-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QudN4mGglbGJuvfFKsJetNzK2CahzVbQYiqVfWQmar7yn0Jbk8WpGMgTwfNSuU6f 8+yPGvQHCpJqgvwEZG21PQ== 0001076405-01-500007.txt : 20010730 0001076405-01-500007.hdr.sgml : 20010730 ACCESSION NUMBER: 0001076405-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010616 FILED AS OF DATE: 20010727 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEPSI BOTTLING GROUP INC CENTRAL INDEX KEY: 0001076405 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 134038356 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14893 FILM NUMBER: 1690811 BUSINESS ADDRESS: STREET 1: ONE PEPSI WAY CITY: SOMERS STATE: NY ZIP: 10589-2201 BUSINESS PHONE: 9147676000 MAIL ADDRESS: STREET 1: ONE PEPSI WAY CITY: SOMERS STATE: NY ZIP: 10589-2201 10-Q 1 pbg2q10q01.txt PBG 2QTR 10Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended June 16, 2001 (24-weeks) ------------------------ OR 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 ------- 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 incorporate 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 X NO --- --- Number of shares of Capital Stock outstanding as of July 13, 2001: 142,647,513 The Pepsi Bottling Group, Inc. ------------------------------ Index
Page No. -------- Part I Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations - 12 and 24-weeks ended June 16, 2001 and June 10, 2000 2 Condensed Consolidated Statements of Cash Flows - 24-weeks ended June 16, 2001 and June 10, 2000 3 Condensed Consolidated Balance Sheets - June 16, 2001 and December 30, 2000 4 Notes to Condensed Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Independent Accountants' Review Report 13 Part II Other Information and Signatures Item 6. Exhibits 14
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PART I - FINANCIAL INFORMATION Item 1. The Pepsi Bottling Group, Inc. Condensed Consolidated Statements of Operations in millions except per share amounts, unaudited 12-weeks Ended 24-weeks Ended -------------- -------------- June 16, June 10, June 16, June 10, 2001 2000 2001 2000 ---- ---- ---- ---- Net Revenues.................................................... $2,060 $1,913 $3,707 $3,458 Cost of sales................................................... 1,108 1,033 1,990 1,878 ------ ------ ------ ------ Gross Profit.................................................... 952 880 1,717 1,580 Selling, delivery and administrative expenses................... 735 689 1,410 1,314 ------ ------ ------ ------ Operating Income................................................ 217 191 307 266 Interest expense, net........................................... 46 44 90 89 Minority interest............................................... 14 12 19 15 ------ ------ ------ ------ Income before income taxes...................................... 157 135 198 162 Income tax expense before rate change........................... 57 50 72 60 Income tax rate change benefit.................................. (16) - (16) - ------ ------ ------ ------ Net Income...................................................... $ 116 $ 85 $ 142 $ 102 ====== ====== ====== ====== Basic Earnings Per Share........................................ $ 0.81 $ 0.58 $ 0.98 $ 0.69 Weighted-Average Shares Outstanding............................. 143 148 144 148 Diluted Earnings Per Share...................................... $ 0.78 $ 0.58 $ 0.95 $ 0.69 Weighted-Average Shares Outstanding............................. 148 148 149 148 See accompanying notes to Condensed Consolidated Financial Statements.
