Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 9, 2009)
  • 10-Q (Jul 14, 2009)
  • 10-Q (Apr 27, 2009)
  • 10-Q (Oct 14, 2008)
  • 10-Q (Jul 22, 2008)
  • 10-Q (Apr 29, 2008)

 
8-K

 
Other

Pepsi Bottling Group 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 21, 2009 (12 weeks)
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-14893
(PBG LOGO)
THE PEPSI BOTTLING GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   13-4038356
     
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
     
One Pepsi Way, Somers, New York   10589
     
(Address of Principal Executive Offices)   (Zip Code)
914-767-6000
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES 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):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
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
             
        Page No.  
  Financial Information        
  Financial Statements        
 
  Condensed Consolidated Statements of Operations -- 12 weeks ended March 21, 2009 and March 22, 2008     2  
 
           
 
  Condensed Consolidated Statements of Comprehensive (Loss) Income -- 12 weeks ended March 21, 2009 and March 22, 2008     3  
 
           
 
  Condensed Consolidated Statements of Cash Flows -- 12 weeks ended March 21, 2009 and March 22, 2008     4  
 
           
 
  Condensed Consolidated Balance Sheets -- March 21, 2009 and December 27, 2008     5  
 
           
 
  Condensed Consolidated Statements of Changes in Equity -- 12 weeks ended March 21, 2009 and March 22, 2008     6  
 
           
 
  Notes to Condensed Consolidated Financial Statements     7-20  
 
           
  Management’s Financial Review     21-28  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     29  
 
           
  Controls and Procedures     29  
 
           
  Other Information        
 
           
  Legal Proceedings     29  
 
           
  Risk Factors     29  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     30  
 
           
  Exhibits     31  
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION

 


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
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Net revenues
  $ 2,507     $ 2,651  
Cost of sales
    1,403       1,482  
 
           
 
               
Gross profit
    1,104       1,169  
Selling, delivery and administrative expenses
    987       1,061  
 
           
 
               
Operating income
    117       108  
Interest expense, net
    79       59  
Other non-operating expenses (income), net
    7       (3 )
 
           
 
               
Income before income taxes
    31       52  
Income tax (benefit) expense
    (27 )     21  
 
           
 
               
Net income
    58       31  
Less: Net income attributable to noncontrolling interests
    1       3  
 
           
 
               
Net income attributable to PBG
  $ 57     $ 28  
 
           
 
               
Earnings per share attributable to PBG’s common shareholders
               
 
               
Basic earnings per share
  $ 0.27     $ 0.13  
 
           
 
               
Weighted-average shares outstanding
    212       222  
 
               
Diluted earnings per share
  $ 0.27     $ 0.12  
 
           
 
               
Weighted-average shares outstanding
    214       229  
 
               
Dividends declared per common share
  $ 0.17     $ 0.14  
 
           
See accompanying notes to Condensed Consolidated Financial Statements.

2


Table of Contents

The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
in millions, unaudited
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Net income
  $ 58     $ 31  
Net currency translation adjustment
    (290 )     (12 )
Cash flow hedge adjustment, net of tax
          4  
Pension and postretirement medical benefit plans adjustment, net of tax
    7       4  
 
           
Comprehensive (loss) income
    (225 )     27  
Less: Comprehensive (loss) income attributable to noncontrolling interests
    (88 )     12  
 
           
Comprehensive (loss) income attributable to PBG
  $ (137 )   $ 15  
 
           
See accompanying notes to Condensed Consolidated Financial Statements.

