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Pepsi Bottling Group 10-Q 2008 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 14, 2008 (12 weeks)
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)
914-767-6000
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO 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 July 12, 2008 was 213,395,514 and 100,000, respectively.
The Pepsi Bottling Group, Inc.
Index
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PART I — FINANCIAL INFORMATION
Item 1.
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations in millions, except per share amounts, unaudited
See accompanying notes to Condensed Consolidated Financial Statements.
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The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows in millions, unaudited
See accompanying notes to Condensed Consolidated Financial Statements.
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The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets in millions, except per share amounts
See accompanying notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions, except per share amounts Note 1—Basis of Presentation
When used in these Condensed 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 prepare our unaudited Condensed Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America, which requires us to make
judgments, estimates and assumptions that affect the results of operations, financial position and
cash flows of The Pepsi Bottling Group, Inc., as well as the related footnote disclosures. Actual
results could differ from these estimates. These interim financial statements have been prepared in
conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include certain information and disclosures required for comprehensive annual financial
statements. Therefore, the Condensed Consolidated Financial Statements should be read in
conjunction with the audited consolidated financial statements for the fiscal year ended December
29, 2007 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim
information includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation.
The significant accounting policies summarized in Note 2 to our audited consolidated financial
statements for the fiscal year ended December 29, 2007 as presented in our Annual Report on Form
10-K have been followed in preparing the accompanying Condensed Consolidated Financial Statements
with the exception of a change to our measurement date for our annual impairment test
for goodwill and intangible assets with indefinite useful lives. For further information about this
accounting policy change, see Note 7.
Our U.S. and Canadian operations report using a fiscal year that consists of fifty-two weeks,
ending on the last Saturday in December. Every five or six years a fifty-third week is added.
Fiscal years 2008 and 2007 consist of fifty-two weeks. Our remaining countries report using a
calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
At June 14, 2008, PepsiCo, Inc. (“PepsiCo”) owned 74,141,350 shares of our common stock,
consisting of 74,041,350 shares of common stock and all 100,000 authorized shares of Class B common
stock. This represents approximately 34.6 percent of our outstanding common stock and 100 percent
of our outstanding Class B common stock, together representing 41.4 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 has a 40 percent ownership interest in PR Beverages Limited, our Russian
venture, which is consolidated under Bottling LLC. We fully consolidate the results of Bottling
LLC and present PepsiCo’s share as minority interest in our Condensed Consolidated Financial
Statements.
We also 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.
Minority interest in earnings and ownership has been recorded for the percentage of these entities
not owned by PBG. We have eliminated all intercompany accounts and transactions in consolidation.
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Note 2—Seasonality of Business
The results for the second quarter are not necessarily indicative of the results that may be
expected for the full year because sales of our products are seasonal, especially in our Europe
segment where sales tend to be more sensitive to weather conditions. The seasonality of our
operating results arises from higher sales in the second and third quarters versus the first and
fourth quarters of the year, combined with the impact of fixed costs, such as depreciation and
interest, which are not significantly impacted by business seasonality. From a cash flow
perspective, the majority of our cash flow from operations is generated in the third and fourth
quarters.
Note 3—New Accounting Standards
SFAS No. 157
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which
establishes a framework for reporting fair value and expands disclosures about fair value
measurements. The Company adopted SFAS 157 as it applies to financial assets and liabilities in our
first quarter of 2008. The adoption of these provisions did not have a material impact on our
Consolidated Financial Statements. For further information about the fair value measurements of our
financial assets and liabilities see Note 8.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). We are currently
evaluating the impact of SFAS 157 on our Consolidated Financial Statements for items within the
scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.
SFAS No. 158
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” (“SFAS 158”). Effective for the current fiscal year, the
standard requires the measurement date for PBG sponsored plan assets and liabilities to coincide
with our fiscal year-end. SFAS 158 provides two transition alternatives related to the change in
measurement date provisions. We adopted the measurement date provisions of SFAS 158 on the first
day of fiscal year 2008 using the “two-measurement” approach. As a result, we measured our plan
assets and benefit obligations on December 30, 2007 and adjusted our opening balances of retained
earnings and accumulated comprehensive loss 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 our pension and other postretirement
medical benefit plans liability of $9 million, a net decrease in retained earnings of $16 million,
net of minority interest of $2 million and taxes of $9 million and a net decrease in accumulated
comprehensive loss of $19 million, net of minority interest of $2 million and taxes of $14 million.
