e10vq
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended March 31, 2007
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-15019
PEPSIAMERICAS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
13-6167838 |
|
|
|
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification Number) |
|
|
|
4000 Dain Rauscher Plaza, 60 South Sixth Street |
|
|
Minneapolis, Minnesota
|
|
55402 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(612) 661-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule
12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is shell company (as defined in Exchange Act Rule 12b-2).
Yes o No þ
As of April 27, 2007, the Registrant had 128,236,919 outstanding shares of common stock, par value
$0.01 per share, the Registrant’s only class of common stock.
PEPSIAMERICAS, INC.
FORM 10-Q
FIRST QUARTER 2007
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
960.2 |
|
|
$ |
848.5 |
|
Cost of goods sold |
|
|
576.0 |
|
|
|
500.7 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
384.2 |
|
|
|
347.8 |
|
Selling, delivery and administrative expenses |
|
|
323.4 |
|
|
|
299.9 |
|
Special charges, net |
|
|
1.4 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
Operating income |
|
|
59.4 |
|
|
|
45.7 |
|
Interest expense, net |
|
|
25.7 |
|
|
|
23.1 |
|
Other expense, net |
|
|
1.2 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
Income before income taxes and equity in net
earnings of nonconsolidated companies |
|
|
32.5 |
|
|
|
20.8 |
|
Income taxes |
|
|
11.9 |
|
|
|
7.9 |
|
Equity in net earnings of nonconsolidated companies |
|
|
— |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
20.6 |
|
|
$ |
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
126.2 |
|
|
|
130.3 |
|
Incremental effect of stock options and awards |
|
|
1.8 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
Diluted |
|
|
128.0 |
|
|
|
132.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
Diluted |
|
|
0.16 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.13 |
|
|
$ |
0.125 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
End of |
|
|
End of |
|
|
|
First Quarter |
|
|
Fiscal Year |
|
|
|
2007 |
|
|
2006 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
98.5 |
|
|
$ |
93.1 |
|
Receivables, net |
|
|
260.2 |
|
|
|
267.1 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
|
100.2 |
|
|
|
104.2 |
|
Finished goods |
|
|
146.4 |
|
|
|
128.8 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
246.6 |
|
|
|
233.0 |
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
95.0 |
|
|
|
81.9 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
700.3 |
|
|
|
675.1 |
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
2,622.4 |
|
|
|
2,576.4 |
|
Accumulated depreciation |
|
|
(1,470.4 |
) |
|
|
(1,437.7 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
1,152.0 |
|
|
|
1,138.7 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
2,028.3 |
|
|
|
2,027.1 |
|
Intangible assets, net |
|
|
299.6 |
|
|
|
299.9 |
|
Other assets |
|
|
67.2 |
|
|
|
66.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,247.4 |
|
|
$ |
4,207.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt, including current maturities of long-term debt |
|
$ |
261.4 |
|
|
$ |
212.9 |
|
Payables |
|
|
209.0 |
|
|
|
189.4 |
|
Other current liabilities |
|
|
285.8 |
|
|
|
291.5 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
756.2 |
|
|
|
693.8 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,489.7 |
|
|
|
1,490.2 |
|
Deferred income taxes |
|
|
247.3 |
|
|
|
243.1 |
|
Other liabilities |
|
|
176.3 |
|
|
|
175.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,669.5 |
|
|
|
2,602.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock ($0.01 par value, 12.5 million shares authorized; no shares issued) |
|
|
— |
|
|
|
— |
|
Common stock ($0.01 par value, 350 million shares authorized; 137.6 million shares
issued - 2007 and 2006) |
|
|
1,277.0 |
|
|
|
1,283.4 |
|
Retained income |
|
|
529.8 |
|
|
|
525.4 |
|
Accumulated other comprehensive income |
|
|
23.9 |
|
|
|
21.7 |
|
Treasury stock, at cost (11.9 million shares and 10.6 million shares, respectively) |
|
|
(252.8 |
) |
|
|
(225.9 |
) |
|
|
|
|
|
|
|
Total
shareholders’ equity |
|
|
1,577.9 |
|
|
|
1,604.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
4,247.4 |
|
|
$ |
4,207.4 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
20.6 |
|
|
$ |
14.1 |
|
Adjustments to reconcile to net cash provided by operating
activities of continuing operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
48.0 |
|
|
|
47.1 |
|
Deferred income taxes |
|
|
0.3 |
|
|
|
(5.0 |
) |
Special charges, net |
|
|
1.4 |
|
|
|
2.2 |
|
Cash outlays related to special charges |
|
|
(7.6 |
) |
|
|
(0.7 |
) |
Pension contributions |
|
|
— |
|
|
|
(10.0 |
) |
Equity in net earnings of nonconsolidated companies |
|
|
— |
|
|
|
(1.2 |
) |
Excess tax benefits from shared-based payment arrangements |
|
|
(1.0 |
) |
|
|
(4.0 |
) |
Other |
|
|
4.4 |
|
|
|
6.6 |
|
Changes in assets and liabilities, exclusive of acquisitions: |
|
|
|
|
|
|
|
|
Decrease (increase) in receivables |
|
|
6.9 |
|
|
|
(1.3 |
) |
Increase in inventories |
|
|
(13.5 |
) |
|
|
(23.1 |
) |
Increase in payables |
|
|
18.9 |
|
|
|
4.1 |
|
Net change in other assets and liabilities |
|
|
(11.7 |
) |
|
|
(13.9 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
66.7 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Franchises and companies acquired, net of cash acquired |
|
|
— |
|
|
|
(6.6 |
) |
Capital investments |
|
|
(60.8 |
) |
|
|
(41.8 |
) |
Proceeds from sales of property |
|
|
2.4 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(58.4 |
) |
|
|
(45.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net borrowings of short-term debt |
|
|
60.0 |
|
|
|
251.7 |
|
Repayment of long-term debt |
|
|
(11.6 |
) |
|
|
(134.7 |
) |
Treasury stock purchases |
|
|
(39.7 |
) |
|
|
(74.6 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
1.0 |
|
|
|
4.0 |
|
Issuance of common stock |
|
|
4.3 |
|
|
|
11.0 |
|
Cash dividends |
|
|
(15.9 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1.9 |
) |
|
|
29.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating cash flows used in discontinued operations |
|
|
(1.0 |
) |
|
|
(3.7 |
) |
Effects of exchange rate changes on cash and cash equivalents |
|
|
— |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
5.4 |
|
|
|
(5.3 |
) |
Cash and cash equivalents at beginning of fiscal year |
|
|
93.1 |
|
|
|
116.0 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of first quarter |
|
$ |
98.5 |
|
|
$ |
110.7 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
PEPSIAMERICAS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Quarterly reporting. The Condensed Consolidated Financial Statements included herein have
been prepared by PepsiAmericas, Inc. (referred to herein as “PepsiAmericas,” “we,” “our” and “us”)
without audit. Certain information and disclosures normally included in financial statements
prepared in accordance with United States generally accepted accounting principles (“GAAP”) have
been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although we believe that the disclosures are adequate to make the information presented
not misleading. The year-end Condensed Consolidated Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by U.S. GAAP. These Condensed
Consolidated Financial Statements should be read in conjunction with the financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year 2006. In the opinion
of management, the information furnished herein reflects all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair statement of results for the interim periods
presented.
Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December
31st. Our 2006 fiscal year contained 52 weeks and ended December 30, 2006. Our first
quarters of 2007 and 2006 were based on the thirteen weeks ended March 31, 2007 and April 1, 2006,
respectively. Our business is seasonal; accordingly, the operating results of any individual
quarter may not be indicative of a full year’s operating results.
Use of accounting estimates. The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and use assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
Fiscal year. Beginning in fiscal year 2007, our Caribbean operations aligned their reporting
calendar with our U.S. operations. Previously, our Caribbean operations fiscal years ended on
December 31. Our U.S. operations report using a fiscal year that consists of 52 or 53 weeks ending
on the Saturday closest to December 31. The change to the Caribbean fiscal year was not material
to our Condensed Consolidated Financial Statements. Our Central Europe operations fiscal years end
on December 31 and therefore are not impacted by the 53rd week.
Earnings per share. Basic earnings per share is based upon the weighted-average number of
common shares outstanding. Diluted earnings per share includes dilutive common stock equivalents
using the treasury stock method.
The following options and restricted stock awards were not included in the computation of
diluted earnings per share because they were antidilutive:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2007 |
|
2006 |
Shares under options outstanding |
|
|
1,337,700 |
|
|
|
— |
|
Weighted-average exercise price per share |
|
$ |
22.63 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Shares under nonvested restricted stock awards |
|
|
965,861 |
|
|
|
953,601 |
|
Weighted-average grant date fair value per share |
|
$ |
22.11 |
|
|
$ |
24.31 |
|
Reclassifications. Certain amounts in the prior period Condensed Consolidated Financial
Statements have been reclassified to conform to the current year presentation.
Recently issued accounting pronouncements. In February 2007, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115.” FASB No. 159 provides guidance on the measurement of financial instruments and
certain other
5
assets and
liabilities at fair value on an instrument-by-instrument basis under a fair value option provided by the FASB. SFAS No. 159
becomes effective at the beginning of fiscal year 2008. We are currently evaluating the impact
SFAS No. 159 will have on our Condensed Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans.” We have adopted the recognition provisions of SFAS No.