3


Table of Contents

The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Cash Flows — Operations
               
Net income
  $ 58     $ 31  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
    136       144  
Deferred income taxes
    1       3  
Share-based compensation
    12       12  
Net other non-cash charges and credits
    72       66  
Changes in operating working capital, excluding effects of acquisitions:
               
Accounts receivable, net
    (49 )     (4 )
Inventories
    (103 )     (88 )
Prepaid expenses and other current assets
    (4 )     (14 )
Accounts payable and other current liabilities
    32       (86 )
Income taxes payable
    (42 )     12  
 
           
Net change in operating working capital
    (166 )     (180 )
Casualty insurance payments
    (17 )     (16 )
Other, net
    (16 )     (40 )
 
           
Net Cash Provided by Operations
    80       20  
 
           
 
               
Cash Flows — Investments
               
Capital expenditures
    (95 )     (185 )
Acquisitions, net of cash acquired
    (15 )     (27 )
Proceeds from sale of property, plant and equipment
    1       2  
Note receivable from PepsiCo
    (92 )      
Other investing activities, net
    (1 )      
 
           
Net Cash Used for Investments
    (202 )     (210 )
 
           
 
               
Cash Flows — Financing
               
Short-term borrowings, net
    214       341  
Proceeds from long-term debt
    741        
Payments of long-term debt
    (1,301 )     (2 )
Dividends paid
    (36 )     (31 )
Excess tax benefit from the exercise of equity awards
    1       1  
Proceeds from the exercise of stock options
    10       7  
Share repurchases
          (180 )
Contributions from noncontrolling interest holder
    33        
Other financing activities
    (7 )      
 
           
Net Cash (Used for) Provided by Financing
    (345 )     136  
 
           
 
               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    (16 )     (3 )
 
           
Net Decrease in Cash and Cash Equivalents
    (483 )     (57 )
Cash and Cash Equivalents — Beginning of Period
    966       647  
 
           
Cash and Cash Equivalents — End of Period
  $ 483     $ 590  
 
           
See accompanying notes to Condensed Consolidated Financial Statements.

4


Table of Contents

The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
                 
    (Unaudited)        
    March     December  
    21, 2009     27, 2008  
ASSETS
               
Current Assets
               
Cash and cash equivalents
  $ 483     $ 966  
Accounts receivable, net
    1,417       1,371  
Inventories
    619       528  
Prepaid expenses and other current assets
    284       276  
 
           
Total Current Assets
    2,803       3,141  
Property, plant and equipment, net
    3,711       3,882  
Other intangible assets, net
    3,758       3,751  
Goodwill
    1,417       1,434  
Investments in noncontrolled affiliates
    511       619  
Other assets
    193       155  
 
           
Total Assets
  $ 12,393     $ 12,982  
 
           
 
               
LIABILITIES AND EQUITY
               
Current Liabilities
               
Accounts payable and other current liabilities
  $ 1,668     $ 1,675  
Short-term borrowings
    305       103  
Current maturities of long-term debt
    7       1,305  
 
           
Total Current Liabilities
    1,980       3,083  
Long-term debt
    5,521       4,784  
Other liabilities
    1,585       1,658  
Deferred income taxes
    1,010       966  
 
           
Total Liabilities
    10,096       10,491  
 
           
 
               
Equity
               
Common stock, par value $0.01 per share: authorized 900 shares, issued 310 shares
    3       3  
Additional paid-in capital
    1,830       1,851  
Retained earnings
    3,152       3,130  
Accumulated other comprehensive loss
    (1,132 )     (938 )
Treasury stock: 97 shares and 99 shares at March 21, 2009 and December 27, 2008, respectively, at cost
    (2,664 )     (2,703 )
 
           
Total Shareholders’ Equity
    1,189       1,343  
Noncontrolling interests
    1,108       1,148  
 
           
Total Equity
    2,297       2,491  
 
           
Total Liabilities and Equity
  $ 12,393     $ 12,982  
 
           
See accompanying notes to Condensed Consolidated Financial Statements.