There was no impact on our results of operations.
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”),
which addresses the recognition and accounting for identifiable assets acquired, liabilities
assumed, and noncontrolling interests in business combinations. SFAS 141(R) also establishes
expanded disclosure requirements for business combinations. SFAS 141(R) will become effective
beginning with our first quarter of 2009. We are currently evaluating the impact of this standard
on our Consolidated Financial Statements.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and
reporting framework for minority interests by a parent company. SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the
noncontrolling owners of a subsidiary. SFAS
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160 will become effective beginning with our first quarter of 2009. We are currently evaluating the impact of this standard on our Consolidated
Financial Statements.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced
disclosures for derivative and hedging activities. SFAS 161 will become effective beginning with
our first quarter of 2009. Early adoption is permitted. We are currently evaluating the impact of
this standard on our Consolidated Financial Statements.
EITF Issue No. 07-1
In December 2007, the FASB ratified the EITF’s Consensus for Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes
reporting requirements for transactions between participants in a collaborative arrangement and
between participants in the arrangement and third parties. EITF 07-1 will become effective
beginning with our first quarter of 2009. We are currently evaluating the impact, if any, of this
standard on our Consolidated Financial Statements.
Note 4—Earnings per Share
The following table reconciles the shares outstanding and net earnings used in the
computations of both basic and diluted earnings per share:
Diluted earnings per share reflects the potential dilution that could occur if outstanding
stock options or other equity awards from our share-based compensation plans were exercised and
converted into common stock that would then participate in net income. The following shares were
excluded from the diluted earnings per share computation because the exercise price of the options
was greater than the average market price of the Company’s common shares during the related periods
and the effect of including the options in the computation would be antidilutive:
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Note 5—Share-Based Compensation
The total impact of share-based compensation recognized in the Condensed Consolidated
Statements of Operations is as follows:
During each of the 24 weeks ended June 14, 2008 and June 16, 2007, we granted approximately 3
million stock option awards at a weighted-average fair value of $7.12 and $8.18, respectively.
During each of the 24 weeks ended June 14, 2008 and June 16, 2007, we granted approximately 1
million restricted stock unit awards at a weighted-average fair value of $35.36 and $30.90,
respectively.
Unrecognized compensation cost related to nonvested share-based compensation arrangements
granted under the incentive plans amounted to $103 million as of June 14, 2008. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Note 6—Balance Sheet Details
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Industrial Revenue Bonds
Pursuant to the terms of an industrial revenue bond, we transferred title of certain fixed
assets with a net book value as of June 14, 2008 of $63 million to a state governmental authority
in the U.S. to receive a property tax abatement. The title to these assets will revert back to PBG
upon retirement or cancellation of the bond. These fixed assets are still recognized in the
Company’s Condensed Consolidated Balance Sheet as all risks and rewards remain with the Company.
Note 7—Other Intangible Assets, net and Goodwill
Other intangible assets, net
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During the first quarter, we acquired Pepsi-Cola Batavia Bottling Corp. The Pepsi-Cola
franchised bottler serves certain New York counties in whole or in part. The acquisition did not
have a material impact on our Condensed Consolidated Financial Statements.
During
the second quarter, PR Beverages Limited, our Russian venture,
acquired Sobol-Aqua JSC (“Sobol”),
a company that manufacturers Sobol brands and co-packs various Pepsi products in Siberia and
Eastern Russia. The acquisition did not have a material impact on our Condensed
Consolidated Financial Statements.
Intangible asset amortization
Intangible asset amortization expense was $2 million and $3 million for the 12 weeks ended
June 14, 2008 and June 16, 2007, respectively. Intangible asset amortization expense was $4
million and $5 million for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively.
Amortization expense for each of the next five years is estimated to be approximately $7 million or
less.
Goodwill
The changes in the carrying value of goodwill by reportable segment for the 24 weeks ended
June 14, 2008 are as follows:
The purchase price allocations include goodwill allocations as a result of the Sobol
acquisition and adjustments to goodwill as a result of changes in taxes associated with prior year
acquisitions.
