The Pepsi Bottling Group, Inc.
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EXHIBIT 13
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MANAGEMENT'S FINANCIAL REVIEW
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OVERVIEW
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Fiscal year 2001 marked the third year for The Pepsi Bottling Group,
Inc. (collectively referred to as "PBG," "we," "our" and "us") as an independent
public company and the third consecutive year of generating outstanding
operating results. Highlights of these results are as follows:
- We delivered 13% constant territory EBITDA growth in 2001.
- Our worldwide constant territory physical case volume grew by 3% in
2001.
- We increased our 2001 worldwide constant territory net revenue per case
by 3% as compared to the same period in 2000.
- We increased our return on invested capital to 8.4% in 2001, an
increase of 0.8 percentage points.
- We delivered 2001 diluted earnings per share of $1.03, an increase of
$0.26, or 35%, over 2000. Diluted earnings per share in 2001 include
tax benefits of $0.08, resulting from reductions in Canadian income tax
rates. Diluted earnings per share in 2000 reflect a $0.02 favorable
impact from the inclusion of an additional week in our 2000 fiscal
year.
The following discussion and analysis covers the key drivers behind our
success in 2001 and is broken down into six major sections. The first three
sections provide an overview, discuss related party transactions, and focus on
items that affect the comparability of historical or future results. The next
two sections provide an analysis of our results of operations and liquidity and
financial condition. The last section contains a discussion of our market risks
and cautionary statements. The discussion and analysis throughout Management's
Financial Review should be read in conjunction with the Consolidated Financial
Statements and the related accompanying notes.
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. In addition, 2000 constant territory results exclude the
impact from an additional week in our fiscal year ("53rd week"), which occurs
every five or six years, as our fiscal year ends on the last Saturday in
December. Constant territory results also exclude any unusual impairment and
other charges and credits discussed on page 29 and in Note 4 to the Consolidated
Financial Statements.
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
accounting principles generally accepted in the United States of America
("GAAP"), and should not be considered an alternative to measurements required
by GAAP such as net income or cash flows. In addition, EBITDA excludes the
impact of the non-cash portion of the unusual impairment and other charges and
credits discussed on page 29 and in Note 4 to the Consolidated Financial
Statements.
Critical Accounting Policies
The preparation of our Consolidated Financial Statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts in our Consolidated Financial Statements and the related accompanying
notes. We use our best judgement based on our knowledge of existing facts and
circumstances and actions that we may undertake in the future, as well as advice
of external experts, in determining the estimates that
affect our Consolidated Financial Statements. We have policies and procedures in
place to ensure conformity with GAAP and we focus your attention on the
following:
REVENUE RECOGNITION We recognize revenue when our products are delivered to
customers. Sales terms do not allow a right of return unless product freshness
dating has expired.
ALLOWANCE FOR DOUBTFUL ACCOUNTS We determine our allowance for doubtful
accounts based on an evaluation of the aging of our receivable portfolio. Our
reserve contemplates our historical loss rate on receivables and the economic
environment in which we operate.
RECOVERABILITY OF LONG-LIVED ASSETS We review all long-lived assets,
including intangible assets, when facts and circumstances indicate that the
carrying value of the asset may not be recoverable. When necessary, we write
down an impaired asset to its estimated fair value based on the best information
available. Estimated fair value is generally based on either appraised value or
measured by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows, which are
discounted based on our weighted-average cost of capital.
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INCOME TAXES Our effective tax rate and the tax bases of our assets and
liabilities reflect our best estimate of the ultimate outcome of our tax audits.
Valuation allowances are established where expected future taxable income does
not support the recognition of the related deferred tax asset.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT We use derivative instruments
to hedge against the risk of adverse movements in the price of certain
commodities and fuel used in our operations. Our use of derivative instruments
is limited to interest rate swaps, 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. All derivative instruments are recorded at
fair value as either assets or liabilities in our Consolidated Balance Sheets.
The fair value of our derivatives is generally based on quoted market prices.
The evaluation of hedge effectiveness is subject to assumptions based on terms
and timing of underlying exposures.
COMMITMENTS AND CONTINGENCIES We are subject to various claims and
contingencies related to lawsuits, taxes, environmental and other matters
arising out of the normal course of business. Liabilities related to commitments
and contingencies are recognized when a loss is probable and reasonably
estimable.
For a more detailed discussion of our significant accounting policies,
refer to Note 2 of our Consolidated Financial Statements.
RELATED PARTY TRANSACTIONS
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Relationship with PepsiCo, Inc.
PepsiCo, Inc. ("PepsiCo") owns 37.7% of our outstanding common stock
and 100% of our outstanding Class B common stock, together representing 42.8% of
the voting power of all classes of our voting stock at December 29, 2001. In
addition, PepsiCo owns 7% of the equity of Bottling Group, LLC, our principal
operating subsidiary. We fully consolidate the results of Bottling Group, LLC
and present PepsiCo's share as minority interest in our Consolidated Financial
Statements.
We have a number of agreements with PepsiCo. The most significant
agreements that govern our relationship with PepsiCo consist of:
(1) the master bottling agreement for cola beverages bearing the
"Pepsi-Cola" and "Pepsi" trademark in the United States;
bottling and distribution agreements for non-cola products in
the United States, including Mountain Dew; and a master
fountain syrup agreement in the United States;
(2) agreements similar to the master bottling agreement and the
non-cola agreements for each specific country, including
Canada, Spain, Greece and Russia, as well as a fountain syrup
agreement similar to the master syrup agreement for Canada;
(3) a shared services agreement whereby PepsiCo provides us or we
provide PepsiCo with certain administrative support, including
procurement of raw materials, transaction processing, such as
accounts payable and credit and collection, certain tax and
treasury services, and information technology maintenance and
systems development. The amounts paid or received under this
contract are equal to the actual costs incurred by the company
providing the service. From 1998 through 2001, a PepsiCo
affiliate provided casualty insurance to us; and
(4) transition agreements that provide certain indemnities to the
parties, and provide for the allocation of tax and other
assets, liabilities, and obligations arising from periods
prior to the initial public offering. Under our tax separation
agreement, PepsiCo maintains full control and absolute
discretion for any combined or consolidated tax filings for
tax periods ending on or before the initial public offering.
PepsiCo has contractually agreed to act in good faith with
respect to all tax audit matters affecting us. In addition,
PepsiCo has agreed to use their best efforts to settle all
joint interests in any common audit issue on a basis
consistent with prior practice.
We purchase concentrate from PepsiCo that is used in the production of
carbonated soft drinks and other ready-to-drink beverages. The price of
concentrate is determined annually by PepsiCo at its sole discretion. We also
produce or distribute other products and purchase finished goods and concentrate
through various arrangements with PepsiCo or PepsiCo joint ventures. We reflect
such purchases in cost of sales.
We share a business objective with PepsiCo of increasing the
availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at
its sole discretion, provides us with various forms of marketing support to
promote its beverages. This support covers a variety of initiatives, including
marketplace support, marketing programs, capital equipment investment, and
shared media expense. Based on the objective of the programs and initiatives, we
record marketing support as an adjustment to net revenues or as a reduction of
selling, delivery and administrative expense. There are no conditions or other
requirements that could result in a repayment of marketing support received.
We manufacture and distribute fountain products and provide fountain
equipment service to PepsiCo customers in some territories in accordance with
the Pepsi beverage agreements.
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Amounts received from PepsiCo for these transactions are offset by the cost to
provide these services and are reflected in selling, delivery and administrative
expenses. We pay a royalty fee to PepsiCo for the Aquafina trademark.
Refer to the Items That Affect Historical or Future Comparability
section of Management's Financial Review for further discussions of concentrate
supply and bottler incentives. In addition, refer to Note 2 of our Consolidated
Financial Statements for further discussions on accounting for bottler
incentives and Note 16 for further discussions on our relationship with PepsiCo.
Board of Directors
Two of our board members are also employees of PepsiCo. In addition in
2001, certain members of our Board of Directors also served on the boards of
other companies affiliated with PepsiCo.
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
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Stock Split
On November 27, 2001, our shareholders approved an amendment to our
Certificate of Incorporation increasing the authorized shares of PBG common
stock from 300 million to 900 million facilitating a two-for-one stock split of
issued common stock. The stock split was effected in the form of a 100% stock
dividend paid to our shareholders of record on November 27, 2001. As a result of
the stock split, the accompanying Consolidated Financial Statements and
Management's Financial Review reflect an increase in the number of outstanding
shares of common stock and shares of treasury stock and the transfer of the par
value of these incremental shares from additional paid-in capital. All PBG share
and per share data have been restated to reflect the split, except for
discussions of our capitalization.
New Accounting Standards
During 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 141, "Business
Combinations," which requires that the purchase method of accounting be used for
all business combinations initiated or completed after June 30, 2001, and SFAS
142, "Goodwill and Other Intangible Assets," which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment. Effective the first day of fiscal year 2002 we
will no longer amortize goodwill and certain franchise rights, but will evaluate
them for impairment annually. We have completed the initial impairment review
required by SFAS 142 and have determined that our intangible assets are not
impaired. The adoption of SFAS 142 will reduce our fiscal year 2002 amortization
expense by approximately $128 million, or $0.31 per diluted share, based on the
weighted-average number of diluted shares outstanding as of December 29, 2001.
In addition, during 2001 the FASB also issued SFAS 143, "Accounting for
Asset Retirement Obligations" and SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires that we recognize
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred if a reasonable estimate of fair value can be made. SFAS
144 superseded SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and Accounting Principles Board
Opinion 30, "Reporting the Results of Operations - Reporting the Effects of a
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 establishes a single accounting
model for the impairment of long-lived assets and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 143 is
effective for fiscal year 2003 and SFAS 144 is effective for fiscal year 2002
and we do not anticipate that the adoption of these statements will have a
material impact on our Consolidated Financial Statements.
During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed
various issues related to the income statement classification of certain
promotional payments. In May 2000, the EITF reached a consensus on Issue 00-14,
"Accounting for Certain Sales Incentives," addressing the recognition and income
statement classification of various sales incentives. Among its requirements,
the consensus will require the costs related to consumer coupons currently
classified as marketing costs to be classified as a reduction of revenue. In
January 2001, the EITF reached
a consensus on Issue 00-22, "Accounting for `Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future." EITF 00-22 requires that certain
volume-based cash rebates to customers currently recognized as marketing costs
be classified as a reduction of revenue. In April 2001, the EITF reached a
consensus on Issue 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products." EITF 00-25 addresses
the income statement classification of consideration, other than that directly
addressed in EITF 00-14, from a vendor to a reseller or another party that
purchases the vendor's products. In November 2001, the EITF codified Issues
00-14, 00-22 and 00-25 as Issue 01-9, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products." EITF 00-22 was
effective for the first quarter of
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2001 and was not material to our Consolidated Financial Statements. The
remainder of EITF 01-9 is effective for 2002 and we do not anticipate that the
adoption will have a material impact on our Consolidated Financial Statements.
Our Consolidated Financial Statements reflect the implementation of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 138, on the first day of fiscal year 2001. SFAS 133, which was
issued in 1998, establishes accounting and reporting standards for hedging
activities and derivative instruments, including certain derivative instruments
embedded in other contracts, which are collectively referred to as derivatives.
It requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value.
Asset Lives
At the beginning of fiscal year 2000, we changed the estimated useful
lives of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in Note 3 to the Consolidated Financial
Statements, lowered total depreciation cost by approximately $69 million, or
$0.13 per diluted share in 2000 as compared to 1999. The estimated useful lives
of our assets were the same in 2001 and 2000.
Fiscal Year
Our fiscal year ends on the last Saturday in December and, as a result,
a 53rd week is added every five or six years. Fiscal years 2001 and 1999
consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. The
following table illustrates the approximate dollar and percentage point impacts
that the extra week had on our operating results:
dollars in millions, except per share amounts PERCENTAGE POINTS
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DOLLARS 2001 VS. 2000 2000 VS. 1999
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Volume..................................................... N/A (2) 2
Net Revenues............................................... $ 113 (1) 2
EBITDA..................................................... $ 14 (2) 2
Diluted Earnings per Share................................. $0.02 (4) 5
Initial Public Offering
PBG was incorporated in Delaware in January 1999 and, prior to our
formation, we were an operating unit of PepsiCo. We became a public company
through an initial public offering on March 31, 1999. Our initial public
offering consisted of 100 million shares of common stock sold to the public,
equivalent to 65% of our outstanding common stock, leaving PepsiCo the owner of
the remaining 35% of outstanding common stock.