5


Table of Contents

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
                                                                         
                            Accumulated                                        
                            Other                                     Compre-  
            Additional             Compre-             Total     Noncon-             hensive  
    Common     Paid-In     Retained     hensive     Treasury     Shareholders’     trolling     Total     Income  
    Stock     Capital     Earnings     Loss     Stock     Equity     Interests     Equity     (Loss)  
Balance at December 29, 2007
  $ 3     $ 1,805     $ 3,124     $ (48 )   $ (2,269 )   $ 2,615     $ 973     $ 3,588          
Comprehensive income (loss):
                                                                       
Net income
                28                   28       3       31     $ 31  
Net currency translation adjustment
                      (21 )           (21 )     9       (12 )     (12 )
Cash flow hedge adjustment, net of tax of $2
                      4             4             4       4  
Pension and postretirement medical benefit plans adjustment, net of tax of $2
                      4             4             4       4  
 
                                                                     
Total comprehensive income
                                                                  $ 27  
 
                                                                     
SFAS 158 — measurement date adjustment, net of tax of $(5)
                (16 )     19             3             3          
Equity awards exercises: 1 shares
          (3 )                 10       7             7          
Tax benefit and withholding tax — equity awards
          2                         2             2          
Share repurchases: 5 shares
                            (180 )     (180 )           (180 )        
Share-based compensation
          13                         13             13          
Cash dividends declared on common stock (per share: $0.14)
                (31 )                 (31 )           (31 )        
Contributions from noncontrolling interest holder
                                        4       4          
 
                                                       
Balance at March 22, 2008
  $ 3     $ 1,817     $ 3,105     $ (42 )   $ (2,439 )   $ 2,444     $ 989     $ 3,433          
 
                                                       
 
                                                                       
Balance at December 27, 2008
  $ 3     $ 1,851     $ 3,130     $ (938 )   $ (2,703 )   $ 1,343     $ 1,148     $ 2,491          
Comprehensive income (loss):
                                                                       
Net income
                57                   57       1       58     $ 58  
Net currency translation adjustment
                      (200 )           (200 )     (90 )     (290 )     (290 )
Cash flow hedge adjustment, net of tax of $2
                                                     
Pension and postretirement medical benefit plans adjustment, net of tax of $4
                      6             6       1       7       7  
 
                                                                     
Total comprehensive loss
                                                                  $ (225 )
 
                                                                     
Equity awards exercises: 2 shares
          (29 )                 39       10             10          
Tax benefit and withholding tax — equity awards
          (4 )                       (4 )           (4 )        
Share-based compensation
          12                         12             12          
Cash dividends declared on common stock (per share: $0.17)
                (35 )                 (35 )           (35 )        
Contributions from noncontrolling interest holder
                                        48       48          
 
                                                       
Balance at March 21, 2009
  $ 3     $ 1,830     $ 3,152     $ (1,132 )   $ (2,664 )   $ 1,189     $ 1,108     $ 2,297          
 
                                                       
See accompanying notes to Condensed Consolidated Financial Statements.

6


Table of Contents

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:
         
Quarter   U.S. & Canada   Mexico & Europe
First Quarter
  12 weeks   January and February
Second Quarter   12 weeks   March, April and May
Third Quarter   12 weeks   June, July and August
Fourth Quarter   16 weeks   September, October, November and December
     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.

7


Table of Contents

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

8


Table of Contents

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:
                 
    12 Weeks Ended  
    March     March  
Shares in millions   21, 2009     22, 2008  
 
               
Net income attributable to PBG
  $ 57     $ 28  
 
           
Weighted-average shares outstanding during period on which basic earnings per share is calculated
    212       222  
Effect of dilutive shares:
               
Incremental shares under share-based compensation plans
    2       7  
 
           
Weighted-average shares outstanding during period on which diluted earnings per share is calculated
    214       229  
 
           
 
               
Earnings per share attributable to PBG’s common shareholders
               
Basic earnings per share
  $ 0.27     $ 0.13  
 
           
Diluted earnings per share
  $ 0.27     $ 0.12  
 
           
     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:
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Total share-based compensation expense
  $ 12     $ 12  
Income tax benefit
    (4 )     (4 )
Noncontrolling interest
           
 
           
Net income attributable to PBG impact
  $ 8     $ 8  
 
           
     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.