Accounting change
The Company completes its impairment testing of goodwill
in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” annually, or
more frequently as indicators warrant. In previous years the Company completed this test during the
fourth quarter using a measurement date of third quarter-end. During the quarter ended June 14,
2008, the Company changed its impairment testing to the third
quarter, using a measurement date at the
beginning of the third quarter, in order to move the testing outside of the normal year-end
reporting process to a date when resources are less constrained and to align with the Company’s
annual strategic planning calendar. The Company believes that the
resulting change in accounting principle related to the annual
impairment testing date will not delay, accelerate, or avoid an
impairment charge. The Company determined that the change in accounting principle
related to the impairment testing date is preferable under the circumstances and does not result in
adjustments to the Company’s financial statements when applied
retrospectively. Similarly, the Company changed its impairment
testing of intangible assets with indefinite useful lives to the
third quarter, using a measurment date at the beginning of the third
quarter.
Note 8—Fair Value Measurements
SFAS 157 defines and establishes a framework for measuring fair value and expands disclosures
about fair value measurements. In accordance with SFAS 157, we have categorized our financial
assets and liabilities, based on the priority of the inputs to the valuation technique, into a
three-level fair value hierarchy as set forth below. 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. The three
levels of the hierarchy are defined as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
We currently do not have any Level 1 financial assets or liabilities.
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Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs
include 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. We currently do not have any Level 3 financial assets or
liabilities.
The following table summarizes the financial assets and liabilities we measure at fair value
on a recurring basis as of June 14, 2008:
Note 9—Pension and Postretirement Medical Benefit Plans
The assets, liabilities and expense associated with our international employee benefit plans
were not significant to our results of operations and our financial position and are not included
in the tables and discussion presented below.
Components of net pension expense
There were no contributions made to our U.S. pension plans for the 24 weeks ended June 14,
2008.
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Components of postretirement medical expense
Defined contribution expense
Defined contribution expense was $7 million for each of the 12 weeks ended June 14, 2008 and
June 16, 2007 and $15 million and $13 million for the 24 weeks ended June 14, 2008 and June 16,
2007, respectively.
Note 10—Income Taxes
We currently have on-going income tax audits in some of our major tax jurisdictions, some of
which may come to a resolution within the next twelve months and could result in a material change
in our unrecognized tax benefits. We cannot reasonably estimate the potential change in
unrecognized tax benefits at this time.
Note 11—Segment Information
We operate 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
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. The operating segments of the U.S. and Canada are aggregated into a single
reportable segment due to their economic similarity as well as similarity across products,
manufacturing and distribution methods, types of customers and regulatory environments.
Operationally, the Company is organized along geographic lines with specific regional
management teams having responsibility for the financial results in each reportable segment. We
evaluate the performance of these segments based on operating income or loss. Operating income or
loss is exclusive of net interest expense, minority interest, foreign exchange gains and losses and
income taxes.
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The following tables summarize select financial information related to our reportable
segments:
Note 12—Comprehensive Income
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Note 13—Full Service Vending Rationalization and Restructuring Charges
Full Service Vending Rationalization
During 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan, which we
completed in the second quarter of 2008, to rationalize our vending asset base in our U.S. & Canada
segment by disposing 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.
Over the course of the FSV Rationalization plan, we incurred a pre-tax charge of approximately
$25 million, the majority of which was non-cash, including costs associated with the removal of
these assets from service, disposal costs and redeployment expenses. We recorded approximately $2
million of this pre-tax charge during 2008. This pre-tax charge is recorded in selling, delivery
and administrative expenses.
Restructuring Charges
In the third quarter of 2007, we announced a restructuring program (the “Organizational
Realignment”) 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
substantially completed the Organizational Realignment during the first quarter of 2008. Over the
course of the program we incurred a pre-tax charge of approximately $29 million, including $3
million which was recorded through the second quarter of 2008 primarily for relocation expenses in
our U.S. & Canada segment. Of the total cost of the program, approximately $25 million has been
paid or settled, including $11 million paid during 2008. The
remaining amount accrued will primarily be paid
out in the second half of 2008.
Note 14—Contingencies
We are subject to various claims and contingencies related to lawsuits, environmental and
other matters arising from the normal course of business. We believe that the ultimate liability
arising from such claims or contingencies, if any, in excess of amounts already recognized is not
likely to have a material adverse effect on our results of operations, financial condition or
liquidity.
Note 15—Supplemental Cash Flow Information
The table below presents the Company’s supplemental cash flow information:
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Item 2.
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 and has 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 Condensed 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.
