further information about our relationship with PepsiCo and its affiliates see Note 14
Related Party Transactions in the Notes to Consolidated Financial Statements.
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ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS
The year-over-year comparisons of our financial results are affected by the following items
included in our reported results:
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Advisory Fees
On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which
PepsiCo will acquire, subject to the satisfaction of certain conditions, all outstanding shares of
PBG common stock it does not already own. In connection with this transaction, the Company has
retained certain external advisors and expects to incur aggregate fees in the range of $50 million
to $60 million. During 2009, the Company recorded pre-tax charges of $40 million, or $0.15 per
diluted share, relating to these services, which were recorded in selling, delivery and
administrative expenses (“SD&A”).
For further information about the pending merger with PepsiCo see Note 18 Contingencies in the
Notes to Consolidated Financial Statements.
Mark-to-Market Net Impact
The Company’s corporate headquarters centrally manages commodity derivatives on behalf of our
segments. During 2009, we expanded our hedging program to mitigate price changes associated with
certain commodities utilized in our production process. These derivatives hedge the underlying
price risk associated with the commodity and are not entered into for speculative purposes.
Certain commodity derivatives do not qualify for hedge accounting treatment. Others receive hedge
accounting treatment but may have some element of ineffectiveness based on the accounting standard.
These commodity derivatives are marked-to-market each period until settlement, resulting in gains
and losses being reflected in corporate headquarters’ results. The gains and losses are
subsequently reflected in the segment results when the underlying commodity’s cost is recognized.
Therefore, segment results reflect the contract purchase price of these commodities. During 2009,
the Company recognized a net pre-tax gain of $12 million, or $0.04 per diluted share, related to
these commodity derivatives. The Company did not have any comparable activity in prior years.
Impairment Charges
During the fourth quarter of 2008, the Company recorded $412 million, or $1.26 per diluted
share, in non-cash impairment charges relating primarily to distribution rights and brands for the
Electropura water business in Mexico. For further information about the impairment charges see Note
6 Other Intangibles, net and Goodwill in the Notes to Consolidated Financial Statements.
2008 Restructuring Actions
In the fourth quarter of 2008, we announced a restructuring program to enhance the Company’s
operating capabilities in each of our reportable segments. The program was substantially complete
in December of 2009 and certain restructuring actions previously planned for 2010 have been
cancelled as a result of the pending merger with PepsiCo.
The program will result in annual pre-tax savings of approximately $110 million. The Company
recorded pre-tax charges of $107 million, or $0.33 per diluted share, over the course of the
restructuring program, which were recorded in SD&A. These charges were primarily for severance and related benefits, pension and
other employee-related costs and other charges, including employee relocation and asset disposal
costs. In 2009, we recorded pre-tax charges of $24 million, or $0.07 per diluted share, of which
$10 million was recorded in the U.S. & Canada segment and $14 million was recorded in the Mexico
segment.
As part of the restructuring program, approximately 4,000 positions were eliminated including
600 positions in the U.S. & Canada, 500 positions in Europe and 2,900 positions in Mexico.
The Company expects to incur approximately $80 million in pre-tax cash expenditures from these
restructuring actions, of which $75 million has been paid since the inception of the program, with
the balance expected to occur in 2010. During 2009, we paid $62 million in pre-tax cash
expenditures for these restructuring actions.
For further information about our restructuring charges see Note 15 Restructuring Charges in
the Notes to Consolidated Financial Statements.
2007 Restructuring Actions
In the third quarter of 2007, we announced a restructuring program to realign the Company’s
organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the
growth potential of the Company’s product portfolio. We completed the organizational realignment
during the first quarter of 2008, which resulted in the elimination of approximately 800 positions.
Annual cost savings from this restructuring program are approximately $30 million. Over the
course of the program we incurred a pre-tax charge of approximately $29 million, which was recorded
in SD&A. During 2007, we recorded pre-tax charges of $26
million, of which $18 million was recorded in the U.S. & Canada segment and the remaining $8
million was recorded in the Europe segment. During the first half of 2008, we recorded an
additional $3 million of
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pre-tax charges primarily relating to relocation expenses in our U.S. & Canada segment. We
made approximately $24 million of after-tax cash payments associated with these restructuring
charges.
In the fourth quarter of 2007, we implemented and completed an additional phase of
restructuring actions to improve operating efficiencies. In addition to the amounts discussed
above, we recorded a pre-tax charge of approximately $4 million
in SD&A, primarily related to employee termination costs in Mexico, where an
additional 800 positions were eliminated as a result of this phase of the restructuring. Annual
cost savings from this restructuring program are approximately $7 million.
Asset Disposal Charges
In the fourth quarter of 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan
to rationalize our vending asset base in our U.S. & Canada segment by disposing of older
underperforming assets and redeploying certain assets to higher return accounts. Our FSV business
portfolio consists of accounts where we stock and service vending equipment. This plan, which we
completed in the second quarter of 2008, was part of the Company’s broader initiative to improve
operating income margins of our FSV business.
Over the course of the FSV Rationalization plan, we incurred a pre-tax asset disposal charge
of approximately $25 million, the majority of which was non-cash. The charge included costs
associated with the removal of these assets from service, disposal costs and redeployment expenses.
Of this amount, we recorded a pre-tax charge of approximately $23 million in 2007 with the
remainder being recorded in 2008. This charge is recorded in SD&A.
Tax Audit Settlements
In 2009, our tax provision was reduced by the reversal of tax reserves, net of noncontrolling
interests, of approximately $151 million, or $0.68 per diluted share, from the resolution of tax
audits and the expiration of statute of limitations in the U.S. and in our international
jurisdictions.
During 2007, PBG recorded a net non-cash tax benefit of approximately $46 million, or $0.20
per diluted share, to income tax expense related to the reversal of tax reserves resulting from the
expiration of the statute of limitations on the IRS audit of our U.S. 2001 and 2002 tax returns.
For further information about our tax audit settlements see Note 12 Income Taxes in the Notes
to Consolidated Financial Statements.
Tax Law Changes
In the fourth quarter of 2009, there was a significant tax law change in Mexico which required
us to re-measure our deferred tax assets and liabilities resulting in a net provision expense, net
of noncontrolling interests, of $68 million, or $0.31 per diluted share. Certain aspects of the
tax law change in Mexico are still subject to clarification with the tax authorities and may
require that we revise our deferred taxes in the future as new information becomes available.
There was also a tax law change in Canada which reduced certain provincial tax rates and which
resulted in a tax provision benefit, net of noncontrolling interests, of $7 million, or $0.03 per
diluted share.
In addition, during 2007, tax law changes were enacted in Canada and Mexico, which required us
to re-measure our deferred tax assets and liabilities. The impact of the tax law change in Canada
was partially offset by the tax law change in Mexico decreasing our income tax expense on a net
basis. As a result of these changes, net income attributable to PBG increased approximately $10
million, or $0.04 per diluted share.
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FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS FOR FISCAL YEAR 2009
Reported net revenues decreased four percent versus the prior year driven by volume declines
and the negative impact from foreign currency translation. This impact was partially offset by
increases in rate per case in each of our reportable segments.
On a currency neutral basis*, net revenues increased one percent and net revenue per case
increased four percent versus the prior year, reflecting the solid execution of our revenue and
margin management strategy in a challenging economic environment. Reported net revenue per case
declined one percent, which includes the negative impact from foreign currency translation of five
percentage points.
Reported gross profit declined six percent versus the prior year, driven by the negative
impact of foreign currency translation and volume declines. This impact was partially offset by a
two percent increase in gross profit per case on a currency neutral basis, as rate gains from the
Company’s global pricing strategy and savings from productivity initiatives more than offset higher
raw material costs. Reported gross profit per case declined three percent, which includes the
negative impact from foreign currency translation of five percentage points.
Reported SD&A declined by seven percent versus the prior year, driven by lower operating costs
due to continued productivity improvements across all segments coupled with the favorable impact of
foreign currency translation. Foreign currency translation contributed five percentage points to
the decline in SD&A growth.
Reported operating income increased 61 percent versus the prior year. Items impacting
comparability** in the current and prior year contributed 65 percent to the operating income growth
for the year. The remaining four percent decrease in operating income growth for the year was
impacted by the negative impact of foreign currency translation of four percentage points and
volume declines. This impact was partially offset by increases in currency neutral gross profit
per case, cost and productivity improvements and the positive impact from acquisitions.
Net income attributable to PBG increased 277 percent versus the prior year to $612 million and
includes a net after-tax gain of $47 million, or $0.22 per diluted share, resulting from items
impacting comparability**. Items impacting comparability in the current and prior year contributed
264 percentage points to the growth rate for the year. The remaining 13 percentage point increase
in growth for the year was driven by a lower effective tax rate in the current year and the impact
from foreign currency transactional losses which occurred in the prior year.
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RESULTS OF OPERATIONS BY SEGMENT
Except where noted, tables and discussion are presented as compared to the prior fiscal year.
Growth rates are rounded to the nearest whole percentage.
Volume
2009 vs. 2008
U.S. & Canada
In our U.S. & Canada segment, base volume, which excludes the impact of acquisitions,
decreased four percent for the year due primarily to the macroeconomic factors negatively impacting
the liquid refreshment beverage category. Our newly acquired rights to distribute Crush, Rockstar
and Muscle Milk in the U.S. contributed three percentage points to our base volume for the year.