9


Table of Contents

Note 6—Balance Sheet Details
                 
    March     December  
    21, 2009     27, 2008  
Accounts Receivable, net
               
Trade accounts receivable
  $ 1,207     $ 1,208  
Allowance for doubtful accounts
    (72 )     (71 )
Accounts receivable from PepsiCo
    188       154  
Note receivable from PepsiCo
    29        
Other receivables
    65       80  
 
           
 
  $ 1,417     $ 1,371  
 
           
 
               
Inventories
               
Raw materials and supplies
  $ 215     $ 185  
Finished goods
    404       343  
 
           
 
  $ 619     $ 528  
 
           
 
               
Prepaid Expenses and Other Current Assets
               
Prepaid expenses
  $ 257     $ 244  
Other current assets
    27       32  
 
           
 
  $ 284     $ 276  
 
           
 
               
Property, Plant and Equipment, net
               
Land
  $ 293     $ 300  
Buildings and improvements
    1,533       1,542  
Manufacturing and distribution equipment
    3,887       3,999  
Marketing equipment
    2,168       2,246  
Capital leases
    21       23  
Other
    151       154  
 
           
 
    8,053       8,264  
Accumulated depreciation
    (4,342 )     (4,382 )
 
           
 
  $ 3,711     $ 3,882  
 
           
 
               
Other Assets
               
Note receivable from PepsiCo
  $ 58     $  
Other assets
    135       155  
 
           
 
  $ 193     $ 155  
 
           
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.

10


Table of Contents

                 
    March     December  
    21, 2009     27, 2008  
Accounts Payable and Other Current Liabilities
               
Accounts payable
  $ 469     $ 444  
Accounts payable to PepsiCo
    275       217  
Trade incentives
    155       189  
Accrued compensation and benefits
    197       240  
Accrued insurance
    101       81  
Other accrued taxes
    98       128  
Accrued interest
    62       85  
Other current liabilities
    311       291  
 
           
 
  $ 1,668     $ 1,675  
 
           
Note 7—Other Intangible Assets, net and Goodwill
The components of other intangible assets are as follows:
                 
    March     December  
    21, 2009     27, 2008  
Intangibles subject to amortization
               
Gross carrying amount
               
Customer relationships and lists
  $ 42     $ 45  
Franchise and distribution rights
    74       41  
Other identified intangibles
    21       34  
 
           
 
    137       120  
 
           
Accumulated amortization
               
Customer relationships and lists
    (14 )     (15 )
Franchise and distribution rights
    (31 )     (31 )
Other identified intangibles
    (8 )     (21 )
 
           
 
    (53 )     (67 )
 
           
Intangibles subject to amortization, net
    84       53  
 
           
 
               
Intangibles not subject to amortization
               
Carrying amount
               
Franchise rights
    3,231       3,244  
Licensing rights
    315       315  
Distribution rights
    46       49  
Brands
    35       39  
Other identified intangibles
    47       51  
 
           
Intangibles not subject to amortization
    3,674       3,698  
 
           
Total other intangible assets, net
  $ 3,758     $ 3,751  
 
           
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.

11


Table of Contents

Goodwill
     The changes in the carrying value of goodwill by reportable segment for the 12 weeks ended March 21, 2009 are as follows:
                                 
    U.S. &                    
    Canada     Europe     Mexico     Total  
Balance at December 27, 2008
  $ 1,235     $ 26     $ 173     $ 1,434  
Purchase price allocations relating to acquisitions
    1                   1  
Impact of foreign currency translation
    (4 )           (14 )     (18 )
 
                       
Balance at March 21, 2009
  $ 1,232     $ 26     $ 159     $ 1,417  
 
                       
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:
                 
    Level 2  
    March     December  
    21, 2009     27, 2008  
Financial Assets
               
Foreign currency (1)
  $ 5     $ 13  
Deferred compensation (2)
    11       13  
Interest-rate swaps (3)
    4       8  
 
           
Total
  $ 20     $ 34  
 
           
 
               
Financial Liabilities
               
Commodity (1)
  $ 58     $ 57  
Foreign currency (1)
    7       6  
Interest-rate swaps (3)
    5       1  
 
           
Total
  $ 70     $ 64  
 
           
 
(1)   Based primarily on the forward rates of the specific indices upon which the contract settlement is based.
 
(2)   Based primarily on the value of our stock price.
 