PBG operates in one industry, carbonated soft drinks and other ready-to-drink beverages, and
all of our segments derive revenue from these products. 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.
Management’s Financial Review should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and the accompanying notes and our Annual Report on Form 10-K for
the fiscal year ended December 29, 2007, which include additional information about our accounting
policies, practices and the transactions that underlie our financial results. The preparation of
our Condensed Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and
assumptions that affect the reported amounts in our Condensed Consolidated Financial Statements and
the accompanying notes, including various claims and contingencies related to lawsuits, taxes,
environmental and other matters arising out of the normal course of business. We use 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 Condensed Consolidated Financial
Statements. Actual results may differ from these estimates.
OUR CRITICAL ACCOUNTING POLICIES
As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December
29, 2007, management believes the following policies to be the most critical to the portrayal of
PBG’s financial condition and results of operations and require the use of estimates, assumptions
and the application of judgment:
Critical Accounting Policy Update—Other Intangible Assets, net and Goodwill
The Company completes its impairment testing of goodwill
in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” annually, or
more frequently as indicators warrant. In previous years the Company completed this test in the
fourth quarter using a measurement date of third quarter-end. During the quarter ended June 14,
2008, the Company changed its impairment testing to the third quarter, using a measurement date
at the beginning of the third quarter, in order to move the testing outside of the normal year-end
reporting process to a date when resources are less constrained and to align with the Company’s
annual strategic planning calendar. Similarly, the Company changed
its impairment testing of intangible assets with indefinite useful
lives to the third quarter, using a measurement date at the beginning
of the third quarter. For further information about this accounting change see Note 7
in the Notes to Condensed Consolidated Financial Statements.
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OUR FINANCIAL RESULTS
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:
2008 Items
PR Beverages Limited (“PR Beverages”)
On March 1, 2007, together with PepsiCo we formed PR Beverages, a venture that will enable 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 the Company immediately prior to the
venture. PepsiCo also granted PR Beverages an exclusive license to manufacture and sell the
concentrate for such products.
Beginning in the second quarter of 2007, we fully consolidate PR Beverages into our financial
statements and record minority interest for PepsiCo’s 40 percent ownership interest. The negative
impact on operating income of $4 million incurred during the first quarter of 2008 resulting from
the consolidation of the venture is offset in minority interest. Minority interest is recorded
below operating income.
Restructuring Charges
In the third quarter of 2007, we announced a restructuring program (the “Organizational
Realignment”) 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. Over
the course of the program we incurred a pre-tax charge of approximately $29 million. Of this
amount, we recorded $2 million in the first quarter of 2008 and $1 million in the second quarter of
2008, primarily relating to relocation expenses in our U.S. & Canada segment. We substantially
completed the Organizational Realignment during the first quarter of 2008, which resulted in the
elimination of approximately 800 positions and we expect to recognize annual cost savings of about
$30 million as a result of the program.
Substantially all costs associated with the Organizational Realignment required or will
require cash payments. The total after-tax cash expenditures, including payments made pursuant to
existing unfunded indemnity plans, are expected to be approximately $25 million, of which $22
million has been paid since the inception of the program and through June 14, 2008. The remaining
expenditures will primarily be paid in the second half of 2008.
Full Service Vending Rationalization
During 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan, which we
completed in the second quarter of 2008, to rationalize our vending asset base in our U.S. & Canada
segment by disposing 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. Over the course of the FSV
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Rationalization plan, we incurred a pre-tax charge of approximately $25 million, the majority
of which is non-cash, including costs associated with the removal of these assets from service,
disposal costs and redeployment expenses. This plan is part of the Company’s broader initiative
designed to improve operating income margins of our FSV business.
We incurred a pre-tax charge of approximately $1 million associated with the FSV
Rationalization plan in each of the first and second quarters of 2008. These charges are recorded
in selling, delivery and administrative expenses.
For further information about our restructuring charges and FSV Rationalization see Note 13 in
the Notes to Condensed Consolidated Financial Statements.
FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS
Worldwide Financial Highlights for the 12 Weeks Ended June 14, 2008
The impact of foreign currency translation, driven by the strength of all our foreign
functional currencies, contributed approximately three-percentage points of growth in worldwide net
revenues, cost of sales, gross profit and selling, delivery and administrative expenses and
contributed two-percentage points to worldwide operating income.