-2- The Pepsi Bottling Group, Inc. Condensed Consolidated Statements of Cash Flows in millions, unaudited
24-weeks Ended -------------- June 16, June 10, 2001 2000 ---- ---- Cash Flows - Operations Net income............................................................... $142 $102 Adjustments to reconcile net income to net cash provided by operations: Depreciation....................................................... 167 153 Amortization....................................................... 62 61 Deferred income taxes.............................................. (7) (14) Other non-cash charges and credits, net............................ 86 78 Changes in operating working capital: Accounts receivable.............................................. (222) (177) Inventories...................................................... (87) (49) Prepaid expenses and other current assets........................ 4 (10) Accounts payable and other current liabilities................... 34 104 ------ ------ Net change in operating working capital ........................... (271) (132) ------ ------ Net Cash Provided by Operations............................................ 179 248 ------ ------ Cash Flows - Investments Capital expenditures.................................................... (255) (224) Acquisitions of bottlers................................................ (68) (2) Other, net.............................................................. (12) (4) ------ ------ Net Cash Used for Investments.............................................. (335) (230) ------ ------ Cash Flows - Financing Short-term borrowings - three months or less............................ 149 7 Payments of third-party debt............................................ - (8) Dividends paid.......................................................... (6) (6) Proceeds from exercise of stock options................................. 7 - Purchases of treasury stock............................................. (117) (58) ------ ------ Net Cash Provided by (Used for) Financing.................................. 33 (65) ------ ------ Effect of Exchange Rate Changes on Cash and Cash Equivalents............... (4) (3) ------ ------ Net Decrease in Cash and Cash Equivalents.................................. (127) (50) Cash and Cash Equivalents - Beginning of Period............................ 318 190 ------ ------ Cash and Cash Equivalents - End of Period.................................. $ 191 $ 140 ====== ====== Supplemental Cash Flow Information Third-party interest and income taxes paid................................. $ 143 $ 164 ====== ====== See accompanying notes to Condensed Consolidated Financial Statements.
-3- The Pepsi Bottling Group, Inc. Condensed Consolidated Balance Sheets in millions, except per share amounts
(Unaudited) June 16, December 30, 2001 2000 ---- ---- Assets Current Assets Cash and cash equivalents................................................ $ 191 $ 318 Accounts receivable, less allowance of $42 at June 16, 2001 and December 30, 2000, respectively.................. 1,013 796 Inventories.............................................................. 367 281 Prepaid expenses and other current assets................................ 159 189 ------ ------ Total Current Assets............................................. 1,730 1,584 Property, plant and equipment, net......................................... 2,432 2,358 Intangible assets, net..................................................... 3,689 3,694 Other assets............................................................... 102 100 ------ ------ Total Assets.................................................. $7,953 $7,736 ====== ====== Liabilities and Shareholders' Equity Current Liabilities Accounts payable and other current liabilities........................... $ 972 $ 941 Short-term borrowings.................................................... 173 26 ------ ------ Total Current Liabilities........................................ 1,145 967 Long-term debt............................................................. 3,282 3,271 Other liabilities.......................................................... 505 474 Deferred income taxes...................................................... 1,058 1,072 Minority interest.......................................................... 322 306 ------ ------ Total Liabilities................................................ 6,312 6,090 Shareholders' Equity Common stock, par value $.01 per share: authorized 300 shares, issued 155 shares............................ 2 2 Additional paid-in capital.............................................. 1,736 1,736 Retained earnings....................................................... 491 355 Accumulated other comprehensive loss.................................... (287) (254) Treasury stock: 12 shares and 10 shares at June 16, 2001 and December 30, 2000, respectively................................................... (301) (193) ------ ------ Total Shareholders' Equity....................................... 1,641 1,646 ------ ------ Total Liabilities and Shareholders' Equity.................... $7,953 $7,736 ====== ====== See accompanying notes to Condensed Consolidated Financial Statements.