For the period prior to our initial public offering, we prepared our
Consolidated Financial Statements as a "carve-out" from the financial statements
of PepsiCo using the historical results of operations and assets and liabilities
of our business. Certain costs reflected in the Consolidated Financial
Statements may not necessarily be indicative of the costs that we would have
incurred had we operated as an independent, stand-alone entity from the first
day of fiscal year 1999. These costs include an allocation of PepsiCo's
corporate overhead and interest expense, and income taxes:
- We included overhead related to PepsiCo's corporate
administrative functions based on a specific identification of
PepsiCo's administrative costs relating to the bottling
operations and, to the extent that such identification was not
practicable, based upon the percentage of our revenues to
PepsiCo's consolidated net revenues. These costs are included
in selling, delivery and administrative expenses in our
Consolidated Statements of Operations.
- We allocated $3.3 billion of PepsiCo's debt to our business
and charged interest expense on this debt using PepsiCo's
weighted-average interest rate. Once we issued $3.3 billion of
third-party debt in the first quarter of 1999, our actual
interest rates were used to determine interest expense for the
remainder of the year.
- We reflected income tax expense in the Consolidated Financial
Statements as if we had actually filed a separate income tax
return.
The amounts of the historical allocations described above are as
follows:
dollars in millions 1999
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Corporate overhead expense................................................. $ 3
Interest expense........................................................... $ 28
PepsiCo's weighted-average interest rate................................... 5.8%
Unusual Impairment and Other Charges and Credits
Our operating results were affected by the following unusual charges and
credits:
dollars in millions 1999
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Non-cash compensation charge............................................... $ 45
Vacation policy change..................................................... (53)
Asset impairment and restructuring charges................................. (8)
----
$(16)
====
After minority interest and income taxes................................... $ (9)
====
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- Non-cash Compensation Charge
In connection with the completion of our initial public
offering, PepsiCo vested substantially all non-vested PepsiCo stock
options held by our employees. As a result, we incurred a $45 million
non-cash compensation charge in the second quarter of 1999, equal to
the difference between the market price of the PepsiCo capital stock
and the exercise price of these options at the vesting date.
- Vacation Policy Change
As a result of changes to our employee benefit and
compensation plans in 1999, employees now earn vacation time evenly
throughout the year based upon service rendered. Previously, employees
were fully vested at the beginning of each year. As a result of this
change, we reversed an accrual of $53 million into income in 1999.
- Asset Impairment and Restructuring Charge
In the fourth quarter of 1999, $8 million of the remaining
restructuring reserve recorded in 1998 relating to an asset impairment
and restructuring in our Russian operations, was reversed into income.
The reversal was necessitated as actual costs incurred to renegotiate
manufacturing and leasing contracts in Russia and to reduce the number
of employees were less than the amounts originally estimated.
Comparability of our operating results may also be affected by the following:
Concentrate Supply
We buy concentrate, the critical flavor ingredient for our products,
from PepsiCo, its affiliates and other brand owners who are the sole authorized
suppliers. Concentrate prices are typically determined annually.
In February 2001, PepsiCo announced an increase of approximately 3% in
the price of U.S. concentrate. PepsiCo has recently announced a further increase
of approximately 3%, effective February 2002. Amounts paid or payable to PepsiCo
and its affiliates for concentrate were $1,584 million, $1,507 million and
$1,418 million in 2001, 2000 and 1999, respectively.
Bottler Incentives
PepsiCo and other brand owners provide us with various forms of
marketing support. The level of this support is negotiated annually and can be
increased or decreased at the discretion of the brand owners. This marketing
support is intended to cover a variety of programs and initiatives, including
direct marketplace support, capital equipment funding and shared media, and
advertising support. Direct marketplace support is primarily funding by PepsiCo
and other brand owners of sales discounts and similar programs, and is recorded
as an adjustment to net revenues. Capital equipment funding is designed to
support the purchase and placement of marketing equipment and is recorded as a
reduction to selling, delivery and administrative expenses. Shared media and
advertising support is recorded as a reduction to advertising and marketing
expense within selling, delivery and administrative expenses. There are no
conditions or other requirements that could result in a repayment of marketing
support received.
The total bottler incentives we received from PepsiCo and other brand
owners were $598 million, $566 million and $563 million for 2001, 2000 and 1999,
respectively. Of these amounts, we recorded $293 million, $277 million and $263
million for 2001, 2000 and 1999, respectively, in net revenues, and the
remainder as a reduction of selling, delivery and administrative expenses. The
amount of our bottler incentives received from PepsiCo was more than 90% of our
total bottler incentives in each of the three years, with the balance received
from the other brand owners.
Employee Benefit Plan Changes
We made several changes to our employee benefit plans that took effect
in fiscal year 2000. The changes were made to our vacation policy, pension and
retiree medical plans and included some benefit enhancements as well as cost
containment provisions. These changes did not have a significant impact on our
financial results in 2001 or 2000.
In 1999, our Board of Directors approved a matching company
contribution to our 401(k) plan that began in 2000. The match is dependent upon
the employee's contribution and years of service. The matching company
contribution was approximately $17 million and $15 million in 2001 and 2000,
respectively.
In the fourth quarter of 1999 we recognized a $16 million compensation
charge related to full-year 1999 performance. This expense was one-time in
nature and was for the benefit of our management employees, reflecting our
successful operating results as well as providing certain incentive-related
features.
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THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
in millions, except per share data
FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
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2001 2000 1999
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NET REVENUES............................................................. $8,443 $7,982 $7,505
Cost of sales............................................................ 4,580 4,405 4,296
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GROSS PROFIT............................................................. 3,863 3,577 3,209
Selling, delivery and administrative expenses............................ 3,187 2,987 2,813
Unusual impairment and other charges and credits......................... -- -- (16)
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OPERATING INCOME......................................................... 676 590 412
Interest expense, net.................................................... 194 192 202
Foreign currency loss.................................................... -- 1 1
Minority interest........................................................ 41 33 21
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INCOME BEFORE INCOME TAXES............................................... 441 364 188
Income tax expense before rate change.................................... 161 135 70
Income tax rate change benefit........................................... (25) -- --
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NET INCOME............................................................... $ 305 $ 229 $ 118
====== ====== ======
BASIC EARNINGS PER SHARE................................................. $ 1.07 $ 0.78 $ 0.46
Weighted-Average Shares Outstanding...................................... 286 294 257
DILUTED EARNINGS PER SHARE............................................... $ 1.03 $ 0.77 $ 0.46
Weighted-Average Shares Outstanding...................................... 296 299 257
See accompanying notes to Consolidated Financial Statements.
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MANAGEMENT'S FINANCIAL REVIEW
RESULTS OF OPERATIONS
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FISCAL 2001 VS. 2000* FISCAL 2000 VS. 1999*
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CONSTANT CONSTANT
REPORTED TERRITORY REPORTED TERRITORY
CHANGE CHANGE CHANGE CHANGE
EBITDA 12% 13% 18% 16%
Volume 2% 3% 3% 1%
Net Revenue per Case 3% 3% 3% 3%
* Fiscal years 2001 and 1999 consisted of 52 weeks while fiscal year 2000
consisted of 53 weeks.
EBITDA
On a reported basis, EBITDA was $1,190 million in 2001, representing a
12% increase over 2000, including an approximate 2 percentage point negative
impact from the 53rd week in 2000. Constant territory growth of 13% for 2001 was
a reflection of higher pricing, an increased mix of higher margin cold drink
volume, and solid volume growth in the U.S., as well as continued growth in our
operations outside the U.S., particularly in Russia. These increases were
partially offset by investments in our cold drink infrastructure.
In 2000, reported EBITDA was $1,061 million, representing an 18%
increase over 1999, with the 53rd week contributing approximately 2 percentage
points of the growth. Constant territory EBITDA was 16% higher than 1999, driven
by continued pricing improvements in our take-home segment, mix shifts to
higher-margin cold drink volume, favorable cost of sales trends, and improved
results outside the United States.
VOLUME
Our worldwide physical case volume grew 2% in 2001, including an
approximate 2 percentage point negative impact from the 53rd week in 2000.
Constant territory volume growth was 3% in 2001, reflecting U.S. growth of more
than 1% and 10% growth outside the United States. U.S. growth was led by the
introductions of Mountain Dew Code Red and Pepsi Twist, expanded distribution of
Sierra Mist, strong growth in Aquafina, as well as the integration of SoBe in
the majority of our markets. This growth was partially offset by declines in
brand Pepsi. New product innovation and consistent in-store execution resulted
in positive cold drink and take-home volume growth in the United States. In
addition, take-home volume growth in the U.S. benefited from significant growth
in mass merchandiser volume. Outside the U.S., all countries delivered solid
volume growth in 2001, led by our operations in Russia. Volume growth in Russia
was driven by the introduction of Mountain Dew and continued growth of Aqua
Minerale, our water product, and Fiesta, our value-brand beverage.
Our reported worldwide physical case volume grew 3% in 2000, with the
53rd week contributing approximately 2 percentage points of the growth.
Worldwide constant territory volume grew 1% in 2000 with flat volume growth from
our U.S. operations and 7% growth from our operations outside the United States.
In the U.S., volume results reflected growth in our cold drink segment and the
favorable impact of the launch of Sierra Mist in the fourth quarter of 2000,
offset by declines in our take-home business. Our cold drink trends reflected
our successful placement of additional cold drink equipment in the United
States. Take-home volume remained lower for the year reflecting the effect of
our price increases in that segment. Our volume growth outside the U.S. was led
by Russia where we have reestablished brand Pepsi, introduced Fiesta, and
continued to increase distribution of Aqua Minerale. Partially offsetting the
growth in Russia were volume declines in Canada resulting from significant
take-home price increases in that country.
NET REVENUES
Reported net revenues were $8,443 million in 2001, representing a 6%
increase over the prior year, including an approximate 1 percentage point
negative impact from the 53rd week in 2000. On a constant territory basis, net
revenues increased by 6%, reflecting 3% volume growth and 3% growth in net
revenue per case. Constant territory U.S. net revenues grew 6% consisting of 5%
growth in net revenue per case and volume growth of more than 1%. U.S. net
revenue per case results reflect higher pricing, primarily in foodstores, and an
increased mix of higher-revenue cold drink
volume from new product innovation and double-digit Aquafina growth. Constant
territory net revenues outside the U.S. grew 7%, reflecting volume growth of
10%, offset by declines in net revenue per case of 3%. Excluding the negative
impact from currency translations, net revenue per case growth was flat outside
the U.S. and increased 4% worldwide.
Reported net revenues were $7,982 million in 2000, a 6% increase over
the prior year, with the 53rd week contributing approximately 2 percentage
points of the growth. On a constant territory basis, worldwide net revenues grew
more than 4%, driven by a 1% volume increase and a 3% increase in net revenue
per case. Constant territory net revenue per case growth was driven by the U.S.,
which grew 6%, reflecting higher pricing, particularly in our take-home segment,
and an increased mix of higher-revenue cold drink volume. These results were
partially offset by account level investment spending aimed at sustainable
Aquafina and cold drink inventory gains in the marketplace.
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Outside the U.S., constant territory net revenues were down 1%, reflecting a 7%
increase in volume offset by an 8% decrease in net revenue per case. Excluding
the negative impact from currency translations, net revenue per case decreased
1% outside the U.S. and increased 4% worldwide.
COST OF SALES
Cost of sales increased $175 million, or 4% in 2001, including an
approximate 2 percentage point favorable impact from the 53rd week in 2000. On a
constant territory basis, cost of sales increased 5% driven by a 3% increase in
volume and a more than 1% increase in cost of sales per case. The increase in
cost of sales per case reflects higher U.S. concentrate costs and mix shifts
into higher cost packages and products, offset by country mix and favorable
currency translations.
Cost of sales increased $109 million, or 3% in 2000, with the 53rd week
contributing approximately 2 percentage points of the growth. On a per case
basis, cost of sales was essentially flat in 2000. Included in cost of sales in
2000 were the favorable impacts from the change in our estimated useful lives of
manufacturing assets, which totaled $34 million in 2000 and an approximate 1
percentage point favorable impact from currency translations. Excluding the
effects of the change in asset lives and currency translations, cost of sales on
a per case basis was more than 1% higher, as higher U.S. concentrate costs were
partially offset by favorable packaging and sweetener costs, favorable country
mix, and efficiencies in production.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administrative expenses grew $200 million, or 7%,
over the comparable period in 2000, including an approximate 1 percentage point
favorable impact from the 53rd week in 2000. Approximately half of the increase
came from higher selling and delivery costs, specifically our continued
investments in our U.S. and Canadian cold drink strategy including people,
routes and equipment. Also contributing to the growth in selling, delivery and
administrative expenses are higher advertising and marketing costs and higher
costs associated with investments in our information technology systems.
