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Pepsi Bottling Group 10-Q 2009 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 21, 2009 (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 April 18, 2009 was 213,518,111 and 100,000, respectively.
The Pepsi Bottling Group, Inc.
Index
Table of Contents
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 Comprehensive (Loss) Income
in millions, 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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The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Changes in Equity
12 Weeks Ended March 21, 2009 and March 22, 2008
in millions, except per share amounts, unaudited
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 have the exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages, in all or a portion of the United States,
Mexico, Canada, Spain, Russia, Greece and Turkey.
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, as well as the related footnote 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.
These interim financial statements have been prepared in conformity with the instructions to
Form 10-Q and Article 10 of U.S. Securities and Exchange Commission 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
27, 2008 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.
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
and 2008 consist of 52 weeks. Our remaining countries report using a calendar-year basis.
Accordingly, we recognize our quarterly business results as outlined below:
At March 21, 2009, PepsiCo, Inc. (“PepsiCo”) owned 70,166,458 shares of our stock, consisting
of 70,066,458 shares of common stock and all 100,000 authorized shares of Class B common stock.
This represents approximately 32.9 percent of our outstanding common stock and 100 percent of our
outstanding Class B common stock, together representing 40.0 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.
We consolidate in our financial statements entities in which we have a controlling financial
interest, as well as variable interest entities for which we are the primary beneficiary.
Noncontrolling 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 first quarter are not necessarily indicative of the results that may be
expected for the full year because sales of our products are seasonal. 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. 141(R) as amended
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141(revised 2007), “Business Combinations” (“SFAS
141(R)”), which addresses the accounting and disclosure for identifiable assets acquired,
liabilities assumed, and noncontrolling interests in a business combination. In April 2009, the
FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which
amended certain provisions of SFAS 141(R) related to the recognition, measurement, and disclosure
of assets acquired and liabilities assumed in a business combination that arise from contingencies.
SFAS 141(R) and FSP FAS 141(R)-1 became effective in the first quarter of 2009, and did not have a
material impact on our Condensed 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 noncontrolling 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 160 became effective in the first quarter of 2009,
which resulted in reporting noncontrolling interest as a component of equity in our Condensed
Consolidated Balance Sheets and below income tax expense in our Condensed Consolidated Statements
of Operations. In addition, the provisions of SFAS 160 require 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. As required by
SFAS 160, we have retrospectively applied the presentation to our prior year balances in our
Condensed 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 became effective in the first quarter
of 2009. See Note 9 for required disclosure.
FSP FAS 132(R)-1
In December 2008, the FASB issued FASB Staff Position No. SFAS 132(revised 2003)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), which
requires employers to disclose information about fair value measurements of plan assets that are
similar to the disclosures about fair value measurements required by SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). FSP FAS 132(R)-1 will become effective for our annual financial
statements for 2009. We are currently evaluating the impact of this standard on our Consolidated
Financial Statements.
FSP FAS 107-1 and APB 28-1
In April 2009, the FASB issued FASB Staff Position No. SFAS 107-1 and APB No. 28-1,
“Disclosures about the Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which
requires quarterly disclosure of information about the fair value of financial instruments within
the scope of FASB Statement
No. 107, “Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1
has an
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effective date requiring adoption by the third quarter of 2009 with early adoption
permitted. PBG adopted the provisions of FSP FAS 107-1 and APB 28-1 in the first quarter of 2009.
See Note 8 for required disclosures.
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:
Basic and diluted earnings per share are calculated by dividing 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 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. For the 12 weeks ended
March 21, 2009 and March 22, 2008, options to purchase 24 million shares and 3 million shares,
respectively, 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.
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 12 weeks ended March 21, 2009 and March 22, 2008, we granted 5 million and
3 million stock option awards at a weighted-average fair value of $4.46 and $7.06, respectively.
During each of the 12 weeks ended March 21, 2009 and March 22, 2008, we granted 2 million and
1 million restricted stock unit awards at a weighted-average fair value of $18.72 and $35.77,
respectively.