Take-home and cold-drink channels declined by three percent and six percent, respectively,
versus last year. The decline in the take-home channel was driven primarily by our small format
stores as changes in consumer shopping trends are shifting more of our volume to channels such as
supercenters, club and dollar stores due to the economic downturn. Declines in our cold-drink
channel were mainly driven by our foodservice channel, including restaurants, travel and leisure,
education and workplace, which have been particularly impacted by the economic downturn in the
United States.
Europe
In our Europe segment, volume declined by eight percent versus the prior year. Soft volume
performance reflected the overall weak macroeconomic environment and category softness throughout
Europe, driven by double digit declines in Russia.
Mexico
In our Mexico segment, volume decreased four percent versus the prior year. Volume declines
were driven by difficult macroeconomic conditions and category softness, coupled with pricing
actions taken by the Company to drive improved margins across its portfolio.
2008 vs. 2007
U.S. & Canada
In our U.S. & Canada segment, volume decreased four percent due to declining consumer
confidence and spending, which has negatively impacted the liquid refreshment beverage category.
Cold-drink and take-home channels both declined by four percent versus last year. The decline in
the take-home channel was driven primarily by our large format stores, which was impacted by the
overall declines in the liquid refreshment beverage category as well as pricing actions taken to
improve profitability in our take-home packages including our unflavored water business. Decline
in the cold-drink channel was driven by our foodservice channel, including restaurants, travel and
leisure and workplace, which has been particularly impacted by the economic downturn in the United
States.
Europe
In our Europe segment, volume declined by three percent resulting from a soft volume
performance in the second half of the year. Results reflect overall weak macroeconomic
environments throughout Europe with high single digit declines in Spain and flat volume growth in
Russia. Despite the slowing growth in Russia, we showed improvements in our energy and tea
categories, partially offset by declines in the CSD category. In Spain, there were declines across
all channels due to a weakening economy and our continued focus on improving revenue and gross
profit growth.
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Mexico
In our Mexico segment, volume decreased five percent driven by slower economic growth coupled
with pricing actions taken by the Company to drive improved margins across its portfolio. This
drove single digit declines in our jug water and multi-serve packages, which were partially offset
by one percent improvement in our bottled water package.
Net Revenues
2009 vs. 2008
U.S. & Canada
In our U.S. & Canada segment, net revenues were flat for the year. The results reflect
improvements in net pricing, partially offset by volume declines and the negative impact of foreign
currency translation. Net revenue per case on a currency neutral basis improved by three percent,
driven by rate increases. Reported net revenue per case increased two percent, which includes the
negative impact from foreign currency translation of one percentage point.
Europe
In our Europe segment, net revenues declined 17 percent, due primarily to the negative impact
of foreign currency translation and volume declines. This was offset by growth in net revenue per
case on a currency neutral basis of seven percent driven primarily by rate actions and disciplined
promotional spending. Europe’s reported net revenue per case declined 10 percent, which includes
the negative impact from foreign currency translation of 17 percentage points.
Mexico
In our Mexico segment, declines in net revenues of 17 percent reflected the negative impact of
foreign currency translation and volume declines, partially offset by improvements in currency
neutral net revenue per case. Net revenue per case on a currency neutral basis grew six percent,
primarily due to rate increases to drive margin improvement. Mexico’s reported net revenue per
case declined 14 percent, which includes a 20 percentage point negative impact from foreign
currency translation.
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2008 vs. 2007
U.S. & Canada
In our U.S. & Canada segment, net revenues were flat versus the prior year driven by net price
per case improvement offset by volume declines. The four percent improvement in net price per case
was primarily driven by rate increases taken to offset rising raw material costs and to improve
profitability in our take-home packages, including our unflavored water business.
Europe
In our Europe segment, growth in net revenues for the year reflects an increase in net price
per case and the positive impact of foreign currency translation, partially offset by volume
declines. Net revenue per case grew in every country in Europe led by double-digit growth in
Russia and Turkey due mainly to rate increases.
Mexico
In our Mexico segment, net revenues were flat versus the prior year reflecting increases in
net price per case offset by declines in volume and the negative impact of foreign currency
translation. Growth in net price per case was primarily due to rate increases taken within our
multi-serve CSDs, jugs and bottled water packages.
Operating Income
2009 vs. 2008
U.S. & Canada
In our U.S. & Canada segment, operating income decreased two percent versus the prior year,
driven by volume declines, partially offset by an improvement in gross profit per case, cost and
productivity savings and the favorable impact of acquisitions.
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Reported gross profit per case increased one percent, which includes the negative impact
from foreign currency translation of one percentage point for the year. Gross profit per case on a
currency neutral basis increased two percent for the year driven by growth in net revenue per case
and savings from productivity initiatives, which more than offset higher raw material costs.
SD&A improved one percent for the year. The decrease in SD&A expenses for the year reflects
lower costs resulting from productivity initiatives and volume declines coupled with a favorable
impact from foreign currency translation of one percentage point, partially offset by higher
pension and employee related costs.
Europe
In our Europe segment, operating income increased 11 percent driven primarily by the impact of
restructuring and other charges taken in the prior year and additional income from our newly
acquired equity investment in Russia, partially offset by decreases in volume and the negative
impact of foreign currency.
Reported gross profit per case in Europe declined 14 percent for the year, which includes the
negative impact from foreign currency translation of 15 percentage points. Gross profit per case
on a currency neutral basis increased one percent driven by strong rate increases which offset
higher raw material costs resulting from the foreign currency transactional impact for U.S. dollar
denominated purchases.
SD&A in Europe improved 24 percent for the year, which includes a benefit from foreign
currency translation of 13 percentage points. The remaining improvement in SD&A was driven by
volume declines, restructuring and other customer related charges taken in the prior year, lower
costs resulting from productivity initiatives throughout Europe and income generated from our
equity investment in Russia.
Mexico
In our Mexico segment, operating income increased 116 percent versus the prior year.
Impairment and restructuring charges contributed 122 percent to the growth, which was partially
offset by foreign currency translation of 23 percent. The remaining 17 percent of growth for the
year was driven primarily by improved pricing actions and lower costs resulting from productivity
initiatives.
Reported gross profit per case declined 15 percent for the year, which includes the negative
impact from foreign currency translation of 19 percentage points. Gross profit per case on a
currency neutral basis increased four percent, reflecting solid margin management and cost savings
from productivity initiatives, which offset rising raw material costs. Higher raw material costs
were driven by the negative impact of foreign currency transactional costs resulting from U.S.
dollar denominated purchases.
SD&A improved 18 percent for the year, which includes an 18 percentage point benefit from
foreign currency translation. Restructuring charges increased SD&A by two percentage points. The
remaining decrease in SD&A growth was driven by improved route and cost productivity initiatives.
Corporate
Corporate reflects a net gain of $12 million for the year related to the mark-to-market of
commodity derivatives used to hedge against price changes associated with certain commodities
utilized primarily in our U.S. and Canada production processes. The Company did not have any
comparable mark-to-market commodity derivative activity in prior years.
2008 vs. 2007
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U.S. & Canada
In our U.S. & Canada segment, operating income was $886 million in 2008, decreasing one
percent versus the prior year. Restructuring and asset disposal charges taken in the current and
prior year together contributed a decrease of two percentage points to the operating income
decline. The remaining one percentage point of growth includes increases in gross profit per case
and lower operating costs, partially offset by lower volume in the United States.
Gross profit per case improved two percent versus the prior year in our U.S. & Canada segment.
This includes growth in net revenue per case, which was partially offset by a six percent increase
in cost of sales per case. Growth in cost of sales per case includes higher concentrate, sweetener
and packaging costs.
SD&A expenses improved three percent versus the prior year in our U.S. & Canada segment due to
lower volume and pension costs and cost productivity initiatives. These productivity initiatives
reflect a combination of headcount savings, reduced discretionary spending and leveraged
manufacturing and logistics benefits. Results also include one percentage point of growth due to
restructuring and asset disposal charges taken in the current and prior year.
Europe
In our Europe segment, operating income was $101 million in 2008, decreasing five percent
versus the prior year. The net impact of restructuring and impairment charges contributed 20
percentage points to the decline for the year. The remaining 14 percentage point increase in
operating income growth for the year reflects improvements in gross profit per case and the
positive impact from foreign currency translation, partially offset by higher SD&A expenses.
Gross profit per case in Europe increased 16 percent versus the prior year due to net price
per case increases and foreign currency translation, partially offset by higher sweetener and
packaging costs. Foreign currency contributed six percentage points of growth to gross profit for
the year.
SD&A expenses in Europe increased 16 percent due to additional operating costs associated with
our investments in Europe coupled with charges in Russia due to softening volume and weakening
economic conditions in the fourth quarter. Foreign currency contributed five percentage points to
SD&A growth. Restructuring charges taken in the current and prior year contributed approximately
two percentage points of growth to SD&A expenses for the year.
Mexico
In our Mexico segment, we had an operating loss of $338 million in 2008 driven primarily by
impairment and restructuring charges taken in the current and prior years. The remaining one
percent decrease in operating income growth for the year was driven by volume declines, partially
offset by increases in gross profit per case and the positive impact from foreign currency
translation.
Gross profit per case improved six percent versus the prior year driven by improvements in net
revenue per case, as we continue to improve our segment profitability in our jug water and
multi-serve packages. Cost of sales per case in Mexico increased by five percent due primarily to
rising packaging costs.
SD&A remained flat versus the prior year driven by lower volume and reduced operating costs as
we focus on route productivity, partially offset by cost inflation.
Interest Expense, net
2009 vs. 2008
Net interest expense increased by $13 million largely due to higher debt levels, proceeds of
which were utilized to fund our acquisitions, coupled by the pre-funding of our $1.3 billion debt
that matured in February 2009.