Selling, delivery and administrative expenses increased $174 million,
or 6% in 2000, with the 53rd week contributing approximately 1 percentage point
of the growth. Included in selling, delivery and administrative expenses are the
favorable impacts from the change in estimated useful lives of certain selling
and delivery assets, which lowered depreciation expense by $35 million, and
currency translations, which lowered selling, delivery and administrative
expense growth by approximately 1 percentage point in 2000. Excluding the
effects of the change in asset lives, currency translations and the inclusion of
the 53rd week, selling, delivery and administrative expenses were approximately
7% higher in 2000. Driving this increase were higher selling and delivery costs
primarily reflecting our significant investment in our U.S. cold drink
infrastructure that began in 1999 and continued through 2000. In addition,
higher performance-related compensation costs contributed to the cost growth.
Growth in administrative costs associated with the company matching contribution
for our new 401(k) plan in 2000 was offset by a one-time, $16 million
compensation charge in 1999.
INTEREST EXPENSE, NET
Net interest expense increased by $2 million, or 1%, in 2001 primarily
reflecting lower interest income in 2001. The reduction in interest income was
due to lower average cash balances in 2001, consistent with increases in
acquisition spending and share repurchases, which were primarily funded through
cash generated from operations.
Net interest expense decreased by $10 million, or 5%, in ▇▇▇▇,
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ by increases in interest income consistent with our increase in
cash and cash equivalents in 2000 and reduced levels of debt outside the United
States.
MINORITY INTEREST
Minority interest represents PepsiCo's 7% ownership in our principal
operating subsidiary, Bottling Group, LLC. The growth in minority interest
expense over the last three years is due to higher Bottling Group, LLC earnings
over the same periods.
INCOME TAX EXPENSE BEFORE RATE CHANGE
Our full-year effective tax rate for 2001 was 36.5% before our income
tax rate change benefit. This rate corresponds to an effective tax rate of 37.0%
in 2000. The one-half point decrease is primarily due to the reduced impact of
fixed non-deductible expenses on higher anticipated pre-tax income in 2001,
partially offset by the decreased favorable impact of our foreign results.
Our full-year effective tax rate for 2000 was 37.0%, compared to 37.4%
in 1999. Our effective tax rate, excluding unusual impairment and other charges
and credits, would have been 37.0% and
33
38.0% in 2000 and 1999, respectively. The one point decrease is primarily due to
the reduced impact of fixed non-deductible expenses on higher pre-tax income in
2000. This impact was partially offset by the decreased favorable impact of our
foreign results.
INCOME TAX RATE CHANGE BENEFIT
During 2001, the Canadian Government enacted legislation reducing
federal and certain provincial corporate income tax rates. These rate changes
reduced deferred tax liabilities associated with our operations in Canada, and
resulted in one-time gains totaling $0.08 per diluted share in 2001.
EARNINGS PER SHARE
shares in millions 2001 2000 1999
---- ---- ----
Basic earnings per share on reported net income ......................... $1.07 $0.78 $0.46
Weighted-average shares outstanding...................................... 286 294 257
Diluted earnings per share on reported net income........................ $1.03 $0.77 $0.46
Weighted-average shares outstanding...................................... 296 299 257
Dilution
Diluted earnings per share reflect the potential dilution that could
occur if stock options from our stock compensation plan were exercised and
converted into common stock that would then participate in net income. Our stock
price improvement during the last two years has resulted in $0.04 and $0.01 per
share of dilution in 2001 and 2000, respectively.
Weighted-Average Shares Outstanding
In 1999, immediately preceding our initial public offering, we had 55
million shares of common stock outstanding. In connection with the offering, we
sold 100 million shares of common stock to the public. Since our initial public
offering, shares outstanding reflect the effect of our share repurchase program,
which began in October 1999. In addition, in November 2001 we executed a
two-for-one stock split in the form of a 100% stock dividend, which doubled our
weighted-average shares outstanding. As a result of the stock split in 2001, the
amount of shares authorized by the Board of Directors to be repurchased totals
50 million shares, of which we have repurchased approximately 31 million shares
since the inception of our share repurchase program.
Pro Forma Earnings per Share
The table below sets forth earnings per share adjusted for the initial
public offering, the impact of our unusual impairment and other charges and
credits and the impact of our income tax rate change benefit as previously
discussed. In 1999, we assumed 310 million shares were outstanding from the
beginning of the year and further adjusted shares outstanding for our share
repurchase program.
shares in millions 2001 2000* 1999
---- ----- ----
Diluted earnings per share on reported net income......................... $1.03 $0.77 $ 0.38
Unusual impairment and other charges and credits.......................... -- -- (0.03)
Income tax rate change benefit............................................ (0.08) -- --
----- ----- ------
Adjusted diluted earnings per share....................................... $0.95 $0.77 $ 0.35
===== ===== ======
Assumed diluted shares outstanding........................................ 296 299 309
* Includes a favorable impact from the inclusion of the 53rd week in 2000 of
$0.02.
34
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
dollars in millions
FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
--------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS--OPERATIONS
Net income...................................................................... $305 $229 $ 118
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................. 379 340 374
Amortization................................................................. 135 131 131
Non-cash unusual impairment and other charges and credits.................... -- -- (32)
Deferred income taxes........................................................ 23 -- (27)
Other non-cash charges and credits, net...................................... 182 176 141
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable....................................................... (28) 13 (42)
Inventories............................................................... (50) 11 3
Prepaid expenses and other current assets................................. 2 (97) 4
Accounts payable and other current liabilities............................ 57 28 48
----- ---- ------
Net change in operating working capital................................. (19) (45) 13
----- ---- ------
NET CASH PROVIDED BY OPERATIONS................................................. 1,005 831 718
----- ---- ------
CASH FLOWS--INVESTMENTS
Capital expenditures............................................................ (593) (515) (560)
Acquisitions of bottlers........................................................ (120) (26) (176)
Sales of property, plant and equipment.......................................... 6 9 22
Other, net...................................................................... (123) (52) (19)
----- ---- ------
NET CASH USED FOR INVESTMENTS................................................... (830) (584) (733)
----- ---- ------
CASH FLOWS--FINANCING
Short-term borrowings--three months or less...................................... 50 12 (58)
Proceeds from long-term debt.................................................... -- -- 3,260
Replacement of PepsiCo allocated debt........................................... -- -- (3,300)
Net proceeds from initial public offering....................................... -- -- 2,208
Payments of long-term debt...................................................... -- (9) (90)
Minority interest distribution.................................................. (16) (3) --
Dividends paid.................................................................. (12) (12) (6)
Proceeds from exercise of stock options......................................... 18 -- --
Purchase of treasury stock...................................................... (249) (103) (90)
Decrease in advances from PepsiCo............................................... -- -- (1,750)
----- ---- ------
NET CASH (USED FOR) PROVIDED BY FINANCING....................................... (209) (115) 174
----- ---- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.................... (7) (4) (5)
----- ---- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (41) 128 154
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR..................................... 318 190 36
----- ---- ------
CASH AND CASH EQUIVALENTS--END OF YEAR........................................... $ 277 $318 $ 190
===== ==== ======
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Liabilities incurred and/or assumed in conjunction with acquisitions of
bottlers................................................................ $ 25 $ 9 $ 65
See accompanying notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
35
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
in millions, except per share data
DECEMBER 29, 2001 AND DECEMBER 30, 2000
--------------------------------------------------------------------------------
2001 2000
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 277 $ 318
Accounts receivable, less allowance of $42 in 2001 and 2000............... 823 796
Inventories................................................................ 331 281
Prepaid expenses and other current assets.................................. 117 189
------ ------
TOTAL CURRENT ASSETS.................................................... 1,548 1,584
Property, plant and equipment, net......................................... 2,543 2,358
Intangible assets, net..................................................... 3,684 3,694
Other assets............................................................... 82 100
------ ------
TOTAL ASSETS............................................................ $7,857 $7,736
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities............................. $1,004 $ 941
Short-term borrowings...................................................... 77 26
------ ------
TOTAL CURRENT LIABILITIES............................................... 1,081 967
Long-term debt............................................................. 3,285 3,271
Other liabilities.......................................................... 550 474
Deferred income taxes...................................................... 1,021 1,072
Minority interest.......................................................... 319 306
------ ------
TOTAL LIABILITIES....................................................... 6,256 6,090
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares................................. 3 2
Additional paid-in capital................................................. 1,739 1,736
Retained earnings.......................................................... 649 355
Accumulated other comprehensive loss....................................... (370) (254)
Treasury stock: 29 shares and 20 shares in 2001 and 2000, respectively..... (420) (193)
------ ------
TOTAL SHAREHOLDERS' EQUITY.............................................. 1,601 1,646
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $7,857 $7,736
====== ======
See accompanying notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
36
LIQUIDITY AND FINANCIAL CONDITION
--------- --- --------- ---------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Prior to our Separation from PepsiCo and our Initial Public
Offering
We financed our capital investments and acquisitions through cash flow
from operations and advances from PepsiCo prior to our separation from PepsiCo
and our initial public offering. Under PepsiCo's centralized cash management
system, PepsiCo deposited sufficient cash in our bank accounts to meet our daily
obligations, and withdrew excess funds from those accounts. These transactions
are included in decrease in advances from PepsiCo in our Consolidated Statements
of Cash Flows.
Liquidity After our Initial Public Offering
Subsequent to our initial public offering, we have financed our capital
investments and acquisitions primarily through cash flow from operations. We
believe that our future cash flow from operations and borrowing capacity will be
sufficient to fund capital expenditures, acquisitions, dividends and working
capital requirements.
Financing Transactions
On February 9, 1999, $1.3 billion of 5 5/8% senior notes and $1.0
billion of 5 3/8% senior notes were issued by Bottling Group, LLC and are
guaranteed by PepsiCo. On March 8, 1999, we issued $1 billion of 7% senior
notes, which are guaranteed by Bottling Group, LLC. During the second quarter of
1999, we executed an interest rate swap converting 3% of our fixed-rate debt to
floating-rate debt.
On March 31, 1999, we offered 100 million shares of PBG common stock
for sale to the public in an underwritten initial public offering generating
$2.2 billion of net proceeds.
The proceeds from the above financing transactions were used to repay
obligations to PepsiCo and fund acquisitions.
We also have a $500 million commercial paper program that is supported
by a credit facility. The credit facility consists of two $250 million
components, one of which expires in May 2002 and the other of which expires in
April 2004. There were no borrowings outstanding under this program at December
29, 2001 or December 30, 2000.
Capital Expenditures
We have incurred and will continue to incur capital costs to maintain
and grow our infrastructure, including acquisitions and investments in
developing market opportunities.
- Our business requires substantial infrastructure investments
to maintain our existing level of operations and to fund
investments targeted at growing our business. Capital
infrastructure expenditures totaled $593 million, $515 million
and $560 million during 2001, 2000 and 1999, respectively. We
believe that capital infrastructure spending will continue to
be significant, driven by our investments in the cold drink
segment and capacity needs.
- We intend to continue to pursue acquisitions of independent
PepsiCo bottlers in the U.S. and Canada, particularly in
territories contiguous to our own, where they create
shareholder value. These acquisitions will enable us to
provide better service to our large retail customers, as well
as to reduce costs through economies of scale. We also plan to
evaluate international acquisition opportunities as they
become available. Cash spending on acquisitions was $120
million, $26 million and $176 million in 2001, 2000 and 1999,
respectively.
CASH FLOWS
Fiscal 2001 Compared to Fiscal 2000
Operating free cash flow grew $22 million from $273 million in 2000 to
$295 million in 2001. Operating free cash flow is defined as net cash provided
by operations less net cash used for investments, excluding cash used for the
acquisitions of bottlers.
Net cash provided by operating activities increased $174 million to
$1,005 million in 2001, driven by strong EBITDA growth and the timing of
casualty insurance payments, partially offset by higher net working capital due
to growth in our business.
Net cash used for investments increased by $246 million from $584
million in 2000 to $830 million in 2001, primarily due to acquisition spending
and increased capital expenditures, which were driven by increases in the U.S.
associated with our cold drink strategy. Also contributing to the increase were
significantly higher pension contribution payments in 2001.
Net cash used for financing increased by $94 million to $209 million in
2001. This increase primarily reflects our share repur-
37
chase program offset by higher short-term borrowings outside the U.S. and
proceeds from stock option exercises.
Fiscal 2000 Compared to Fiscal 1999
Operating free cash flow grew $112 million, or 70%, to $273 million in
2000.