Net revenues — Growth of five percent includes an eight-percent increase in net revenue per
case driven by pricing gains in each of our countries and by foreign currency translation,
partially offset by a decrease in worldwide volume growth.
Cost of sales — Increase of five percent includes an eight-percent increase in cost of sales
per case primarily attributable to higher raw material costs as well as foreign currency
translation, partially offset by volume declines.
Gross profit — Growth of five percent includes an eight-percent increase in gross profit per
case due to rate increases to mitigate higher worldwide raw material costs coupled with the
positive impact of foreign currency translation.
Selling, delivery and administrative (“SD&A”) expenses — Increase of five percent includes
additional costs associated with our investment in Europe coupled with the negative impact from
foreign currency translation. These increases were mitigated by continued cost productivity
improvements and disciplined cost management, driven primarily by the U.S. & Canada segment.
Operating income — Increase of four percent was driven primarily by strong growth in our
Europe and Mexico segments, partially offset by a decline in our U.S. & Canada segment. Overall,
operating income growth was due to strong net revenue per case performance, cost productivity
improvements across all segments, and the positive impact from foreign currency translation. This
was partially offset by higher raw material costs worldwide and volume declines.
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Net income — Increase of eight percent reflects higher operating income and lower effective
taxes and net interest expense, which was partially offset by increased minority interest due to
growth in PR Beverages Limited, our Russian venture.
2008 RESULTS OF OPERATIONS
Tables and discussion are presented as compared to the similar periods in the prior year.
Growth rates are rounded to the nearest whole percentage.
Volume
Our worldwide physical case volume decreased three percent in the second quarter and one
percent for the first 24 weeks of 2008. The decrease in worldwide volume for the quarter was
primarily driven by the overall weakness in the liquid refreshment beverage category in the U.S.,
coupled with a one-percentage point negative impact from the shift of the Easter holiday into the
first quarter in 2008 versus the second quarter in 2007 (“Easter shift”) in our U.S & Canada
segment. The decrease for the year-to-date period was primarily due to declines in our U.S. &
Canada segment partially offset by growth in Europe.
In our U.S. & Canada segment, volume decreased four-percentage points in the second quarter
and two-percentage points for the first 24 weeks of 2008. The decrease in volume for the quarter
was a result of a two-percentage point impact from the Easter shift and the macroeconomic factors
negatively impacting the liquid refreshment beverage category. On a year-to-date basis, volume
declines were driven by a two-percentage point decline in the cold drink channel and
one-percentage point decline in our take home channel. Declines in our small format and foodservice
channels, including restaurants, travel and leisure and workplace have been particularly impacted
by the economic downturn in the U.S.
In our Europe segment, volume grew one percent for the quarter and three percent for the
year-to-date period, driven by strong growth in Russia and Turkey, partially offset by volume
declines in Spain. Russia continues to lead Europe with volume growth of six percent for the
quarter and seven percent for the year-to-date period, reflecting a strong performance in our
non-carbonated beverages.
In our Mexico segment, volume decreased three percent for the quarter and one percent for the
year-to-date period, due in part to the Company’s pricing actions to drive improved margins across
its portfolio.
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Net Revenues
Worldwide net revenues were $3.5 billion in the second quarter of 2008 and $6.2 billion in the
first 24 weeks of 2008, increasing five percent and six percent, respectively. Increases for the
quarter and year-to-date periods reflect growth in net price per case in each of our segments and
contributions from foreign currency translation, partially offset by volume declines in our U.S. &
Canada and Mexico segments.
In our U.S. & Canada segment, net revenues growth was flat in the quarter and increased two
percent for the year-to-date period. The second quarter and year-to-date performance was primarily
due to net price per case improvement and the positive impact from foreign currency translation,
partially offset by volume declines. The increases in net price per case for both the quarter and
year-to-date periods were primarily driven by rate improvements across our portfolio to offset
rising raw material costs.
In our Europe segment, growth in net revenues in the quarter and year-to-date periods reflects
increases in net price per case in each of our countries, coupled with volume growth and the positive
impact of foreign currency translation. Growth in net price per case was driven primarily by rate
increases.
In our Mexico segment, growth in net revenues in the quarter and year-to-date periods reflects
strong increases in net price per case and the positive impact of foreign currency translation,
partially offset by declines in volume. Growth in net price per case was primarily due to rate
increases taken within our multi-serve carbonated soft drinks, jugs
and bottled water packages, driving increased
margin improvement.