2008 vs. 2007
Net interest expense increased by $16 million largely due to higher average debt balances
throughout the year and our treasury rate locks that were settled in the fourth quarter. These
increases were partially offset by lower effective interest rates from interest rate swaps which
convert our fixed-rate debt to variable-rate debt.
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Other Non-Operating (Income) Expenses, net
2009 vs. 2008
Other net non-operating income was $4 million in 2009 as compared to $25 million of net
non-operating expenses in 2008 reflecting the transactional impact of U.S. dollar and euro
purchases in Mexico and Europe. The positive change versus the prior year reflects the
stabilization of the Mexican peso and Russian ruble during 2009.
2008 vs. 2007
Other net non-operating expenses were $25 million in 2008 as compared to $6 million of net
non-operating income in 2007. Foreign currency transactional losses in 2008 resulted primarily
from our U.S. dollar and euro purchases in Mexico and Russia, reflecting the impact of the
weakening peso and ruble during the second half of 2008.
Net Income Attributable to Noncontrolling Interests
2009 vs. 2008
Net income attributable to noncontrolling interests primarily reflects PepsiCo’s ownership in
Bottling LLC of 6.6 percent, coupled with their 40 percent ownership in the PR Beverages venture in
Russia. The $34 million increase versus the prior year was primarily driven by higher net income
due to the impairment and restructuring charges taken in the prior year.
2008 vs. 2007
The $34 million decrease versus the prior year was primarily driven by lower operating results
due to the impairment and restructuring charges taken in the fourth quarter of 2008.
Income Tax Expense
2009 vs. 2008
Our effective tax rate for 2009 and 2008 was 5.7 percent and 33.4 percent, respectively. The
decrease in our effective tax rate is primarily due to year-over-year comparability associated with
the following:
During 2009, our tax provision was reduced by $158 million due to the reversal of tax reserves
from the resolution of tax audits and the expiration of the statute of limitations in the U.S. and
in our international jurisdictions, for an effective tax rate benefit of approximately 21.1
percentage points.
In the fourth quarter, we reversed approximately $39 million of valuation allowances on some
of our deferred tax assets as we anticipate receiving future benefit from those tax assets, which
decreased our effective tax rate by approximately 5.2 percentage points.
Our effective tax rate was also favorably impacted in 2009 by favorable country earnings mix,
lower carrying charges on tax reserves due to the audit settlements discussed above, as well as tax
planning strategies.
Also, in the fourth quarter of 2009, there was a significant tax law change in Mexico which
required us to re-measure our deferred tax assets and liabilities resulting in a net provision
expense of $72 million. Certain aspects of the tax law change in Mexico are still subject to
clarification with the tax authorities and may require that we revise our deferred taxes in the
future as new information becomes available. There was also a tax law change in Canada which
reduced certain provincial tax rates and which resulted in a tax provision benefit of $7 million.
The net effect of these law changes increased our effective tax rate by approximately 8.7
percentage points.
In 2008, our effective tax rate was unfavorably impacted by the impairment charges primarily
related to Mexico and restructuring charges, the net effect of which increased our effective tax
rate by 3.8 percentage points.
2008 vs. 2007
Our effective tax rates for 2008 and 2007 were 33.4 percent and 22.1 percent, respectively.
The increase in our effective tax rate is primarily due to year-over-year comparability associated
with the 2008 impairment charges primarily related to Mexico and restructuring charges the net
effect of which increased our effective tax rate by 3.8 percentage points and a 2007 tax audit
settlement which reduced our tax provision by $46 million, coupled with tax law changes that
reduced our deferred income tax provision by $13 million, which decreased our effective tax rate by
7.3 percentage points.
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Diluted Weighted-Average Shares Outstanding
Diluted weighted-average shares outstanding includes the weighted-average number of common
shares outstanding plus the potential dilution that could occur if equity awards from our stock
compensation plans were exercised and converted into common stock.
Our diluted weighted-average shares outstanding for 2009, 2008 and 2007 were 221 million, 220
million and 233 million, respectively. The increase in diluted shares outstanding for 2009 reflects
share issuances from the exercise of equity awards and a higher share price, partially offset by
the effect of our share repurchase program in the prior year. The amount of shares authorized by
the Board of Directors to be repurchased totals 175 million shares, of which we have repurchased
approximately 146 million shares since the inception of our share repurchase program. We did not
repurchase shares of PBG common stock in 2009. For further discussion on our earnings per share
calculation see Note 3 Earnings per Share in the Notes to Consolidated Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows
2009 vs. 2008
PBG generated $1,108 million of net cash from operations, a decrease of $176 million from
2008. The decrease in net cash provided by operations was driven primarily by an increase in
pension contributions offset by the timing of disbursements, net of collections primarily related
to promotional activities and tax.
Net cash used for investments was $714 million, a decrease of $1,044 million from 2008. The
decline in cash used for investments was due to $742 million of payments made in 2008, associated
with our investment in JSC Lebedyansky (“Lebedyansky”) and lower capital expenditures and
acquisition spending in 2009. This was partially offset by a loan made to Lebedyansky in 2009,
which was contemplated as part of the initial capitalization of the purchase of Lebedyansky between
PepsiCo and us.
Net cash used for financing activities was $470 million, an increase of $1,320 million from
2008. This increase in cash used for financing activities reflects the repayment of our $1.3
billion bond that matured in February 2009. In addition in 2008, the Company issued $1.3 billion
in senior notes to pre-fund the 2009 bond maturity and received $308 million of cash from PepsiCo
for their proportional share in the acquisitions by PR Beverages. This was partially offset by the
issuance of a $750 million bond in 2009, lower share repurchases and short-term borrowings, and
more proceeds from stock option exercises in 2009.
2008 vs. 2007
Net cash provided by operations decreased $153 million to $1,284 million in 2008, driven
primarily by a change in working capital due largely to timing of accounts payable disbursements
and higher payments relating to promotional activities and pensions.
Net cash used for investments increased $875 million to $1,758 million in 2008, primarily due
to payments associated with our investment in Lebedyansky and payments for acquisitions, partially
offset by lower capital expenditures.
Net cash provided by financing activities increased $1,414 million to $850 million in 2008,
primarily due to a debt issuance and cash received from PepsiCo for their proportional share in the
acquisitions by PR Beverages.
Capital Expenditures
Our business requires substantial infrastructure investments to maintain our existing level of
operations and to fund investments targeted at growing our business. Capital expenditures included
in our cash flows from investing activities totaled $556 million, $760 million and $854 million
during 2009, 2008 and 2007, respectively. Capital expenditures decreased $204 million in 2009 due
to our disciplined approach to capital spending.
Liquidity and Capital Resources
Our principal sources of cash include cash from our operating activities and the issuance of
debt and bank borrowings. We believe that these cash inflows will be sufficient to fund capital
expenditures, benefit plan contributions, acquisitions, share repurchases, dividends and working
capital requirements for the foreseeable future. Our liquidity remains healthy and management does
not expect that it will be materially impacted in the near-future.
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Acquisitions and Investments
During 2009, we acquired a Pepsi-Cola and Dr Pepper franchise bottler serving portions of
central Texas, as well as a Pepsi-Cola franchise bottler serving northeastern Massachusetts. The
total cost of these acquisitions during 2009 was approximately $92 million.
During 2009, we acquired distribution rights for certain energy drinks in the United States
and Canada and protein-enhanced functional beverages in the United States. In addition, we
acquired rights to manufacture and distribute Crush in portions of the United States. The total
cost of these distribution and franchise rights during 2009 was approximately $40 million, of which
$20 million will be paid over the next four years.
During 2008, we completed a joint acquisition with PepsiCo of Russia’s leading branded juice
company Lebedyansky for approximately $1.8 billion. Lebedyansky was acquired 58.3 percent by
PepsiCo and 41.7 percent by PR Beverages, our Russian venture with PepsiCo. We have recorded an
equity investment for PR Beverages’ share in Lebedyansky and a noncontrolling interest for
PepsiCo’s proportional contribution to PR Beverages relating to Lebedyansky. As a result of
PepsiCo’s 40 percent ownership of PR Beverages, PepsiCo and PBG have acquired a 75 percent and 25
percent economic stake in Lebedyansky, respectively.
Also during 2008, we acquired two Pepsi-Cola franchise bottlers serving certain New York
counties and portions of Colorado, Arizona and New Mexico. In addition we acquired a company that
will manufacture various Pepsi products in Siberia and Eastern Russia. The total cost of
acquisitions during 2008 was approximately $279 million.
Long-Term Debt Activities
During the first quarter of 2009, we issued $750 million in senior notes, with a coupon rate
of 5.125 percent, maturing in 2019. The net proceeds of the offering, together with a portion of
the proceeds from the offering of our senior notes issued in the fourth quarter of 2008, were used
to repay our senior notes due at their scheduled maturity on February 17, 2009. The next
significant scheduled debt maturity is not until 2012.
During the fourth quarter of 2008, we issued $1.3 billion in senior notes with a coupon rate
of 6.95 percent, maturing in 2014. A portion of the proceeds of this debt was used to finance
acquisitions and repay short-term commercial paper debt.
Short-Term Debt Activities
We have a committed revolving credit facility of $1.2 billion and an uncommitted credit
facility of $500 million. Both of these credit facilities are guaranteed by Bottling LLC and are
used to support our $1.2 billion commercial paper program and working capital requirements. We had
no commercial paper outstanding at December 26, 2009 or December 27, 2008.