(3)   Based primarily on the London Inter-Bank Offer Rate (“LIBOR”) index.

12


Table of Contents

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 9Financial 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

13


Table of Contents

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.

14


Table of Contents

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.
             
Derivatives Designated as Hedging       Fair  
Instruments under SFAS 133   Balance Sheet Classification   Value  
Assets
           
Foreign currency
  Prepaid expenses and other current assets   $ 4  
Interest-rate swaps
  Other assets     4  
Commodity
  Accounts payable and other current liabilities     1  
Commodity
  Other liabilities     2  
 
         
 
      $ 11  
 
         
 
           
Liabilities
           
Foreign currency
  Prepaid expenses and other current assets   $ 1  
Commodity
  Accounts payable and other current liabilities     51  
Commodity
  Other liabilities     10  
Interest-rate swaps
  Other liabilities     5  
 
         
 
      $ 67  
 
         
             
Derivatives Not Designated as Hedging       Fair  
Instruments under SFAS 133   Balance Sheet Classification   Value  
Assets
           
Foreign currency
  Prepaid expenses and other current assets   $ 3  
Deferred compensation
  Prepaid expenses and other current assets     11  
 
         
 
      $ 14  
 
         
 
           
Liabilities
           
Foreign currency
  Prepaid expenses and other current assets   $ 1  
Foreign currency
  Accounts payable and other current liabilities     5  
Foreign currency
  Other liabilities     2  
 
         
 
      $ 8  
 
         
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.
                     
Derivatives in SFAS   Amount of         Amount of Gain  
133 Cash Flow   Gain (Loss)     Location of Gain (Loss)   (Loss) Reclassified  
Hedging   recognized in     Reclassified from AOCL into   from AOCL into  
Relationships   OCL     Income   Income  
Foreign currency
  $     Cost of goods sold   $ 3  
Commodity
    (7 )   Cost of goods sold     (3 )
Commodity
    (5 )  
Selling, delivery and administrative expenses
    (14 )
Treasury rate lock
        Interest expense, net      
 
               
 
  $ (12 )       $ (14 )
 
               
     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

15


Table of Contents

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:
             
        Amount of Gain  
        (Loss) Recognized  
    Location of Gain (Loss) Recognized in   in Income on  
    Income on Derivative   Derivative  
Derivatives in SFAS 133 Fair Value Hedging Relationship
           
Interest-rate swaps
  Interest expense, net   $ 4  
 
         
Derivatives Not Designated as Hedging Instruments under SFAS 133
           
Deferred compensation
  Selling, delivery and administrative expenses   $ (1 )
Foreign currency
  Other non-operating expenses (income), net     (5 )
 
         
 
      $ (6 )
 
         
     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 10Pension 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.

16


Table of Contents

Components of Net Pension Expense
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Service cost
  $ 14     $ 12  
Interest cost
    25       23  
Expected return on plan assets — (income)
    (28 )     (27 )
Amortization of net loss
    8       3  
Amortization of prior service costs
    2       2  
 
           
Net pension expense for the defined benefit plans
  $ 21     $ 13  
 
           
     On March 31, 2009, we made a contribution of $70 million to the U.S. defined benefit pension trust.
Components of Postretirement Medical Expense
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Service cost
  $ 1     $ 1  
Interest cost
    5       5  
Amortization of net loss
          1  
 
           
Total postretirement medical expense
  $ 6     $ 7  
 
           
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.

17


Table of Contents

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:
                 
    12 Weeks Ended  
    March     March  
    21, 2009     22, 2008  
Net Revenues
               
U.S. & Canada
  $ 2,177     $ 2,207  
Europe
    174       236  
Mexico
    156       208  
 
           
Worldwide net revenues
  $ 2,507     $ 2,651  
 
           
 
               
Operating Income (Loss)
               
U.S. & Canada
  $ 144     $ 136  
Europe
    (25 )     (31 )
Mexico
    (2 )     3  
 
           
Worldwide operating income
    117       108  
Interest expense, net
    79       59  
Other non-operating expenses (income), net
    7       (3 )
 