-4- Notes to Condensed Consolidated Financial Statements Tabular dollars in millions - -------------------------------------------------------------------------------- Note 1 - Basis of Presentation The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations located in the United States, Canada, Spain, Greece and Russia. These bottling operations manufacture, sell and distribute Pepsi-Cola beverages including Pepsi-Cola, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks and other ready-to-drink beverages. Approximately 90% of PBG's net revenues were derived from the sale of Pepsi-Cola beverages. References to PBG throughout these Condensed Consolidated Financial Statements are made using the first-person notations of "we," "our" and "us." Prior to our formation, we were an operating unit of PepsiCo, Inc. ("PepsiCo"). On March 31, 1999, we offered 100 million shares of PBG common stock for sale at $23 per share in an initial public offering. As of June 16, 2001, PepsiCo's ownership consisted of 37.0% of our outstanding common stock and 100% of our outstanding Class B common stock, together representing 45.5% of the voting power of all classes of our voting stock. PepsiCo also owns 7.0% of the equity of Bottling Group, LLC, our principal operating subsidiary, giving PepsiCo economic ownership of 41.5% of our combined operations at June 16, 2001. The accompanying Condensed Consolidated Balance Sheet at June 16, 2001 and the Condensed Consolidated Statements of Operations for the 12 and 24-weeks ended June 16, 2001 and June 10, 2000 and Cash Flows for the 24-weeks ended June 16, 2001 and June 10, 2000 have not been audited, but have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 30, 2000 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. 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 of business seasonality. 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, amortization and interest, which are not significantly impacted by business seasonality. Note 3 - Inventories June 16, December 30, 2001 2000 ---- ---- Raw materials and supplies.................... $ 127 $ 107 Finished goods................................ 240 174 ------ ------ $ 367 $ 281 ====== ====== -5- Note 4 - Property, Plant and Equipment, net June 16, December 30, 2001 2000 ---- ---- Land.................................................. $ 145 $ 145 Buildings and improvements............................ 913 903 Manufacturing and distribution equipment.............. 2,248 2,186 Marketing equipment................................... 1,806 1,745 Other................................................. 97 89 ------ ------ 5,209 5,068 Accumulated depreciation.............................. (2,777) (2,710) ------ ------ $2,432 $2,358 ====== ====== Note 5 - Income Tax Rate Change Benefit In the second quarter of 2001, the Canadian Government enacted legislation that reduced the federal corporate income tax rate from 28% to 21% over a four-year period beginning January 1, 2001. In addition, certain provincial income tax rates were also reduced. These rate changes reduced deferred tax liabilities associated with our operations in Canada. The changes to deferred taxes resulted in a reduction of our tax expense in the second quarter of $16 million ($0.10 per diluted share after minority interest). On June 29, 2001, the Province of Ontario enacted legislation that reduced the provincial income tax rate. This change will further reduce our deferred tax liabilities associated with our operations in Canada and will result in an additional income tax rate benefit in the third quarter of $8 million (approximately $0.05 per diluted share after minority interest). Note 6 - Acquisitions On May 1, 2001, PBG acquired the Pepsi-Cola bottling operations along with the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from Pepsi-Cola Bottling of Northern California for an aggregate purchase price of $70 million in cash and assumed debt. This acquisition was accounted for by the purchase method of accounting. Note 7 - Treasury Stock In the second quarter of 2001, the Board of Directors authorized the repurchase of 10 million shares of common stock, increasing the cumulative amount of shares that can be repurchased to 25 million shares. We made repurchases of approximately 3 million shares for $117 million in the first 24-weeks in 2001 and approximately 3 million shares for $58 million over the same period in 2000. Of the 25 million shares authorized we have repurchased 13 million shares since the inception of our stock repurchase plan, which began in October 1999. Note 8 - New Accounting Standards Accounting for Derivative Instruments and Hedging Activities We adopted the accounting and reporting standards of Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138, on the first day of fiscal year 2001. The adoption resulted in an increase in current assets of $4 million, a reduction of accumulated other comprehensive loss