In addition to the revolving credit facilities discussed above, we had available short-term
bank credit lines of approximately $892 million at December 26, 2009, of which the majority was
uncommitted. These lines were primarily used to support the general operating needs of our
international locations. As of December 26, 2009, we had $188 million outstanding under these
lines of credit at a weighted-average interest rate of 3.1 percent. As of December 27, 2008, we
had available short-term bank credit lines of approximately $772 million, of which $103 million was
outstanding at a weighted-average interest rate of 10.0 percent.
Our peak borrowing timeframe varies with our working capital requirements and the seasonality
of our business. Additionally, throughout the year, we may have further short-term borrowing
requirements driven by other operational needs of our business. During 2009, borrowings from our
commercial paper program in the U.S. peaked at $240 million. Borrowings from our line of credit
facilities peaked at $245 million, reflecting payments for working capital requirements.
Debt Covenants and Credit Ratings
Certain of our senior notes have redemption features and non-financial covenants that will,
among other things, limit our ability to create or assume liens, enter into sale and lease-back
transactions, engage in mergers or consolidations and transfer or lease all or substantially all of
our assets. Additionally, certain of our credit facilities and senior notes have financial
covenants. These covenants are not, and it is not anticipated that they will become restrictive to
our liquidity or capital resources. We are in compliance with all debt covenants. For a discussion
of our covenants, see Note 8 Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated
Financial Statements.
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Our credit ratings are periodically reviewed by rating agencies. Currently our long-term
ratings from Moody’s and Standard and Poor’s are A2 and A, respectively. Changes in our operating
results or financial position could impact the ratings assigned by the various agencies resulting
in higher or lower borrowing costs.
Pensions
During 2010, we expect to contribute $158 million to fund our U.S. pension and postretirement
plans. For further information about our pension and postretirement plan funding see section
entitled “Pension and Postretirement Medical Benefit Plans” in our Critical Accounting Policies.
Dividends
On March 26, 2009, the Company announced that its Board of Directors approved an increase in
the Company’s quarterly dividend from $0.17 to $0.18 per share on the outstanding common stock of
the Company. This action resulted in a six percent increase in our quarterly dividend.
Contractual Obligations
The following table summarizes our contractual obligations as of December 26, 2009:
This table excludes our pension and postretirement liabilities recorded on the balance sheet.
For a discussion of our future pension contributions, as well as expected pension and
postretirement benefit payments see Note 11 Pension and Postretirement Medical Benefit Plans in the
Notes to Consolidated Financial Statements.
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Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our results of operations, financial condition, liquidity,
capital expenditures or capital resources.
MARKET RISKS AND CAUTIONARY STATEMENTS
Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, our financial position is routinely subject to a variety of
risks. These risks include changes in the price of commodities purchased and used in our business,
interest rates on outstanding debt and currency movements impacting our non-U.S. dollar denominated
assets and liabilities. We are also subject to the risks associated with the business environment
in which we operate. We regularly assess these risks and have strategies in place to reduce the
adverse effects of these exposures.
Our objective in managing our exposure to fluctuations in commodity prices, interest rates and
foreign currency exchange rates is to minimize the volatility of earnings and cash flows associated
with changes in the applicable rates and prices. To achieve this objective, we have derivative
instruments to hedge against the risk of adverse movements in commodity prices, interest rates and
foreign currency. We monitor our counterparty credit risk on an ongoing basis. Our corporate
policy prohibits the use of derivative instruments for trading or speculative purposes, and we have
procedures in place to monitor and control their use. See Note 10 Financial Instruments and Risk
Management in the Notes to Consolidated Financial Statements for additional information relating to
our derivative instruments.
A sensitivity analysis has been prepared to determine the effects that market risk exposures
may have on our financial instruments. These sensitivity analyses evaluate the effect of
hypothetical changes in commodity prices, interest rates and foreign currency exchange rates and
changes in our stock price on our unfunded deferred compensation liability. Information provided
by these sensitivity analyses does not necessarily represent the actual changes in fair value that
we would incur under normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor were held constant. As a result, the reported changes
in the values of some financial instruments that are affected by the sensitivity analyses are not
matched with the offsetting changes in the values of the items that those instruments are designed
to finance or hedge.
Commodity Price Risk
We are subject to market risks with respect to commodities because our ability to recover
increased costs through higher pricing may be limited by the competitive business environment in
which we operate. We use forward and option contracts to hedge the risk of adverse movements in
commodity prices related primarily to anticipated purchases of raw materials and energy used in our
operations. With respect to commodity price risk, we currently have various contracts outstanding
for commodity purchases in 2010 and 2011, which establish our purchase prices within defined
ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held
constant would have resulted in a change in the fair value of our financial instruments of $48
million and $14 million at December 26, 2009 and December 27, 2008, respectively.
Interest Rate Risk
Interest rate risk is inherent to both fixed-rate and floating-rate debt. We effectively
converted $1.25 billion of our senior notes to floating-rate debt through the use of interest rate
swaps. Changes in interest rates on our interest rate swaps and other variable debt would change
our interest expense. We estimate that a 50 basis point increase in interest rates on our variable
rate debt and cash equivalents, with all other variables held constant, would have resulted in an
increase to net interest expense of $4 million and $1 million in fiscal years 2009 and 2008,
respectively.
Foreign Currency Exchange Rate Risk
In 2009, approximately 30 percent of our net revenues were generated from outside the United
States. Social, economic and political conditions in these international markets may adversely
affect our results of operations, financial condition and cash flows. The overall risks to our
international businesses include changes in foreign governmental policies and other social,
political or economic developments. These developments may lead to new product pricing, tax or
other policies and monetary fluctuations that may adversely impact our business. In addition, our
results of operations and the value of our foreign assets and liabilities are affected by
fluctuations in foreign currency exchange rates.
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As currency exchange rates change, translation of the statements of operations of our
businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally
have not hedged against these types of currency risks because cash flows from our international
operations have been reinvested locally. We have foreign currency transactional risks in certain
of our international territories for transactions that are denominated in currencies that are
different from their functional currency. We have entered into forward exchange contracts to hedge
portions of our forecasted U.S. dollar cash flows in these international territories. A 10
percent weaker U.S. dollar against the applicable foreign currency, with all other variables held
constant, would result in a change in the fair value of these contracts of $16 million and $5
million at December 26, 2009 and December 27, 2008, respectively.
In 2007, we entered into forward exchange contracts to economically hedge a portion of
intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S.
dollar versus the Mexican peso, with all other variables held constant, would result in a change of
$4 million in the fair value of these contracts at December 26, 2009 and December 27, 2008.
Unfunded Deferred Compensation Liability
Our unfunded deferred compensation liability is subject to changes in our stock price, as well
as price changes in certain other equity and fixed-income investments. We use prepaid forward
contracts to hedge the portion of our deferred compensation liability that is based on our stock
price. Therefore, changes in compensation expense as a result of changes in our stock price are
substantially offset by the changes in the fair value of these contracts. We estimate that a 10
percent unfavorable change in the year-end stock price would have reduced the fair value from these
forward contract commitments by $2 million and $1 million at December 26, 2009 and December 27,
2008, respectively.
Cautionary Statements
Except for the historical information and discussions contained herein, statements contained
in this annual report on Form 10-K 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:
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AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions, except per share data
See accompanying notes to Consolidated Financial Statements.
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Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions
See accompanying notes to Consolidated Financial Statements.
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December 26, 2009 and December 27, 2008
in millions, except per share data
See accompanying notes to Consolidated Financial Statements.
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The Pepsi Bottling Group, Inc.
Consolidated Statements of Changes in Equity Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 in millions, except per share data
See accompanying notes to Consolidated Financial Statements.
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The Pepsi Bottling Group, Inc.
Consolidated Statements of Comprehensive Income (Loss) Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 in millions
See accompanying notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular dollars in millions, except per share data
Note 1—BASIS OF PRESENTATION
The Pepsi Bottling Group, Inc. is the world’s largest manufacturer, seller and distributor of
Pepsi-Cola beverages. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola
beverages in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. When
used in these Consolidated Financial Statements, “PBG,” “we,” “our,” “us” and the “Company” each
refers to The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC (“Bottling
LLC”), our principal operating subsidiary.
At December 26, 2009, PepsiCo, Inc. (“PepsiCo”) owned 70,166,458 shares of our common stock,
consisting of 70,066,458 shares of common stock and all 100,000 authorized shares of Class B common
stock. This represents approximately 31.7 percent of our outstanding common stock and 100 percent
of our outstanding Class B common stock, together representing 38.6 percent of the voting power of
all classes of our voting stock. In addition, PepsiCo owns approximately 6.6 percent of the equity
of Bottling LLC and 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for
our Russian operations, which was formed on March 1, 2007.
The common stock and Class B common stock both have a par value of $0.01 per share and are
substantially identical, except for voting rights. Holders of our common stock are entitled to one
vote per share and holders of our Class B common stock are entitled to 250 votes per share. Each
share of Class B common stock is convertible into one share of common stock. Holders of our common
stock and holders of our Class B common stock share equally on a per-share basis in any dividend
distributions.
Our Board of Directors has the authority to provide for the issuance of up to 20,000,000
shares of preferred stock, and to determine the price and terms, including, but not limited to,
preferences and voting rights of those shares without stockholder approval. At December 26, 2009,
there was no preferred stock outstanding.
On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which
PepsiCo will acquire all outstanding shares of PBG common stock it does not already own for the
price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to proration such that
the aggregate consideration to be paid to PBG shareholders shall be 50 percent in cash and 50
percent in PepsiCo common stock. At a special meeting of our shareholders held on February 17,
2010, our shareholders adopted the merger agreement. The transaction is subject to certain
regulatory approvals and is expected to be finalized by the end of the first quarter of 2010.
Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the U.S. (“GAAP”) often requires management to make judgments,
estimates and assumptions that affect the reported amounts included in our Consolidated Financial
Statements and related disclosures. We evaluate our estimates on an on-going basis using our
historical experience as well as other factors we believe appropriate under the circumstances, such
as current economic conditions, and adjust or revise our estimates as circumstances change. As
future events and their effect cannot be determined with precision, actual results may differ from
these estimates. In preparation of these financial statements, we have evaluated and assessed all
events occurring subsequent to December 26, 2009 and through February 22, 2010, which is the date
our financial statements were issued.
Basis of Consolidation – We consolidate in our financial statements entities in which we have
a controlling financial interest, as well as variable interest entities where we are the primary
beneficiary. Noncontrolling interests in earnings and ownership has been recorded for the
percentage of these entities not owned by PBG. In addition, we use the equity method of accounting
to recognize investments in and income from entities where we have significant influence, but do
not have a controlling financial interest. We have eliminated all intercompany accounts and
transactions in consolidation.
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Fiscal Year – Our U.S. and Canadian operations report using a fiscal year that consists of 52
weeks, ending on the last Saturday in December. Every five or six years a 53rd week is added.
Fiscal years 2009, 2008 and 2007 consisted of 52 weeks. Our remaining countries report on a
calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
Revenue Recognition – Revenue, net of sales returns, is recognized when our products are
delivered to customers in accordance with the written sales terms. We offer certain sales
incentives on a local and national level through various customer trade agreements designed to
enhance the growth of our revenue, market share and consumer brand awareness. Customer trade
agreements are accounted for as a reduction to our revenues.
Customer trade agreements with our customers include payments for in-store displays, volume
rebates, equipment placements, featured advertising and other growth incentives. A number of our
customer trade agreements are based on quarterly and annual targets that generally do not exceed
one year. Amounts recognized in our financial statements are based on amounts estimated to be paid
to our customers depending upon current performance, historical experience, actual and forecasted
volume and other performance criteria.
Advertising and Marketing Costs – We are involved in a variety of programs to promote our
products. We include advertising and marketing costs in
selling, delivery and administrative expenses (“SD&A”). Advertising and marketing costs were $360 million, $437 million and $424 million in
2009, 2008 and 2007, respectively, before bottler incentives received from PepsiCo and other brand
owners.
Bottler Incentives – PepsiCo and other brand owners, at their discretion, provide us with
various forms of bottler incentives. These incentives cover a variety of initiatives, including
direct marketplace support and advertising support. We classify bottler incentives as follows:
Total bottler incentives recognized as adjustments to net revenues, cost of sales and SD&A in our Consolidated Statements of Operations were as follows:
Share-Based Compensation – The Company grants a combination of stock option awards and
restricted stock units to our middle and senior management and our Board of Directors. See Note 4
Share-based Compensation for further discussion on our share-based compensation.
Shipping and Handling Costs – Our shipping and handling costs reported in the Consolidated
Statements of Operations are recorded primarily within SD&A. Such
costs recorded within SD&A totaled $1.7
billion in 2009, 2008 and 2007.
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Foreign Currency Gains and Losses and Currency Translation – We translate the balance sheets
of our foreign subsidiaries at the exchange rates in effect at the balance sheet date, while we
translate the statements of operations at the average rates of exchange during the year. The
resulting translation adjustments of our foreign subsidiaries are included in accumulated other
comprehensive loss (“AOCL”), net of noncontrolling interests on our Consolidated Balance Sheets.
Transactional gains and losses on our financial assets and liabilities arising from the impact of
currency exchange rate fluctuations on transactions in foreign currency that is different from the
local functional currency are included in other non-operating (income) expenses, net in our
Consolidated Statements of Operations.
Pension and Postretirement Medical Benefit Plans – We sponsor pension and other postretirement
medical benefit plans in various forms in the U.S. and other similar plans in our international
locations, covering employees who meet specified eligibility requirements.
Based on new pension accounting rules, we began to recognize the overfunded or underfunded
status of each of the pension and other postretirement plans beginning on December 30, 2006. In
addition, on December 30, 2007, we changed our measurement date to the year-end balance sheet date
for our plan assets, liabilities and expenses. For fiscal years ended 2007 and prior, the majority
of the pension and other postretirement plans used a September 30 measurement date and all plan
assets and obligations were generally reported as of that date. As part of measuring the plan
assets and benefit obligations on December 30, 2007, we adjusted our opening balances of retained
earnings and AOCL for the change in net periodic benefit cost and
fair value, respectively, from the previously used September 30 measurement date. The adoption of
the measurement date provisions resulted in a net decrease in the pension and other postretirement
medical benefit plans liability of $9 million, a net decrease in retained earnings of $16 million,
net of noncontrolling interests of $2 million and taxes of $9 million and a net decrease in
AOCL of $19 million, net of noncontrolling interests of $2
million and taxes of $14 million. There was no impact on our results of operations.
The determination of pension and postretirement medical benefit plan obligations and related
expenses requires the use of assumptions to estimate the amount of benefits that employees earn
while working, as well as the present value of those benefit obligations. Significant assumptions
include discount rate; expected rate of return on plan assets; certain employee-related factors
such as retirement age, mortality, and turnover; rate of salary increases for plans where benefits
are based on earnings; and for retiree medical plans, health care cost trend rates. We evaluate
these assumptions on an annual basis at each measurement date based upon historical experience of
the plans and management’s best judgment regarding future expectations.
Differences between the assumed rate of return and actual return on plan assets are deferred
in AOCL in equity and amortized to earnings utilizing the
market-related value method. Under this method, differences between the assumed rate of return and
actual rate of return from any one year will be recognized over a five-year period in the
market-related value.
Differences between assumed and actual returns on plan assets and other gains and losses
resulting from changes in actuarial assumptions are determined at each measurement date and
deferred in AOCL in equity. To the extent the amount of all
unrecognized gains and losses exceeds 10 percent of the larger of the benefit obligation or the
market-related value of plan assets, such amount is amortized to earnings over the average
remaining service period of active participants.
The
cost or benefit from benefit plan changes is also deferred in AOCL in equity and amortized to earnings on a straight-line basis over the average
remaining service period of the employees expected to receive benefits.
See Note 11 Pension and Postretirement Medical Benefit Plans for further discussion on our
pension and postretirement medical benefit plans.
Income Taxes – Our effective tax rate is based on pre-tax income, statutory tax rates, tax
laws and regulations and tax planning strategies available to us in the various jurisdictions in
which we operate.
Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and
costs we expect to realize in the future. We establish valuation allowances to reduce our deferred
tax assets to an amount that will more likely than not be realized.
Effective fiscal year 2007, we adopted the new income tax standard and began to recognize the
impact of our tax positions in our financial statements if those positions will more likely than
not be sustained on audit, based on the technical merit of the position. The impact of adopting
this standard was recorded by adjusting opening retained earnings.
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Significant management judgment is required in evaluating our tax positions and in determining
our effective tax rate.
See Note 12 Income Taxes for further discussion on our income taxes.
Earnings Per Share – We compute basic earnings per share by dividing net income attributable
to PBG by the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if stock options or other equity
awards from stock compensation plans were exercised and converted into common stock that would then
participate in net income.
Cash and Cash Equivalents – Cash and cash equivalents include all highly liquid investments
with original maturities not exceeding three months at the time of purchase. The fair value of our
cash and cash equivalents approximates the amounts shown on our Consolidated Balance Sheets due to
their short-term nature.
Allowance for Doubtful Accounts – A portion of our accounts receivable will not be collected
due to non-payment, bankruptcies and sales returns. We reserve an amount based on the evaluation
of the aging of accounts receivable, sales return trend analysis, detailed analysis of high-risk
customers’ accounts, and the overall market and economic conditions of our customers.
Inventories – We value our inventories at the lower of cost or net realizable value. The cost
of our inventory is generally computed using the average cost method.
Property, Plant and Equipment – We record property, plant and equipment (“PP&E”) at cost,
except for PP&E that has been impaired, for which we write down the carrying amount to estimated
fair market value, which then becomes the new cost basis.
We depreciate PP&E on a straight-line basis over the estimated lives as follows:
Other Intangible Assets, net and Goodwill – Intangible assets with indefinite useful lives and
goodwill are not amortized; however, they are evaluated for impairment at least annually, or more
frequently if facts and circumstances indicate that the assets may be impaired.
Intangible assets that are determined to have a finite life are amortized on a straight-line
basis over the period in which we expect to receive economic benefit, which generally ranges from
five to twenty years, and are evaluated for impairment only if facts and circumstances indicate
that the carrying value of the asset may not be recoverable.
The determination of the expected life depends upon the use and the underlying characteristics
of the intangible asset. In our evaluation of the expected life of these intangible assets, we
consider the nature and terms of the underlying agreements; our intent and ability to use the
specific asset; the age and market position of the products within the territories in which we are
entitled to sell; the historical and projected growth of those products; and costs, if any, to
renew the related agreement.
See Note 6 Other Intangible Assets, net and Goodwill for further discussion on our goodwill
and other intangible assets.
Casualty Insurance Costs – In the United States, we use a combination of insurance and
self-insurance mechanisms, including a wholly owned captive insurance entity. This captive entity
participates in a reinsurance pool for a portion of our workers’ compensation risk. We provide
self-insurance for the workers’ compensation risk retained by the Company and automobile risks up
to $10 million per occurrence, and product and general liability risks up to $5 million per
occurrence. For losses exceeding these self-insurance thresholds, we purchase casualty insurance
from a third-party provider. Our liability for casualty costs is estimated using individual
case-based valuations and statistical analyses and is based upon historical experience, actuarial
assumptions and professional judgment. We do not discount our loss expense reserves.