           
Income before income taxes
  $ 31     $ 52  
 
           
                 
    March     December  
    21, 2009     27, 2008  
Total Assets
               
U.S. & Canada
  $ 9,545     $ 9,815  
Europe
    1,999       2,222  
Mexico
    849       945  
 
           
Worldwide total assets
  $ 12,393     $ 12,982  
 
           
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

18


Table of Contents

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
                                 
            U.S. &              
    Worldwide     Canada     Mexico     Europe  
Costs incurred through December 27, 2008
  $ 83     $ 53     $ 3     $ 27  
Costs incurred during the first quarter ended March 21, 2009
    5       3       2        
Costs expected to be incurred through December 26, 2009
    52-82       33-44       18-33       1-5  
 
                       
Total costs expected to be incurred
  $ 140-$170     $ 89-$100     $ 23-$38     $ 28-$32  
 
                       
 
By Activity                              
 
                            Asset  
                    Pension     Disposal,  
            Severance     & Other     Employee  
            & Related     Related     Relocation  
    Total     Benefits     Costs     & Other  
Costs incurred through December 27, 2008
  $ 83     $ 47     $ 29     $ 7  
Cash payments
    (11 )     (10 )           (1 )
Non-cash settlements
    (30 )     (1 )     (23 )     (6 )
 
                       
Remaining costs accrued at December 27, 2008
    42       36       6        
Costs incurred during the first quarter ended March 21, 2009
    5       1       1       3  
Cash payments
    (22 )     (18 )     (2 )     (2 )
Non-cash settlements
    (2 )           (1 )     (1 )
 
                       
Remaining costs accrued at March 21, 2009
  $ 23     $ 19     $ 4     $  
 
                       

19


Table of Contents

Note 14—Supplemental Cash Flow Information
     The table below presents the Company’s supplemental cash flow information:
                 
    12 Weeks Ended
    March   March
    21, 2009   22, 2008
Interest paid
  $ 101     $ 71  
Income taxes paid
  $ 12     $ 6  
Decrease in accounts payable related to capital expenditures
  $ (10 )   $ (49 )
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.

20


Table of Contents

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:
  Other Intangible Assets, net and Goodwill;
 
  Pension and Postretirement Medical Benefit Plans;
 
  Casualty Insurance Costs; and
 
  Income Taxes.

21


Table of Contents

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:
                 
    12 Weeks Ended  
    March     March  
Income/(Expense)   21, 2009     22, 2008  
Operating Income
               
2008 Restructuring Charges
  $ (5 )   $  
2007 Restructuring and Asset Disposal Charges
          (3 )
 
           
Total Operating Income Impact
  $ (5 )   $ (3 )
 
 
               
Net Income Attributable to PBG
               
2008 Restructuring Charges
  $ (3 )   $  
2007 Restructuring and Asset Disposal Charges
          (1 )
Tax Audit Settlement
    39        
 
           
Total Net Income Attributable to PBG Impact
  $ 36     $ (1 )
 
 
               
Diluted Earnings per Share
               
2008 Restructuring Charges
  $ (0.01 )   $  
2007 Restructuring and Asset Disposal Charges
          (0.01 )
Tax Audit Settlement
    0.18        
 
           
Total Diluted Earnings per Share Impact
  $ 0.17     $ (0.01 )
 
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.

22


Table of Contents

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
                         
    12 Weeks Ended
    March   March   % Change
    21, 2009   22, 2008   Better/(Worse)
Net revenues
  $ 2,507     $ 2,651       (5 )%
Cost of sales
  $ 1,403     $ 1,482       5 %
Gross profit
  $ 1,104     $ 1,169       (6 )%
Selling, delivery and administrative expenses
  $ 987     $ 1,061       7 %
Operating income
  $ 117     $ 108       8 %
Net income attributable to PBG
  $ 57     $ 28       104 %
Diluted earnings per share (1)
  $ 0.27     $ 0.12       118 %
 
(1)   Percentage change for diluted earnings per share is calculated using earnings per share data expanded to the fourth decimal place.
     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”).