Unrecognized compensation cost related to nonvested share-based compensation arrangements
granted under the incentive plans amounted to $112 million as of March 21, 2009. That cost is
expected to be recognized over a weighted-average period of 2.3 years.
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Note 6—Balance Sheet Details
Note Receivable from PepsiCo
During the first quarter of 2009, we issued a ruble-denominated 3-year note with an interest
rate of 10.0 percent (“Note receivable from PepsiCo”) to JSC Lebedyansky (“Lebedyansky”), a
consolidated subsidiary of PepsiCo and a noncontrolled affiliate of PBG, valued at $87 million on
March 21, 2009. This funding was contemplated as part of the initial capitalization of the
purchase of Lebedyansky between PepsiCo and us. This note receivable is recorded in accounts
receivable, net and other assets in our Condensed Consolidated Balance Sheets.
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Note 7—Other Intangible Assets, net and Goodwill
The components of other intangible assets are as follows:
Intangible asset amortization
Intangible asset amortization expense was $1 million and $2 million for the 12 weeks ended
March 21, 2009 and March 22, 2008, respectively. Amortization expense for each of the next five
years is estimated to be approximately $10 million or less.
During the first quarter of 2009, we acquired distribution rights for Rockstar energy drinks
in the United States and Canada and Muscle Milk protein-enhanced functional beverages in the United
States. As a result of these acquisitions, we recorded approximately $35 million of amortizable
distribution rights.
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Goodwill
The changes in the carrying value of goodwill by reportable segment for the 12 weeks ended
March 21, 2009 are as follows:
Note 8—Fair Value Measurements
We adopted SFAS 157 at the beginning of the 2008 fiscal year for all financial instruments
valued on a recurring basis, at least annually. Additionally, beginning in the first quarter of
2009, in accordance with the provisions of FASB Staff Position No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”) we now apply SFAS 157 to financial and nonfinancial assets and
liabilities. FSP 157-2 delayed the effective date of SFAS 157 for nonfinancial assets and
liabilities, except for certain items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. In accordance with SFAS 157, we have categorized our
assets and liabilities that are measured at fair value into a three-level fair value hierarchy as
set forth below. If the inputs used to measure fair value fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is significant to the fair
value measurement. 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 and 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.
The following table summarizes the financial assets and liabilities we measure at fair value
on a recurring basis as of March 21, 2009 and December 27, 2008:
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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
value 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 March 21, 2009,
had a carrying value and fair value of $5.5 billion and $5.9 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.
Note 9—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.
All derivative instruments are recorded at fair value as either assets or liabilities in our
Condensed Consolidated Balance Sheets. Derivative instruments are generally designated and
accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) 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 under SFAS 133 and are used as “economic hedges” to manage certain risks in
our business.
Cash Flow Hedges
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 accumulated other
comprehensive loss (“AOCL”) until the underlying hedged item is recognized in earnings. The
derivative’s 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.
The Company hedges the following types of items that qualify for cash flow hedge accounting
under SFAS 133:
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 and as of March 21,
2009, have a notional value, based on the contract price, of $351 million.
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 12 months in duration and as of March 21, 2009, have a notional value, based on the contract
price, of $64 million.
Interest — We have entered into treasury rate lock agreements to hedge against adverse
interest rate changes on certain debt financing arrangements. Gains and losses from these treasury
rate lock agreements that are considered effective are deferred in AOCL and amortized to interest
expense over the duration of the debt term. The Company has a $3 million net deferred gain in
AOCL, which will be amortized over a maximum of 7 years. For the quarter ended March 21, 2009, we
recognized a loss of $0.2 million in interest expense.
Fair Value Hedges
Interest Rate Swaps — We effectively converted $750 million 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
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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.