of $4 million and had no impact on our statement of operations. -6- All derivatives are now recorded at fair value as either assets or liabilities in our consolidated balance sheet. Using qualifying criteria defined in SFAS 133, derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For a fair value hedge, both the effective and ineffective portions of the change in fair value of the derivative instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument that are highly effective are deferred in accumulated other comprehensive loss until the underlying hedged item is recognized in earnings. The ineffective portion of fair value changes on qualifying hedges is recognized in earnings immediately and is recorded consistent with the expense classification of the underlying hedged item. If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated, it would continue to be carried on the balance sheet at fair value until settled but hedge accounting would be discontinued prospectively. If a forecasted transaction were no longer probable of occurring, amounts previously deferred in accumulated other comprehensive loss would be recognized immediately in earnings. On occasion, we may enter into a derivative instrument for which hedge accounting is not required because it is entered into to offset changes in the fair value of an underlying transaction recognized in earnings (natural hedge). These instruments are reflected in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings. As of June 16, 2001, our use of derivative instruments was limited to an interest rate swap, forward contracts, futures and options on futures contracts. 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. Cash Flow Hedges We are subject to market risk with respect to the cost of commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. We use futures contracts and options on futures in the normal course of business to hedge the risk of adverse movements in commodity prices related to anticipated purchases of certain raw materials and fuel used in our operations. These contracts, which generally range from 1 to 12 months in duration, establish our commodity purchase prices within defined ranges in an attempt to limit our purchase price risk resulting from adverse commodity price movements and are designated as and qualify for cash flow hedge accounting treatment. In 2001, we recognized $2 million of deferred gains from our commodity hedging into income as inventory being hedged was sold. At June 16, 2001 a $2 million deferred loss remained in accumulated other comprehensive loss in our Condensed Consolidated Balance Sheet resulting from our commodity hedges. We anticipate that this loss, which totals $1 million on an after-tax basis, will be recognized in cost of sales in our Condensed Consolidated Statements of Operations over the next 12 months. The ineffective portion of the change in fair value of these contracts was not material to our results of operations in the second quarter or first 24-weeks of 2001. -7- Fair Value Hedges We finance a portion of our operations through fixed rate debt instruments. At June 16, 2001 our debt instruments primarily consisted of $3 billion of fixed rate long-term senior notes, 3% of which we converted to floating rate debt through the use of an interest rate swap with the objective of reducing our overall borrowing costs. This interest rate swap, which expires in 2004, is designated as and qualifies for fair value hedge accounting and is 100% effective in eliminating the interest rate risk inherent in our long-term debt as the notional amount, interest payment and maturity date of the swap matches the notional amount, interest payment and maturity date of the related debt. Accordingly, any market risk or opportunity associated with this swap is fully offset by the opposite market impact on the related debt. The second quarter and first 24-weeks of 2001 changes in fair value of the interest rate swap was a gain of $4 million and $7 million, respectively. These gains were recorded in interest expense, net in our Condensed Consolidated Statements of Operations and prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets. An offsetting loss was recorded in interest expense, net in our Condensed Consolidated Statements of Operations and in long-term debt in our Condensed Consolidated Balance Sheets representing the change in fair value in long-term debt. Equity Derivatives We use equity derivative contracts with financial institutions to hedge a portion of our deferred compensation liability which is based on our stock price. These prepaid forward contracts for the purchase of PBG common stock are accounted for as natural hedges. The earnings impact from these hedges is classified as selling, delivery and administrative expenses consistent with the expense classification of the underlying hedged item. Business Combinations & Goodwill and Other Intangible Assets On July 20, 2001 the Financial Accounting Standards Board issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141 replaces Accounting Principles Board Opinion 16, "Business Combinations" and SFAS 142 replaces APB 17, "Intangible Assets". Beginning in fiscal year 2002, we anticipate that we will no longer amortize goodwill and certain franchise rights, but will evaluate them for impairment annually. We are currently reviewing these statements to determine their impact. Note 9 - Comprehensive Income
12-weeks Ended 24-weeks Ended -------------- -------------- June 16, June 10, June 16, June 10, 2001 2000 2001 2000 ---- ---- ---- ---- Net income...................................... $ 116 $ 85 $ 142 $ 102 Currency translation adjustment................. - (8) (31) (21) FAS 133 adjustment.............................. - - (2) - ------ ------ ------ ------ Comprehensive Income............................ $ 116 $ 77 $ 109 $ 81 ====== ====== ====== ======
-8- Item 2. Management's Discussion and Analysis of Results of Operations and Financial - -------------------------------------------------------------------------------- Condition - --------- Overview In the second quarter and first 24-weeks of 2001 The Pepsi Bottling Group, Inc. (collectively referred to as "PBG," "we," "our" and "us") again delivered outstanding operating results. Highlights of the quarter were as follows: o We delivered 11% constant territory EBITDA growth in the second quarter and first 24-weeks of 2001. o We increased worldwide constant territory physical case volume by 4% in the second quarter and first 24-weeks of 2001. o We grew second quarter and second quarter year-to-date worldwide constant territory net revenue per case by 3% compared to the same periods in 2000. o We delivered second quarter 2001 diluted earnings per share of $0.78, an increase of $0.20, or 36%, over 2000 and year-to-date diluted earnings per share of $0.95, an increase of $0.26, or 39%, over the same 24-week period in 2000. Diluted earnings per share in 2001 includes a tax benefit of $0.10 resulting from a reduction in Canadian income tax rates. The following management's discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying footnotes along with the cautionary statements at the end of this section. Constant Territory We believe that constant territory performance results are the most appropriate indicators of operating trends and performance, particularly in light of our stated intention of acquiring additional bottling territories, and are consistent with industry practice. Constant territory operating results are derived by adjusting current year results to exclude significant current year acquisitions and adjusting prior year results to include the results of significant prior year acquisitions as if they had occurred on the first day of the prior fiscal year. Use of EBITDA EBITDA, which is computed as operating income plus the sum of depreciation and amortization, is a key indicator management and the industry use to evaluate operating performance. It is not, however, required under generally accepted accounting principles and should not be considered an alternative to measurements required by GAAP such as net income or cash flows. Results of Operations - ---------------------
Reported Change Constant Territory Change --------------- ------------------------- June 16, 2001 June 16, 2001 ------------- ------------- 12-weeks 24-weeks 12-weeks 24-weeks -------- -------- -------- -------- EBITDA............................ 12% 12% 11% 11% Volume............................ 5% 4% 4% 4% Net Revenue per Case.............. 3% 3% 3% 3%
EBITDA EBITDA was $335 million and $536 million in the second quarter and first 24-weeks of 2001, representing a 12% increase over the same periods of 2000, respectively. On a constant territory basis, EBITDA growth was 11% for both the quarter and year-to-date periods reflecting a balanced equation of increased net revenue per case and solid volume growth as well as continued favorable cost of sales trends. -9- Volume Our worldwide physical case volume increased 5% and 4% in the second quarter and first 24-weeks of 2001, respectively. Constant territory volume growth was 4% in both the second quarter and year-to-date. In the U.S., constant territory volume increased 2% in the second quarter and year-to-date led by the introduction of Mountain Dew Code Red, distribution of Sierra Mist and strong growth in Aquafina, driving increases in both our cold drink and take-home segments. Outside the U.S., our constant territory volumes increased 12% in the quarter and 13% year-to-date reflecting improvements across all of our markets, particularly in Russia. Net Revenues Net revenues for the quarter grew $147 million, an 8% increase over the prior year, raising year-to-date net revenues up 7% to $3,707 million over the same period of 2000. On a constant territory basis, net revenues grew 7% in the quarter and first 24-weeks of 2001 driven by volume growth of 4% and a 3% increase in net revenue per case, respectively. Constant territory net revenue per case growth was driven by the U.S., which grew 5% in both periods, reflecting higher take-home pricing and positive package and channel mix, which was driven by the introduction of Mountain Dew Code Red and SoBe. Outside the U.S., constant territory net revenues were up 7% in the quarter and year-to-date reflecting a double-digit increase in volume and an approximate 5% decrease in net revenue per case. Excluding the negative impact of currency translations, net revenue per case was essentially flat outside the U.S. and increased 4% worldwide in the second quarter and first 24-weeks of 2001. Cost of Sales Cost of sales increased $75 million, or 7%, in the second quarter of 2001 and $112 million, or 6%, year-to-date. On a constant territory basis, cost of sales per case increased 3% for the quarter and 2% year-to-date, compared to the same periods in 2000 reflecting higher U.S. concentrate costs, and mix shifts into higher cost packages and products offset by favorable currency translations and country mix. Selling, Delivery and Administrative Expenses Selling, delivery and administrative expenses grew $46 million, or 7%, in the second quarter and $96 million, or 7%, in the first 24-weeks of 2001. This primarily reflects increased selling and delivery costs resulting from volume growth and our continued investment in our U.S. and Canadian cold drink infrastructure as well as higher advertising and marketing costs. Current year costs also include an approximate 1 percentage point favorable impact from currency translations. Income Tax Expense Before Rate Change PBG's full year forecasted effective tax rate for 2001 is 36.5% and this rate has been applied to our 2001 results. This rate corresponds to an effective tax rate of 37.0% in 2000. The decrease is primarily due to the reduced impact of fixed non-deductible expenses on higher anticipated pre-tax income in 2001. Income Tax Rate Change Benefit In the second quarter of 2001, the Canadian Government enacted legislation that reduced the federal corporate income tax rate from 28% to 21% over a four-year period beginning January 1, 2001. In addition, certain provincial income tax rates were also reduced. These rate changes reduced deferred tax liabilities associated with our operations in Canada. The changes to deferred taxes resulted in a reduction of our tax expense in the second quarter of $16 million ($0.10 per diluted share after minority interest). On June 29, 2001, the Province of Ontario enacted legislation that reduced the provincial income tax rate. This change will further reduce our deferred tax liabilities associated with our operations in Canada and will result in an additional income tax rate benefit in the third quarter of $8 million (approximately $0.05 per diluted share after minority interest). -10- Liquidity and Capital Resources - ------------------------------- Cash Flows Net cash provided by operations decreased $69 million to $179 million reflecting higher working capital requirements due to the growth of our business and the unfavorable timing of payments on current liabilities, partially offset by strong growth in net income. Net cash used for investments increased by $105 million from $230 million in the first 24-weeks of 2000 to $335 million over the same period in 2001, primarily due to acquisition spending which was $66 million higher in 2001 and capital expenditures, which increased by $31 million, driven by increased infrastructure spending. Net cash provided by (used for) financing increased by $98 million from a use of cash of $65 million in 2000 to a source of cash of $33 million in 2001. This change reflects $142 million of short-term borrowings, which were used primarily to fund investment spending and higher share repurchases. Euro - ---- On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between existing currencies and one common currency, the Euro. Beginning in January 2002, new Euro-denominated bills and coins will be issued, and existing currencies will be withdrawn from circulation. Spain is one of the original member countries that instituted the Euro and, in June 2000, Greece also elected to institute the Euro effective January 1, 2001. We have established plans to address the issues raised by the Euro currency conversion. These issues include, among others, the need to adapt computer and financial systems, business processes and equipment such as vending machines to accommodate Euro-denominated transactions and the impact of one common currency on cross-border pricing. Since financial systems and processes currently accommodate multiple currencies, we do not expect the system and equipment conversion costs to be material. Due to numerous uncertainties, we cannot reasonably estimate the long-term effects one common currency may have on pricing, costs and the resulting impact, if any, on our financial condition or results of operations. 