158, which required us to fully recognize the funded status associated with our defined benefit
plans. We will also be required to measure our plans’ assets and liabilities as of the end of our
fiscal year instead of our current measurement date of September 30. The measurement date
provisions will be effective as of the end of fiscal year 2008. We do not anticipate that the
impact of the measurement date provisions will have a material impact on our Condensed Consolidated
Financial Statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to provide
enhanced guidance when using fair value to measure assets and liabilities. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about
fair value measurements. SFAS No. 157 applies whenever other pronouncements require or permit
assets or liabilities to be measured by fair value and, while not requiring new fair value
measurements, may change current practices. SFAS No. 157 becomes effective at the beginning of
fiscal year 2008. We are currently evaluating the impact SFAS No. 157 will have on our Condensed
Consolidated Financial Statements.
We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” (“FIN 48”) at the beginning of fiscal year 2007. FIN 48
provides guidance regarding the financial statement recognition and measurement of a tax position
either taken or expected to be taken in a tax return. It requires the recognition of a tax
position if it is more likely than not that position would be sustained during an examination based
on the technical merits of the position. See Note 4 below for additional information, including
the effects of adoption on our Condensed Consolidated Balance Sheet.
2. Special Charges
In the first quarter of 2007, we recorded special charges of $1.2 million in the U.S. related
to our strategic realignment of the U.S. sales organization to further strengthen our customer
focused go-to-market strategy. In addition, we recorded special charges of $0.2 million in Central
Europe, primarily related to a reduction in the workforce. These special charges were primarily
for severance, related benefits and relocation costs.
In the first quarter of 2006, we recorded special charges of $2.2 million in Central Europe,
primarily related to a reduction in the workforce. These special charges were primarily for
severance costs and related benefits.
The following table summarizes activity associated with the special charges (in millions):
|
|
|
|
|
2007 Charges |
|
|
|
|
End of fiscal year 2006 |
|
$ |
11.1 |
|
Special charges, net |
|
|
1.4 |
|
Application of special charges |
|
|
(7.6 |
) |
|
|
|
|
End of the first quarter of 2007 |
|
$ |
4.9 |
|
|
|
|
|
The total accrued liabilities remaining at the end of the first quarter of 2007 were comprised
of deferred severance payments, certain employee benefits, and other costs. We expect the
remaining special charge liability of $4.9 million to be paid using cash from operations during the
next twelve months; accordingly, such amounts are classified as “Other current liabilities” in the
Condensed Consolidated Balance Sheet.
6
3. Interest Expense, Net
Interest expense, net, was comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
Interest expense |
|
$ |
26.2 |
|
|
$ |
23.8 |
|
Interest income |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
25.7 |
|
|
$ |
23.1 |
|
|
|
|
|
|
|
|
4. Income Taxes
The effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, was 36.6 percent for the first quarter of 2007, compared to 38.0 percent in
the first quarter of 2006. The effective income tax rate decreased due in part to the impact of
the mix of our international operations.
We adopted FIN 48 at the beginning of fiscal year 2007. As of result of the implementation,
we recorded a $0.6 million increase to the beginning balance in retained earnings on the Condensed
Consolidated Balance Sheet. At the beginning of fiscal year 2007, we had approximately $25.9
million of total unrecognized tax benefits. Of this total, $15.4 million (net of the federal
benefit on state tax issues and interest) would favorably impact the effective income tax rate in
any future period, if recognized. It is expected that the amount of unrecognized tax benefits for
positions which we have identified will not change significantly in the next twelve months.
Upon adoption of FIN 48, our policy is to recognize interest and penalties related to income
tax matters in income tax expense. Formerly, interest was recorded in interest expense. We had
$4.1 million accrued for interest and no amount accrued for penalties as of the beginning of fiscal
year 2007.
We are subject to U.S. federal income tax, state income tax in multiple state tax
jurisdictions, and foreign income tax in our Central Europe and Caribbean tax jurisdictions. We
have concluded all U.S. federal income tax examinations for years through 2004. Our primary tax
jurisdictions are Illinois, Indiana, Iowa, Romania, Poland and the Czech Republic. The following
table summarizes the years that are subject to examination for each primary jurisdiction:
|
|
|
|
|
Jurisdiction |
|
Subject to Examination |
Federal |
|
|
2005-2006 |
|
Illinois |
|
|
1999-2006 |
|
Indiana |
|
|
2003-2006 |
|
Iowa |
|
|
2003-2006 |
|
Romania |
|
|
2002-2006 |
|
Poland |
|
|
2001-2006 |
|
Czech Republic |
|
|
2003-2006 |
|
The amounts recorded for unrecognized tax benefits, interest and penalties did not materially
change during the first quarter of 2007.
5. Comprehensive Income
Comprehensive income was comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
20.6 |
|
|
$ |
14.1 |
|
Foreign currency translation adjustment |
|
|
2.2 |
|
|
|
3.1 |
|
Net unrealized investment and hedging losses |
|
|
— |
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
22.8 |
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
Net unrealized investment and hedging losses are presented net of income tax benefit $2.1
million in the first quarter of 2006.
7
6. Goodwill and Intangible Assets
The changes in the carrying value of goodwill by geographic segment for the first quarter of
2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Europe |
|
|
Caribbean |
|
|
Total |
|
Balance at end of fiscal year 2006 |
|
$ |
1,825.2 |
|
|
$ |
185.7 |
|
|
$ |
16.2 |
|
|
$ |
2,027.1 |
|
Purchase accounting adjustments |
|
|
(0.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of first quarter of 2007 |
|
$ |
1,824.8 |
|
|
$ |
187.3 |
|
|
$ |
16.2 |
|
|
$ |
2,028.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of First |
|
|
End of Fiscal |
|
|
|
Quarter 2007 |
|
|
Year 2006 |
|
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
3.3 |
|
|
$ |
3.3 |
|
Customer relationships and lists |
|
|
8.0 |
|
|
|
8.0 |
|
Other |
|
|
2.9 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14.2 |
|
|
$ |
14.2 |
|
Accumulated amortization |
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
(0.9 |
) |
|
$ |
(0.9 |
) |
Customer relationships and lists |
|
|
(1.5 |
) |
|
|
(1.3 |
) |
Other |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(3.1 |
) |
|
$ |
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization, net |
|
$ |
11.1 |
|
|
$ |
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
288.5 |
|
|
$ |
288.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
299.6 |
|
|
$ |
299.9 |
|
|
|
|
|
|
|
|
Total amortization expense was $0.3 million and $0.2 million in the first quarter of 2007 and
2006, respectively.
In fiscal year 2006, we acquired the remaining 51 percent interest in Quadrant-Amroq Bottling
Company Limited (“QABCL”), resulting in an increase in goodwill in Central Europe of $148.8
million. This preliminary allocation included the goodwill that was associated with the first step
of the acquisition completed in fiscal year 2005. This initial investment was recorded
under the equity method in accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock,” and this amount was previously recorded in “Other assets” on the
Condensed Consolidated Balance Sheet. We are in the process of valuing the assets, liabilities and
intangibles acquired in connection with the acquisition. We anticipate that the valuation will be
completed in the second quarter of 2007.
In the first quarter of 2006, we acquired Ardea Beverage Co., resulting in an allocation of
$7.7 million to goodwill and $2.4 million to other intangibles. The process of valuing the assets,
liabilities and intangibles acquired in connection with the Ardea acquisition was completed in the
second quarter of 2006.
7. Acquisitions
In fiscal year 2006, we acquired the remaining 51 percent of the outstanding stock of QABCL
for $81.9 million, net of $17.0 million cash acquired. We acquired $55.4 million of debt as part
of the acquisition, of which $51.1 million was repaid in December 2006. QABCL is a holding company
that, through subsidiaries, produces, sells and distributes Pepsi and other beverages throughout
Romania with distribution rights in Moldova. In fiscal year 2005, we had initially acquired 49
percent of the outstanding stock of QABCL for $51.0 million. The increase in the purchase price
for the remainder of QABCL compared to the original investment was
due to the improved operating performance subsequent to the initial acquisition of our 49 percent minority interest. Due to the
timing of the receipt of available financial information from QABCL, we record results from such
operations on a one-month lag basis.
8
In the first quarter of 2006, we completed the acquisition of Ardea Beverage Co., the maker of
the airforce Nutrisoda line of soft drinks, for $6.6 million in cash plus $3.6 million of
additional consideration that will be paid over the next three years.
The results of operations for the acquisitions described above are included in the Condensed
Consolidated Statements of Income since the respective dates of acquisition. These acquisitions
are not material to our consolidated results of operations; therefore, pro forma financial
information is not included in this note.
8. Debt
In the first quarter of 2007, we paid $11.6 million at maturity of the 8.25 percent note due
February 2007. We had $214.0 million of commercial paper borrowings at the end of the first
quarter of 2007, compared to $164.5 million at the end of fiscal year 2006. The increase in
commercial paper borrowings was primarily for capital expenditures, the funding of maturing debt
and general corporate purposes.
9. Financial Instruments
We use derivative financial instruments to reduce our exposure to adverse fluctuations in
commodity prices and interest rates. These financial instruments are “over-the-counter”
instruments. We do not use derivative financial instruments for speculative or trading purposes.
Cash Flow Hedges – In anticipation of a long-term debt issuance, we had entered into treasury
rate lock instruments and a forward starting swap agreement. We accounted for these treasury rate
lock instruments and forward starting swap agreement as cash flow hedges, as each hedged against
the variability of interest payments attributable to changes in interest rates on the forecasted
issuance of fixed-rate debt. These treasury rate locks and forward starting swap agreement are
considered highly effective in eliminating the variability of cash flows associated with the
forecasted debt issuance.