Economic Hedges
As part of our risk management strategy, we enter into derivative instruments that are not
designated as hedging instruments under SFAS 133, but are used as economic hedges to manage certain
risks in our business. These derivative instruments are marked to market on a periodic basis and
recognized currently in earnings consistent with the expense classification of the underlying
hedged item. The Company has the following types of economic hedges:
Foreign Currency Hedges — We entered into forward exchange contracts to economically hedge a
portion of our intercompany receivable balances that are denominated in Mexican pesos. These
contracts generally range from one to 12 months in duration and as of March 21, 2009, have a
notional value, based on the contract price, of $50 million.
Additionally, we fair value certain vendor and customer contracts that have embedded foreign
currency derivative components. These contracts generally range from one year to four years and
have a notional value, based on the contract price, of $16 million.
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 March 21, 2009, we had a prepaid forward contract
for 585,000 shares of our stock.
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Balance Sheet Classification
The following summarizes the fair values and location in our Condensed Consolidated Balance
Sheet of all derivatives held by the Company as of March 21, 2009.
Cash Flow Hedge Gains (Losses) Recognition
The following summarizes the gains (losses) recognized in the Condensed Consolidated Statement
of Operations and AOCL of derivatives designated and qualifying as cash flow hedges for the quarter
ended March 21, 2009.
The ineffective portion of the change in fair value of our cash flow hedges was not material
to our results for the quarter ended March 21, 2009. Assuming no change in the commodity prices
and foreign currency
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rates as measured on March 21, 2009, $42 million of unrealized losses will be
reclassified from AOCL and recognized in earnings over the next 12 months.
Other Derivatives Gains (Losses) Recognition
The following summarizes the gains (losses) and the location in the Condensed Consolidated
Statement of Operations of derivatives designated and qualifying as fair value hedges and
derivatives not designated as hedging instruments for the quarter ended March 21, 2009:
The Company has recorded $7 million of foreign currency transactional losses in other
non-operating expenses (income), net in the Condensed Consolidated Statement of Operations for the
quarter ended March 21, 2009.
Note 10—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 our financial
position and are not included in the tables and discussion presented below.
Defined Benefit Pension Plans
In the U.S. we participate in 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 participate in these plans.
Additionally, effective April 1, 2009, we no longer accrue benefits for certain of our salaried and
non-union employees that do not meet 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.
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Components of Net Pension Expense
On March 31, 2009, we made a contribution of $70 million to the U.S. defined benefit pension
trust.
Components of Postretirement Medical Expense
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, U.S. employees not eligible to participate in the defined benefit
pension plans and whose benefits are discontinued will receive additional Company retirement
contributions under the defined contribution plans. Defined contribution expense was $8 million
and $7 million for the 12 weeks ended March 21, 2009 and March 22, 2008, respectively.
Note 11—Income Taxes
During the first quarter of 2009, we settled our audits with the IRS for our 2003-2005 tax
years. As a result, our gross reserves for uncertain tax benefits, excluding interest, decreased
by $71 million. Of this amount, $25 million was reflected as a benefit in income tax expense in
our Condensed Consolidated Statements of Operations, $43 million was reclassified to deferred
income taxes and other assets in our Consolidated Balance Sheets and $3 million was paid. In
addition, we decreased our related reserves for interest by approximately $14 million, for a total
net provision benefit of $39 million as a result of the settlement.
We currently have on-going income tax audits in our major tax jurisdictions, where issues such
as deductibility of certain expenses have been raised. During the second quarter of 2009, we reached a settlement with the Canadian tax authorities
related to an issue that was in dispute for our 1999-2005 tax years. We believe that it is reasonably possible
that our reserves for uncertain tax benefits could further decrease in the range of $50 million to
$90 million within the next 12 months as a result of the completion of audits in various
jurisdictions and the expiration of statute of limitations. The reductions in our tax reserves
could result in a combination of additional tax payments, the adjustment of certain deferred taxes
or the recognition of tax benefits in our Consolidated Statements of Operations. In the event that
we cannot reach settlement of some of these audits, our tax reserves may increase, although we
cannot estimate such potential increases at this time.