In the second quarter, our U.S. & Canada segment generated approximately 72 percent of our
worldwide net revenues. Our Europe segment generated 17 percent of our net revenues and Mexico
generated the remaining 11 percent. On a year-to-date basis, approximately 77 percent of our net
revenues were generated in our U.S. & Canada segment, 13 percent was generated by Europe and the
remaining 10 percent was generated by Mexico.
Cost of Sales
Worldwide cost of sales were $1.9 billion in the second quarter of 2008 and $3.4 billion for
the first 24 weeks of 2008, increasing five percent and seven percent, respectively. The increases
in cost of sales for both the quarter and year-to-date periods were mainly due to higher raw
material costs worldwide and the negative impact of foreign currency translation. These increases
were partially offset by a decrease in volume in our U.S. & Canada and Mexico segments for both the
quarter and year-to-date periods.
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Selling, Delivery and Administrative Expenses
Worldwide SD&A expenses were $1.3 billion in the second quarter of 2008 and $2.3 billion in
the first 24 weeks of 2008, increasing five percent in both the quarter and year-to-date periods.
Increases in worldwide SD&A expenses for the quarter and year-to-date periods reflect additional
costs associated with the continued investment in Europe and the negative impact of foreign
currency translation. These increases were partially offset by continued cost productivity
improvements and disciplined cost management across all our segments and volume declines. Total
SD&A costs in the U.S. remained flat versus prior year for both the quarter and year-to-date
periods, largely driven by our cost saving initiatives.
Operating Income
Worldwide operating income was $350 million in the second quarter of 2008 and $458 million for
the first 24 weeks of 2008, increasing four percent for the quarter and remaining flat for the
year-to-date period. Results were driven by strong net revenue per case performance, cost
productivity improvements across all segments, and the positive impact from foreign currency
translation, partially offset by higher raw materials costs and declines in volume. On a
year-to-date basis, the Restructuring and FSV Rationalization charges and the consolidation of PR
Beverages negatively impacted operating income growth by two-percentage points. For further
information on each of these items see section entitled “Items Affecting Comparability of Our
Financial Results”.
In our U.S. & Canada segment, operating income decreased eight percent for the quarter and
year-to-date periods primarily due to higher raw material costs and lower volume in the U.S. These
declines were partially offset by rate increases, cost productivity improvements and a
one-percentage point positive impact from foreign currency translation. Additionally, the
restructuring and FSV Rationalization charges had a one-percentage point negative impact for both
the quarter and year-to-date periods.
In our Europe segment, operating income tripled for the quarter and increased $25 million on a
year-to-date basis, reflecting strong growth in Russia and Turkey. Increase in operating income for
the quarter reflects growth in net price per case to mitigate higher raw material costs, good cost
performance in Spain and a $3 million positive impact from foreign currency translation. On a
year-to-date basis, operating income benefited from growth in Russia and Turkey, coupled with good
cost performance in Spain. This was partially offset by a $1 million negative impact from foreign
currency translation and a $4 million negative impact in the first quarter from the consolidation
of PR Beverages.
In our Mexico segment, operating income increased approximately 32 percent in the quarter and
35 percent for the year-to-date period, due primarily to strong gross profit improvement
resulting from rate increases and a five-percentage point positive impact from foreign currency
translation for both the quarter and year-to-date periods.
Interest Expense, net
Net interest expense decreased $5 million in the second quarter and $12 million on a
year-to-date basis versus the prior year, largely due to lower effective interest rates on our
variable rate debt.
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Other Non-operating Income, net
Other
net non-operating income, consisting principally of foreign currency
transactional gains, was flat in the
second quarter and increased $4 million on a year-to-date basis. The year-to-date increase was
driven by foreign currency transactional gains resulting from the strength of our foreign currencies.
Minority Interest
Minority interest primarily reflects PepsiCo’s ownership in Bottling LLC of 6.6 percent,
coupled with their 40 percent ownership in the PR Beverages venture. The $7 million increase in the
second quarter and $2 million increase on a year-to-date basis is primarily driven by growth in our
Russian operating venture.