At December 26, 2009, our net liability for casualty costs was $240 million, of which $70
million was considered short-term in nature. At December 27, 2008, our net liability for casualty
costs was $235 million, of which $70 million was considered short-term in nature.
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Noncontrolling Interests – Noncontrolling interests are recorded for the entities that we
consolidate but are not wholly owned by PBG. Noncontrolling interests recorded in our Consolidated
Financial Statements is primarily comprised of PepsiCo’s share of Bottling LLC and PR Beverages.
At December 26, 2009, PepsiCo owned 6.6 percent of Bottling LLC and 40 percent of PR Beverages
venture.
Treasury Stock – We record the repurchase of shares of our common stock at cost and classify
these shares as treasury stock within PBG shareholders’ equity. Repurchased shares are included in
our authorized and issued shares but not included in our shares outstanding. We record shares
reissued using an average cost. At December 26, 2009, we had 175 million shares authorized under
our share repurchase program. Since the inception of our share repurchase program in October 1999,
we have repurchased approximately 146 million shares and have reissued approximately 57 million for
stock option exercises.
Financial Instruments and Risk Management –All derivative instruments are recorded at fair
value as either assets or liabilities in our Consolidated Balance Sheets. Derivative instruments
are generally designated and accounted for as either a hedge of a recognized asset or liability
(“fair value hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). Certain of these
derivatives are not designated as hedging instruments and are used as “economic hedges” to manage
certain risks in our business.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective
portion of the change in the fair value of a derivative instrument is deferred in AOCL until the
underlying hedged item is recognized in earnings. The derivative gain or loss recognized in
earnings is recorded consistent with the expense classification of the underlying hedged item. The
ineffective portion of a fair value change on a qualifying cash flow hedge is recognized in
earnings immediately. For derivatives that receive fair value hedge treatment, we recognize the
change in fair value for both the derivative and hedged item currently in earnings.
Derivative instruments that are not designated as hedging instruments, but are used as
economic hedges to manage certain risks in our business, are marked-to-market on a periodic basis
and recognized currently in earnings consistent with the expense classification of the underlying
hedged item.
Commitments and Contingencies – We are subject to various claims and contingencies related to
lawsuits, environmental and other matters arising out of the normal course of business. Liabilities
related to commitments and contingencies are recognized when a loss is probable and reasonably
estimable.
New Accounting Standards
Accounting Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Codification Update No. 2009-01 (“ASU No. 2009-1”), “Topic 105 – Generally Accepted Accounting
Principles,” which establishes the FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with generally accepted accounting
principles. The guidance also explicitly recognizes rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for
SEC registrants. This standard became effective in the fourth quarter of 2009 and required the
Company to update all GAAP references to refer to the new Codification topics, where applicable.
Variable Interest Entity
In June 2009, the FASB issued an accounting standard on variable interest entities, which was
incorporated into the Consolidation topic of the Codification, to address the elimination of the
concept of a qualifying special purpose entity. This standard also replaces the quantitative-based
risks and rewards calculation for determining which enterprise has a controlling financial interest
in a variable interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation to absorb losses of
the entity or the right to receive benefits from the entity. Additionally, it provides more timely
and useful information about an enterprise’s involvement with a variable interest entity. The
standard will become effective in the first quarter of 2010. We do not expect that this standard
will have a material impact on our Consolidated Financial Statements.
Postretirement Benefit Plan Disclosure
In December 2008, the FASB issued an accounting standard enhancing employer’s disclosures
about postretirement benefit plan assets, which was incorporated into the Codification topic
Compensation – Retirement Benefits. This new standard requires companies to disclose information
about the fair value measurement of plan
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assets. The standard became effective in the fourth quarter of 2009. See Note 11 Pension and
Postretirement Medical Benefit Plans for further information.
Derivative Instruments and Hedging Activity
In March 2008, the FASB issued an accounting standard, which was incorporated into the
Derivatives and Hedging topic of the Codification, requiring enhanced disclosure for derivative and
hedging activities. The standard became effective in the first quarter of 2009. See Note 10
Financial Instruments and Risk Management for the required disclosures.
Business Combinations
In December 2007, the FASB issued an accounting standard which addresses the accounting and
disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a
business combination. The standard, which was incorporated into the Business Combinations topic of
the Codification, became effective in 2009 and did not have a material impact on our Consolidated
Financial Statements.
Noncontrolling
Interests
In December 2007, the FASB issued an accounting standard on noncontrolling interests which
addresses the accounting and reporting framework for noncontrolling interests by a parent company.
The standard, which was incorporated into the Consolidation topic of the Codification, also
addresses disclosure requirements to distinguish between interests of the parent and interests of
the noncontrolling owners of a subsidiary. The standard became effective in the first quarter of
2009 and required that minority interest be renamed noncontrolling interests and that a company
present a consolidated net income measure that includes the amount attributable to such
noncontrolling interests for all periods presented. In addition, it requires reporting
noncontrolling interests as a component of equity in our Consolidated Balance Sheets and below
income tax expense in our Consolidated Statements of Operations. We have retrospectively applied
the presentation to our prior year balances in our Consolidated Financial Statements.
Note 3—EARNINGS PER SHARE
The following table reconciles the shares outstanding and net income attributable to PBG used
in the computations of both basic and diluted earnings per share attributable to PBG’s common
shareholders:
Basic earnings per share are calculated by dividing the net income attributable to PBG by the
weighted-average number of shares outstanding during each period. Diluted earnings per share
reflects the potential dilution that could occur if stock options or other equity awards from our
stock compensation plans were exercised and converted into common stock that would then participate
in net income.
Diluted earnings per share for the fiscal years ended 2009 and 2008 exclude the dilutive
effect of 8.4 million and 11.6 million stock options, respectively. These shares were excluded
from the diluted earnings per share computation because for the years noted, the exercise price of
the stock options was greater than the average market price of the Company’s common shares during
the related periods and the effect of including the stock options in the computation would be
anti-dilutive. For the fiscal year ended 2007, there were no stock options excluded from the
diluted earnings per share calculation.
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Note 4—SHARE-BASED COMPENSATION
Accounting for Share-Based Compensation
Effective January 1, 2006, the Company began recognizing compensation expense for equity
awards over the vesting period based on their grant-date fair value. The Company uses the modified
prospective approach. Under this transition method, the measurement and our method of amortization
of costs for share-based payments granted prior to, but not vested as of January 1, 2006, would be
based on the same estimate of the grant-date fair value and the same amortization method that was
previously used in our pro forma disclosure. Results for prior periods have not been restated as
provided for under the modified prospective approach. For equity awards granted after the date of
adoption, we amortize share-based compensation expense on a straight-line basis over the vesting
term.
Compensation expense is recognized only for share-based payments expected to vest. We
estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on
the Company’s historical experience and future expectations.
Total share-based compensation expense recognized in the Consolidated Statements of Operations
is as follows:
Share-Based Long-Term Incentive Compensation Plans
We grant a mix of stock options and restricted stock units to middle and senior management
employees and our Board of Directors under our incentive plans.
Shares available for future issuance to employees and our Board of Directors under existing
plans were 9.5 million at December 26, 2009.
The fair value of PBG stock options was estimated at the date of grant using the
Black-Scholes-Merton option-valuation model. The table below outlines the weighted-average
assumptions for options granted during years ended December 26, 2009, December 27, 2008 and
December 29, 2007:
The risk-free interest rate is based on the implied yield available on U.S. Treasury
zero-coupon issues with an equivalent remaining expected term. The expected term of the options
represents the estimated period of time employees will retain their vested stocks until exercise.
Due to the lack of historical experience in stock option exercises, we estimate expected term
utilizing a combination of the simplified method and historical experience of similar awards,
giving consideration to the contractual terms, vesting schedules and expectations of future
employee behavior. Expected stock price volatility is based on a combination of historical
volatility of the Company’s stock and the implied volatility of its traded options. The expected
dividend yield is management’s long-term estimate of annual dividends to be paid as a percentage of
share price.
The fair value of restricted stock units is based on the fair value of PBG stock on the date
of grant.
We receive a tax deduction for certain stock option exercises when the options are exercised,
generally for the excess of the stock price over the exercise price of the options. Additionally,
we receive a tax deduction for certain restricted stock units equal to the fair market value of
PBG’s stock at the date the restricted stock units are converted to PBG stock. GAAP requires that
benefits received from tax deductions up to the grant-date fair value of equity awards be reported
as operating cash inflows in our Consolidated Statements of Cash Flows. Benefits from tax
deductions in excess of the grant-date fair value from equity awards are treated as financing cash
inflows in our Consolidated Statements of Cash Flows. For the year ended December 26, 2009, we
recognized $36 million in tax
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benefits from equity awards in the Consolidated Statements of Cash Flows, of which $10 million
was recorded in the financing section with the remaining being recorded in cash from operations.
As of December 26, 2009, there was approximately $71 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under the
incentive plans. That cost is expected to be recognized over a weighted-average period of 1.8
years.
Stock Options
Stock options expire after 10 years and generally vest ratably over three years. Stock
options granted to our Board of Directors are typically fully vested on the grant date.
The following table summarizes option activity during the year ended December 26, 2009:
The aggregate intrinsic value in the table above is before income taxes, based on the
Company’s closing stock price of $37.56 and $22.00 as of the last business day of the years ended
December 26, 2009 and December 27, 2008, respectively.