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Note 12—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
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. We
evaluate the performance of these segments based on operating income or loss. Operating income or
loss is exclusive of net interest expense, noncontrolling interest, foreign exchange gains and
losses and income taxes.
The following tables summarize select financial information related to our reportable
segments:
Note 13—Restructuring Charges
In the fourth quarter of 2008, we announced a restructuring program to enhance the Company’s
operating capabilities in each of our reporting segments with the objective to strengthen customer
service and selling effectiveness; simplify decision making and streamline the organization; drive
greater cost productivity to adapt to current macroeconomic challenges; and rationalize the
Company’s supply chain infrastructure. As part of the restructuring program, approximately 3,600
positions will be eliminated across all reporting segments, four facilities will be closed in the
United States, three plants and about 30 distribution centers will be closed in Mexico and about
700 routes will be eliminated in Mexico. In addition, the Company modified its U.S. defined
benefit pension plans, which will generate long-term savings and significantly reduce future
financial obligations.
The Company expects to record pre-tax charges of $140 million to $170 million in selling,
delivery and administrative expenses over the course of the restructuring program, which are
primarily for severance and related benefits, pension and other employee-related costs and other
charges, including employee relocation
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and asset disposal costs. The program is expected to be
substantially completed by the end of 2009. Since
the inception of the program and through March 21, 2009, we eliminated approximately 1,700
positions across all reporting segments and closed four facilities in the United States, two plants
in Mexico and eliminated 326 routes in Mexico.
The Company expects to incur approximately $130 million in pre-tax cash expenditures from
these restructuring actions, of which $35 million was paid since the inception of the program, with
the balance expected to occur in 2009 and 2010. This includes $2 million of employee benefit
payments pursuant to existing unfunded termination indemnity plans. These benefit payments have
been accrued for in previous periods, and therefore, are not included in our estimated cost for
this program or the tables below.
The following tables summarize the pre-tax costs associated with the restructuring program.
By Reportable Segment
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Note 14—Supplemental Cash Flow Information
The table below presents the Company’s supplemental cash flow information:
Note 15—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 16—Subsequent Event
On April 19, 2009, PBG received an unsolicited, non-binding proposal from PepsiCo to acquire all of the outstanding shares of the Company’s common stock not already
owned by PepsiCo for $29.50 per share. The tender offer consists of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share of PBG common stock. PBG’s Board of Directors will evaluate the proposal and respond in due course.
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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.
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 manage and report 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 27, 2008, 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 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 Condensed 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.
OUR CRITICAL ACCOUNTING POLICIES
As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December
27, 2008, 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
financial condition and results of operations:
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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:
2009 Items
2008 Restructuring Charges
In the fourth quarter of 2008, we announced a restructuring program to enhance the Company’s
operating capabilities in each of our reportable segments. We anticipate the program to be
substantially complete by the end of 2009 and the program is expected to result in annual pre-tax
savings of approximately $150 million to $160 million. The Company expects to record pre-tax
charges of $140 million to $170 million over the course of the restructuring program. These
charges are primarily for severance and related benefits, pension and other employee-related costs
and other charges, including employee relocation and asset disposal costs. As part of the
restructuring program, approximately 3,600 positions will be eliminated including 800 positions in
the U.S. & Canada, 600 positions in Europe and 2,200 positions in Mexico.
Since the inception of the program, the Company incurred pre-tax charges of $88 million. Of
this amount, we recorded $5 million in the first quarter of 2009, of which $3 million was recorded
in our U.S. & Canada segment and $2 million was recorded in our Mexico segment.
The Company expects to incur approximately $130 million in pre-tax cash expenditures from
these restructuring actions, of which $35 million was paid since the inception of the
program, with the balance expected to occur in 2009 and 2010. During the first quarter of 2009, we
paid $22 million in pre-tax cash expenditures from these restructuring actions.
For further information about our restructuring charges see Note 13 in the Notes to Condensed
Consolidated Financial Statements.