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 lower-than-expected net pricing resulting from marketplace competition, material changes from expectations in the cost of raw materials and ingredients, an inability to achieve the expected timing for returns on cold drink equipment and employee infrastructure expenditures, material changes in expected levels of marketing support payments from PepsiCo, Inc., an inability to meet projections for performance in newly acquired territories, unexpected costs associated with conversion to the common European currency and unfavorable interest rate and currency fluctuations. -11- Item 3. Quantitative and Qualitative Disclosures About Market Risk - ---------------------------------------------------------- We have no material changes to the risk disclosures made in our 2000 Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders - --------------------------------------------------- (a) Annual Meeting of Shareholders of The Pepsi Bottling Group, Inc. was held on May 23, 2001. (b) The names of all directors are set forth in (c) below. The proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There were no solicitations in opposition to the nominees as listed in the proxy and all such nominees were elected. (c) A brief description of each matter voted on and the number of votes cast are as follows:
Number of Votes (millions) --------------------------- Broker Description of Proposals For Against Abstain Non-votes - ------------------------ --- ------- ------- --------- 1) Election of Directors: Linda G. Alvarado 156 N/A 1 N/A Barry H. Beracha 156 N/A 1 N/A John T. Cahill 156 N/A 1 N/A Thomas W. Jones 156 N/A 1 N/A Thomas H. Kean 156 N/A 1 N/A Susan D. Kronick 156 N/A 1 N/A Margaret D. Moore 155 N/A 2 N/A Robert F. Sharpe, Jr. 155 N/A 2 N/A Craig E. Weatherup 156 N/A 1 N/A 2) Approval of the PBG Directors' Stock Plan 141 16 - N/A 3) Approval of the appointment of KPMG LLP as independent auditors 157 - - N/A
-12- Independent Accountants' Review Report -------------------------------------- The Board of Directors The Pepsi Bottling Group, Inc. We have reviewed the accompanying Condensed Consolidated Balance Sheet of The Pepsi Bottling Group, Inc. as of June 16, 2001, and the related Condensed Consolidated Statements of Operations for the twelve and twenty-four weeks ended June 16, 2001 and June 10, 2000 and the Condensed Consolidated Statements of Cash Flows for the twenty-four weeks ended June 16, 2001 and June 10, 2000. These Condensed Consolidated Financial Statements are the responsibility of The Pepsi Bottling Group, Inc.'s management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the Condensed Consolidated Financial Statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the Consolidated Balance Sheet of The Pepsi Bottling Group, Inc. as of December 30, 2000, and the related Consolidated Statements of Operations, Cash Flows and Changes in Shareholders' Equity for the fifty-three week period then ended not presented herein; and in our report dated January 30, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 30, 2000, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ KPMG LLP New York, New York July 11, 2001 -13- PART II - OTHER INFORMATION AND SIGNATURES Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits See Index to Exhibits on page 16. -14- Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned. THE PEPSI BOTTLING GROUP, INC. ------------------------------ (Registrant) Date: July 27, 2001 Andrea L. Forster ------------- ----------------- Vice President and Controller Date: July 27, 2001 Alfred H. Drewes ------------- ---------------- Senior Vice President and Chief Financial Officer -15- INDEX TO EXHIBITS ITEM 6 (a) ---------- EXHIBITS - -------- Exhibit 11 Computation of Basic and Diluted Earnings Per Share -16- EXHIBIT 11 The Pepsi Bottling Group, Inc. Computation of Basic and Diluted Earnings Per Share (in millions, except per share data)
12-weeks Ended 24-weeks Ended -------------- -------------- June 16, June 10, June 16, June 10, 2001 2000 2001 2000 ------- ------- ------- ------- Number of shares on which basic earnings per share is based: Average outstanding during period................ 143 148 144 148 Add - Incremental shares under stock compensation plans............................. 5 - 5 - ------ ------ ------ ------ Number of shares in which diluted earnings per share is based...................... 148 148 149 148 Net earnings applicable to common shareholders (millions)......................... $ 116 $ 85 $ 142 $ 102 Net earnings on which diluted earnings per share is based (millions)................... $ 116 $ 85 $ 142 $ 102 Basic earnings per share........................... $ 0.81 $ 0.58 $ 0.98 $ 0.69 Diluted earnings per share......................... $ 0.78 $ 0.58 $ 0.95 $ 0.69
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