The following table summarizes the net derivative gains or losses deferred in “Accumulated
other comprehensive income” and reclassified to earnings in the first quarter of 2007 and 2006 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
Unrealized losses on derivatives at the end of fiscal year 2006 |
|
$ |
(3.3 |
) |
|
$ |
(2.4 |
) |
Deferral of net derivative gains in accumulated other
comprehensive income |
|
|
— |
|
|
|
0.2 |
|
Reclassification of net derivative gains (losses)
to income |
|
|
0.4 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
Unrealized losses on derivatives at end of first quarter |
|
$ |
(2.9 |
) |
|
$ |
(2.7 |
) |
|
|
|
|
|
|
|
Fair Value Hedges – Periodically, we enter into interest rate swap contracts to convert a
portion of our fixed rate debt to floating rate debt, with the objective of reducing overall
borrowing costs. We account for these swaps as fair value hedges, since they hedge against the
change in fair value of fixed rate debt resulting from fluctuations in interest rates. In fiscal
year 2004, we terminated all outstanding interest rate swap contracts and received $14.4 million
for the fair value of the interest rate swap contracts. Amounts included in the cumulative fair
value adjustment to long-term debt will be reclassified into earnings commensurate with the
recognition of the related interest expense. At the end of the first quarter of 2007 and the end
of fiscal year 2006, the cumulative fair value adjustments to long-term debt were $5.5 million and
$6.1 million, respectively.
Derivatives not Designated as Hedges – In the first quarter of 2007, we entered into heating
oil swap contracts to hedge against volatility in future cash flows on anticipated purchases of
diesel fuel. These derivative financial instruments were not designated as hedging instruments,
and therefore we record unrealized gains and losses in the Condensed Consolidated Statement of
Income. Realized gains and losses are recorded in cost of goods sold and selling, delivery &
administrative (“SD&A”) expenses where the associated diesel fuel purchases are
9
recorded. Unrealized gains and losses are recorded in SD&A expenses. During the first quarter of 2007, $0.1
million of realized gains were recorded in cost of goods sold and $3.8 million of unrealized gains
were recorded in SD&A expenses.
Amounts recorded for all derivatives on the Condensed Consolidated Balance Sheets are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
End of First |
|
End of Fiscal |
|
|
Quarter 2007 |
|
Year 2006 |
Unrealized gains: |
|
|
|
|
|
|
|
|
Commodities |
|
$ |
3.8 |
|
|
$ |
— |
|
Interest rate instruments |
|
|
7.5 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
Unrealized losses: |
|
|
|
|
|
|
|
|
Commodities |
|
$ |
— |
|
|
$ |
(0.6 |
) |
Interest rate instruments |
|
|
(6.5 |
) |
|
|
(6.8 |
) |
10. Pensions
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
0.8 |
|
|
$ |
0.9 |
|
Interest cost |
|
|
2.6 |
|
|
|
2.5 |
|
Expected return on plan assets |
|
|
(3.7 |
) |
|
|
(3.5 |
) |
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.1 |
|
Amortization of net loss |
|
|
0.7 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
0.5 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
We previously disclosed in our financial statements for fiscal year 2006 that we expected to
contribute $0.7 million to our plans in fiscal year 2007. As of the end of the first quarter of
2007, we have not made any contributions to the plans; however, we expect the minimum contribution
will be made during the remainder of fiscal year 2007. We will continue to evaluate the plans’
funding requirements throughout the balance of fiscal year 2007, and we will fund to levels deemed
necessary for the plans.
11. Share-Based Compensation
In February 2007, we granted 990,278 restricted shares at a weighted-average fair value (at
the date of grant) of $22.11 to key members of U.S. and Caribbean management and members of our
Board of Directors under our 2000 Stock Incentive Plan (the “Plan”). We recognized compensation
expense of $4.5 million and $3.7 million in the first quarter of 2007 and 2006, respectively,
related to grants made in 2007 and previous years. At the end of the first quarter 2007, there
were 2,542,989 unvested restricted shares outstanding.
In February 2007, we granted 83,675 restricted stock units at a weighted average value of
$22.11 on the date of grant to key members of our Central Europe management team under the Plan.
We recognized compensation expense of $0.4 million and $0.2 million in the first quarter of 2007
and 2006, respectively, related to restricted stock unit grants made in 2007 and previous years.
At the end of the first quarter of 2007, there were 227,765 unvested restricted stock units
outstanding.
10
12. Supplemental Cash Flow Information
Net cash provided by operating activities reflected cash payments and receipts for interest
and income taxes as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2007 |
|
2006 |
Interest paid |
|
$ |
22.2 |
|
|
$ |
26.3 |
|
Interest received |
|
|
0.5 |
|
|
|
0.7 |
|
Income taxes paid, inclusive of refunds received |
|
|
10.2 |
|
|
|
1.2 |
|
13. Environmental and Other Commitments and Contingencies
Current Operations. We maintain compliance with federal, state and local laws and regulations
relating to materials used in production and to the discharge of wastes, and other laws and
regulations relating to the protection of the environment. The capital costs of such management and
compliance, including the modification of existing plants and the installation of new manufacturing
processes, are not material to our continuing operations.
We are defendants in lawsuits that arise in the ordinary course of business, none of which is
expected to have a material adverse effect on our financial condition, although amounts recorded in
any given period could be material to the results of operations or cash flows for that period.
We participate in a number of trustee-managed multi-employer pension and health and welfare
plans for employees covered under collective bargaining agreements. Several factors, including
unfavorable investment performance, changes in demographics and increased benefits to participants
could result in potential funding deficiencies, which could cause us to make higher future
contributions to these plans.
Discontinued Operations – Remediation. Under the agreement pursuant to which we sold our
subsidiaries, Abex Corporation and Pneumo Abex Corporation (collectively, “Pneumo Abex”), in 1988
and a subsequent settlement agreement entered into in September 1991, we have assumed
indemnification obligations for certain environmental liabilities of Pneumo Abex, after any
insurance recoveries. Pneumo Abex has been and is subject to a number of environmental cleanup
proceedings, including responsibilities under the Comprehensive Environmental Response,
Compensation and Liability Act and other related federal and state laws regarding release or
disposal of wastes at on-site and off-site locations. In some proceedings, federal, state and local
government agencies are involved and other major corporations have been named as potentially
responsible parties. Pneumo Abex is also subject to private claims and lawsuits for remediation of
properties previously owned by Pneumo Abex and its subsidiaries.
There is an inherent uncertainty in assessing the total cost to investigate and remediate a
given site. This is because of the evolving and varying nature of the remediation and allocation
process. Any assessment of expenses is more speculative in an early stage of remediation and is
dependent upon a number of variables beyond the control of any party. Furthermore, there are often
timing considerations, in that a portion of the expense incurred by Pneumo Abex, and any resulting
obligation of ours to indemnify Pneumo Abex, may not occur for a number of years.
In fiscal year 2001, we investigated the use of insurance products to mitigate risks related
to our indemnification obligations under the 1988 agreement, as amended. The insurance carriers
required that we employ an outside consultant to perform a comprehensive review of the former
facilities operated or impacted by Pneumo Abex. Advances in the techniques of retrospective risk
evaluation and increased experience (and therefore available data) at our former facilities made
this comprehensive review possible. The consultant’s review was completed in fiscal year 2001 and
was updated in the fourth quarter of fiscal year 2005. We have recorded our best estimate of our
probable liability under our indemnification obligations using this consultant’s review and the
assistance of other professionals.
At the end of the first quarter of 2007, we had $53.0 million accrued to cover potential
indemnification obligations, compared to $60.3 million recorded at the end of fiscal year 2006.
This indemnification obligation includes costs associated with approximately 15 sites in various
stages of remediation or negotiations. At the present time, the most significant remaining
indemnification obligation is associated with the Willits site, as discussed below, while no other
single site has significant estimated remaining costs associated with it. Of the total amount
accrued, $26.2 million was classified as a current liability at the end of the first quarter of
2007 and at the end of fiscal year 2006. The amounts exclude possible insurance recoveries and are determined on
an undiscounted cash flow basis. The estimated indemnification liabilities include
11
expenses for
the investigation and remediation of identified sites, payments to third parties for claims and
expenses (including product liability and toxic tort claims), administrative expenses, and the
expenses of on-going evaluations and litigation. We expect a significant portion of the accrued
liabilities will be resolved during the next 5 years.
Included in our indemnification obligations is financial exposure related to certain remedial
actions required at a facility that manufactured hydraulic and related equipment in Willits,
California. Various chemicals and metals contaminate this site. In August 1997, a final consent
decree was issued in the case of the People of the State of California and the City of Willits,
California v. Remco Hydraulics, Inc. This final consent decree was amended in December 2000 and
established a trust (the “Willits Trust”) which is obligated to investigate and clean up this site.
We are currently funding the Willits Trust and the investigation and interim remediation costs on a
year-to-year basis as required in the final amended consent decree. We have accrued $18.6 million
for future remediation and trust administration costs, with the majority of this amount to be spent
over the next several years.
Although we have certain indemnification obligations for environmental liabilities at a number
of sites other than the site discussed above, including Superfund sites, it is not anticipated that
additional expense at any specific site will have a material effect on us. At some sites, the
volumetric contribution for which we have an obligation has been estimated and other large,
financially viable parties are responsible for substantial portions of the remainder. In our
opinion, based upon information currently available, the ultimate resolution of these claims and
litigation, including potential environmental exposures, and considering amounts already accrued,
should not have a material effect on our financial condition, although amounts recorded in a given
period could be material to our results of operations or cash flows for that period.
Discontinued Operations–Insurance. During fiscal year 2002, as part of a comprehensive
program concerning environmental liabilities related to the former Whitman Corporation
subsidiaries, we purchased new insurance coverage related to the sites previously owned and
operated or impacted by Pneumo Abex and its subsidiaries. In addition, a trust, which was
established in 2000 with the proceeds from an insurance settlement (the “Trust”), purchased
insurance coverage and funded coverage for remedial and other costs (“Finite Funding”) related to
the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries.
Essentially all of the assets of the Trust were expended by the Trust in connection with the
purchase of the insurance coverage, the Finite Funding and related expenses. These actions have
been taken to fund remediation and related costs associated with the sites previously owned and
operated or impacted by Pneumo Abex and its subsidiaries and to protect against additional future
costs in excess of our self-insured retention. The original amount of self-insured retention (the
amount we must pay before the insurance carrier is obligated to begin payments) was
$114.0 million of which $45.0 million has been eroded, leaving a remaining self-insured
retention of $69.0 million at the end of the first quarter of 2007. The estimated range of
aggregate exposure related only to the remediation costs of such environmental liabilities is
approximately $25 million to $45 million. We had accrued $26.3 million at the end of the first
quarter of 2007 for remediation costs, which is our best estimate of the contingent liabilities
related to these environmental matters. The Finite Funding may be used to pay a portion of the
$26.3 million and thus reduces our future cash obligations. Amounts recorded in our Condensed
Consolidated Balance Sheets related to Finite Funding were $13.2 million and $13.7 million at the
end of the first quarter of 2007 and the end of fiscal year 2006, respectively, and are recorded in
“Other assets,” net of $4.2 million recorded in “Other current assets” in each respective period.
In addition, we had recorded other receivables of $2.6 million and $7.8 million at the end of
the first quarter of 2007 and at the end of fiscal year 2006, respectively, for future probable
amounts to be received from insurance companies and other responsible parties. These amounts were
recorded in “Other assets” in the Condensed Consolidated Balance Sheets as of the end of each
respective period. Of this total, no portion of the receivable was reflected as current as of the
first quarter of 2007 and at the end of fiscal year 2006.
On May 31, 2005, Cooper Industries, LLC (“Cooper”) filed and later served a lawsuit against
us, Pneumo Abex, LLC, and the Trustee of the Trust (the “Trustee”), captioned Cooper Industries,
LLC v. PepsiAmericas, Inc., et al., Case No. 05 CH 09214 (Cook Cty. Cir. Ct.). The claims involve
the Trust and insurance policy described above. Cooper asserts that it was entitled to access $34
million that previously was in the Trust and that was used to purchase the insurance policy.
Cooper claims that Trust funds should have been distributed for underlying Pneumo Abex asbestos
claims indemnified by Cooper. Cooper complains that it was deprived of access to money in the
Trust because of the Trustee’s decision to use the Trust funds to purchase the insurance policy
described above. Pneumo Abex, LLC, the corporate successor to our prior subsidiary, has been
dismissed from the suit.
12
During the second quarter of 2006, the Trustee’s motion to dismiss, in which we had joined,
was granted and three counts against us based on the use of Trust funds were dismissed with
prejudice, as were all counts against the Trustee, on the grounds that Cooper lacks standing to
pursue these counts because it is not a beneficiary under the Trust. We then filed a separate
motion to dismiss the remaining counts against us. Our motion was granted during the third quarter
of 2006 and all remaining counts against us were dismissed with prejudice. Cooper subsequently
filed a notice of appeal with regard to all rulings by the court dismissing the counts against us
and the Trustee. Briefing of Cooper’s appeal is expected to take place during the first half of
fiscal year 2007.
Discontinued Operations–Product Liability and Toxic Tort Claims. We also have certain
indemnification obligations related to product liability and toxic tort claims that might emanate
out of the 1988 agreement with Pneumo Abex. Other companies not owned by or associated with us also
are responsible to Pneumo Abex for the financial burden of all asbestos product liability claims
filed against Pneumo Abex after a certain date in 1998, except for certain claims indemnified by
us. The sites and product liability and toxic tort claims included in the aggregate accrued
liabilities we have recorded are described more fully in our Annual Report on Form 10-K for the
fiscal year 2006. No significant changes in the status of those sites or claims occurred and we
were not notified of any significant new sites or claims during the first quarter of 2007.
14. Segment Reporting
We operate in one industry located in three geographic areas – the U.S., Central
Europe and the Caribbean. We operate in 19 states in the U.S. Outside the U.S., we operate in
Poland, Hungary, the Czech Republic, Republic of Slovakia, Romania, Puerto Rico, Jamaica, the
Bahamas and Trinidad and Tobago. We have distribution rights in Moldova, Estonia, Latvia,
Lithuania and Barbados. Net sales and operating income for Ardea are included in the U.S.
geographic segment and for QABCL are included in the Central Europe geographic segment since their
respective dates of consolidation.
The following tables present net sales and operating income (loss) of our geographic segments
for the first quarter of 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
Net Sales |
|
|
Operating Income (Loss) |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
U.S. |
|
$ |
764.9 |
|
|
$ |
728.4 |
|
|
$ |
60.4 |
|
|
$ |
57.7 |
|
Central Europe |
|
|
143.0 |
|
|
|
68.4 |
|
|
|
1.0 |
|
|
|
(11.0 |
) |
Caribbean |
|
|
52.3 |
|
|
|
51.7 |
|
|
|
(2.0 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
960.2 |
|
|
$ |
848.5 |
|
|
$ |
59.4 |
|
|
$ |
45.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Related Party Transactions
We are a licensed producer and distributor of PepsiCo branded carbonated and non-carbonated
soft drinks and other non-alcoholic beverages in the U.S., Central Europe and the Caribbean. We
operate under exclusive franchise agreements with soft drink concentrate producers, including
“master” bottling and fountain syrup agreements with PepsiCo, Inc. (“PepsiCo”) for the manufacture,
packaging, sale and distribution of PepsiCo branded products. The franchise agreements exist in
perpetuity, with the exception of QABCL, and contain operating and marketing commitments and
conditions for termination. As of the end of the first quarter of 2007, PepsiCo beneficially owned
approximately 45 percent of PepsiAmericas’ outstanding common stock.
We purchase concentrate from PepsiCo to be used in the production of PepsiCo branded
carbonated soft drinks and other non-alcoholic beverages. PepsiCo also provides us with various
forms of bottler incentives (marketing support programs) to promote their brands. These bottler
incentives cover a variety of initiatives, including direct marketplace, shared media and
advertising support, to support volume and market share growth. There are no conditions or
requirements that could result in the repayment of any support payments we have received.
We manufacture and distribute fountain products and provide fountain equipment service to
PepsiCo customers in certain territories in accordance with various agreements. There are other
products that we produce and/or distribute through various arrangements with PepsiCo or partners of
PepsiCo. We also purchase finished beverage products from PepsiCo and certain of its affiliates
including tea, concentrate and finished beverage products from a Pepsi/Lipton partnership, as well
as finished beverage products from a Pepsi/Starbucks partnership.
13
PepsiCo provides procurement services to us pursuant to a shared services agreement. Under
such agreement, PepsiCo acts as our agent and negotiates with various suppliers the cost of certain
raw materials by entering into raw material contracts on our behalf. PepsiCo also collects and
remits to us certain rebates from the various suppliers related to our procurement volume. In
addition, PepsiCo acts as our agent for the execution of derivative contracts associated with
certain anticipated raw material purchases.
We have an existing arrangement with a subsidiary of the Pohlad Companies related to the joint
ownership of an aircraft. This transaction is not material to our Condensed Consolidated Financial
Statements. Robert C. Pohlad, our Chairman and Chief Executive Officer, is the President and owner
of approximately 33 percent of the capital stock of Pohlad Companies.
See additional discussion of our related party transactions in our Annual Report on Form 10-K
for the fiscal year 2006.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements of expected
future developments, as defined in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements in this Form 10-Q refer to the expectations regarding continuing
operating improvement and other matters. These forward-looking statements reflect our expectations
and are based on currently available data; however, actual results are subject to future risks and
uncertainties, which could materially affect actual performance. Risks and uncertainties that
could affect such performance include, but are not limited to, the following: competition,
including product and pricing pressures; changing trends in consumer tastes; changes in our
relationship and/or support programs with PepsiCo and other brand owners; market acceptance of new
product and package offerings; weather conditions; cost and availability of raw materials; changing
legislation; outcomes of environmental claims and litigation; availability of capital including
changes in our debt ratings; labor and employee benefit costs; unfavorable interest rate and
currency fluctuations; costs of legal proceedings; and general economic, business and political
conditions in the countries and territories where we operate. See “Risk Factors” in Item 1A. of our
Annual Report on Form 10-K for the fiscal year 2006 for additional information.
These events and uncertainties are difficult or impossible to predict accurately and many are
beyond our control. We assume no obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated events.
CRITICAL ACCOUNTING POLICIES
The preparation of the Condensed Consolidated Financial Statements in conformity with United
States generally accepted accounting principles requires management to use estimates. These
estimates are made using management’s best judgment and the information available at the time these
estimates are made, including the advice of outside experts. For a better understanding of our
significant accounting policies used in preparation of the Condensed Consolidated Financial
Statements, please refer to our Annual Report on Form 10-K for fiscal year 2006. We focus your
attention on the following critical accounting policies:
Recoverability of Goodwill and Intangible Assets with Indefinite Lives. Goodwill and
intangible assets with indefinite useful lives are not amortized, but instead tested
annually for impairment or more frequently if events or changes in circumstances indicate
that an asset might be impaired.
Goodwill is tested for impairment using a two-step approach at the reporting unit level:
U.S., Central Europe and the Caribbean. First, we estimate the fair value of the
reporting units primarily using discounted estimated future cash flows. If the carrying
value exceeds the fair value of the reporting unit, the second step of the goodwill
impairment test is performed to measure the amount of the potential loss. Goodwill
impairment is measured by comparing the “implied fair value” of goodwill with its carrying
amount.
Our identified intangible assets with indefinite lives principally arise from the
allocation of the purchase price of businesses acquired and consist primarily of franchise
and distribution agreements. Impairment is measured as the amount by which the carrying
value of the intangible asset exceeds its estimated fair value. The estimated fair value
is generally determined on the basis of discontinued future cash flows.
The impairment evaluation requires the use of considerable management judgment to
determine the fair value of the goodwill and intangible assets with indefinite lives using
discounted future cash flows, including estimates and assumptions regarding the amount and
timing of cash flows, cost of capital and growth rates.
Environmental Liabilities. We continue to be subject to certain indemnification
obligations under agreements related to previously sold subsidiaries, including potential
environmental liabilities (see Note 13 to the Condensed Consolidated Financial
Statements). We have recorded our best estimate of our probable liability under those
indemnification obligations, with the assistance of outside consultants and other
professionals. The estimated indemnification liabilities include expenses for the
remediation of identified sites, payments to third parties for claims and expenses
(including product liability and toxic tort claims), administrative expenses, and the
expense of on-going
15
evaluations
and litigation. Such estimates and the recorded liabilities are subject to various factors, including possible
insurance recoveries, the allocation of liabilities among other potentially responsible
parties, the advancement of technology for means of remediation, possible changes in the
scope of work at the contaminated sites, as well as possible changes in related laws,
regulations, and agency requirements. We do not discount environmental liabilities.
Income Taxes. Our effective income tax rate is based on income, statutory tax rates and
tax planning opportunities available to us in the various jurisdictions in which we
operate. We have established valuation allowances against a portion of the non–U.S. net
operating losses and state-related net operating losses to reflect the uncertainty of our
ability to fully utilize these benefits given the limited carryforward periods permitted
by the various jurisdictions. The evaluation of the realizability of our net operating
losses requires the use of considerable management judgment to estimate the future taxable
income for the various jurisdictions, for which the ultimate amounts and timing of such
estimates may differ. The valuation allowance can also be impacted by changes in the tax
regulations.
Significant judgment is required in determining our unrecognized tax benefits. We have
recorded amounts related to unrecognized tax benefits using management’s best judgment and
adjust these liabilities as warranted by changing facts and circumstances. A change in our
tax liabilities in any given period could have a significant impact on our results of
operations and cash flows for that period.
Casualty Insurance Costs. Due to the nature of our business, we require insurance
coverage for certain casualty risks. We are self-insured for workers’ compensation,
product and general liability up to $1 million per occurrence and automobile liability up
to $2 million per occurrence. The casualty insurance costs for our self-insurance program
represent the ultimate net cost of all reported and estimated unreported losses incurred
during the period. We do not discount casualty insurance liabilities.
Our liability for casualty costs is estimated using individual case-based valuations and
statistical analyses and is based upon historical experience, actuarial assumptions and
professional judgment. These estimates are subject to the effects of trends in loss
severity and frequency and are based on the best data available to us. These estimates,
however, are also subject to a significant degree of inherent variability. We evaluate
these estimates with our actuarial advisors on an annual basis and we believe that they
are appropriate and within acceptable industry ranges, although an increase or decrease in
the estimates or economic events outside our control could have a material impact on our
results of operations and cash flows. Accordingly, the ultimate settlement of these costs
may vary significantly from the estimates included in our Condensed Consolidated Financial
Statements.
16
RESULTS OF OPERATIONS
2007 FIRST QUARTER COMPARED WITH 2006 FIRST QUARTER
BUSINESS OVERVIEW
PepsiAmericas, Inc. (“we”, “our” or “us”) manufactures, distributes, and markets a broad
portfolio of beverage products in the U.S., Central Europe and the Caribbean. We sell a variety of
brands that we bottle under franchise agreements with various brand owners, the majority with
PepsiCo or PepsiCo joint ventures. In some territories, we manufacture, package, sell and
distribute our own brands, such as Toma brands in Central Europe. We operate in a significant
portion of a 19 state region in the U.S. In Central Europe, we serve Poland, Hungary, the Czech
Republic, Republic of Slovakia, and Romania, with distribution rights in Moldova, Estonia, Latvia
and Lithuania. In the Caribbean, our territories include Puerto Rico, Jamaica, the Bahamas, and
Trinidad and Tobago, with distribution rights in Barbados. Management’s Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and accompanying Notes in this Form 10-Q and our Annual
Report on Form 10-K for the year ended December 30, 2006.
In the discussions of our results of operations below, the number of bottle and can cases sold
is referred to as volume. Constant territory refers to the results of operations excluding
acquisitions. Net pricing is net sales divided by the number of cases and gallons sold for our
core businesses, which include bottles and cans (including bottle and can volume from vending
equipment sales), as well as food service. Changes in net pricing include the impact of sales
price (or rate) changes, as well as the impact of foreign currency translation and brand, package
and geographic mix. Net pricing and reported volume amounts exclude contract, commissary, and
vending (other than bottles and cans) revenue and volume. Contract sales represent sales of
manufactured product to other franchise bottlers and typically decline as excess manufacturing
capacity is utilized. Net pricing and volume also exclude activity associated with beer and snack
food products. Cost of goods sold per unit is the cost of goods sold for our core businesses
divided by the related number of cases and gallons sold.
Seasonality
Our business is seasonal; accordingly, the operating results of any individual quarter may not
be indicative of a full year’s operating results.
Items Impacting Comparability
Acquisition
Quadrant-Amroq Bottling Company Limited (“QABCL”) is a holding company that through its
subsidiaries produces, sells and distributes Pepsi and other beverages throughout Romania and also
has distribution rights in Moldova. In June 2005, we acquired a 49 percent interest in QABCL for a
purchase price of $51.0 million. This initial investment was recorded under the equity method in
accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock” and was included in “Other Assets” in the Condensed Consolidated Balance Sheet. We
recorded our share of QABCL earnings in “Equity in net earnings of nonconsolidated companies” in
the Condensed Consolidated Statement of Income. Equity in net earnings of nonconsolidated
companies was $1.2 million in the first quarter of 2006.
In July 2006, we acquired the remaining 51 percent interest in QABCL for a purchase price of
$81.9 million, net of $17.0 million cash received. We acquired $55.4 million of debt as part of
the acquisition, of which $51.1 million was repaid in December 2006. QABCL is now a wholly-owned
subsidiary which was consolidated in the third quarter of 2006. The increased purchase price for
the remainder of QABCL was due to the improved operating performance subsequent to the initial
acquisition of our 49 percent minority investment. Due to the timing of the receipt of available
financial information from QABCL, we record results on a one-month lag basis.
Special Charges
In the first quarter of 2007, we recorded special charges of $1.2 million in the U.S. related
to our strategic realignment of the U.S. sales organization to further strengthen our customer
focused go-to-market strategy. In addition, we recorded special charges of $0.2 million in Central
Europe. These special charges were primarily for severance, related benefits and relocation costs.
17
In the first quarter of 2006, we recorded special charges of $2.2 million in Central Europe,
primarily related to a reduction in the workforce. These special charges were primarily for
severance costs and related benefits.
Financial Results
Net income in the first quarter of 2007 was $20.6 million, or $0.16 per diluted common share,
compared to net income of $14.1 million, or $0.11 per diluted common share, in the first quarter of
2006. The acquisition of QABCL had an incremental impact of $0.02 per diluted common share in the
first quarter of 2007. Approximately half of that impact was due to favorable foreign currency
translation. We also entered into derivative instruments in the first quarter of 2007 to manage
the risks associated with variations in the price of diesel fuel. An unrealized gain reflecting
the change in the fair value of these instruments had an incremental impact of $0.02 per diluted
common share. The remainder of the increase in diluted earnings per share resulted from organic
growth in both the U.S. and Central Europe.
We achieved volume growth and net price increases in both the U.S. and Central European
markets. The increases in net pricing offset cost of goods sold increases caused by higher
ingredient costs. In the U.S., we continued to show growth in non-carbonated beverages, which
accounted for 19 percent of our portfolio during the first quarter of 2007. On a constant
territory basis, volume in Central Europe grew 14 percent during the first quarter of 2007 due to
growth in both carbonated soft drinks and non-carbonated beverages. QABCL was incremental to
growth in volume, net sales and operating income.
2007 Outlook
In fiscal year 2007, we expect diluted earnings per share to be in the range of $1.33 to
$1.37, including an estimated impact of $0.02 to $0.03 for special charges related to the
reorganization of our U.S. business. We expect worldwide volume to increase in the range of 5 to 6
percent, and to improve average net selling price by 3 to 4 percent. We expect cost of goods sold
per unit to increase approximately 4 percent, and selling, delivery and administrative (“SD&A”)
expenses to be higher by 7 to 8 percent compared to fiscal year 2006. Overall, we expect to
generate operating income growth of 4 to 7 percent. This growth target is based on operating
income that excludes the impact of special charges. The outlook described above includes the
full-year impact of the QABCL acquisition, which is expected to contribute 4 to 5 percent growth in
volume, lower both net selling price and cost of goods sold per unit by one percentage point, and
increase SD&A expenses by 3 percentage points.
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the first quarter 2007 compared
to the first quarter of 2006.
Volume
Sales volume growth (declines) for the first quarter of 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
As reported |
|
2007 |
|
2006 |
U.S. |
|
|
0.6 |
% |
|
|
(2.0 |
%) |
Central Europe |
|
|
81.1 |
% |
|
|
2.0 |
% |
Caribbean |
|
|
(6.4 |
%) |
|
|
4.6 |
% |
Worldwide |
|
|
10.6 |
% |
|
|
(1.1 |
%) |
|
|
|
|
|
|
|
|
|
Constant territory |
|
2007 |
|
2006 |
U.S. |
|
|
0.6 |
% |
|
|
(2.0 |
%) |
Central Europe |
|
|
14.0 |
% |
|
|
2.0 |
% |
Caribbean |
|
|
(6.4 |
%) |
|
|
4.6 |
% |
Worldwide |
|
|
1.9 |
% |
|
|
(1.1 |
%) |
In the first quarter of 2007, worldwide volume increased 10.6 percent compared to the prior
year first quarter. The increase in volume was primarily due to growth in Central Europe and the
impact of the QABCL acquisition.
In the first quarter of 2007, U.S. volume increased 0.6 percent compared to the first quarter
of 2006 due to an increase in non-carbonated beverages volume, product innovation and a lower rate
of volume decline for carbonated soft drinks. The non-carbonated
beverage category
18
grew 20 percent and was approximately 19 percent
of the total volume. The tea category, which grew approximately 60
percent, continues to be a significant
contributor to non-carbonated beverage growth. Aquafina volume grew 16 percent in the first
quarter of 2007, and although growth was lower than the first quarter of 2006, it was in line with
expectations. Innovation, such as Aquafina Alive, contributed to non-carbonated volume growth.
Carbonated soft drink volume declined 3 percent during the quarter, which was an improvement
compared to the 6 percent decline in the first quarter of 2006. Volume declines in both Trademark
Pepsi and Trademark Mountain Dew were partly offset by the successful launch of Diet Pepsi Jazz
Caramel Cream. Innovations in carbonated soft drinks, including the restaging of Trademark Diet
Pepsi and the introduction of Diet Pepsi Max, are anticipated to contribute positively to
carbonated soft drink volume during the summer selling season.
Volume in Central Europe increased 81.1 percent in the first quarter of 2007 compared to the
first quarter of 2006. The increase in volume was driven by the incremental contribution of QABCL
and constant territory growth of 14.0 percent. Constant territory growth was driven by
double-digit growth in carbonated soft drinks, teas, and juices. We continue to expand our
portfolio of products and increase our frontline selling and marketing efforts.
Volume in the Caribbean decreased 6.4 percent in the first quarter of 2007 compared to the
same period last year. Volume declines were driven primarily by the softer economic conditions in
Puerto Rico and stronger competition in Jamaica and the Bahamas. In addition, tourism was
negatively impacted in the Bahamas due to new passport laws in the U.S. Carbonated soft drink
volume declined 12 percent, driven mainly by a volume decline for Trademark Pepsi. Non-carbonated
beverage growth, led by Malta and Tropicana, partly offset this volume decline.
Net Sales
Net sales and net pricing statistics for the first quarter of 2007 and 2006 were as follows
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
764.9 |
|
|
$ |
728.4 |
|
|
|
5.0 |
% |
Central Europe |
|
|
143.0 |
|
|
|
68.4 |
|
|
|
109.1 |
% |
Caribbean |
|
|
52.3 |
|
|
|
51.7 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
960.2 |
|
|
$ |
848.5 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Pricing Growth (Decline)—as reported |
|
2007 |
|
2006 |
U.S. |
|
|
3.9 |
% |
|
|
3.6 |
% |
Central Europe |
|
|
19.2 |
% |
|
|
(4.6 |
%) |
Caribbean |
|
|
6.8 |
% |
|
|
5.3 |
% |
Worldwide |
|
|
2.5 |
% |
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
Net Pricing Growth (Decline)—constant territory |
|
2007 |
|
2006 |
U.S. |
|
|
3.9 |
% |
|
|
3.6 |
% |
Central Europe |
|
|
17.9 |
% |
|
|
(4.6 |
%) |
Caribbean |
|
|
6.8 |
% |
|
|
5.3 |
% |
Worldwide |
|
|
4.6 |
% |
|
|
2.8 |
% |
Net sales increased $111.7 million, or 13.2 percent, to $960.2 million in the first quarter of
2007 compared to $848.5 million the first quarter of 2006. The increase was primarily due to
increased worldwide net pricing of 2.5 percent and worldwide volume growth.
Net sales in the U.S. for the first quarter of 2007 increased $36.5 million, or 5.0 percent,
to $764.9 million from $728.4 million in the prior year first quarter. The increase in net sales
was primarily due to the 3.9 percent increase in net pricing, driven entirely by rate increases.
The impact of package mix on pricing was flat in the quarter and represented an improvement from
the previous several quarters. While our single-serve business was essentially flat during the
quarter, our take home business improved and the mix of volume within these segments improved.
19
Net sales in Central Europe for the first quarter of 2007 increased $74.6 million, or 109.1
percent, to $143.0 million from $68.4 million in the prior year first quarter. The increase was
primarily due to the acquisition of QABCL, which contributed approximately 70 percentage points of
the increase. The remainder of the increase in net sales was due to an increase in net pricing of
17.9 percent, of which approximately 11 percent was contributed by the favorable impact of foreign
currency translation. The remaining increase in net pricing was due to improvements in both rate
and mix.
Net sales in the Caribbean increased $0.6 million, or 1.2 percent in the first quarter of 2007
to $52.3 million from $51.7 million in the prior year first quarter. The increase was a result of
an increase in net pricing of 6.8 percent, offset partly by a volume decline of 6.4 percent. The
increase in net pricing was due to the mix shift from the multi-serve carbonated soft drink package
to single-serve non-carbonated beverages and carbonated soft drinks. In addition, net pricing was
impacted by rate increases across most package categories and lower large format volume in Puerto
Rico.
Cost of Goods Sold
Cost of goods sold and cost of goods sold per unit statistics for the first quarter of 2007
and 2006 were as follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
448.4 |
|
|
$ |
417.8 |
|
|
|
7.3 |
% |
Central Europe |
|
|
88.0 |
|
|
|
44.2 |
|
|
|
99.1 |
% |
Caribbean |
|
|
39.6 |
|
|
|
38.7 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
576.0 |
|
|
$ |
500.7 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
2007 |
|
2006 |
Increase (Decrease)—as
reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
6.1 |
% |
|
|
5.6 |
% |
Central Europe |
|
|
12.5 |
% |
|
|
(4.5 |
%) |
Caribbean |
|
|
7.4 |
% |
|
|
5.6 |
% |
Worldwide |
|
|
4.1 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
2007 |
|
2006 |
Increase
(Decrease)—constant
territory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
6.1 |
% |
|
|
5.6 |
% |
Central Europe |
|
|
14.1 |
% |
|
|
(4.5 |
%) |
Caribbean |
|
|
7.4 |
% |
|
|
5.6 |
% |
Worldwide |
|
|
6.3 |
% |
|
|
4.6 |
% |
Cost of goods sold increased $75.3 million, or 15.0 percent, to $576.0 million in the first
quarter of 2007 from $500.7 million in the prior year first quarter. This increase was driven
primarily by the impact of acquisitions, higher ingredient costs and the negative impact of foreign
currency translation. The acquisition of QABCL accounted for 5.5 percentage points of the increase
in cost of goods sold. Cost of goods sold per unit increased 4.1 percent in the first quarter of
2007 compared to the same period in 2006.
In the U.S., cost of goods sold increased $30.6 million, or 7.3 percent, to $448.4 million in
the first quarter of 2007 from $417.8 million in the prior year first quarter. Cost of goods sold
per unit increased 6.1 percent in the U.S., primarily driven by price increases in ingredients.
In Central Europe, cost of goods sold increased $43.8 million, or 99.1 percent, to $88.0
million in the first quarter of 2007, compared to $44.2 million in the prior year first quarter.
Cost of goods sold increased primarily due to the acquisition of QABCL, which contributed
approximately 63 percentage points of the increase, volume growth and higher ingredient costs. The
unfavorable impact of foreign currency translation contributed approximately 8 percentage points to
the increase in cost of goods sold per unit.
20
In the Caribbean, cost of goods sold increased $0.9 million, or 2.3 percent, to $39.6 million
in the first quarter of 2007, compared to $38.7 million in the first quarter of 2006. The increase
was driven by an increase in cost of goods sold per unit of 7.4 percent, mostly offset by a volume
decline of 6.4 percent.
Selling, Delivery and Administrative Expenses
SD&A expenses and SD&A expense statistics for the first quarter of 2007 and 2006 were as
follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A Expenses |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
254.9 |
|
|
$ |
252.9 |
|
|
|
0.8 |
% |
Central Europe |
|
|
53.8 |
|
|
|
33.0 |
|
|
|
63.0 |
% |
Caribbean |
|
|
14.7 |
|
|
|
14.0 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
323.4 |
|
|
$ |
299.9 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A as Percent of Net Sales |
|
2007 |
|
2006 |
U.S. |
|
|
33.3 |
% |
|
|
34.7 |
% |
Central Europe |
|
|
37.6 |
% |
|
|
48.2 |
% |
Caribbean |
|
|
28.1 |
% |
|
|
27.1 |
% |
Worldwide |
|
|
33.7 |
% |
|
|
35.3 |
% |
In the first quarter of 2007, SD&A expenses increased $23.5 million, or 7.8 percent, to $323.4
million from $299.9 million in the first quarter of the prior year. As a percentage of net sales,
SD&A expenses decreased to 33.7 percent in the first quarter of 2007, compared to 35.3 percent in
the prior year first quarter.
In the U.S., SD&A expenses increased $2.0 million, or 0.8 percent, to $254.9 million in the
first quarter of 2007, compared to $252.9 million in the prior year first quarter. As a percentage
of net sales, SD&A expenses decreased to 33.3 percent in the first quarter of 2007, due to
headcount and fuel cost favorability. This favorability was driven, in part, by a $3.5 million
unrealized gain in the fair value of derivative financial instruments. These instruments are used
to manage the risks associated with the variability in the market price for forecasted purchases of
diesel fuel. We expect this benefit to be offset by higher prices for our diesel fuel purchases
during the remainder of fiscal year 2007, which we expect will result in our original cost guidance
for fiscal year 2007.
In Central Europe, SD&A expenses increased $20.8 million, or 63.0 percent, to $53.8 million in
the first quarter of 2007 compared to $33.0 million in the prior year first quarter. The
acquisition of QABCL contributed approximately 43 percentage points of the increase. The remainder
of the increase was due to the unfavorable impact of foreign currency translation and volume
growth. As a percentage of net sales, SD&A expenses decreased to 37.6 percent. This was primarily
due to the lower overall operating costs contributed by QABCL, which are lower than the other
markets in Central Europe.
In the Caribbean, SD&A expenses increased $0.7 million, or 5.0 percent, to $14.7 million in
the first quarter of 2007 from $14.0 million in the prior year first quarter. The increase was due
in part to higher outside commissions. SD&A expenses as a percentage of net sales increased to
28.1 percent in the first quarter of 2007 compared to 27.1 percent in the prior year first quarter
reflecting the volume declines brought about by the soft economic conditions in Puerto Rico.
Special Charges
In the first quarter of 2007, we recorded special charges of $1.2 million in the U.S. related
to our strategic realignment of the U.S. sales organization to further strengthen our customer
focused go-to-market strategy. In addition, we recorded special charges of $0.2 million in Central
Europe. These special charges were primarily for severance, related benefits and relocation costs.
21
Operating Income (Loss)
Operating income (loss) for the first quarter of 2007 and 2006 was as follows (dollar amounts
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
60.4 |
|
|
$ |
57.7 |
|
|
|
4.7 |
% |
Central Europe |
|
|
1.0 |
|
|
|
(11.0 |
) |
|
|
109.1 |
% |
Caribbean |
|
|
(2.0 |
) |
|
|
(1.0 |
) |
|
|
(100.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
59.4 |
|
|
$ |
45.7 |
|
|
|
30.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating income increased $13.7 million, or 30.0 percent, to $59.4 million in the first
quarter of 2007, compared to $45.7 million in the prior year first quarter.
Operating income in the U.S. increased $2.7 million to $60.4 million in the first quarter of
2007. The increase was mainly due to volume and net pricing growth and the unrealized gain from
derivative financial instruments, offset partly by higher ingredient costs.
Operating income in Central Europe increased $12.0 million to $1.0 million in the first
quarter of 2007, compared to an operating loss of $11.0 million in the prior year first quarter.
This was primarily due to the acquisition of QABCL, which contributed approximately 59 percentage
points of growth. The remainder of the growth was primarily due to volume and net pricing growth.
Operating losses in the Caribbean increased $1.0 million to $2.0 million in the first quarter
of 2007. The soft economic environment in Puerto Rico was the primary cause of the increase in
operating losses.
Interest Expense and Other Expenses
Net interest expense increased $2.6 million in the first quarter of 2007 to $25.7 million,
compared to $23.1 million in the first quarter of 2006, due primarily to higher interest rates on
floating rate debt and higher overall debt levels related to our acquisitions.
We recorded other expense, net, of $1.2 million in the first quarter of 2007 compared to other
expense, net, of $1.8 million reported in the first quarter of 2006. The decrease in other
expense, net, was due primarily to foreign currency transaction gains of $0.2 million in the
current quarter compared to foreign currency transaction losses of $0.3 million in the previous
year’s first quarter.
Income Taxes
The effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, was 36.6 percent for the first quarter of 2007, compared to 38.0 percent in
the first quarter of 2006. The effective income tax rate decreased due in part to the impact of
the mix of our international operations on our rate.
Equity in Net Earnings of Nonconsolidated Companies
In the second quarter of 2005, we acquired a 49 percent minority interest in QABCL. Equity in
net earnings of nonconsolidated companies was $1.2 million in the first quarter of 2006. With the
acquisition of the remaining 51 percent, we began fully consolidating the results of QABCL during
the third quarter of 2006.
Net Income
Net income increased $6.5 million to $20.6 million in the first quarter of 2007, compared to
$14.1 million in the first quarter of 2006. The discussion of our operating results, included
above, explains the increase in net income.
22
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash provided by operating activities increased by $51.8 million to
$66.7 million in the first quarter of 2007, compared to $14.9 million in the first quarter of 2006.
This increase can mainly be attributed to the favorable year-over-year impact of the timing of
payments to our pension plans and a benefit from changes in primary working capital. We made no
contributions to our pension plans during the first quarter of 2007 compared to $10.0 million of
contributions in the first quarter of 2006. The benefit in changes in primary working capital was
due to improvements in cash flows from all components of primary working capital, which includes
accounts receivable, inventory and accounts payable. The improvement in accounts payable was
primarily due to the timing of the payment of the first quarter 2007 dividend which will occur in
the second quarter of 2007 compared to the prior year when the first quarter dividend was paid in
the first quarter.
Investing Activities. Investing activities in the first quarter of 2007 included capital
investments of $60.8 million which were $19.0 million higher than the prior year period primarily
due to the timing of capital investments. Spending in the U.S., primarily on fleet and machinery,
drove the increase. We anticipate our capital spending to be in the range of $190 million to $200
million in fiscal year 2007, compared to capital investments of $169.3 million for fiscal year
2006.
Financing Activities. Our total debt increased $48.0 million to $1,751.1 million at the end
of the first quarter of 2007, from $1,703.1 million at the end of fiscal year 2006. The increase
in commercial paper borrowings described below was primarily for capital expenditures, the funding
of maturing debt and general corporate purposes. In the first quarter of 2007, we paid $11.6
million at maturity of the 8.25 percent note due February 2007.
We utilize revolving credit facilities both in the U.S. and in our international operations to
fund short-term financing needs, primarily for working capital. In the U.S., we have an unsecured
revolving credit facility under which we can borrow up to an aggregate of $600 million. The
facility is for general corporate purposes, including commercial paper backstop. It is our policy
to maintain a committed bank facility as backup financing for our commercial paper program.
Accordingly, we have a total of $600 million available under our commercial paper program and
revolving credit facility combined. We had $214.0 million of commercial paper borrowings at the
end of the first quarter of 2007, compared to $164.5 million at the end of fiscal year 2006.
Internationally, we had revolving credit facility borrowings of $19.8 million at the end of the
first quarter of 2007 compared to $9.2 million at the end of fiscal year 2006.
During the first quarter of 2007 and 2006, we repurchased 1.9 million and 3.3 million shares,
respectively, of our common stock for $41.3 million and $79.1 million, respectively. At the end of
the first quarter of 2007 and 2006, $1.6 million and $4.5 million, respectively, of treasury stock
purchases were unsettled and recorded in “Other current liabilities” in our Condensed Consolidated
Balance Sheets. The issuance of common stock, including treasury shares, for the exercise of stock
options resulted in cash inflows of $4.3 million in the first quarter of 2007, compared to $11.0
million in the first quarter of 2006.
On February 22, 2007, our Board of Directors declared a quarterly dividend of $0.13 per share
on PepsiAmericas common stock for the first quarter of 2007. The dividend was payable April 2,
2007 to shareholders of record on March 15, 2007. This dividend was paid in the second quarter of
2007. We paid cash dividends of $15.9 million in the first quarter 2007 related to dividends that
were declared in the fourth quarter of 2006, but not paid until 2007. In the first quarter of
2006, we paid cash dividends of $27.7 million which included the fourth quarter 2005 dividend of
$11.2 million and the first quarter 2006 dividend of $16.5 million. The fourth quarter 2005 and
first quarter 2006 dividends were based on a dividend rate of $0.085 and $0.125 per share,
respectively.
See the Annual Report on Form 10-K for fiscal year 2006 for a summary of our contractual
obligations as of the end of fiscal year 2006. There were no significant changes to such
contractual obligations in the first quarter of 2007. We believe that our operating cash flows are
sufficient to fund our existing operations and contractual obligations for the foreseeable future.
In addition, we believe that our operating cash flows, available lines of credit, and the potential
for additional debt and equity offerings will provide sufficient resources to fund our future
growth and expansion. There are a number of options available to us and we continue to examine the
optimal uses of our cash, including reinvesting in our existing business, repurchasing our stock
and acquisitions with an appropriate economic return.
Discontinued operations. We continue to be subject to certain indemnification obligations,
net of insurance, under agreements related to previously sold subsidiaries, including
indemnification expenses for potential environmental and tort liabilities of these former
subsidiaries.
23
There is
significant uncertainty in assessing our potential expenses for complying with our indemnification obligations, as the determination of such
amounts is subject to various factors, including possible insurance recoveries and the allocation
of liabilities among other potentially responsible and financially viable parties. Accordingly,
the ultimate settlement and timing of cash requirements related to such indemnification obligations
may vary significantly from the estimates included in our financial statements. At the end of the
first quarter of 2007, we had recorded $53.0 million in liabilities for future remediation and
other related costs arising out of our indemnification obligations. This amount excludes possible
insurance recoveries and is determined on an undiscounted cash flow basis. In addition, we have
funded coverage pursuant to an insurance policy (the “Finite Funding”) purchased in fiscal year
2002, which reduces the cash required to be paid by us for certain environmental sites pursuant to
our indemnification obligations. The Finite Funding amount recorded was $13.2 million at the end
of the first quarter of 2007, of which $4.2 million is expected to be recovered in the next 12
months based on our expenditures, and thus, is included as a current asset.
During the first quarters of 2007 and 2006, we paid, net of taxes, approximately $1.0 million
and $3.7 million, respectively, related to such indemnification obligations, including the
offsetting benefit of insurance recovery settlements of $3.6 million and $1.4 million,
respectively, on an after-tax basis. We expect to spend approximately $25 million on a pre-tax
basis in fiscal year 2007 for remediation and other related costs, excluding possible insurance
recoveries (see Note 13 to the Condensed Consolidated Financial Statements for further discussion
of discontinued operations and related environmental liabilities).
RELATED PARTY TRANSACTIONS
We are a licensed producer and distributor of PepsiCo branded carbonated and non-carbonated
soft drinks and other non-alcoholic beverages in the U.S., Central Europe and the Caribbean. We
operate under exclusive franchise agreements with soft drink concentrate producers, including
“master” bottling and fountain syrup agreements with PepsiCo, Inc. (“PepsiCo”) for the manufacture,
packaging, sale and distribution of PepsiCo branded products. The franchise agreements exist in
perpetuity, except for QABCL, and contain operating and marketing commitments and conditions for
termination. As of the end of the first quarter of 2007, PepsiCo beneficially owned approximately
45 percent of PepsiAmericas’ outstanding common stock.
We purchase concentrate from PepsiCo to be used in the production of PepsiCo branded
carbonated soft drinks and other non-alcoholic beverages. PepsiCo also provides us with various
forms of bottler incentives (marketing support programs) to promote Pepsi’s brands. These bottler
incentives cover a variety of initiatives, including direct marketplace, shared media and
advertising support, to support volume and market share growth. There are no conditions or
requirements that could result in the repayment of any support payments we have received.
We manufacture and distribute fountain products and provide fountain equipment services to
PepsiCo customers in certain territories in accordance with various agreements. There are other
products that we produce and/or distribute through various arrangements with PepsiCo or partners of
PepsiCo. We also purchase finished beverage products from PepsiCo and certain of its affiliates
including tea, concentrate and finished beverage products from a Pepsi/Lipton partnership, as well
as finished beverage products from a Pepsi/Starbucks partnership.
PepsiCo provides various procurement services under a shared services agreement. Under such
agreement, PepsiCo acts as our agent and negotiates with various suppliers the cost of certain raw
materials by entering into raw material contracts on our behalf. PepsiCo also collects and remits
to us certain rebates from the various suppliers related to our procurement volume. In addition,
PepsiCo acts as our agent for the execution of derivative contracts associated with certain
anticipated raw material purchases.
We have an existing arrangement with a subsidiary of the Pohlad Companies related to the joint
ownership of an aircraft. This transaction is not material to our Condensed Consolidated Financial
Statements. Robert C. Pohlad, our Chairman and Chief Executive Officer, is the President and owner
of approximately 33 percent of the capital stock of Pohlad Companies.
See additional discussion of our related party transactions in our Annual Report on Form 10-K
for the fiscal year 2006.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to various market risks, including risks from changes in commodity prices,
interest rates and currency exchange rates, which are addressed below. In addition, please see
Note 9 to the Condensed Consolidated Financial Statements.
Commodity Prices
We purchase commodity inputs such as aluminum cans, polyethylene terephthalate (“PET”)
bottles, natural gas, diesel fuel, unleaded gasoline, high fructose corn syrup, and sugar to be
used in our operations. These commodities are subject to price fluctuations that may create price
risk. Our ability to recover higher product costs through price increases to customers may be
limited due to the competitive pricing environment that exists in the soft drink business. We use
derivative financial instruments to hedge price fluctuations for a portion of anticipated purchases
of certain commodities used in our operations. We have policies governing the hedging instruments
we may use, including a policy to not enter into derivative contracts for speculative or trading
purposes. At the end of the first quarter of 2007, we have hedged a portion of our anticipated
diesel fuel purchases through December 2007.
Interest Rates
In the first quarter of 2007, the risk from changes in interest rates was not material to our
operations because a significant portion of our debt issues represented fixed rate obligations. At
the end of the first quarter of 2007, approximately thirty percent of our debt issues were variable
rate obligations. Our floating rate exposure relates to changes in the six-month London Interbank
Offered Rank (“LIBOR”) rate and the overnight Federal Funds rate. Assuming consistent levels of
floating rate debt with those held at the end of the first quarter of 2007, a 50 basis-point (0.5
percent) change in each of these rates would not have had a significant impact on our first quarter
of 2007 interest expense. We had cash equivalents throughout the first quarter of 2007,
principally invested in money market funds, which were most closely tied to overnight Federal Funds
rates. Assuming a 50 basis-point change in the rate of interest associated with our cash
equivalents at the end of the first quarter of 2007, interest income for the first quarter of 2007
would not have changed by a significant amount.
Currency Exchange Rates
Because we operate in non-U.S. franchise territories, we are subject to risk resulting from
changes in currency exchange rates. Currency exchange rates are influenced by a variety of
economic factors including local inflation, growth, interest rates and governmental actions, as
well as other factors. Any positive cash flows generated have been reinvested in the operations,
excluding repayments of intercompany loans from the manufacturing operations in Poland and the
Czech Republic.
Based on net sales, non-U.S. operations represented approximately 20 percent of our total
operations in the first quarter of 2007. Changes in currency exchange rates impact the translation
of the non-U.S. operations’ results from their local currencies into U.S. dollars. If the currency
exchange rates had changed by ten percent in the first quarter of 2007, we estimate the impact on
reported operating income for this period would not have been significant. This estimate reflects
the fact that a portion of the non-U.S. operations costs are denominated in U.S. dollars, including
concentrate purchases. This estimate does not take into account the possibility that rates can
move in opposite directions and that gains in one category may or may not be offset by losses from
another category.
25
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March
31, 2007, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
26
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
No new material legal proceedings and no material changes to previously reported legal
proceedings to be reported for the first quarter of 2007.
Item 1A. Risk Factors
There have been no changes with respect to the risk factors disclosed in Item 1A. of our
Annual Report on Form 10-K for the fiscal year ended December 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c). Our share repurchase program activity for each of the three months and the quarter ended
March 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
Number of |
|
Average |
|
Shares Purchased |
|
of Shares that May |
|
|
Shares |
|
Price |
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
Purchased |
|
Paid per |
|
Announced Plans |
|
Under the Plans or |
Period |
|
(1) |
|
Share (2) |
|
or Programs |
|
Programs (3) |
December 31, 2006 - January
27, 2007 |
|
|
818,790 |
|
|
$ |
21.34 |
|
|
|
30,984,290 |
|
|
|
9,015,710 |
|
January 28 - February 24, 2007 |
|
|
531,210 |
|
|
|
21.87 |
|
|
|
31,515,500 |
|
|
|
8,484,500 |
|
February 25 – March 31, 2007 |
|
|
567,580 |
|
|
|
21.60 |
|
|
|
32,083,080 |
|
|
|
7,916,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March
31, 2007 |
|
|
1,917,580 |
|
|
$ |
21.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares purchased in open-market transactions
pursuant to our publicly announced repurchase program. |
|
(2) |
|
Includes commissions of $0.02 per share. |
|
(3) |
|
On July 21, 2005, we announced that our Board of Directors authorized the
repurchase of 20 million additional shares under a previously authorized repurchase
program. This repurchase authorization does not have a scheduled expiration date. |
Item 5. Other Information
(a). Item 8.01. Other Events. On April 26, 2007, our Board of Directors declared a dividend
of $0.13 per share on PepsiAmericas common stock. The dividend is payable July 2, 2007 to
shareholders of record on June 15, 2007. Our Board of Directors reviews the dividend policy on a
quarterly basis.
Item 6. Exhibits
See “Exhibit Index.”
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
PEPSIAMERICAS, INC.
|
|
Date: May 4, 2007 |
By: |
/s/ ALEXANDER H. WARE
|
|
|
|
Alexander H. Ware |
|
|
|
Executive Vice President and Chief Financial Officer
(As Chief Accounting Officer and Duly
Authorized Officer of PepsiAmericas, Inc.) |
|
|
28
EXHIBIT INDEX
3.1 |
|
Restated Certificate of Incorporation (incorporated by reference to
the Company’s Registration Statement on Form S-8 (File No. 333-64292)
filed on June 29, 2001). |
|
3.2 |
|
By-Laws, as amended and restated on December 14, 2006 (incorporated
by reference to the Company’s Current Report on Form 8-K (File No.
000-15019) filed on December 18, 2006). |
|
31.1 |
|
Chief Executive Officer Certification pursuant to Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
31.2 |
|
Chief Financial Officer Certification pursuant to Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
32.1 |
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
32.2 |
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
29