Income Tax Expense
Our effective tax rate for the 24 weeks ended June 14, 2008 was 34.5 percent compared with our
effective tax rate of 35.3 percent for the 24 weeks ended June 16, 2007. The decrease in our
effective tax rate is primarily driven by a pre-tax income mix shift into jurisdictions with lower
effective tax rates, partially offset by the timing of recording discrete items in 2007.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows
24 Weeks Ended June 14, 2008 vs. June 16, 2007
PBG generated $89 million of net cash from operations, a decrease of $69 million from 2007.
The decrease in net cash provided by operations was driven primarily by timing of payments relating
to promotional activities and compensation arrangements, partially offset by lower cash taxes.
Net cash used for investments was $428 million, an increase of $17 million from 2007. The
increase in cash used for investments reflects higher payments for capital expenditures due to
timing of projects.
Net cash provided by financing activities was $212 million, an increase of $93 million versus
prior year. This increase in cash from financing reflects higher short-term borrowings to fund
working capital needs and share repurchases. Also reflected in financing activities was $8 million
of cash received from PepsiCo for their proportional share in the acquisition of Sobol-Aqua JSC, a
venture in eastern Russia.
Liquidity and Capital Resources
Our principal sources of cash come 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 has not been materially impacted by
the current credit environment.
We had $460 million and $50 million of outstanding commercial paper at June 14, 2008 and
December 29, 2007, respectively.
Our $1.3 billion of 5.63 percent senior notes will become due in February 2009. We plan to
refinance these notes.
On March 27, 2008, the Company’s Board of Directors approved an increase in the Company’s
quarterly dividend from $0.14 to $0.17 per share on the outstanding common stock of the Company.
This action resulted in a 21-percent increase in our quarterly dividend.
On March 20, 2008, together with PepsiCo, we announced the joint acquisition of 75.5 percent
in Russia’s leading branded juice company JSC Lebedyansky (“Lebedyansky”) for $1.4 billion,
excluding the company’s baby food and mineral water business. As announced, PepsiCo will acquire 75
percent and we will acquire 25 percent of the 75.5 percent stake. We plan to fund the acquisition
using our commercial paper program and cash provided by our operations. The acquisition is expected
to be completed during the second half of our fiscal year 2008 and is subject to normal local
regulatory approvals and the de-merger of the baby
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food business. The de-merger of the baby
food business has been approved by Lebedyansky’s shareholders. Additionally, together with PepsiCo, we expect to
tender for the remaining 24.5 percent ownership of Lebedyansky’s juice business. Our and PepsiCo’s tender for Lebedyansky’s remaining shares will
continue to be purchased 25 percent and 75 percent, respectively.
Contractual Obligations
As of June 14, 2008, there have been no material changes outside the normal course of business
in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal
year ended December 29, 2007, under the caption “Contractual Obligations”.
CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein, statements contained
in this Form 10-Q may constitute forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on currently available
competitive, financial and economic data and our operating plans. These statements involve a number
of risks, uncertainties and other factors that could cause actual results to be materially
different.
Cautionary statements included in Management’s Discussion and Analysis and in Item 1A in our
Annual Report on Form 10-K for the fiscal year ended December 29, 2007 should be considered when
evaluating our trends and future results.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risks as disclosed in Item 7 to our Annual
Report on Form 10-K for the year ended December 29, 2007.
Item 4.
CONTROLS AND PROCEDURES
PBG’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), with the participation of our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as
of the end of our last fiscal quarter. Based upon this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information
relating to PBG and its consolidated subsidiaries required to be disclosed in our Exchange Act
reports filed with the SEC (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and communicated to PBG’s
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
In addition, PBG’s management carried out an evaluation, as required by Rule 13a-15(d) of the
Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial
Officer, of changes in PBG’s internal control over financial reporting. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that there were no changes in
our internal control over financial reporting that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are party to a variety of legal proceedings arising in the normal course of business. While
the results of proceedings cannot be predicted with certainty, management believes that the final
outcome of these proceedings will not have a material adverse effect on our Consolidated Financial
Statements, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes with respect to the risk factors disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 29, 2007.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PBG PURCHASES OF EQUITY SECURITIES
We repurchased approximately 6 million shares of PBG common stock in the second quarter of
2008. Since the inception of our share repurchase program in October 1999, we have repurchased
approximately 143 million shares of PBG common stock. Our share repurchases for the second quarter
of 2008 are as follows:
Unless terminated by resolution of the PBG Board, each share repurchase program expires
when we have repurchased all shares authorized for repurchase thereunder.
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Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Item 6.
EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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