23


Table of Contents

     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
                                 
    12 Weeks Ended
    March 21, 2009 vs. March 22, 2008
            U.S. &        
    Worldwide   Canada   Europe   Mexico
Base volume
    (6 )%     (5 )%     (16 )%     (7 )%
Acquisitions
    1       2              
 
                               
Total volume change
    (5 )%     (3 )%     (16 )%     (7 )%
 
                               
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.

24


Table of Contents

     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
                                 
    12 Weeks Ended  
    March 21, 2009 vs. March 22, 2008  
            U.S. &              
    Worldwide     Canada     Europe     Mexico  
2009 Net revenues
  $ 2,507     $ 2,177     $ 174     $ 156  
2008 Net revenues
  $ 2,651     $ 2,207     $ 236     $ 208  
 
                               
% Impact of:
                               
Volume impact
    (6 )%     (5 )%     (16 )%     (7 )%
Net price per case impact (rate/mix)
    5       4       10       5  
Acquisitions
    1       1              
Currency translation
    (5 )     (2 )     (20 )     (23 )
 
                       
Total net revenues change
    (5 )%     (1 )%*     (26 )%     (25 )%
 
                       
 
*   Does not add due to rounding to the whole percent.
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.

25


Table of Contents

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
                                 
    12 Weeks Ended  
    March 21, 2009 vs. March 22, 2008  
            U.S. &              
    Worldwide     Canada     Europe     Mexico  
2009 Operating income (loss)
  $ 117     $ 144     $ (25 )   $ (2 )
2008 Operating income (loss)
  $ 108     $ 136     $ (31 )   $ 3  
 
                               
% Impact of:
                               
Operations
    2 %     6 %     (8 )%     (147 )%
Currency translation
    5       (2 )     26       29  
2008 Restructuring charges
    (4 )     (2 )           (62 )
2007 Restructuring and asset disposal charges
    2       2              
Acquisitions
    3       2              
 
                       
Total operating income change
    8 %     6 %     17 %*     (180 )%
 
                       
 
*   Does not add due to rounding to the whole percent.
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

26


Table of Contents

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

27


Table of Contents

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.

28


Table of Contents

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.

29


Table of Contents

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:
                                 
                    Total Number of   Maximum Number of
                    Shares Purchased as   Shares that May Yet
    Total Number           Part of Publicly   Be Purchased Under
    of Shares   Average Price Paid   Announced Plans or   the Plans or
Period   Purchased   per Share   Programs   Programs 1
 
Period 1
12/28/0801/24/09
                      28,540,400  
Period 2
01/25/0902/21/09
                      28,540,400  
Period 3
02/22/0903/21/09
                      28,540,400  
 
Total
                         
 
 
1   The PBG Board has authorized the repurchase of shares of common stock on the open market and through negotiated transactions as follows:
         
    Number of Shares
    Authorized to be
Date Share Repurchase Program was Publicly Announced   Repurchased
 
October 14, 1999
    20,000,000  
July 13, 2000
    10,000,000  
July 11, 2001
    20,000,000  
May 28, 2003
    25,000,000  
March 25, 2004
    25,000,000  
March 24, 2005
    25,000,000  
December 15, 2006
    25,000,000  
March 27, 2008
    25,000,000  
 
       
Total shares authorized to be repurchased as of March 21, 2009
    175,000,000  
 
       
     Unless terminated by resolution of the PBG Board, each share repurchase program expires when we have repurchased all shares authorized for repurchase thereunder.

30


Table of Contents

Item 6.
EXHIBITS
     
EXHIBIT NO.   DESCRIPTION OF EXHIBIT
31.1
  Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

31


Table of Contents

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.
         
  THE PEPSI BOTTLING GROUP, INC.
(Registrant)
 
 
Date: April 27, 2009  /s/ Thomas M. Lardieri    
  Thomas M. Lardieri   
  Vice President and Controller   
     
Date: April 27, 2009  /s/ Alfred H. Drewes    
  Alfred H. Drewes   
  Senior Vice President and Chief Financial Officer   
 

 

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki