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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 June 13, 2009 (12 weeks)
OR
For the transition period from to
Commission file number 1-14893
 THE PEPSI BOTTLING GROUP, INC.
914-767-6000
N/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ The number of shares of Common Stock and Class B Common Stock of The Pepsi Bottling Group, Inc.
outstanding as of July 11, 2009 was 215,375,529 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 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 24 Weeks Ended June 13, 2009 and June 14, 2008 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 Income in millions, 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 ongoing
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 on a calendar-year basis.
Accordingly, we recognize our quarterly business results as outlined below:
At June 13, 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 32.6 percent of our outstanding common stock and 100 percent of our
outstanding Class B common stock, together representing 39.6 percent of the voting power of all
classes of our voting stock. In addition, PepsiCo owns approximately 6.6 percent of the equity of
Bottling LLC and 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for
our Russian operations.
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.
Note 2—Seasonality of Business
The results for the second quarter are not necessarily indicative of the results that may be
expected for the full year because sales of our products are seasonal. 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.
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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.
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. In addition SFAS 160 requires 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. 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, “Interim
Disclosures about 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 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.
SFAS No. 165
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which sets forth
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before
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financial statements are issued or are available to be issued. SFAS 165 will
become effective in the third quarter of 2009 and will not likely have a material impact on our
Consolidated Financial Statements.
SFAS No. 167
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”), which amends FASB Interpretation No. 46(revised December 2003) to address the
elimination of the concept of a qualifying special purpose entity. SFAS 167 also replaces the
quantitative-based risks and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity. Additionally,
SFAS 167 provides more timely and useful information about an enterprise’s involvement with a
variable interest entity. SFAS 167 will become effective in the first quarter of 2010. We are
currently evaluating the impact of this standard on our Consolidated Financial Statements.
SFAS No. 168
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162” (“SFAS 168”), which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles recognized by the FASB
to be applied in the preparation of financial statements in conformity with generally accepted
accounting principles. SFAS 168 explicitly recognizes rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for
SEC registrants. SFAS 168 will become effective in the fourth quarter of 2009 and will not have a
material impact on our Consolidated Financial Statements.
Note 4—Earnings per Share
The following table reconciles the shares outstanding and net earnings used in the
computations of both basic and diluted earnings per share:
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. The following shares were
excluded from the diluted earnings per share computation because the exercise price of the options
was greater than the average market
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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 the 24 weeks ended June 13, 2009 and June 14, 2008, we granted 6 million and 3 million
stock option awards at a weighted-average fair value of $4.52 and $7.12, respectively.
During the 24 weeks ended June 13, 2009 and June 14, 2008, we granted 2 million and 1 million
restricted stock unit awards at a weighted-average fair value of $18.76 and $35.36, respectively.
Unrecognized compensation cost related to nonvested share-based compensation arrangements
granted under the incentive plans amounted to $101 million as of June 13, 2009. That cost is
expected to be recognized over a weighted-average period of 2.2 years.
Note 6—Balance Sheet Details
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Note Receivable from Noncontrolled Affiliate
During
the first quarter of 2009, we issued a ruble-denominated three-year note with an interest
rate of 10.0 percent (“Note receivable from noncontrolled affiliate”) to JSC Lebedyansky
(“Lebedyansky”), a consolidated subsidiary of PepsiCo and a noncontrolled affiliate of PBG, valued
at $92 million on June 13, 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 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:
During
the first quarter of 2009, we acquired distribution rights for certain energy drinks
in the United States and Canada and protein-enhanced functional beverages in the United
States. As a result of these acquisitions, we recorded approximately $36 million of amortizable
distribution rights, with a weighted-average amortization period of 10 years.
During the second quarter, we acquired a Pepsi-Cola and Dr Pepper
franchise bottler serving portions of central Texas. As a result of this acquisition we recorded
approximately $57 million of non-amortizable franchise rights and $8 million of non-compete
agreements, with a weighted-average amortization period of 10 years.
Intangible asset amortization
Intangible asset amortization expense was $2 million for both the 12 weeks ended June 13, 2009
and June 14, 2008. Intangible asset amortization expense was $4 million for both the 24 weeks
ended June 13, 2009 and June 14, 2008. Amortization expense for each of the next five years is
estimated to be approximately $11 million or less.
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Goodwill
The changes in the carrying value of goodwill by reportable segment for the 24 weeks ended
June 13, 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 June 13, 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 June 13, 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.
Credit Risk Associated with Derivatives
We are exposed to counterparty credit risk on all of our derivative financial instruments. We
have established and maintained counterparty credit guidelines and enter into transactions only
with financial institutions of investment grade or better. We monitor our counterparty credit risk
and utilize numerous counterparties to minimize our exposure to potential defaults. We do not
require collateral under these agreements.
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 June 13,
2009, have a notional value, based on the contract price, of $345 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 24 months in duration and as of June 13, 2009, have a notional value, based on the contract
price, of $74 million.
Interest — We have entered into treasury rate lock agreements to hedge against adverse
interest rate changes relating to the issuance of certain fixed rate debt financing arrangements.
Gains and losses from these treasury rate lock agreements that are considered effective are
deferred in AOCL and amortized to
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interest expense over the duration of the debt term. The Company has a $3 million net
deferred gain in AOCL, which will be amortized over the next seven years. For the 12 weeks and 24
weeks ended June 13, 2009, we recognized, in interest expense, a loss of $0.1 million and $0.3
million, respectively.
Fair Value Hedges
Interest Rate Swaps — We effectively converted $1.25 billion of our fixed-rate debt to
floating-rate debt through the use of interest rate swaps with the objective of reducing our
overall borrowing costs. These interest rate swaps meet the criteria for fair value hedge
accounting and are assumed to be 100 percent effective in eliminating the market-rate risk inherent
in our long-term debt. Accordingly, any gain or loss associated with these swaps is fully offset
by the opposite market impact on the related debt and recognized currently in earnings.
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 June 13, 2009, have a
notional value, based on the contract price, of $33 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 three years and
as of June 13, 2009, have a notional value, based on the contract price, of $15 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 June 13, 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 June 13, 2009:
Cash Flow Hedge Gains (Losses) Recognition
The
following summarizes the gains (losses) recognized in the Condensed Consolidated Statements
of Operations and Other Comprehensive Income (“OCI”) of derivatives designated and qualifying as
cash flow hedges for the 12 and 24 weeks ended June 13,
2009:
The ineffective portion of the change in fair value of our cash flow hedges was not material
to our results for the 12 weeks and 24 weeks ended June 13, 2009. Assuming no change in the
commodity prices and foreign currency rates as measured on June 13, 2009, $19 million of unrealized
net losses will be reclassified from AOCL and recognized in earnings over the next 12 months.
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Other Derivatives Gains (Losses) Recognition
The following summarizes the gains (losses) and the location in the Condensed Consolidated
Statements of Operations of derivatives designated and qualifying as fair value hedges and
derivatives not designated as hedging instruments for the 12 and 24 weeks ended June 13, 2009:
The Company has recorded $11 million and $4 million of net foreign currency transactional
gains in other non-operating income, net in the Condensed
Consolidated Statements of Operations for
the 12 weeks and 24 weeks ended June 13, 2009, respectively.
Note 10—Pension and Postretirement Medical 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.
Components of Net Pension Expense
For the 24 weeks ended June 13, 2009, we made $88 million of contributions to the U.S. defined
benefit pension trust.
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Components of Postretirement Medical Expense
Defined Contribution Benefits
Defined contribution expense was $13 million and $7 million for the 12 weeks ended June 13,
2009 and June 14, 2008, respectively, and $21 million and $15 million for the 24 weeks ended June
13, 2009 and June 14, 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 Condensed 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.
During the second quarter of 2009, the statute of limitations closed for our IRS audit in the
U.S. for the 2003 and 2004 tax returns, and we reached a settlement with the Canadian tax
authorities on an issue related to the 1999-2005 tax years. As a result, our gross reserves for
uncertain tax benefits, excluding interest, decreased by $44 million of which $43 million was
reflected as a benefit in income tax expense in our Condensed Consolidated Statements of Operations
and $1 million was offset against other assets in our Condensed Consolidated Balance Sheets. In
addition, we decreased our related reserves for interest by approximately $11 million and
recognized a tax benefit from interest refunds of approximately $2 million. The total impact of
these items was a net provision benefit of $56 million.
We currently have ongoing income tax audits in our major tax jurisdictions, where issues such
as deductibility of certain expenses have been raised. We believe that it is reasonably possible
that our reserves for uncertain tax benefits could further decrease in the range of $25 million to
$60 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 Condensed 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.
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.
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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 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 June
13, 2009, we eliminated approximately 2,500 positions across all reporting segments and closed four
facilities in the United States, two plants and 10 distribution centers in Mexico and eliminated
432 routes in Mexico.
The Company expects to incur approximately $130 million in pre-tax cash expenditures from
these restructuring actions, of which $52 million was paid since the inception of the program, with
the balance expected to occur in 2009 and 2010. This includes $5 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.
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By Reportable Segment
By Activity
Note 14—Supplemental Cash Flow Information
The table below presents the Company’s supplemental cash flow information:
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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.
Litigation Related to PepsiCo Proposal
On April 19, 2009, PBG received an unsolicited 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 proposal consisted of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share
of PBG common stock. Immediately following receipt of the proposal, PBG’s Board of Directors
formed a special committee to review the adequacy of the proposal. On May 4, 2009, our Board of
Directors rejected the proposal.
As discussed below, we and members of our Board of Directors have been named in a number of
lawsuits relating to the PepsiCo proposal. It is not presently possible to accurately forecast the outcome or
the ultimate cost of these lawsuits. In the event of prolonged proceedings or a determination adverse to the Company or its
directors or officers, the Company may incur substantial monetary liability and expense, which
could have a material adverse effect on our business and financial results.
Since April 20, 2009, seven separate stockholder lawsuits were filed in Delaware Chancery
Court against the Company and members of the Board of Directors by various shareholder plaintiffs
on behalf of themselves and all others similarly situated (the “Delaware Lawsuits”). The Delaware
Lawsuits generally allege that the Company’s Board of Directors breached their fiduciary duties in
connection with PepsiCo’s proposal. The Delaware Lawsuits seek declaratory and injunctive relief,
as well as an award of plaintiffs’ attorneys’ fees and costs. The Delaware Lawsuits were
consolidated on June 5, 2009, and an amended complaint was filed on June 19, 2009. The amended
complaint does not contain any additional causes of action.
Since April 20, 2009, three separate stockholder lawsuits were filed in New York Supreme Court
against the Company and members of the Board of Directors by various shareholder plaintiffs on
behalf of themselves and all others similarly situated (the “New York Lawsuits”). The claims and
relief sought under the New York Lawsuits are substantially similar to the Delaware Lawsuits. On
June 8, 2009, we filed Motions to Dismiss (or, in the alternative, to Stay), asking the Courts to
dismiss (or at least stay) the New York Lawsuits because identical claims were first made in
Delaware Chancery Court (as described above), and because Delaware is the more appropriate forum
for this dispute. The Motions to Dismiss are pending the Courts’ review.
On May 11, 2009, PepsiCo, Inc. and the PBG Board members affiliated with PepsiCo filed a
complaint against the Company and the non-PepsiCo affiliated members of its Board of Directors, in
Delaware Chancery Court, alleging, among other things, that the named Board of Directors breached
their fiduciary duties by rejecting PepsiCo’s unsolicited proposal to purchase all outstanding
shares of the Company that it does not already own, and by adopting certain defensive measures in
response to the proposal (the “PepsiCo Lawsuit”). The PepsiCo Lawsuit seeks declaratory and
injunctive relief, as well as an award of plaintiffs’ attorneys’ fees and costs. Our answer to
the PepsiCo Lawsuit is due on August 3, 2009. PepsiCo has informed the Court that it does not seek
any expedited action in this matter at this time.
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Note 16 — Stockholders’ Rights Agreement
During the second quarter, the Company declared a dividend payable to stockholders of record
on May 28, 2009, of one right (a “Right”) per each share of outstanding Common Stock and Class B
Common Stock to purchase 1/1,000th of a share of Series A Preferred Stock of the Company
(the “Preferred Stock”), at a price of $100 per share (the “Purchase Price”). In connection with
the declaration of the dividend, the Company entered into a Rights Agreement, dated May 18, 2009,
with Mellon Shareholder Services LLC, as the Rights Agent.
The Rights will become exercisable upon the earliest of (i) the date that a person or group
other than PepsiCo has obtained beneficial ownership of more than 15 percent of the outstanding
shares of Common Stock, (ii) a date determined by the PBG Board of Directors after a person or
group commences (or publicly discloses an intent to commence) a tender or exchange offer that would
result in such person or group becoming the beneficial owner of more than 15 percent of the
outstanding shares of Common Stock, or (iii) the date that PepsiCo or any of its affiliates has
acquired, or obtained the right to acquire, beneficial ownership of any additional shares of Common
Stock not owned by PepsiCo or such affiliate. The Rights will expire on May 18, 2010, unless
earlier redeemed or canceled by the Company.
Each right, if and when it becomes exercisable, will entitle the holder (other than the person
or group whose action triggered the exercisability of the Rights (the “Acquiring Person”)) to
receive, upon exercise of the Right and the payment of the Purchase Price, that number of
1/1,000ths of a share of Preferred Stock equal to the number of shares of Common Stock
which at the time of the applicable triggering transaction would have a market value of twice the
Purchase Price.
In the event the Company is acquired by PepsiCo or another person in a merger or other
business combination that triggers the exercisability of the Rights, or 50 percent or more of the
Company’s assets are sold in a transaction that triggers the exercisability of the Rights, each
Right will entitle its holder (other than an Acquiring Person) to purchase common shares in the
surviving entity at 50 percent of market price.
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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 ongoing 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 period-over-period 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 $97 million. Of
this amount, we recorded $9 million, or $0.03 per diluted share, in the second quarter of 2009, of
which $4 million was recorded in our U.S. & Canada segment, $4 million was recorded in our Mexico
segment and $1 million was recorded in our Europe segment. For the 24 weeks ended June 13, 2009,
we recorded $14 million in pre-tax charges, or $0.04 per diluted share, of which $7 million was
recorded in our U.S. & Canada segment, $6 million was recorded in our Mexico segment and $1 million
was recorded in our Europe segment.
The Company expects to incur approximately $130 million in pre-tax cash expenditures from
these restructuring actions, of which $52 million was paid since the inception of the program, with
the balance expected to occur in 2009 and 2010. During the second quarter of 2009, we paid $17
million in pre-tax cash expenditures for these restructuring actions.
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For further information about our restructuring charges see Note 13 in the Notes to Condensed
Consolidated Financial Statements.
Acquisition Proposal Advisory Fees
In connection with PepsiCo’s proposal, PBG’s Board of Directors formed a special committee to
review the adequacy of the acquisition proposal. As part of this review, the Company has retained
certain external advisors and expects to incur aggregate fees in the range of $40 million to $60
million. For the 12 and 24 weeks ended June 13, 2009, the Company has recorded pre-tax charges of
$15 million, or $0.04 per diluted share, relating to these services.
For further information about PepsiCo’s proposal see Note 15 in the Notes to Condensed
Consolidated Financial Statements.
Tax Audit Settlements
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 settlement of U.S. audits with the IRS for our 2003-2005 tax years.
During the second quarter of 2009, the statute of limitations closed for our IRS audit in the
U.S. for the 2003 and 2004 tax returns. In addition, we reached a settlement with the Canadian tax
authorities on an issue related to the 1999-2005 tax years. As a result, we recorded a tax benefit
related to these items of $54 million after noncontrolling interest, or $0.25 per diluted share.
For further information about our tax audit settlements see Note 11 in the Notes to Condensed
Consolidated Financial Statements.
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 2008, we 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 and $1 million in the second 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 each of the first and second quarters of 2008. This charge was recorded in
selling, delivery and administrative expenses.
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FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS
Worldwide Financial Highlights for the 12 and 24 Weeks Ended June 13, 2009
Foreign Currency Impact — The impact of foreign currency translation for the quarter reduced
the growth in reported net revenues and gross profit by seven percentage points. Foreign currency
translation also reduced the growth in reported cost of sales and selling, delivery and
administrative expenses (“SD&A”) by eight percentage points and operating income by a net four
percentage points.
The impact of foreign currency translation for the year-to-date period reduced the growth in
reported net revenues and gross profit by six percentage points, cost of sales and SD&A by seven
percentage points and operating income by a net two percentage points.
Currency neutral growth rates exclude the impact of foreign currency translation (discussed
above) by translating current year results using prior year’s foreign exchange rates.
Volume — Volume decreased by four percent in the second quarter and five percent for the
first 24 weeks of 2009, driven by declines in each of our segments due to the soft economic
conditions globally, which have negatively impacted the liquid refreshment beverage category. In
the second quarter, worldwide volume growth benefited by one percentage point due to the shift of
the Easter holiday from the first quarter in 2008 to the second quarter in 2009 (“Easter Shift”).
Net revenues — Reported net revenues declined seven percent in the second quarter and six
percent for the first 24 weeks of 2009, 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 for both the quarter
and year-to-date period, driven primarily by rate increases in each of our segments. Reported net
revenue per case declined three percent for the quarter and two percent for the year-to-date
period, which includes a negative impact of eight percentage points and seven percentage points
from foreign currency translation for the quarter and year-to-date period, respectively.
Cost of sales — Reported cost of sales declined five percent for both the second quarter and
first 24 weeks of 2009, due to the favorable impact of foreign currency translation and lower
volume in the quarter. These declines were partially offset by higher raw material costs coupled
with the negative impact of foreign currency transactional costs relating primarily to our U.S.
dollar denominated purchases in Europe and Mexico. Currency neutral cost of sales per case
increased eight percent in the quarter and seven percent for the year-to-date period. Reported
cost of sales per case was flat versus the prior year for both the quarter and the year-to-date
period, which includes a negative impact of eight percentage points and seven percentage points
from foreign currency translation for the quarter and year-to-date period, respectively.
Gross profit — Reported gross profit declined 10 percent in the second quarter and eight
percent for the first 24 weeks of 2009, driven by volume declines and the impact of foreign
currency translation. This was
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partially offset by improvement in gross profit per case on a currency neutral basis as rate
gains more than offset higher raw material costs due to the Company’s global pricing strategy.
Currency neutral gross profit per case increased one percent in the quarter and three percent in
the year-to-date period. Reported gross profit per case declined six percent for the quarter and
four percent for the year-to-date period, which includes a negative impact of seven percentage
points from foreign currency translation for both the quarter and year-to-date period.
Selling, delivery and administrative expenses — Reported SD&A declined by 10 percent in the
second quarter and eight percent for the first 24 weeks of 2009, driven by the favorable benefit of
foreign currency translation and volume declines coupled with lower operating costs due to
continued productivity improvements across all segments. Restructuring charges and advisory fees
relating to PepsiCo’s proposal increased reported SD&A growth by two percentage points for the
quarter and one percentage point for the year-to-date period.
Operating income — Reported operating income declined 12 percent in the second quarter and
seven percent for the first 24 weeks of 2009. Restructuring charges and advisory fees relating to
PepsiCo’s proposal reduced operating income growth by six percent for the quarter and five percent
for the year-to-date period. The remaining decrease in reported operating income for the quarter
and the year-to-date period was due to volume declines and the negative impact of foreign currency
translation, partially offset by rate increases, cost and productivity improvements and the
positive impact from acquisitions.
Net income attributable to PBG — Net income attributable to PBG for the second quarter was
$211 million, which increased 21 percent versus the prior year. The increase for the quarter
includes a net after-tax gain of $39 million, or $0.18 per diluted share, resulting from the
benefit of tax audit settlements, restructuring charges and advisory fees relating to PepsiCo’s
proposal. These items contributed 23 percentage points to the growth rate for the quarter. The
remaining two percentage point decrease for the quarter was driven by a decline in operating
income, partially offset by a lower effective tax rate and the benefit from foreign currency
transactional gains.
Net income attributable to PBG for the first 24 weeks of 2009 was $268 million, which
increased 32 percent versus the prior year. The increase for the year-to-date period includes a
net after-tax gain of $75 million, or $0.35 per diluted share, resulting from the benefit of tax
audit settlements, restructuring charges and advisory fees relating to PepsiCo’s proposal. These
items contributed 38 percent to the growth rate for the year-to-date period. The remaining six
percent decrease for the year was impacted by higher interest costs and a decline in operating
income, partially offset by a lower effective tax rate for the 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
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U.S. & Canada
In our U.S. & Canada segment, volume decreased one percent for the quarter and two percent for
the year-to-date period, primarily due to the macroeconomic factors negatively impacting the liquid
refreshment beverage category. For the quarter, volume growth benefited by two percentage points
due to the Easter holiday shifting from the first quarter in 2008 to the second quarter in 2009.
Additionally, volume from our newly acquired rights to distribute Crush, Rockstar and Muscle Milk
in the U.S., contributed two percentage points of growth for both the quarter and the year-to-date
period and volume from our acquisition of Lane Affiliated Companies, Inc. (“Lane”) contributed one
percentage point of growth for both the quarter and the year-to-date period.
Our take-home channel was flat for the quarter and decreased two percent for the year-to-date
period. During the quarter, large format stores benefited from improving trends in our carbonated
soft drink (“CSD”) portfolio and incremental volume from the Easter Shift.
Our cold drink channel declined seven percent in both the quarter and the year-to-date period.
These declines 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 15 percent for both the quarter and the year-to-date
period. 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 both the quarter and the
year-to-date period, driven by worsening macroeconomics and category softness, coupled with pricing
actions taken by the Company to drive improved margins across its portfolio. This drove declines
in each of our categories including CSD, bottled water and jug categories.
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Net Revenues
U.S. & Canada
In our U.S. & Canada segment, net revenues increased one percent in the quarter and were flat
for the year-to-date period. Net revenues results for the quarter and year-to-date period reflect
improvements in rate per case partially offset by volume declines and the negative impact of
foreign currency translation. Net revenue per case on a currency neutral basis improved by three
percent for the quarter and four percent for the year-to-date period, driven by rate increases
taken on the majority of our packages to offset rising raw material costs and improve
profitability. Reported net revenue per case increased two percent for both the quarter and the
year-to-date period, which includes a one percentage point and two percentage point negative impact
from foreign currency translation for the quarter and the year-to-date period, respectively.
Europe
In our Europe segment, net revenues declined 28 percent for the quarter and year-to-date
period, due primarily to the negative impact of foreign currency translation and volume declines.
Growth in net revenue per case on a currency neutral basis of eight percent for the quarter and
nine percent for the year-to-date period was driven primarily by rate actions and disciplined
promotional spending. Europe’s reported net revenue per case declined 16 percent for the quarter
and 15 percent for the year-to-date period, which includes a 24 percentage point negative impact
from foreign currency translation for both the quarter and the year-to-date period.
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Mexico
In our Mexico segment, declines in net revenues of 24 percent for the quarter and year-to-date
period, reflect the negative impact of foreign currency translation and lower volume. Net revenue
per case on a currency neutral basis grew six percent for the quarter and year-to-date period,
primarily due to rate increases to drive margin improvement. Mexico’s reported net revenue per
case declined 19 percent for both the quarter and the year-to-date period, which includes a 25
percentage point negative impact from foreign currency translation for both the quarter and the
year-to-date period.
Operating Income
U.S. & Canada
In our U.S. & Canada segment, operating income decreased one percent for the quarter and
increased one percent for the year-to-date period, driven by the negative impact of items impacting
comparability listed above, partially offset by an improvement in operating activities. Increases
in operating activities were driven by cost and productivity savings and gross profit per case
improvement, partially offset by volume declines.
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On a currency neutral basis gross profit per case improved one percent for the quarter and
three percent for the year-to-date period driven by growth in net revenue per case, which more than
offset higher raw material costs. Reported gross profit per case declined one percent for the
quarter and improved one percent
for the year-to-date period, which includes a two percentage point negative impact from
foreign currency translation for both the quarter and the year-to-date period.
SD&A improved two percent for both the quarter and the year-to-date period due to lower costs
resulting from productivity initiatives and volume declines coupled with a two percentage point
positive impact from foreign currency translation. Restructuring charges and advisory fees relating to the
PepsiCo proposal increased SD&A by two percentage points for the quarter and one percentage point
for the year-to-date period. SD&A also includes increased costs in connection with employee
related benefits, partially offset by a favorable actuarial adjustment for our casualty insurance
accrual reflecting improved safety performance.
Europe
In our Europe segment, operating income declines for the quarter and year-to-date period were
driven primarily by decreases in volume partially offset by declines in SD&A.
Reported gross profit per case in Europe declined 21 percent for the quarter and 19 percent
for the year-to-date period, which includes a 21 percentage point negative impact from foreign
currency translation for both the quarter and the year-to-date period. Gross profit per case on a
currency neutral basis was flat for the quarter and increased two percent for the year-to-date
period driven by strong rate increases which 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 denominated purchases in this segment.
SD&A in Europe improved 28 percent for the quarter and 27 percent for the year-to-date period,
which includes a 21 percentage point benefit from foreign currency translation for both the quarter
and the year-to-date period. The remaining improvement in SD&A was driven by volume declines, a
decrease in bad debt provision due to the Company’s increased focus on credit and collections and
lower costs resulting from productivity initiatives throughout Europe.
Mexico
In our Mexico segment, operating income declines for the quarter and year-to-date period were
due to decreases in volume growth, partially offset by improved pricing actions and lower costs
resulting from productivity initiatives.
Reported gross profit per case declined 21 percent for both the quarter and the year-to-date
period which includes a negative impact from foreign currency translation of 23 percentage points for the
quarter and 24 percentage points for the year-to-date period. Gross profit per case on a currency neutral basis increased
two percent for the quarter and three percent for the year-to-date period, reflecting solid margin
management which offset rising raw material costs. Higher raw material costs were driven by the
negative impact of foreign currency transactional costs resulting from U.S. dollar denominated
purchases.
SD&A improved 24 percent for the quarter and 23 percent for the year-to-date period which
includes a 23 percentage point benefit from foreign currency translation for both the quarter and the
year-to-date period. Restructuring charges increased SD&A by three percentage points for the
quarter and two percentage points for the year-to-date period. The remaining decrease in SD&A
growth for the quarter and year-to-date period was driven by lower costs associated with volume
declines and reduced operating costs attributable to improved route productivity.
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Interest Expense, net
Net interest expense increased $6 million in the second quarter and $26 million on a
year-to-date basis versus the prior year, largely 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 Income, net
Other net non-operating income was $11 million for the quarter and $4 million for the first 24
weeks of 2009, driven primarily by foreign currency transactional gains recorded in the quarter
resulting from strengthening currencies in Europe and Mexico.
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 decrease of $3 million in the second quarter and $5 million on a year-to-date basis was
primarily driven by lower income in the PR Beverages venture.
Income Tax Expense
Our effective tax rate for the 24 weeks ended June 13, 2009 was a benefit of 5.0 percent
compared with our effective tax rate of 31.2 percent for the 24 weeks ended June 14, 2008. The
decrease in our 2009 effective tax rate was primarily driven by tax audit settlements with the IRS
and Canadian tax authorities, which resulted in a tax benefit of approximately $95 million. These
audit settlements benefited our effective tax rate by approximately 34 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
24 Weeks Ended June 13, 2009 vs. June 14, 2008
PBG generated $215 million of net cash from operations, an increase of $126 million from 2008.
The increase in net cash provided by operations was driven primarily by the timing of
disbursements and tax payments, partially offset by an $88 million pension contribution made in
2009.
Net cash used for investments was $388 million, a decrease of $40 million from 2008. The
decrease in cash used for investments was due to lower capital expenditures, partially offset by a
loan to our Lebedyansky non-controlled affiliate, which was contemplated as part of the initial
capitalization of the purchase of Lebedyansky between PepsiCo and us and higher acquisition
spending.
Net cash used for financing activities was $285 million, an increase of $497 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 higher share repurchases in 2008.
Liquidity and Capital Resources
Our principal sources of cash include cash from our operating activities and the issuance of
debt and bank borrowings. We believe that these cash inflows will be sufficient to fund capital
expenditures, benefit plan contributions, acquisitions, share repurchases, dividends and working
capital requirements for the foreseeable future. Our liquidity remains healthy and management does
not expect that it will be materially impacted in the near-future.
We had $153 million of outstanding commercial paper at June 13, 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.
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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.
For the 24 weeks ended June 13, 2009, we made $88 million of contributions to the U.S. defined
benefit pension trust.
Contractual Obligations
With the exception of the advisory fees we expect to incur in connection with the PepsiCo
proposal discussed in Items Impacting Comparability, 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. Among the events and uncertainties that could adversely affect future periods are:
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For additional information on these and other risks and uncertainties that could cause our
actual results to materially differ from those expressed or implied in our forward-looking
statements, see the “Risk Factors” section of this Report and our Annual Report on Form 10-K for
the fiscal year ended December 27, 2008. Forward-looking statements speak only as of the date they
were made, and we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are party to a variety of legal proceedings arising in the normal course of business. While
the results of these 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 with the exception of the
following:
Uncertainty resulting from PepsiCo’s unsolicited proposal to purchase all outstanding shares
of the Company that it does not already own and related matters could adversely affect our business
and financial results.
On April 19, 2009, we received an unsolicited proposal from PepsiCo to purchase all
outstanding shares of common stock of the Company that PepsiCo does not already own. On May 4,
2009, our Board of Directors rejected the proposal. Until the status
of this proposal is resolved, there may be continuing
uncertainty for our employees, customers and other business partners. This continuing uncertainty
could negatively impact our business. Additionally, we and members of our Board of Directors have
been named in a number of lawsuits relating to the PepsiCo
proposal as more fully described in Note 15 — “Contingencies” to our Condensed Consolidated
Financial Statements. These lawsuits or any future lawsuits may be time consuming and expensive.
These matters, alone or in combination, could have a material adverse effect on our business and
financial results.
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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 second 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 second 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 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Item 6.
EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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