Net cash provided by operating activities increased $113 million to
$831 million in 2000, driven by strong EBITDA growth partially offset by the
timing of casualty insurance payments in 2000, which significantly contributed
to our unfavorable change in operating working capital.
Net cash used for investments decreased by $149 million from $733
million in 1999 to $584 million in 2000, primarily due to acquisition spending,
which was $150 million lower in 2000. Capital expenditures decreased by $45
million, or 8%, as increases in the U.S. associated with our cold drink strategy
were offset by decreases outside the United States.
Net cash (used for) provided by financing decreased from a source of
cash of $174 million in 1999 to a use of cash of $115 million in 2000. This
decrease resulted from net cash received from initial public offering activities
in 1999 coupled with an increase of $13 million of share repurchases in 2000.
MARKET RISKS AND CAUTIONARY STATEMENTS
--------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the company
routinely is subject to a variety of risks. These risks include the risk
associated with the price of commodities purchased and used in our business,
interest rate on outstanding debt and currency movements of non-U.S. dollar
denominated assets and liabilities. We are also subject to the risks associated
with the business environment in which we operate, including the collectibility
of accounts receivable. We regularly assess all of these risks and have policies
and procedures in place to protect against the adverse effects of these
exposures.
Our objective in managing our exposure to fluctuations in commodity
prices, interest rates, and foreign currency exchange rates is to minimize the
volatility of earnings and cash flows associated with changes in the applicable
rates and prices. To achieve this objective, we primarily enter into commodity
forward contracts, commodity futures and options on futures contracts and
interest rate swaps. 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.
A sensitivity analysis has been prepared to determine the effects that
market risk exposures may have on the fair values of our debt and other
financial instruments. To perform the sensitivity analysis, we assessed the risk
of loss in fair values from the hypothetical changes in commodity prices,
interest rates, and foreign currency exchange rates on market-sensitive
instruments. Information provided by this sensitivity analysis does not
necessarily represent the actual changes in fair value that we would incur under
normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor were held constant. In addition, the
results of the analysis are constrained by the fact that certain items are
specifically excluded from the analysis, while the financial instruments that
relate to the financing or hedging of those items are included. As a result, the
reported changes in the values of some financial instruments that affect the
results of the sensitivity analysis are not matched with the offsetting changes
in the values of the items that those instruments are designed to finance or
hedge.
The results of the sensitivity analysis at December 29, 2001 are as
follows:
Commodity Price Risk
We are subject to market risks with respect to 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 anticipated
purchases of aluminum and fuel used in our operations. With respect to commodity
price risk, we currently have various contracts outstanding for aluminum and
fuel oil purchases in 2002, which establish our purchase price within defined
ranges. These
contracts have notional amounts of $573 million and $557 million at December 29,
2001 and December 30, 2000, respectively. These notional amounts do not
represent amounts exchanged by
38
the parties and thus are not a measure of our exposure; rather, they are used as
a basis to calculate the amounts due under the agreements. We estimate that a
10% decrease in commodity prices with all other variables held constant would
have resulted in a decrease in the fair value of our financial instruments of
$15 million and $18 million at December 29, 2001 and December 30, 2000,
respectively.
Interest Rate Risk
The fair value of our fixed-rate long-term debt is sensitive to changes
in interest rates. Interest rate changes would result in gains or losses in the
fair market value of our debt representing differences between market interest
rates and the fixed rate on the debt. With respect to this market risk, we
currently have an interest rate swap converting 3% of our fixed-rate debt to
floating-rate debt. This interest rate swap has a notional value of $100 million
at December 29, 2001 and December 30, 2000. We estimate that a 10% decrease in
interest rates with all other variables held constant would have resulted in a
net increase in the fair value of our financial instruments, both our fixed rate
debt and our interest rate swap, of $144 million and $158 million at December
29, 2001 and December 30, 2000, respectively.
Foreign Currency Exchange Rate Risk
In 2001, approximately 15% of our net revenues came from Canada, Spain,
Greece and Russia. Social, economic, and political conditions in these
international markets may adversely affect our results of operations, cash
flows, and financial condition. The overall risks to our international
businesses include changes in foreign governmental policies, and other political
or economic developments. These developments may lead to new product pricing,
tax or other policies, and monetary fluctuations which may adversely impact our
business. In addition, our results of operations and the value of the foreign
assets are affected by fluctuations in foreign currency exchange rates.
As currency exchange rates change, translation of the statements of
operations of our businesses outside the U.S. into U.S. dollars affects
year-over-year comparability. We have not hedged currency risks because cash
flows from international operations have generally been reinvested locally, nor
historically have we entered into ▇▇▇▇▇▇ to minimize the volatility of reported
earnings. We estimate that a 10% change in foreign exchange rates with all other
variables held constant would have affected reported income before income taxes
by less than $30 million in 2001 and 2000.
Foreign currency gains and losses reflect translation gains and losses
arising from the re-measurement into U.S. dollars of the net monetary assets of
businesses in highly inflationary countries and transaction gains and losses.
Russia is considered a highly inflationary economy for accounting purposes.
EURO
We have successfully executed our 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. We have experienced no business
interruption as a result of the issuance and circulation of Euro-denominated
bills and coins beginning January 1, 2002. Our financial systems and processes
have been successfully converted to accommodate the Euro. 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 the
financial condition or results of operations.
CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this annual report on Form 10-K 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 PBG's 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 related
infrastructure expenditures, material changes in expected levels of marketing
support payments from PepsiCo, an inability to meet projections for performance
in newly acquired territories, and unfavorable interest rate and currency
fluctuations.
39
THE PEPSI BOTTLING GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
in millions
FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
--------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS STOCK TOTAL INCOME/(LOSS)
----- ------- -------- ---- ----- ----- -------------
BALANCE AT DECEMBER 26, 1998.................... $-- $ -- $ -- $(238) $ -- $(238)
Comprehensive income:
Net loss before IPO....................... -- -- -- -- -- -- $(29)
Net income after IPO...................... -- -- 147 -- -- 147 147
Currency translation adjustment........... -- -- -- (4) -- (4) (4)
Minimum pension liability adjustment...... -- -- -- 19 -- 19 19
----
Total comprehensive income................... $133
====
Initial public offering: 100 shares net of
settlement of advances from PepsiCo....... 2 1,736 -- -- -- 1,738
Treasury stock transactions, net: 5 shares... -- -- -- -- (90) (90)
Cash dividends declared on common stock...... -- -- (9) -- -- (9)
---- ------ ---- ----- ------- ------
BALANCE AT DECEMBER 25, 1999.................... 2 1,736 138 (223) (90) 1,563
Comprehensive income:
Net income................................ -- -- 229 -- -- 229 $229
Currency translation adjustment........... -- -- -- (31) -- (31) (31)
----
Total comprehensive income................... $198
====
Treasury stock transactions, net: 5 shares... -- -- -- -- (103) (103)
Cash dividends declared on common stock...... -- -- (12) -- -- (12)
---- ------ ---- ----- ------- ------
BALANCE AT DECEMBER 30, 2000.................... 2 1,736 355 (254) (193) 1,646
Comprehensive income:
Net income................................ -- -- 305 -- -- 305 $305
Currency translation adjustment........... -- -- -- (49) -- (49) (49)
FAS 133 adjustment...................... -- -- -- (12) -- (12) (12)
Minimum pension liability adjustment.... -- -- -- (55) -- (55) (55)
----
Total comprehensive income................... $189
====
Stock split: (shares: 145 outstanding - 9
treasury)................................. 1 (1) -- -- -- --
Stock option exercises: 2 shares............. -- (4) -- -- 22 18
Tax benefit - stock option exercises......... -- 8 -- -- -- 8
Purchase of treasury stock: 12 shares........ -- -- -- -- (249) (249)
Cash dividends declared on common stock...... -- -- (11) -- -- (11)
---- ------ ---- ----- ------- ------
BALANCE AT DECEMBER 29, 2001.................... $ 3 $1,739 $649 $(370) $ (420) $1,601
=== ====== ==== ===== ======= ======
See accompanying notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular dollars in millions, except per share data
--------------------------------------------------------------------------------
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 ready-to-drink beverages. Approximately 90% of PBG's 2001 net revenues were
derived from the sale of Pepsi-Cola beverages. References to PBG throughout
these 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 generating $2.2
billion in net proceeds. These proceeds were used to fund acquisitions and repay
obligations to PepsiCo.
On November 27, 2001, our shareholders approved an amendment to our
Certificate of Incorporation increasing the authorized shares of PBG common
stock from 300 million to 900 million facilitating a two-for-one stock split of
issued common stock. The stock split was effected in the form of a 100% stock
dividend paid to our shareholders of record on November 27, 2001. As a result of
the stock split, the accompanying Consolidated Financial Statements reflect an
increase in the number of outstanding shares of common stock and shares of
treasury stock and the transfer of the par value of these incremental shares
from additional paid-in capital. All PBG share and per share data have been
restated to reflect the split except for discussions of our capitalization.
Subsequent to the offering and the stock split, PepsiCo owned and
continues to own 106,011,358 shares of common stock, consisting of 105,911,358
shares of common stock and 100,000 shares of Class B common stock. PepsiCo's
ownership at December 29, 2001, represents 37.7% of the outstanding common stock
and 100% of the outstanding Class B common stock, together representing 42.8% of
the voting power of all classes of our voting stock. PepsiCo also owns 7% of the
equity of Bottling Group, LLC, our principal operating subsidiary, as of
December 29, 2001.
The common shares and Class B common shares are substantially
identical, except for voting rights. Holders of our common stock are entitled to
one vote per share and holders of our Class B common stock are entitled to 250
votes per share. Each share of Class B common stock held by PepsiCo is, at
PepsiCo's option, convertible into one share of common stock. Holders of our
common stock and holders of our Class B common stock share equally on a per
share basis in any dividend distributions.
The accompanying Consolidated Financial Statements include information
that has been presented on a "carve-out" basis for the period prior to our
initial public offering. This information includes the historical results of
operations and assets and liabilities directly related to PBG, and has been
prepared from PepsiCo's historical accounting records. Certain estimates,
assumptions and allocations were made in determining such financial statement
information. Therefore, these Consolidated Financial Statements may not
necessarily be indicative of the results of operations, financial position or
cash flows that would have existed had we been a separate, independent company
from the first day of fiscal year 1999.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
("GAAP") requires us to make estimates and assumptions that affect reported
amounts of assets, liabilities, revenues, expenses and disclosure of contingent
assets and liabilities. Actual results could differ from these estimates.
NEW ACCOUNTING STANDARDS During 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") 141, "Business Combinations," which requires that the purchase method
of accounting be used for all business combinations initiated or completed after
June 30, 2001, and SFAS 142, "Goodwill and Other Intangible Assets," which
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment. Effective the first day
of fiscal year
2002, we will no longer amortize goodwill and certain franchise rights, but will
evaluate them for impairment annually. We have completed the initial impairment
review required by SFAS 142 and have determined that our intangible assets are
not impaired. The adoption of SFAS 142 will reduce our fiscal year 2002
amortization expense by approximately $128 million, or $0.31 per diluted share,
based on the weighted-average number of diluted shares outstanding as of
December 29, 2001.
In addition, during 2001 the FASB also issued SFAS 143, "Accounting for
Asset Retirement Obligations" and SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires that we recognize
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred if a reasonable estimate of fair value can be made. SFAS
144 superseded SFAS 121, "Accounting for the Impairment of Long-Lived Assets
41
and for Long-Lived Assets to Be Disposed Of," and Accounting Principles Board
Opinion 30, "Reporting the Results of Operations - Reporting the Effects of a
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 establishes a single accounting
model for the impairment of long-lived assets and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 143 is
effective for fiscal year 2003 and SFAS 144 is effective for fiscal year 2002
and we do not anticipate that the adoption of these statements will have a
material impact on our Consolidated Financial Statements.
During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed
various issues related to the income statement classification of certain
promotional payments. In May 2000, the EITF reached a consensus on Issue 00-14,
"Accounting for Certain Sales Incentives," addressing the recognition and income
statement classification of various sales incentives. Among its requirements,
the consensus will require the costs related to consumer coupons currently
classified as marketing costs to be classified as a reduction of revenue. In
January 2001, the EITF reached a consensus on Issue 00-22, "Accounting for
`Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to Be Delivered in the Future." EITF
00-22 requires that certain volume-based cash rebates to customers currently
recognized as marketing costs be classified as a reduction of revenue. In April
2001, the EITF reached a consensus on Issue 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
EITF 00-25 addresses the income statement classification of consideration, other
than that directly addressed in EITF 00-14, from a vendor to a reseller or
another party that purchases the vendor's products. In November 2001, the EITF
codified Issues 00-14, 00-22 and 00-25 as Issue 01-9, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products." EITF 00-22 was effective for the first quarter of 2001 and was not
material to our Consolidated Financial Statements. The remainder of EITF 01-9 is
effective for 2002 and we do not anticipate that the adoption will have a
material impact on our Consolidated Financial Statements.