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Tax Audit Settlement
During the first quarter of 2009, PBG recorded a net non-cash tax benefit of approximately $39
million or $0.18 per diluted share which was reflected in income tax expense. The benefit resulted
from the reversal of tax reserves for the completion of certain IRS
audits of our 2003 - 2005 tax
years.
2008 Items
2007 Restructuring Charges
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. During the first quarter of 2008, we
substantially completed the organizational realignment, 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 $29 million. Of this
amount, we recorded $2 million in the first quarter of 2008, primarily relating to relocation
expenses in our U.S. & Canada segment.
Asset Disposal Costs
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 designed to
improve operating income margins of our FSV business. Over the course of the FSV Rationalization
plan, we incurred a pre-tax charge of $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. Of this amount, we incurred a pre-tax charge of $1 million associated with the FSV
Rationalization plan in the first quarter of 2008. This charge was recorded in selling, delivery
and administrative expenses.
FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS
Foreign Currency Impact — The impact of foreign currency translation, driven by weakening
foreign functional currencies, reduced worldwide net revenues and gross profit growth by
approximately five percentage points. Weakening currencies also reduced growth in cost of sales
and selling, delivery and administrative expenses by approximately six percentage points.
Operating income was favorably impacted by a net increase of five percentage points due to foreign
currency translation.
The benefit from foreign currency translation was offset by a significant increase in foreign
currency transactional costs for our U.S. dollar and euro denominated purchases in Europe and Mexico. Negative
foreign currency transactional costs increased cost of sales growth by approximately $27 million
and other non-operating expenses (income), net by an additional $10 million, for the
quarter.
Volume — Decrease of five percent was driven by declines in each of our segments due to the
soft economic conditions globally, which have negatively impacted the liquid refreshment beverage
category. Additionally, worldwide volume was negatively impacted by two percentage points due to
the shift of the Easter holiday from the first quarter in 2008 to the second quarter in 2009
(“Easter Shift”).
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Net revenues — Reported net revenues declined five percent driven by a decrease in worldwide
volume growth and the negative impact from foreign currency translation. This decline was
partially offset by a five percentage point increase in net revenue per case on a currency neutral
basis driven primarily by rate increases in each of our segments. Reported net revenue per case
declined one percent versus the prior year, which includes a five percentage point negative impact
from foreign currency translation.
Cost of sales — Reported cost of sales declined five percent due to foreign currency
translation and lower volume in the quarter. These declines were partially offset by a five
percentage point increase in cost of sales per case on a currency neutral basis due to higher raw
material costs coupled with the negative impact of foreign currency transactional costs in Europe and
Mexico. Reported cost of sales per case was flat versus the prior year, which includes a six
percentage point benefit from foreign currency translation.
Gross profit — Reported gross profit declined by six percent driven by volume declines and
foreign currency translation. This was partially offset by a five percentage point improvement in
gross profit per case on a currency neutral basis where rate gains more than offset higher raw
material costs. Reported gross profit per case declined one percent versus the prior year, which
includes a five percentage point negative impact from foreign currency translation.
Selling, delivery and administrative (“SD&A”) expenses — Reported SD&A expenses declined by
seven percent driven by foreign currency translation and lower operating costs due to continued
productivity improvements across all segments coupled with volume declines.
Operating income — Reported operating income grew eight percent driven primarily by cost and
productivity improvements, strong pricing actions and the positive impact from acquisitions and
foreign currency translation. Operating income growth was reduced by volume declines and a two
percentage point negative impact from the restructuring charges discussed above.
Net income attributable to PBG — Growth for the quarter was primarily due to an after-tax gain
of $39 million, or $0.18 per diluted share, from the tax audit settlement discussed above coupled
with operating income growth. This was partially offset by higher interest expense and increased
foreign currency transactional costs versus the prior year.
2009 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
U.S. & Canada
In our U.S. & Canada segment, volume decreased three percent due primarily to the
macroeconomic factors negatively impacting the liquid refreshment beverage category and the Easter
Shift. The Easter Shift contributed two percentage points to the decline for the quarter. This
decline in volume was partially offset by a two percentage point increase from our acquisition of
Lane Affiliated Companies, Inc. (“Lane”) in the fourth quarter of 2008, coupled with incremental
volume from our newly acquired rights to distribute Crush and Muscle Milk in the U.S., which
contributed an additional two percentage points of growth to the quarter.
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Take-home and cold drink channels declined by four percent and seven percent, respectively,
for the quarter. The decline in the take-home channel for the quarter was driven primarily by our
large format stores due to the overall slow down in the economy and the negative impact from the
Easter Shift. Declines in the cold drink channel were driven by our foodservice channel, including
restaurants, travel and leisure and workplace, which have been particularly impacted by the
economic downturn in the United States.
Europe
In our Europe segment, volume declined by 16 percent for the quarter. Soft volume performance
reflected the overall weak macroeconomic environment and category softness throughout Europe, which
resulted in double digit declines in Russia, Spain and Turkey.
Mexico
In our Mexico segment, volume decreased seven percent for the quarter 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 carbonated soft drink (“CSD”) and bottled
water categories and double digit declines in jug water and single serve packages.
Net Revenues
U.S. & Canada
In our U.S. & Canada segment, net revenues declined one percent in the quarter driven by
volume declines and currency translation. These decreases were partially offset by a four percent
improvement in net revenue per case on a currency neutral basis driven by rate increases on the
majority of our packages taken to offset rising raw material costs and improve profitability
coupled with incremental revenue from our prior year acquisition of Lane.
Europe
In our Europe segment, net revenues declined 26 percent in the quarter due primarily to the
negative impact of foreign currency translation and volume declines. Growth in net revenue per case
on a currency neutral basis was driven primarily by rate actions and disciplined promotional
spending in Russia.
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Mexico
In our Mexico segment, declines in net revenues of 25 percent in the quarter reflect the
negative impact of foreign currency translation and lower volume. Net revenue per case grew five
percent on a currency neutral basis primarily due to rate increases taken on our CSD and bottled
water categories to drive margin improvement.
Operating Income
U.S. & Canada
In our U.S. & Canada segment, operating income increased six percent for the quarter.
Increase in operating income for the quarter was primarily due to cost and productivity
improvements, increases in gross profit per case and the positive impact from our acquisition of
Lane. These increases were partially offset by lower income due to volume declines and the
negative impact of foreign currency translation.
Reported gross profit per case improved two percent for the quarter in our U.S. & Canada
segment which includes a two percentage point negative impact from foreign currency translation.
The remaining four percent improvement in gross profit per case on a currency neutral basis was
driven by growth in net revenue per case, which more than offset higher raw material costs.
Reported cost of sales per case increased two percent versus the prior year, which includes a two
percentage point benefit from foreign currency translation.
SD&A expenses improved three percent for the quarter in our U.S. & Canada segment due to lower
costs resulting from productivity initiatives and volume declines coupled with a three percentage
point positive impact from foreign currency. These declines were partially offset by rising
costs in labor and benefits and the impact of our prior year acquisition.
Europe
In our Europe segment, reported operating income increased 17 percent for the quarter which
includes a 26 percentage point benefit from foreign currency translation. The remaining eight
percent decrease in operating income on a currency neutral basis was due to lower volume, partially
offset by improvements in gross profit per case and cost and productivity improvements.
Reported gross profit per case in Europe declined 14 percent for the quarter which includes a
22 percentage point negative impact from foreign currency translation. The remaining eight percent
improvement in gross profit per case on a currency neutral basis was driven by strong rate
increases which
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offset higher raw material costs. Increases in raw material costs in Europe were primarily due
to the negative impact of foreign currency transactional costs resulting from U.S. dollar and Euro
purchases in this segment.
SD&A expenses in Europe improved 25 percent which includes a 20 percentage point benefit from
foreign currency translation. The remaining five percentage points of improvement were driven by
lower volume and cost and productivity initiatives throughout Europe, partially offset by higher
operating costs due to the increased investment in Russia.