For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, the
weighted-average grant-date fair value of stock options granted was $4.55, $7.10 and $8.19,
respectively. The total intrinsic value of stock options exercised during the years ended December
26, 2009, December 27, 2008 and December 29, 2007 was $98 million, $21 million and $100 million,
respectively.
Restricted Stock Units
Restricted stock units granted to employees generally vest over three years. In addition,
restricted stock unit awards to certain senior executives contain vesting provisions that are
contingent upon the achievement of pre-established performance targets. The initial restricted
stock unit award to our Board of Directors remains restricted while the individual serves on the
Board. The annual grants to our Board of Directors vest immediately, but receipt of the shares may
be deferred. All restricted stock unit awards are settled in shares of PBG common stock.
The following table summarizes restricted stock unit activity during the year ended December
26, 2009:
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For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, the
weighted-average grant-date fair value of restricted stock units granted was $18.82, $35.38 and
$31.02, respectively. The total intrinsic value of restricted stock units converted during the
years ended December 26, 2009, December 27, 2008 and December 29, 2007 was approximately $19
million, $4 million and $575 thousand, respectively.
Note 5—BALANCE SHEET DETAILS
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Note 6—OTHER INTANGIBLE ASSETS, NET AND GOODWILL
The components of other intangible assets are as follows:
During the second quarter of 2009, we acquired a Pepsi-Cola and Dr Pepper franchise bottler
serving portions of central Texas. As a result of this acquisition we recorded approximately $56
million of non-amortizable franchise rights and $8 million of non-compete agreements, with a
weighted-average amortization period of 5 years.
During the third quarter of 2009, we acquired a Pepsi-Cola franchise bottler serving
northeastern Massachusetts. As a result of this acquisition we recorded approximately $24 million
of non-amortizable franchise rights and $1 million of non-compete agreements, with a
weighted-average amortization period of 5 years.
During 2009, we acquired distribution rights for certain energy drinks in the United States,
Canada and Mexico, and protein-enhanced functional beverages in the United States. As a result of
these acquisitions we recorded approximately $36 million of amortizable distribution rights, with a
weighted-average amortization period of 10 years.
During 2009, we acquired rights to manufacture and distribute Crush brands in portions of the
United States and recorded approximately $4 million of non-amortizable franchise rights.
During the first quarter of 2008, we acquired a Pepsi-Cola franchise bottler serving certain
New York counties in whole or in part. As a result of the acquisition we recorded approximately $18
million of non-amortizable franchise rights and $4 million of non-compete agreements, with a
weighted-average amortization period of 10 years.
During the first quarter of 2008, we acquired distribution rights for SoBe brands in portions
of Arizona and Texas and recorded approximately $6 million of non-amortizable distribution rights.
During the fourth quarter of 2008, we acquired a Pepsi-Cola franchise bottler serving portions
of Colorado, Arizona and New Mexico. As a result of the acquisition we recorded approximately $176
million of non-amortizable franchise rights.
The total cost of acquisitions and distribution and franchise rights during 2009 and 2008 was
approximately $132 million and $279 million, respectively.
Intangible Asset Amortization
Intangible asset amortization expense was $10 million, $9 million and $10 million in 2009,
2008 and 2007, respectively. Amortization expense for each of the next five years is estimated to
be approximately $12 million or less.
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Goodwill
The changes in the carrying value of goodwill by reportable segment for the years ended
December 27, 2008 and December 26, 2009 are as follows:
During 2009, the purchase price allocations in the U.S. & Canada segment primarily relate to
goodwill allocations resulting from changes in taxes associated with our previous acquisitions.
During 2008, the purchase price allocations in the U.S. & Canada segment primarily relate to
goodwill allocations resulting from the acquisitions discussed above. In the Europe segment, the
purchase price allocations primarily relate to Russia’s purchase of a company that will manufacture
various Pepsi products in Siberia and Eastern Russia. The purchase price allocations in the Mexico
segment primarily relate to goodwill allocations resulting from changes in taxes associated with
our previous acquisitions.
Annual Impairment Testing
The Company completed its impairment test of goodwill and indefinite lived intangible assets
during the third quarter of 2009 and recorded no impairment charge. In the fourth quarter of 2008,
the Company recorded $412 million in non-cash impairment charges ($277 million net of tax and
noncontrolling interests), relating primarily to distribution rights and brands for the Electropura
water business in Mexico. The impairment charge relating to these intangible assets was determined
based upon the findings of an extensive strategic review and the finalization of certain
restructuring plans for our Mexican business. The fair value of our distribution rights was
estimated using a multi-period excess earnings method that is based upon estimated discounted
future cash flows. The fair value of our brands was estimated using a multi-period royalty savings
method, which reflects the savings realized by owning the brand and, therefore, not having to pay a
royalty fee to a third party.
Note 7—FAIR VALUE MEASUREMENTS
During 2008, the Company began disclosing the fair value of all financial instruments valued
on a recurring basis, at least annually. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It also establishes a three level fair value hierarchy that
prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined
as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted
prices for identical assets or liabilities in non-active markets, quoted prices for similar
assets or liabilities in active markets and inputs other than quoted prices that are observable
for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in
pricing the asset or liability.
If the inputs used to measure the financial instruments fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is significant to the fair
value measurement of the instrument.
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The following table summarizes the financial assets and liabilities we measure at fair value
on a recurring basis as of December 26, 2009 and December 27, 2008:
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash
equivalents and accounts receivable. Financial liabilities with carrying values approximating fair
value include accounts payable and other accrued liabilities and short-term debt. The carrying
values of these financial assets and liabilities approximates fair value due to their short
maturities and since interest rates approximate current market rates for short-term debt.
Long-term debt, which includes the current maturities of long-term debt, at December 26, 2009,
had a carrying value and fair value of $5.5 billion and $6.1 billion, respectively and at December
27, 2008, had a carrying value and fair value of $6.1 billion and $6.4 billion, respectively. The
fair value is based on interest rates that are currently available to us for issuance of debt with
similar terms and remaining maturities.
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Note 8—SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Aggregate Maturities — Long-Term Debt
Aggregate maturities of long-term debt as of December 26, 2009 are as follows: 2010: $8
million, 2011: $8 million, 2012: $1,000 million, 2013: $400 million, 2014: $1,300 million, 2015 and
thereafter: $2,800 million. The maturities of long-term debt do not include the capital lease
obligations, the non-cash impact of the fair value hedge adjustment and the interest effect of the
unamortized discount.
On January 14, 2009, we issued $750 million in senior notes, with a coupon rate of 5.125
percent, maturing in 2019. The net proceeds of the offering, together with a portion of the
proceeds from the offering of our senior notes issued in the fourth quarter of 2008, were used to
repay our senior notes due in 2009, at their scheduled maturity on February 17, 2009. Any excess
proceeds of this offering were used for general corporate purposes. The next significant scheduled
debt maturity is not until 2012.
On October 24, 2008, we issued $1.3 billion of 6.95 percent senior notes due 2014 (the
“Notes”). The Notes were guaranteed by PepsiCo on February 17, 2009. A portion of the proceeds of
this debt was used to finance acquisitions and repay short-term commercial paper debt.
2009 Short-Term Debt Activities
We have a committed credit facility of $1.2 billion and an uncommitted credit facility of $500
million. Both of these credit facilities are guaranteed by Bottling LLC and are used to support
our $1.2 billion commercial paper program and working capital requirements.
We had no commercial paper outstanding at December 26, 2009 or December 27, 2008.
In addition to the credit facilities discussed above, we had available short-term bank credit
lines of approximately $892 million at year-end 2009, of which the majority was uncommitted. These
lines were primarily used to support the general operating needs of our international locations.
As of December 26, 2009, we had $188
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million outstanding under these lines of credit at a weighted-average interest rate of 3.1
percent. As of December 27, 2008, we had available short-term bank credit lines of approximately
$772 million with $103 million outstanding at a weighted-average interest rate of 10.0 percent.
Debt Covenants
Certain of our senior notes have redemption features and non-financial covenants that will,
among other things, limit our ability to create or assume liens, enter into sale and lease-back
transactions, engage in mergers or consolidations and transfer or lease all or substantially all of
our assets. Additionally, certain of our credit facilities and senior notes have financial
covenants consisting of the following:
Interest Payments and Expense
Amounts paid to third parties for interest, net of settlements from our interest rate swaps,
were $323 million, $293 million and $305 million in 2009, 2008 and 2007, respectively. Total
interest expense incurred during 2009, 2008 and 2007 was $324 million, $316 million and $305
million, respectively.
Letters of Credit, Bank Guarantees and Surety Bonds
At December 26, 2009, we had outstanding letters of credit, bank guarantees and surety bonds
valued at $314 million from financial institutions primarily to provide collateral for estimated
self-insurance claims and other insurance requirements.
Note 9—LEASES
We have non-cancelable commitments under both capital and long-term operating leases,
principally for real estate and manufacturing and office equipment. Certain of our operating
leases for real estate contain escalation clauses, holiday rent allowances and other rent
incentives. We recognize rent expense on our operating leases, including these allowances and
incentives, on a straight-line basis over the lease term. Capital and operating lease commitments
expire at various dates through 2072. Most leases require payment of related executory costs,
which include property taxes, maintenance and insurance.
The
cost of manufacturing and office equipment under capital leases is included in the
Consolidated Balance Sheets as PP&E. Amortization of assets under capital
leases is included in depreciation expense.
Capital lease additions totaled $25 million, $4 million and $7 million for 2009, 2008 and
2007, respectively.
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The future minimum lease payments by year and in the aggregate, under capital leases and
non-cancelable operating leases consisted of the following at December 26, 2009:
The total minimum rentals to be received in the future from our non-cancelable subleases were
$3 million at December 26, 2009.
Components of Net Rental Expense Under Operating Leases
Note 10—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
We are subject to the risk of loss arising from adverse changes in commodity prices, foreign
currency exchange rates, interest rates and our stock price. In the normal course of business, we
manage these risks through a variety of strategies, including the use of derivatives. Our
corporate policy prohibits the use of derivative instruments for trading or speculative purposes,
and we have procedures in place to monitor and control their use.
We are exposed to counterparty credit risk on all of our derivative financial instruments. We
have established and maintain counterparty credit guidelines and only enter into transactions with
financial institutions of investment grade or better. We monitor our counterparty credit risk and
utilize numerous counterparties to minimize our exposure to potential defaults. We do not require
collateral under these transactions.
Commodity — We use forward and option contracts to hedge the risk of adverse movements in
commodity prices related primarily to anticipated purchases of raw materials and energy used in our
operations. These contracts generally range from one to 24 months in duration. Our open commodity
derivative contracts that qualify for cash flow hedge accounting have a notional value, based on
the contract price, of $347 million as of December 26, 2009. Our open commodity derivative
contracts that act as economic hedges but do not qualify for hedge accounting have a notional
value, based on the contract price, of $50 million as of December 26, 2009.
Foreign Currency — We are subject to foreign currency transactional risks in certain of our
international territories primarily for the purchase of commodities that are denominated in
currencies that are different from their functional currency. We enter into forward contract
agreements to hedge a portion of this foreign currency risk. These contracts generally range from
one to 24 months in duration. Our open foreign currency derivative contracts that qualify for
cash flow hedge accounting have a notional value, based on the contract price, of $150 million as
of December 26, 2009.
We have foreign currency derivative contracts to economically hedge the foreign currency risk
associated with certain assets on our balance sheet, which have a notional value, based on the
contract price, of $40 million as of December 26, 2009. Additionally, we fair value certain vendor
and customer contracts that have embedded foreign currency derivative components. These contracts
generally range from one year to three years and as of December 26, 2009 have a notional value,
based on the contract price, of $10 million.
Interest — We have entered into treasury rate lock agreements to hedge against adverse
interest rate changes relating to the issuance of certain fixed rate debt financing arrangements.
The settled gains and losses from these treasury rate lock agreements that were considered
effective were deferred in AOCL and are being amortized to
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interest expense over the duration of the debt term. The Company has a $3 million net
deferred gain in AOCL related to these instruments, which will be amortized over the next six
years. For the year ended December 26, 2009, we recognized in interest expense a loss of $0.4
million.
We effectively converted $1.25 billion of our fixed-rate debt to floating-rate debt through
the use of interest rate swaps with the objective of reducing our overall borrowing costs. These
interest rate swaps meet the criteria for fair value hedge accounting and are assumed to be 100
percent effective in eliminating the market-rate risk inherent in our long-term debt. Accordingly,
any gain or loss associated with these swaps is fully offset by the opposite market impact on the
related debt and recognized currently in earnings.
Unfunded Deferred Compensation Liability — Our unfunded deferred compensation liability is
subject to changes in our stock price as well as price changes in other equity and fixed-income
investments. We use prepaid forward contracts to hedge the portion of our deferred compensation
liability that is based on our stock price. At December 26, 2009, we had a prepaid forward
contract for 410,000 shares.
Balance Sheet Classification
The following summarizes the fair values and location in our Consolidated Balance Sheet of all
derivatives held by the Company as of December 26, 2009:
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Cash Flow Hedge Gains (Losses) Recognition
The following summarizes the gains (losses), recognized in the Consolidated Statement of
Operations and AOCL, of derivatives designated and qualifying as cash flow hedges for the year
ended December 26, 2009:
Assuming no change in the commodity prices and foreign currency rates as measured on December
26, 2009, $50 million of unrealized gains will be recognized in earnings over the next 12 months.
During 2009, we recognized $7 million of ineffectiveness relating to our commodity cash flow
hedges. During 2008, we recognized $8 million of ineffectiveness
for the treasury rate locks that were
settled in the fourth quarter.
Other Derivatives Gains (Losses) Recognition
The following summarizes the gains (losses) and the location in the Consolidated Statement of
Operations of derivatives designated and qualifying as fair value hedges and derivatives not
designated as hedging instruments for the year ended December 26, 2009:
The Company has recorded $4 million of net foreign currency transactional gains in other
non-operating (income) expenses, net in the Consolidated Statement of Operations for the year ended
December 26, 2009.
Note 11—PENSION AND POSTRETIREMENT MEDICAL BENEFIT PLANS
Employee Benefit Plans
We sponsor both pension and other postretirement medical benefit plans in various forms in the
United States and other similar pension plans in our international locations, covering employees
who meet specified eligibility requirements. The assets, liabilities and expense associated with
our international plans were not significant to our results of operations and are not included in
the tables and discussion presented below.
Defined Benefit Pension Plans
In the U.S., we sponsor non-contributory defined benefit pension plans for certain full-time
salaried and hourly employees. Benefits are generally based on years of service and compensation,
or stated amounts for each year of service. Effective January 1, 2007, newly hired salaried and
non-union hourly employees are not eligible to
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participate in these plans. Additionally, effective April 1, 2009, benefits from these plans
are no longer accrued for certain salaried and non-union employees that did not meet specified age
and service requirements.
Postretirement Medical Plans
Our postretirement medical plans provide medical and life insurance benefits principally to
U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and
service requirements. The plans are not funded and since 1993 have included retiree cost sharing.
Defined Contribution Benefits
Nearly all of our U.S. employees are eligible to participate in our defined contribution
plans, which are voluntary defined contribution savings plans. We make matching contributions to
the defined contribution savings plans on behalf of participants eligible to receive such
contributions. Additionally, employees not eligible to participate in the defined benefit pension
plans and employees whose benefits have been frozen as of April 1, 2009, are currently receiving
additional retirement contributions under the defined contribution plans. Defined contribution
expense was $42 million, $29 million and $27 million in 2009, 2008 and 2007, respectively.
Components of Net Pension Expense and Other Amounts Recognized in Other Comprehensive (Income)
Loss
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Components of Postretirement Medical Expense and Other Amounts Recognized in Other
Comprehensive (Income) Loss
Changes in Benefit Obligations
Changes in the Fair Value of Plan Assets
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Amounts Included in AOCL (1)
Estimated Gross Amounts in AOCL to be Amortized in 2010
Selected Information for Plans with Liabilities in Excess of Plan Assets
Fair Market Value of Pension Plan Assets
The following table sets forth a summary of changes in the fair value of the GAC:
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Reconciliation of Funded Status
Weighted Average Assumptions
The expected rate of return on plan assets for a given fiscal year is based upon actual
historical returns and the long-term outlook on asset classes in the pension plans’ investment
portfolio.
Funding and Plan Assets
The table above shows the target allocation for 2010 and the actual allocation as of December
26, 2009 and December 27, 2008. Target allocations of PBG sponsored pension plans’ assets reflect
the long-term nature of our pension liabilities. None of the current assets are invested directly
in equity or debt instruments issued by PBG, PepsiCo or any bottling affiliates of PepsiCo,
although it is possible that insignificant indirect investments exist through our broad market
indices. PBG sponsored pension plans’ equity investments are currently diversified across all
areas of the equity market (i.e., large, mid and small capitalization stocks as well as
international equities). PBG sponsored pension plans’ fixed income investments consist primarily
of corporate bonds. The pension plans currently do not invest directly in any derivative
investments. The pension plans’ assets are held in a pension trust account at our trustee’s bank.
PBG’s pension investment policy and strategy are mandated by PBG’s Pension Investment
Committee (“PIC”) and are overseen by the PBG Board of Directors’ Compensation and Management
Development Committee. The plan assets are invested using a combination of enhanced and passive
indexing strategies. The performance of the plan assets is benchmarked against market indices and
reviewed by the PIC. Changes in investment strategies, asset allocations and specific investments
are approved by the PIC prior to execution.
Health Care Cost Trend Rates
We have assumed an average increase of 8.00 percent in 2010 in the cost of postretirement
medical benefits for employees who retired before cost sharing was introduced. This average
increase is then projected to decline gradually to five percent in 2015 and thereafter.
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Assumed health care cost trend rates have an impact on the amounts reported for postretirement
medical plans. A one-percentage point change in assumed health care costs would have the following
impact:
Pension and Postretirement Cash Flow
We do not fund our pension plan and postretirement medical plans when our contributions would
not be tax deductible or when benefits would be taxable to the employee before receipt. Of the
total U.S. pension liabilities at December 26, 2009, $66 million relates to pension plans not
funded due to these unfavorable tax consequences.
Expected Benefits
The expected benefit payments to be made from PBG sponsored pension and postretirement medical
plans (with and without the prescription drug subsidy provided by the Medicare Prescription Drug,
Improvement and Modernization Act of 2003) to our participants over the next ten years are as
follows:
Note 12—INCOME TAXES
The details of our income tax provision are set forth below:
In 2009, our tax provision includes the following significant items:
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In 2008, our tax provision included the following significant items:
In 2007, our tax provision included higher taxes on higher international earnings, as well as
the following significant items:
Our U.S. and foreign income before income taxes is set forth below:
Below is the reconciliation of our income tax rate from the U.S. federal statutory rate to our
effective tax rate:
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