Our Consolidated Financial Statements reflect the implementation of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 138, on the first day of fiscal year 2001. SFAS 133, which was
issued in 1998, establishes accounting and reporting standards for hedging
activities and derivative instruments, including certain derivative instruments
embedded in other contracts, which are collectively referred to as derivatives.
It requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheets and measure those instruments at
fair value.
BASIS OF CONSOLIDATION The accounts of all of our wholly and
majority-owned subsidiaries are included in the accompanying Consolidated
Financial Statements. We have eliminated intercompany accounts and transactions
in consolidation.
FISCAL YEAR Our fiscal year ends on the last Saturday in December and,
as a result, a 53rd week is added every five or six years. Fiscal years 2001 and
1999 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks.
REVENUE RECOGNITION We recognize revenue when our products are
delivered to customers. Sales terms do not allow a right of return unless
product freshness dating has expired. Reserves for returned product were $4
million, $3 million and $2 million at fiscal years ended 2001, 2000 and 1999,
respectively.
ADVERTISING AND MARKETING COSTS We are involved in a variety of
programs to promote our products. We include advertising and marketing costs in
selling, delivery and administrative expenses and expense such costs in the year
incurred. Advertising and marketing costs were $389 million, $350 million and
$342 million in 2001, 2000 and 1999, respectively.
BOTTLER INCENTIVES PepsiCo and other brand owners, at their sole
discretion, provide us with various forms of marketing support. This marketing
support is intended to cover a variety of programs and initiatives, including
direct marketplace support, capital equipment funding and shared media, and
advertising support. Based on the objective of the programs and initiatives, we
record marketing support as an adjustment to net revenues or as a reduction of
selling, delivery and administrative expenses. Direct marketplace support is
primarily funding by PepsiCo and other brand owners of sales discounts and
similar programs and is recorded as an adjustment to net revenues. Capital
equipment funding is designed to support the purchase and placement of marketing
equipment and is recorded as a reduction of selling, delivery and administrative
expenses. Shared media and advertising support is recorded as a reduction to
advertising and marketing expense within selling, delivery and administrative
expenses. There are no conditions or other requirements that could result in a
repayment of marketing support received.
The total bottler incentives we received from PepsiCo and other brand
owners were $598 million, $566 million and $563 million for 2001, 2000 and 1999,
respectively. Of these amounts, we recorded $293 million, $277 million and $263
million for 2001, 2000 and 1999, respectively, in net revenues, and the
remainder as a reduction of selling, delivery and administrative expenses. The
amount of our bottler incentives received from PepsiCo was
42
more than 90% of our bottler incentives in each of the three years, with the
balance received from the other brand owners.
SHIPPING AND HANDLING COSTS We record shipping and handling costs
within selling, delivery and administrative expenses. Such costs totaled $947
million, $925 million and $915 million in 2001, 2000 and 1999, respectively.
FOREIGN CURRENCY GAINS AND LOSSES We translate the balance sheets of
our foreign subsidiaries that do not operate in highly inflationary economies at
the exchange rates in effect at the balance sheet date, while we translate the
statements of operations at the average rates of exchange during the year. The
resulting translation adjustments of our foreign subsidiaries are recorded
directly to accumulated other comprehensive loss. Foreign currency gains and
losses reflect translation gains and losses arising from the re-measurement into
U.S. dollars of the net monetary assets of businesses in highly inflationary
countries and transaction gains and losses. Russia is considered a highly
inflationary economy for accounting purposes.
INCOME TAXES Our effective tax rate and the tax bases of our assets and
liabilities reflect our best estimate of the ultimate outcome of our tax audits.
Valuation allowances are established where expected future taxable income does
not support the recognition of the related deferred tax asset.
EARNINGS PER SHARE We compute basic earnings per share by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised and
converted into common stock that would then participate in net income.
CASH EQUIVALENTS Cash equivalents represent funds we have temporarily
invested with original maturities not exceeding three months.
ALLOWANCE FOR DOUBTFUL ACCOUNTS We determine our allowance for doubtful
accounts based on an evaluation of the aging of our receivable portfolio. Our
reserve contemplates our historical loss rate on receivables and the economic
environment in which we operate.
INVENTORIES We value our inventories at the lower of cost computed on
the first-in, first-out method or net realizable value.
PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment
("PP&E") at cost, except for PP&E that has been impaired, for which we write
down the carrying amount to estimated fair-market value, which then becomes the
new cost basis.
INTANGIBLE ASSETS Identifiable intangible assets arise principally from
the allocation of the purchase price of businesses acquired, and consist
primarily of territorial franchise rights. Our franchise rights are typically
perpetual in duration, subject to compliance with the underlying franchise
agreement. We assign amounts to such identifiable intangibles based on their
estimated fair value at the date of acquisition. Goodwill represents the
residual purchase price after allocation to all identifiable net assets.
Identifiable intangible assets are evaluated at the date of acquisition and
amortized on a straight-line basis over their estimated useful lives, which in
most cases is from 20-40 years the maximum period permitted by GAAP.
RECOVERABILITY OF LONG-LIVED ASSETS We review all long-lived assets,
including intangible assets, when facts and circumstances indicate that the
carrying value of the asset may not be recoverable. When necessary, we write
down an impaired asset to its estimated fair value based on the best information
available. Estimated fair value is generally based on either appraised value or
measured by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows, which are
discounted based on our weighted-average cost of capital. Accordingly, actual
results could vary significantly from such estimates.
MINORITY INTEREST PBG and PepsiCo contributed bottling businesses and
assets used in the bottling businesses to Bottling Group, LLC, our principal
operating subsidiary, in connection with the formation of Bottling Group, LLC.
As a result of the contribution of these assets, PBG owns 93% of Bottling Group,
LLC and PepsiCo owns the remaining 7%. Accordingly, the Consolidated Financial
Statements reflect PepsiCo's share of consolidated net income of Bottling Group,
LLC as minority interest in our Consolidated Statements of Operations, and
PepsiCo's share of consolidated net assets of Bottling Group, LLC as minority
interest in our Consolidated Balance Sheets.
TREASURY STOCK We record the repurchase of shares of our common stock
at cost and classify these shares as treasury stock within shareholders' equity.
Repurchased shares are included in our authorized and issued shares but not
included in our shares outstanding. We record shares reissued using an average
cost. Since our initial public offering, shares issued and outstanding reflect
the effect of our share repurchase program, which began in October 1999. 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. As a result of our stock split in
November of 2001, the amount of shares authorized by the
43
Board of Directors to be repurchased now totals 50 million shares. Share
repurchases were approximately 12 million in 2001 for $249 million and
approximately 9 million in 2000 for $103 million. We have repurchased
approximately 31 million shares since the inception of our program and have
reissued approximately 2 million for stock option exercises.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT We use derivative instruments
to hedge against the risk of adverse movements in the price of certain
commodities and fuel used in our operations. Our use of derivative instruments
is limited to interest rate swaps, 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.
All derivative instruments are recorded at fair value as either assets
or liabilities in our Consolidated Balance Sheets. 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 ▇▇▇▇▇▇ 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 Consolidated Balance Sheets at
fair value with changes in fair value recognized in earnings.
STOCK-BASED EMPLOYEE COMPENSATION We measure stock-based compensation
expense in accordance with Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees," and its related interpretations. Accordingly,
compensation expense for stock option grants to PBG employees is measured as the
excess of the quoted market price of common stock at the grant date over the
amount the employee must pay for the stock. Our policy is to grant stock options
at fair value on the date of grant.
COMMITMENTS AND CONTINGENCIES We are subject to various claims and
contingencies related to lawsuits, taxes, environmental and other matters
arising out of the normal course of business. Liabilities related to commitments
and contingencies are recognized when a loss is probable and reasonably
estimable.
RECLASSIFICATIONS Certain reclassifications were made in our
Consolidated Financial Statements to 2000 and 1999 amounts to conform with the
2001 presentation.
NOTE 3--COMPARABILITY OF RESULTS
Stock Split
On November 27, 2001, our shareholders approved an amendment to our
Certificate of Incorporation increasing the authorized shares of PBG common
stock from 300 million to 900 million facilitating a two-for-one stock split of
issued common stock. The stock split was effected in the form of a 100% stock
dividend paid to our shareholders of record on November 27, 2001. As a result of
the stock split, the accompanying Consolidated Financial Statements reflect an
increase in the number of outstanding shares of common stock and shares of
treasury stock and the transfer of the par value of these incremental shares
from additional paid-in capital. All PBG share and per share data have been
restated to reflect the split except for discussions of our capitalization.
Asset Lives
At the beginning of fiscal year 2000, we changed the estimated useful
lives of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in the table below, lowered total depreciation
cost by approximately $69 million, or $0.13 per diluted share in 2000. In 2001,
we are utilizing the same asset lives as in 2000.
Estimated Useful Lives
----------------------
(in years)
----------
2000 1999
---- ----
Manufacturing equipment......................................... 15 10
Heavy fleet..................................................... 10 8
Fountain dispensing equipment................................... 7 5
Small specialty coolers and specialty marketing equipment....... 3 5 to 7
44
Fiscal Year
Our fiscal year ends on the last Saturday in December and, as a result,
a 53rd week is added every five or six years. Fiscal years 2001 and 1999
consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. The extra
week in 2000 contributed approximately $0.02 of additional diluted earnings per
share to our 2000 operating results.
Initial Public Offering
For the period prior to our initial public offering, we prepared our
Consolidated Financial Statements as a "carve-out" from the financial statements
of PepsiCo using the historical results of operations and assets and liabilities
of our business. Certain costs reflected in the Consolidated Financial
Statements may not necessarily be indicative of the costs that we would have
incurred had we operated as an independent, stand-alone entity from the first
day of fiscal year 1999. These costs include an allocation of PepsiCo's
corporate overhead and interest expense, and income taxes:
- We included overhead related to PepsiCo's corporate
administrative functions based on a specific identification of
PepsiCo's administrative costs relating to the bottling
operations and, to the extent that such identification was not
practicable, based upon the percentage of our revenues to
PepsiCo's consolidated net revenues. These costs are included
in selling, delivery and administrative expenses in our
Consolidated Statements of Operations.
- We allocated $3.3 billion of PepsiCo's debt to our business
and charged interest expense on this debt using PepsiCo's
weighted-average interest rate. Once we issued $3.3 billion of
third-party debt in the first quarter of 1999, our actual
interest rates were used to determine interest expense for the
remainder of the year.
- We reflected income tax expense in the Consolidated Financial
Statements as if we had actually filed a separate income tax
return.
The amounts of the historical allocations described above are as
follows:
1999
-----
Corporate overhead expense................................................. $ 3
Interest expense........................................................... $ 28
PepsiCo's weighted-average interest rate................................... 5.8%
In addition, our historical capital structure is not representative of
our current structure due to our initial public offering. In 1999, immediately
preceding the offering, we had 55 million shares of common stock outstanding. In
connection with the offering, we sold 100 million shares to the public.
NOTE 4--UNUSUAL IMPAIRMENT AND OTHER CHARGES AND CREDITS
Our operating results were affected by the following unusual charges and
credits:
1999
-----
Non-cash compensation charge............................................... $ 45
Vacation policy change..................................................... (53)
Asset impairment and restructuring charges................................. (8)
----
$(16)
====
After minority interest and income taxes................................... $ (9)
====
- Non-cash Compensation Charge
In connection with the completion of our initial public offering,
PepsiCo vested substantially all non-vested PepsiCo stock options held
by our employees. As a result, we incurred a $45 million non-cash
compensation
charge in the second quarter of 1999, equal to the difference between
the market price of the PepsiCo capital stock and the exercise price of
these options at the vesting date.
- Vacation Policy Change
As a result of changes to our employee benefit and compensation plans
in 1999, employees now earn vacation time evenly throughout the year
based upon service rendered. Previously, employees were fully vested at
the beginning of each year. As a result of this change, we reversed an
accrual of $53 million into income in 1999.
- Asset Impairment and Restructuring Charges
In the fourth quarter of 1999, $8 million of the remaining
restructuring reserve recorded in 1998, relating to an asset impairment
and restructuring in our Russian operations, was reversed into income.
The reversal was necessitated as actual costs incurred to renegotiate
manufacturing and leasing contracts in Russia and to reduce the number
of employees were less than the amounts originally estimated.
45
NOTE 5--INVENTORIES
2001 2000
----- -----
Raw materials and supplies................................................................. $ 117 $ 107
Finished goods............................................................................. 214 174
----- -----
$ 331 $ 281
===== =====
NOTE 6--PROPERTY, PLANT AND EQUIPMENT, NET
2001 2000
------- -------
Land....................................................................................... $ 145 $ 145
Buildings and improvements................................................................. 925 903
Manufacturing and distribution equipment................................................... 2,308 2,169
Marketing equipment........................................................................ 1,846 1,745
Other...................................................................................... 121 106
------- -------
5,345 5,068
Accumulated depreciation................................................................... (2,802) (2,710)
------- -------
$ 2,543 $ 2,358
======= =======
We calculate depreciation on a straight-line basis over the estimated
lives of the assets as follows:
Buildings and improvements................................ 20-33 years
Manufacturing equipment................................... 15 years
Distribution equipment.................................... 5-10 years
Marketing equipment....................................... 3-7 years
NOTE 7--INTANGIBLE ASSETS, NET
2001 2000
------- -------
Franchise rights and other identifiable intangibles........................................ $ 3,636 $ 3,557
Goodwill................................................................................... 1,574 1,591
------- -------
5,210 5,148
Accumulated amortization................................................................... (1,526) (1,454)
------- -------
$ 3,684 $ 3,694
======= =======
NOTE 8--ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
2001 2000
------ ----
Accounts
payable.................................................................................... $ 362 $344
Trade incentives........................................................................... 205 206
Accrued compensation and benefits.......................................................... 141 147
Accrued interest........................................................................... 71 71
Accounts payable to PepsiCo................................................................ 17 --
Other current liabilities.................................................................. 208 173
------ ----
$1,004 $941
====== ====
NOTE 9--SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2001 2000
---- ----
Short-term borrowings
Current maturities of long-term debt.................................................... $ 3 $ 1
Other short-term borrowings............................................................. 74 25
---- ----
$ 77 $ 26
==== ====
Long-term debt
5 5/8% senior notes due 2009............................................................ $1,300 $1,300
5 3/8% senior notes due 2004............................................................ 1,000 1,000
7% senior notes due 2029................................................................ 1,000 1,000
Other................................................................................... 18 6
------ ------
3,318 3,306
Less: Unamortized discount.............................................................. 30 34
Current maturities of long-term debt.............................................. 3 1
------ ------
$3,285 $3,271
====== ======
Maturities of long-term debt as of December 29, 2001 are 2002: $3
million, 2003: $3 million, 2004: $1,008 million, 2005: $0, 2006: $0 and
thereafter, $2,304 million.
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8%
senior notes were issued on February 9, 1999, by our subsidiary Bottling Group,
LLC and are guaranteed by PepsiCo. We issued the $1.0 billion of 7% senior
notes, which are guaranteed by Bottling Group, LLC, on March 8, 1999. During the
second quarter of 1999 we executed an interest rate swap converting 3% of our
fixed-rate debt to floating-rate debt.
We allocated $3.3 billion of PepsiCo's long-term debt in our financial
statements prior to issuing the senior notes referred to above. Our interest
expense includes the related allocated interest expense of $28 million in 1999,
and is based on PepsiCo's weighted-average interest rate of 5.8% in 1999.
We also have a $500 million commercial paper program that is supported
by a credit facility. The credit facility consists of two $250 million
components, one of which expires in May 2002 and the other of which expires in
April 2004. There were no borrowings outstanding under this program at December
29, 2001 or December 30, 2000.
We have available short-term bank credit lines of approximately $177
million and $135 million at December 29, 2001 and December 30, 2000,
respectively. These lines are used to support the general operating needs of our
businesses outside the United States. The weighted-average interest rate for
these lines of credit outstanding at December 29, 2001 and December 30, 2000 was
4.3% and 8.9%, respectively.
46
Amounts paid to third parties for interest were $191 million, $202
million and $108 million in 2001, 2000 and 1999, respectively. In 1999,
allocated interest expense was deemed to have been paid to PepsiCo, in cash, in
the period in which the cost was incurred.
NOTE 10--LEASES
We have noncancellable commitments under both capital and long-term
operating leases. Capital and operating lease commitments expire at various
dates through 2021. Most leases require payment of related executory costs,
which include property taxes, maintenance and insurance.
Our future minimum commitments under noncancellable leases are set
forth below:
COMMITMENTS
---------------------
CAPITAL OPERATING
------- ---------
2002........................................................................ $-- $ 22
2003........................................................................ -- 20
2004........................................................................ -- 17
2005........................................................................ -- 16
2006........................................................................ -- 14
Later years................................................................. 3 82
--- ----
$ 3 $171
=== ====
At December 29, 2001, the present value of minimum payments under
capital leases was $1 million, after deducting $2 million for imputed interest.
Our rental expense was $40 million, $42 million and $55 million for 2001, 2000
and 1999, respectively.
NOTE 11--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
These Consolidated Financial Statements reflect the implementation of
SFAS 133, as amended by SFAS 138, on the first day of fiscal year 2001. In June
1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for hedging activities and derivative instruments, including certain
derivative instruments embedded in other contracts, which are collectively
referred to as derivatives. It requires that an entity recognize all derivatives
as either assets or liabilities in the consolidated balance sheet and measure
those instruments at fair value. In June 2000, the FASB issued SFAS 138,
amending the accounting and reporting standards of SFAS 133. Prior to the
adoption of SFAS 133, there were no deferred gains or losses from our hedging
activities recorded in our Consolidated Financial Statements. The adoption of
these statements resulted in the recording of a deferred gain in our
Consolidated Balance Sheets, which was recorded as an increase to current assets
of $4 million and a reduction of other comprehensive loss of $4 million.
Furthermore, the adoption had no impact on our Consolidated Statement of
Operations.
As of December 29, 2001, our use of derivative instruments is 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 HEDGE 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 aluminum 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, the amount of deferred losses from our commodity hedging that
we recognized into income was $4 million. At December 29, 2001 a $19 million
deferred loss remained in accumulated other comprehensive loss in our
Consolidated Balance Sheets resulting from our commodity ▇▇▇▇▇▇. We anticipate
that this loss, which is $12 million on an after-tax basis, will be recognized
in cost of sales in our 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 2001.
FAIR VALUE ▇▇▇▇▇▇ We finance a portion of our operations through
fixed-rate debt instruments. At December 29, 2001 our debt instruments primarily
consisted of $3.3 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 matu-
47
rity 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 change in fair value of the interest rate swap was a gain of
$7 million in 2001. The fair value change was recorded in interest expense, net
in our Consolidated Statements of Operations and in prepaid expenses and other
current assets in our Consolidated Balance Sheets. An offsetting adjustment was
recorded in interest expense, net in our Consolidated Statements of Operations
and in long-term debt in our 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 ▇▇▇▇▇▇. The earnings impact from
these ▇▇▇▇▇▇ is classified as selling, delivery and administrative expenses
consistent with the expense classification of the underlying hedged item.
FAIR VALUE 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 the short
maturity of our financial assets and liabilities, and since interest rates
approximate fair value for short-term debt.
Long-term debt at December 29, 2001 had a carrying value and fair value
of $3.3 billion and $3.4 billion, respectively, and at December 30, 2000 had a
carrying value and fair value of $3.3 billion and $3.2 billion, respectively.
NOTE 12--PENSION AND POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS
Our U.S. employees participate in noncontributory defined benefit
pension plans, which cover substantially all full-time salaried employees, as
well as most hourly employees. Benefits generally are based on years of service
and compensation, or stated amounts for each year of service. All of our
qualified plans are funded and contributions are made in amounts not less than
minimum statutory funding requirements and not more than the maximum amount that
can be deducted for U.S. income tax purposes. Our net pension expense for the
defined benefit pension plans for our operations outside the U.S. was not
significant.
POSTRETIREMENT BENEFITS
Our postretirement plans provide medical and life insurance benefits
principally to U.S. retirees and their dependents. Employees are eligible for
benefits if they meet age and service requirements and qualify for retirement
benefits. The plans are not funded and since 1993 have included retiree cost
sharing.
PENSION
----------------------------
Components of net periodic benefit costs: 2001 2000 1999
----------------------------------------- ---- ---- ----
Service cost.................................................... $ 28 $ 27 $ 30
Interest cost................................................... 50 49 42
Expected return on plan assets.................................. (60) (56) (49)
Amortization of net loss........................................ -- -- 4
Amortization of prior service amendments........................ 4 5 5
---- ---- ----
Net periodic benefit costs...................................... $ 22 $ 25 $ 32
==== ==== ====
POSTRETIREMENT
----------------------------
Components of net periodic benefit costs: 2001 2000 1999
----------------------------------------- ---- ---- ----
Service cost.................................................... $ 3 $ 3 $ 4
Interest cost................................................... 16 14 12
Amortization of net loss........................................ 1 1 --
Amortization of prior service amendments........................ (6) (6) (5)
----- ----- ----
Net periodic benefit costs...................................... $ 14 $ 12 $ 11
===== ===== ====
We amortize prior service costs on a straight-line basis over the
average remaining service period of employees expected to receive benefits.
PENSION POSTRETIREMENT
----------------- -----------------
Changes in the benefit obligation: 2001 2000 2001 2000
---------------------------------- ---- ---- ----- ----
Obligation at beginning of year.................................. $ 664 $ 647 $ 212 $ 206
Service cost..................................................... 28 27 3 3
Interest cost.................................................... 50 49 16 14
Plan amendments.................................................. 10 4 -- (10)
Actuarial loss/(gain)............................................ 48 (19) 14 11
Benefit payments................................................. (40) (40) (17) (12)
Acquisitions and other........................................... -- (4) -- --
----- ----- ----- -----
Obligation at end of year........................................ $ 760 $ 664 $ 228 $ 212
===== ===== ===== =====
48
PENSION POSTRETIREMENT
----------------- -----------------
Changes in the fair value of assets: 2001 2000 2001 2000
------------------------------------ ---- ---- ----- ----
Fair value at beginning of year.................................. $ 665 $ 597 $ -- $ --
Actual (loss)/gain on plan assets................................ (117) 96 -- --
Employer contributions........................................... 70 16 17 12
Benefit payments................................................. (40) (40) (17) (12)
Acquisitions and other........................................... -- (4) -- --
----- ----- ----- ----
Fair value at end of year........................................ $ 578 $ 665 $ -- $ --
===== ===== ===== ====
Selected information for the plans with accumulated benefit obligations
in excess of plan assets:
PENSION POSTRETIREMENT
----------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Projected benefit obligation........................................ $ 760 $ 31 $228 $212
Accumulated benefit obligation...................................... 690 14 228 212
Fair value of plan assets........................................... 604 -- -- --
Funded status recognized on the Consolidated Balance Sheets:
PENSION POSTRETIREMENT
----------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Funded status at end of year........................................ $(182) $ 1 $(228) $(212)
Unrecognized prior service cost..................................... 36 31 (16) (21)
Unrecognized loss/(gain)............................................ 153 (73) 57 45
Unrecognized transition asset....................................... (1) (1) -- --
Fourth quarter employer contributions............................... 26 10 5 7
----- ----- ----- -----
Net amounts recognized.............................................. $ 32 $(32) $(182) $(181)
===== ==== ===== =====
Net amounts recognized in the Consolidated Balance Sheets:
PENSION POSTRETIREMENT
----------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Prepaid expenses.................................................... $ -- $ 31 $ -- $ --
Other liabilities................................................... (101) (63) (182) (181)
Intangible assets, net.............................................. 37 -- -- --
Accumulated other comprehensive loss................................ 96 -- -- --
----- ---- ----- -----
Net amounts recognized.............................................. $ 32 $(32) $(182) $(181)
===== ==== ===== =====
At December 29, 2001, the accumulated benefit obligation of certain PBG
pension plans exceeded the fair market value of the plan assets resulting in the
recognition of an additional unfunded liability as a minimum balance sheet
liability. As a result of this additional liability, an intangible asset of $37
million and an increase to accumulated other comprehensive loss of $96 million
was recognized. The adjustment to accumulated other comprehensive loss is
reflected after minority interest and taxes in our Consolidated Statements of
Changes in Shareholders' Equity.
The weighted-average assumptions used to compute the above information
are set forth below:
PENSION
---------------------------
2001 2000 1999
---- ---- ----
Discount rate for benefit obligation........................................... 7.5% 7.8% 7.8%
Expected return on plan assets................................................. 10.0% 10.0% 10.0%
Rate of compensation increase.................................................. 4.3% 4.6% 4.3%
POSTRETIREMENT
---------------------------
2001 2000 1999
---- ---- ----
Discount rate for benefit obligation........................................... 7.5% 7.8% 7.8%
COMPONENTS OF PENSION ASSETS
The pension plan assets are principally invested in stocks and bonds.
None of the assets are invested directly into PBG stock.
HEALTH CARE COST TREND RATES
We have assumed an average increase of 8.0% in 2002 in the cost of
postretirement medical benefits for employees who retired before cost sharing
was introduced. This average increase is then projected to decline gradually to
4.5% in 2009 and thereafter.
Assumed health care cost trend rates have an impact on the amounts
reported for postretirement medical plans. A one-percentage point change in
assumed health care costs would have the following effects:
1% 1%
INCREASE DECREASE
Effect on total fiscal year 2001 service and interest cost components...................... $- $-
Effect on the fiscal year 2001 accumulated postretirement benefit obligation............... 7 (6)
OTHER EMPLOYEE BENEFIT PLANS
We made several changes to our employee benefit plans that took effect
in fiscal year 2000. The changes were made to our vacation policy, pension and
retiree medical plans and included some benefit enhancements as well as cost
containment provisions. These changes did not have a significant impact on our
financial results in 2001 or 2000.
49
In 1999, our Board of Directors approved a matching company
contribution to our 401(k) plan that began in 2000. The match is dependent upon
the employee's contribution and years of service. The matching company
contribution was approximately $17 million and $15 million in 2001 and 2000,
respectively.
In the fourth quarter of 1999 we recognized a $16 million compensation
charge related to full-year 1999 performance. This expense was one-time in
nature and was for the benefit of our management employees, reflecting our
successful operating results as well as providing certain incentive-related
features.
NOTE 13--EMPLOYEE STOCK OPTION PLANS
Under our long-term incentive plan, stock options are issued to middle
and senior management employees and vary according to salary and level within
PBG. Except as noted below, options granted in 2001 and 2000 had exercise prices
ranging from $18.88 per share to $22.50 per share, and $9.38 per share to $15.88
per share, respectively, expire in 10 years and become exercisable 25% after the
first year, 25% after the second year and the remainder after the third year.
Options granted in 1999 had exercise prices ranging from $9.63 per share to
$11.50 per share and, with the exception of our chairman's options, are
exercisable after three years and expire in 10 years. Our chairman's 1999
options are exercisable ratably over the three years following our initial
public offering date.
In 2001, two additional option grants were made to certain senior
management employees. One grant had an exercise price of $19.50 per share,
expires in 10 years and became exercisable on the grant date. The other grant
had an exercise price of $22.50 per share, expires in 10 years and becomes
exercisable in 5 years.
In conjunction with our initial public offering, we issued a one-time
founders' grant of options to all full-time non-management employees in 1999 to
purchase 200 shares of PBG stock. These options have an exercise price equal to
the initial public offering price of $11.50 per share, are exercisable after
three years and expire in 10 years.
In connection with the completion of our initial public offering,
PepsiCo vested substantially all non-vested PepsiCo stock options held by PBG
employees. As a result, we incurred a $45 million non-cash compensation charge
in the second quarter of 1999, equal to the difference between the market price
of the PepsiCo capital stock and the exercise price of these options at the
vesting date.
The following table summarizes option activity during 2001:
WEIGHTED-
AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- --------
Outstanding at beginning of year...................................... 33.2 $ 10.75
Granted............................................................ 10.2 20.47
Exercised.......................................................... (1.8) 10.84
Forfeited.......................................................... (1.9) 12.01
----- --------
Outstanding at end of year............................................ 39.7 $ 13.20
===== ========
Exercisable at end of year............................................ 6.6 $ 13.38
===== ========
Weighted-average fair value of options granted during the year........ $ 8.55
========
The following table summarizes option activity during 2000:
WEIGHTED-
AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- -----
Outstanding at beginning of year...................................... 22.4 $11.49
Granted............................................................ 13.2 9.57
Exercised.......................................................... (0.2) 10.53
Forfeited.......................................................... (2.2) 11.20
------ ------
Outstanding at end of year............................................ 33.2 $10.75
====== ======
Exercisable at end of year............................................ 1.8 $11.11
====== ======
Weighted-average fair value of options granted during the year........ $ 4.68
======
The following table summarizes option activity during 1999:
WEIGHTED
-AVERAGE
EXERCISE
Options in millions OPTIONS PRICE
------- -----
Outstanding at beginning of year...................................... -- $ --
Granted............................................................ 24.2 11.49
Exercised.......................................................... -- --
Forfeited.......................................................... (1.8) 11.50
------ ------
Outstanding at end of year............................................ 22.4 $11.49
====== ======
Exercisable at end of year............................................ -- $ --
====== ======
Weighted-average fair value of options granted during the year........ $ 5.15
======
50
Stock options outstanding and exercisable at December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING AVERAGE
Options in millions CONTRACTUAL WEIGHTED-AVERAG EXERCISE
RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS PRICE
----------------------- ------- ------------- -------------- -------- -------
$9.38-$11.49............. 10.4 7.99 $ 9.38 2.2 $ 9.40
$11.50-$15.88............ 19.5 7.02 $11.55 2.3 $11.57
$15.89-$22.50............ 9.8 9.00 $20.47 2.1 $19.59
---- ---- ------ --- ------
39.7 7.77 $13.20 6.6 $13.38
==== ==== ====== === ======
We adopted the disclosure provisions of SFAS 123, "Accounting for
Stock-Based Compensation," but continue to measure stock-based compensation cost
in accordance with the Accounting Principles Board Opinion 25 and its related
interpretations. If we had measured compensation cost for the stock options
granted to our employees under the fair value based method prescribed by SFAS
123, net income would have been changed to the pro forma amounts set forth
below:
2001 2000 1999
---- ---- ----
Net Income
Reported................................................................. $ 305 $ 229 $ 118
Pro forma................................................................ 269 204 102
Diluted Earnings per Share
Reported................................................................. $1.03 $0.77 $0.46
Pro forma................................................................ 0.91 0.69 0.39
The fair value of PBG stock options used to compute pro forma net
income disclosures was estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate......................................................... 4.6% 6.7% 5.8%
Expected life................................................................... 6 years 7 years 7 years
Expected volatility............................................................. 35% 35% 30%
Expected dividend yield......................................................... 0.20% 0.43% 0.35%
NOTE 14--INCOME TAXES
The details of our income tax provision are set forth below:
2001 2000 1999
---- ----- ----
Current: Federal............................................................ $ 93 $107 $ 79
Foreign.............................................................. 5 1 (1)
State................................................................ 15 27 19
---- ----- ----
113 135 97
---- ----- ----
Deferred: Federal............................................................. 43 7 (17)
Foreign.............................................................. (1) -- --
State................................................................ 6 (7) (10)
---- ----- ----
48 -- (27)
---- ----- ----
161 135 70
Rate change benefit.................................................. (25) -- --
---- ----- ----
$136 $135 $ 70
==== ===== ====
Our 2001 income tax provision includes a nonrecurring reduction in
income tax expense of $25 million due to enacted tax rate changes in Canada
during the year.
Our U.S. and foreign income before income taxes is set forth below:
2001 2000 1999
---- ---- ----
U.S.......................................................................... $375 $318 $188
Foreign...................................................................... 66 46 --
---- ---- ----
$441 $364 $188
==== ==== ====
Our reconciliation of income taxes calculated at the U.S. federal
statutory rate to our provision for income taxes is set forth below:
2001 2000 1999
---- ---- ----
Income taxes computed at the U.S. federal statutory rate..................... 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit................................. 3.1 3.2 3.2
Impact of foreign results.................................................... (9.0) (7.5) (9.1)
Goodwill and other nondeductible expenses.................................... 3.9 5.1 7.8
Unusual impairment and other charges and credits............................. -- -- (0.6)
Other, net................................................................... 3.5 1.2 1.1
---- ---- ----
36.5 37.0 37.4
Rate change benefit.......................................................... (5.7) -- --
---- ---- ----
Total effective income tax rate.............................................. 30.8% 37.0% 37.4%
==== ==== ====
51
The details of our 2001 and 2000 deferred tax liabilities (assets) are
set forth below:
2001 2000
------- -------
Intangible assets and property, plant and equipment........................................ $ 1,094 $ 1,098
Other...................................................................................... 109 96
------- -------
Gross deferred tax liabilities............................................................. 1,203 1,194
------- -------
Net operating loss carryforwards........................................................... (121) (139)
Employee benefit obligations............................................................... (141) (112)
Bad debts.................................................................................. (13) (15)
Various liabilities and other.............................................................. (72) (70)
------- -------
Gross deferred tax assets.................................................................. (347) (336)
Deferred tax asset valuation allowance..................................................... 122 148
------- -------
Net deferred tax assets.................................................................... (225) (188)
------- -------
Net deferred tax liability................................................................. $ 978 $ 1,006
======= =======
Included in:
Prepaid expenses and other current assets.................................................. $ (43) $ (66)
Deferred income taxes...................................................................... 1,021 1,072
------- -------
$ 978 $ 1,006
======= =======
We have net operating loss carryforwards totaling $370 million at
December 29, 2001, which are available to reduce future taxes in the U.S.,
Spain, Greece and Russia. Of these carryforwards, $2 million expire in 2002 and
$368 million expire at various times between 2003 and 2021. We have established
a full valuation allowance for the net operating loss carryforwards attributable
to Spain, Greece and Russia based upon our projection that it is more likely
than not that these losses will not be realized. In addition, at December 29,
2001 we have a tax credit carryforward in the U.S. of $7 million with an
indefinite carryforward period.
Our valuation allowances, which reduce deferred tax assets to an amount
that will more likely than not be realized, have decreased by $26 million, in
2001 and increased $1 million in 2000.
Deferred taxes are not recognized for temporary differences related to
investments in foreign subsidiaries that are essentially permanent in duration.
Determination of the amount of unrecognized deferred taxes related to these
investments is not practicable.
Income taxes receivable were $15 million and $12 million at December
29, 2001 and December 30, 2000, respectively. Such amounts are recorded within
prepaid expenses and other current assets in our Consolidated Balance Sheets.
Amounts paid to taxing authorities for income taxes were $101 million, $147
million and $111 million in 2001, 2000 and 1999, respectively.
NOTE 15--GEOGRAPHIC DATA
We operate in one industry, carbonated soft drinks and other
ready-to-drink beverages. We conduct business in 41 states and the District of
Columbia in the United States. Outside the U.S., we conduct business in eight
Canadian provinces, Spain, Greece and Russia.
NET REVENUES
----------------------------------
2001 2000 1999
---- ---- ----
U.S........................................................... $7,197 $6,830 $6,352
Other countries............................................... 1,246 1,152 1,153
------ ------ ------
$8,443 $7,982 $7,505
====== ====== ======
LONG-LIVED ASSETS
---------------------------------
2001 2000 1999
---- ---- ----
U.S........................................................... $5,395 $5,192 $5,139
Other countries............................................... 914 960 987
------ ------ ------
$6,309 $6,152 $6,126
====== ====== ======
NOTE 16--RELATIONSHIP WITH PEPSICO
At the time of the initial public offering we entered into a number of
agreements with PepsiCo. The most significant agreements that govern our
relationship with PepsiCo consist of:
(1) the master bottling agreement for cola beverages bearing the
"Pepsi-Cola" and "Pepsi" trademark in the United States;
bottling and distribution agreements for non-cola products in
the United States, including Mountain Dew; and a master
fountain syrup agreement in the United States;
(2) agreements similar to the master bottling agreement and the
non-cola agreements for each specific country, including
Canada, Spain, Greece and Russia, as well as a fountain syrup
agreement similar to the master syrup agreement for Canada;
(3) a shared services agreement whereby PepsiCo provides us or we
provide PepsiCo with certain administrative support, including
procurement of raw materials, transaction processing, such as
accounts payable and credit and collection, certain tax and
treasury services, and information technology maintenance and
systems development. The amounts paid or received under this
contract are equal to the actual costs incurred by the company
providing the service. From 1998 through 2001, a PepsiCo
affiliate provided casualty insurance to us; and
(4) transition agreements that provide certain indemnities to the
parties, and provide for the allocation of tax and other
assets, liabilities, and obligations arising from periods
prior to the
52
initial public offering. Under our tax separation agreement,
PepsiCo maintains full control and absolute discretion for any
combined or consolidated tax filings for tax periods ending on
or before the initial public offering. PepsiCo has
contractually agreed to act in good faith with respect to all
tax audit matters affecting us. In addition, PepsiCo has
agreed to use their best efforts to settle all joint interests
in any common audit issue on a basis consistent with prior
practice.
We purchase concentrate from PepsiCo that is used in the production of
carbonated soft drinks and other ready-to-drink beverages. The price of
concentrate is determined annually by PepsiCo at its sole discretion. We also
produce or distribute other products and purchase finished goods and concentrate
through various arrangements with PepsiCo or PepsiCo joint ventures. We reflect
such purchases in cost of sales.
We share a business objective with PepsiCo of increasing the
availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at
its sole discretion, provides us with various forms of marketing support to
promote its beverages. This support covers a variety of initiatives, including
marketplace support, marketing programs, capital equipment investment, and
shared media expense. Based on the objective of the programs and initiatives, we
record marketing support as an adjustment to net revenues or as a reduction of
selling, delivery and administrative expense.
We manufacture and distribute fountain products and provide fountain
equipment service to PepsiCo customers in some territories in accordance with
the Pepsi beverage agreements. Amounts received from PepsiCo for these
transactions are offset by the cost to provide these services and are reflected
in selling, delivery and administrative expenses. We pay a royalty fee to
PepsiCo for the Aquafina trademark.
The Consolidated Statements of Operations include the following income
(expense) amounts as a result of transactions with PepsiCo and its affiliates:
2001 2000 1999
---- ---- ----
Net revenues................................................ $ 262 $ 244 $ 236
Cost of sales............................................... (1,927) (1,626) (1,488)
Selling, delivery and administrative expenses............... 259 266 285
We are not required to pay any minimum fees to PepsiCo, nor are we
obligated to PepsiCo under any minimum purchase requirements. There are no
conditions or requirements that could result in the repayment of any marketing
support payments received by us from PepsiCo.
With respect to PepsiCo's 7% ownership of Bottling Group, LLC, Bottling
Group, LLC guarantees that to the extent there is available cash, it will
distribute pro rata to PepsiCo and PBG sufficient cash such that aggregate cash
distributed to PBG will enable us to pay income taxes and interest on our $1
billion 7% senior notes due 2029.
Net amounts payable to PepsiCo and its affiliates were $17 million at
December 29, 2001 and net amounts receivable from PepsiCo and its affiliates
were $8 million and at December 30, 2000. Such amounts are recorded within
accounts payable and other current liabilities and accounts receivable in our
Consolidated Balance Sheets, respectively.
NOTE 17--CONTINGENCIES
We are involved in a lawsuit with current and former employees
concerning wage and hour issues in New Jersey . We are unable to predict the
amount of any costs or implications of this case at this time as legal
proceedings are ongoing.
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability arising from such claims or
contingencies, if any, in excess of amounts already recognized is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
NOTE 18--ACQUISITIONS
▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇ acquired the operations and exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages from two PepsiCo franchise
bottlers. In May and August of 2001, we acquired Pepsi-Cola Bottling of Northern
California, and Pepsi-Cola Elmira Bottling Co. Inc., respectively, for an
aggregate purchase price of $125 million of cash and assumed debt. In December
2001, we signed a letter of intent to purchase the Pepsi-Cola Bottling Company
of Macon, Inc. The transaction is expected to close in the first quarter of
2002. During 2000, we acquired two territories in Canada for an aggregate
purchase price of $26 million in cash.
These acquisitions were accounted for by the purchase method, and were
made to enable us to provide better service to our large retail customers, as
well as reduce costs through economies of scale. The aggregate purchase price
exceeded the fair value of net tangible assets acquired, including the resulting
tax effect, by approximately $108 million and $14 million in 2001 and 2000,
respectively. The excess was recorded in intangible assets.
53
NOTE 19--COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
shares in thousands
2001 2000 1999
---- ---- ----
Number of shares on which basic earnings per share is based:
Weighted-average outstanding during period....... 286,024 294,294 256,852
Add - Incremental shares under stock
compensation plans............................. 9,655 4,376 --
------- ------- -------
Number of shares on which diluted
earnings per share is based...................... 295,679 298,670 256,852
Basic and diluted net income applicable to
common shareholders............................. $ 305 $ 229 $ 118
Basic earnings per share........................... $ 1.07 $ 0.78 $ 0.46
Diluted earnings per share......................... $ 1.03 $ 0.77 $ 0.46
Diluted earnings per share reflect the potential dilution that could
occur if the stock options from our stock compensation plan were exercised and
converted into common stock that would then participate in net income. The
calculation of earnings per share above reflects the two-for-one stock split as
discussed in Note 3. Our stock price improvement has resulted in $0.04 and $0.01
per share of dilution in 2001 and 2000, respectively.
In 1999, immediately preceding our initial public offering, we had 55
million shares of common stock outstanding. In connection with the offering, we
sold 100 million shares of common stock to the public. Since our initial public
offering, shares outstanding reflect the effect of our share repurchase program,
which began in October 1999. In addition, in November 2001 we executed a
two-for-one stock split in the form of a 100% stock dividend, doubling our
weighted-average shares outstanding. As a result of the stock split in 2001, the
amount of shares authorized by the Board of Directors to be repurchased totals
50 million shares, of which we have repurchased approximately 31 million shares
since the inception of our share repurchase program.
NOTE 20--SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 2002, we acquired the operations and
exclusive right to manufacture, sell and distribute Pepsi-Cola's international
beverages in Turkey for a purchase price of approximately $100 million in cash
and assumed debt.
NOTE 21--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER FULL YEAR
------- ------- ------- ------- ---------
Net revenues.................. $1,647 $2,060 $2,274 $2,462 $8,443
Gross profit.................. 765 952 1,052 1,094 3,863
Operating income.............. 90 217 285 84 676
Net income (1)................ 26 116 150 13 305
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER FULL YEAR
------- ------- ------- ------- ---------
Net revenues.................. $1,545 $1,913 $2,125 $2,399 $7,982
Gross profit.................. 700 880 962 1,035 3,577
Operating income.............. 75 191 256 68 590
Net income.................... 17 85 123 4 229
(1) During 2001, the Canadian Government passed laws reducing federal and
certain provincial corporate income tax rates. These rate changes resulted in
one-time gains of $16 million and $9 million in the second and third quarters of
2001, respectively.
The first, second and third quarters of each year consisted of 12 weeks, while
the fourth quarter consisted of 16 weeks in 2001 and 17 weeks in 2000. The extra
week in fiscal year 2000 contributed $7 million of additional net income to our
fourth quarter and fiscal year 2000 results.
54
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To Our Shareholders:
We are responsible for the preparation, integrity and fair presentation
of the Consolidated Financial Statements, related notes and other information
included in this annual report. The Consolidated Financial Statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and include certain amounts based upon our estimates
and assumptions, as required. Other financial information presented in the
annual report is derived from the Consolidated Financial Statements.
We maintain a system of internal control over financial reporting,
designed to provide reasonable assurance as to the reliability of the
Consolidated Financial Statements, as well as to safeguard assets from
unauthorized use or disposition. The system is supported by formal policies and
procedures, including an active Code of Conduct program intended to ensure
employees adhere to the highest standards of personal and professional
integrity. Our internal audit function monitors and reports on the adequacy of
and compliance with the internal control system, and appropriate actions are
taken to address significant control deficiencies and other opportunities for
improving the system as they are identified.
The Consolidated Financial Statements have been audited and reported on
by our independent auditors, KPMG LLP, who were given free access to all
financial records and related data, including minutes of the meetings of the
Board of Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and appropriate.
The Audit Committee of the Board of Directors, which is composed solely
of outside directors, provides oversight to our financial reporting process and
our controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent auditors and
internal auditors have free access to the Audit Committee.
Although no cost-effective internal control system will preclude all
errors and irregularities, we believe our controls as of December 29, 2001
provide reasonable assurance that our assets are safeguarded.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Senior Vice President Vice President
and Chief Financial Officer and Controller
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
The Pepsi Bottling Group, Inc.:
We have audited the accompanying Consolidated Balance Sheets of The
Pepsi Bottling Group, Inc. as of December 29, 2001 and December 30, 2000, and
the related Consolidated Statements of Operations, Cash Flows and Changes in
Shareholders' Equity for each of the fiscal years in the three-year period ended
December 29, 2001. These Consolidated Financial Statements are the
responsibility of management of The Pepsi Bottling Group, Inc. Our
responsibility is to express an opinion on these Consolidated Financial
Statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the financial position of The Pepsi
Bottling Group, Inc. as of December 29, 2001 and December 30, 2000, and the
results of its operations and its cash flows for each of the fiscal years in the
three-year period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
------------------
New York, New York
January 24, 2002
55
SELECTED FINANCIAL AND OPERATING DATA
in millions, except per share data
2001 2000(1) 1999 1998 1997 1996
FISCAL YEARS ENDED ---- ------- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues....................................... $8,443 $ 7,982 $7,505 $7,041 $ 6,592 $6,603
Cost of sales...................................... 4,580 4,405 4,296 4,181 3,832 3,844
------ ------- ------ ------ ------- ------
Gross profit....................................... 3,863 3,577 3,209 2,860 2,760 2,759
Selling, delivery and administrative expenses...... 3,187 2,987 2,813 2,583 2,425 2,392
Unusual impairment and other charges and credits (2) -- -- (16) 222 -- --
------ ------- ------ ------ ------- ------
Operating income................................... 676 590 412 55 335 367
Interest expense, net.............................. 194 192 202 221 222 225
Foreign currency loss (gain)....................... -- 1 1 26 (2) 4
Minority interest.................................. 41 33 21 -- -- --
------ ------- ------ ------ ------ -----
Income (loss) before income taxes.................. 441 364 188 (192) 115 138
Income tax expense (benefit) (3)(6)................ 136 135 70 (46) 56 89
------ ------- ------ ------ ------ -----
Net income (loss).................................. $ 305 $ 229 $ 118 $ (146) $ 59 $ 49
====== ======= ====== ====== ====== =====
PER SHARE DATA: (5)
Basic earnings (loss) per share.................... $ 1.07 $ 0.78 $ 0.46 $ (1.33)$ 0.54 $ 0.45
Diluted earnings (loss) per share.................. $ 1.03 $ 0.77 $ 0.46 $ (1.33)$ 0.54 $ 0.45
Cash dividend per share............................ $ 0.04 $ 0.04 $ 0.03 -- -- --
Weighted-average basic shares outstanding.......... 286 294 257 110 110 110
Weighted-average diluted shares outstanding........ 296 299 257 110 110 110
OTHER FINANCIAL DATA:
EBITDA (4)......................................... $1,190 $1,061 $ 901 $ 721 $ 774 $ 792
Cash provided by operations........................ 1,005 831 718 625 548 451
Capital expenditures............................... (593) (515) (560) (507) (472) (418)
BALANCE SHEET DATA (AT PERIOD END):
Total assets....................................... $7,857 $7,736 $7,624 $7,322 $ 7,188 $7,052
Long-term debt:
Allocation of PepsiCo long-term debt............ -- -- -- 3,300 3,300 3,300
Due to third parties............................ 3,285 3,271 3,268 61 96 127
------ ------- ------ ------ ------ -----
Total long-term debt 3,285 3,271 3,268 3,361 3,396 3,427
Minority interest.................................. 319 306 278 -- -- --
Advances from PepsiCo.............................. -- -- -- 1,605 1,403 1,162
Accumulated other comprehensive loss............... (370) (254) (223) (238) (184) (102)
Shareholders' equity (deficit)..................... 1,601 1,646 1,563 (238) (184) (102)
(1) Our fiscal year 2000 results were impacted by the inclusion of an extra
week in our fiscal year. The extra week increased net income by $7
million, or $0.02 per share.
(2) Unusual impairment and other charges and credits comprises of the
following:
- $45 million non-cash compensation charge in the second quarter of 1999.
- $53 million vacation accrual reversal in the fourth quarter of 1999.
- $8 million restructuring reserve reversal in the fourth quarter of
1999.
- $222 million charge related to the restructuring of our Russian
bottling operations and the separation of Pepsi-Cola North America's
concentrate and bottling organizations in the fourth quarter of 1998.
(3) 1998 includes a $46 million income tax benefit in the fourth quarter
for the settlement of a disputed claim with the Internal Revenue
Service relating to the deductibility of the amortization of acquired
franchise rights.
(4) Excludes the non-cash component of unusual impairment and other charges
and credits.
(5) Reflects the 2001 two-for-one stock split.
(6) Fiscal year 2001 includes Canada tax law change benefits of $25
million.
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