Mexico
In our Mexico segment, operating income decreased in the quarter due to volume declines,
partially offset by improved pricing actions and lower costs resulting from productivity initiatives.
Reported gross profit per case declined 21 percent which includes a 24 percent negative impact
from foreign currency translation. The remaining three percent improvement in gross profit per
case on a currency neutral basis was due to solid revenue and margin management which offset rising
raw material costs due to higher foreign currency transactional costs relating to our U.S. dollar denominated
purchases in Mexico.
SD&A expenses improved 22 percent which includes a 25 percent benefit from foreign currency
translation and a two percentage point negative impact from restructuring charges. The remaining
one percent increase was due to inflation, partially offset by lower costs associated with volume
declines and reduced operating costs attributable to improved route productivity.
Interest Expense, net
Net interest expense increased $20 million due to higher debt levels associated with the
issuance of $750 million of senior notes in January 2009 and the pre-funding of our February 2009
$1.3 billion debt maturity.
Other Non-operating Expenses (Income), net
Other net non-operating expense was $7 million in the first quarter of 2009 as compared to $3
million of net non-operating income in the first quarter of 2008. Foreign currency transactional
losses in 2009 resulted primarily from our U.S. dollar and euro denominated purchases in Mexico and
Russia, reflecting the impact of the weakening peso and ruble.
Net Income Attributable to Noncontrolling Interests
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. The $2 million decrease in
the quarter was primarily driven by lower income in the quarter.
Income Tax Expense
Our effective tax rate for the 12 weeks ended March 21, 2009 was a benefit of 90.2 percent
compared with our effective tax rate of 39.9 percent for the 12 weeks ended March 22, 2008. The
decrease in our 2009 effective tax rate was primarily driven by the favorable settlement of the
2003-2005 IRS audit, which resulted in a non-cash tax benefit of approximately $39 million. This
audit settlement benefited our effective tax rate by approximately 125 percentage points. In
addition, in 2009, we have certain tax planning strategies that are favorably impacting our tax
provision.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows
12 Weeks Ended March 21, 2009 vs. March 22, 2008
PBG generated $80 million of net cash from operations, an increase of $60 million from 2008.
The increase in net cash provided by operations was driven primarily by the timing of accounts
payable disbursements.
Net cash used for investments was $202 million, a decrease of $8 million from 2008. The
decrease in cash used for investments was due to lower capital expenditures, partially offset by a
loan made to our
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Lebedyansky non-controlled affiliate, 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 $345 million, an increase of $481 million from
2008. This increase in cash used for financing activities reflects the repayment of our $1.3
billion bond and lower proceeds from short-term borrowings, partially offset by the issuance of a
$750 million bond and by the 2008 share repurchases.
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.
The recent and extraordinary disruption in the world credit markets has had a significant
adverse impact on a number of financial institutions. At this point in time, the Company’s
liquidity has not been materially impacted by the current credit environment and management does
not expect that it will be materially impacted in the near-future. Management will continue to
closely monitor the Company’s liquidity and the credit markets. However, management cannot predict
with any certainty the impact to the Company of any further disruption in the credit environment.
We had $129 million of outstanding commercial paper at March 21, 2009. At December 27, 2008,
we had no outstanding commercial paper.
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.
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 will result in a six percent increase in our quarterly dividend.
On March 31, 2009, we made a contribution of $70 million to the U.S. defined benefit pension
trust.
Contractual Obligations
As of March 21, 2009, 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 27, 2008, 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 27, 2008 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 27, 2008.
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.
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 27, 2008.
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Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PBG PURCHASES OF EQUITY SECURITIES
We did not repurchase shares of PBG common stock in the first quarter of 2009. Since the
inception of our share repurchase program in October 1999, we have repurchased approximately 146
million shares of PBG common stock. Our share repurchases for the first quarter of 2009 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 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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